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The legal framework for international arbitration

Indonesia has ratified the ICSID Convention by Law No. 5 of 1968.1 According to article 3 (1) of Law No. 5 of 1968, which is in line with articles 53–55 of the ICSID Convention, the ICSID award is enforceable in Indonesia after the receipt of a ‘certificate of enforceability’ (exequatur) from Indonesia’s Supreme Court.

Indonesia has also ratified the 1958 New York Convention by Presidential Decree No. 34 of 1981. Indonesia became a party to the New York Convention subject to reciprocity and commercial reservations.

Under the reciprocity reservation,2 Indonesia will apply the Convention to arbitral awards made only in the territory of other contracting states. In other words, in Indonesia, foreign arbitral awards can only be enforced if the country deciding on the award is also a contracting state to the New York Convention.3

Under the commercial reservation, Indonesia will apply the New York Convention only to disputes that, according to Indonesian law, arise from ‘commercial legal relationships of a contractual nature or a non-contractual nature’. Therefore, foreign arbitral awards can only be enforced in Indonesia if the awards pertain to differences arising out of legal relationships, either contractual or otherwise, which are considered commercial under Indonesian law.

In order to further encourage foreign investment from major investor countries, Indonesia has also signed bilateral investment treaties with Australia, Belgium, China, Denmark, Egypt, France, India, Italy, Malaysia, the Netherlands, Syria, Thailand, South Korea, the United Kingdom, Germany, Turkey, Singapore, Russia and many others. In order to provide the necessary legal certainty sought by investors, the treaties specifically provide arbitration as the preferred method of dispute settlement.

Realising the value of arbitration in international commercial relations, on 12 August 1999 the Indonesian government enacted and promulgated the first Indonesian national arbitration law (ie, Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution).4 Pursuant to its closing provision, the Arbitration Law replaces articles 615–651 of the Dutch Code of Civil Procedure. The Arbitration Law provides for rules of ad hoc arbitration proceedings. Moreover, the Arbitration Law also provides provisions on international and national arbitration as well as the recognition and enforcement of these awards in Indonesia.

It is obvious that the Arbitration Law was designed to create a more pro-arbitration legal regime (ie, to minimise the intervention of the courts and to ensure the finality and enforceability of arbitral awards), which has been a highly controversial issue in the recent past, and has directly impacted commercial relations and investment costs in Indonesia.

Despite this, it should be noted that Indonesia is not a Model Law country. The Indonesian Arbitration Law did not take the UNCITRAL Model Law on International Commercial Arbitration into account.

The use of arbitration

History indicates that arbitration has long-established roots in Indonesia. Arbitration only began to receive a great deal of attention following the late 1970s, when Indonesian businesspeople started to actively take part in international trade and the government started to promote it. Due the increase of international commercial transactions done by Indonesian businesspeople, arbitration has gained acceptance.

Agreeing to have disputes resolved by arbitration is, apparently, the obvious and usually inevitable solution for foreign parties dealing with Indonesian companies. In international commercial contracts, the parties usually have no option other than to agree to arbitration in order to avoid court proceedings in any of the parties’ jurisdictions.

Foreign parties are conscious that the prospect of bringing a claim arising out of an international business transaction before an Indonesian court is an unattractive one. The judges may not be familiar with sophisticated business transactions and the foreign party will not be able to be represented by lawyers of its own nationality, but instead will have to use the services of local lawyers. Furthermore, when cases are tried by an Indonesian court, all of the documents and evidence will have to be translated into Indonesian by an official translator before their submission to the court. Moreover, there is no international treaty signed by Indonesia for the enforcement of foreign judgments in case it can obtain or secure a favourable court judgment.

In Indonesia, the parties have complete freedom to choose ad hoc or institutional arbitration. Such decisions are left entirely to the parties to any dispute. Additionally, there is no prohibition on parties making use of any national or international arbitration institutions, if the contract between the parties so provides.

In practice, Indonesian parties usually choose institutional arbitration in their arbitration agreements, largely due to lack of their arbitration knowledge and experience. Some Indonesians still have the perception that arbitration must be under the administration of an institution. If the parties decide to choose ad hoc arbitration, they would usually refer to the UNCITRAL Arbitration Rules.5

In Indonesia, some arbitral institutions have been established and have engaged in promoting arbitration. Of these, the Indonesian National Board of Arbitration (BANI) is the longest-established and handles the largest number of cases. BANI deals with disputes in the areas of trade, industry and commerce. During the last decade, BANI has experienced a steady increase in arbitration cases.

