I MARKET OVERVIEW
Third-party funding in litigation or arbitration proceedings in Indonesia is still undeveloped and unregulated, despite its significant popularity and wide usage in neighbouring countries (e.g., Singapore and Australia) in recent years. Although this can be one of the ways for disputing parties to manage financial risks, Indonesia is currently not that familiar with the practice of using third-party funding.
To date, there are no publicly available judicial precedents in Indonesian courts in relation to the use of third-party funding. There are also no associations or companies in Indonesia recorded as having a formal presence in the business of providing third-party funding for litigation or arbitration. The use of third-party funding is rare and not yet regarded as a commercial activity.
The opportunities and market for third-party funding in Indonesia are currently considered to be wide open, and yet it can be a high-risk prospect at the same time. In the absence of official statistics or media coverage on third-party funding in Indonesia, and as a way to fill this information gap in relation to these activities, this chapter will discuss the possible use of third-party funding for both court litigation and arbitration proceedings seated in Indonesia by drawing comparisons with practices in other countries.
II LEGAL AND REGULATORY FRAMEWORK
Third-party funders, as we know, provide funding for disputing parties (usually the plaintiffs or claimants) in litigation or arbitration proceedings to pursue meritorious claims in return for a share of the proceeds recovered in the proceedings or some other financial benefit. The underlying reasons for using a third-party funder go beyond impecuniosity and may include spreading risk throughout the course of the proceedings, as well as minimising cash flow disruptions. Use of such funding could even enable a party to pursue multiple claims at the same time.
Third-party funders conduct thorough due diligence on the potential funded party, its lawyer (if any) and the case, as they would naturally only be interested in financing claims that are likely to succeed. Further, proper assessment could align interests and strategies between the third-party funder, the funded party and the attorneys involved. For example, it could be done to prevent a scenario where a plaintiff or claimant inflates the amount of damages claimed to maximise recovery since a portion of the proceeds would be provided to the third-party funder.
In numerous common law countries, encouraging litigation and funding another party's claim for profit are prohibited by common law doctrines of maintenance and champerty. Hence, activities of this kind are considered torts, or prohibited, to counter frivolous or vexatious cases.
Indonesia does not have any regulatory framework on third-party funding for litigation or arbitration proceedings; it is neither permitted nor prohibited in Indonesia. Indonesian law also does not recognise the concept of champerty and maintenance.2
To provide some context, Indonesia is a civil law jurisdiction, which inherited the civil law system from the Netherlands. The sources of law under the Indonesian legal system are: (1) statutory law; (2) custom or unwritten law; (3) treaty; (4) precedent; and (5) legal doctrine.
As a rule of thumb, disputing parties are responsible for paying their own fees for litigation or arbitration in Indonesia. There are no disclosure obligations or restrictions on how parties finance their litigation or arbitration proceedings.
Under Law No. 18 Year 2003 regarding Advocates (the Advocates Law) and the Code of Ethics for Indonesian advocates, clients and advocates are free to agree on the arrangement or type of fees. There are also no regulations that prohibit a third party from paying the costs of another party's case. The appointed judges or arbitrators are typically not in the position to question the source of the parties' funds. Thus, there are no restrictions on third-party funding from a legal or ethical perspective.
The conduct and procedures of Indonesian general courts are regulated under: Law No. 2 Year 1986 regarding General Courts as last amended by Law No. 49 Year 2009; Law No. 48 Year 2009 regarding Judicial Power; and Law No. 14 Year 1985 regarding the Supreme Court as last amended by Law No. 3 Year 2009, and its implementing regulations. None of these existing regulations contain any prohibition on third-party funding.
Indonesian civil procedure law, which governs procedures for the examination of a statement of claim through proceedings until the enforcement of the relevant court's decision, is also silent on financing of litigation. As a general rule, a party to a dispute cannot claim the costs for litigation from the opposing party.
Although other South East Asia countries such as Singapore3 and Hong Kong4 have expressly permitted the use of third-party funding, the scope of proceedings is limited to arbitration proceedings and only court proceedings that are related to such arbitration (e.g., mediation and enforcement proceedings).
Despite these limitations, the Singapore High Court in 2018 had permitted third-party funding for liquidators on investigations and potential claims related to unpaid bonds against the Singapore subsidiaries of PT Trikomsel Oke Tbk, an Indonesian telecommunications company. Similarly, there are also a number of insolvency matters in Hong Kong that are financed by third-party funders. Furthermore, in practice, the use of third-party funding for claims arising out of insolvency is progressively increasing in Singapore and Hong Kong. Some of the most prominent third-party funding companies that have expanded their commercial presence to Singapore and Hong Kong include IMF Bentham, Burford Capital Ltd and Woodsford Litigation Funding.
