The International Arbitration Review: Indonesia
Indonesia follows the civil law system. Indonesia's civil law system is based on the Roman-Dutch model and influenced by customary law. There are Islamic and family codes as well as criminal codes. Some laws date back to the Dutch colonial era. Indonesia's complex justice system evolved from three inherited sources of law: customary or adat law, Islamic law (shariah) and Dutch colonial law.
People often raise concerns about the complicated litigation process for dispute settlement in the Indonesian courts. In general, the complexity of litigation in court might be said to illustrate the complexity of the bureaucracy in Indonesia. Although the government has made improvements in many sectors, numerous complaints regarding the court litigation process still exist today. Therefore, one of the solutions adopted to avoid a time-consuming litigation process is opting for dispute settlement through arbitration.
i The Arbitration Law
Arbitration in Indonesia is governed by the Arbitration Law,2 which came into force on 12 August 1999. Prior to its enactment, arbitration was governed by a handful of clauses in the mid-19th century Dutch-originated Code of Civil Procedure, known as the RV.3 The Arbitration Law is not based on the United Nations Commission of International Trade Law (UNCITRAL) Model Law, although it does contain a number of similar provisions. One early draft was based upon the Model Law but the Arbitration Law, as eventually promulgated, is the result of many drafts and revisions by a number of different sources, and includes incorporation of a number of principles from the previous legislation. As a result, there is considerable similarity in principle between the Arbitration Law and the RV, but also some differences. Some practitioners have suggested that the Arbitration Law be amended to comply more closely with the UNCITRAL Model Law, but there has been no such amendment considered by the Indonesian Parliament as yet. Nor is this really necessary, as for most part the Arbitration Law serves very well.
Upon the enactment of the Arbitration Law, trends relating to arbitration shifted. This is because the law has provided further operative structure in arbitration proceedings.
The Arbitration Law provides that the only disputes that can be settled by arbitration are commercial disputes and disputes related to rights and obligations that, according to law and statutory regulations, are within the control of the disputing parties to resolve.
There are a number of differences between the provisions of the Model Law and those of the Arbitration Law. Perhaps the primary one is that the Arbitration Law applies to all arbitrations held within the territory of the archipelago of Indonesia, and there is no distinction between 'domestic' and 'international' arbitrations with respect to the nationality of the parties or the location of their project or dispute. The only effective differences between a domestic arbitration, defined in the Arbitration Law as one held in Indonesia, and an international one, defined as one held outside of Indonesia, are some registration requirements and the venue for the enforcement of an award.
The Arbitration Law also differs from the Model Law regarding, inter alia, the following:
Reference to arbitration
The Arbitration Law does not specifically require a court to refer to arbitration a dispute brought before it where there is an agreement to arbitrate. It only states that the courts do not have, and may not take, jurisdiction to hear such cases.
The Arbitration Law does not specify that arbitrators are competent to rule on their own jurisdiction (Kompetenz-Kompetenz), although this should be implicit from Articles 3 and 11, which divest the court of jurisdiction where the parties have agreed to arbitrate.
Unless the parties otherwise agree, the Arbitration Law (Article 28) provides that the language of proceedings will be Indonesian, regardless of the language of the underlying documents.
Criteria for arbitrators are stated in the Arbitration Law (Article 12). These criteria are very inclusive: any person independent of the parties who is over 35 years of age with 15 years of experience in his or her field may serve as an arbitrator, except court or government officials.
The Arbitration Law states that a case is decided on documents unless the parties or the arbitrators wish to have hearings, whereas the Model Law requires hearings unless the parties agree otherwise. As a practical matter, however, most arbitrations held in Indonesia do involve hearings.
While the Model Law is silent on confidentiality, the Arbitration Law contains the minimum requirement that hearings are closed to the public.
The Arbitration Law (Article 54) provides a list of requirements that apply to awards, including that they must be reasoned.
Time limit for awards
The Arbitration Law (Article 57) provides that awards must be rendered no later than 30 days after the conclusion of the hearings, but this and other time limits may be, and normally are, waived by the parties.
Under the Arbitration Law (Article 58), parties may request typographical errors and similar to be corrected, unlike under the UNCITRAL Model Law, which provides also that a tribunal may make such corrections on its own initiative. In addition, parties have only 14 days from the rendering of an award to so request, as compared to 30 days under the UNCITRAL Model Law.
The grounds for annulment of awards under the Arbitration Law (Article 70) are far more limited than those set out in the UNCITRAL Model Law, as the former provides for annulment of an award only in cases involving fraud, forgery or deliberately concealed material documents.
The grounds for refusing enforcement of an international arbitration award under the Arbitration Law (Article 66) are different from those set out in the Model Law – limited to a violation of public order or a failure to obtain an order of exequatur from the Chief Judge of the District Court of Central Jakarta The Court may also refuse to enforce an award if it finds that the parties did not agree to arbitration or that the subject matter of the dispute is not commercial.
