Indonesia gains from new arbitration law

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.