Arbitration Process in Kazakhstan: Key Provisions, Expenses, and Challenges

An arbitration agreement is a written agreement between parties to submit a dispute arising or that may arise from civil legal relations to arbitration. The arbitration agreement is concluded in writing. It is considered to be concluded in writing if it is contained in the form of an arbitration clause in a document signed by the parties, or concluded through the exchange of letters, telegrams, telexes, faxes, electronic documents, or other documents that identify the parties and the content of their expression of will.

A dispute may be submitted to arbitration if there is an arbitration agreement concluded between the parties. In other words, the arbitration agreement establishes the legal and binding conditions for submitting a dispute to arbitration. Without such an agreement, arbitration becomes impossible. Based on the principle of party autonomy, the arbitration agreement reflects their desire to choose a dispute resolution mechanism and determine the conditions under which they agree to the arbitration process.

According to paragraph 4 of Article 9 of the new Arbitration Law, an arbitration agreement must include the following:

1. Clear expression of the parties' intention to submit the dispute to arbitration.
2. Definition of the specific subject matter to be considered in the arbitration process.
3. Indication of a specific arbitration institution.
4. Consent of the authorized body in the relevant field or local executive body, if provided for by paragraph 10 of Article 8 of the specified Law.

In accordance with paragraph 1 of Article 393 of the Civil Code, a contract is considered concluded when the parties have reached agreement on all essential conditions in the form required in the relevant cases. Submitting a dispute to arbitration is the object of the arbitration agreement. Therefore, the arbitration agreement must contain information that allows for the unambiguous identification of the arbitral tribunal to which the parties intend to submit an existing or potential dispute.

The designation of the arbitral tribunal is a key element of the agreement since it determines the subject of the agreement. Therefore, the arbitration agreement must contain information that allows for the unambiguous identification of the specific arbitration body chosen by the parties to resolve the current or potential dispute. Consequently, among all the elements of the arbitration clause, the indication of the arbitration court chosen by the parties or such characteristics that are directly unique to it and clearly define its identification holds the greatest importance. In the absence of such information in the arbitration agreement, as well as if it is impossible to apply compensatory norms (including the provisions of the European Convention on International Commercial Arbitration), such arbitration agreement is considered invalid.

The question of the legality of an arbitration agreement must be resolved in accordance with the legislation referred to by the parties in the terms of the agreement itself. In case the arbitration agreement does not specify the applicable law, the court, when considering a request for the recognition of the invalidity of an arbitration decision, determines the validity or invalidity of the arbitration agreement in accordance with the legislation of the Republic of Kazakhstan.

According to the first part of Article 10 of the Arbitration Law, the court to which the claim related to the subject of arbitration proceedings has been filed must, if requested by one of the parties, refer the parties to arbitration if it is not established that the arbitration agreement is invalid, has lost its force, or cannot be executed. In this case, the court (or judge) dismisses the claim referring to paragraph 7 of the first part of Article 152 or paragraph 5 of Article 279 of the Civil Procedure Code. To decide on the return of the claim or leaving it without consideration, the court (or judge) must establish whether a statement by one of the parties was filed for the referral of the case to arbitration no later than the submission of the first statement on the substance of the dispute and also consider the issues of the validity of the arbitration agreement, its legal force, and the possibility of its execution.

It is necessary to distinguish cases when an arbitration agreement is invalid from situations where it loses its force or cannot be executed. Examples of the loss of force of an arbitration agreement can be the expiration of its term or the occurrence of a condition for its cancellation.

The impossibility of executing an arbitration agreement may manifest, for example, in a situation where its terms provide for a permanently operating arbitration court, which has already ceased to exist by the time the dispute arises.

According to the principle of autonomy of the arbitration agreement, the cancellation, modification, or recognition of the invalidity of the main agreement will not lead to the termination, modification, or recognition of the invalidity of the arbitration agreement.

