The Karaha Bodas case and Indonesia's 5 fatal blunders

Todung Mulya Lubis, Jakarta

It has been reported by a number of newspapers that the National Police and the Directorate General of Taxation are dealing with the case of U.S.-based power firm Karaha Bodas Company as a crime. Unfortunately, considering this case as a crime will only complicate the settlement of the case itself, which, as we are aware, has remained pending over the last few years. It is a surprise that a clear and smart legal mind has yet to emerge in the settlement of this case. Instead, as time passes, we have been witnessing an increasingly stubborn and stupid frame of mind. It is really hard to understand why the best legal mind in our government should be hiding.

If we conscientiously observe the Karaha Bodas case from the first time it was publicly exposed, we can find at least five mistakes in the handling of the case on the part of the government. These are not honest mistakes; rather, they are stupid ones. Let's take a look at these mistakes:

The first mistake is that the Indonesian government did not take Karaha Bodas seriously when it took the case to the arbitration court. Instead, it behaved as if the arbitration court was toothless, or as if the arbitration ruling could not be enforced in Indonesia. Therefore, the government did not appoint an arbiter to sit in the arbitration court, a reason why it was not unlikely that the arbitration court was not impartial.

Besides the government's legal team very likely is not well-prepared and lacks an appropriate arbitration strategy. As a lawyer that has often been involved in arbitration, I am well aware that the party that fails to seriously prepare itself to contest the arbitration and make available evidence and witnesses (including expert witnesses) will be in a weak position and will almost surely lose the case. This is what has happened.

The second mistake is that the government was really shocked when Indonesia lost the case in the arbitration court and was penalized to pay US$261 million. The government may not have realized that an arbitration ruling is final and binding, as there is no appeal court in the case of arbitration.

Finally, the government decided to file a lawsuit against this arbitration ruling with the Central Jakarta District Court and the district court deliberately awarded the government a victory. It is clear to everybody, however, that the ruling of the Central Jakarta District Court can never cancel out the arbitration ruling. The advice that the government should contest the arbitration ruling -- even though not unlikely by virtue of Law No. 30/1999 on arbitration -- was a silly recommendation. Look at what has happened!

Karaha Bodas has become increasingly more aggressive. It has seized the account of Pertamina, worth $650 million, at the Bank of New York and continues to pursue other assets belonging to Pertamina. This stupidity has caused huge losses to Pertamina. I wonder why the government does not seek an amicable settlement that leads to a win-win solution so that the Karaha Bodas case is settled once and for all. I believe Karaha Bodas will surely welcome a business deal.

The third mistake is that the Indonesian government does not realize that Indonesia has ratified the Convention on the Recognition and Enforcement of the Foreign Arbitration Award, known as The New York Convention. We have ratified this convention by virtue of Presidential Decree no. 34/1981. This means that all international arbitration rulings are enforceable in Indonesia. Law No. 30/1999 on arbitration stipulates that an international arbitration ruling can be executed through the Central Jakarta District Court.

In the present global business era, where Indonesia is part of a global community, it will be very difficult for the Indonesian government to continue refusing to execute final and binding international arbitration rulings. If Indonesia persists in this refusal, its reputation will be bad, a situation that will not be conducive to investments. It could also mean that Indonesia would see its country risk rate increase.

The fourth mistake is that the government persists, in its stubbornness, to cancel the arbitration ruling by dealing with Karaha Bodas and its executives as criminals. Allegations of corruption, collusion and nepotism have been made along with charges of tax manipulation. The Directorate General of Taxation itself has threatened to detain Karaha Bodas executives charged with tax manipulation.

I do not wish to deny these charges as they may be right. The problem lies in why these charges and the legal process were ignored before, and when the arbitration process was conducted. If all this was conducted during the arbitration process, it would not be unlikely that Indonesia would win the arbitration case. As it happens now, dealing with this case as a crime may be considered a post-factum attempt and an excuse to avoid the arbitration ruling. This is a stupid panicky attitude. If the charges are right, the criminal legal process will be a separate process that will not affect the validity of the arbitration ruling.

The fifth mistake is that the government has tried to relate the Karaha bodas case to nationalism. There is a suspicion that an international conspiracy has evolved to benefit foreign parties. I don't believe this conspiracy theory because, to me, the government's loss in this arbitration case is merely the result of its own mistakes and carelessness. If the government was serious and was prepared to fight in the arbitration court, I'm sure Indonesia would be in a strong position and would very likely win the case.

It's all history now, though. Mistakes must indeed be dearly paid for. What matters now is to try to seek negotiations for an amicable settlement that, business-wise, will be mutually acceptable. Such a big country as Indonesia must have a business proposition as an incentive for a business settlement. So, the problem is not that of nationalism, because, for the business world, nationalism is no longer of any great significance.

If the administration of Susilo Bambang Yudhoyono wishes to create a business climate that is more conducive to investment, this Karaha Bodas case will be both an expensive lesson and a case that must be settled. It is indeed quite a burden to pay a penalty of almost US$300 million, but sometimes we must take a few steps back to move forward and win.

The writer is International Arbiter at the International Chamber of Commerce (ICC), Paris.