Indonesia gains from new arbitration law

By Stefanus Haryanto

JAKARTA (JP): The long awaited arbitration law was finally signed by President B.J. Habibie and became effective on Aug. 12, 1999. As part of the effort to reform the Indonesian legal system as requested by the International Monetary Fund, this new arbitration law is expected to provide legal certainty for investors, who have been waiting for such a law to assure them that their investments in Indonesia are safe from being "expropriated" by their local partners or the Indonesian government.

Learning from recent arbitration cases in Indonesia, investors know arbitration is useless if the decisions cannot be enforced because of the existence of legal loopholes in the Indonesian arbitration law. This is particularly true in relation to provisions on the cancellation of arbitration awards.

Under Indonesian civil procedure regulations, which for years were considered to be Indonesia's arbitration law, parties can waive their right to appeal an arbitration award, but they cannot waive their rights to seek the cancellation of awards.

Article 643 of the regulations provides 10 grounds for a party to seek the cancellation of an arbitration award. Since the reasons are quite numerous, in practice they provided a loophole for bad-faith parties to delay the enforcement of an award by filing a cancellation suit in a district court using Article 643 as its cause of action.

Because a cancellation suit followed a regular civil suit, it could be years before a case was finally decided by the Supreme Court. This would create legal uncertainty and frustrate investors, who would feel that their rights as good-faith parties were not protected by the Indonesian legal system.

Act No. 30/1999 on Arbitration and Alternative Dispute Resolution was enacted to meet the demands of the international community for legal certainty in Indonesia. Through the IMF, international investors demanded the Indonesian government provide better legal protection for their investments, particularly if they became involved in a dispute with their local partners or the Indonesian government.

Under this act, an arbitration award can still be canceled, although the reasons for seeking cancellation have been reduced from 10 to three. Article 70 of the new law provides that a party may seek the cancellation of an award if a document or letter which was filed in the arbitration proceeding is found to be forged, acknowledged as fake, or declared to be fake; an important and decisive document is found after the award has been rendered; and the award is rendered as the result of a fraud conducted by a party in the dispute.

Notwithstanding the fact that by decreasing the reasons for seeking the cancellation of an arbitration award, the new law also minimizes the possibility of bad-faith parties delaying the enforcement of arbitration awards. While Article 70 of the new law in fact opens the door for bad-faith parties to delay the enforcement of award, articles 71 and 72 provide a time frame for the cancellation of arbitration awards.

While under the old law a cancellation suit could prevent the enforcement of an award for years, the new law stipulates that the District Court must decide a cancellation suit within 30 days of receiving the suit. The decision of the District Court may be appealed directly to the Supreme Court, which has to rule on the case within 30 days of receiving the appeal. Therefore, if a party with bad-faith wants to delay the enforcement of a final and binding award, it may only delay the enforcement for 60 days.

The new arbitration law also provides greater legal certainty with regards to awards rendered in international arbitration. Before the enactment of the law, international arbitration was regulated by Supreme Court Regulation No. 1/1990. Under the new law, the recognition and enforcement of an international arbitration is specifically regulated in articles 65 to 69. Although the provisions of the law remain basically the same as those of the Supreme Court regulation, the new law provides greater legal certainty.

The new arbitration law stipulates that an international arbitration award can be enforced in Indonesia after it obtains an execution order from the chief of the Central Jakarta District Court.

Parties are not permitted to appeal the decision to the High Court when the chief of the Central Jakarta District Court approves the arbitration. However, if the chief denies the recognition and enforcement of an international arbitration award, parties are permitted to appeal the decision directly to the Supreme Court.

Although the new arbitration law provides greater legal certainty, it must be acknowledged that the law still opens the door for bad-faith parties to delay the enforcement of an award. Therefore, if the Indonesian judiciary is serious about improving its image, the enactment of the new arbitration law will provide it an opportunity to prove it. After all, there is no law in the world which can be considered free from loopholes. In this imperfect world, we must count on judges to enforce the spirit of the law. If judges allow a party to delay the enforcement of an award, there will always be a loophole that can be manipulated. If this happens, the new arbitration law will be good on paper but ineffective in reality. This will prevent investors from putting their money in Indonesia.

The writer is a senior lawyer at the Law Firm of Hanafiah Ponggawa Adnan Bangun Kelana in Jakarta.