To determine the arbitrability of disputes involving government agencies, state-owned enterprises, and legal entities in which the controlling stake (or shareholding) is owned by the state, the following conditions must be observed:

• The dispute must be civil in nature.
• One of the parties to the dispute must be a natural and/or legal person.
• The parties must conclude an arbitration agreement.
• Special consent must be obtained from the authorized body of the relevant industry (for republican property) or the local executive body (for municipal property).

When government agencies, state-owned enterprises, and legal entities in which the controlling stake (or shareholding) is owned by the state enter into arbitration agreements with non-residents of the Republic of Kazakhstan, such consent is not required.

In the case of the conclusion of an arbitration agreement by a government agency, which may be the authorized body of the relevant industry, it is necessary to comply with the legislation regulating issues of subordination of government agencies. For example, according to the Constitution and the Law of the Republic of Kazakhstan dated March 1, 2011, No. 413-IV "On State Property," the Government of the Republic of Kazakhstan is the authorized body for ministries.

It is important to note that the requirement for obtaining consent from the authorized body or local executive body applies to all arbitration agreements valid on the territory of the Republic of Kazakhstan, regardless of the time of their conclusion.

Expenses related to resolving disputes in arbitration include:

1. Arbitrators' fees.
2. Expenses incurred by arbitrators in connection with their participation in arbitration proceedings, including travel to the location of the dispute, accommodation, and meals.
3. Amounts paid to experts and translators.
4. Expenses related to the inspection and examination of written and material evidence at the location of the arbitration.
5. Expenses incurred by witnesses.
6. Costs for the services of representatives of the parties in whose favor the arbitration decision is rendered.
7. Expenses for organizational and material support of arbitration proceedings.

In a permanent arbitration tribunal, the amount of arbitrators' fees is determined in accordance with the fee scale provided for in the regulations of the arbitration. In the absence of a fixed fee amount in the regulations, the arbitration panel may determine its amount taking into account various factors, including the amount in dispute, the complexity of the dispute, and the time spent on its consideration.

In arbitration proceedings to resolve a specific dispute, the number of arbitrators' fees may be determined by agreement between the parties or by the arbitration itself in accordance with the procedures established for a permanent arbitration tribunal.

During the resolution of a dispute in arbitration, the related expenses are allocated between the parties in accordance with an agreement between them. In the absence of such an agreement, the expenses are allocated proportionally to the satisfied and dismissed claims. Expenses for the payment of the services of a representative of the party in whose favor the arbitration decision was rendered, as well as other expenses related to arbitration proceedings, may be shifted to the other party at the discretion of the arbitration if the corresponding demand was made and satisfied by the arbitration.

Arbitrators have the right to demand from the parties the provision of security for the expenses they incurred during the resolution of the dispute in arbitration. They may also require security for specific claims. If one of the parties fails to provide security within the specified period, the other party may provide full security. In case of failure to provide the necessary security, the arbitrators have the right to partially or completely terminate the proceedings.

Arbitrators may use the provided security to cover their expenses during the proceedings. After the arbitrators have settled the issue of their compensation in the final decision, and this decision can be enforced, the arbitrators have the right to receive payment from the security if the parties fail to fulfill their payment obligations in accordance with the decision.

An agreement on the compensation of arbitrators to which the parties did not jointly agree is considered invalid. The party providing full security may agree to the use of the entire security by the arbitrators for the compensation of their work.

According to the legislation, arbitration courts do not consider the following types of disputes:

1. Disputes related to the interests of individuals who have not reached the age of majority, as well as individuals recognized by a court decision or in accordance with the law as partially or fully legally incapacitated.
2. Disputes concerning rehabilitation and bankruptcy proceedings.
3. Disputes between subjects of natural monopolies and their consumers.
4. Disputes between state authorities and entities in the quasi-state sector.
5. Disputes arising from personal non-property relations that are not directly related to property matters.
6. Disputes where state enterprises, as well as legal entities in which the state directly or indirectly owns fifty percent or more of the voting shares (participation interest in the charter capital), do not have the consent of the authorized body to conclude an arbitration agreement.

