Kazakhstan: Choice Of Governing Law For Agreement With Kazakhstani Counterparty

Last Updated: 2 October 2017
Article by Vsevolod Markov and Anara Urakova

If your counterparty is a Kazakhstani company, the choice of governing law would be one of the major questions in an agreement being entered into with such counterparty.

This choice is extremely important because, from a Kazakhstani law perspective, the law governing an agreement covers such basic for any agreement aspects of its execution and performance as interpretation of the agreement, rights and obligations of the parties, performance of the agreement and consequences of its failure to perform/ improper performance, termination of the agreement, grounds and consequences of its invalidity and also possibility of its assignment.

Kazakhstani law offers sufficient freedom in the choice of law.  The general rule is that an agreement is governed by law of the jurisdiction chosen by the parties, unless otherwise is established by laws of Kazakhstan.

There are several cases where the legislation prohibits using foreign law as the law governing an agreement.  Such cases, in particular, include agreements, the subject of which is real estate located in Kazakhstan, and assets registered in a state register in Kazakhstan (e.g. railway vehicles, inland water vessels, vessels for river-sea navigation, etc.).

Apart from that, creation of a legal entity in Kazakhstan (including when a foreign person/entity acts as a shareholder/participant in such legal entity), termination of its operation, transfer of shares/ participatory interest in such legal entity and also other relationships associated with mutual rights and obligations of its shareholders/ participants must be governed by Kazakhstani law.

For each party to an agreement the main argument for choosing its "own" law as governing is normally a desire to "play by own rules".  Quite often, the choice of foreign (non-Kazakhstani) law is also inspired by underdevelopment in Kazakhstani law of such traditional for many legal systems concepts as representations and warranties, indemnity, waiver, and some others.

Sometimes, the use of foreign law is triggered by the fact that Kazakhstani "commercial" law emerged relatively recently, and court practice for certain types of court cases is fairly limited, which entails for a foreign counterparty a certain risk that application of Kazakhstani law would not offer it the level of legal protection it is anticipating.

The choice of law, however, should be a well-considered decision of all parties to the agreement and should not be based purely on a desire to use the system of law "familiar" to a party.

In particular, the choice of governing law should, inter alia, correlate to the jurisdiction for dispute resolution under the agreement.  For example, if the parties choose English law as governing and refer disputes to Kazakhstani courts, then in the proceedings they would incur additional costs for retaining experts in English law and, more generally, the proceedings would be substantially complicated by the fact that the court would need to understand substance and application of foreign legal provisions.  It should also be noted, that Kazakhstani law allows Kazakhstani court applying (irrespective of choice of law) Kazakhstani law when substance of foreign legal provisions (despite relevant queries) remains unclear to the court within a reasonable period of time.

Kazakhstani law sets forth that the parties to an agreement may choose the governing law either for the entire agreement or for its particular part(s). The governing law may be chosen by the parties at any time, at the execution of the agreement or thereafter.  The parties may also at any time agree to change the governing law.

Practice shows, however, that the governing law should be chosen by the parties before execution of an agreement, and such choice should be expressly reflected in the agreement.

The choice itself should be made on the basis of a thorough review of the entirety of relations being established by the agreement and professional advice of lawyers from relevant jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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