ARBITRATION UNDER THE INDONESIAN INVESTMENT LAW Huala Adolf.

Abstract: This article describes the investment law of Indonesia, Law No 25 of 2007, in particular the content and the new provisions under the Law. A brief discussion is given on the provision on arbitration contained in the Law.

Introduction Indonesia has enacted the Law No.25 of 2007 on Investment Law which replaced the former investment laws, namely the foreign investment law (Law No.1 of 1967) and the domestic investment law (Law No.6 of 1968). The main reason for the enactment of the new investment law is mainly because the former laws had failed to draw more investment into the country. Besides, as stated in the Preamble of the Law, the participation of Indonesia in bilateral and multilateral agreements, has, to a great degree, affected the investment regulations. The (old) investment laws had also been regarded as discriminatory since they treated foreign and domestic investors differently. The government hopes that the new Law will better serve the interests and needs of foreign investors. Foreign investors have warmly welcomed the new Law. But a number of political parties and NGOs claim that the new Law is too liberal. The investors now enjoy much leeway in investing in Indonesia. Content of the Law The Law contains 18 chapters and 38 Articles. The main provisions include in brief: Land Titles Article 22 of the Law provides a longer duration for land titles. It extends land cultivation titles of up to 95 years, building right titles to 80 years and land-use titles to 70 years. This article has provoked criticism from a number of political parties and NGOs. They argued that the longer land title periods will only benefit big foreign investors and will eventually harm the farmers. The longer land usage rights is also a violation of the 1960 Land Law. Article 29 of the Land Law provides that land cultivation titles are limited to 60 years. Equal Treatment between Foreign and Domestic Investors The Investment Law provides for the equal treatment of local and foreign investors. [FN1] As noted above, previously the Law on investment differentiated between foreign and domestic investors. The rationale behind this provision, as the government argues, is

that it gives equal legal status and equal treatment to both domestic and foreign investors. [FN2] The government contends that the issuance of a single regulation was needed to provide fiscal incentives and investment facilities under the new Investment Law. More attractive investment incentives Investors eligible to receive incentives include those who invest in labour-intensive industries and in infrastructure projects; in particular those projects that promote the transfer of technology, pioneering industries and rural areas, a in projects that involve scientific research and innovation, partnerships with small and medium-sized enterprises, in projects that use local production capital, or in environmentally friendly projects. [FN3] Support to Small and Medium Enterprises The Law also gives more support to small and medium-sized enterprises. The Law includes special provisions which require the government to reserve particular business sectors exclusively for micro, small and medium-sized enterprises and cooperatives. [FN4] More Power to BKPM The new Law also lifted up the status of the BKPM. The BKPM was set up to coordinate the investment service in order to implement the domestic and the foreign law. The other functions include assessing and formulating national investment policy and promoting investment generally. Currently the BKPM is under the control of the Trade Ministry. Under the new Law, the BKPM is a non-departmental government institution. The BKPM no longer reports to the Trade Ministry, but reports directly to the President. [FN5] Protection of Investment Similar to the 1967 Foreign Investment Law, the new legislation specifically protects investors from expropriation. [FN6] The Law guarantees them free repatriation of foreign investment capital and returns of dividends and salaries and wages of expatriate personnel. [FN7] Divestment of Investment Unlike the 1967 Foreign Investment Law, the new Law does not require foreign investors to divest the majority of their shareholding after a specified period of time. [FN8] This is a major change in the investment law. The provision has been criticized. Critics conted that the divestment is still necessary in *N33 order to ensure that investment comes to Indonesia solely for business purposes. Indonesia Arbitration Law