In accordance with the mentioned norm, disputes arising from public law relations (such as tax, customs, etc.) are not subject to arbitration. Disputes arising from personal non-property relations not related to property interests, such as claims for compensation for moral damages or protection of honor, dignity, and business reputation, are also not subject to arbitration, according to Article 141, Clause 2 of the Civil Code.

When determining the jurisdiction of arbitration in disputes involving state authorities, state enterprises, and legal entities controlled by the state with a share of fifty percent or more in the charter capital, the following conditions must be met:

1. The dispute must relate to civil law relations.
2. The other party to the dispute must be a natural and/or legal person.
3. The parties must conclude an arbitration agreement.
4. Special consent must be obtained from the relevant authorized body (in the case of republican property) or the local executive body (in the case of communal property).

When entering into arbitration agreements, the aforementioned organizations may not require the consent of non-residents of the Republic of Kazakhstan.

If an arbitration agreement is concluded by a state authority that may be considered as an authorized body in the relevant sector, it is necessary to follow the norms of legislation defining the structure of state bodies. For example, in the case of a ministry, the authorized body is the Government of the Republic of Kazakhstan.

It is important to note that the requirement for the consent of the authorized body or the local executive body, as established in Article 8, Clause 10 of the Arbitration Law, applies only to arbitration agreements concluded after the entry into force of the relevant law. Article 8, Clause 10 of the Arbitration Law contains a mandatory requirement for the necessity of obtaining consent from the authorized body or the local executive body regarding any arbitration (whether permanent or established for the resolution of a specific dispute) operating on the territory of the Republic of Kazakhstan.

Arbitration decisions are based on the norms of law chosen by the parties and are applied accordingly. If the parties have not determined the applicable law, the arbitration determines it taking into account conflict of laws rules. In the absence of relevant legal norms, arbitration is guided by business customs. If such customs are unavailable, similar legal norms or general principles of civil law are applied to resolve disputes.

After carefully examining the circumstances of the case, the arbitration makes a decision by a majority vote of the arbitration members. The decision is announced at the arbitration meeting, unless otherwise provided by the regulations. Arbitration may limit itself to announcing the operative part of the decision, with reasoned justification sent to the parties within ten calendar days. An arbitrator who disagrees with the majority decision has the right to present their dissenting opinion, which is also provided to the parties for review. If necessary, the arbitration may postpone the decision and convene the parties for an additional meeting. The arbitration decision is considered adopted at the place of proceedings and comes into force from the moment of its signing by the arbitrator(s).

The arbitration decision is formalized in writing and signed by the arbitrators or a sole arbitrator. If the proceedings were conducted collegially and there is no signature of any arbitrator, the reason for the absence is indicated. The decision may remain unsigned by the arbitrator who expressed a dissenting opinion, which is attached to the decision.

The arbitration decision must contain the following information:

• Date of decision;
• Place of proceedings established in accordance with Article 22 of the Arbitration Law;
• Composition of the arbitration;
• Justification of the arbitration's jurisdiction;
• Names of the dispute parties and their representatives with indications of authority;
• Plaintiff's claims and defendant's objections;
• Essence of the dispute;
• Established circumstances of the case, evidence supporting the arbitration's conclusions, and applicable legal acts;
• Arbitration decision on each claim;
• Expenses related to dispute resolution, their distribution between the parties, as well as terms and procedure for decision enforcement.

Arbitration proceedings are terminated when the arbitration issues a decision to terminate on the following grounds:

1. The plaintiff withdraws their claim, and the arbitration accepts this withdrawal if the defendant does not object to terminating the proceedings due to their legitimate interest in resolving the dispute on the merits.
2. The dispute submitted to arbitration falls outside its jurisdiction.
3. There is a final court or arbitration decision between the same parties, on the same issue, and on the same grounds.
4. The parties reach an agreement to terminate the proceedings.
5. A legal entity participating in the proceedings is liquidated.
6. A natural person participating in the proceedings dies, is declared dead, or is recognized as missing.

