Indonesia

In 1981, Indonesia ratified the 1958 New York Convention (the 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,1 Indonesia will apply the New York Convention to arbitral awards made only in the territory of other contracting states. In other words, foreign arbitral awards can only be enforced in Indonesia if the country deciding on the award is also a contracting state to the New York Convention.2

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, that are considered commercial under Indonesian law.

Besides, Indonesia ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) in 1968.3 According to article 3 (1) of Law No. 5 of 1968 concerning ratification 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.

To further encourage foreign investment from major investor countries, Indonesia has also signed a considerable number of bilateral investment treaties (BITs) with many countries. At the time of writing, Indonesia has signed BITs with 67 countries including Australia, China, France, India, Italy, Malaysia, the Netherlands, Thailand, South Korea, the United Kingdom, Germany, Singapore and Russia.4 To provide the legal certainty sought by investors, the treaties specifically provide arbitration as the preferred method of dispute settlement.

To promote further economic cooperation between and among member states of the Association of Southeast Asian Nations (ASEAN), Indonesia ratified the ASEAN Comprehensive Investment Agreement (ACIA)5 through Presidential Regulation No. 49 of 2011. The ACIA was signed by Indonesia and other ASEAN members on 26 February 2009. One of the most important features of the ACIA is its investor–state dispute settlement mechanisms and the promotion of alternative dispute resolution methods. ASEAN investors can resolve disputes by using domestic courts and tribunals, through international arbitration (including ICSID) and by means of alternative dispute methods, such as mediation, conciliation, consultation and negotiation.

The Indonesian Arbitration Law

Realising the value of arbitration in both international and domestic commercial relations, on 12 August 1999, the Indonesian government enacted and promulgated Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (Arbitration Law),6 as the first national arbitration law in Indonesia. Pursuant to its closing provision, the Arbitration Law replaces articles 615–651 of the Dutch Code of Civil Procedure, which had been applicable in Indonesia since the Dutch colonisation of Indonesia.

The Indonesian Arbitration Law provides for rules of ad hoc arbitral proceedings and procedures for the recognition and enforcement of international and national arbitral awards in Indonesia.

It should be noted that Indonesia is not a UNCITRAL Model Law country because the Indonesian Arbitration Law did not take the UNCITRAL Model Law on International Commercial Arbitration into account.

The use of arbitration in Indonesia

While arbitration has long-established roots in Indonesia, it only began to receive significant attention in the late 1970s when Indonesian businesspeople started to actively take part in international trade and the government started to promote it. Arbitration is now widely accepted in Indonesia although there is significant room for it to be used more as a dispute resolution mechanism.

Agreeing to have disputes resolved by arbitration has long been the only solution for many 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 generally of the view that bringing a claim relating to an international business transaction before an Indonesian court is an unattractive option. Indonesian judges may not be familiar with sophisticated business transactions, especially those with an international dimension. The foreign party cannot be represented by lawyers of its own nationality, but must instead use the services of local lawyers. Further, all documents and evidence in cases before an Indonesian court must be in the Indonesian language, requiring translation and interpretation by an official translator or interpreter before being accepted by the court. Moreover, Indonesia is not party to an international treaty for the enforcement of foreign judgments.

In practice, and perhaps due to their limited knowledge of and experience in arbitration, Indonesian parties usually choose institutional arbitration over ad hoc arbitration in their arbitration agreements. There remains the misunderstanding 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.

In Indonesia, some arbitral institutions have engaged in promoting arbitration. Of these, the Indonesian National Board of Arbitration (BANI) is the oldest 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.

Other arbitration institutions in Indonesia include the Indonesian Shariah Arbitration Board and the Indonesian Capital Market Arbitration Board (BAPMI). The former was established by the Indonesian Council of Ulemas (religious scholars) and handles various disputes, including commercial and financial disputes, based on shariah principles. BAPMI focuses on resolving disputes related 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, 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 having already occurred, the parties may decide for arbitration by a separate submission agreement.7 It is specifically required that both parties sign the agreement.8 In the event the parties desire to submit their dispute to arbitration after it arises, their submission agreement must be made in the form of a notarial deed if any of the parties cannot sign for themselves.9

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 they are accompanied by ‘a record of receipt of correspondence between 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 arbitration clause is considered an agreement independent from the contract containing it. Therefore, the invalidity of the main contract does not necessarily mean the invalidity of the arbitral clause.