There are several local arbitration institutions in Indonesia, and there seem to be more cropping up all the time. A few of the more established ones include the following:
- the Indonesian National Board of Arbitration (BANI);
- the Indonesian Capital Market Arbitration Board;
- the Futures Commodity Trading Arbitration Board;
- the National Sharia Arbitration Board; and
- the Indonesian Board of Insurance Mediation and Arbitration.
Most of these local arbitration institutions resolve specific disputes between or among parties, in accordance with their specialities, and their respective rules and procedures. Arbitration proceedings held before BANI, however, may fall within virtually any commercial sector.
Parties are also free to choose to hold their arbitration before any international or other venue's local institution, in or outside of Indonesia, or to apply any rules they may mutually agree upon. If they do not choose any institution or rules, the Arbitration Law does contain some skeletal rules that can apply. These are limited but usually adequate.
Often parties will prefer not to involve an institution at all but to hold an arbitration ad hoc, normally under the UNCITRAL Arbitration Rules. This can save considerable time and also reduce costs to a greater or lesser extent. Where parties are represented by experienced counsel, or appoint experienced arbitrators, or both, no institution is necessary. Such ad hoc arbitration may be held anywhere the parties agree, and is becoming more and more popular in Indonesia.
The year in review
The Arbitration Law defines arbitration as a method of settling a civil dispute outside court. An agreement to arbitrate must be made in writing by the disputing parties, and it must comply with the general requirements for the validity of a contract, in accordance with Article 1320 of the Indonesian Civil Code, as follows:
- the contract is concluded by mutual consent between the parties;
- the parties are competent and authorised to enter into the contract;
- the contract has a definite object; and
- the contract has a permissible cause.
i Agreement to arbitrate
An agreement to arbitrate can be embodied in the parties' underlying contract (i.e., agreed upon before any dispute arises) or in a separate agreement, normally entered into after a dispute has arisen. In either case, the agreement to arbitrate must be in writing, although being in writing is not a requirement for contracts in general. If an agreement to arbitrate is entered into after a dispute has arisen, the formal requirements for such agreement are greater (see Article 9 of the Arbitration Law).
ii The courts
Once parties have agreed to arbitration, the district courts do not have, nor may they take, any jurisdiction to examine or hear disputes between the parties who are bound by an arbitration agreement. Therefore, if court proceedings are commenced in breach of an arbitration agreement, the other party can file an objection to the district court on the grounds of absolute competence (which determines whether a court has the authority and jurisdiction to adjudicate a particular case). The district court will declare that it has no authority to try the case and that the case should be settled in accordance with the arbitration agreement.
The only involvement of the courts is with the annulment or enforcement of final and binding awards, and the appointment of arbitrators in cases where no other appointing authority has been designated by the parties or in the rules chosen by the parties. This also means that although the Arbitration Law gives arbitrators the power to issue interlocutory orders in aid of an arbitration, because these are not final awards the courts will not get involved in enforcing them, so it is up to the parties to follow these orders of the tribunal if issued.
The Arbitration Law also provides that the parties are free to hold their arbitration pursuant to whatever procedural rules or under whatever arbitral institution they may agree, including an ad hoc arbitration.
iii Enforcement of awards
For the purpose of enforcement proceedings, the Arbitration Law distinguishes arbitral awards based on the venue or seat of arbitration (that is, enforcement proceedings relating to domestic awards or international awards). The enforcement processes for domestic and international awards differ only slightly. Awards are defined as domestic, regardless of the nationality of the parties or other factors, if the arbitration is held in Indonesia. Awards are defined as international if they are rendered outside Indonesia, even if both parties are Indonesian. Regardless of whether an award is domestic or international, to be enforced the award must first be registered with the relevant court by the arbitrators or their duly authorised representatives. There is a 30-day time limit for such registration of domestic awards, but no time limit for international awards.
The relevant court may refuse to enforce an award if the dispute is not of a commercial nature or if it can be established that the parties did not agree to arbitrate such dispute.
Domestic awards must be registered, within 30 days of rendering, with the district court having jurisdiction over the domicile of the respondent. Failing such time limit means domestic awards shall be deemed unenforceable.
On the other hand, foreign-rendered, or international, awards must be registered with the District Court of Central Jakarta, regardless of where the respondent is domiciled. There is no time limit for the registration of international awards. However, the registration of an international award will require the submission of a certificate from the Indonesian diplomatic representative in the country in which the award has been rendered to the effect that that country and Indonesia are both parties to a bilateral or multilateral treaty on the recognition and enforcement of foreign arbitral awards. To date, the only relevant treaty is the 1958 United Nations Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention), to which over 160 countries are signatory. Indonesia is a contracting state to the New York Convention by virtue of the Presidential Decree No. 34 of 1981. Indonesia signed the New York Convention with the following reservations: an international arbitral award must concern a dispute of a commercial nature; and the international arbitral award must have been rendered in a contracting state to the New York Convention.
