Indonesian Dispute Resolution 2015 – The Year In Review.

Legal News & Analysis - Asia Pacific - Indonesia - Dispute Resolution

29 January, 2016

 

The past year has seen a number of developments in the Indonesian dispute resolution landscape.

 

In this summary, we highlight decisions on the controversial "Language Law", the concept of "trust" under Indonesian law and the annulment of domestic arbitral awards. We also provide an update on Indonesia's ongoing termination of its Bilateral Investment Treaties and the establishment of a new Small Claims Court. 

 

Anda bisa berbicara Bahasa Indonesia?

 

Indonesian Law No. 24 of 2009 on its National Flag, Language, Emblem and Anthem (known as the "Language Law") seeks to establish Bahasa Indonesia as the official language of Indonesia, and includes provisions that official state documents should primarily be written in the language. The drafters of the law also included an Article 31, which provided that contracts with governmental organisations should also be in the national language.

 

In a 2013 decision,1 the West Jakarta District Court held a loan agreement between an Indonesian company and a foreign investor unenforceable for failure to comply with the Language Law. The loan agreement concerned was drafted in English only, while the deed of fiduciary security was in Bahasa Indonesia. The Court determined that Article 31 of the Language Law requires every contract involving an Indonesian party, whether public or private, to be made in Bahasa Indonesia, and hence the loan agreement was null and void. In August 2015, the Supreme Court affirmed that decision, although reasoning has not been released.

 

Indonesia does not recognise the concept of binding precedent and, interestingly, there have been contrary decisions in other cases.

 

For example, in 2011, the Praya District Court in Lombok described as an "exaggeration" the plaintiff's argument that the absence of an Indonesian translation was fatal to the agreement concerned. Nevertheless, in light of the Supreme Court's decision, it is very difficult to make any recommendation other than to sign bilingual versions of all commercial contracts involving an Indonesian party, regardless of the governing law. It is also important to ensure the translation is accurate – this can be an expensive exercise, as it cannot simply be left to professional translators, but requires an Indonesian lawyer to review.

 

It is hoped that implementing regulations will soon be adopted to remove this particular provision, or at least clarify that it does not apply to purely private contracts. However, we have seen no indication that regulations are imminent.

 

(Public) order in the Court!

 

Arbitration awards rendered in Indonesia-seated arbitrations ("domestic" awards) or in arbitrations seated outside Indonesia ("foreign" awards) are enforceable in Indonesia in accordance with the provisions of the Law Concerning Arbitration and Alternative Dispute Resolution Law No. 30 of 1999 (the Arbitration Law). In a recent decision, the Central Jakarta District Court2 appears to have gone beyond the grounds for annulment of domestic arbitration awards set out in that legislation.

 

In the case of a domestic award, Article 70 of the Arbitration Law provides for annulment in circumstances where:

 

  • a letter or document submitted in the proceedings is, after an award is issued, found to be forged or is declared to be forged;
  • a document which is decisive in its effect was concealed by a party and is discovered after the award has been issued; or
  • an award is made based on fraud committed by one of the parties to the dispute. 

 

However, in a matter concerning ownership of an Indonesian television station, the Central Jakarta District Court found that an award made in a domestic arbitration under the Rules of the BANI Arbitration Centre in favour of PT Berkah Jaya Bersama (Berkah) was contrary to public order. This is a ground for refusing enforcement of an international award under Article 66 of the Arbitration Law, but it is not expressly stated in the legislation as being grounds for annulment of a domestic award (although execution should be refused if the award conflicts with public morality and order). Despite this, the Court annulled the award.

 

Berkah has appealed the decision. In the meantime – and while the BANI Arbitration Centre itself reports that instances of annulment of awards made under its Rules have so far been rare – parties who consider choosing Indonesia as the seat of arbitration should be aware of the increased potential for defendants to invoke this ground as a basis for annulment.

 

Trick or Treaty?

 

In 2014, the Government of Indonesia signalled that it would progressively terminate all of the Bilateral Investment Treaties (BITs) to which it is a party. That process has continued through 2015.

 

Broadly, BITs are agreements between states to protect and promote investments by nationals of each state in each other's jurisdictions. BITs typically list a number of standards and protections which the state parties agree to uphold. Crucially, they also contain arbitration provisions, which mean that investors' rights arising from these protections can viably be pursued; the treaties are not simply statements of good intentions.

 

Despite expressions of concern from foreign investors, Indonesia has, to date, terminated BITs with (among others) the PRC, Malaysia, France, the Netherlands and Italy, and has notified termination of BITs with (among others) Singapore, India, Vietnam and Spain. Press reports indicate that Indonesia's Investment Coordinating Board (or BKPM) has been tasked with developing a new model form of bilateral investment agreement, however we have not seen any indication that release of this is imminent.

 

As we reported in our "Year in Review – 2014", the short-term impact of Indonesia's termination of its BITs on existing investors may be limited.