BANI is definitely not the only arbitration institution in Indonesia. The Indonesian Shariah Arbitration Board, initiated by the Indonesian Council of Ulemas (religious scholars) has been established. It handles various disputes including commercial and financial disputes based on shariah principles.

The Indonesian Capital Market Arbitration Board (BAPMI) is more recently established as an institutional arbitration body specifically for resolving disputes relating to capital market activities.

Smaller bodies exist for the purpose of settling claims in specialised areas such as insurance, capital markets and employment.

The judicial approach towards arbitration agreement

In Indonesia, there is a requirement that an arbitration agreement must be made in writing. The agreement may be in the form of an arbitration clause in the principal agreement providing for the arbitration of disputes that may arise in the future, or, in the case of a dispute already having occurred, the parties may decide for arbitration by a separate submission agreement.6 It is specifically required that both parties sign the agreement,7 although a submission agreement instead may be in the form of a notarial deed if the parties cannot sign8 for themselves.

Specifically, article 4 (3) of the Indonesian Arbitration Law states that an arbitration agreement may be concluded by the exchange of letters, telexes, telegrams, facsimiles, e-mails or other means of communication, provided that they are accompanied by ‘a record of receipt of such correspondence by the parties’.

The Indonesian Arbitration Law acknowledges the notion of severability of the arbitration agreement from the rest of the contract. From the perspective of the Indonesian Arbitration Law, an arbitral clause is considered as an agreement independent from the main contract. Therefore, the invalidity of the main contract does not entail the invalidity of the arbitral clause.

Furthermore, under the Indonesian Arbitration Law, the existence of a valid arbitration agreement precludes the right of the parties to submit the dispute to the court. Legally, the parties are deemed to have waived their rights in order to have their dispute resolved by a national court when they agree to arbitration.

It is explicit in the Arbitration Law that the Indonesian courts have no jurisdiction over a dispute that is subject to an arbitration agreement. Article 11 (2) of the Indonesian Arbitration Law stipulates that: ‘The district court, before which an action is brought in a matter which is the subject to arbitration, must not interfere and must reject the action as inadmissible, except for on certain matters as stipulated in [the Arbitration Law]’. In many recent cases, the court has refused to intervene in a dispute if the parties’ contracts made a specific reference to arbitration.

The power of the Indonesian courts to intervene in arbitral proceedings is explicitly restricted to particular circumstances. Nonetheless, the Arbitration Law allows the parties to request the intervention of the court on the appointment of an arbitrator, in the event the parties fail to reach an agreement on the appointment of the arbitrator.

The judicial approach towards enforcement and challenges against international arbitral awards

Like arbitration law and practice in many other jurisdictions,8 judicial intervention in Indonesia could also occur after the final award has been rendered. Such interventions are possible at two levels: (i) at the level of enforcement of the arbitral award when a party is seeking an exequatur against the party who does not want to honour the terms of the arbitral award; and (ii) at the level of taking a motion for cancellation or setting aside of the award.

Theoretically speaking, the results of an arbitration proceeding are difficult to challenge in an Indonesian court. The Indonesian Arbitration Law provides very limited grounds for the court to undertake judicial control over arbitral awards. In Indonesia, for example, a party is not allowed to appeal to the court on any question of law arising out of an award made pursuant to an arbitration agreement.

Additionally, there is no provision in the Arbitration Law permitting court control over the decision of the arbitrators on the jurisdictional issue, similar to article 16 (3) of the UNCITRAL Model Law. Unlike the old regime (under the Dutch Code of Civil Procedure), arbitral awards on any kinds are not appealable ‘at all’, even if the decision-maker manifestly misapplied the law.9 Article 60 of the Arbitration Law specifically states that an arbitral award shall have the same effect on the parties as the final and conclusive judgment of the court. It is also stipulated in the Arbitration Law that application to set aside an award may only be made within 30 days as from the date the award was registered at the court.

It is important to note that the grounds for refusing enforcement of arbitral awards are not similar to those enumerated in Article V of the New York Convention or article 36 of the Model Law.

Unlike the Model Law,10 the Arbitration Law does not regulate a stay procedure in connection with the enforcement of an arbitration award.

