Different Treatment for Arbitral Awards Issued in and outside Kazakhstan - International Law Office

Article V.1(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 allows competent authorities of any member state, including Kazakhstan, to set aside an arbitral award issued outside the member state if the award was made under its law. Recognition and enforcement of such an award in other member states in this case may be refused at the request of a party against which the award is invoked if the party furnishes proof that the award was thus set aside.

The convention leaves the regulation of the grounds for setting aside an award to national legislation: the underlying logic is to let judges in the governing law jurisdiction have a final say in the event that an arbitral tribunal incorrectly applies the rules of domestic legislation and renders an award in breach of some basic legal principles of the applicable national law.

Kazakh law takes a conservative approach and does not allow challenges to arbitral awards simply on a point of law. The Law on International Commercial Arbitration provides that a Kazakh court may set aside an arbitral award only if:

• a party to the arbitration agreement has been found to have no legal capacity by a competent court or the agreement is invalid under the law to which it was subjected by the parties;
• a party to arbitration was not duly notified of the appointment of an arbitrator or the commencement of arbitration, or was otherwise denied the opportunity to present its case;
• the award:
  • was issued in respect of a dispute that does not fall within the scope of the arbitration agreement,
  • contains decisions on issues that exceed the scope of the agreement or
  • exceeds the competence of the arbitral tribunal; or
• the competent court finds that the award is contrary to public order in Kazakhstan or the subject matter of the dispute may not be considered in and resolved by arbitration.

The law also sets out a procedure for the recognition and enforcement of foreign arbitral awards and allows courts to refuse to recognize or enforce an award (on grounds on which an award may be set aside). However, the law governs only: (i) relations which arise in the course of the activity of international commercial arbitration courts in Kazakhstan, and (ii) the procedure and terms of recognition and enforcement of international arbitral awards in Kazakhstan.

As the procedure for setting aside an award is distinguished from its recognition and enforcement (or refusal thereof), the law does not govern the procedure for and terms of setting aside an award which was issued outside Kazakhstan. Article 426(1) of the Civil Procedure Code supports this approach and authorizes Kazakhstan courts to set aside arbitral awards “at the place of resolution of the dispute” - that is, only if the dispute was resolved in Kazakhstan. Therefore, an award issued by the International Chamber of Commerce (ICC) or London Court of International Arbitration (LCIA) outside Kazakhstan and under Kazakh law may not be set aside in Kazakhstan by application of the law, regardless of whether the award:

• contradicts Kazakhstan’s public order;
• exceeds the scope of the arbitral agreement; or
• involves a party which had no legal capacity to be bound by an arbitration agreement.

Despite the fact that an award issued outside Kazakhstan can still be refused recognition and enforcement by the Kazakh courts, the defendant is not protected against enforcement of the award if it has property in other member states of the convention. Therefore, in a situation where an arbitral tribunal has incorrectly understood and applied Kazakh law (including a decision on its own competence) and issued an award in contradiction of fundamental Kazakh legal principles, Kazakh law would not accord fair protection to the defendant to the level offered by the convention for a purely technical reason, such as the location of the seat of arbitration.

Ironically, if parties to a dispute agree that the seat of arbitration shall be in Kazakhstan, an award made by an LCIA or ICC tribunal in Kazakhstan falls within the scope of the law and may be set aside by a Kazakh court on the grounds specified in Article 31. However, if the parties agree to a seat of arbitration in another country and the dispute is to be resolved by what is identified as an 'international commercial arbitration court' constituted and registered in Kazakhstan, the award issued by the international arbitration court may not be set aside in Kazakhstan.

The courts should arguably be able to look beyond the formal limit of the scope of the law. According to the code, it is the responsibility of Kazakhstan’s civil dispute resolution system to safeguard public order in Kazakhstan; thus, the courts should be able to set aside arbitral awards issued both in and outside Kazakhstan on the grounds of breach of public order, a party’s lack of legal capacity or the absence of a valid arbitral agreement. Article 6 of the code requires the court, in the absence of legal rules applicable to the dispute, to apply legal rules governing a similar legal relationship; therefore, Article 426(1) of the code should apply by analogy, (although some legal experts dispute whether civil procedural law may ever be applied by analogy). Article 6 also requires that, in the absence of applicable and analogous legal rules, the court should resolve disputes based on general legal principles, the meaning of law and general notions of justice and reason.

The courts have not yet dealt with a request to set aside an award made outside Kazakhstan. It seems likely that the courts would take the path of least resistance and find that such an award may not be set aside. There may be a change in what we consider a legislative lapse in future. However, at present Kazakh defendants prefer not to subject their foreign assets to the risk of seizure and choose to pay costs ordered in awards even if, as occasionally happens, such awards represent a breach of Kazakhstan’s public order requirements and exceed the scope of the arbitration agreement.

For further information on this topic please contact Vladimir Furman or Dinara Jarmukhanova at McGuireWoods Kazakhstan LLP by telephone (+7 3272 596 100) or by fax (+7 3272 596 116) or by email (vfurman@mcguirewoods.com or djarmukhanova@mcguirewoods.com).