RI legal mess pushes firms to seek foreign justice

RI legal mess pushes firms to seek foreign justice

Tom Wright, Dow Jones Newswires, Jakarta

Indonesia's corrupt legal system has let foreign investors down one time too many.

Now, a growing number of foreign companies that feel wronged are appealing to Singapore courts and even further afield in a bid to recover losses suffered after being swindled on business deals gone bad here.

On the surface, this is nothing new. For years, foreign investors here have taken disputes with Indonesian joint venture partners to international arbitration.

But even when foreign investors won those disputes, which was often, Indonesian courts refused to enforce the rulings under pressure from local businessmen.

Angered by Indonesia's failure to stand by international treaties it has signed to honor arbitration rulings, many companies are now turning to a new path to seek justice.

Bypassing Indonesian courts, companies are asking foreign courts to freeze Indonesian assets held overseas.

"I think it's a valid trend and it's happening because you can't seize assets here," said a Jakarta-based lawyer with a leading commercial firm.

Earlier this year, Manulife Financial Corp. persuaded a Singapore court to freeze assets of a former Indonesian joint partner that the Canadian life insurer claims is trying to defraud it.

Karaha Bodas, a power company owned mainly by U.S. investors, is attempting through the Singapore, Hong Kong, and U.S. court system to get its hands on assets of PT Pertamina after the state oil and gas company refused to pay compensation ordered by an arbitration panel.

The decision by the Singapore High Court to freeze up to $36 million in assets of the Gondokusumo family - owners of the Manulife's former partners, the indebted Dharmala Group, could set a precedent for other foreign companies to take legal action in the city state against Indonesian companies.

Others are already lining up. The Loan Star Fund -- one of the creditors owed $240 million by a consortium which has defaulted on loans used to build the Jakarta Stock Exchange's building -- says it is considering taking action in Singapore to get its money back.

Such a trend is worrying for Indonesia's mainly ethnic Chinese business elite, who have huge assets in Singapore and spend much of their time on the island.

Until now, many of these businessmen have been able to use Indonesia's nefarious court system to their advantage. Singapore, on the other hand, attracts foreign investors due to the nation's reputation for having a strong justice system.

Still, don't expect a quick resolution to the hundreds of disputes between Indonesian companies and their foreign partners, many of which were spawned by the country's economic collapse after the 1997 Asian financial crisis.

In fact, companies seeking repayment overseas are likely to get locked in complicated and largely untested legal procedures that could take several years to complete, lawyers say.

And not all companies have recourse to international justice. Take the example of PT Kaltim Prima Coal, a joint venture between Anglo-Australian mining company Rio Tinto PLC (RTP) and BP PLC (BP), which is facing legal action in Indonesia over the sale of a 51 percent in the country's largest and most profitable coal mine.

Few investors are willing to brave a system where justice appears to go to the highest bidder.

Foreign companies setting up joint ventures with local partners during the economic boom years of the mid 1990s insisted on arbitration clauses in their joint venture agreements. These basically allowed that any dispute would go before an international tribunal.

After the economic crisis, which soured a number of these joint venture agreements, a slew of foreign companies have taken their cases to arbitration.

But Indonesian courts have repeatedly refused to accept those rulings. That goes against Indonesia's signing in 1981 of the New York Convention which compels states to recognize the legal authority of international arbitration awards, lawyers say.

Local businessmen can easily bribe Jakarta's Central District Court to overturn any settlement reached outside the country.

"Enforcement of foreign arbitral awards in Indonesia was never successful in the case where the losing party actively resisted the enforcement of the award," Tony Budidjaja, an Indonesian commercial lawyer, wrote in a recent paper.

Karaha Bodas, which is seeking for Singapore, Hong Kong and U.S. courts to freeze Pertamina's assets, has faced exactly this problem.

The Cayman Islands company, which is controlled by Florida- based FPL Group Inc. and Caithness Energy LLC of New York, was awarded $261 million by a Swiss arbitration court in 2000 to cover losses from the cancellation of the company's independent power project in 1998.

Pertamina refused to pay the award and attempted through the Jakarta court system in March to overturn the Swiss arbitration decision. A Houston court ordered Pertamina in April to drop the attempt and found the company in contempt of court.

In an attempt to force Pertamina to pay the funds, Karaha Bodas won a decision from a U.S. court to freeze $275 million of the oil and gas company's funds held in trust accounts in New York banks.

This week, another U.S. court ruled that Pertamina must post a dollar bond to cover the amount of the arbitration award until the end of legal proceedings. But in a sign the wrangling could drag on for many months, Pertamina told Dow Jones Newswires they wouldn't comply with the order.

Only a handful of legal disputes in Indonesia have ended successfully. Normally such cases involve two parties that want to keep doing business in the country and maintain a good reputation, lawyers say.

Roche Indonesia, a unit of Swiss pharmaceutical company Roche Holding AG, fell into a legal dispute in 2000 after terminating a distribution contract with its local partner after a commercial dispute.

PT Tempo Scan Pacific, the local partner, moved to sue Roche in the South Jakarta court, which froze Roche Indonesia's assets despite the contract allowing the Swiss company to terminate its relationship with the distributor at any time.

But after months of bad publicity, and lobbying from Swiss authorities, Tempo Scan and Roche Indonesia reached a confidential out-of-court settlement.

A major reason for the settlement was Tempo Scan is a valid business which wanted to continue operating with foreign companies, says a foreign lawyer who worked on the case. Tempo Scan still distributes some products for Roche in Indonesia.

Window:

Until Indonesia's government reforms its legal system, fresh investment from overseas will only trickle in, analysts say. In the first five months of this year, foreign direct investment approvals fell 59 percent to $1.6 billion, according to government figures.