General Since its independence from the Dutch administration in 1945, Indonesia has adopted Dutch arbitration procedural law. The said law, the Rv (Reglement op de Rechtsverordering or the Dutch Code of Civil Procedure) contains, at Arts 615- 651,the arbitration regulation. The other Dutch legislation that recognizes arbitration as a dispute settlement procedure is Art.377: Het Herziene Indonesisch Reglement, (similar to the Civil Procedure Regulation), State Gazette (Staatsblad) 1941 No.44, and Art.705 of the Reglemen Acara Untuk Daerah Luar Jawa dan Madura (Rechtsreglement Buitengewesten, or the Civil Procedure for the Islands outside Java and Madura), State Gazette 1927 No.227. The Rv laid down basic arbitration regulations. Among other things, it recognized arbitration as a means of resolution of disputes that parties could elect to solve their trade problems (Art.615). It also laid down the subject-matter capable of arbitration (arbitrability and non-arbitrability), the requirements relating to arbitrators, the arbitration clause and the arbitration agreement, etc. Law No.30 of 1999 on ADR and Arbitration On August 12, 1999, the Indonesian President enacted for the first time the Law on Alternative Dispute Resolution and Arbitration, Law No.30 of 1999 (the Arbitration Law). It is a more comprehensive piece of legislation than its predecessor. As its title suggests, it covers both alternative dispute resolution and arbitration. It also covers both national and international arbitration, including recognition and enforcement. The drafter of the Law, Mr Husseyn Umar, admitted that the present Law, (Law No.30 of 1999) does not adopt the UNCITRAL Model Law of 1985. Yet, he contends that, some of its provisions do reflect the Model Law. [FN9] Law No.33 of 1999 defines the disputes that can be settled by arbitration. Article 5 of the Law specifies that the disputes that can be brought before an arbitral tribunal are those disputes that fall within the phrase "trade or commercial matters". It does not specifically mention the kinds of disputes. Since arbitration, both in Law No.1 of 1967 and Law No.25 of 2007, is recognized as a mechanism for the settlement of investment disputes, the jurisdiction of arbitration in Indonesia over investment (disputes) has been legally accepted. [FN10] Law No.25 defines the term "investment" as "all form of investment activities, either domestic or foreign investments for the purpose of conducting business in the territory of the Republic of Indonesia". RI Ratification of International Treaties Indonesia is a party to both the important conventions on arbitration, namely the Washington Convention of 1965 and the New York Convention of 1958. Washington Convention of 1965

Indonesia ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (or the Washington Convention of 1965) in 1968. Thus Indonesia submitted its ratification three years after the Washington Convention was signed. * The ratification of the Convention was made given the economic condition then existing. After declaring its independence in 1945, the political and security conditions in Indonesia had been deteriorating. The worst political situation existed in 1965. The new government which took over the administration had officially begun its function not long after 1965 with a budget deficit. Investment was badly needed. So the ratification of the 1965 Washington Convention was intended to convince foreign investors that Indonesia was willing to settle investment disputes, if they should arise in international arbitration, instead of through the national courts. The only investment dispute settled before ICSID Arbitration to date involving Indonesia was the Amco Asia Case (Case No.Arb/81/1). The case was about the revocation of and investment license by the Indonesian government. The ICSID Tribunal issued an interlocutory judgment and award on the merits. [FN11] In 2005, however, Cemex SA, the world's third largest manufacturer, registered a claim against Indonesia with the ICSID Secretariat. Before ICSID heard the dispute, the two parties agreed to temporarily suspend the case. The parties later agreed to settle the dispute. The New York Convention of 1958 Indonesia ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in 1981. The main purpose of the ratification, like the notificaton of the ICSID Convention, was to assure foreign businesses that Indonesia is willing to recognize and enforce foreign arbitral awards made in the territory of states members of the New York Convention. When submitting its instrument of ratification to the New York Convention, Indonesia made two important reservations. First, the arbitral awards will only be recognized and enforced if the subject-matters of the award, constitute commercial law matters. Secondly, Indonesia adopts the reciprocity principle; Indonesia will only recognize and enforce arbitral awards made in the territory of a state that is a member of the New York Convention. Thirdly, Indonesia will only enforce the foreign arbitral awards as long as the award does not violate Indonesian public policy. Fourthly, the request for the enforcement of the award should be addressed to the District Court of Jakarta (Indonesia). Settlement of Disputes under the Investment Law The Investment Law only regulates the settlement of investment disputes in one article, namely Art.32. This article is actually a new provision under the Investment Law as compared to the former investment law, Law No.1 of 1967. Article 23 consists of four paragraphs which recognized means of settlement of disputes. They include negotiation, alternative dispute resolution, national courts, and arbitration (domestic and international arbitrations).

