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Indonesia – Dispute Resolution 2014: The Year In Review

2 February, 2015

Indonesia’s dispute resolution landscape is everchanging, and 2014 has been no exception. There have been important developments taking place across a range of areas, from decisions on the controversial “Language Law”, to the government’s changing stance on Bilateral Investment Treaties. In this article we highlight five of the most significant of these.

 

Translation Turmoil

 

Indonesian Law No 24 of 2009 on its National Flag, Language, Emblem and Anthem (known as the “Language Law“) still raises eyebrows among global professionals doing business in Indonesia – Indonesians and foreigners alike. Recent judicial decisions have revived concerns about the effect of this law on the enforceability of contracts in Indonesia.

 

The Language Law seeks to establish Bahasa Indonesia as the official language of Indonesia, and includes provisions that official state documents should primarily be written in the language. The drafters of the law also included an Article 31, which provided that contracts with governmental organisations should also be in the national language.

 

During the legislative process, Article 31 was extended by lawmakers to ostensibly cover contracts with private enterprises. A generous reading of the context might suggest that this was intended to cover contracts between private enterprises and Indonesian governmental bodies. Many government officials expressed this view and the expectation that implementing regulations would clarify the impact.

 

However, industry’s worst fears were realised when, in a 2013 decision1 , the West Jakarta District Court held a loan agreement between an Indonesian company and a foreign investor unenforceable for failure to comply with the Language Law. The loan agreement concerned was drafted in English only, while the deed of fiduciary security was in Bahasa Indonesia. The Court determined that Article 31 of the Language Law requires every contract involving an Indonesian party, whether public or private, to be made in Bahasa Indonesia, and hence the loan agreement was null and void.

 

In May 2014, the High Court of Jakarta upheld this decision on appeal. There is an additional level of appeal to the Supreme Court, so it is still possible that the case will be overturned.

 

Some have downplayed the importance of the case, saying that it concerned an Indonesian law contract subject to Indonesian jurisdiction, and that it shouldn’t impact those foreign law contracts for which disputes are determined by foreign tribunals. These arguments neglect the possibility that a failure to comply with the Language Law could be viewed by Indonesian courts as a fundamental question of public policy which could lead to refusal to enforce a foreign arbitral award.

 

Indeed, in an interview with litigator Hotman Paris Hutapea, there was no doubt how this would be argued if the question came up in an enforcement context: “A litigator would be negligent to ignore this argument. There is a clear ground under law and a clear precedent. If I don’t raise it I would not be representing my client properly.”

 

The result is that it is very difficult to make any recommendation other than to sign bilingual versions of all commercial contracts involving an Indonesian party, regardless of the governing law. It is also important to ensure the translation is accurate – this can be an expensive exercise as it cannot simply be left to professional translators, but requires an Indonesian lawyer to review.

 

It is hoped that implementing regulations will soon be adopted to remove this particular provision, or at least clarify that it does not apply to purely private contracts. However, we have seen no indication that regulations are imminent.

 

A New Threat To Enforcement Of Domestic Awards In Indonesia?

 

A recent decision of the Indonesian Constitutional Court2 has clarified the process for annulment of domestic arbitration awards. However, in doing so, it has also removed an obstacle to annulment.

 

Arbitration awards rendered in Indonesia-seated arbitrations (“domestic” awards), or in arbitrations seated outside Indonesia (“foreign” awards) are enforceable in Indonesia in accordance with the provisions of the Law Concerning Arbitration and Alternative Dispute Resolution Law No. 30 of 1999 (the “Arbitration Law“). In the case of a domestic award (or a foreign award where the law of the arbitration proceedings, or lex arbitri, is stated to be Indonesian law), Article 70 of the Arbitration Law allows a party to apply to annul an award in circumstances where:

 

  • a letter or document submitted in the proceedings is, after an award is issued, found to be forged or is declared to be forged;
  • a document which is decisive in its effect was concealed by a party and is discovered after the award has been issued; or
  • an award is made based on fraud committed by one of the parties to the dispute.

 

However, time constraints are imposed on a party seeking to set aside an award on this basis: an application to annul must be made within 30 days after registration of the award. A decision must then be made by the court within 30 days after the application is received. There may be an appeal to the Supreme Court, but this must also be decided within 30 days after the appeal is lodged.

