CASE STUDY: Compensation For Environmental Damage as a Result of Production of Commonly Occurring Mineral Resources

Dear colleagues, in this newsletter we would like to share an interesting experience that occurred in our recent litigation practice. At first glance, the quite common dispute regarding compensation for environmental damage has some aspects that are interesting from a practical point of view. For example, determining the person responsible for compensation for damage; resolution of the issue of liability for the actions of third parties; and finally, the correct calculation of environmental damage. This publication should be regarded solely as a description of a particular case from the point of view of a party in the dispute. Therefore, this coverage does not purport to be an objective and comprehensive analysis. We hope that the information about the existing court practice will be helpful should similar disputes arise, and will help to resolve disputes in a positive manner.

Thus, here is a brief introduction. Our client’s program of deposit infrastructure development provides for the construction of oil platforms and access roads to them. In order to carry out the construction, the subsoil user engaged contractors.

The work included subgrade flooring and subsequent soil compaction and graveling. The project documentation stipulated the use of either imported soil, or “local” soil from side thrusts for compaction of the subgrade. During construction, the roughness of relief was leveled (uplands were dismantled and lowlands were covered, including via the use of soil left from the dismantlement of uplands).

Based on the results of a survey of the subsoil user’s activities, the Ecology Department (ED) filed a claim against the subsoil user for compensation for damages to the environment as a result of unauthorized production of COMR in 2012–2014 in the amount of 3.9 bln. tenge.

Claimant’s position

The ED reasoned their position as follows:

(1) Contractors used “local” soil for work—i.e., they carried out production of COMR without a permit. Because the use of soil involved removing soil from side thrusts, the ED considers such use as production of minerals.

In accordance with Article 35 of the Law “On Subsoil and Subsoil Use,” the subsoil use right for exploration or production of COMR is performed via conclusion of a contract with the local executive body. Thus, by permits, the ED implies the contracts for production of COMR.

At that, the ED provided no references to the legislation that would have proved that (1) the use of soil involved production of COMR, and (2) the soil is COMR.

(2) The ED does not deny that the alleged violation of the law, resulting in damage to the environment, was made not by the subsoil user himself but by his contractors. Nevertheless, the ED concludes as follows: production of COMR was carried out by contractors in the contract territory of the subsoil user with the knowledge of the subsoil user, and COMR was intended to meet the needs of the subsoil user. Accordingly, the ED believes that the subsoil user is responsible for the production of COMR by his contractors. In that regard, the ED does not provide any reference to the law.

(3) As a result of unauthorized production of COMR, damage to the environment was caused. According to Article 10, paragraph 1, of the Law “On Subsoil and Subsoil Use,” subsoil and minerals contained therein are state owned. In accordance with Article 321 of the Environmental Code, damage caused to the environment and the state due to unauthorized and irrational use of natural resources is subject to compensation. Due to the fact that the subsoil user’s contractors carried out unauthorized production of COMR, the state suffered damage.

In accordance with Article 108 of the Environmental Code, economic assessment of the damage caused by illegal use of subsoil is determined in accordance with the Rules of economic assessment of damage caused by environmental pollution (approved by the Resolution of the Government of the Republic of Kazakhstan №535 dated 27 June 2007).

In accordance with paragraph 16 of the above-mentioned Rules, economic assessment of the damage caused by unauthorized production of COMR is defined as tenfold of the value of produced COMR. The cost of produced COMR is defined based on the average market price for implementation of the commercial product for a period not exceeding a quarter, starting from the date of the detection of violation.

Subsoil User’s position

The subsoil user provided the following statements:

(1) The damage is compensated by a person causing such damage. The ED does not deny the fact that the subsoil user did not directly carry out the removal of soil, and all activities that the ED is considering illegal use of subsoil were carried out by third parties.

(2) The subsoil user is not liable for actions of third parties on their contract area unless those actions are related to subsoil use operations of such subsoil user.

(3) Soil is not COMR. Accordingly, (1) the fact of illegal use of subsoil is absent; (2) contractors’ use (removal) of soil cannot be regarded as COMR production; and (3) the ED was not entitled to calculate damages on the basis of soil price.

Findings of the Court

Who is liable for the damage?

The court ruled that the environmental legislation permits assignment of compensation for damages only to the person who caused such damage as a result of environmental offense. At that, the court reasonably referred to

(1) Article 917 of the Civil Code, according to which the damage caused by unlawful actions shall be compensated by the person who caused such damage.

