By: Alexander Korobeinikov1Alexander Korobeinikov is a senior associate in Baker & McKenzie’s Almaty office and a member of Baker & McKenzie International Arbitration Practice Group.
A. Legislation, Trends and Tendencies
A.1 Legislation
International arbitration in Kazakhstan continues to be governed by the Law On International Arbitration (the “International Arbitration Law”), which was enacted on 28 December 2004. The law is based on the UNCITRAL Model Law.
Under the new version of the Civil Procedural Code of the Republic of Kazakhstan, adopted in October 2015 and in force since 1 January 2016, the procedure for the enforcement of the local arbitration procedure has become more complicated. In particular, in addition to the grounds for refusing to enforce an arbitral award listed in Article V of the New York Convention, the enforcement of an award may now be rejected if: (i) there is a judgment or an arbitral award issued on the same dispute between the same parties and based on the same grounds (i.e., a judgment or award that has res judicata effect), or (ii) an award is issued as a result of a crime confirmed by the sentence of a criminal court.
While it is not entirely clear, due to the fact that Kazakhstan is a member of the New York Convention, we think that these new grounds will be applied only to domestic arbitral awards. However, this issue will need to be clarified by local court practice.
A.2 Trends and Tendencies
A.2.1 New Arbitration Law
While in 2004, the Kazakh Parliament adopted two separate laws that regulate international and domestic arbitration proceedings in 2004, 10 years of experience has shown that there are a number of practical issues arising from application of different laws. Therefore, the Kazakhstani Parliament is currently considering a new version of the Law On Arbitration (the “New Arbitration Law”). This draft, which was presented for the first time by the Ministry of Justice in 2014, is also based on the UNCITRAL Model Law. It will govern both international and domestic arbitration proceedings. In addition to unifying procedural rules for international and domestic arbitration proceedings, the New Arbitration Law will implement the following changes to the current rules:
i. State-owned companies will have a right to execute arbitration agreements with Kazakhstani companies only after getting consent from the superior state authority.
ii. An arbitration agreement will have to set forth the name of the arbitration institution to be used. Due to this provision, it is not entirely clear whether arbitration agreements that refer to ad hoc arbitration rules will be valid or not.
iii. A new association of arbitration institutions and arbitrators – the Arbitration Chamber – will be established. This Chamber will be responsible for maintaining a Register of Arbitrators and will represent local arbitration institutions to local state authorities and foreign organizations.
iv. When reviewing disputes with state-owned companies, arbitrators will be required to apply Kazakhstani law only, unless otherwise provided in the international treaties of the Republic of Kazakhstan.
v. Parties will have a right to seek the reconsideration of arbitral awards based on so-called “newly opened circumstances” (i.e., facts which are material to the case, but have not previously been known to an applicant). This provision has been copied from the Civil Procedure Code, and it is not entirely clear how it will be applied by arbitrators.
vi. In addition to the currently existing grounds for challenging an arbitral award, the New Arbitration Law will allow parties to challenge the award if there is a judgment or an award that has a res judicata effect on the subject matter of the challenged award.
Generally, while the unification of procedural rules for international and domestic arbitration proceedings is a positive change, other provisions of the proposed Law will make the regulation of arbitration proceedings in Kazakhstan more restrictive. Additionally, it is not entirely clear how these new provisions will interrelate with the provisions of international treaties ratified by Kazakhstan.
A.2.2 New Court and Arbitration Institution in Astana
In an effort to attract further investment into Kazakhstan, President Nursultan Nazarbayev on 19 May issued a decree (the “Financial Center Decree” or the “Decree”) that significantly affects the republic’s financial and judicial systems and which, as a consequence, will alter the relative importance of the country’s two leading cities, Astana and Almaty. Pursuant to the Financial Center Decree, a new international financial center will be created in Astana (the “Astana Financial Center” or the “Center”), with the goal of becoming one of the top 10 financial centers in Asia, as well as one of the top 30 financial centers in the world, by 2020.
In line with the Financial Center Decree, in December 2015 the Constitutional Law on International Astana Financial Center (“Astana Financial Center Law”) has been adopted in order to ensure the establishment and operation of the Astana Financial Center.
A key part of the Astana Financial Center will be the creation of a “financial court” in the Center (“Astana Financial Center Court”). It will engage foreign judges to resolve investment and other disputes between members of the Astana Financial Center, or other parties if they agree to settle their disputes in this financial court. It appears that the new court may hear disputes under agreements governed by English law and that the English language will be used for the proceedings of the new court. It is expected that the new court at the Astana Financial Center will have many similarities to the Dubai Financial Center Court or the new Singapore International Commercial Court.
Similar to the Dubai Financial Center, under the Astana Financial Center Law, the Council of the Astana Financial Center will establish the International Arbitration Center, which will be a new arbitration institution. While it is not entirely clear, it seems that the Astana Financial Center Court will be responsible for the enforcement of awards issued by the International Arbitration Center and other arbitration institutions on disputes between members of the Astana Financial Center.
B. Cases
B.1 Interim Measures to Secure Foreign Arbitration Proceedings
In 2015, there were two court proceedings where Kazakhstani courts granted applications to impose interim measures in order to secure arbitration proceedings commenced abroad. While the Kazakhstani Civil Procedure Code set forth the right of a party to arbitration proceedings to seek interim measures in the Kazakhstani courts after the commencement of the arbitration proceedings, these provisions are usually used to secure domestic arbitration proceedings and after getting interim measures orders from arbitrators.
