Court System Reform in Kazakhstan:
What is There for Investors?
Chairman of the Board of Kazakhstan
Bar Association (KazBar)
One of the most important recent developments in the Kazakhstan’s legal system is its clear aim to improving the attractiveness of the investment climate. Those who are around for long enough might remember that something similar took place a little more than 20 years ago. However, the investment attracting measures at that time were made in the circumstances where the government and local businesses did not have any experience in this field and heavily relied on experience of other countries and on foreign consultants to show the way. Since that time, as the economy was growing and with gaining its own experience Kazakhstan had been tightening its laws to reflect new realities. The effect of such policy was that many investors left the country and its reputation of an investor-friendly country significantly diminished. The return to the policy of attracting investors shows new approaches and is based on a much better understanding of the ways business works.
The Government and other state bodies adopted an approach where they listen to well established business organizations that have a proven record of assisting and promoting of investment in the country, such as ITIC, American Chamber of Commerce, European Business Association, Kazakhstan Bar Association and the like. A significant number of various conferences, round table discussions are been held for this purpose.
All such discussions show that one of the most important requirements for the attractiveness of the investment climate is adhering to the principles of the rule of law, including, inter alia, fair and unbiased judicial system. It is no secret, large investors, especially those with contracts with the government, usually insist that the disputes were solved in international arbitration, and Kazakhstan, of course, wants to resolve them at home, without bringing it into the international arena. As confidence in the courts is one of the main indicators of investment attractiveness of the country, the President, the Government and the Supreme Court are determined to reform the law so that the credibility of the justice is increased.
To this end, significant changes have already been made to the Civil Procedure Code, and now a large scale public discussion is going on for further improvement of the legislation on civil procedure. Some of these proposals are quite progressive, some are not so.
Novelty: Investment Court
The draft Civil Procedure Code was recently discussed at a Round Table meeting which was organized by the Supreme Court and the Kazakhstan Bar Association (KazBar). The discussion was led by the Chairman of the Supreme Court, and was attended by the leading judges, government officials, representatives of the Parliament, ministries, diplomats, lawyers of large investment companies working in Kazakhstan. In short, the attendance was very solid, and the discussion was constructive.
By nature the Supreme Court is a somewhat closed organization. However, the recent discussion shows that it is now open to cooperation more than ever before, they are ready to discuss with us any issues of legal reform. KazBar is also ready to cooperate with the Supreme Court, and we are already discussing specific issues of the law reform, where we could help the Supreme Court.
In addition to general discussion, the Supreme Court is ready to take concrete steps to improving the quality of justice. In particular, it is proposed in the draft Civil Procedure Code to establish a special Investment Court, which would be specialized in disputes with investors.
It is expected that consideration of disputes with investors will take place in the Astana City Court as the first instance court, and the appellate review will be at the Supreme Court. However, consideration of the disputes involving major investors will directly in the Supreme Court as the first instance court. This would be a very serious innovation, but the problem is that under the law the definition of «investor» and «investment» is very narrow, and under such definition only a very small percentage of disputes would fall under jurisdiction of this court. Therefore, in order for this novelty to work we need to expand the definition of «investment» in the law «On Investments» or change this law in its entirety.
Under the current system we have the economic courts, and these should be enough for consideration of disputes involving investors. Why, then, it has been decided to create investment courts? Because investors, especially large ones, are unhappy with the quality of the administration of justice in Kazakhstan. They believe that the level of professionalism of the courts is low and, in addition to this, they are often biased. It is widely perceived that courts prefer to decide disputes with state authorities in favor of the state, that they are afraid to take decisions against the state, that they consider the interests of the state as very narrow, suggesting that supporting the interests of the state means simply getting some amount of money into the state budget. But the interests of the state should be understood more widely, i.e. in our view, interests of the state should be understood as making sure that the participants of economic relations are confident that in case of them strictly adhering to the law courts will protect them.
Taking into account the concerns of investors about the quality of justice, the Supreme Court suggests creating investment courts on the basis of the higher courts. The idea is that judges in the higher courts do not have to fear that their decision will be overturned tomorrow, and also that judges in the higher courts are usually more experienced. Normally, all courts must be professional, competent and independent. Normally the system should ensure that all judges are not afraid to make decisions on their inner conviction based on the principles of legality, fairness and reasonableness. I am not sure that creation of the investment court is the right way for addressing the problem but the problem really exists, and such a compromise probably suits all parties.