(2) Article 321 of the Environmental Code, according to which the perpetrators of environmental offenses are obliged to compensate the damage caused by them.

The Court indicated that the subsoil user may not be responsible for alleged damage, as the subsoil user did not commit acts that caused damage to the environment.

We believe that in this case the court correctly applied the substantive law, establishing assignment of responsibility for the damage to the person whose illegal actions caused such damage.

Noteworthy is the position of the prosecutor involved in the case. Thus, the prosecutor stated that the contractors should be considered as employees of the subsoil user. Consequently, the subsoil user, as an employer, should be held responsible in accordance with Article 921 of the Civil Code. The Court rightly indicated that Article 921 of the Civil Code is not applicable in this case, as this Article gives a clear definition of “employees”, which covers only citizens (individuals).

Thus, the court found no grounds for bringing the subsoil user to responsibility for alleged illegal use of subsoil.

Responsibility of the subsoil user for actions of third parties in the contract territory

The court resolved that removal of soil by third parties in the contract territory of the subsoil user does not serve as grounds for bringing the subsoil user to material liability.

At that, the court indicated that in accordance with Article 1 paragraph 39 of the Law “On Subsoil and Subsoil Use”, the contract area is the territory defined by the mining allotment, where the subsoil user has the right to carry out operations on subsoil use in accordance with the contract. Consequently, the subsoil user is responsible only for the activity related to subsoil use operations, stipulated by the contract. Therefore, the court finds that the subsoil user shall not be held responsible for the actions of other subsoil users in his contract territory.

The court indicated that guilt is the grounds for bringing to material liability for causing harm to environment. Due to the fact that the ED has not proved that the subsoil user committed a wrongful act which caused damage to the environment, the guilt of the subsoil user has also not been proven.

The court also took into account that, in accordance with civil legal contracts between the subsoil user and contractors, it is established that contractors shall be held responsible for obtaining any permits.

Thus, the court ruled that the subsoil user is not responsible for the actions of third parties in the contract territory, unless such actions are related to subsoil use operations of such subsoil user.

Could soil be considered COMR?

The court resolved that soil is not COMR. The court justified its finding as follows.

In accordance with Article 16 paragraph 8 of the Law “On Subsoil and Subsoil Use”, the list of COMR is determined by the Government of the Republic of Kazakhstan. In the surveyed period (2012-2014) List of common mineral resources, approved by Decree of the Government of the Republic of Kazakhstan №397 dated 7 April 2011, was active. This list of COMR is exhaustive and does not contain such type of COMR as soil. Thus, the ED, while imputing illegal production of COMR, did not prove what kind of COMR was produced and in what amount.

The court further indicated that economic assessment of environmental damage caused by unauthorized production of COMR is defined tenfold of the value of produced COMR. Therefore, addressing the ED for assessment of the damage to soil price directly contradicts the requirements of legislation. The court reasonably rejected the arguments of the ED that soil is a composite of COMR.

It should be noted that some bylaws also do not refer soil to COMR. Thus, in accordance with Construction Rules of the RK 1.02-19-2007 “Earth building materials prospecting. General rules of work”, soil (including soil from construction cavities and concentrated dump banks occurred during construction) refers to soil building materials, which in contrast to local building materials do not contain COMR. Soil building materials also cover coarse, sandy, clay and rocky soils that do not contain minerals in industrial conditions.

It should be noted that previously the courts of the Republic of Kazakhstan gave a similar assessment concerning reference of soil to COMR (e.g., in case of lawsuit of Atyrau region Department of Ecology to “Atyrauinzhdorstroy” LLP).

Could removal of soil be considered mineral production?

Unfortunately, the court did not provide univocal assessment of this issue. Nevertheless, in our opinion, the court indirectly confirmed that removal of soil cannot be equated with production of COMR.

Firstly, whereas soil is not mineral, its removal cannot be regarded as production. In accordance with the Law “On Subsoil and Subsoil Use”, production refers to a whole range of works (operations) connected with extraction of minerals from subsoil to surface. Consequently, the object of production covers only minerals.

Secondly, the above-mentioned Construction Rules of the RK 1.02-19-2007 indicated that earth building materials prospecting should not be subject to the requirements which govern exploration, development, calculation and assertion of mineral deposits reserves.

It is possible that in this case, the use of soil should be considered as construction activities, and to some extent as land-use activities, as opposed to subsoil use operations.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy and its legislation and legal system are in constant development. Should you have any questions or would like to discuss matters addressed in this Client Update, please contact us.