Against that background, Indonesia could adapt its litigation landscape by weighing the possibility of expressly permitting the use of a third-party funding for civil proceedings and insolvency proceedings (i.e., suspension of payment and bankruptcy). In the latter proceedings, third-party funders are in a better position to predict the likelihood of the creditor's success because the evidence required to prove the debtor's bad debt would be straightforward under the applicable law. In any case, third-party funders could better anticipate, and thereby mitigate, the possible risks during both proceedings and the enforcement stage by engaging experienced Indonesian advocates, who understand the Indonesian legal framework.
On a related note, the opportunities for third-party funders to tap into the Indonesian market through the banking sector would also bear further assessment. The high number of non-performing loans (NPLs) is a critical issue in the Indonesian banking sector. In practice, banks could choose to sell their NPLs to third parties (e.g., companies) as a relatively quick solution to their credit problems and to clean up their balance sheets. In a sense, this could be viewed as an investment opportunity for third-party funders, because it could be repaid as an obligation or any payment form agreed upon by the parties. The terms of the third-party funding agreement might also specify the transfer mechanism of the NPL, which would most likely be in the form of a transfer of receivables (cession).
Other countries in Asia, namely Japan, South Korea and Thailand, share the same position as Indonesia in that there is no regulatory framework prohibiting the use of third-party funding. From a broader perspective, the practice of third-party funding is slowly growing in other civil law countries (which also have no regulatory framework), such as Brazil, Egypt and Ukraine.
In Indonesia, there are currently various arbitration institutions that administer arbitration proceedings in the country, but the relevant arbitration rules are silent on the use of third-party funding.
The use of third-party funding is more prevalent in international arbitration, particularly in light of the substantially higher costs of such arbitration. In view of this, in maintaining their reputation as arbitration hubs, Singapore and Hong Kong have stayed abreast of developments by amending their regulatory frameworks to accommodate third-party funding.
Both Hong Kong and Singapore require the third-party funder to have a sufficient amount of capital. The 2018 Administered Arbitration Rules of the Hong Kong International Arbitration Centre (the HKIAC Rules) provide for the disclosure of third-party funding, namely its existence and the identity of the funder.5 Furthermore, arbitral tribunals are also permitted to take into account any third-party funding arrangement in determining all or part of the costs of the arbitration. The Singapore International Arbitration Centre (SIAC) issued a practice note in 20176 requiring arbitrators to disclose any direct or indirect relationship with third-party funders that could impact their impartiality or independence. Under the HKIAC Rules and both the SIAC's Arbitration Rules and its Investment Arbitration Rules (effective from 2017 (the SIAC IA Rules 2017)),7 arbitrators are empowered to order disclosure on the existence of third-party funding arrangement and identity of the funder.
A few steps behind Singapore and Hong Kong is Malaysia, which had proposed amending its present Arbitration Act 2005 (last amended in 2011) to similarly regulate the use of third-party funding for international arbitration and related court proceedings. However, lawyers are still currently prohibited from receiving contingency fees in Malaysia.
In contrast, arbitration in Indonesia is regulated under Law No. 30 Year 1999 regarding Arbitration and Alternative Dispute Resolution (the Arbitration Law), which contains no restrictions, or guidance, on the use of third-party funding for arbitration proceedings or for the enforcement of arbitral awards in Indonesia.
A third-party funder indisputably would not be a party to the arbitration agreement and would have no direct interest in the arbitration. In terms of coverage of funds, presumably the third-party funder would pay for the arbitral costs of the arbitration institution, the honorarium of the arbitrators, and the adverse costs (if any). Separately, the third-party funder would also cover the claimant's legal costs. Subsequently, there would be no correlation between the funds allocated to the arbitral tribunal and the advocates through the third-party funding agreement.
As an attempt to become a preferred seat of arbitration, Indonesia could consider permitting the use of third-party funding through a possible amendment of the Arbitration Law. In any event, Indonesian legislators must bear in mind that the realisation of the proceeds from an arbitral award is dependent upon the award's enforceability in the courts.
Indonesia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In the context of enforcement, there are no statutory provisions under Indonesian law that prohibit or preclude an arbitral award creditor from having a funding arrangement with a third-party funder to finance the enforcement of an arbitral award in Indonesia.