Indonesia is also a contracting state to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) by virtue of Law No. 5 of 1968 regarding Settlement of Dispute between State and National of Other States on Capital Investment. The ICSID Convention, however, does not address enforcement.
The procedure for enforcing foreign and international awards is set out in the Arbitration Law, which provides that an international award shall be recognised and enforced in Indonesia if the award:
- is rendered by an arbitrator or arbitral tribunal in a country with which Indonesia is a party to a bilateral or multilateral treaty on the recognition and enforcement of foreign arbitral awards (effectively the New York Convention);
- falls within the scope of commercial law under Indonesian law; and
- does not violate the public order of Indonesia.
An international award can be enforced upon the issuance of an order of exequatur (that is, an order allowing enforcement of the award) by the Chair of the District Court of Central Jakarta, or by the Supreme Court if Indonesia is a party to the arbitral proceeding.
An arbitral award may be challenged through an application to the court for annulment of the award. Article 70 of the Arbitration Law provides limited grounds for annulment: false or forged letters submitted in the hearings; discovery after the award of decisive documents intentionally concealed by a party; or if the award was rendered as a result of fraud committed by one of the parties to the dispute.
The Arbitration Law not only deals with matters such as the requirements for an arbitration agreement: it also determines and regulates the specific qualifications of arbitrators. Article 12 of the Arbitration Law sets out the qualifications for those who may be appointed as arbitrators: arbitrators must be legally and mentally competent, and over 35 years of age; they must have at least 15 years of experience in their field; and they must not be a court or government official. There is no citizenship or residency requirement. Arbitrators must also confirm that they do not have any conflict of interest with respect to any of the disputing parties.
In accordance with Article 22 of the Arbitration Law, parties may challenge the appointment of an arbitrator if the concerned party's challenge is supported by sufficient reasons and authentic evidence justifying such party's doubts as to the arbitrator's impartiality and independence. An arbitrator's appointment can also be challenged if the concerned party can prove that the arbitrator has a certain relationship (blood, financial or business relation) with a party or its counsel. A party must register any such objection to the appointment of an arbitrator within 14 days of his or her appointment. A written objection must be submitted to the other party and to the concerned arbitrator, stating the reason for the claim. If an objection by one party is approved by the other party, the arbitrator must resign, and his or her replacement will be appointed following the same appointment procedure as his or her predecessor's. If such challenge is not approved by the other party or the arbitrator is not prepared to resign, the objecting party may submit a request to the chair of the relevant district court to issue a ruling on the impartiality of the arbitrator (or to such other appointing authority as the parties may have designated in their agreement to arbitrate). Such decision shall be binding upon both parties and shall not be challenged. Of course, if the parties have chosen other rules, then the procedures in those rules will apply.
The Arbitration Law also provides procedures on the appointment of a sole arbitrator where other rules have not been designated.
The Arbitration Law would appear to respect party autonomy in their selection of rules and the appointment of arbitrators. Not all institutions, however, do. For example, BANI's rules require that all arbitrators must be chosen from BANI's panel, and that BANI itself will appoint the chair even if both parties have otherwise mutually agreed upon one.
Regarding the proceedings, as a civil law jurisdiction, the underlying principle is that each party must present whatever evidence it needs to prove or support its case. There is no concept of discovery in this jurisdiction, which does tend to allow proceedings to be more time-efficient. The parties could, of course, agree upon a system of document disclosure, but that would be entirely up to them: there is no mechanism for tribunals to order the same, and the courts will not get involved to enforce any such order, even if one were to be made.
Despite there being no formal requirements in the Arbitration Law, arbitrators may always request that parties provide additional information or documentation in writing, or any other evidence deemed necessary by the arbitrators, within a determined period of time.
Arbitrators can draw their own conclusions on a dispute and decide on the basis of the evidence provided to them. However, a party can also apply to annul an arbitration award if, after the award is issued, that party discovers that decisive documents have been concealed by the other side.
vi Investor–state disputes
Since 1968, Indonesia has signed 72 bilateral investment treaties (BITs), but today only 26 are in force. The first seven BITs, executed between 1968 and 1974, all with European countries, have all been terminated. The BIT with Norway was revised and re-executed later, but then terminated for a second time. Two consecutive BITs with Singapore were both terminated, although a new one was executed in 2018.
