The International Arbitration Review: Indonesia

Introduction

Indonesia's legal system is based on civil law, inherited from the Dutch, who ruled Indonesia until 1945. The civil law system in Indonesia is also 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 (sharia) 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 to opt for dispute settlement through arbitration.

i The Arbitration Law

Arbitration in Indonesia is governed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (The Arbitration Law), which came into force on 12 August 1999. Prior to its enactment, arbitration was governed by a handful of clauses in the mid-nineteenth century Dutch-originated Code of Civil Procedure, known as the RV. 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 the most part the Arbitration Law is quite user-friendly and serves very well.

Upon the enactment of the Arbitration Law, trends relating to arbitration have 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:

  1. commercial disputes; and
  2. disputes related to rights and obligations which, 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 nor the governing law, location of their project or dispute. The only effective operative 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 enforcement of the award.

Some of the other differences from the Model Law include:

  1. 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 a case.
  2. Jurisdiction: the Arbitration Law does not specify that the 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.
  3. Language: unless the parties otherwise agree, the Arbitration Law (Article 28) provides that the language of the proceedings will be Indonesian, regardless of the language of the underlying documents.
  4. Arbitrators: 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/her field may serve as arbitrator, except court or government officials.
  5. Hearings: the Arbitration Law states that the 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. (Recently, since the advent of the covid-19 pandemic, many hearings are held virtually.)
  6. Confidentiality: While the Model Law is silent on confidentiality, the Arbitration Law contains the minimum requirement that the hearings are closed to the public.
  7. Awards: the Arbitration Law (Article 54) provides a list of requirements that apply to awards, including that they must be reasoned.
  8. Time-limit for award: the Arbitration Law (Article 57) provides that the award 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.
  9. Corrections: under the Arbitration Law (Article 58), the parties may request typographical errors and similar to be corrected, unlike the UNCITRAL Model Law which provides also that the tribunal may make such corrections on its own initiative; and parties have only 14 days from the rendering of the award to so request, as compared to 30 days under the UNCITRAL Model Law.
  10. Annulment: the grounds for annulment of awards under the Arbitration Law (Article 70) are far more limited than those set out in the Model Law, as the former provides for annulment of an award only in cases involving fraud, forgery or deliberately concealed material documents.
  11. Enforcement: 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 the violation of public order or the 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 if it finds that the parties did not agree to arbitration or that the subject matter of the dispute is not commercial.

ii Local arbitration institutions

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:

  1. Indonesian National Board of Arbitration (BANI);
  2. Indonesian Capital Market Arbitration Board (BAPMI);
  3. Futures Commodity Trading Arbitration Board (BAKTI);
  4. National Sharia Arbitration Board (Basyarnas)
  5. Indonesian Board of Insurance Mediation and Arbitration (BMAI).

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, as well as some of the other new institutions currently being or having recently been established, 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, within 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 will apply. These are limited but usually are more or less adequate.

Often the parties will prefer not to involve an institution at all but to hold the arbitration ad hoc, normally under the UNCITRAL Arbitration Rules. This can save considerable time and also reduce costs to a greater or less extent. Where the parties are represented by experienced counsel, or appoint experienced arbitrators, no institution is necessary. Such ad hoc arbitration may be held anywhere the parties agree, and is becoming more and more popular in Indonesia, as elsewhere.

The year in review

The Arbitration Law defines arbitration as a method of settling a civil dispute outside the court. The 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, as mentioned below.

i Agreement to arbitrate

The 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 the dispute has arisen. If the agreement to arbitrate is entered into after the dispute has arisen, the formal requirements for such agreement are greater.2

Although agreements in general are not required to be in writing to be valid and binding under Indonesian law, Article 1(3) of the Arbitration Law requires the agreement to arbitrate to be in writing.