 

Like many Indonesian statutes, the Arbitration Law is accompanied by a non-binding “Elucidation” which is designed to guide the courts’ interpretation of the legislation. The Elucidation has been viewed as problematic for two main reasons: Firstly, by suggesting that the grounds for an application to annul an award under Article 70 are not exhaustive. Secondly, by requiring that a party can only apply to annul an award which has been registered, and must possess a court judgment proving the fraud which is alleged to have occurred under Article 70. That judgment may then be considered by the court deciding the matter of the annulment. The ramifications of the Elucidation for parties applying to annul an award were considered by the Indonesian Constitutional Court in the course of a recent petition for judicial review of an arbitration award.

 

The Petitioner sought judicial review of an arbitration award claiming that the Elucidation prevented it from exercising its rights under Article 70. The Petitioner argued that not only did the Elucidation create ambiguity in the law, but it also created a new legal requirement, which was not otherwise found in the Arbitration Law.

 

In effect, the Elucidation required a party applying to annul an award to first obtain a criminal court ruling in respect of the fraud which was alleged to have occurred under Article 70. Given the length of time it takes in Indonesia to obtain a final and binding judgment, including any appeal or cassation, it would in most cases be impossible for a party to comply with the 30 day time frame prescribed for the annulment process under the Arbitration Law. As a result, a court would be bound to reject the application for annulment on the basis of insufficient evidence of fraud. The Petitioner argued that the Elucidation therefore infringed its rights under Article 70.

 

The Indonesian Constitutional Court found for the Petitioner, holding that Article 70 of the Arbitration Law was sufficiently clear and did not need to be interpreted in light of the Elucidation, and that the inability of a party to avail itself of its rights under Article 70 was a violation of Article 28(D) (1) of the Indonesian Constitution3.

 

The cancellation of the Elucidation has removed the ambiguity which had arisen in relation to the interpretation of Article 70 of the Arbitration Law, but also has the consequence of removing an obstacle to the annulment process. The impact of the decision should not, however, be overstated. In fact the grounds for setting aside an award under Article 70 are much narrower than those contained in the UNCITRAL Model law. Nonetheless, parties who consider choosing Indonesia as the seat of arbitration should be aware of the increased potential for defendants to invoke this annulment process to avoid enforcement.

 

BIT By BIT – Indonesia’s Changing Stance On Investment Treaties

 

Foreign investors were unsettled in March 2014 by suggestions that Indonesia would terminate all of its Bilateral Investment Treaties (BITs), starting with the Indonesia-Netherlands BIT.

 

Broadly, BITs are agreements between states to protect and promote investments by nationals of each state in each other’s jurisdictions. BITs typically list a number of standards and protections which the stateparties agree to uphold. Crucially, they also contain arbitration provisions, which mean that investors’ rights arising from these protections can viably be pursued; the treaties are not simply statements of good intentions.

 

In March 2014, the Dutch Ministry of Foreign Affairs reported that Indonesia would not be renewing the Indonesia-Netherlands BIT, which will now expire on 1 July 2015. This was accompanied by a statement that Indonesia also intends to terminate all of its other BITs.

 

Indonesia’s action can be interpreted as a response to the increasing number of treaty claims being brought against it by foreign investors. In particular, a tribunal has recently ruled that claims of some USD 1bn can be brought against Indonesia under its BITs with the UK and Australia4 .

 

Soon after the Dutch announcement, Indonesia’s Vice President Boediono indicated that “Indonesia will create a new bilateral investment agreement that will be adjusted to recent developments”. In other words, it appears that Indonesia may not be resiling from its regime of investment treaties entirely, but allowing existing BITs to lapse, so that it can renegotiate them.

 

Furthermore, at least in the short term, the impact of termination of its BITs for existing investors may be limited.

 

First, BITs will usually include “sunset clauses” which ensure that investment protections will continue to apply to investments made prior to termination for a defined period. For example, the IndonesiaNetherlands BIT contains a 15-year sunset clause, so investments made through the Netherlands before 1 July 2015 will in principle attract protections under that BIT through to 2030.

 

Second, BITs may contain restrictions upon when termination rights can be exercised (generally within a defined period prior to a renewal date; for example, the Indonesia-Singapore BIT will automatically extend to June 2026 absent any notification of termination prior to June 2015). Therefore, many BITs will remain in force for some time to come.

 

Third, we have not identified reports that Indonesia plans to terminate any of the Economic Integration Agreements (including, say, Economic Partnership Agreements such as that between Japan and Indonesia) or Multilateral Investment Treaties (such as the Association of Southeast Asian Nations (ASEAN) Comprehensive Investment Agreement, and the ASEAN-Australia-New Zealand Free Trade Agreement) to which it is a party and which include certain investment protections. Indonesia also continues to participate in negotiation of the Regional Comprehensive Economic Partnership (RCEP) agreement between ASEAN and its trading partners. Again, drafts of this agreement contain investment protections.