It should also be considered that under the Arbitration Law, the grounds for annulment are not in line with the grounds for ‘declining’ to enforce awards. Articles 70-72 of the Arbitration Law governs the very limited grounds12 and procedure for annulment of arbitral awards.11

The Indonesian Arbitration Law specifically provides grounds for refusing the enforcement of domestic arbitration awards, while there is no provision within the Indonesian Arbitration Law that specifically regulates the grounds for refusing enforcement of an international arbitration award.

It is also worth highlighting that the Indonesian Arbitration Law does not contain any express provisions regarding the grounds for non-enforcement, similar to those as enumerated in article V of the 1958 New York Convention. Therefore, it can be said that the Indonesian Arbitration Law provides more limited means to challenge international arbitral awards than those in article V of the New York Convention12 or article 36 of the UNCITRAL Model Law. This situation can effectively make any attempts to resist enforcement of domestic arbitral award in Indonesia easier.

Procedure for enforcement of international arbitral awards

The Arbitration Law makes a distinction between national (domestic) and international (foreign) arbitration. According to article 1.9 of the Arbitration Law, ‘international arbitral awards’ are ‘awards rendered by an arbitration institution or by individual arbitrator(s) outside the jurisdiction of the Republic of Indonesia or awards by an arbitration institution or individual arbitrator(s) which, under the provisions of Indonesian law are deemed to be ‘international arbitration awards’.

To date, there is no provision of law that would give the status of international arbitration to any arbitral award rendered within Indonesia. Hence, in practice, we can say that arbitral awards rendered outside of the jurisdiction of Indonesia are ‘international’ awards, and awards rendered within Indonesia are ‘national’ awards.

The procedure, as well as grounds for refusal of enforcement of international awards is not entirely similar to those for refusal of enforcement of national awards. It is apparent that there is a slightly different treatment of national and international awards in respect of the enforcement of arbitral awards.

Despite the foregoing, the enforcement procedure for both national and international arbitral awards must begin with registration. In this respect, the arbitral award is required to be registered by the arbitrator or his proxy with the clerk’s office of the relevant district court before it can be enforced.

In Indonesia, an international arbitral award may only be enforced after the chairman of the competent court has recognised and ratified the award through the issue of exequatur.13 Unless the Republic of Indonesia is a party to the arbitrated dispute, the Indonesian Arbitration Law vests in the District Court of Central Jakarta jurisdiction to issue exequatur to enforce foreign arbitral awards in Indonesia.

In practice, before the chairman of the Court issues an exequatur, he or she will first examine whether both the nature of the dispute and the agreement to arbitrate meet the requirements set out in the Indonesian Arbitration Law. Apart from the availability of a valid and enforceable arbitration agreement, which gives jurisdiction to the arbitrator, this clearly means that the arbitral award should not be contrary to good morals and public policy.14 The dispute resolved by the arbitral award is a dispute in the commercial sector and concerning rights, which according to laws and regulations, are fully controlled by the parties.15 Thus, if parties are not allowed to dispose of their rights by compromise pursuant to applicable laws and regulations, they cannot arbitrate them.16

The Indonesian Arbitration Law17 suggests that in response to an application for the enforcement of an international arbitral award, the court has to grant its exequatur an order to enforce the award in accordance with the Indonesian normal procedural law, unless (i) the award is rendered in a state that is not bound by a bilateral or multilateral convention or treaty with recognition and enforcement of foreign arbitral awards, by which Indonesia is bound;18 (ii) the legal relationship on which the award was based cannot be considered as commercial under Indonesian law; or (iii) the recognition or enforcement of the award would be contrary to public policy.19

In response to an application for the enforcement of an award, as a general rule, the court may not review the reasoning of the award.

In Indonesia, the courts will enforce arbitral awards in the same way as the judgments of state courts (eg, seizure of movables or immovables, as well as of money claims, of the defendant against third parties).

