Arbitration Clause: A Shield Or A Delayed Trap?

In commercial contracts, an arbitration clause is often inserted by default. It can look like boilerplate, a standard paragraph at the end of the document, seemingly less important than price, scope, or liability. As a result, this clause is frequently left outside a careful legal review, even though it can embed procedural and jurisdictional risks that only surface once a dispute arises.

In cross-border deals, the arbitration clause is not a technical detail. It sets the rules of the game, from the forum you end up in to the practical enforceability of the future decision. A poorly drafted clause can undermine even well negotiated commercial terms. A well drafted clause, by contrast, acts as legal hedging and helps reduce jurisdictional, procedural, and political risk.

This article opens a series where we look at arbitration in two dimensions: (i) as a protective mechanism (shield) and (ii) as a potential trap. The series will also include practical tools to help identify and carefully avoid common pitfalls so that parties can capture the full benefits of arbitration. The recommendations are general and not exhaustive, and they may not fit your specific facts. This material is not legal advice and does not replace tailored legal review. Part 1 focuses on the contractual foundation of arbitration and the limits of an arbitration clause.

The arbitration clause as a shield

Arbitration is contractual and it consolidates forum risk

International arbitration is, at its core, a contractual dispute resolution mechanism. Unlike court jurisdiction, which arises by operation of law ¹ and is backed by the state, arbitration exists because the parties choose to replace litigation with a tribunal of arbitrators.

In cross-border transactions, that choice matters. Without an arbitration agreement, the same dispute may fall within the jurisdiction of multiple national courts at once, depending on where the contract was signed, where obligations are performed, where a party is incorporated or managed, and where its assets are located. This creates risks of parallel proceedings, clashes over jurisdiction, and tactical forum shopping.

A well drafted arbitration clause allows the parties to select a single dispute resolution mechanism that excludes the others. This private, consent-based choice is the source of many practical advantages of arbitration.

Three core concepts support arbitration jurisdiction:

Kompetenz-Kompetenz. The tribunal can decide its own jurisdiction, including challenges to the validity, effectiveness, or applicability of the arbitration agreement. This reduces the ability of a party to delay the process by trying to move the jurisdiction debate to a different forum (for example, a national court ²). Where a contract contains competing dispute resolution clauses, decision makers often assume rational parties intended to concentrate disputes in one forum, so any carve out from arbitration jurisdiction should be drafted expressly and unambiguously ³.

Separability. The arbitration agreement is treated as legally independent from the main contract. Even if the main contract is challenged or found invalid, the arbitration clause does not automatically fall away.

Waiver.  A party that participates in the arbitration without timely objections to jurisdiction or procedure will usually be treated as having waived the right to rely on those defects later ⁴. This discourages gamesmanship and supports speed, efficiency, and predictability, especially at the set-aside and enforcement stages.

A neutral forum and avoiding the 'home court' advantage

A key benefit of international arbitration is the ability to take the dispute outside the national court system of either party. In cross-border commerce, 'home court' advantage is a practical concern, especially where one party is state owned or where the state is a significant ultimate beneficiary. National courts operate within their own legal culture, institutional constraints, and sometimes political and administrative context.

A well drafted arbitration clause typically provides:

• a neutral seat that is not tied to either party;
• a predictable, arbitration friendly legal framework at the seat, which matters for any set-aside proceedings;
• reduced exposure to local procedural and political risk;
• the ability to select qualified arbitrators.

Reducing uncertainty of national court litigation

Even strong court systems can be unpredictable because of inconsistent interpretation, heavy caseloads, limited specialisation in complex commercial disputes, and multi level appeals. These factors increase time and cost and may still produce overly formal outcomes.

Arbitration can reduce these risks through:

• stable procedural rules known in advance and adjustable by agreement;
• finality, with no review on the merits (which can be a downside in some cases) and set-aside generally limited to serious procedural defects;
• the ability to appoint arbitrators with industry expertise, independence, and strong reputations.

