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IMPEDIMENTS TO ARBITRATION DEVELOPMENT IN KAZAKHSTAN OR WHY THE EFFECTIVENESS OF ECONOMIC DISPUTE SE

January 2016 - Litigation & Dispute Resolution. Legal Developments by AEQUITAS.

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Valikhan Shaikenov, Partner, Head of Dispute Resolution, AEQUITAS Law Firm

IMPEDIMENTS TO ARBITRATION DEVELOPMENT IN KAZAKHSTAN OR WHY THE EFFECTIVENESS OF ECONOMIC DISPUTE SETTLEMENT SUFFERS [1]

To begin with, this article will focus exclusively on commercial, rather than investment, arbitration (which, by its nature, is a public law forum in which the state is always acting as one of the parties).

[1] The Russian version of this article was published in the "Expert Kazakhstan" journal. – 2015. – No. 47. – p. 22–23.

Talks, and even attempts, to develop arbitration in Kazakhstan as an effective way to improve the investment climate are becoming popular, including at the legislative level. Investors, both foreign and local, often do not trust the domestic justice system and are therefore willing to resolve disputes in a neutral forum, which arbitration is.

There exist fundamental and specific problems that hinder development of commercial arbitration in our country.

Specific issues include the poor quality of both legislation governing arbitration and judicial practice in this area.

These problems, in turn, have several underlying causes: a long tradition of etatism (i.e., rigid state regulation of the economy) in our region, a low legal culture (including the culture of contract performance) and the lack of an independent judiciary. Autonomy of the will of individuals is always at odds with the state’s active intervention in the spheres of public and private life.

Let me first review the fundamental impediments to arbitration development.

It is extremely difficult to set up an independent arbitration in the absence of an independent judiciary. A court exercises public power but arbitration is exclusively the affair of private persons. Only an independent court respects the autonomy of will of private law subjects and ensures civil contract performance. Conversely, a corrupt and unprofessional judge is the greatest threat to the freedom of contract.

This requires clarification.

Arbitration is essentially a contract and the arbitration process is essentially the performance of the contract. Nothing more. The parties agree to resolve a dispute under certain rules: the rules, which they choose themselves and which become a part of the arbitration agreement. The parties choose the arbitrators who will settle their dispute. The parties also determine which law will “apply” to the settlement of their dispute.

This requires clarification as well.

"Application" of the law is not a precise term. Arbitration is not competent to apply the law, because law-application is exclusively a function of the public authorities (if using strictly scholarly terminology).

A court may apply the law. A public administrative authority may apply the law. But a private person, which the arbitrator is, has no capacity to apply the law. He can only interpret the law according to those rules upon which the parties have agreed or which are contained in the law proper.

Further, ideally, the parties should be free to agree on other dispute resolution rules: for example, in equity or even by tossing a coin.

The fact that arbitration does not apply the law, but merely interprets it, as do all other participants in marketplace interactions, is a matter of principle. This distinguishes arbitration from the state court and distinguishes the sphere of private relations from the sphere of public relations. Application of the law must be legal; that is why the rule of law is an indispensable attribute of justice.

In turn, private persons are guided in their relations exclusively by their own understanding of the content of mutual arrangements. No one can compel the parties to understand their mutual arrangements differently from how they themselves understand them. In this sense, their interpretation of the content of their arrangements does not have to be lawful. It suffices that both parties agree with the interpretation. Similarly, if the parties entrusted a third party to resolve their dispute in its discretion, no one but the parties themselves can refute its decision.

But if the parties promised to acknowledge any decision of the arbitrator, they are obligated to abide by this promise. The obligation to comply with the arbitrator’s award and consider it final is a civil law obligation that must be performed. The so-called "procedure of recognition and enforcement of an arbitral award" by a court is nothing but the enforcement of an undisputed claim through a state court.

A fair and independent judge should not be tempted to interfere in the private affairs of the parties. A progressive (or democratic) legislature is likewise not tempted to limit the freedom of contract.

But what if a party initially consenting to arbitration attempts to bypass its agreement or intends to obtain an unfair award when a dispute arises? Unable to influence the arbitrator (because there are mechanisms by which the parties select arbitrators and control their activities), such party is trying to make it interesting for a judge. And here the court is tempted to invade the arbitral process, the private affairs of the parties. Similarly, in a corrupt (or authoritarian) state system, the legislature is tempted to limit the freedom of contract. This phenomenon is systemic in nature.

Courts often use the following methods to interfere in the arbitration process:

declaring the arbitration clause in a contract invalid or non-concluded;

      reviewing the arbitral award on the merits and referring to the arbitral award's “unlawfulness”;

      rejecting the arbitral award recognition and enforcement by referring to a violation of the public order; and

      refusing to take injunctive measures in the framework of the arbitration proceedings.

This situation ostensibly gives rise to competition between arbitration as a private-law method of dispute resolution and justice as a form of exercise of the public authority. Such reasoning is widely supported not only by many private legal practitioners, but also by legal theoreticians, as well as by judges and the legislature.