 

Nevertheless, this move is likely to impact how foreign companies assess investment risk in Indonesia in future and should prompt investors to consider the options available to them while those options still remain open. Such options may include structuring investments (and, in particular, domiciling the investing entity appropriately) to take advantage of alternative protections, including those under the ASEAN Comprehensive Investment Agreement or under BITs which are not subject to renewal in the near future and so have a long “shelf life”. Depending upon the strategic importance of an investment, it may also be open for an investor to negotiate a suitable investment agreement with the Government of Indonesia which incorporates appropriate protections and arbitration provisions. Finally, we continue to recommend the inclusion of arbitration agreements (and appropriate waivers of sovereign immunity against suit and enforcement) as routine in contracts relating to investments in Indonesia.

 

Meanwhile, Indonesia’s BITs up for renewal in 2015 include those with France and with Italy. We, like many others, will await Indonesia’s next move with interest.

 

Indonesia’s Corruption Conundrum

 

Indonesia’s corruption woes have continued in 2014, with two high profile cases damaging the country’s record.

 

The first involved former Chief Justice of the Constitutional Court, Akil Mochtar, who in October 2013 was arrested and charged with accepting bribes to fix two cases of disputed district-head elections. In June 2014, the Jakarta Anti-Corruption Court convicted and sentenced Mr Mochtar to life in prison, a sentence which was upheld by the High Court in November 2014.

 

On passing the sentence, the most severe of its kind in Indonesian history, the first instance Judge noted that “[Mr Mochtar] was the chairman of a high-level state institution that was the last bastion for people seeking justice. His actions have resulted in the collapse of the authority of the Constitutional Court.”

 

No less troubling is the recent conviction of Rudi Rubiandini, former head of the Indonesian energy regulator SKKMigas. Mr Rubiandini was convicted and sentenced to 7 years in prison for taking bribes from a Singaporean company seeking a contract to sell the government’s crude oil overseas.

 

While these cases highlight the deep extent of Indonesia’s corruption problem, the silver lining is perhaps the strong stance being taken against the offenders and the hope that this may deter others.

 

Employees Move Up The Bankruptcy Priority Chain

 

In a controversial decision in September 2014,5 the Constitutional Court declared that unpaid employee wages take top priority in the bankruptcy or liquidation of an employer, including taking preference over the rights of secured creditors.

 

Article 95(4) of the Indonesian Labour Law stipulates that if an employer is declared bankrupt or is liquidated, the payment of the employees’ wages shall take priority over the payment of “other debts.”

 

There is no clarification in the Labour Law as to the meaning of “other debts”, and before this decision, it was unclear whether “other debts” included secured debts and other preferential debts.

 

In coming to its decision, the Court relied on Article 28D of the 1945 Indonesian Constitution, which, among other things, refers to every person’s right to receive fair and proper remuneration.

 

The Court held that the Labour Law must be interpreted consistently with this constitutional right, and accordingly held that employee rights to unpaid wages took priority over all other rights in a bankruptcy or liquidation, including state rights (e.g. unpaid taxes), the rights of secured creditors, and preferential/privileged rights (e.g. the rights of insurance policy holders in the bankruptcy of an insurance company).

 

The Court held that other employee rights, on the other hand, take priority over all other claims except those of secured creditors. The Court did not specify what these “other rights” were, but presumably they include things like severance pay, and allowances for housing, health care etc.

 

Unfortunately, the Court neglected to consider how their decision would operate in practice, and in particular, how it interacts with the Bankruptcy Law and secured creditors’ rights under that law to sell secured assets. For example:

 

  • Must secured creditors wait for the insolvent company to pay employee wages before enforcing their securities? Or must they seek court approval prior to doing so?
  • Can a liquidator sell secured assets to pay employees’ wages without reference to the secured creditor?

 

These, and other questions, will undoubtedly trouble lenders in Indonesia until either the Constitutional Court or the government clarifies the law in this area.

 

 

End Notes:

 

1 PT Bangun Karya Pratama Lestari v Nine AM Ltd (Decision Number 451/Pdt.G/2012/PN.Jkt Bar.)

 

2 Decision No. 15/PUU/XII/2014

 

3 The right to recognition, security, protection and certainty under the law.

 

4 These were claims by UK company, Churchill Mining, and its Australian subsidiary, Planet Mining, in respect of Indonesia’s alleged expropriation their assets.

 

5 Decision No. 67/PUU-XI/2013.

 

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For further information, please contact:

 

Rob Palmer, Partner, Ashurst

rob.palmer@ashurst.com


Dispute Resolution Law Firms in Indonesia

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