Int'l arbitration developments in RI

Todung Mulya Lubis and Maurice Burke, Jakarta

ith regards to developments in international arbitration in Indonesia, three issues need to be seriously discussed.

First, is interference by the courts in the interpretation and application of arbitration agreements. Second, is the enforcement of International Arbitration Awards in Indonesia, and the third is attempts to minimize court interference in the enforcement of arbitration agreements and arbitration awards.

Most jurisdictions in Southeast Asia have taken great steps in recent years to promote arbitration as an attractive option for dispute resolution. For example, most countries have become parties to the New York Convention, adopted or followed the UNCITRAL Model Law in their arbitration legislation, and have set up international arbitration centers with specialist resources to facilitate the conduct of arbitrations.

These developments may be seen as part of a general global trend to modernize and internationalize arbitration. They also reflect the growth in international trade in Asia in recent years and the consequential increase in the number of disputes in the region involving trade and commerce.

Notwithstanding these encouraging figures, however, arbitration in this part of the world still presents challenges to foreign investors and commercial entities conducting business here. The result is that arbitration is not always as straightforward as may be intended when parties first agree on it as their preferred mechanism for resolving disputes.

Indonesia is often regarded as a particular jurisdiction where judicial interpretation of arbitration principles needs improving.

Two examples illustrate this point: In the case of PT Perusahaan Dagang Tempo v. PT Roche Indonesia, an agreement to arbitrate a dispute was not upheld by the courts on the basis that the dispute in question was a "legal dispute", and that arbitral tribunals only had jurisdiction over "technical disputes". This, many commentators noted at the time, was clearly incorrect. The position under the Indonesian Arbitration Law of 1999 is that parties may arbitrate any dispute of a "commercial" nature.

In the second example, the case of PT Branita Sandhini v. PT Panen Buah Emas from January this year, the agreement between the parties contained a clause providing for arbitration in Singapore using SIAC rules applying Indonesian law. The court in Indonesia treated the SIAC Rules as "law", and found that this clause contained an inherent conflict as to the parties' choice of substantive law. The court therefore refused to grant a stay of proceedings, and instead retained jurisdiction over the dispute.

These cases illustrate common problems with the interpretation and enforcement of arbitration clauses in Indonesia. In practice, these problems mean that parties are often left with no alternative but to litigate in Indonesian courts, despite the arbitration clauses in their contracts. Enforcement can also be a serious problem, and this is a disadvantage to international arbitration in Indonesia.

Indonesia, Hong Kong, Malaysia, the Philippines and Thailand each have systems enabling successful parties to enforce arbitral awards in the same manner as judgments obtained in local courts, subject to leave of those courts.

These countries are also all signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention, which provides that foreign awards obtained in member states may be recognized and enforced locally, subject to the very limited grounds recognized in the convention upon which a court may refuse enforcement.

Specifically, a court may refuse enforcement for several reasons: the arbitration agreement is invalid; a breach of due process; the award does not comply with the terms of the arbitration agreement; irregularities in the selection of arbitrators or the proceedings; enforcement is against public policy.

In Indonesia, a court may refuse to enforce an award when: it contravenes decency and public order; forged or falsified documents have been submitted to the tribunal; a decisive document has been concealed by one party from another; or false evidence has been given during the hearing.

Here, it is not uncommon for parties to encounter real difficulties when it comes to enforcing an award. For example, local courts can refuse enforcement on the grounds that the award is contrary to "public order" and for the other aforementioned reasons.

It has been our experience in acting for clients that there is, at times, great uncertainty as to the ambit of these exceptions and how the Indonesian courts will apply them.

A particular case involved derivative trading in exchange and interest rate swaps between the bank and its customers. Each contract followed the standard form of the International Swaps and Derivatives Association's (ISDA) Master Agreement. Each contract incorporated a schedule of terms and conditions that contained an arbitration clause. The bank's customers defaulted in their payment obligations.

While negotiations were in progress, the customers brought an action in the South Jakarta District Court seeking the annulment of the contracts on the grounds that they were contrary to public policy and that it was beyond the customers' corporate authority to enter into such contracts.

At the same time, the bank commenced international arbitration proceedings against its customers before the London Court of International Arbitration, as permitted by the arbitration clause. An award was made in favor of the bank, which was subsequently registered with the Central Jakarta District Court for execution.

Meanwhile, the South Jakarta District Court had ruled in favor of the customers and held that the arbitration clause in the terms and conditions had not been incorporated into the agreements and was therefore not binding on the parties.

It is important to note that, while the arbitration award was final and therefore immediately enforceable, the judgment of the South Jakarta court was not binding until all appeals had been exhausted. On this basis, the bank sought a final ruling from the Supreme Court, requesting immediate enforcement of the arbitration award.

The Supreme Court refused to rule on the matter until all the appeals to the South Jakarta court had been exhausted.

Recent events in the Karaha Bodas case provide another illustration of a different type of problem encountered in the enforcement of arbitration awards: The government has adopted a number of measures to resist enforcement of this award.

This case shows that the difficulties in enforcing a foreign arbitral award are not confined to extended court proceedings, but may also involve real personal risks to the executives of the company seeking to enforce such an award.

Further, the inconsistent approach adopted by the courts has created problems for parties wishing to enforce international arbitration awards in Indonesia.

Todung Mulya Lubis is Senior Partner at Lubis, Santosa & Maulana Law Firm, Jakarta; Maurice Burke is Partner at Herbert Smith Law Firm, Singapore.