If Indonesia were to enact legislation on third-party funding, it is likely that Indonesia, as a new market, would adopt a similar approach to Hong Kong and Singapore in specifying the scope of disclosure and qualification requirements for third-party funders, to maintain efficiency and the fairness of proceedings.
iii Contingency fees
Contingency fee arrangements are not prohibited in Indonesia. Parties are permitted to engage advocates in Indonesia on a contingency basis and for honorarium payments to be based on the success of the case. Article 21 Paragraph 1 of the Advocates Law simply states that advocates are entitled to receive honorariums in return for legal services provided to their clients. The Code of Ethics provides that, in determining the fees, advocates or lawyers must take into consideration the client's financial ability, and that unnecessary expenses must not be imposed on the clients.
Legally speaking, advocates and their clients are free to agree on their preferred payment terms by taking into account the circumstances and complexity of the case. The types of payment may be in the form of a contingency fee arrangement, hourly fee, lump sum or other arrangement. Hence, third-party funding for dispute resolution based solely on success fees should be permissible.
III STRUCTURING THE AGREEMENT
Third-party funding agreements for dispute resolution actions are neither regulated nor prohibited under Indonesian law. Indonesian contract law upholds the principles of freedom of contract and party autonomy. Funders and claimants are free to determine and structure the funding agreement, including choosing the governing law of the agreement.
Under Indonesian law, Article 1320 of the Indonesian Civil Code provides that a valid and binding agreement comes into existence when it meets all the following requirements:
- consent from the parties to be bound;
- sufficient legal capacity of the parties to enter into the agreement;
- a specific object; and
- a valid cause (not against applicable laws and regulations).
Based on the above, in principle, funders and claimants are free to structure the agreement as a purchase of the claim or financing of the claim. Notably, however, Indonesian law acknowledges that only the arbitral award or judgment creditor (the winning party in fact) has the right to enforce the arbitral award or judgment against the arbitral award or judgment debtor. Therefore, although the funder and the claimants or judgment or award creditor can contractually agree (between them) that the funder has an entitlement to the claim (either by way of purchase of the claim or assignment), the funder cannot have any right or legal standing (to act on behalf of the arbitral award or judgment creditor) to enforce the arbitral award or judgment in Indonesia.
In the absence of a regulatory framework, the parties have a relatively wide discretion in determining the terms and arrangements in the third-party funding agreement. The funder and the funded party may enter into an agreement that, among other things, specifies the former's financial reward for funding the litigation or arbitration, and sets further details of other terms and conditions, including exclusivity, withdrawal, confidentiality, pricing, settlement and liability for costs.
Furthermore, from the perspective of compliance with mandatory provisions under Indonesian law, note that Article 31 of Indonesian Law No. 24 Year 2009 on Flag, Language and Symbol of State and National Anthem (the Indonesian Language Law) stipulates that the Indonesian language must be used in a contract involving an Indonesian party, and if the agreement or contract involves a foreign party, then the agreement or contract may also be made in the national language of the foreign party or in the English language. The requirement is only for a contract to be made in the Bahasa Indonesia language. There is nothing that prevents a contract involving a foreign party from also being made in the English language (bilingual), and the English-language version having priority over the Indonesian-language version.
The requirements under the Indonesian Language Law cannot be ignored when a party enters into a contract with an Indonesian counterparty, even if the contract is not governed by Indonesian law. This applies to any type of contract, including third-party funding agreements. The provisions under the Indonesian Language Law would be particularly relevant during the enforcement stage wherein compliance with applicable laws and regulations would be examined. Moreover, it is also prudent to have the Bahasa Indonesia language version to ensure that the third-party funding agreement is not vulnerable to challenges by any other party; for example, it is possible for a party to file a petition requesting that an Indonesian court declare the third-party agreement null and void for violating the Indonesian Language Law.
To protect the interest of the plaintiff or claimant, third-party funding agreements must set clear boundaries on the limits of the third-party funder's exercise of control over the strategic decisions that may be influenced by its interest in protecting its investment. At the same time, these boundaries could also protect the interest of the attorney in maintaining its position as the adviser and strategist for the case. To protect the interest of the funder, the third-party funding agreement could include a provision that requires the funded party to disclose information regarding its position, or other information that could impact the outcome of the case, whenever necessary.
