Court ruling on Karaha case gives bad image to RI: Expert

Moch. N. Kurniawan, The Jakarta Post, Jakarta

The decision by the Central Jakarta District Court to annul an international arbitration ruling on the Karaha case is against the New York convention on the general principle of arbitration, according to prominent legal expert Todung Mulya Lubis.

He said on Thursday that the local court ruling would further undermine the confidence of foreign investors in the country.

"This will create a negative impact on foreign direct investment because an international arbitration ruling has been annulled by a local court," Todung told The Jakarta Post.

He added that the International Monetary Fund and other international institutions would likely question the local court ruling.

President of state oil-and-gas firm Pertamina Baihaki Hakim said on Wednesday that the local court had annulled the international arbitration ruling, which orders Pertamina to pay some US$261 million in compensation to independent power producer Karaha Bodas Co. LLC.

Karaha, which is controlled by U.S. energy firms Florida Power and Caithness, has been seeking compensation because the government suspended its geothermal power project in West Java in 1998 in the wake of the country's economic crisis.

The power project was signed in 1994 with state electricity company PLN and Pertamina.

Karaha claims that it had invested some $100 million.

The arbitration ruling was issued by a Swiss-based arbitration panel in 2000, and was confirmed by a Houston court in the U.S. late last year.

But instead of paying the compensation, Pertamina filed an appeal last month with the Central Jakarta District Court to annul the arbitration rule, arguing that since the contract with Karaha was made based on Indonesian law, any arbitration ruling must be first confirmed by a local court before it becomes effective.

The Bank of America (BoA) last month, under a U.S. court order, froze around $130 million worth of funds believed to belong to Pertamina. This is part of Karaha's campaign to collect compensation from Pertamina.

But Hikmahanto Juwana, an expert on international law at the University of Indonesia, said that while the Jakarta court ruling is valid at home, it could not become effective overseas.

This means that efforts by Karaha to seize Pertamina assets overseas cannot be stopped by a local court. But it could block efforts to seize Pertamina's local assets.

Pertamina is estimated to have assets of more than $10 billion.

Baihaki said earlier that the Jakarta court ruling gave Pertamina the legal grounds to refuse paying compensation to Karaha.