Many businessmen and lawyers faced with the need to conclude a foreign trade contract or conduct its legal examination often face the question of what jurisdiction should be specified in the contract. In other words, how to choose the right court that will consider disputes between two parties in a foreign trade transaction, one of which is a resident of a foreign state.
In fact, this question is not simple and the answer to it has its own characteristics.
First of all, I would like to note that in any foreign trade contract, the parties can independently choose the jurisdiction of the dispute, including specifying a specific court that will consider the dispute that has arisen between the parties to the contract. In jurisprudence, this is called contractual jurisdiction. In Kazakhstani legislation, contractual jurisdiction with the participation of foreign persons is provided for by Article 419 of the Civil Procedure Code of the Republic of Kazakhstan.
However, not all disputes can be subject to jurisdiction. There is so-called exclusive jurisdiction, when disputes on certain issues should be considered only by the courts of a certain country.
For example, in accordance with Article 417 of the Civil Procedure Code of the Republic of Kazakhstan, the following are within the exclusive jurisdiction of the courts of the Republic of Kazakhstan:
1) cases related to the right to real estate located in the Republic of Kazakhstan;
2) cases on claims against carriers arising from transportation contracts;
3) cases on divorce of citizens of the Republic of Kazakhstan with foreigners or stateless persons, if both spouses have a place of residence in the Republic of Kazakhstan;
4) cases provided for in Chapters 25-29 of this Code.
So, if the alleged dispute that may arise from the future contract does not fall under exclusive jurisdiction, then we move on to the next step: determine whether your potential dispute under the contract will be considered by a state court or an international commercial arbitration court?
International commercial arbitration is a non-governmental (arbitration) commercial arbitration court, specifically designed to consider disputes between participants in international commercial transactions, the parties to which are persons of different nationalities (foreign firms and organizations). Along with appeals to state courts, international commercial arbitration is one of the most popular means of resolving disputes between parties to an international contract. When choosing arbitration as a method of resolving disputes under their contract, the parties should take into account the following factors:
- The enforceability of a future judgment against the other party to the case, which is especially important if the parties are located in different countries. Even if you win in a state court, it will only be possible to enforce its judgment in other countries on the basis of a special international treaty or on the basis of reciprocity. Treaties on the recognition of judgments have not yet had much success in international practice. The Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters has been signed by only five states. The Council of Europe’s decision on jurisdiction and enforcement of judgments in civil and commercial matters applies only within the EU. Within the CIS, there are a number of Conventions on the recognition and mutual enforcement of judicial acts, such as the Agreement on the procedure for resolving disputes related to the implementation of economic activities (Kyiv, March 20, 1992), the Convention on legal assistance and legal relations in civil, family and criminal cases (Chisinau, October 7, 2002) and the Convention on legal assistance and legal relations in civil, family and criminal cases (Minsk, January 22, 1993) on the terms and in the manner set out in the said international treaties. Thus, decisions of Kazakhstani state courts can be enforced only in 19 countries: Azerbaijan, Vietnam, Georgia, India, DPRK, PRC, Kyrgyzstan, Lithuania, Mongolia, UAE, Pakistan, Turkey, Uzbekistan, Ukraine, Belarus, Russia, Armenia, Tajikistan and Turkmenistan. In contrast, international arbitration decisions are enforced throughout the world in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention has been ratified by more than 140 states (including Russia and Kazakhstan), that is, almost all economically significant jurisdictions. On the other hand, a court decision in its “own” jurisdiction is executed immediately, while an arbitration award requires additional recognition by the court for its execution (Article 425-1 of the Civil Procedure Code of the Republic of Kazakhstan). There are also grounds on which the enforcement of a foreign arbitration award may be refused (for example, in cases where one of the parties to the arbitration agreement was recognized by the court as incompetent or partially incompetent, or the arbitration agreement is not valid under the law to which the parties have subjected it; one of the parties was not duly notified of the appointment of an arbitrator or of the arbitration proceedings, or for other reasons recognized by the court as valid, could not present its explanations; the arbitration award was made on a dispute not provided for by the arbitration agreement or not falling within its terms, or contains decisions on issues that go beyond the limits of the arbitration agreement, as well as due to the dispute not being subject to arbitration; the composition of the arbitration tribunal or the arbitration procedure did not comply with the agreement of the parties and the arbitration rules; the court determines that the arbitration award is contrary to the public policy of the Republic of Kazakhstan or that the dispute on which the arbitration award was made cannot be the subject of arbitration under the legislation of the Republic of Kazakhstan).