The validity of contracts in general is covered in the Indonesian Civil Code, of which Article 1320 sets out the basic requirements for a valid contract: (1) free consent of the parties to be bound; (2) competence/authority of the parties to enter into the contract; (3) clearly defined subject matter/rights and obligations; and (4) a lawful purpose. Writing is not required under Article 1320 for normal contractual obligations, whereas writing becomes more of an evidentiary matter, as it is difficult to prove consent and subject matter where there is no writing to evidence it. Where Indonesian law governs the contract, or in most cases where an arbitration is held in Indonesia, the validity of the agreement to arbitrate will be a matter of Indonesian law and it must in such cases comply with the above requirements, as well as the Arbitration Law's requirement that it be in writing.

ii The courts

Articles 3 and 11 of the Arbitration Law make it clear that once the parties have agreed to arbitrate their disputes, the 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 invariably declare that it has no authority to try the case and the case should be settled in accordance with the arbitration agreement. They do not order the parties to go to arbitration, however, but they leave no alternative.

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 the arbitrators the power to issue interlocutory orders in aid of the arbitration, as these are not final awards the courts will not get involved in enforcing these, 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.

Aside from that, Article 14 allows a party to request the court to appoint a sole arbitrator if the parties cannot agree upon one, and in the case of three arbitrators, Article 15 allows a party to request the court to appoint the chair of the arbitral tribunal if the two appointed arbitrators are unable to agree on one. This is only effective, of course, where the parties have not chosen specific rules to govern the procedure, nor otherwise designated a different appointing authority, and thus is rarely, if ever, applied in practice.

iii Enforcement of awards

Enforcement differs slightly between domestic and international awards, specifically the court to which one applies and the time limit to register the award, a prerequisite for enforceability. While domestic awards must be registered within 30 days, there is no time limit for registration of international awards. Note that registration of foreign-rendered awards requires a certificate from the Indonesian diplomatic mission in the place of arbitration to the effect that the state and Indonesia are both signatories to the New York Convention. This latter requirement has too often proven to involve inordinate amounts of time and annoyance, and is completely unnecessary in any case because that information can be obtained online in a matter of minutes, and thus is one of the primary items that indeed ought to be removed in the event of any amendment.

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, then the domestic award 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 registration of international awards. However, registration of an international award will require 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 (the New York Convention), to which, as of the date of writing,168 countries are signatory. Indonesia has been 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: (1) the international arbitral award must concern a dispute of a commercial nature; and (2) 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:

  1. 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);
  2. falls within the scope of commercial law under Indonesian law; and
  3. does not violate the public order in 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 Chairman of the District Court of Central Jakarta, or by the Supreme Court if the Republic of Indonesia is a party to the arbitral proceeding.

The enforcement and execution process itself, however, can only be done by the district court in the jurisdiction of domicile of the losing party or the jurisdiction in which it maintains assets.

iv Challenges

To the award

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, which are as follows:

  1. false or forged letters submitted in the hearings;
  2. discovery after the award of decisive documents intentionally concealed by a party; or
  3. if an award was rendered as a result of fraud committed by one of the parties to the dispute.

To an arbitrator

Unlike many other laws, Indonesia's Arbitration Law (Article 12) sets out the qualifications for those who may be appointed as arbitrators. These include only that the arbitrator must be legally and mentally competent, over 35 years of age and have at least 15 years of experience in their field, and must not be a court or government official. There is no citizenship or residency requirement. The arbitrator must also confirm that they do not have any conflict of interest with respect to any of the disputing parties.

Article 22 of the Arbitration Law gives the parties a right to request recusal of an arbitrator if 'there is found sufficient cause and authentic evidence to give rise to doubt that such arbitrator will not perform his/her duties independently or will be biased in rendering an award'. The recusal application shall be made to the arbitral tribunal itself, unless the arbitrator concerned was appointed by the court, in which case it is made to the Chairman of the relevant court. 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) 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 also be submitted to the other party, stating the reason for the request. 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 procedure as he or she was. If this 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 chairman 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). This 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.

Furthermore, the Arbitration Law also provides procedures on appointment of a sole arbitrator where other rules have not been designated.

The Arbitration Law would appear to respect party autonomy in the selection of the rules and appointment of the 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.

Evidence

As for presentation of evidence in 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 the 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 the tribunal to order the same, nor will the courts get involved to enforce any such order, even if one were to be made.

