Kazakhstan’s new arbitration law – Uncertainties about the choice of international arbitration
October 2016 - On 8 April 2016, Kazakhstan adopted the Law No. 488-V On Arbitration which replaced two previous laws – the Law No. 23-III On International Arbitration dated 28 December 2004 and the Law No. 22-III On Arbitration (treteiskii sud) dated 28 December 2004. The new law is a good step forward in simplifying domestic arbitration proceedings but a number of respected lawyers believe that still more can be done. More of a concern is the uncertainty created due to the adoption of the new law in its current form.
The main problem with the new law is that it does not clearly differentiate between domestic and foreign arbitration. By foreign arbitration we mean international arbitration bodies such as the London Court of International Arbitration (LCIA), International Chamber of Commerce (ICC), the Arbitration Institute of the Stockholm Chamber of Commerce and similar establishments.
The preamble to the new law reads as follows: “This Law regulates social relations arisen in the process of arbitration activity on the territory of the Republic of Kazakhstan as well as the procedure and terms of recognition and enforcement of arbitral awards in Kazakhstan…”
Thus, we believe that the new law should apply only to the activities of domestic arbitration courts (i.e., arbitration with a seat in Kazakhstan). The text of the new law is vague and can be interpreted as applying to both domestic and foreign arbitration. This is a particular problem given certain aspects of the new law, which may have implications for the inclusion of foreign arbitration provisions in cross-border transaction documents. Specifically,
- Article 8.8 (non-arbitrability of disputes between qualified entities)
Article 8.8 applies to disputes between quasi-sovereign entities (please see definition below) and/or state bodies (e.g., the National Bank of Kazakhstan or the Government). Quasi-sovereign entities include state enterprises, limited liability partnerships, joint stock companies, including national managing holdings, national holdings, national companies, in which the founder, a participant or a shareholder is the State, as well as subsidiaries, associates and other legal entities affiliated with them in accordance with the laws of Kazakhstan.
Under Article 8.8 disputes between quasi-sovereign entities and/or state bodies may not be subject to arbitration. As often happens in cross-border transactions in Kazakhstan, the parties to the transaction documents include two or more quasi-sovereign entities (e.g. a guarantor/sponsor in a deal will be Samruk-Kazyna and the project company will be a quasi-sovereign entity, both of which will be parties to the same transaction documents ) in addition to foreign investors, lenders or sponsors involved in the transaction. Usually transaction documents involving foreign parties provide for disputes to be resolved by foreign arbitration. In such cases, under Article 8.8 of the new arbitration law if a dispute were to arise between two quasi-sovereign entities such as Samruk-Kazyna and a project company, the submission of this dispute to foreign arbitration in accordance with the terms of the transaction document may be held invalid and/or a Kazakhstan court may refuse to recognize and enforce a foreign arbitral award obtained under this document.
- Article 8.10 (consent to arbitrate for qualified entities)
Article 8.10 says that State-controlled companies, state enterprises and/or state bodies must obtain the consent of the competent authority to settle any dispute by arbitration. Under the new law, such entities clearly have to obtain consent for domestic arbitration. Such consent will need to be obtained before entering into a transaction document that provides for arbitration.
It is not clear whether they must obtain consent of the competent authority to settle any dispute by foreign arbitration. This uncertainty means that for now, at least, it may be advisable for such entities to seek consent before entering into agreements with foreign counterparties that provide for disputes to be settled by international arbitration. In that case, the relevant competent authority may respond that such consent is not necessary (e.g., because consent is required for domestic arbitration only) and that would help.
Note further that it is not clear which body is the competent body to give such consent and no procedure for obtaining consent has been adopted yet.
- Article 9.5 (unilateral refusal from arbitration agreement)
Article 9.5 states that the parties have the right prior to a dispute arising to unilaterally withdraw from arbitration in accordance with article 404 of the Civil Code. Article 404 provides for three grounds for refusal including change or termination of a state act that served as the basis for the [arbitration] agreement. If the relevant state body granted its consent for foreign arbitration, but then withdraws its consent, this may be qualified as termination of a state act for the purposes of article 404 and serve as grounds for the entity that obtained the consent to withdraw from the arbitration agreement. As it is not clear whether and to what extent this provision of the new law applies to a foreign arbitration clause under the relevant transaction documents, the provision creates significant uncertainty for counterparties that expect to rely on the agreement to settle a dispute by international arbitration.
- Article 44 (Kazakhstan law as applicable law to disputes with qualified entities)
Article 44 says that any dispute involving State-controlled companies, State enterprises and State bodies should be settled by arbitration in accordance with Kazakhstan law unless otherwise provided by international agreements ratified by Kazakhstan. As currently drafted, it is unclear whether any dispute involving State-controlled companies can be settled by arbitration in accordance with law other than Kazakhstan law even where the parties to an agreement have chosen foreign law to govern the agreement. Until there is clarity as to whether this provision applies to foreign arbitration, the uncertainty may cause serious concern for foreign parties entering into agreements with State-controlled entities or State bodies.
The uncertain application of the new arbitration law to the choice of international arbitration to resolve disputes with quasi-sovereign entities is troubling for foreign counterparties and may pose a material impediment to cross-border transactions, in particular to the attraction of financing by quasi-sovereigns. Amendments to the new law are needed to remove the uncertainty and to ease the concerns of foreign counterparties. Without such amendments, we believe that official clarifications from the General Prosecutor or other competent authorities can help establish how, in practice, the new law will be interpreted, thus removing some of the uncertainty.
For more information please contact Joel Benjamin, Partner, at and Maksim Grekov, Of Counsel, .