Laws Governing International Commercial Arbitration in Kazakhstan and Associated Risks
Shakhrukh Usmanov, Partner, GRATA Law Firm
Bakhyt Tukulov, Senior Lawyer, GRATA Law Firm
The main statute governing international arbitration in the Republic of Kazakhstan (hereinafter "RoK") was introduced in 2004. However, the growing interest in the resolution of disputes by means of international arbitration is only a recent development. In addition to those who would traditionally pursue this route, such as foreign companies or subsidiaries located in the RoK, an increasing number of Kazakhstani companies are considering international arbitration.
I n light of this we would like to highlight the most significant areas of uncertainty in the law which should be borne in mind by parties contemplating arbitration.
1. Risks Associated With Clauses Stipulating Arbitration as the Means of Dispute Resolution or Courts of General Jurisdiction, which are at the Discretion of One of the Parties or So-Called "Split Arbitration Clauses"
We frequently encounter arbitration agreements which permit one of the parties to submit a dispute not only to international arbitration, but also to courts of general jurisdiction (state courts). This category of arbitration agreement is also referred to as a "split arbitration clause". Split arbitration clauses are common in loan agreements entered into with western financial organizations. They could also be found in other types of commercial contracts. In these contracts, the right to select the forum (means of dispute settlement) generally rests with the creditor or pledgee. Below, for your reference, is an example of a split arbitration clause:
The Parties agree that all disputes, controversies or claims arising out of or in connection with this Agreement, or its breach, termination or invalidity (the "Disputes") shall be subject to final resolution by arbitration in accordance with [indicate arbitral institution] Rules.
[Section above] is for the benefit of the Pledgeholder only. As a result and notwithstanding [Section above], it does not prevent the Pledgeholder from taking proceedings relating to a Dispute in any other court having general jurisdiction in any country.
As you may see from the provision referred to above, the pledgeholder has the discretion to resort to either international arbitration or courts of general jurisdiction. In connection with this category of arbitration agreement, we are frequently requested to assess whether a split arbitration agreement would be valid, and whether Kazakh courts would recognize and enforce arbitral awards issued by tribunals formed on the basis of a split arbitration agreement.
Although, in light of the principle of freedom of contract, RoK law does not prohibit entering into split arbitration agreements, in our view, there are risks regarding the validity of such arbitration agreements. For example, the fact that the arbitration agreement allows only one of the parties to submit to courts of general jurisdiction, while simultaneously preventing the other party from doing the same, may be viewed as a violation of the principle of equality of parties.
Recently, in June 2012, the High Arbitrazh Court of the Russian Federation applied this specific rationale (hereinafter "HAC RF") in "Sony Ericsson Mobile Communications" vs. ZAO "Russkaya Telefonnaya Kompaniya". The Resolution of the HAC RF is interesting in that it analyzed the validity of the following arbitration agreement:
Any dispute arising in connection with this Agreement, if not resolved by negotiations, shall be subject to final resolution in accordance with Rules of Conciliation and Arbitration of the International Chamber of Commerce by three (3) arbitrators appointed in accordance with the said Rules. The place of arbitration shall be London. The language of arbitration shall be English. . . .
The arbitration agreement does not prevent Sony Ericsson from initiating proceedings to recover the value of supplied Goods in a competent court having the jurisdiction.
Although the courts of lower levels have affirmed the validity of the arbitration agreements, sometimes referring to the principle of the freedom of contract, the HAC RF has held as follows:
[I]n light of the general principles of protection of rights, an agreement to resolve disputes may not vest in only one party (supplier) to the contract the right to resort to a competent state court and deprive the second party (customer) from such right. If such an agreement is concluded, it shall be invalid, as violating the balance of rights of the parties. Therefore, a party whose right has been violated may also resort to a competent state court and exercise the right for judicial protection on terms equal to those of its counter party.
The HAC RF concluded that the arbitration agreement was also invalid on the grounds that it violates the adversarial principle and the principle of equality of the parties. It is difficult to agree with this rationale, because when entering into the arbitration agreement both parties were equal, and no one has been forced to limit one's right to resort to courts of general jurisdiction. One could also argue that a creditor bears greater risks associated with the failure to repay the debt or return the value of the goods supplied.
This explains why one party should have a priority in protecting his/her rights. Having said that, notwithstanding broad criticism of the resolution issued by HAC RF, there is at least some certainty in the Russian Federation when it comes to the validity of split arbitration clauses.
In Kazakhstan, due to lack of consistent judicial practice, the validity of split arbitration clauses remains questionable. This raises a number of questions and creates uncertainty in entering into contracts. It is also unclear as to whether an arbitration agreement which allows both parties to resort to arbitration or courts of general jurisdiction, depending on the size of the claim, would be upheld.