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)