Applicable law in cross-border agreements

Over the 25 years of independence in Kazakhstan, there have been significant developments in the economy, legislative reforms, investment climate improvement, which have made and are making Kazakhstan attractive for foreign investors to do business and gain profit. Plenty of foreign legal entities and individuals are launching business in Kazakhstan. To do business, one cannot underestimate the importance of making legally correct agreements between foreign companies/individuals and Kazakhstani entrepreneurs. The critical if not the most critical aspect thereof is the choice of applicable law to an agreement.

For the cross-border transactions, the parties should choose the law to govern the transaction as well as the law applicable to resolution of disputes in case they arise out of the agreement. The law includes both the substantive and procedural law of this or that state. The choice of applicable law at the stage of making the agreement allows to agree on all essential terms of the agreement, ensure observance of imperative statutory norms, which might be applicable not only to the contract but the parties thereto, and reveal possible risks related to these or that area of civil relations.

Determination of applicable law at the stage of the agreement conclusion allows defining properly all essential terms of the agreement, providing compliance with the rules of legislation that might be applied not only to the agreement but to the parties as well and revealing possible risks related to these or other civil-law relations.

In relations complicated by a foreign element it is common to refer to what is called as “conflict rules”. These are the rules that help to determine the law subject to appliance to regulate relations complicated by a foreign element.

According to Special part of the Republic of Kazakhstan Civil Code, clause 1112 (“Civil Code”), agreement is regulated by the law of a country which has been chosen by mutual agreement of the parties unless otherwise provided for by law of the Republic of Kazakhstan. Agreement of the parties on applicable law choice shall be expressed clearly and appear directly from the agreement terms.

It should be emphasized that such consent is not always achievable by the parties as each party is committed to lobby its country law to be applied to the agreement and is negative to foreign law. In such cases where no agreement is in place clause 1113 of the Civil Code allows defining applicable law. A variety of agreements is being specified when we can apply law of a country from the perspective of establishment, domicile or principal place of activity of a party, which is:

1. a seller – in a sale-purchase agreement;
2. a grantor – in a gift agreement;
3. a lessor or lender – in a lease agreement (rental agreement);
4. a baylor – in an agreement for the gratuitous use of property;
5. a contractor – in a construction agreement;
6. a transport operator – in a transport agreement;
7. a forwarding agent – in a freight forwarding agreement;
8. a creditor – in a loan agreement or other credit agreement;
9. a mandator – in a mandate agreement;
10. a commissionaire – in a commission agreement;
11. a custodier – in a custodial agreement;
12. an insurer – in an insurance agreement;
13. a warrantor – in a warranty agreement;
14. a pledger – in a pledge agreement;
15. a licenser – in a license agreement on exclusive right use.

Referenced clause 1113 of the Civil Code separately marks out agreements, which have real estate as its subject. In such agreements, the applicable law is the law of the country where the property is located, and in respect of the property, which is entered in the state register of the Republic of Kazakhstan - the law of the Republic of Kazakhstan.

If it is impossible to determine the performance having decisive significance for the content of the agreement, the applicable law is the law of the country the agreement is most closely connected with. Anyway, the parties should find a mutually beneficial solution based on the common goals and objectives that they pursue entering into contractual relations.

Mandatory attention should be paid to the point as the clause on public policy. This means that foreign law does not apply in cases where its appliance would be contrary to the fundamental principles of the Republic of Kazakhstan legal system (the Republic of Kazakhstan public policy). In these cases, the law of the Republic of Kazakhstan is applicable. That being said, the denial of the foreign law appliance cannot be based only on the difference between political and economic system of the relevant foreign state from the Republic of Kazakhstan political or economic system.

Summing up what has been said, the question of choosing the applicable law in contractual relations complicated by a foreign element is very important. If for some reason the parties missed this side of the question, they might face significant challenges in the future, such as invalidity of the agreement, potential losses as a consequence of the invalidity, litigation expenses.

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