Party autonomy and procedural control

Arbitration is driven by party autonomy. Unlike court litigation, the dispute resolution model is largely designed by the parties rather than dictated by a mandatory national procedure. This allows the process to match the commercial structure of the deal.

An arbitration clause allows the parties to decide, among other things:

• the arbitral institution or ad hoc rules (not administered by an institution);
• the seat of arbitration;
• the number of arbitrators and appointment method;
• the language of the proceedings;
• the law governing the arbitration agreement;
• other procedural parameters.

This level of control makes arbitration a powerful risk management tool. The same autonomy, however, can create problems if the clause is drafted casually and without careful legal input.

Cost, timing, and confidentiality

Party autonomy also affects practical outcomes: timeline, cost, and publicity.

First, arbitration can offer a more predictable timetable because the award is final and there is usually no multi level appeal. Parties can also shape the procedural calendar and the amount of procedural steps ⁵.

Second, arbitration is not always cheaper, but choosing the tribunal, seat, language, and rules in advance helps manage cost drivers and reduce uncertainty about total spend ⁶.

Third, arbitration is typically more confidential than court litigation ⁷. For commercially sensitive disputes, confidentiality can be a decisive factor. Many leading institutional rules include confidentiality obligations. Parties can also require separate non-disclosure undertakings from experts and witnesses. Unlike court proceedings, where closed hearings are usually limited to narrow grounds (for example, state secrets), arbitration awards are generally not published and remain non-public.

In combination, control over timeline, cost, and confidentiality strengthens the arbitration clause as a risk management tool. These benefits, however, are only achieved when the clause is drafted carefully.

The arbitration clause as a trap

This section highlights a few common drafting defects and their practical consequences.

Scope limits of the arbitration clause

Some disputes are not arbitrable under the law of a particular state. In Kazakhstan, non-arbitrable categories are commonly understood to include disputes affecting minors or persons declared legally incapable or with limited capacity; certain consumer style loan disputes involving inpiduals (including bank loans and microcredit not related to business activity); rehabilitation and bankruptcy matters; disputes between natural monopoly entities and consumers; and disputes involving state bodies and quasi-state entities.

Beyond statutory limits, a frequent and underestimated problem is an overly narrow scope clause. Parties sometimes draft language that captures only part of potential conflicts, leaving others outside the agreed arbitration mechanism. This gives the counterparty room to take the remaining claims to court.

A classic example is the phrase 'disputes arising under this contract'. Despite sounding broad, it is interpreted narrowly ⁸ in many jurisdictions and often focuses on performance disputes in a strict contractual sense.

As a result, the following may fall outside arbitration:

• disputes about formation, validity, or termination of the contract;
• tort based claims (for example, damages caused by wrongful conduct);
• other related claims.

Courts in a number of jurisdictions draw a distinction between 'arising under' and broader formulations such as 'arising out of or in connection with'. The broader language is typically treated as covering the full relationship, including contractual and non-contractual claims and questions about the contract's existence and validity.

This is why the market safe standard in many international contracts is an expanded clause such as 'all disputes arising out of or in connection with this contract'. It reduces the risk of fragmentation and parallel proceedings where some claims go to arbitration and others go to court.

Underestimating scope is a common procedural trap. Parties expect arbitration to cover everything, but end up running parallel cases in different forums, with higher cost, inconsistent outcomes risk, and less predictability.

Arbitration involving state and quasi-state entities: the consent trap

Arbitration clauses involving state bodies or entities with direct or indirect state ownership carry a separate category of risk. The trap is often not the wording, but ignoring mandatory Kazakhstan law requirements that override party autonomy.

In Kazakhstan, arbitration generally cannot hear disputes involving state bodies, state enterprises, or legal entities with predominant state participation unless the relevant authorised body has given prior consent ⁹.

The Kazakhstan Law on Arbitration provides that such consent must be obtained before the arbitration agreement is concluded and must be in writing, including an indication of projected arbitration costs ¹⁰. Without this consent, the arbitration clause is invalid regardless of the chosen institution or seat.