Investors Need Certainty, Stability and Uniformity of Law Enforcement Practice
One of the ways for improving certainty of our legal system and practice is to streamline organizational issues. Kazakhstan very often undergoes reorganization of the government structures. Transfer of authority to manage various sectors of the economy from one central state body to another, especially involving rearrangement and redistribution of competencies almost of all ministries, leads to a lot of confusion for businesses. As a result, after such government reshuffle for several months no one decides any issues, state agencies do not know who is responsible for what, the whole country is paralyzed, and this strongly influences the development of business.
Let's say, an investor enters into a transaction involving multiple jurisdictions, and such transaction requires getting an antitrust approval in Kazakhstan among other jurisdictions. In case of a government reshuffle getting the approval promptly would not be possible because the investor would have to sit and wait for several months for redistribution of competence, for approval of the regulations for various state bodies, and for certain tasks and functions to be re-assigned between state officials. Usually, similar approvals could be obtained in other jurisdictions much easier and faster, and in such case lack of a Kazakhstan approval significantly influences the viability of the transaction because usually time is of essence. This is a very serious problem affecting the investment climate. There were cases in our practice where investors took decisions to avoid having anything to do with Kazakhstan in order not to be subjected to this sort of complexity.
Kazakhstan also needs to ensure stability of the investment legislation. Stability must be understood so that, on one hand, the fundamental, core principles of basic laws remain unchanged to ensure stability of the main rules of the game, but, on the other hand, details of law within the main parameters should be constantly improved. Investors need certainty, they do not like uncertainty. They want to know exactly the prospects of a project, be able to calculate the economics of the project for its life, and know exactly what benefits will be received from the project if they work according to the law. In most cases, investors need certainty and stability even more than some tax or other benefits.
It is also necessary to ensure uniformity of law enforcement practice of the government agencies, to oblige them to make more use of the power to adopt regulations, letters of instruction, clarification of the laws. In view of the law on corruption, our state agencies are afraid of anything, and often do not provide any meaningful answers to our questions. For example, we write a letter to a state body to clarify its position regarding the application of a rule. In response we often get a simple citation of a provision of the law. However, we know this provision ourselves. What we need is an explanation on how to use it. Thus, uncertainties still remain and entrepreneurs are left with a dilemma on either take the risk or do nothing. This obviously hinders business activity. The only possibility of getting some certainty in such circumstances would be applying to courts. As a result, courts are overwhelmed and are not capable of making justice due to heavy workload. It is therefore necessary to establish a system where state bodies would be obliged to issue binding rulings in response to questions related to their position on application of laws. Such system successfully functions in many countries. For example, in the Netherlands one can apply to the tax authority with respect to a transaction and obtain a so-called Tax Ruling, which is binding for all, including the tax authority itself. This approach significantly increases the level of certainty for investors and the state.
The legislation is also moving to a system where court cases will be considered in a very quick fashion. On one hand, this is good, especially for simple cases. However, one size cannot fit all. There are complex cases where there are many participants, especially foreign ones, they need interpreters, time to arrive to the hearings from abroad, time to get a visa, time to apostille a power of attorney and other documents for the court file, and so on.
Obviously a one month period for such complex cases is not sufficient. In the end, the most important thing is to get just an informed decision based on thorough examination of the case, rather than a quick but incorrect decision.
In addition, we have serious doubts about another innovation of the draft CPC - a simplified procedure. The desire to solve a case quickly can lead to serious errors.
Professionalism of Party Representatives in Courts
Under the current system any person with legal education can be admitted to court. This raised serious complaints and criticism from judges and general public. There is mechanism for ensuring the required level of professionalism of representatives in civil disputes in courts. Kazakhtsan Bar Association (KazBar) proposes to introduce a rule that non-advocate representatives of the parties in courts must be members of professional self-regulated organizations of lawyers where such organizations would have to ensure that their members comply with regulatory and ethical requirements. One of such requirements is continuing legal education and specialization of lawyers. Without special training a person should not be allowed in court as a representative, even if such person holds a legal diploma. Such person must undergo special training in civil and administrative procedure. Only after such a special training lawyers could be admitted to courts as representatives of the parties.