In addition to addressing the question of the permissibility of third-party funding, a question equally worthy of being addressed concerns the procedural means to ensure that the use of third-party funding is not compromised by conflicts of interest. Nowadays, it is common for individuals to switch hats as arbitrators and attorneys, especially given the relatively exclusive nature of the international arbitration community.
There is no requirement for disclosure of third-party funding (neither the existence of the agreement nor the funder's identity) in both court and arbitration proceedings in Indonesia. However, judges and arbitrators are expected to be fully independent and impartial.
Indonesian law does not recognise the notion of discovery (commonly known as 'fishing expeditions'), whereby a party may require the other party to produce any document in their possession. Hence, a party would not be able to compel this type of discovery to reveal the existence of a third-party funding agreement. Instead, the parties must present evidence that is relevant and material to substantiate their respective claims before the courts or arbitration tribunals.
For guidance on conflicts of interest in arbitration proceedings, parties and arbitrators may refer to the 2014 International Bar Association Guidelines on Conflicts of Interest in International Arbitration. Most Indonesian legal practitioners are familiar with and respect this non-binding instrument.
With regards to the recoverability of legal costs, Indonesia does not adopt the 'costs follow the event' principle, whereby the losing party would be ordered to bear the winning party's legal costs. Indonesian law does not expressly prohibit the inclusion of legal costs as a component of losses that could be recovered, and similarly there is no prohibition on claiming for compensation of legal costs. In practice, however, Indonesian courts tend to reject claims for compensation of legal costs, reasoning that it is not mandatory under Indonesian procedural law for parties to appoint an advocate for litigation or arbitration. Moreover, there is no regulatory provision for security for costs in Indonesia.
VI THE YEAR IN REVIEW
Based on the Supreme Court's Annual Report in 2018,8 there were 5,514,996 cases submitted to Indonesian general courts, of which 5,507,953 were decided and 4,372 were revoked. The number of cases in Indonesian courts has shown an increasing trend. Overall, in 2018 the number of cases received by Indonesian courts has increased by 13.27 per cent since 2017 and the number of cases decided increased by 14.21 per cent in the same year. This presents a relatively large pool of cases for the third-party funding market.
Based on the most recent data published by the Indonesian National Board of Arbitration, the number of arbitration cases submitted since its establishment in 1977 shows an exponential increase. For instance, the number of cases tripled within 10 years: there were 215 cases up until 2006 and a total of 728 cases by 2016.9 Within the period 2014–2016, 42 per cent, or the majority, of cases submitted were completed within 90 days.10 To date, there have been three arbitral awards that are publicly known to have been annulled by the Supreme Court, in 2001, 2002 and 2007.11
Cases in Indonesia, depending on their complexity, could be pursued through a number of available legal remedies, through appeals at the authorised High Court and cassation by the Supreme Court, or even other extraordinary legal remedies pursued against final and binding judgments. These tiered proceedings arguably could create more room for third-party funding. Nevertheless, this could extend the duration and substantial costs incurred from additional court proceedings, creating uncertainty for the retained third-party funder. With that in mind, any third-party agreement should also provide clear limitations on the scope of funding to prevent unwanted losses.
Additionally, the Supreme Court recently issued Regulation No. 1 Year 2019 regarding the Electronic Administration of Cases and Proceedings in Courts dated 6 August 2019. This new Regulation widens the scope of the previous Regulation No. 3 Year 2018 dated 4 April 2018, which covered electronic registration (including electronic filling of claims and electronic payment of court fees) and electronic summonses. Based on the technical guidelines in Supreme Court Decision No. 129/KMA/SK/VIII/2019 dated 13 August 2019, court proceedings can now be conducted electronically, including the exchange of court documents between disputing parties, and the pronouncement of judgments.
Indonesia's devotion to the development of an electronic court system with the premise of faster and more effective court proceedings could be perceived as a unique selling point for third-party funders.
On 4 March 2019, Indonesia and Australia signed the Australia-Indonesia Comprehensive Economic Partnership Agreement (AI-CEPA) to dismantle trade barriers and expand investment. Chapter 14 of the AI-CEPA regarding investment acknowledges the increasing trend of using third-party funding for dispute resolution, and the significance of disclosure, which can be seen in Article 14.32:
1. If there is third party funding, the disputing investor benefiting from it shall notify to the disputing Party and to the tribunal, or where the tribunal is not established, to the Appointing Authority of the tribunal, the name and address of the third party funder.
2. Such notification shall be made at the time of submission of a claim, or, where the financing agreement is concluded or the donation or grant is made after the submission of a claim, without delay as soon as such agreement is concluded or the donation or grant is made.
