Indonesia

International conventions and treaties

In 1981, Indonesia ratified the 1958 New York Convention (the New York Convention) by Presidential Decree No. 34 of 1981. Since then, Indonesia effectively 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 (Rv), which had been applicable in Indonesia since the Dutch colonisation of Indonesia.

The Indonesian Arbitration Law did not take the UNCITRAL Model Law on International Commercial Arbitration into account. The Arbitration Law applies to all arbitrations held within the territory of the Republic of Indonesia, provided the parties have not agreed that a specific foreign law or arbitration rules shall apply. There is no statutory distinction between national arbitration and international arbitration with regard to the nationality of the parties or the location of their project. The only effective differences between a national arbitration, one held in Indonesia, and an international one, held outside of Indonesia, is the procedure for enforcement of the award.

The use of arbitration in Indonesia

Despite the rising popularity of arbitration, there is an emerging sentiment within the legal and business community in Indonesia that arbitration is more complicated, more time-consuming and more expensive than court litigation. Many Indonesian business and legal people also express concern about the lack of court support for enforcement of the arbitral award and the possibility of annulment of the arbitral agreement or awards by the court. That is why, in domestic transactions, many Indonesian companies tend not to choose arbitration as the exclusive forum for resolving disputes covered by their contracts.

The attitude is different when it comes to international commercial contracts. Agreeing to have disputes resolved by arbitration has long been the only solution to avoid court proceedings in Indonesia or other jurisdictions. Foreign parties are generally of the view that bringing a claim relating to an international business transaction before an Indonesian court is an unwise 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.

If the use of arbitration is unavoidable, Indonesian parties usually choose institutional arbitration over ad hoc arbitration in their arbitration agreements. In Indonesia, there is still a mistaken perception among the general public that arbitration must be under the administration of an institution. Many people mistakenly understand that an arbitration seated in Indonesia cannot be an ad hoc arbitration.

Since the late 1990s, Indonesia has experienced a steady increase in arbitration cases, although the popularity or arbitration has moved up and down. The rise in popularity of arbitration after the enactment of the Arbitration Law has motivated the establishment of several new arbitral institutions in Indonesia to compete with or supplement the longest existing Indonesian National Board of Arbitration (BANI). The major ones 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.

Along with the increase of public awareness of non-­institutional mediation and ad hoc arbitration, there is a growing number of independent mediation and arbitration practices in Indonesia. To foster the level of skills and professionalism of Indonesian mediators and arbitrators, Indonesia has seen the establishment of several mediation and arbitration training institutes, such as the Indonesian Arbitrators Institute and the Indonesian Academy of Independent Mediators and Arbitrators.

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 Arbitration Law acknowledges the notion of severability of the arbitration agreement from the rest of the contract. From the perspective of the 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 (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 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, in the case of ad hoc arbitration.

In a recent judgment in the case between PT Citra Televisi Pendidikan Indonesia and PT Berkah Karya Bersama (Decision No. 533/Pdt.G/2014/PN.Jkt.Sel), the District Court of South Jakarta refused to hear an application to recuse an arbitrator in arbitral proceeding held under the BANI rules. The District Court was of the view that it had no jurisdiction to deal with the application. The judgment confirms the position of the Arbitration Law, namely where parties have agreed that a dispute should be referred to an arbitral institution for resolution, the rules of the institution should fully govern the conduct of the arbitration, including procedures for the appointment and recusal of arbitrators. Intervention of the courts is only to support the arbitration.

Judicial approach to enforcement and challenges of international awards

Like arbitration law and practice in many other jurisdictions,10 judicial intervention can 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 Arbitration Law provides very limited grounds for the court to undertake judicial control over arbitral awards. There is no provision in the 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 In practice, the judges’ interpretation and application of ‘public policy’ thus becomes so criticial as it would determine whether an exequatur can be granted or not.

It is also worth highlighting that the Arbitration Law provides for very limited grounds13 and very strict procedure for annulment of arbitral awards. In practice, however, the application of these provisions often raises issues. While there is no clear definition of public policy, the concept of public policy can be relied on by the Indonesian courts to nullify an arbitration award or to refuse enforcement.

Unlike the UNCITRAL Model Law,14 the Arbitration Law does not regulate a stay procedure in connection with the enforcement of an arbitral award. In practice, the commencement of an annulment action is often used by the losing party as a tempting dilatory avenue of an adverse arbitral award. As an application for annulment could effectively stay or frustrate the enforcement of the award, the award creditor upon receipt of a favourable award against an Indonesian party should immediately engage an Indonesian counsel who have experience in handling international arbitration enforcement cases and able to process things speedily in the courts.

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 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.

To register an international award, in addition to the power of attorney from the arbitrator, which must have been legalised by the Indonesian embassy, the applicant would be required to furnish: (i) a certification from the Indonesian embassy or other diplomatic representation in the seat of the arbitration to the effect that both the country and Indonesia are parties to the New York Convention; (ii) the original or an authenticated copy of the international award plus its official Indonesian translation (by an Indonesian sworn translator); and (iii) the original or an authenticated copy of the underlying contract (which is the basis for the award) plus its official Indonesian translation (by an Indonesian sworn translator). Therefore in practice registration of an international award generally takes much longer than a domestic award.

Moreover, under the Indonesian Arbitration Law, an international arbitral award can only be enforced after the chairman of the District Court of Central Jakarta 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 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 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 moveables or immoveables, 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 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.
  14. 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’.
  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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