In practice, this becomes a delayed trap. The contract is signed and performed, and both parties assume they have agreed to arbitrate. Once a dispute arises, it may turn out that the required consent was never obtained. Arbitration then becomes unavailable and the dispute shifts to national courts, often in the very jurisdiction the parties wanted to avoid. That said, the prior consent requirement is not universal.

According to a Supreme Court clarification, when arbitration agreements are concluded with non-residents of Kazakhstan, such prior consent is not required, including where state bodies or entities with predominant state participation are involved ¹¹.

In this context, one practical risk mitigation option may be the Astana International Financial Centre (AIFC), designed as a safe harbour ¹² jurisdiction for international arbitration.

The prior consent requirement does not apply to arbitrations conducted under the AIFC Arbitration Regulations ¹³. Those regulations exclude the application of Kazakhstan's arbitration law ¹⁴ to arbitrations administered under the AIFC framework. As a result, if AIFC is chosen as the seat, there is no need to obtain the authorised body's consent, and a state or quasi-state counterparty has weaker grounds to challenge jurisdiction on that basis.

The AIFC regulations are based on the UNCITRAL Model Law and typically include:

• a ban on court interference except in clearly specified cases;
• an obligation to refer the dispute to arbitration where a valid clause exists;
• party freedom to choose the seat, arbitrators, and language;
• limited and harmonised grounds to set aside an award.

Awards seated in the AIFC can be set aside only by the AIFC Court, which is independent and not part of Kazakhstan's national court system. If a party does not apply to set aside the award before the AIFC Court, it generally cannot later rely, in enforcement proceedings within the AIFC, on arguments it did not raise (or could and should have raised) at the set-aside stage. Together, these features support predictability and institutional neutrality for international deals.

A well designed clause therefore gives parties a neutral and predictable dispute resolution path. This article covers only selected issues and does not aim to address all procedural risks associated with arbitration clauses.

Additional arbitration traps and practical ways to minimise them will be discussed in the next publications in this series.

Footnotes

1. Ex lege (Lat. “from the law”, “by operation of law”) refers to the automatic occurrence of legal consequences by virtue of the law itself, without the need for a specific decision of a court, a public authority, or the consent of the parties.

2.William W. Park “The Arbitrator's Jurisdiction to Determine Jurisdiction”, pp.23.

3. Fiona Trust & Holding Corp v Privalov [2007] UKHL 40 (17 October 2007), para 12-13.

4. Ibid pp.33, 40, 71.

5. International Chamber of Commerce (ICC) “Controlling Time and Costs in Arbitration” < https://iccwbo.org/wp-content/uploads/sites/3/2018/03/861-2-ENG-Controlling-Time-and-Costs-in-Arbitration.pdf>

6. Ibid pp.15.

7. Wiebke Voß, Lea Katharina Kumkar “Confidentiality in International Commercial Arbitration”.

8. Fillite (Runcorn) v AquaLift (1989) 26 Const LR 66. Overseas Union v AA Mutual [1988] 2 Lloyds Rep 62, 67

9. Article 8(10) of the Law on Arbitration.

10. Success K LLP v Ministry of Healthcare of the RK (AIFC Court, CFI, Case No. 8 of 2021, Judgment 24.01.2022) https://court.aifc.kz/wp-content/uploads/2025/03/AIFC-Court-Case-No.-8-of-2021-Judgment-dated-24-January_2022.pdf

Ministry of Healthcare v Success K (AIFC Court, Court of Appeal, Case No. 11 of 2022, Judgment 27.06.2022)

11. Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan No. 3 dated 2 November 2023 “On Certain Issues of Application of Arbitration Legislation by Courts”.

12. The term “safe harbour” refers to a legally protected framework in which the parties operate under clear, predefined rules and are shielded from adverse consequences that might otherwise arise in the ordinary legal environment.

13. Section 1, paragraph 7 of the Regulations dated 5 December 2017  https: //aifc.kz/wp-content/uploads/2024/06/aifc-arbitration-regulations-ru.pdf

14. Including paragraph 10 of Article 8 of the Arbitration Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.