Australian businesses investing in Indonesia are often concerned about general sovereign risk. A range of legal protections – both domestic and international – may be available, although each has its complications.

DOMESTIC PROTECTION

Indonesia's Investment Law provides some basic protection for foreign investment.

Any nationalisation must be in accordance with law, with compensation based on the market price. If the government and the foreign investor cannot agree on the compensation, the dispute must be settled through arbitration.

Market price is explained as a price determined according to an internationally used method by an independent appraiser appointed by the parties.

Notably this protection may not apply if the government takes action against foreign investment which is not considered to be nationalisation (for example, changing the regulatory context).

Under the Investment Law the government and foreign investor must try to settle any investment dispute through consultation; otherwise it may be settled through international arbitration based on an agreement between the government and the investor.

It is possible the government may not agree to international arbitration and instead seek to settle the dispute through domestic arbitration, such as through the Indonesian National Arbitration Board (BANI) or through the Indonesian courts.

For foreign investors these options may be less preferable than international arbitration.

INTERNATIONAL PROTECTION

Both Australia and Indonesia are parties to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).

The ICSID Convention makes it possible for an investor from one member country to pursue an investment dispute against the government of another member country through the International Centre for the Settlement of Investment Disputes (ICSID Centre).

One problem with this dispute resolution option is that both parties must consent to submit the dispute to the ICSID Centre. Indonesia may refuse to consent to the jurisdiction of the ICSID Centre and in previous investment disputes, the government has sought to raise such jurisdictional challenges.

Even if Indonesia consents to the jurisdiction of the ICSID Centre, it can complicate the process by requiring the foreign investor to first proceed through the Indonesian courts, adding costs and delay.

If the investor does succeed in getting the dispute to the ICSID Centre, the dispute must still be decided in accordance with the law of the relevant member country (amongst other sources). As discussed, Indonesian law may not afford the foreign investor sufficient protection.

Additionally, ICSID Centre arbitration tribunal awards are executed under the laws of the member country in which enforcement is sought. This means that enforcement of awards against the government in Indonesia will depend upon Indonesian laws and regulations. As discussed here, enforcing a foreign arbitration award in Indonesia is often more difficult than enforcing a domestic arbitration award.

Finally, in 2012 Indonesia excluded from the jurisdiction of the ICSID Convention disputes arising from administrative decisions of its regencies. Given Indonesia's decentralised system of government, this excludes a wide range of decisions relevant to foreign investors from this dispute resolution framework.

BILATERAL INVESTMENT TREATY

Australia and Indonesia have had a Bilateral Investment Treaty (BIT) since 1993. This BIT also provides for investor-state dispute settlement. Foreign investors must try to resolve investment disputes through consultation; otherwise the investor may submit the dispute to the ICSID Centre (among other options).

Once an investor submits a dispute to the ICSID Centre, the other country is supposed to consent to such submission within 45 days of the investor's request for such consent.

However, in a recent ICSID Centre arbitration involving Indonesia (Churchill Mining Plc v Republic of Indonesia; Planet Mining Pty Ltd v Republic of Indonesia), the arbitration tribunal decided this did not amount to actual, advance consent by Indonesia under the ICSID Convention, but only a promise to consent (which could be withdrawn).

If this conclusion is accepted in other arbitrations, it will make it more difficult for foreign investors to rely on the BIT to pursue dispute resolution in relation to Indonesia through the ICSID Centre.

AANZFTA

Australia and Indonesia are also parties to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which contains a range of relevant principles, including:

  • National treatment: each party must give investors of the other party (and their investments) treatment no less favourable than it gives in like circumstances to its own investors (and their investments).
  • Fair and equitable treatment and full protection and security: a party must give investments of investors of the other party fair and equitable treatment and full protection and security.
  • Prohibition on expropriation: a party must not expropriate or nationalise the investments of investors of the other party except for a public purpose, in a non-discriminatory manner, in accordance with law and on payment of prompt, adequate and effective compensation. The compensation must represent fair market value at the time the expropriation was announced or occurred (whichever is earlier).

The AANZFTA also provides for investor-state dispute settlement, which again contemplates resolving investment disputes by consultation; otherwise the investor may submit the dispute under the ICSID Convention (amongst other options).

In contrast to the BIT, AANZFTA provides that a claim is deemed submitted to arbitration when the foreign investor's notice of dispute is received. While it is arguable this makes it clear that there is advance, automatic consent by a country under the ICSID Convention, Indonesia may still seek to argue that a more express form of consent is required.

The foreign investor must submit the dispute to such arbitration within 3 years of becoming aware of the relevant loss or damage. Once again, the arbitration tribunal must decide the dispute in accordance with the law of the relevant country (amongst other sources).

Under the AANZFTA, the arbitration tribunal does not have the power to require the government to amend any challenged law, regulation or policy to ensure conformity with the AANZFTA, but may award the foreign investor monetary damages (including interest) and restitution of property.

The arbitration tribunal's award is final and binding and the particular country must comply with the award without delay. Ultimately, however, enforcement of awards against the government in Indonesia will depend upon Indonesian laws and regulations.

ACIA

Indonesia is also party to the ASEAN Comprehensive Investment Agreement (ACIA). The ACIA contains foreign investment protections broadly similar to the AANZFTA. Under the ACIA if any Australian business establishes an entity in an ASEAN member state (for example, Singapore) and that entity invests in Indonesia, it may be able to access the protections under the ACIA.

IA-CEPA

Australia and Indonesia are currently negotiating an Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA), which builds on the AANZFTA. IA-CEPA may provide further protection for Australian investors in Indonesia.

More on Australia and Indonesia trade agreements is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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