Int'l arbitration developments in RI

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.