 

First, BITs will usually include "sunset clauses" which ensure that investment protections will continue to apply to investments made prior to termination for a defined period. For example, the Indonesia- Netherlands BIT contains a 15-year sunset clause, so investments made through the Netherlands before 1 July 2015 will, in principle, attract protections under that BIT through to 2030.

 

Second, BITs may contain restrictions upon when termination rights can be exercised. Therefore, many BITs will remain in force for some time to come.

 

Third, we have not identified reports that Indonesia plans to terminate any of the Economic Integration Agreements (including, say, Economic Partnership Agreements such as that between Japan and Indonesia) or Multilateral Investment Treaties (such as the Association of Southeast Asian Nations (ASEAN) Comprehensive Investment Agreement, and the ASEAN-Australia-New Zealand Free Trade Agreement) to which it is a party and which include certain investment protections. In fact, press reports state that Indonesia has indicated that it may seek to join the recently concluded Trans-Pacific Partnership, which also includes investment protections.

 

Nevertheless, this move is likely to impact how foreign companies assess investment risk in Indonesia in future and should prompt

investors to consider the structuring options available to them.

 

Trust me, I'm an issuer

 

In a high-profile restructuring case involving PT Bakrie Telecom Tbk, the Jakarta Commercial Court has refused to accept the validity of a trustee arrangement.

 

The transaction concerned involved establishment of a special purpose vehicle subsidiary of the Indonesian borrower for the sole purpose of obtaining funds from offshore bondholders, with proceeds and payments administered by a trustee. The Court took the view that the concept of a "trust" is unknown under Indonesian law and therefore refused to admit the trustee as a creditor in the restructuring. 

 

This is not the first time an Indonesian Court has refused to accept the validity of trustee arrangements. For example, these arrangements were successfully challenged during the Asia Pulp & Paper saga. Nevertheless, use of trustee structures remains commonplace and, while recognition of trusts under Indonesian law remains problematic, this should not prevent underlying noteholders from proving claims and voting (in the case of New York and English law bonds in analogous proceedings - Chapter 11 or a Scheme of Arrangement - it is the usual practice of the courts to admit the underlying holders to vote). The problem is that it is not always straightforward to prove holdings of notes issued through clearing systems to the evidentiary standards demanded by Indonesian courts.

 

It is also possible that trustees could be admitted to vote by analogy with provisions of the Indonesian Capital Markets Law of 1995, which has express provision for OJK licensed Trust-Agents to represent noteholders under Indonesian public bond issuances, without need for the typical power of attorney required by rules of court. However, the difficulty with this approach is that it could be argued that bonds issued outside of the Indonesian regulatory framework do not benefit from this statutory provision, and therefore the trustee does need the power of attorney from underlying holders.

 

In any PKPU proceeding involving complex questions of evidence, the approach of the court appointed administrators and supervisory judge will be critical in determining the proof of claims. We recommend taking prompt legal advice, preparing the best possible evidence in accordance with rules of court and entering into early discussions with the administrators on the proof of claim documents.

 

Thinking small

 

Traditionally, Indonesian litigation has been a drawn- out process, with multiple layers of appeal available as of right. In a bid to address some of these concerns, the Indonesian Supreme Court has established a Small Claims Court with jurisdiction over claims of up to Rp200m (approximately US$15,000) which are not subject to the jurisdiction of other special courts or related to land. Hearings are before a single judge, decisions are to be issued within 25 working days from the first hearing, and a strike-out procedure is available.

 

Decisions are not subject to appeal to higher courts but the regulation allows for the submission of an objection to a decision to the Chairman of the District Court. This objection must be decided within seven working days from appointment of the judges.

 

Indonesian and foreign parties alike will hope that the establishment of this court is a first step towards rectifying some of the structural difficulties impacting the litigation process in Indonesia.

 

A hazy decision

 

In 2015, haze from fires in Sumatra and Kalimantan spread across the region. Responsibility for the fires has been a contentious issue, and the Palembang District Court has now had its say on the matter.

 

The Indonesian Ministry of Nature Environment and Forestry filed a civil law suit against PT Bumi Mekar Hijau in the Palembang District Court, accusing the company of causing forest fires across 20,000 hectares of land in 2014. The Panel of Judges rejected the entire claim by stating that "the results from the lab shows no indication of damaged plants subsequent to the fire, besides, the plants can be replanted in that area". The Ministry has appealed the decision and the case is now being reviewed by the Palembang High Court. An NGO has also reported the District Court judges concerned to the Judicial Commission, alleging improprieties in the decision-making process.

 

Notes

 

1  PT Bangun Karya Pratama Lestari -v- Nine AM Ltd (Decision Number 451/Pdt.G/2012/PN.Jkt Bar.)

2  Decision No 24/Pdt.G/2015/PN.JKT.PST. 

 

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For further information, please contact:

 

Debby Sulaiman, Partner, Oentoeng Suria & Partners 

debby.sulaiman@oentoengsuria.com