- Confidentiality of proceedings. As a rule, except for cases where the court decides on a closed session or otherwise limits the publicity of the case, judicial proceedings may be known to the general public and the press, and judicial decisions may be published. Arbitration proceedings are much more closed and, if both parties wish to keep them secret, may remain confidential for a long time.
- Neutrality. A significant factor in the attractiveness of international arbitration is its neutrality and non-state status. If the parties to a contract from two different countries anticipate a dispute between themselves, it will be difficult for either to agree to have it heard in the courts of the other party, since it is obvious that the foreign party will cause a certain level of prejudice. At the same time, the courts of a third country may refuse to accept the claim for consideration and in any case their decision will be problematic to enforce. From this point of view, arbitration conducted by neutral private persons (including from third countries) and whose decisions are enforced everywhere is much preferable.
ДрOther factors that may also influence the choice between arbitration or court proceedings may include the ability of a party to choose an arbitrator as opposed to a state-appointed judge; the consensual nature of arbitration jurisdiction, which makes it difficult or impossible to involve co-defendants and third parties; the relative flexibility of the arbitration process, elements of which can be determined by the parties and the tribunal, etc.
In addition, when determining jurisdiction, it is necessary to assess who has greater risks associated with the execution of a foreign trade contract.
For example, a Kazakhstani company sells goods to a company resident in Germany and receives 100% prepayment for these goods. In this case, it is worth trying to specify in the contract the jurisdiction of the state court of Germany. In this case, the German company will have to apply to the court specified in the contract in the event of a dispute, but a court decision rendered by a German court is unlikely to be enforced in Kazakhstan, since there is no international agreement between Kazakhstan and Germany on the recognition and enforcement of court decisions. If a German company, despite the fact that the contract stipulates the jurisdiction of the German court, applies to a Kazakh court, the Kazakh court, upon receipt of a corresponding motion from the defendant, must leave the claim without consideration (according to Article 419 of the Civil Procedure Code of the Republic of Kazakhstan, the competence of a foreign court may be provided for by a written agreement of the parties, except for the cases stipulated by Article 33 of this Code. In the presence of such an agreement, the court, at the request of the defendant, leaves the application without consideration if such a motion is filed before the start of the consideration of the case on the merits). However, if the contractual risks are greater for the Kazakh company (for example, a Kazakh company purchases goods from a German company and makes a 100% prepayment for the goods), then in this case it makes no sense to indicate the jurisdiction of the courts of the Republic of Kazakhstan as contractual jurisdiction: it is unlikely that the decision of the Kazakh court will be enforced in Germany. It should also be noted that Russian state arbitration courts, unlike, for example, Kazakh ones, economic courts, by virtue of Article 249 of the Arbitration Procedure Code of the Russian Federation, may consider cases between parties to a contract – foreign organizations (non-residents of Russia), if the jurisdiction of the Russian arbitration court is stipulated in the contract. For example, on July 25, 2014, the Arbitration Court of the City of Moscow issued a decision on the claim of PJSC Keramet (Ukraine) against JSC Kazvtorchermet (Republic of Kazakhstan) for the recovery of the debt.
Thus, in order to correctly determine jurisdiction when developing a foreign trade contract, it is necessary to correctly assess both potential contractual risks and determine the possibility (or impossibility) of enforcing the court decision.
The specialists of the international law firm SION & Partners are ready to assist in correctly determining the jurisdiction of potential disputes when developing a foreign trade contract.
In addition, our specialists are ready to provide services to represent the client’s interests in the commercial arbitration courts of Kazakhstan and Russia.