Legislative developments in Kazakhstan affecting investors in the oil & gas sector

November 2016  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

November 2016 Issue

The oil and gas industry is the basis of Kazakhstan’s economy, and the current trend of low oil prices has had a significant impact on the country. This prompted its leaders to re-think investment policy and introduce changes to legislation. Since access to fair and equitable dispute resolution is one of the most important conditions for investment, this issue received perhaps the most attention.

First of all, it has been decided that Kazakhstan should take steps to assure investors they have access to fair and equitable treatment in courts. The court system was long criticised for the low level of professionalism of its judges, as well as for their bias in favour of the state where one of the parties was a state body. To resolve this situation, new specialised panels (Investment Courts) were established in the Astana City Court and the Supreme Court.

In addition, arbitration as a form of alternative dispute resolution (ADR) was supposed to benefit from enactment of a new law on arbitration.

As we briefly discuss below, the results of these reforms have not been wholly satisfactory. New legislative changes are required to rectify the problems.

The new Law on Arbitration

Until recently, domestic and international arbitrations were regulated by two different laws, and the legal status of domestic arbitrations was largely inferior to the legal status of international arbitrations. Therefore, the idea of enacting a single law for all arbitrations was accepted with enthusiasm. This resulted in enactment of the new Law on Arbitration on 8 April 2016.

Certain provisions of the Law on Arbitration could be viewed as undermining the attractiveness of investment in Kazakhstan. It is questionable whether the Law on Arbitration applies to recognition and enforcement of foreign arbitral awards in the country. This could be used by foreign investors as an argument for avoiding some of its problematic provisions, by referring any potential disputes to foreign arbitration. However, there is a risk of Kazakh courts taking extensive interpretation at the time of enforcement and still subordinating disputes arbitrated abroad to the Law on Arbitration. Some of the ‘problematic provisions’ are outlined below.

Unilateral withdrawal from an arbitration agreement. The Law on Arbitration provides that, prior to the emergence of a dispute, any party has the right to withdraw unilaterally from an arbitration agreement by giving notice to the other party within a reasonable timeframe. Obviously, this regulation will lead to the destruction of arbitration in Kazakhstan, which will definitely worsen the investment climate in the country.

Applicable law. It is a general rule of Kazakhstan law that disputes will be resolved in accordance with the law applicable to the underlying relationships. Where at least one of the contracting parties is a non-resident, the Civil Code clearly provides them with the choice of law freedom.

The Law on Arbitration, to the contrary, contemplates that Kazakhstan substantive law must apply to the merits of disputes with participation of state bodies, state enterprises and state-owned (50 percent or more of direct or indirect shareholding) entities. This requirement is detrimental to the investment climate since it directly applies to, among others, joint ventures that are often created between foreign investors and state enterprises or state-owned companies. Under the Law on Arbitration, arbitrators in Kazakhstan will have to ignore “governing law” clauses contained in, for example, shareholder agreements concluded with respect to such joint ventures.

Consent requirement. Pursuant to Article 8.10 of the Law on Arbitration, disputes between physical and/or legal persons of Kazakhstan, on one side, and state bodies, state enterprises and state-owned companies (i.e., 50 percent or more of voting shares of which directly or indirectly are controlled by the state), on the other side, cannot be arbitrated without the consent of the authorised body of the respective branch of industry (with respect to republican property) or a local executive body (with respect to communal property).

In the past, state enterprises and state-owned companies enjoyed the right to enter into arbitration agreements freely if the place of arbitration was outside of Kazakhstan, yet now such entities are deprived of this right and must obtain the state’s consent in order to conclude an arbitration agreement.

The provisions of the Law on Arbitration outlined above make the investment climate in Kazakhstan less attractive, particularly for investors implementing or planning to implement various projects jointly with state enterprises and state-owned companies. We hope that future judicial practice, resolutions of the Supreme Court and the Constitutional Council as well as possible amendments to the legislation will change this situation.

Specialised panels for investment disputes

Establishing specialised panels to consider investment disputes is a major new element in Kazakhstan’s legislation on civil procedure. Under the new Civil Procedure Code, effective from 1 January 2016, there is a special procedure for hearing some investment disputes by the Supreme Court of Kazakhstan (Supreme Court) and the Astana City Court as first instance courts (Investment Courts).

The term ‘investment dispute’ is defined in the Entrepreneurial Code as: “disputes arising from contractual relations between an investor, including a large investor, and the state authorities in connection with the investor’s investment activities”. The term ‘investor’ refers to legal entities and individuals with investments in Kazakhstan, whereas large investor means a legal entity or individual that has invested a minimum of two million times monthly calculation indexes (approximately US$12.6m) in Kazakhstan. Under the Entrepreneurial Code ‘investments’ must refer to: “all kinds of property (except goods intended for the personal use) including assets purchased under financial lease arrangements from the date of the lease agreement, as well as rights on such items contributed by an investor into the charter capital of a legal entity or increase of fixed assets used for the entrepreneurial activity, as well as for implementation of public-private projects and concession projects”.

There are different procedures for considering investment disputes, depending on the investor’s category. The Supreme Court’s competence includes only two categories of disputes, one of which is “investment disputes involving a large investor”, whereas ‘investment disputes’ not included in the Supreme Court’s competence shall be heard by the Astana City Court acting as a first instance court. The latter shall also consider “other disputes between investors and the state authorities associated with investors’ investment activity”.

Since the procedures for considering investment disputes are not clearly described in the legislation and at present there is little court practice for such cases, the Supreme Court has recently published an explanatory note on its official website concerning the applicable procedure for such disputes. Summarising the position of the Supreme Court, we conclude that the jurisdiction of the Investment Courts should be understood in the broad sense and, therefore, should not be limited to disputes arising from investment contracts. The Supreme Court confirms that the term ‘investment dispute’ should be understood as a dispute between an investor and a Kazakhstan state authority concerning investment activity under a contract with the state authority (including the cases where the state authority signs a contract on behalf of Kazakhstan, e.g., subsoil use contracts).

Based on the foregoing, it is obvious that most of the court cases that fall under the jurisdiction of the Investment Courts will be disputes involving subsoil users. In the first three months after the new law was introduced, there were cases where subsoil users filed their claims against state bodies in the wrong courts – i.e., they were not able to properly choose jurisdiction. As a result, they received refusals from the economic courts. In order not to lose their right to bring a claim, they then appealed to the higher court. A better approach would be to bring a new claim to the Investment Court with a motion to reinstate the statute of limitations.

The Investment Courts were established only recently. In the absence of detailed regulation by law, it is up to the Investment Courts themselves to establish detailed procedures and rules through normative rulings of the Supreme Court, and through decisions on specific cases. At the moment the Supreme Court is determined to follow a fundamental principle ‘Uniformity of Court Practice’, which is set forth in the Civil Procedure Code, to its full extent. Every decision of the Investment Courts will be regarded as setting standards for resolution of disputes in general, and disputes with investors in particular. This is a huge task that, if implemented properly, could help Kazakhstan take a giant step toward the rule of law. Whether the Investment Courts will cope with this task now depends entirely on them.

 

Aigoul Kenjebayeva is the managing partner at Dentons Kazakhstan. She can be contacted on +7 727 258 2380 or by email: aigoul.kenjebayeva@dentons.com.

© Financier Worldwide

BY

Aigoul Kenjebayeva

Dentons Kazakhstan

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