In Indonesia, the parties have the freedom to choose ad hoc or institutional arbitration (either domestic or international). Additionally, there is no prohibition on parties choosing foreign law as the applicable substantive law, and there is no requirement that the chosen law has some connection to the parties or to the dispute.

Further, 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 their rights waived 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 courts have no jurisdiction over a dispute that is subject to an arbitration agreement. Article 11 (2) of the 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. One of these circumstances is to appoint an arbitrator only if the parties cannot reach an agreement on this.

The judicial approach towards enforcement and challenges against international arbitral awards

Like arbitration law and practice in many other jurisdictions,10 judicial intervention can also occur after the final award has been rendered. Such interventions are possible at two levels:

  • at the level of enforcement of the arbitral award when a party is seeking an ‘exequatur’ of the arbitral award; and
  • at the level of taking a motion for annulment of the award.

Theoretically speaking, the results of arbitral proceedings 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. There is no provision in arbitration law allowing a party to appeal to the court on a jurisdictional issue or any question of law arising out of an arbitral award.11

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 an application to annul an award may only be made within 30 days from the date the award was registered at the court.

It is also important to note that while the Arbitration Law provides the court the option of refusing to enforce an international arbitral award, it does not specify the grounds on which such refusal can be made.12 Unlike the Model Law,13 the Arbitration Law also does not regulate a stay procedure in connection with the enforcement of an arbitration award.

It is also worth highlighting that the Arbitration Law provides for very limited grounds14 for annulment of arbitral awards. 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 suggests: ‘Chapter VII regulates the annulment of an arbitral award. This is possible for several reasons, among others: [the subsections of Article 70 are cited]’. The limitative nature of this provision is an area of considerable debate among legal practitioners.

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, ‘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 an arbitral award rendered within Indonesia the status of international arbitral award. However, in PT Lirik Petroleum v PT Pertamina EP, Indonesia’s Supreme Court (Decision No. 904K/PDT.SUS/2009) regarded an arbitral award rendered by the International Chamber of Commerce (ICC) in Jakarta as an international award. Despite the fact that the seat of the arbitration was in Jakarta, the Supreme Court in this case considered the subject of the dispute between the parties to be an international contract and the ICC to be an international arbitral institution.

Although there is a slightly different treatment of national and international awards in respect of the enforcement of arbitral awards, the enforcement procedures for both national and international arbitral awards must begin with registration. 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.15 Unless the Republic of Indonesia is a party to the arbitrated dispute, the Arbitration Law vests in the District Court of Central Jakarta’s jurisdiction to issue the exequatur to enforce foreign arbitral awards in Indonesia.

The general rule in an application for the enforcement of an arbitral award is that the court may not review the reasoning for the award. In practice, however, the chair of the court will only issue an exequatur if he or she is satisfied that both the nature of the dispute and the underlying arbitration agreement are valid under Indonesian law and not contrary to good morals and public policy.16

The Arbitration Law provides that only disputes in the commercial sector and concerning rights that are fully controlled by the parties can be resolved through arbitration.17 Consequently, if parties are not permitted to dispose their rights by compromise pursuant to applicable laws and regulations, they cannot arbitrate them.18

  • The Arbitration Law19 suggests that the Indonesian courts will grant an application for the enforcement of an international arbitral award unless:
  • the award was rendered in a state that is not bound by a bilateral or multilateral convention or treaty with recognition and enforcement of foreign arbitral awards and to which Indonesia is party;20
  • the legal relationship on which the award was based cannot be considered as commercial under Indonesian law; or
  • the recognition or enforcement of the award would be contrary to public policy.21

After issuance of the exequatur, 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).

Notes

  1. 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’.
  2. There are many 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 an 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.
  3. 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.
  4. In line with Indonesia’s strengthened economic and trading status, the Indonesian government is currently undertaking a serious review of all of its BITs with a view to re-negotiating their terms and conditions once they expire.
  5. In addition to the ACIA, Indonesia is a signatory of ASEAN free trade agreements with Australia, New Zealand China, Japan, Korea and India. Indonesia has also expressed an interest in joining the Trans-Pacific Partnership Agreement.
  6. 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.
  7. See article 4 (2) of the Indonesian Arbitration Law.
  8. See article 9 (1) of the Indonesian Arbitration Law.
  9. See article 9 (1) of the Indonesian Arbitration Law.
  10. 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, p129
  11. 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.
  12. 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).
  13. 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’.
  14. 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.
  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:
    • 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;
    •  the legal relationship on which the award was based cannot be considered as commercial under Indonesian law; or
    • 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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