September 2024 – We have gathered practical insights based on case studies within the Astana International Financial Centre (AIFC), with a focus on the application of law in this jurisdiction. In this brief note, we aim to summarize these key points and share them with potential AIFC participants, investors, and professionals in the legal and financial sectors.
It is important to note that this is not an academic article or legal advice, but rather practical observations.
Purpose of the AIFC and application of AIFC Law
As a starting point, the AIFC, located in Astana, Kazakhstan’s capital, was created to serve as a specialized financial hub, fostering investments and promoting regulated financial services. What distinguishes the AIFC from other financial hubs is its foundation on English law principles, a feature that has drawn significant attention, especially from foreign investors. Over the past five years, the AIFC has increasingly demonstrated its success, contributing to Kazakhstan’s vision of establishing a financial hub that effectively employs English law concepts in diverse areas.
AIFC law, by default, governs relationships between AIFC participants, AIFC-related activities, and investments connected to the AIFC. In cases where transactions involve an AIFC element, parties can freely apply AIFC law. However, for transactions without an AIFC connection, it is important to assess whether AIFC law can still be applied, depending on the specific terms and parties of the deal.
Expanding the use of AIFC Law beyond its boundaries
A notable development in recent years is the expanding use of AIFC law outside its geographical jurisdiction. Not only are AIFC participants applying this law, but entities with no direct connection to the AIFC—those without operations or assets within the AIFC—are also choosing to govern their transactions by AIFC law.
A prime example is its use in sale and purchase agreements involving joint-stock companies (JSCs) or limited liability partnerships (LLPs) established in Kazakhstan, where AIFC law is applied despite the absence of an AIFC element. This raises a critical question: why are parties increasingly opting for AIFC law over Kazakhstan’s legal framework?
Why AIFC Law is favored in M&A transactions
To address this question, two key aspects must be considered. First, does AIFC law allow its application to transactions unrelated to the AIFC? And second, does Kazakhstan’s general legal framework permit such application?
Firstly, the AIFC’s Contracts Regulations provide flexibility, allowing parties to apply AIFC law even if none of the parties nor the subject of the transaction are directly connected to the AIFC. Secondly, Kazakhstan’s general law also does not impose any explicit prohibitions on using AIFC law. Thus, unless Kazakhstan’s general law explicitly requires its own application, AIFC law can be utilized. While interpretations may vary, we consider AIFC law to be a vital part of Kazakhstan’s legal structure, created under a constitutional law and integrated with national law.
Benefits of applying AIFC Law in Kazakhstan’s M&A market
In mergers and acquisitions (M&A), AIFC law is especially appealing to investors. It closely resembles English law, which is known for offering a comprehensive range of protective mechanisms for parties involved in M&A transactions. Consequently, when given a choice, parties often prefer AIFC law over Kazakhstan’s general legal framework, even in transactions with no direct AIFC connection. As investors seek greater certainty and predictable outcomes, AIFC law continues to stand out as a reliable option for securing agreements, particularly in the M&A space.
Dispute Resolution available in AIFC
The dispute resolution options offered by the AIFC, including both the AIFC Court and the AIFC International Arbitration Centre (AIFC IAC), are highly attractive to both foreign and Kazakh investors due to their distinct features and benefits.
AIFC Court
The AIFC Court operates under a two-instance system comprising a first-instance court and an appeals court. It functions independently of the judicial system of the Republic of Kazakhstan and follows procedural rules modelled on English common law and the practices of leading global financial centres. The Court's judges are distinguished professionals from the common law world, renowned for their independence, impartiality, and unwavering commitment to the rule of law.
The AIFC Court ensures a high level of predictability for disputes governed by English law or specific AIFC regulations through its expert and consistent application of the law. Known for its exceptional objectivity, the Court conducts public proceedings and provides extensive opportunities for evidence gathering, including witness testimony and cross-examination. Additionally, for contracts entered into before 1 April 2023, that designate the AIFC Court for dispute resolution, parties benefit from the waiver of application fees and complimentary administration of all case work. Importantly, decisions of the AIFC Court can be enforced in Kazakhstan directly, without the need to go through Kazakhstan's courts.
International Arbitration Centre (IAC)
The IAC International Arbitration Centre provides arbitration with arbitral awards being set aside only through the AIFC Court and only in exceptional cases. The IAC’s awards have a high rate of enforcement, recognized through the AIFC Court, which is notably higher compared to other arbitration institutions. Notably, arbitral awards issued by the IAC can be enforced in Kazakhstan directly by the order of the AIFC Court, eliminating the need for recourse to Kazakhstan’s courts.
Parties can appoint highly qualified arbitrators based on the arbitration rules, case circumstances, and party positions, allowing for flexibility in selecting the most suitable arbitrators. The IAC ensures exceptional objectivity and confidentiality in its proceedings, with flexible time limits, allowing the tribunal to devote as much time and resources as necessary. Evidence gathering is extensive, including witness testimony, cross-examination, and requests for production of evidence.
Conclusion: AIFC Law as a growing force
In conclusion, the increasing adoption of AIFC law, even in transactions unrelated to the AIFC, underscores its growing significance. This expansion is fueled by the AIFC law’s flexibility, clarity, and strong protective mechanisms. Furthermore, the AIFC's dispute resolution options, including the AIFC Court and the AIFC International Arbitration Centre (IAC), add considerable value. The AIFC Court’s adherence to English common law principles and its ability to enforce decisions directly within Kazakhstan enhance legal predictability and efficiency. The IAC’s arbitration process offers high enforcement rates and exceptional confidentiality. As AIFC law continues to gain traction, it is poised to be an ultimate legal asset for investors and market participants, reinforcing its role in the broader legal landscape.
This article is prepared by members of Kinstellar' s Kazakhstan team: Joel Benjamin (Managing Partner) and Kuanysh Shekerbekov (Counsel).