Arbitration Law in Kazakhstan. General Overview

Law on Arbitration of 8th April, 2016 (Arbitration law), passed in Kazakhstan together with the new Civil Procedure Code (CPC) of the same date and enacted 19th April, 2016 constitute the new environment for foreign and domestic arbitrations in the country

Picture: © Depositphotos.com/nupix

In general, the new legislation recognizes arbitration clauses as obligatory agreements, the right to choice of foreign law, the enforceability of arbitration awards through judicial procedural means, the prohibition of judicial intervention into arbitration awards on merits and the clean hands doctrine - all the internationally accepted principles of alternative dispute resolution.

However, we are of the opinion that exact implementation of the above-mentioned doctrines may meet serious complications, basically due to unsatisfactory quality of legal techniques and wordings used in both laws. Because of the poor drafting and the obvious absence of judicial practice, interpretation of critical provision of the laws may not be predicted and may even lead to a result fully contradicting the main purpose of the laws.

Future judicial practice, resolutions of the Supreme Court and the Constitutional Council as well as novations of the legislation may change the situation, but currently arbitration agreements are less stable and enforceability of foreign arbitration awards in the Republic of Kazakhstan is less certain than they were before 19th April, 2016.

Is arbitration clause a civil-law agreement, regulated by the Civil Code?

Arbitration clause is described as a written agreement of parties to submit their dispute out of civil relationships for consideration by arbitration (Arbitration law Art. 2 par. 4).

There’s no unified and developed opinion on what the nature of an arbitration agreement is. Professor Suleimenov, one of the drafters of the Kazakh Civil Code (CC), considers arbitration clause to be a normal civil law agreement. Russian professor Sukhanov, whose opinion is influential in Kazakhstan, takes an opposite view.

We have no choice but to share professor Suleimenov’s approach as arbitration agreement is concluded between parties of equal legal status (leaving aside investment arbitrations which are of a different nature) with regard to a dispute concerning property rights or rights associated with property. This means that an arbitration agreement is primarily regulated by the CC as a normative legal act of a higher rank (Law of the Republic of Kazakhstan on legal acts of 6 April 2016, articles 10 and 12).

Does arbitration agreement with state and state-owned enterprises have to be approved by governmental authorities?

An arbitration agreement with state bodies, state enterprises and legal entities directly or indirectly controlled by the state (50% or more of shareholding) among other required provisions has to contain a consent of an appropriate regulatory state body (Art. 8 par. 10 and Art. 9 par. 4 of the Arbitration law). The legal nature of this exemption from the freedom of contract doctrine needs consideration:

State bodies are not parties to civil relationships, they only represent the Republic or its administrative-territorial divisions, the same way that CEO or board of directors represent corporation; correct interpretation of this unclear provision shall be that a conclusion of an arbitration agreement with the Republic of Kazakstan or its territorial division has to be accompanied by formal consent of a regulatory body in case the authorities to enter into agreement and to approve it are split between different state bodies. The final legal meaning of the provision under discussion may be established by future judicial practice only.

State enterprises are not completely independent in making civil transactions and do not own any property at their disposal (CC, Law on state enterprises), therefore this requirement is clear and logical – it is the specific form of civil transaction, procedure of deal conclusion.

Entities of private property (JSCs, LLPs, et cetera), of which 50% or more are owned by the state, directly or indirectly, are also obliged to obtain similar consent. Such requirement may not relate to the form of the agreement, as it has nothing to do with the expression of will by the legal entity, and it is not a provision of the contract, as it does not put any obligation on the parties, it is not a condition precedent or subsequent either, as it is not established by the parties (Art. 150 of the CC). The only explanation we may think of is that we’re dealing here with a state license-like permission of a public law nature. An arbitration agreement which does not meet this requirement shall be considered as null and void in accordance with the Art. 159 par. 1 of the CC.

To what extent does the Arbitration law procedurally regulate arbitration process?

Articles 5, 13 - 38, 40 - 43, 45 - 51 of the Arbitration law establish certain rules and procedures to be observed during arbitration. These provisions are designed by analogy with the legislation on judicial procedures and deal with issues like qualification of arbitrators, procedural rights of parties to an arbitration, competence of arbitration panel, place of arbitration, statement of claim and statement of defense, settlement agreement, correction and revision of arbitration awards and many more.

The law does not make any difference between domestic and foreign arbitrations, even more, it states that the law is applicable to disputes resolved through arbitration between individuals and legal entities irrespective of their location in the country or abroad (Art. 1of the Arbitration law); the very definition of arbitration given by the Arbitration law does not make any distinction between domestic and foreign arbitration either (Art. 2 par. 3). This raises a serious question: do foreign arbitrations and their proceedings have to meet all of the above-mentioned requirements to be honored in Kazakhstan? What happens if, for example, an arbitrator of the LCIA is 29 years old instead of 30 as provided by the law? What if a statement of claim does not contain «evidences in support of the claim» as required or even the «list of documents and other materials attached to the claim»? Until we have the established judicial practice with regard to the matter, the risk that above-mentioned provisions will be understood as imperative regulation applicable to any arbitration agreement will remain. Non-observance of such rules may lead to invalidity of arbitration awards (which themselves are civil-law transaction) in Kazakhstan.

Fortunately, the Law on Arbitration is addressed to relationships arising from arbitration proceeding on the territory of the Republic of Kazakhstan as well as recognition and implementation (enforcement) of arbitration awards (Preamble of the Arbitration law). We do hereby recommend not to arbitrate on the territory of the Republic of Kazakhstan regardless of the arbitration forum or arbitration rules applicable, in order to reduce risk of noncompliance with the over-regulative arbitration legislation. Such approach would reduce the application of the Arbitration law to the issue of recognition and enforceability of arbitration awards (see below).

Do parties have a right to unilaterally abandon an arbitration agreement?

Initial version of the Arbitration law contained Paragraph 5 of the Article 9, which allowed parties to abandon their arbitration agreement unilaterally. Fortunately, the paragraph was eliminated by the only amendment to the law so far, affective 11th March, 2017.

We still believe however, that this canceled provision needs to be analyzed as it may affect arbitration of disputes covered by arbitration agreements entered into before 11th March, 2017.

 It is the universal principle that a valid agreement has to be honored by its parties (pacta sunt servanda). The CC provides a very limited list of reasons why a party may unilaterally refuse to implement a civil-law agreement, such reasons are basically limited by situations when implementation of agreement becomes legally or practically impossible (Art. 404 of the CC).

Unfortunately, the same article of the CC states that unilateral refusal is also possible for reasons allowed in the cases provided for by other legislative acts. The Arbitration law stated, with the reference to the Art. 404 of the CC, that parties to an arbitration agreement could unilaterally abandon it before a dispute arose. The question of whether or not a refusal took place before or after the dispute arose is to be resolved by courts, not by arbitrators, because if an arbitration clause had been abandoned properly, an arbitration would have no competence.

We may expect extensive interpretation of this provision as Kazakh courts may take the opinion that the Arbitration law not only covered arbitrations held in Kazakhstan but those to be enforced in Kazakhstan as well (please, see the Preamble of the Arbitration law).

If a party to an arbitration is able to provide evidence that in-between 19th April, 2016 and 11th March, 2017 it had notified its counterparty about being reluctant to honor the arbitration agreement, enforcement of the arbitration award may be under question.

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Linkage & Mind Law firm partner, KIMEP University Law school Adjunct lecturer

 

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