3. If a disputing investor fails to disclose third party funding under this Article, the tribunal may order the suspension or termination of the proceedings.
This Article obliges investors to disclose any third-party funding, at the time of the claim, either to the Secretary General of the International Centre for Settlement of Investment Disputes (ICSID) or the Secretary General of the Permanent Court of Arbitration (for ICSID arbitration or UNCITRAL arbitration respectively) as the chosen forums.
Indonesia, as an ICSID contracting state that had faced seven claims as respondent,12 proposed an amendment of the ICSID Arbitration Rules to include a provision on the disclosure of third-party funding for nationals of a contracting state. In particular, Indonesia proposed that a disclosure obligation be imposed only in relation to investors (claimants) to prevent frivolous claims, noting that host states are unable to initiate a claim against investors who are nationals of another contracting state. Furthermore, Indonesia proposed that the scope of disclosure should reveal the details of the third-party funding arrangement, not merely its existence. The rationale behind this would be to allow identification of the entity with ownership and control over the claims and the likelihood of the third-party funder paying adverse costs if this were ordered against the claimant; this enhancement of the scope of disclosure would also be relevant to a consideration of an investment arbitration award's substantial consequences for the public of the state.
In this context, and despite the absence of a third-party funding regime of its own, Indonesia has displayed extensive understanding of the mechanisms and potential risks of third-party funding.
VII CONCLUSIONS AND OUTLOOK
It is still unknown whether Indonesia will follow in the bold footsteps of neighbouring countries such as Singapore and Australia and decide to expressly permit third-party funding. In the event that Indonesia decides to enact legislation on third-party funding in the near future, one could presume that the country's participation in investment agreements is one of the driving factors that would prompt such a decision.
For now, the prevailing regulatory conditions in Indonesia seem to be more supportive than discouraging in welcoming individuals or entities to develop the third-party funding market. The absence of a legal regime provides a sense of flexibility, allowing parties to pick and choose the terms of their third-party funding agreements, as long as these are in accordance with applicable Indonesian laws and regulations.
Third-party funders will, of course, take into account a handful of factors before making their decision to fund a plaintiff or a claimant in a dispute. Specifically, they are interested in being well informed on the merits of the claim to assess the likelihood of success, the opposing party's ability to meet its claims and, undoubtedly, whether the country's legal system is supportive and its ability to enforce judgments and arbitral awards. The last of these factors would be significant as funders will require certainty on the return of their investments from the proceeds arising from the judgments or arbitral awards.
That being the case, Indonesia is also tasked with consistently increasing the effectiveness and efficiency of its courts as part of its efforts in attracting investments in the form of third-party funding.
1 Tony Budidjaja is managing partner and Narada Kumara and Reynalda Basya Ilyas are senior associates at Budidjaja International Lawyers.
2 As a comparison, since 2017 Singapore has had a clear framework on third-party funding by passing legislation that abolished the common law torts of champerty and maintenance, and confirmed that third-party funding is not contrary to public policy or illegal where it is (1) provided by eligible parties (whose principal business is the funding of dispute resolution proceedings, and with paid-up capital of not less than US$5 million); and (2) in prescribed proceedings (i.e., Singapore-seated international arbitration proceedings and court litigation and mediation arising out of such proceedings).
3 The Civil Law (Amendment) Bill (Bill No. 38/2016) as the Civil Law (Amendment) Act 2017 (the Act) together with the Civil Law (Third Party Funding) Regulations 2017 (the Regulations).
4 The Arbitration and Mediation (Third Party Funding) (Amendment) Ordinance in 2017.
5 Article 44, Article 4.3 letter (i), Article 5.1 letter (g), Article 27.6 (i), and Schedule 4 (Emergency Arbitration Procedures) of the Administered Arbitration Rules of the Hong Kong International Arbitration Centre.
6 SIAC Practice Note PN – 01/17 (31 March 2017) Administered Cases under the Arbitration Rules of the Singapore International Arbitration Centre on Arbitration Conduct in Cases involving External Funding.
7 Rule 24 letter (l) of the SIAC IA Rules.
8 2018 Annual Report of the Supreme Court of the Republic of Indonesia, pp. 72-74.
9 The Indonesian National Board of Arbitration (BANI) Brochure 2017, Figure 2: Case Submission, p. 2.
10 BANI Brochure 2017, Figure 1: Completion Time, p. 2.
11 BANI Brochure 2017, Figure 5: Successful Awards and Challenges, p. 6.