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The Asia-Pacific Arbitration Review 2018

Timor-Leste

The Democratic Republic of Timor-Leste is a former Portuguese colony, located in South East Asia, which proclaimed its independence from colonial rule on 28 November 1975. However, in that same year, Indonesian troops invaded the country. On 20 May 2002, Timor-Leste restored its independence after more than two decades of Indonesian occupation.

Timor-Leste is divided into 12 municipalities and one special administrative region. The political system is organised as a semi-presidential representative democracy and the legal system is a civil law system. The Timorese Constitution defines four sovereign bodies: the President of the Republic, who is the head of state; the National Parliament; the government, headed by the Prime Minister; and the courts.1

Timor-Leste has Tetum and Portuguese as its official languages. The English and Indonesian languages are designated in the Constitution as secondary working languages. The United States Dollar is the official currency.

Despite political turmoil and unsteadiness in the first few years after the restoration of its independence, Timor-Leste is currently benefiting from a strong political consensus and stability, which contributes to the development and preservation of a more positive social-economic environment.

The national budget is mainly dependent on the results of offshore oil and gas reserves. However, in recent years, the Timorese political leadership has started to invest in different solutions to diversify its sources of revenue and, consequently, guarantee a more sustainable economy.

To achieve such goal, the Timorese authorities have also begun an ongoing legislative initiative to attract and secure domestic and foreign investment. Based on this initiative, some legislation has already been approved by Parliament, namely, the Land and Property Law, the New Companies Law and the New Private Investment Law (approved in early 2017). These acts will become effective after promulgation by the President and publication in the Official Gazette.

A draft of the Law Establishing the Timorese Bar Association has already been approved by the Council of Ministers and sent to Parliament for discussion and approval. This act is expected to be approved in the coming months.

A draft arbitration law has also been approved by the Council of Ministers and sent to Parliament for final approval.

Current status regarding arbitration

The existence of arbitral tribunals is expressly acknowledged in article 123(3) of the Constitution.

Furthermore, there are several explicit references to arbitration agreements and awards in Timorese legislation.

For instance, articles 239 and 240 of the Code of Civil Procedure provide for the termination of court proceedings if the parties decide to submit the dispute to one or more arbitrators. Additionally, article 671 of the same Code establishes that domestic arbitral awards are enforceable in the same terms as domestic court decisions, while article 672 determines that foreign arbitral awards, as well as court decisions, have to be recognised and confirmed by the Supreme Court prior to enforcement in Timor-Leste.

The Civil Code also provides that if the parties agree to submit a dispute to arbitration, the applicable limitation period in question is interrupted. 

However, these and other references are sparse and, since Timor-Leste’s restoration of independence in 2002, no arbitration law has been approved.

Thus, and at least in theory, the Indonesian Arbitration Law that was in force until 19 May 2002 may still be regarded as partly applicable (duly adapted) in matters not regulated by the laws of Timor-Leste, provided it is not contrary to the Constitution and its principles.2

In practice, commercial arbitration is extremely underdeveloped in Timor-Leste, something to which the lack of a modern arbitration law has surely contributed.

However, and as explained below, public authorities seem to be determined to create the conditions for an arbitration-friendly environment.

Draft Arbitration Law

Context and general provisions of the draft law

On 20 December 2016, the Council of Ministers approved the draft law on arbitration, mediation and conciliation.

The draft law was sent to Parliament and a final approval may be given in 2017. According to the draft, the law will enter into force 180 days after its publication.

Although the final version of the law may still be subject to changes in Parliament, it already indicates a clear intention of aligning Timor-Leste with international best practices.

This intention is explicitly conveyed in the preamble of the draft law, which includes, inter alia, the following passages:

The Constitution of the Democratic Republic of Timor-Leste acknowledges, in accordance with article 123 (3), the existence of arbitral tribunals. The Strategic Development Plan for 2011-2030 and the Program of the VI Constitutional Government aim to create alternative means of resolving commercial disputes as a way of contributing to greater legal certainty and speed in resolving conflicts through effective and closer justice of the parties to the conflict. The aim is to increase domestic and international commercial transactions, as well as to attract and give confidence to economic operators, investors, companies, commercial enterprises and, in general, public and private entities, with the aim of improving the business environment and effectively promoting investment and economic growth.

      The main inspiration of this Law is the UNCITRAL Model Law on International Commercial Arbitration, with amendments as adopted in 2006, which reflects the best practices universally harmonized. Those recommendations are essentially followed in the countries of the Asia and Pacific Region, internationally recognized as arbitration “friendly” and holders of high indexes of good business environment, as well as adopted in the arbitration legislation of some of the Community of Portuguese Speaking Countries.3

The draft law is applicable to domestic and international arbitration, mediation and conciliation located in the territory of Timor-Leste and also to the recognition and enforcement of awards issued in arbitration proceedings located abroad. 

