It is no secret that English law is a preferred choice as a governing law for large-scale mergers and acquisitions in Kazakhstan. Historically, Kazakhstan’s market growth called for international law firms to set their foot on Kazakhstan soil to offer readily available English law-governed solutions to local businesses. This yielded the desired effects for Kazakhstan users as the offered solutions were time-proven and based on international best practices in other markets.

A widespread use of a foreign law in Kazakhstan, a sovereign state, opened a gate for Kazakhstan legal professionals to voice out concerns regarding inefficiency of Kazakh laws. As a result, we witness an increasing number of supporters of adopting English law concepts in the Kazakhstan legal system, particular those legal instruments traditionally used in mergers and acquisitions (M&A). On the other hand, there are lawyers who oppose this idea, arguing that civil law fundamentally is incompatible with case law system.

In light of such debate it is always helpful to draw upon experience of other jurisdictions which have already passed that stage and actually introduced foreign law concepts in their civil law system. Among them, the Russian Federation (Russia), which has adopted certain English law concepts as part of their civil law reform. Today Russian law recognizes concepts of representations & warranties, indemnities, put and call option, escrow agreements and others. According to Russian lawyers, the outcome of this reform was quite astonishing with Russian law governed transaction documents rising up considerably and eventually making vanish foreign law in M&A deals. Surely political reasons, such as sanctions, must have also played their own substantial role in transforming Russian business’ preferences in terms of use of English law. As a side note, the number of Russian M&A transactions increased significantly in 2018: from 552 in 2017 to 652 in 2018.

What we learn from the Russian experience

Kazakhstan lawyers will likely be keen on finding out what these Russian law novelties exactly changed in reality. Questions like how the concept of representations & warranties and indemnities works in terms of Russian law paradigm seem to be of greater interest for us.

Adopting English law concepts by the Russian legal system has been high on the agenda for a long time. This matter sparked heated discussions in Russia both by lawmakers in the State Duma and the Russian professional legal community at large. Eventually it resulted in massive civil law reforms, which culminated in 2013 and 2015 respectively, when the English legal concepts were finally introduced into the Russian law.

Since then the Russian civil law reform has drastically raised a profile of Russian law. The Russian law became a world-class legal system, which offers investors and other beneficiaries various legal tools which are vital in business transactions environment especially in the international context, such as indemnities, representations and warranties, escrow accounts, put and call options, waivers – just to name a few.

Studies show that in 2015 more than 65% of Russian legal professionals are ready to make the recourse to Russian law in investment transactions, and 58% of the respondents noted that they are ready to use Russian law amid the latest amendments to the Russian Civil Code. In particular, lawyers confirmed that “there are less cases of artificial foreign law elements in the contracts”. Notably, while prior to the reforms parties were more inclined to use foreign law as a governing law in their transactions, many big players now prefer Russian law and would opt for alternatives only in exceptional cases”.  At the same time, it is premature to claim that Russian businessmen would fully give up the English law as there are still outstanding issues which cannot be addressed just by introducing certain concepts into the law; mistrust in the Russian court still remains.

Key take-aways

Despite the positive dynamics in the use of Russian law, Russian lawyers generally acknowledge lack of flexible legal regime due to excessive number of imperative rules and bureaucracy. This could be a major pitfall for Kazakhstan’s breakthrough in legal system as well.

Certainly Kazakhstan can legitimately be proud of significant legal developments that took place in the last decade ultimately aimed at creating favorable business environment.  At the same time, the practice shows that these developments do not necessarily improve or simplify the current legal regime. Hence, by taking one step forward, it seems as though we are actually making two steps backward by overwhelming the already existing regime. Another major concern which may be applicable for both Kazakhstan and Russia is that most of “local judges are not proficient in business specifics”.  

In our opinion, the main problem that may unlikely change in both jurisdictions in the near future is inability of our legal and judicial systems to fully understand and adopt the fundamental principle of English law: “If it ain’t forbidden, do it”. In our reality we often deal with quite an opposite principle: “Unless expressly permitted, it is forbidden”.

Russia has already made its first important step towards adopting English law concepts. Now the Russian legal system and business would probably need some time to come to the terms with the borrowed mechanisms. The most challenging part of the process is yet to come, that is to adapt the concepts to the Russian reality and provide them with proper and unified interpretation.

So what about Kazakhstan? We can indeed follow the Russian path with its already proven track record. Some baby steps have already been made, and the work at the government level is currently underway.  Legal scholars and practitioners are heavily involved and these issues are repeatedly raised by Atameken, the National Chamber of Entrepreneurs of the Republic of Kazakhstan.

Similar to the Russian experience in the past the question yet arises as to whether the concepts borrowed from English law and set out in a Kazakh-law governed contract would have any legal effect and be enforceable in Kazakhstan. Parties are not comforted or reassured due to a lack of relevant legal regulations and the unwillingness or unpreparedness of the Kazakh judicial system to apply and enforce mechanisms which while agreed to by the parties, are hardly known to the local courts. As opposed to English courts, in a situation when the legal concepts will be adopted by local laws, Kazakh courts will have to interpret these foreign concepts based on Kazakh civil laws. At the same time local courts are relatively isolated from foreign influence and the search for solutions beyond Kazakh legal borders is a novelty for the Kazakh judiciary.

Alongside the need for implementing English law concepts, which in itself is more of a technical matter, the law-maker and experts involved in this process should more broadly consider among others the following:

1) How we should assess the country’s capability and readiness to give meaning to the transplanted law. Given the details of borrowed foreign legal concepts and in order to avoid any potential serious mistakes as a result of “artificial adoption” of common law concepts, this should be carefully addressed, so that only applicable English law concepts are implemented;

2) How we should proceed in order to align Kazakh law, especially corporate law, with the foreign law concepts.  It should be noted though that some of those concepts, such as put and call options, may likely be unenforceable due to certain Kazakh imperative norms.

In light of the Kazakhstan Government’s initiatives aimed at raising the status of Kazakhstan law as against those of developed countries in terms of flexibility, usability and the rights protection, the implementation of foreign law concepts will undoubtedly, increase the investment attractiveness of Kazakhstan. For that to happen, first and foremost, parties should be comforted and assured that these legal concepts will work and be enforceable in local courts. At the same time, we believe it is not sufficient just to adopt fancy foreign legal concepts, it is also a guaranteed fair trial and justice that will give more confidence to investors, be it foreign or local, to do business in Kazakhstan and widely use Kazakhstan law.