In all, so far Indonesia has terminated 25 treaties, and 16 others have never come into force and effect. Thus, at the moment Indonesia is party to 26 BITs, but that number may well decrease as time goes on if others are terminated and not reinstated, a trend that we seem to be seeing throughout the world, particularly the developing world. Indonesia has been involved in 12 investor–state arbitrations (seven of them before the ICSID), three of which were settled or withdrawn before any hearings were held, and two of which were eventually dismissed for lack of jurisdiction. None is pending at the time of writing.
Of the cases that did proceed, both before the ICSID and others, Indonesia was successful on the merits in four, one of which (which was ad hoc under the UNCITRAL Rules) was actually brought by the state, as claimant, against a recalcitrant investor in the mining sector who refused to comply with its contractual obligation to divest a portion of its interest after 20 years. Thus, Indonesia has suffered only three awards against it. However, at least two of these cases, both relating to speculative private power projects postponed as a result of the economic crisis of 1997 and 1998, were rife with political interference (primarily by the US) and other serious defects, and resulted in disproportionate losses to the state. Even some of the cases in which Indonesia was successful on the merits had serious jurisdictional overreaches, which are at least in part the rationale for Indonesia's backing away from the BIT system altogether, and thus the recent terminations.
Actually, at least over the past 20 years or so, Indonesia has been successful in either settling with, or staving off, investors who have sought to use investment treaties for their own benefit. Aside from settling an arbitration brought by the Dutch subsidiary of a US mining giant under the Dutch–Indonesian BIT even before a tribunal had been constituted, Indonesia has prevailed in arbitrations brought under the BIT with the United Kingdom and also under a multilateral treaty among 55 Islamic states, the Investment Agreement of the Organisation of Islamic Conference) In fact, had the tribunals properly examined the jurisdictional bases in the first place, none of these would have had to be heard on the merits. While right prevailed in the end, it was at an unnecessarily high cost to all involved.
It certainly seems clear that the ambiguous language of BITs is leaving too much leeway for misinterpretation by tribunals, not only in Indonesia but in other parts of the world, with tribunals' interpretations differing drastically from what was intended by the states when they agreed to enter into these BITs. This must be addressed, perhaps through the revision of the language of treaties, for if the system is not fixed, it will expire. BITs must be redesigned to address the problems that have arisen from their present form in today's world. Otherwise, not only Indonesia but many other states will abandon the system altogether.
Outlook and conclusions
Arbitration is increasingly becoming the preferred method of dispute resolution among businesses in Indonesia. Business actors, including investors, more and more are providing for arbitration as a method of dispute resolution, thereby divesting the courts of their otherwise innate jurisdiction to resolve commercial disputes.
There are a number of reasons for this:
- It usually (although not always) involves less expenditure of time and cost, particularly if the parties can cooperate on procedural matters, as they can structure an efficient process if they can agree on most of the administrative decisions. In court, the parties have no say at all as to procedure. Counsel's costs may or may not differ greatly, but arbitrators' fees are invariably considerably higher than official court costs, which are unrealistically low in Indonesia.
- There is no time limit on court cases, whereas Indonesia's Arbitration Law requires that hearings be concluded within 180 days of the formulation of an arbitral panel, and that an award nust be rendered within 30 days of the conclusion of hearings (these time limits may, however, be extended upon agreement of the parties).
- The process can be kept confidential. Some laws and rules require some degree of confidentiality in arbitration, but the parties may agree on greater confidentiality of proceedings. Court proceedings, on the other hand, are fully open to the public.
- The parties may choose arbitrators who have the required experience or expertise in their relevant field of business, whereas they have no say in the appointment of which judge or judges will hear a case in court.
- The parties may also choose the rules to govern their proceedings and the place where they shall be held, and they will have a say in scheduling. Litigation cases must be filed and heard in the district court with jurisdiction over the domicile of the defendant.
- There is no appeal against a final and binding award by an arbitral tribunal, whereas there are two levels of appeal for cases in the court system.
- Finally, an arbitral award, if not voluntarily satisfied, must still be enforced by the courts. They generally do this with reasonable efficiency, and they may not reexamine the merits even where a challenge has been lodged.
The Arbitration Law has been in effect for just over 20 years, and it has proven for the most part to be quite flexible. The Law has certainly served the purpose of divorcing the arbitral process almost completely from the Indonesian court system, which has fallen into unfortunate repute. A few practitioners occasionally suggest that the Arbitration Law ought to be revised, or replaced by one following the UNCITRAL Model Law, but there has been no serious effort on the part of the legislature to make any such changes, and it really is not necessary. Nor is it an issue that will gain political capital for anyone, so it is unlikely there will be any significant revisions in the near future.
In short, arbitration is alive and well in Indonesia, with parties able to choose any arbitral mechanism or rules that they wish, and the courts may not interfere in the arbitral process. The state has also had relative success in a few investor–state cases over the past 20-plus years.