The Karaha Bodas case and Indonesia's 5 fatal blunders

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.