Therefore, before going into the purely technical aspects of the arbitration legislation, it is necessary to reconsider the concept of arbitration as a means of dispute resolution and to explain the fundamental differences between arbitration and justice.

Justice is but one of many ways for resolving disputes and, as proclaimed by the Constitution
of the Republic of Kazakhstan, "shall be administered solely by a court.” Justice is a kind of law-enforcement activity and, accordingly, a form of exercise of the public authority. Going to court is one of many ways to protect a right which, among other things, can be protected by applying to the executive authorities. Other means to protect rights are the recognition of the right, the restoration of status quo ante, and the suppression of actions violating the right, etc.

Dispute resolution is not a privilege of the judicial system. Disputes are settled by completely different persons: children's disputes can be resolved by parents, disputes between friends – by a common friend, and disputes between colleagues – by senior management.

Justice is a strictly formalized process aimed at resolving disputes in accordance with strict application of the law and ensured by governmental enforcement. Justice must be lawful. If the parties wish an enforced restoration of violated rights in strict accordance with the law, they can apply to the sovereign for justice.

However, parties are free to agree not to resort to justice as a method to resolve their dispute, and such an agreement should be correspondingly protected by the court. A party cannot first promise to arbitrate a dispute and then, changing its mind, unilaterally break its promise and seek submission of the dispute to court. A promise not to go to court is the same as a civil law obligation that must be observed by the parties.

Clearly, a general desire by the state (represented by legislators and judicial power) to restrict and interfere in private affairs inevitably affects the quality of legislation and judicial practice.

Since the Kazakh legislation on arbitration contains a great many shortcomings and contradictions, its detailed review should be the subject of a separate work. This article, however, deals only with some common characteristic mistakes and weak points of our legislation, including that planned for adoption.

It is important to note that while other aspects of legal reform (for example, those intended to raise the general level of legal culture, eradicate corruption and improve the professionalism of judges) can hardly be conjured up by the legislature, it is possible to quite effectively expand the freedom of contract and hold arbitration harmless against judicial intervention by adopting progressive and clear-cut legislation.

The most discussed news, arbitration-wise, is the Government's work on the new draft Law on Arbitration (hereafter, the "Draft Law”), which is meant to replace the existing Law on International Arbitration and Law on Domestic Arbitral Tribunals. The Draft Law was submitted for public discussion in January 2015 and is currently pending consideration by the Parliament of the Republic of Kazakhstan.

The current legislation on arbitration and the Draft Law (its publicly available version) are united by one common characteristic – a significant limitation of the autonomy of the parties’ will.

Here are a few examples from the Draft Law:

The Draft Law necessitates observance of the “principle of lawfulness” under which arbitration must be guided in its decisions only by those legal norms made applicable by agreement of the parties. We are aware of several instances in which the courts, referring to "the principle of lawfulness," interpreted broadly the "public order" concept and denied, on this basis, enforcement of international arbitral awards.

The Draft Law provides the grounds for review of arbitration awards upon newly discovered circumstances, which include, for example, recognition as unconstitutional by the RK Constitutional Council of a law or another normative legal act which has been applied by the arbitration. Again, here the legislature is imposing on the parties the idea of the arbitral award lawfulness!

The Draft Law sets extremely stringent requirements for arbitrators (comparable to the requirements for candidates for the post of a judge). For example, the arbitrator must be at least 35 years old and have a higher legal education as well as at least five years continuous work experience in the legal profession.

A person charged with a crime cannot be an arbitrator (what about the presumption of innocence guaranteed by the Constitution?). Likewise, a government official, a member of the Parliament of the Republic of Kazakhstan, or a deputy of a local representative body cannot be an arbitrator.

How does the status of a person in a criminal proceeding (prior to pronouncement of conviction) or a deputy’s mandate prevent the person from acting as an arbitrator in a commercial dispute? Why does a person need to have a higher legal education to resolve a dispute, if lawfulness is not a mandatory characteristic of the arbitral award?

The Draft Law sets severe requirements for the content of an arbitration agreement. Not limiting itself to the agreement’s written form, the legislature demands that the parties have an “express intention to refer the dispute to arbitration” thus creating an additional opportunity for the court to intervene if, in its opinion, the intention was not sufficiently expressed.

In addition, the arbitration procedures proper are strictly regulated, including the arbitration timeframes.

All of these requirements, which obviously limit the freedom of an arbitration agreement, are based on the legislature’s erroneous view of the arbitration as competing with the public function of justice.

Until our legislature rethinks the conceptual fundamentals of commercial arbitration as well as the court following the legislator’s example, the freedom of arbitration, without which there can be no development of the institute of civil law, will continue to be infringed.

Conversely, any fencing-off of arbitration against judicial intervention will contribute to promoting Kazakhstan as Central Asia's dispute resolution center, which, of course, should have a positive impact on the quality of the investment climate in the country.