Forum Selection Clause in an International Trade Contract

When negotiating a contract, parties may agree on a specific forum that would resolve their disputes in the future. Kazakhstan Civil Procedure Code § 419 governs forum selection in international trade contracts.

Actually this question is not easy and the answer to it has its own features.

First of all, I would like to note, that in any external economic contract the party can independently choose jurisdiction of dispute, including specify specific court which will consider disputes arising between the parties of the contract. In jurisprudence it refers to as contractual jurisdiction. In Kazakhstan the contractual jurisdiction with participation of foreign persons is stipulated by article 419 of Civil Procedure Code of the Republic of Kazakhstan.

However it is not possible to choose jurisdiction for all disputes. There is a so-called outstanding jurisdiction, when disputes on some questions should be considered only by courts of the certain country.

So, for example, in conformity with article 47 of the Civil Procedure Code of the Republic of Kazakhstan the outstanding competence of courts of the RK includes:

1) Cases, connected with the right for real estate, located in the RK

2) Cases under claims to the carriers which are resulting from contracts for transportation;

3) Cases, about divorce of citizens of the RK with foreigners or persons without citizenship if both of the spouses are residents of the RK;

4) Cases, provided by chapters 25-29 of the present Code;

So, if the future dispute which can result from the future contract does not fall under outstanding jurisdiction we shall pass to the next stage: to define, whether your potential dispute under the contract will be considered by the state court or the international commercial arbitration court?

The international commercial arbitration represents non-governmental, commercial arbitration court specially intended for consideration of disputes between participants of the international commercial deals, the parties under which are persons of a different state (foreign firms and the organizations).

Alongside with the reference to the state courts, the international commercial arbitration is one of the most popular means of disputes resolution between parties of the international contract. when choosing the arbitration as a way of the resolution of disputes under the contract the party should consider the following factors:

а) Enforceability of the future decision against other party of dispute that is especially important if parties are from the different states. Even in case if the party prevail in the state court its decision can be executed in other states only on the basis of the special international agreement or on the basis of reciprocity. Agreements about recognition of decisions had no big success in the international practice. The Hague convention on a recognition and execution of foreign decisions in civil and commercial affairs has been signed by only five states. The decision of the Council of Europe on jurisdiction and forced execution of decisions on civil and commercial affairs is applied only within the limits of the EU. The same way there is a number of conventions inside the CIS concerning recognition and execution of decisions, such, for example, as the Agreement on the procedure for resolution of disputes, connected with realization of economic activities (Kiev, dd. March 20, 1992), Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters (Kishinev, October 7, 2002) and the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters (Minsk, January 22, 1993) on the conditions and procedures contained in these international instruments.
Thus, the decision of Kazakhstan’s state courts may be exercised only in 19 countries: Azerbaijan, Vietnam, Georgia, India, North Korea, China, Kyrgyzstan, Lithuania, Mongolia, the United Arab Emirates, Pakistan, Turkey, Uzbekistan, Ukraine, Belarus, Russia, Armenia, Tajikistan and Turkmenistan.
In contrast to them, the international awards are forcibly performed all over the world in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Convention has been ratified by more than 140 countries (including Russia and Kazakhstan), that is, almost all economically relevant jurisdictions.
On the other hand, the decision of the court in his “own” jurisdiction is executed immediately, while the award for his performance requires an additional recognition of the court (art. 425-1 of the Civil Procedural Code of the Republic of Kazakhstan).
There is also reason under which it is possible to receive a refuse for enforcement of a foreign arbitration award (eg, in cases when one of the parties under an arbitration agreement has been recognized by the court as incapable or partially capable, or the arbitration agreement is not valid under the law to which the parties have subjected it or, one of the parties was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or for other reasons recognized as valid by a court, and for which the party could not provide the justification; if the arbitration award was made regarding a dispute not contemplated by the arbitration agreement or not falling within the terms of it, or which contains decisions on matters beyond the scope of the arbitration agreement, and also if jurisdiction of the dispute to arbitration, the arbitral tribunal or the arbitral procedure of the proceedings did not meet the agreement of the parties and the rules of arbitration, if the court finds that the arbitration award is contrary to public policy of the Republic of Kazakhstan or the dispute on which the arbitral decision was made cannot be a subject to arbitration under the law of the Republic of Kazakhstan).