  1. Under the ICSID Convention, disputes between a foreign investor or locally incorporated foreign investment company and a state can, with the consent of all parties, can be referred to ICSID.
  2. Article I (3) of the New York Convention offers the possibility to the contracting states to reserve the applicability of the Convention to ‘awards made only in the territory of another Contracting State’.
  3. There are abundant examples of the application of the first reservation. A court of appeal in Germany, which has used the first reservation, refused to apply the Convention to an award made in the United Kingdom at a time when it had not adhered to the Convention. Similarly, the Federal Supreme Court of Germany did not apply the Convention to a award made in Yugoslavia, a country which has still not become a Party to the Convention. See Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation, Kluwer Law and Taxation Publishers, 1994, at 13.
  4. The Arbitration Law has 82 articles, divided into 11 chapters as follows: general provisions; alternative dispute resolution; arbitration conditions, appointment of arbitrators and the right of refusal; the procedure before the arbitration tribunal; opinion and arbitral decision; enforcement; annulment; termination; costs; transitional provisions; and concluding provision. There also is an official elucidation, which is not legally binding.
  5. See the cases Pertamina v KBC and Government of Indonesia v Newmont.
  6. See article 1 (3) of the Indonesian Arbitration Law.
  7. See article 4 (2) of the Indonesian Arbitration Law.
  8. See article 9 (1) of the Indonesian Arbitration Law.
  9. For example, in Malaysia, the courts have the authority to appoint or remove an arbitrator or to extend the time for rendering an award, in order to discover or compel the appearance of witnesses. See KR Simmonds et al, Commercial Arbitration Law in Asia and the Pacific, Paris, ICC Publishing Sa, 1987, p. 129
  10. In some countries, an award can be appealed to the competent state court within three months of the notification of the award under specific circumstances, including:

    the absence of a valid arbitration agreement;

    denial of a party’s fair chance to present its case;

    violation of statutory or contractual stipulations as to either the composition of the arbitral tribunal or the decision-making of such tribunal;

    the failure of the arbitrators to sign the original copy of the arbitration award;

    dismissal of the challenge of an arbitrator although sufficient reason for the challenge existed;

    excessive exercise of the arbitral tribunal’s jurisdiction (ultra petita);

    violation of Austrian public order or statutory provisions of Austrian law which cannot be avoided, even if the parties agree on the application of foreign law; and

    special circumstances for the reopening of civil procedures (including, for example, false testimony of witnesses). However, this ground may be waived in the arbitration agreement if such agreement is entered into by businessmen.

  11. Article 34 (4) of the Model Law states: ‘The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside’.
  12. Article 70 of the Arbitration Law regulates the reason that can be used by any of the parties to file an application to court for annulment of an award is a presumption that the arbitral award made against it contains elements of falsification, fraud or the hiding of facts/documents.
  13. These provisions often raise issues. Problems arise because these provisions are vague and seem inconsistent. For example, while article 70 appears to be drafted in an exhaustive (as opposed to inclusive) mode, the General Elucidation to the Arbitration Law however suggests otherwise. It states: ‘Chapter VII regulates the annulment of an arbitral award. This is possible for several reasons, among others: [the subsections of Art. 70 are cited]’. The limitative nature of this provision is an area of considerable debate among legal practitioners.
  14. Under the 1958 New York Convention, challenges to enforcement of foreign arbitral awards fall into two broad categories: first, that a dispute is not subject to arbitration in the first place (inarbitrability defence) and second, that enforcement would be contrary to the public policy of the state in which enforcement is sought (public policy defence).
  15. As a rule, in response to an application for enforcement of a foreign arbitral award, the court is obliged to grant its exequatur in order to enforce the award in accordance with the Indonesian normal procedural law, unless: (i) the award is rendered in a state which is not bound by a bilateral or multilateral convention or treaty on the recognition and enforcement of foreign arbitral awards, by which Indonesia is bound; (ii) the legal relationship on which the award was based cannot be considered as commercial under Indonesian law; or (iii) the recognition or enforcement of the award would be contrary to public policy.
  16. See article 62 (2) of the Indonesian Arbitration Law.
  17. See article 5 of the Indonesian Arbitration Law.
  18. This approach mimics the classical test used in many civil law jurisdictions.
  19. See article 66 of the Indonesian Arbitration Law.
  20. The main treaty referred to in article 66.a is the New York Convention. Indonesia, however, has also entered into the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which applies to the recognition and enforcement of arbitral awards rendered by tribunals established within the International Centre for the Settlement of Investment Disputes (ICSID). This Convention was ratified by Indonesia on 28 September 1968 through Law No. 5 of 1968 dated 29 June 1968.
  21. See article 66.a, b, and c of the Indonesian Arbitration Law.

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