The first case relates to securing arbitration proceedings commenced under the SCC Arbitration Rules. In this case, the claimant sought interim measures from the Kazakhstani court after the commencement of the arbitration proceedings, but without an interim measures order issued by arbitrators. As a result of the review of the interim measures application, the court granted this application against a state-owned company to secure the EUR25 million claim.
The second case relates to securing ad hoc arbitration proceedings commenced under the UNCITRAL Arbitration Rules. In this case, the respondent argued that the Kazakhstani court could not impose interim measures before the constitution of the arbitral tribunal. This position of the respondent was based on the provisions of the International Arbitration Law, which state that the arbitration proceedings are deemed to be commenced after the arbitrators issue the relevant decisions.
While the court of the first instance rejected the interim measures application, the appellate court granted it. The position of the court of appeal was based on the provisions of the UNCITRAL Arbitration Rules, which provide that the arbitration proceedings are deemed to be commenced once the request for arbitration has been submitted.
These two cases are early examples of the positive practice of local courts relating to the security of foreign arbitration proceedings and show the pro-arbitration approach of the Kazakhstani courts.
B.2 Enforcement of the SCC Separate Award on Costs
In July 2015, the Kazakh court reviewed an application seeking the enforcement of a separate award on costs (“SCC Separate Award”) issued under Article 45.4 of the SCC Arbitration Rules. This Article allows arbitrators to issue a separate award for the reimbursement in full of the advance cost payment made by one of the parties to the arbitration proceedings if the other party refuses to pay its part. This separate award may be issued before the issuance of the final award on the dispute.
As a result of the review of the application, the Kazakh court decided that this SCC Separate Award could be recognized and enforced under the New York Convention 1958. To the best of our knowledge, this was the first time the Kazakhstani courts have reviewed this issue.
This case has not been reviewed by higher courts, and it is not entirely clear whether this practice will be supported by further Kazakhstani court practice. However, the positive outcome of this case evidences the general pro-arbitration approach used by the Kazakhstani courts.
C. Costs in International Arbitration
C.1 Allocation of Costs
The International Arbitration Law sets forth rules for the allocation of costs relating to the arbitration proceedings. Under Article 14.1 of the Law, costs are to be allocated in proportion to the amount of claims that have been granted or declined by the arbitrators, unless otherwise agreed by the parties. This means that under the default rule, if a party prevails 100 percent on the merits, its costs are to be reimbursed at the same rate. This provision is in line with the approach used by the Kazakhstani courts under the Civil Procedure Code.
Arbitration rules of major local arbitration institutions generally follow these default provisions of the International Arbitration Law. At the same time, they also set forth some additional options or requirements for the allocation of costs. For example:
(i) The Regulation for the Arbitration Fees and Expenses of the International Arbitration Court allows arbitrators to split the arbitration costs equally between the parties under certain circumstances.
(ii) The Regulation on Arbitration Fees and Expenses of the Kazakhstani International Arbitrage sets forth the right of the Chairman of the Kazakhstani International Arbitrage to change pro rata allocation of costs because of mala fide behavior of one of parties.
(iii) Article 10 of the Rules of the Center of Arbitration of the National Chamber of Entrepreneurs of the Republic of Kazakhstan provides that legal costs of the successful party can be reimbursed in the amount not more than 10 percent of the granted or declined claims. This limitation has been copied from the civil procedure rules used by the Kazakhstani courts.
C.2 Security for Costs
Neither the International Arbitration Law nor the arbitration rules of major local arbitration institutions set forth any special rules for the security for the other party’s costs. At the same time, in theory, a party’s claim relating to the reimbursement of costs may be secured by imposing interim measures against the other party in the manner set forth for the security of claims on the merits (i.e., via local Kazakhstani courts). However, we are not aware of any relevant court practice.
C.3 Recovery of Costs
Article 13 of the International Arbitration Law sets forth a long list of costs that may be recoverable. In particular, this list includes representation costs as well as any costs relating to the organization of the arbitration proceedings. The International Arbitration Law does not set forth any limits on these costs or guidelines for arbitrators concerning the calculation of the amount of costs that can be recovered. Therefore, these issues are mostly regulated by arbitration rules of local arbitration institutions and/or decisions of arbitrators on a case-by-case basis.
For example, as we stated above, the Rules of the Center of Arbitration of the National Chamber of Entrepreneurs of the Republic of Kazakhstan set forth a 10 percent cap for the representation fees. In absence of the agreement between parties and provisions of arbitration rules, local arbitrators also use the same approach and are reluctant to grant the recovery of representation fees if they exceed 10 percent of the granted or declined amount of the claim.
Costs of a party’s in-house counsel and other members of a party’s staff (contract managers, engineers, etc.) are usually not claimed by parties, because these are not directly mentioned in the list of recoverable costs set forth in Article 13 of the International Arbitration Law.
Based on the approach used by the state Kazakhstani courts, before reviewing the application to recover arbitration costs, local arbitrators usually ask parties to provide documentary evidence (payment documents) confirming that they have actually incurred these expenses.