If the parties settle the dispute during the arbitration proceedings, including through mediation, except as provided by the legislation of the Republic of Kazakhstan on mediation, the arbitration terminates the proceedings and, at the request of the parties, records this settlement in the form of an arbitration decision on agreed terms.

To request the annulment of an arbitration decision by the court, the party making the application must provide evidence of the following circumstances:

1. The decision contains resolutions on matters not covered in the arbitration agreement or beyond its scope, or due to the non-subject matter jurisdiction of the arbitration. If resolutions regarding issues covered by the arbitration agreement can be separated from those not covered by such agreement, only the part of the decision relating to the issues not covered by the agreement may be annulled.
2. One of the parties to the arbitration agreement was declared legally incapacitated by the court or the agreement was declared void under the law to which the parties have subjected themselves, or, in the absence of such indication, under the legislation of the Republic of Kazakhstan.
3. The party was not properly notified of the appointment of the arbitrator or the arbitration proceedings, or for other valid reasons, could not present their explanations.
4. The composition of the arbitration or the procedure for the proceedings did not correspond to the agreement of the parties, if such agreement does not contradict the law from which the parties cannot deviate, or if there is no such agreement, then it does not correspond to the law.
5. There is a final court or arbitration decision on the same issue and between the same parties.
6. The arbitration decision contradicts the public order of the Republic of Kazakhstan.
7. The dispute for which the arbitration decision was rendered is not subject to arbitration resolution under the legislation of the Republic of Kazakhstan.

When considering the application for the annulment of the arbitration decision, the court does not have the right to review the substance of the arbitration decision.

An arbitration decision is recognized as binding and, upon submission of a written application to the court, must be enforced in accordance with the civil procedural legislation of the Republic of Kazakhstan. In the absence of a specified deadline in the arbitration decision, it must be promptly enforced.

The enforcement of an arbitration decision is carried out in accordance with the procedure for enforcement proceedings in force at the time of decision enforcement, based on the enforcement order issued by the court. An application for the enforcement of an arbitration decision is filed with the general jurisdiction court at the place where the dispute was considered by the arbitration or at the debtor's domicile or the location of the legal entity's office. If the location of the debtor or the entity is unknown, the application is filed at the place where their property is located.

The application for the issuance of an enforcement order must be accompanied by the original or a notarized copy of the arbitration decision, as well as the arbitration agreement concluded in accordance with the law. The application for the issuance of an enforcement order may be filed within three years from the date of expiration of the deadline for voluntary execution of the arbitration decision.

The court, when considering the application for the issuance of an enforcement order for the compulsory execution of an arbitration decision, does not have the right to review the substance of the arbitration decision. Upon completion of the review, the court issues a determination on the issuance of the enforcement order or refusal to issue it, which must be promptly enforced.

The execution of foreign court decisions in Kazakhstan is carried out only in the presence of an international agreement on legal assistance or a multilateral treaty between the Commonwealth of Independent States (CIS) countries. Kazakhstan has concluded a limited number of such agreements, mainly with other CIS member states, as well as with some other countries, including Lithuania, the United Arab Emirates, North Korea, Pakistan, Turkey, Mongolia, China, and Iran.

However, for the recognition and enforcement of decisions of international arbitration courts, two main documents are of key importance: the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted in New York on June 10, 1958, and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), adopted in Washington on March 18, 1965.

According to Article III of the New York Convention, each contracting state undertakes to recognize arbitral awards as binding and enforce them in accordance with the procedural rules of the jurisdiction where enforcement is sought.

In accordance with Article 54(3) of the ICSID Convention, the procedure for the enforcement of arbitration awards is determined by the laws on the enforcement of court decisions in force in the territory of the state where such enforcement is required.

An arbitration decision, regardless of the state or jurisdiction in which it was made, is recognized as binding in the AIFC and enforced based on a written application to the AIFC Court. To avoid doubt, in cases where the Republic of Kazakhstan has concluded a treaty on mutual recognition and enforcement of judicial and arbitration decisions, the AIFC Court must comply with the terms of such treaty. The AIFC Court makes a decision on the recognition of an arbitration decision for its enforcement.