According to the draft law, disputes regarding administrative and tax law that may be submitted to arbitration, including those emerging from individual labour contracts, are regulated by special laws.

The criteria for determining which disputes may be referred to arbitration seems to be included in the definition of ‘arbitration agreement’, which is described as an agreement by which the parties submit to arbitration ‘any disputes between them that arise from a commercial legal relationship, whether contractual or non-contractual’. It is thus relatively wide and encompassing criteria that should pose no obstacles in the vast majority of disputes between corporations and business people.

Furthermore, according to the draft law, the state and other legal entities governed by public law may enter into arbitration agreements if such agreements concern the resolution of disputes emerging from commercial activities.

With regard to arbitration, the draft law is based on the UNCITRAL Model Law on International Arbitration and is also influenced by the laws of other Portuguese-speaking countries, such as Portugal and Mozambique.

Therefore, and despite certain specificities in its structure and in certain particular provisions, the typical rules and principles of modern arbitration laws are present in this draft law.4

For instance, the draft law clearly enshrines the principles of autonomy and separability of the arbitration agreement as well as the principle of Kompetenz-Kompetenz.

The provisions regarding the form of the arbitration agreement, the composition of the arbitral tribunal, the making of the award and the termination of proceedings are also similar to the those provided in the Model Law.

Furthermore, the draft law provides for the possibility of arbitral tribunals issuing interim measures and preliminary orders, while allowing court-ordered interim measures.

Final awards issued in arbitration proceedings located in Timor-Leste will be enforceable essentially in the same terms as decisions issued by the courts (ie, without the need for prior recognition).

Regarding recourse against awards, the draft law provides that awards can only be challenged via an application for setting aside before the competent state court.

An application for setting aside may be made within the 60 days following the date on which the party making that application has received the award, or if a request has been made for correction or interpretation of the award or for an additional award,5 from the date on which that request has been ruled on by the arbitral tribunal.

The right to file an application for setting aside cannot be waived. However, the draft law further provides that a party loses the right to set aside the arbitral award if such party continues the arbitration without immediate opposition, knowing that one of the provisions of that law that parties can derogate from, or any condition set out in the arbitration agreement, was not respected, or, if there is a defined time limit for objections, does not object within said time limit.

The grounds for setting aside arbitral awards are limited and similar to those provided in the Model Law.6 Furthermore, the draft law explicitly mentions that the court that annuls the arbitral award cannot analyse the merits of the questions or issues decided by the arbitral tribunal.

One of the specificities of the draft law is that the court proceeding for setting aside suspends the effects of the arbitral award.

International commercial arbitration

Although the provisions applicable to domestic arbitration are also, in general, applicable to international arbitration, there are a few rules that are specifically applicable to the latter.

International commercial arbitration is defined in the draft law as arbitration having as its subject matter a conflict emerging from international commercial relations. According to the draft law, and following article 1(3) of the Model Law, this is the case when at least one of the following situations occurs:

  • the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their business headquarters in different states;
  • one of the following places is situated outside the state in which the parties have their business headquarters:
  • the place of arbitration if determined in, or pursuant to, the arbitration agreement; or
  • any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or
  • the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

Regarding the rules of law applicable to the merits of the dispute in international arbitration, the draft law adopts a provision similar to the provision recommended in article 28 of the Model Law, albeit with a few differences. The parties may choose the rules of law applicable to the merits of the dispute. Any choice of the law or legal system of a given state shall be construed, unless otherwise expressly agreed, as directly referring to the substantive law of that state and not to its conflict of laws rules. In the absence of choice by the parties, the arbitral tribunal shall apply the law of the state with which the subject matter of the dispute has the closest connection.7 In all cases, the arbitral tribunal shall take into consideration the contractual terms agreed by the parties and the relevant trade usages.

Specifically with regard to international arbitration, the draft law provides that a state or a state-owned entity cannot invoke its domestic law to challenge the arbitrability of the dispute, its capacity to be a party to the arbitration, or in any other way evade the obligations emerging from the arbitration agreement.

With regard to international arbitration, the draft law further provides that the arbitration agreement is valid as to its substance and the dispute it governs may be submitted to arbitration if the requirements set out either by the law chosen by the parties to govern the arbitration agreement, by the law applicable to the subject matter of the dispute or by the law of Timor-Leste are met.

Recognition and enforcement of foreign arbitral awards

According to the draft law, the awards made in commercial arbitrations seated abroad shall only be effective in Timor-Leste, regardless of the nationality of the parties, if the awards have been recognised by the competent state court under this law, or pursuant to other treaties or conventions that bind Timor-Leste.