It should be noted that Art.32 only regulates investment disputes where the parties are (i) the government, and (ii) an investor. Article 1 of the Law states that the term "investors" include domestic and foreign investors. Disputes between investors are not subject to this Law. Negotiation If a disputes arises between investors and the government, the parties shall settle the disputes through direct negotiation in order to reach a consensus between the parties (para.1). ADR If negotiation fails to settle the dispute, the parties may chose settlement through, alternative dispute resolution (para.2). *N35 The regulation on ADR is embodied in Art.6 of the Law No.30 of 1999. This article lays down the time limit for the parties to solve their dispute by ADR. Paragraph 7 of this Article states that the agreement of the parties to end their disputes is final and binding. This agreement must be made in writing and must be deposited with the District Court. If settlement through ADR fails, the parties may refer their disputes to arbitration or ad hoc arbitration (para.7). The reference of a dispute to arbitration must be based on a written agreement made before or after the dispute arises (Art.1, para.(3) of Law No.30 of 1999). Court Paragraph 3 of Art.23 states that if an investment dispute arises between the government and domestic investors, the parties may settle their dispute in the (national) court. The parties may also submit their disputes to the district courts (Pengadilan Negeri) or to the national arbitration bodies which exist in Indonesia. Reference of commercial disputes to Indonesian district courts has not been popular. The slow process of cases, the alleged incompetence of courts to deal with modern commercial transactions and the lack of legal certainty and enforceability have been blamed for the unpopularity of the courts. Arbitration under the New Law Arbitration under the new Investment Law plays an important role. Arbitration may be chosen by the parties if negotiation fails to settle the dispute (Art.32, para.2). Arbitration may also become an alternative, as stated in para.3 of Art.23 of the Law, if an investment dispute arises between the government and domestic investors. The reference of the dispute to arbitration must and can only be chosen on the basis of an agreement between the parties. The use of arbitration is similarly required to settle disputes concerning the amount of compensation the government has to pay to the investor in the case of nationalization or

expropriation. This provision is similar to the former foreign investment law, Law No.1 of 1967. A difference between the new and legislation is that the earlier law specified the number of arbitrators to hear the dispute. Each party the investor and the government, chose one arbitrator. The third arbitrator, acting as the chairman of the arbitral tribunal, was to be chosen together by the parties (not by the arbitrators already chosen by the parties). Another difference is that the former law specifically stated that the award was binding upon the parties. The new Law does not specifically mention this provision. The stipulation of the binding nature of the arbitration award under the former law may be understood in the light of Indonesian arbitration law in the 1960s. As mentioned above, Indonesian arbitration law was still then applying the Rv (Dutch Code of Civil Procedure). Therefore, the requirement that the arbitration award be binding amuses foreign investors that arbitration awards have a binding force upon the parties, and that the government will honour it. The lack of a clause specifying that the arbitral award is binding in the new investment Law does not mean that the award does not have binding force. With the Arbitration Law enacted in 1999, the binding nature of awards (including foreign awards) is given legal certainty. Various articles under the Arbitration Law of 1999 do mention the binding nature of awards. They include Arts 15 para.3, 17 para.2, 45 para.2, 52 and 60. The most important article is Art.60 which states that "the decision of the arbitration is final and has legal force and binds the parties". Prior to the promulgation of the Law No.30 of 1999, the position of the court towards arbitration (and arbitration agreements) has been surprisingly encouraging. Landmark cases on arbitration agreements and the absolute competence of arbitration to settle commercial disputes in Indonesia have been reported. These cases are, for example, Ahju Forestry Co v Sutomo (1981), PT Asuransi Royal Indrapura v Sohandi Kawilarang (1982), PT Arpeni Pratama Ocean Line v PT Shorea Mas. The Indonesian Supreme Court in these cases has been right to state that the arbitration agreement signed by the parties must be respected and the district courts must stay its proceedings when the parties in dispute are bound an by arbitration agreement. Under Art.7 para.(3), there is no mention of the form of arbitration. It is right to state here that it may be national or international arbitration. Similarly, it may be institutionalized or ad hoc arbitration. The institutionalized arbitral body in Indonesia is the Indonesian National Board of Arbitration (Badan Arbitrase Nasional Indonesia or BANI). BANI was set up on December 3, 1977 with the support of the Indonesian Chamber of Commerce, the Indonesian Supreme Court, the Lawyers Association, and some individuals. It was established to respond to the growing needs of the Indonesian business community for a speedy solution to business disputes. It has its own rules and procedures and maintains a list of potential impartial arbitrators to settle the disputes. The arbitrators are law professors, business persons, engineers, etc. One type of dispute under the jurisdiction of BANI is investment disputes (both domestic investment disputes as well as international investment disputes).

If an investment dispute arises between the Indonesian government and foreign investors, the parties will settle it in international arbitration. The reference of the dispute to international arbitration must be based on the agreement of the parties (Art.23 para.4). Closing Remarks Since the enactment a year ago, no cases have yet been reported where the parties have referred their disputes to arbitration under the Law No.25 of 1999. Nevertheless, the incorporation of arbitration in the Law, especially in its Arts 7 and 32, shows that arbitration has been getting a growing and ever more new important position in the Indonesian legal system.