Submission of dispute between Kazakhstani companies to international arbitration court. Is it possible?

As a general rule, investors and Kazakhstani entrepreneurs prescribe an arbitration clause in contracts with foreign counterparties and, subsequently submit disputes to international arbitration courts in other states (herein below “international arbitration courts”), and  Kazakhstani residents also sometimes submit their disputes to international arbitration courts.

However, a judicial practice shows that residents encounter difficulties in recognition of validity of arbitration clauses (arbitration agreements), because the competent courts opine that residents’ disputes cannot be submitted to international arbitration courts, e.g. LCIA, ICC, etc., referring to provision of point 4, article 6 Law on Foreign Arbitration of 28 December 2004 (the Law).  It is worth mentioning that the Supreme Court of the Republic of Kazakhstan has recently heard a case on dispute between the Kazakhstan residents, and affirmed the decision of a court a quo on recognition of arbitration clause between residents of Kazakhstan nil and invalid.

Such point of view of competent Kazakhstani courts is not encouraging for Kazakhstani investors and entrepreneurs, as they want the case to be heard in international arbitration court.

It should be noted that as per the article 6, point four, a civil dispute can be submitted for consideration to foreign arbitration, if one of the parties is a non-resident of Kazakhstan. In addition, disputes connected with performance and cessation of concession agreements in cases, provided in the Concession Law of the Republic of Kazakhstan can also be submitted to international arbitration court. This provision was the basic reason in delivering judgements on recognition of arbitration agreements as nil and invalid by competent courts.

In this article, we would like to impugn the correctness and lawfulness of certain judgements of competent courts that deprive Kazakhstani entrepreneurs to submit their disputes to foreign arbitration courts.

Firstly, the preamble of the Law states that the Law regulates relations during the arbitration process on the territory of the Republic of Kazakhstan and order and conditions for recognition and enforcement of international arbitration awards.

In other words, the Law can regulate relations during the arbitration proceedings in Kazakhstani International Arbitration Court, Centre of Arbitral Proceedings in National Chamber of Entrepreneurs, International Arbitration Court “IUS” etc.

Therefore, deciding on competence of foreign arbitration courts on the basis of provisions of the Law directly contradicts to the preamble of the Law.

Secondly, the Kazakhstani courts did not take into consideration the principle “Competence-Competence”, the central principle of international commercial arbitration. The principle is embedded in point 1, article 15, the Law, which states: “an arbitration court decides on its competence in cases, when a dispute is submitted to the tribunal for consideration, inter alia in cases, when one party has objections as to the proceedings on the reason of invalidity of arbitration agreement.

Besides this, as per article 16 UNCITRAL Model Law on International Commercial Arbitration, the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.

In addition, we can refer to the European Convention[1]. Pursuant to article 6, point 3 of the Convention, where either party to an arbitration agreement has initiated arbitration proceedings 48 before any resort is had to a court, courts of Contracting States subsequently asked to deal with the same subject-matter between the same parties or with the question whether the arbitration agreement was non-existent or null and void or had lapsed, shall stay their ruling on the arbitrator’s jurisdiction until the arbitral award is made, unless they have good and substantial reasons to the contrary.

Thirdly, it is necessary to note that division of alternative court institutions into international arbitration and referees courts is conditional, and arbitration and referee’s court is the same institution.

Any arbitration (referees’) court may accept and examine either local and international disputes; any individuals and legal entities (resident and non-resident) may apply to any arbitration court however named “referees’ court” or “international arbitration court.”

Thus, the same court may act as a referees’ court, when both parties are residents and as an arbitration one, when one party is a non-resident.»[2]

Article 1, point 2, Rules on Kazakhstan International Arbitration, directly states that the following disputes may be submitted to the Kazakhstan International Arbitration: (i) during referees’ proceedings  – civil disputes between residents individuals, including private entrepreneurs and (or) resident legal entities; (ii) during arbitral proceedings – civil disputes between individuals, including private entrepreneurs) and (or) legal entities, in which one of the parties is a non-resident of Kazakhstan.

If one interpret and construe provision of article 6, point 3 the  Law the way the competent state courts of the Republic of Kazakhstan do so, it can be concluded that Kazakhstan International Arbitration cannot consider disputes between two residents of Kazakhstan during the referees proceedings.

Then it begs the question, why LCIA or any other foreign arbitration cannot hear a dispute between two residents of Kazakhstan during referees’ proceedings?

Fourthly, one should bear in mind the autonomy of arbitral clause in the contracts, i.e. independence of arbitral clause from other clauses of a contract, and note the governing law for the arbitral clause or agreement. Any other law, different from one governing the contract, can govern the arbitral clause and, the parties usually decide on the governing law for the whole contract, but it is not often when the parties decide on the governing law for the arbitral clause.

Thus, when the parties indicated the location of foreign arbitration court, but failed to indicate which  will govern the arbitral clause, the dispute should be submitted to and  handled by a public (state) court of country, where the arbitration review of dispute must take place by virtue of para.2, article 6, European Convention.

Therefore, the pubic courts of the Republic of Kazakhstan cannot decide on validity or invalidity of arbitral clauses, pursuant to which the disputes between the parties should be submitted to international arbitration court.

In summary, it can be said that the residents of the Republic of Kazakhstan may prescribe an arbitration clause in contracts between them and submit a dispute between them into international arbitration court. Moreover, when either party appears to be unfair and attempts to invalidate the arbitration clause through a public court of the Republic of Kazakhstan, it should be stated that a domestic court cannot handle such case, as it is beyond of its competence and under the competence of a public court of a country, where the arbitration review should take place.

 

[1] European Convention on International Commercial Arbitration  (Geneva , 21 April 1961). The Republic of Kazakhstan joined the Convention pursuant to decree of the Kazakhstani President. № 2484 of 4 October 1995

[2] New laws on arbitration and mediation in Kazakhstan Suleimenov М.К./ Paragraph legal database

Yerzhan Manasov

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