Although Timor-Leste is not a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention), the rules set forth in the draft law for recognition and enforcement of foreign awards, especially with regard to grounds for refusing recognition or enforcement, are identical to the ones provided for in article 36 of the Model Law.

Interestingly, while the Model Law (and the New York Convention) allow the state to refuse recognition or enforcement of the award if such recognition or enforcement would be ‘contrary to the public policy of this State’, the draft law seems to further restrict that possibility by including, ‘contrary to the international public policy of this State’.

Council of Arbitration, Mediation and Conciliation

The law will establish a Council of Arbitration, Mediation and Conciliation, which will have powers of promotion, training, institutional cooperation, development and general regulation in the field of arbitration, mediation and conciliation activities.

The Council will have representatives from the private and public sectors, appointed by Parliament, the government and the justice sector.

According to the draft law, the Council shall exercise its functions of general regulation without prejudice to the specific self-regulation responsibilities of the arbitration, mediation and conciliation institutions, namely with regard to the definition of procedures and determination of costs, case management, professional ethics and organisation and management of the institutions, provided that it complies with the applicable laws and regulations.

The reference to the self-regulation powers of these institutions is a positive sign and indicates that the Council has not been created with the intention of micromanaging the institutions or interfering with their day-to-day activities or with the proceedings that they may administer.

With regard to international commercial arbitration, it is highly advisable to focus the actions of the Council at the much-needed level of promotion and training, without attempts to reinvent or depart from the rules and principles established in the draft law.

According to the draft law, the statute of the Council will still have to be approved by a government decree. It is advisable that the decree will further confirm that the Council will essentially play a supporting role regarding arbitration, as opposed to an intervening one.

Preliminary assessment

In effect, and despite certain minor issues, the approval of the arbitration law – if accompanied by an appropriate effort to train and educate the main legal players, including the courts8 – will be a precious opportunity for effectively and efficiently dealing with commercial disputes related to Timor-Leste.

Memorandum of understanding with the Singapore International Arbitration Centre

Another recent development that steered Timor-Leste in the direction of the ‘community’ of the jurisdictions that actively promote and foster commercial arbitration was the signing of an agreement between one of its administrative regions and the Singapore International Arbitration Centre (SIAC).

Oe-Cusse, a coastal enclave located in the western part of the island of Timor, was originally designated as one of the 13 districts of Timor-Leste. In March 2014, Parliament approved Law No. 03/2014 of 18 June (Law 03/14), which created the Special Administrative Region of Oe-Cusse Ambeno (Saroa) and the Special Zones of Social Market Economy of Oe-Cusse Ambeno and Atauro (Zeesm TL) (jointly referred to as Saroa-Zeesm TL).

As promoted by its authority, the establishment of Saroa-Zeesm TL will play a major role to achieve ‘regional development objectives and the creation of national strategic areas attractive for domestic and foreign investors’.9

With the aim of promoting private sector development and attracting direct foreign investment, on 22 March 2016, the Saroa-Zeesm TL entered into a memorandum of understanding (MOU) with SIAC, where the latter is designated as the preferred institution for dispute resolution services (provided under its own rules and procedures), through arbitration, within the jurisdiction of the former for contracts to be concluded between Saroa-Zeesm TL and private sector firms, investors and service providers.

The MOU obliges the Saroa-Zeesm TL to include, in all contracts and investment agreements that it enters into, a clause providing for ‘all disputes to be referred to arbitration or arbitration­-mediation-arbitration as the dispute resolution method, with Singapore as the seat of arbitration and SIAC as the preferred dispute resolution service provider’.10 Additionally, this MOU provides an exclusivity clause, inhibiting Saroa-Zeesm TL to enter into any similar agreement or arrangement with any other institution for the provision of dispute resolution services.11

Nevertheless, in accordance with clause 2.2.3 of the MOU, the Saroa-Zeesm TL is free to enter into contracts or investment agreements that provide for a seat of arbitration other than Singapore or a dispute resolution provider other than SIAC, if, during negotiations, such is requested by the other party to the relevant contract or agreement, and agreed to by Saroa-Zeesm TL.

The MOU binds Saroa-Zeesm TL and SIAC until 21 March 2019, with the possibility of a three-year extension.

The Private Investment Law

As mentioned above, the draft for the New Private Investment Law has been approved by the Timorese Council of Ministers and by Parliament.12

This draft aims to substitute the current Private Investment Law13 through the implementation of a more modern legal regime and by assuring the conformity of the Timorese legislation with the guidelines of the Association of Southeast Asian Nations Comprehensive Investment Agreement, in order to facilitate the accession of Timor-Leste in ASEAN, and to promote and protect private investment.

Both the current private investment law and the draft of the new proposed law provide, albeit in different ways, for the resolution of disputes through arbitration.

