Indonesia: Arbitrating Indonesian Disputes

Political and economic uncertainty in Indonesia has led to a large drop in foreign investment. However, for investors already committed to the country and for those assessing new opportunities, the prospects for effective dispute resolution will be a matter of immediate interest.

Private dispute resolution – arbitration – is often thought attractive in an environment where the public alternatives – Courts – are unpredictable and may lack requisite technical expertise. However, the efficiency and reliability of the arbitration process is governed to some degree by the extent of support and recognition that it receives in the laws of the place where the arbitration is proceeding, or where an award is to be enforced.

Arbitration in Indonesia was until recently governed by the colonial Dutch Code.The Code provisions had been in place for more than 150 years and had lost touch with international practice and the needs of modern business. New laws were clearly required and, in 1999, a new Law on Arbitration and Alternative Dispute Resolution was duly enacted to replace the old provisions. Following this, in November 2000, there was a comprehensive revision of the rules of the Indonesian arbitration institution, BANI.

It is beyond the scope of this short briefing to look at all aspects of the new Law. Instead, we focus on two issues that are likely to be particularly important to those doing business in Indonesia: court intervention in arbitration and the enforceability of an award.

The old laws were widely considered inadequate to prevent the Courts from interfering with proposed and on-going arbitrations. There were regular instances of the Courts refusing to recognise arbitration agreements and of parties using the Courts to disrupt and delay arbitrations. The new laws were designed to stop this. Articles 3 and 11 of the new Arbitration Law clearly state that the District Court has no authority to adjudicate disputes between the parties to an arbitration agreement, and that it must reject any such lawsuits and should not interfere in the ensuing arbitration.

These provisions are a welcome affirmation of the independence of the arbitration process. However, it remains to be seen how rigorously they will be applied. Recent experience suggests that the Courts will find it hard to resist interference in some cases. In one well-known instance last year, a Jakarta District Court decided that it could ignore a clearly-binding arbitration clause on the basis that the dispute in question was purely legal in nature, whereas an arbitration agreement would only apply to "technical business matters". This unusual decision was not an encouraging first test for the new hands-off regime. In another case, a different Jakarta District Court refused to follow the accepted international view that arbitration clauses operate as separate agreements to the contracts in which they appear, so that they will be binding even if the main contract is held to be invalid. Instead, the Court decided that it had jurisdiction over a dispute when the validity of the main contract was questioned, on the basis that the arbitration clause in that contract must also be invalid. Other anecdotal evidence similarly suggests that Court interference is a real concern. In practice, parties arbitrating in Indonesia must be prepared for continuing attempts to use the Courts to disrupt the arbitration process in defiance of the new Law.

The arbitration process will be complete when the arbitrators deliver their award. For the winning party, however, there may be further hurdles ahead before he receives his money. If the loser refuses to pay, it will be necessary to take formal action to enforce the award. In this context there are important differences between domestic awards (awards made in Indonesia) and international awards (awards made overseas).

A domestic award must be registered within 30 days with the Clerk of the District Court in the district where the award was rendered. If the award is not registered within this period it will be unenforceable. Then, if the debtor still does not pay, the successful party may apply to the Chief Judge of the District Court for an order of execution. Importantly, the Chief of the District Court is not permitted at this stage to review the merits of the award. Provided that the award complies with certain formal conditions (in practice it usually will), the order of execution is issued within 30 days of the request and enforcement if implemented through procedures such as the seizure and sale of assets.

International awards are enforceable in Indonesia if they were made in a country with which Indonesia has relevant convention obligations. Most importantly, Indonesia is a party to the multi-lateral 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, whereby more than 150 countries (including most modern trading nations) have undertaken to recognise and enforce each other’s arbitration awards. All applications for permission to enforce a Convention award in Indonesia must be made to the Chief Judge of the Central Jakarta District Court, in an attempt to ensure uniformity of treatment. Unlike domestic awards, there is no time limit for this application. As with a domestic award, the Court is not permitted at this stage to review the merits of the award, and an order for execution of the award is not appealable. If however the Chief Judge refuses to enforce the award, an appeal lies directly to the Supreme Court which must give its decision within 90 days of receiving the application.

There is a generally positive perception of the regime for enforcement of domestic awards. These awards appear to be enforced quickly and efficiently and without inappropriate Court interference (although there can be delays in the final execution process). By contrast, there is less unanimity about the efficiency of the procedures for enforcing international awards. Despite the new streamline provisions the process remains largely untested. Given Indonesia’s past record in handling international awards, difficulties in enforcement can still be anticipated. There is currently little or no anecdotal evidence of a pattern of successful enforcement, notwithstanding the new legislation.

It can be seen from this short summary that foreign businessmen face a dilemma when considering how to pursue an Indonesian dispute. On the one hand experience suggests that domestic awards are more easily enforced in Indonesia than international awards. On the other hand experience also suggests that arbitration in Indonesia can be a difficult and frustrating process that is sometimes subject to unexpected and unwelcome interference from the Courts. Whilst there is usually a clear preference for arbitrating Indonesian disputes rather than litigating them in Court, it will be necessary in every case to consider very carefully at the contract stage where and how any subsequent arbitration ought to take place to maximise the chances of a successful recovery.

"© Herbert Smith 2002

For more information on this or other Herbert Smith publications, please email us."