Arbitration Law In Kazakhstan. International Aspects

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

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Previous article: Arbitration Law in Kazakhstan. General Overview

Does the Arbitration law subordinate all arbitration agreements with Kazakh entities to itself?

One practically important issue is whether an arbitration clause still needs a competent body’s approval even if the arbitration is deemed to take place outside of the territory of Kazakhstan. The answer depends on whether an arbitration agreement with a Kazakhstani entity, individual or state, may be governed by foreign law.

Generally, individuals and entities are free to choose a foreign law if their relationship contains a foreign element: party, property, et cetera (Art. 1112 of the CC), provided that so called imperative norms (rules strictly obligatory due to their importance, whatever foreign law is applicable) of the Kazakh legislation are still observed. Such freedom may be restricted by legislative acts. The Arbitration law basically consists of imperative norms, so application of a foreign law to an arbitration agreement within the borders of the Republic of Kazakhstan is practically not possible, although not directly prohibited.

The question of law applicable to arbitrations held outside the country is more complicated: parties are free to choose a foreign law for their arbitration clause and this formally eliminates all the requirements provided for by the law, as the Arbitration law only applies to arbitration proceeding on the territory of the Republic of Kazakstan (Preamble of the Arbitration law). However, it is extremely difficult to expect that Kazakh courts would take this literal interpretation with regard to the necessity of authorities’ approval of arbitration clauses concluded by the state, state-owned companies and state enterprises. The purpose of the law is obviously to restrict their freedom to come into arbitration agreements and therefore, courts will likely use teleological interpretation, expanding the requirement of approval to all arbitration clauses entered into by the state, state enterprises and state-owned entities, regardless of the place of arbitration. If courts take this position, enforcement of foreign arbitration awards by Kazakh courts may not be possible if corresponding arbitration agreements had not been approved at the moment of conclusion.

Does the Arbitration law eliminate the freedom to choose a foreign law for a dispute on merits?

Disputes are resolved in accordance to law applicable to underlying relationships. The CC clearly provides parties to a contractual relationship «complicated by a foreign element» with the choice of law freedom.

On the contrary, the Arbitration law states that disputes with participation of state bodies (shall be understood as the state itself), state enterprises and state-owned (50% or more of shareholding) companies shall be resolved with the laws of the Republic applied to merits of the dispute (Art. 44 of the Arbitration law).

This puts arbitration into a more restricted position compared to a judicial process, as courts are still obliged to honor the parties’ choice of law agreement if such choice is allowed by the Private International Law section of the CC (if a party, property, place of conclusion or implementation is located abroad). Arbitrators in the Republic will have to ignore such a choice of law clause. We repeat our recommendation not to hold arbitrations with the Republic of Kazakhstan, state or state-owned enterprises on Kazakh soil; this course of action would reduce the risk of invalidity of a choice of law clause, unless Kazakh courts choose to take extensive interpretation and subordinate disputes arbitrated abroad to the Art. 44. Extensive interpretation, in our opinion, would be erroneous but still practically possible, as the Arbitration law does not distinguish between foreign and domestic arbitrations.

Professor Suleimenov states in his article that the Art. 44 contradicts the Art. 1112 of the CC and therefore shall not be valid, as the CC prevails over the Arbitration law as a legal act of a higher rank. We, however, may not expect this opinion of a respected civil law theorist to be honored by Kazakh courts, because the Art. 1112 of the CC reserves that exception from the freedom to choose governing law may be established by legislative acts, and the Arbitration law is a legislative act.

We also expect that state-owned companies will be insisting on the Kazakh law choice while negotiating arbitration and choice of law clauses with foreign companies, based on the Art. 44 of the Arbitration law.

Are arbitration awards still enforceable in Kazakhstan?

Clean hands doctrine

Provided that an arbitration clause has not been recognized as null and void, has not been unilaterally abandoned, an arbitration proceeding has been properly held and an arbitration award does not violate the public order of the Republic, it is recognized as obligatory and has to be enforced through the judicial system (if not voluntarily implemented) - Art. 54 of the Arbitration law.

This provision is also supported by the Art. 6 of the Arbitration law which prohibits parties from making objections against violation of the Arbitration law if such an objection had not been made properly and timely before or during the arbitration proceeding. The Art. 6 obviously extends to judicial proceeding associated with arbitration, including the enforcement.

It means that if a party has made its way through a proper arbitration proceeding and has obtained an arbitration award without objections from the other side, such award will be obligatory.

Of course, If objections have been made but were rejected by arbitrators, such objections may be repeated in court and considered by a judge.

The final judicial test of an arbitration award would be whether or not it violates the public order of the country.

The public order concept is described in the Arbitration law as «basics of law and order, established by legislative acts». Our opinion is that an arbitration award (or a foreign judicial act) may only be considered as violating the public order if its implementation would not be legally possible due to its contradiction to general principles of the legislation. We do not think that the new law has changed the situation with regard to the public order compared to the one that existed before 8th April 2016 but we have to emphasize that Kazakhstan does not yet have a developed judicial practice of implementation of the public order doctrine and that a certain potential legal risk associated with this concept remains.

Status of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)

Kazakhstan joined the New York Convention by the Decree of the President number 2485 dated 4th October, 1995. No law on international treaties existed by that time, the previous legislation was recognized as unconstitutional by the Constitutional Court (Resolution of 20th January 1993) and the new legislation was not yet adopted. However, the authority of the President to access the New York Convention on behalf of the Republic of Kazakhstan is confirmed by the Vienna Convention on the Law of Treaties (Articles 7 and 11), the Constitution of the Republic of Kazakhstan (Article 44) and the New York Convention itself (Articles 8, 9 and 12). The New York Convention is an international treaty of the Republic of Kazakhstan, obligatory for the state, and it simultaneously constitutes a part of national legislation of the republic in accordance with the Art. 4 of the Constitution.

The Art. 501 of the CPC states that foreign judicial acts and arbitration awards are recognized and enforced in Kazakhstan if such recognition and enforcement is provided for by the legislation, international treaties ratified (sic!) by the Republic of Kazakhstan or on the basis of reciprocity.

We are of the opinion that the Decree N2485 is not equal to ratification. Ratification is the condition for an international treaty to have priority over national laws and therefore, ratification is made through the procedure of issuing a law on ratification. Both the Parliament and the President (delegated in certain cases) have legislative powers but not any act issued by them automatically has the force of law. The President may have the power to ratify international treaties if such power is delegated to him by the Parliament but such ratification has to be made through passing a law or a decree having the force of law. The decree under discussion has no indication that it was deemed to have the force of law.

The New York Convention does not have priority over the laws of the Republic of Kazakstan.

However, the New York Convention is still good for direct implementation as its status is equal to the status of the enacting decree. In accordance to the Law on Legal Acts (Art. 1 par. 16) «legislation» includes all normative legal acts of the country.

The Decree N2485 together with the New York Convention constitute the part of the national legislation and allow recognition and enforcement of foreign arbitration awards in accordance with the Art. 501 of the CPC.

We hereby strongly advise our clients, partners and colleagues to involve thorough professional consideration by lawyers who deeply specialize in both civil, civil procedural and private international law matters while entering into arbitration agreements with Kazakh companies and individuals or while enforcing arbitration awards in Kazakhstan.

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