Despite no formal requirements in the Arbitration Law, the arbitrators may always request that the parties provide additional information or documentation in writing or any other evidence deemed necessary by the arbitrators, within a determined period of time.

The arbitrators can draw their own conclusions on the dispute and decide on the basis of the evidence provided to the arbitrator. However, a party can also apply to annul an arbitration award if, after the award is issued, the party discovers that decisive documents have been concealed by the other side.

In addition to the above, Law No. 11 of 2008 (Information and Electronic Transactions Law) regulates the legal basis and legal force for an electronic document to be accepted as evidence before the court. Article 5(1) of Information and Electronic Transactions Law stipulates that electronic information, electronic documents or the print-outs of electronic documents or information are considered valid legal evidence.

Electronic documents must comply with the material and formal requirements of Article 5(4) and Articles 6, 15 and 16 of the Information and Electronic Transactions Law. The material requirements require that the information and documents are guaranteed by their originality, integrity and availability. The formal requirements require that the information and documents are not required to be in writing by law.

Some laws have specific requirements for electronic communications. For example, Article 4(3) of the Arbitration Law provides that if the agreement for resolution of disputes by arbitration is contained in an exchange of correspondence (including letters, telexes, telegrams, faxes, email or any other form of communication), the agreement for resolution must be accompanied by a record of receipt of such correspondence by the parties.

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, that with Norway revised and re-executed later, but then terminated for a second time. Two consecutive BITs with Singapore were both terminated, but a new one 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 a 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 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 are pending at the time of writing.

Of the cases that did proceed, both ICSID and others, Indonesia was successful on the merits in four, one of which (ad hoc under 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 her. However at least two of these cases, both relating to speculative private power projects postponed as a result of the Economic Crisis of 1997/1998, were rife with political interference (primarily US) and other serious defects and resulted in disproportionate losses to the state. But 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, thus the recent terminations.

Actually, at least over the last 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 Netherlands–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 (OIC). 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. However, right prevailed in the end, although at a very high and unnecessary cost to all involved.

It certainly seems clear, not only in Indonesia but in an accelerating portion of the world, that the ambiguous language of BITs is leaving too much leeway for misinterpretation by tribunals, differing drastically from what was intended by states when they agreed to enter into these BITs in the first place. This must be addressed, perhaps through revision of treaty language, for if the system is not fixed, it will expire. BITs must be redesigned to address the problems that have arisen in their present form and in today's world. Otherwise, not only Indonesia but many other states are likely to decide to abandon the system altogether.

Conclusion

Arbitration is increasingly becoming the preferred method of dispute resolution among businesses, in Indonesia, as elsewhere. 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:

  1. 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 the court the parties have no say at all as to procedure. Counsels' costs may or may not differ greatly, but arbitrators' fees are invariably considerably higher than official court costs, which are unrealistically low in Indonesia.
  2. Nor is there a time limit on court cases, whereas Indonesia's Arbitration Law requires that a hearings be concluded within 180 days of the formulation of the arbitral panel, and that the award be rendered within 30 days of the conclusion of hearings. These time limits may be extended upon agreement of the parties, however.
  3. The process can be kept confidential. Some laws and rules require some degree of confidentiality, but the parties may agree on more. Court proceedings are fully open to the public.
  4. The parties may choose arbitrators who have the required experience or expertise in the relevant field of business, whereas they have no say in the appointment of which judges will hear a case in the court.
  5. The parties may also choose the rules to govern the proceedings, the place it shall be held, and will have a say in scheduling. A litigation case must be filed and heard in the district court with jurisdiction over the domicile of the defendant.
  6. 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 Indonesian court system.
  7. Of course an arbitral award, if not voluntarily satisfied, must still be enforced by the courts; however, they generally do this with reasonable efficiency and may not re-examine the merits even where a challenge has been lodged.

Indonesia's Arbitration Law has been in effect for a little over 20 years by the time of drafting of this chapter, 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 we must admit 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.

Footnotes

1 Karen Mills is a member and Margaret Rose is an associate at KarimSyah Law Firm.

2 See Article 9 of the Arbitration Law.

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