1. b) Confidentiality of proceeding. As a general rule, except in cases when the court decides on the closed session or otherwise restricts the publicity of the case, the proceeding can be open to the general public and the press, and judicial decisions are published. The arbitration proceeding is much more closed and, if both parties decided to keep it secret, may remain confidential for a long time.
2. c) Neutrality. An important factor of the attractiveness of international arbitration is its neutrality, non-state status. If the parties under a contract from two different states have the dispute between them, for each of them it will be difficult to agree to consider it in the court of the opposite party, so it is obvious that the foreign party will cause a certain level of prejudice. At the same time, the courts of a third State can refuse to accept the lawsuit for consideration and in any case the decision will be difficult to fulfill.

From this point of view, the arbitration which is conducted by neutral individuals (including from third countries), and whose decisions are executed throughout is preferred.

Other factors that may also affect the choice between arbitration or litigation may include the possibility of the parties to select an arbitrator as opposed to a state-appointed judges; consensual nature of arbitration jurisdiction, which makes it difficult or impossible to attract codefendant and third parties; the relative flexibility of the arbitration process, the 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 the most risks associated with the performance of the external economic contract.

For example, the Kazakh company sells a product to the company-resident of Germany and receives for this product 100% prepayment. In this case, it is worth trying to specify the jurisdiction of the State Court of Germany in the contract. In this case, the German company will have to apply to the court set by the treaty in case of a dispute, but the decision made by the German court is unlikely to be executed in Kazakhstan, as there is no international agreement on the recognition and enforcement of decisions between Kazakhstan and Germany. In case, if a German company, in spite of the German court jurisdiction for the dispute fixed in the contract will appeal to the Kazakh court, the Kazakh court in case of corresponding request from defendant will have to leave the claim without consideration (according to Art. 419 of the CPC of the RK the competence of a foreign court may be set by a written agreement between the parties, except in cases provided for in Article 33 of this Code. If there is such an agreement, the court at the defendant’s request leaves the application without consideration, if such an application is given prior to the consideration on the merits).

However, if the contract risks are greater for the Kazakh company (for example, the Kazakh company buys goods from a German company and provides 100% prepayment for the goods), then it is meaningless to indicate the jurisdiction of courts of the Republic of Kazakhstan as the contractual jurisdiction for the dispute: hardly Kazakh court decision will be enforced in Germany.

It should also be noted that the Russian state arbitration courts, in contrast to, for example, the Kazakh economic courts, by virtue of Article 249 of the Arbitration Procedural Code of the Russian Federation may consider cases between parties under the contract – foreign entities (non-residents of Russia) if the jurisdiction of the Russian Arbitration Court is provided for in the agreement.

For example, on July 25, 2014 the Moscow Arbitration Court issued a decision on the claim of “Keramet” PJSC (Ukraine) to “Kazvtorchermet” JSC (the Republic of Kazakhstan) for the recovery of debt.

Thus, for proper determination of jurisdiction in the development of foreign economic contract it is necessary to properly assess a potential contract risks and determine the presence of the possibility (or impossibility) of the enforcement of the court decision.
Experts from SION & Partners International law company are ready to assist in determining the correct jurisdiction for potential disputes in the development of foreign economic contract.

In addition, our specialists are ready to provide services for representation in the International Commercial Arbitration Court under the Chamber of Commerce of Russia, the Moscow Arbitration Court, the International Centre for settlement of disputes by the American Arbitration Association and other government and commercial arbitration courts in Kazakhstan, Russia and USA.