Resolution of disputes with participation of investors
Under provisions of the new Civil Procedure Code1 effective from 1 January 2016, there is a special procedure for the consideration of certain “investment disputes” by the Supreme Court of the Republic of Kazakhstan (Supreme Court) and the Astana City Court as first instance courts (collectively - Investment Courts).
The new Civil Procedure Code envisages different procedures for consideration of investment disputes depending on the investor’s category. According to Article 28 of the Civil Procedure Code the competence of the Supreme Court includes only two categories of disputes, one of which is the “investment disputes with the participation of a large investor,” whereas “investment disputes” not included in the competence of the Supreme Court will be considered by the Astana City Court as the court of first instance.
The term “investment dispute” defined in Article 296 of the Entrepreneurial Code2 as “disputes arising from contractual relations between investor, including large investor, and the state authorities in connection with the investment activities of the investor”. The term “investor” refers to legal entities and individuals performing investments in the Republic of Kazakhstan, whereas the term “large investor” means a legal entity or individual that invested in the Republic of Kazakhstan not less than two million times monthly calculation indexes3 (MCIs).
Article 274 of the Entrepreneurial Code provides that the term “investments” refers to all kinds of property (except of the goods intended for the personal use) including assets purchased under financial lease arrangements from the dated of the lease agreement as well as rights on such items contributed by an investor into a charter capital of a legal entity or increase of fixed assets used for the entrepreneurial activity, as well as for the implementation of public-private projects and concession projects.
Disputes that fall under the category of “investment disputes” are considered in Astana City Court acting in the capacity of a first instance court following the generally established procedure, except for the cases under the jurisdiction of the Supreme Court. In addition to “investment disputes” the Astana City Court also considers “other disputes between investors and the state authorities associated with investment activity of investors”.
According to Article 402 of the Civil Procedure Code an appellate claim on the decision of the Astana City Court should be considered by the specialized judicial tribunal of the Supreme Court consisting of at least three judges. Therefore, it is implied that the Supreme Court will be acting as an appellate court in respect of cases on investment disputes considered in the Astana City Court. Pursuant to Article 434.1 of the Civil Procedure Code decisions of the specialized panel of the Supreme Court could be appealed under the cassation procedure in the Supreme Court.
Disputes with the participation of a “large investor” pursuant to Article 35.3 of the Civil Procedure Code should be considered by a single judge of the Supreme Court at the rules of a first instance court. According to Article 240.4 of the Civil Procedure Code decision of the Supreme Court made under the rules of a first instance court becomes effective at the day of its announcement and, therefore, could not be considered in the appellate court instance. However, the Civil Procedure Code provides that decisions of the specialized judicial tribunal of the Supreme Court could be appealed under a cassation procedure.
Since the procedures for the consideration of investment disputes are not clearly described in the legislation and at the current stage there is no court practice in respect of such cases the Supreme Court has published on the official web site an explanatory note4 addressing certain questions associated with the procedure applicable in respect of such disputes. In this explanatory note the Supreme Court expresses the official position and suggests interpretation of the provision of the legislation applicable in respect of the investment disputes.
Summarizing 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 merely to the disputes arising from the 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 relevant to investment activity under a contract with the state authority (including the cases where the state authority signs a contract on behalf of the Republic of Kazakhstan, e.g. the subsoil use contracts).
What is the correct way to determine jurisdiction of disputes with participation of investors in the subsoil use sphere?
- First it is necessary to determine whether a party to the dispute constitutes an investor, namely (a) whether the party holds shares in a JSC or participating interest in an LLP; or (b) whether the party is engaged in formation or enlargement of fixed assets used for the business purposes.
- If the party satisfies the definition of “investor” it is necessary to determine whether there is an agreement with the state authority, including the Republic of Kazakhstan. Such agreements include the following types:
- Investment contracts
- Subsoil use agreements
- Concession agreements
- PPP agreements
- Other unnamed agreements containing the main features: subject matter (investment object), amounts of investments, other essential conditions.
The subsoil users may prove compliance with the definition of “investor” or “large investor” by providing the subsoil use contract and working program indicating financial obligations of the subsoil user for the life of the contract.
- Further it is necessary to determine whether the subject of the dispute relates to appealing of actions of the state authorities breaching the rights and interests of the investors envisaged by legislation of the Republic of Kazakhstan. If yes, it should be determined whether the dispute falls under the category “investment dispute” or “other dispute relevant to investment activity”.
Cases included in the category “investment dispute” shall be considered by the Astana City Court or the Supreme Court depending on the investor’s category (investor / large investor). This category of disputes includes disputes arising under various agreements on realization of investments (hereinafter – investment agreements), including:
- Disputes relevant to conclusion, amendment, and termination of investment agreements;
- Disputes associated with fulfilment by an investor of tax, customs, social, special environmental, and other obligations under investment agreements, including additionally assessed amounts under investment agreements;
- Disputes on appealing of actions (failure to act) of a state authority in the course of an audit of the fulfilment of obligations under investment agreements;
- Disputes associated with returning of property provided to an investor in the form of a state in-kind grant, or recovery by the state authority of the value of such property in case of early termination of an investment agreement;
- Other disputes based on the investors’ claims as well as claims of the state authorities associated with the fulfilment of mutual obligations under investment agreements.
Disputes included in the category “other disputes relevant to investment activity” should be considered by the Astana City Court, including for instance the following types of disputes:
- Disputes on invalidation of actions (failure to act) of the state authorities’ officials breaching investors’ rights (in the sphere of licensing, assessment of tax, customs, and other payments to the state budget not relevant to an investment agreement);
- Disputes associated with collection by the state authority from an investor of the amounts of taxes and other obligatory payments to the state budget, customs duties, not relevant to an investment agreement;
- Disputes on forced seizure if an investor’s property (nationalization, requisition) for the state purposes and compensation of damages;
- Disputes associated with claims for investor’s damages resulted from issuance by the state authorities of acts that does not correspond to legislation of Kazakhstan;
- Disputes on ability of an investor to engage in an investment activity;
- Other disputes between the state authorities and investors not relevant to fulfilment of obligations under investment agreements.
Based on the aforesaid clarifications of the Supreme Court it appears that the significant amount of disputes with the participation of foreign investors in Kazakhstan may fall under the jurisdiction of the Astana City Court or the Supreme Court, including, inter alia, the disputes arising under the subsoil use contracts, such as disputes relevant to fulfilment of tax, customs, social, environmental and other contractual obligations. At the same time, the Supreme Court expressly provides that the disputes not associated with investment activity (e.g. employment disputes, corporate disputes, disputes subject to simplified procedure) should be considered by the courts of general jurisdiction.
In current practice there are certain cases when claims of subsoil users submitted to the specialized economic courts in respect of actions of the tax authorities or other state authorities were rejected due to absence of the jurisdiction. In such cases it is necessary to re-submit the claim to the Astana City Court of the Supreme Court and to ask the court for the reinstatement of the period for the appealing period.
According to our knowledge the Astana City Court and the Supreme Court have not yet formed any practice in respect of investment disputes. Taking into account the willingness of the Republic of Kazakhstan to improve the access to justice and to increase the quality of the court decisions certain categories of investors have the right to take advantage of new opportunities for the consideration of investment disputes.