The law currently in force establishes conciliation as the main dispute resolution modality, without prejudice of any other dispute resolution procedure established by any international treaty of which Timor-Leste is a signatory or by any agreement concluded by the state and the investor. According to the current law, if conciliation proves to be ineffective, the parties shall submit the dispute to arbitration, in accordance with International Chamber of Commerce rules and regulations. Nevertheless, the parties may also agree to take the dispute to the competent Timorese court.14 In the draft of the New Private Investment Law, however, conciliation, as a modality of dispute resolution, is no longer an obligation or an option. Although the draft prioritises an amicable resolution of disputes, its article 38 provides the option for disputes between the state and the private investor to be submitted to arbitration, under the terms to be agreed by the parties. The second paragraph of the above-mentioned article also allows for the arbitration agreement, entered into between the state and the foreign investor, to submit the dispute to the International Centre for Settlement of Investment Disputes (ICSID) and be subjected to its rules and regulations.

Bilateral and multilateral treaties

Washington Convention and bilateral investment treaties

On 23 July 2002, Timor-Leste signed the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, entered into in Washington, DC, on 18 March, 1965 (the Washington Convention) and deposited its instrument of ratification. In accordance with its article 68(2), the Washington Convention entered into force for Timor-Leste 30 days after the deposit of the ratification instrument (ie, on 22 August 2002).15

Timor-Leste signed several bilateral investment treaties (BITs), but only the BIT entered into with Portugal is currently in force.16

This BIT provides the standard substantive protections for investors (fair and equitable treatment, protection against expropriation, full protection and security, most-favoured-nation, umbrella clause).

According to article 11(1) of the Timor-Leste-Portugal BIT, investment disputes between one of the parties and an investor from the other party shall be settled amicably, through negotiations.

Article 11(2) provides that if the dispute cannot be settled by negotiation within a six-month period, any party may submit the dispute to:

  • the competent courts of the host state;
  • the ICSID for conciliation or arbitration, pursuant to the Washington Convention; or
  • to an ad hoc tribunal established pursuant to the arbitration rules of the United Nations Conference on Trade and Development.17

According to article 11(3) of the BIT, the decision to submit the dispute to one of these mechanisms is irreversible.

Article 11(4) further provides that the decision is binding for both parties and will not be subjected to any type of appeal in addition to those provided for in national legislation (if the decision was rendered by national courts) or in the above-­mentioned Conventions.

Finally, article 11(5) states that once the court or arbitral proceeding is over, and in case of non-compliance of the decision issued pursuant to this article, the parties may, exceptionally, follow a diplomatic route in order to ensure the enforcement of the decision.

New York Convention

Timor-Leste is not a party to the New York Convention. However, and as mentioned above, the regime that is set forth in the draft law for the recognition and enforcement of foreign awards is at least as favourable – if not more favourable – as the one provided for in the Convention.

Notes

  1. Article 67 of the Constitution of the Democratic Republic of Timor-Leste.
  2. According to article 165 of the Constitution the laws and regulations in force in Timor-Leste shall apply until such time as they are amended or revoked, in all that does not prove contrary to the Constitution and the principles contained therein. Law 2/2002 of 7 August further provides that the laws and regulations in force in Timor-Leste in 19 May 2002 shall apply, duly adapted, in all that does not prove contrary to the Constitution and the principles contained therein.
  3. Free translation from the original in Portuguese.
  4. One of the potential differences regarding other modern legislation is related with the requirements for acting as arbitrator. The draft law provides that in addition to being natural persons that meet the requirements of the parties and are independent and impartial, arbitrators have to comply with qualifications that will be defined in a regulation. It is unclear what those qualifications may be, but it is highly advisable to avoid any peculiar or discriminatory criteria.
  5. Which can be requested in terms that are similar to those provided in article 33 of the Model Law.
  6. Nonetheless, the wording of some of the grounds may still be refined in order to mitigate the risk of unexpected interpretations from the courts.
  7. Differently, article 28(2) of the Model Law provides that failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.
  8. The courts of Timor-Leste still face significant capacity challenges, and their limitations are particularly manifest when dealing with complex or novel cases.
  9. http://zeesm.com/zeesm-tl/.
  10. Clause 2.2.2 of the MOU.
  11. Clause 3.2 of the MOU.
  12. The New Private Investment Law was approved by Parliament on 25 April 2017. However, at the time of writing, it is yet to be promulgated by the President and published in the Official Gazette. No copies of the approved law are available yet. Therefore, the analysis provided here is based on the draft that was approved by the Council of Ministers (which may differ from the approved law).
  13. Law No. 14/2011 of 28 November.
  14. Article 34 of Law No. 14/2011 of 28 November.
  15. https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx, last accessed on 4 July 2017.
  16. In force since 7 April 2004.
  17. As mentioned in the BIT.