Arbitration urged for compensation dispute

Arbitration urged for compensation dispute

JAKARTA (JP): A legal expert called on the government
yesterday to seek international arbitration if foreign investors
sought compensation for projects canceled due to the economic
crisis.

Erman Rajagukguk, a lecturer at the University of Indonesia,
said he was optimistic an international arbitration agency would
rule in favor of Indonesia's decision to cancel certain projects
in view of its economic difficulties.

"If the arbitration is fair enough, I am very sure we would
win such a case," Erman told The Jakarta Post.

Erman, who has a doctoral degree on economic law from the
University of Washington, said there were several international
arbitration agencies, including the Washington-based
International Center for Settlement of Investment Disputes, which
handle disputes involving governments and foreign investors.

Erman made the remarks following a report that the U.S.
government's private-sector financing and investment arm, the
Overseas Private Investment Corp. (OPIC), had warned the
Indonesian government that it may seek to recover US$100 million
in lost investments if Indonesia sticks to its decision to cancel
a power project involving U.S. firm CalEnergy.

On Jan. 10, President Soeharto canceled and put under review
12 infrastructure projects as part of austerity measures to cope
with the economic crisis.

The 12 projects include the 240-megawatt Patuha power plant in
West Java, in which CalEnergy has a majority share.

Another U.S. company, Unocal Corp., had its geothermal project
in Sarulla, North Sumatra, canceled. The company has not
protested the decision as it is aware that pressure from the
International Monetary Fund (IMF) was a major factor in the
government move.

Dow Jones reported that OPIC has sent a letter to the
Indonesian government saying it had insured the Patuha project
against political risks and that it would seek to recover
investment funds from Indonesia if the project was canceled and a
claim was filed.

OPIC said that under a 1967 mutual investment treaty, the
Indonesian government was committed to recognize any payments
made by the U.S. government to American companies holding U.S.-
government issued insurance.

If Indonesia does not compensate the U.S. for the payment, the
U.S. could seek to recover the money by going through binding
arbitration.

Erman said the current economic crisis has put Indonesia into
a position which entitles it to cancel the projects under a force
majeure clause.

Traditional interpretations of a force majeure situation
include, but are not limited to, problems caused by natural
disasters, riots, war, blockage or labor strife, he said.

He said a modern interpretation of force majeure could include
Indonesia's currency crisis.

Force majeure is defined as: "An occurrence beyond the control
of the party affected, provided that such party could not
reasonably have foreseen such an occurrence at the time of
entering into contract or could not reasonably have avoided or
overcome its consequences".

"Furthermore, investors should realize the government canceled
the projects at the request of the IMF. The IMF has even ordered
Indonesia to (assume) zero economic growth, (which means) no
additional power supply would be needed until the crisis is
over," Erman said.

He was referring to point No. 13 of the letter of intent
signed by Soeharto and IMF chairman Michel Camdessus on Jan. 15,
which states: "In recognition of the serious financial crisis
facing Indonesia, the government has canceled 12 major
infrastructure projects." (jsk)