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January 2015

Indonesian Dispute Resolution 2014


the Year in Review
Indonesia's dispute resolution landscape is everchanging, and 2014 has been no exception.
There have been important developments taking
place across a range of areas, from decisions on
the controversial "Language Law", to the
government's changing stance on Bilateral
Investment Treaties. In this summary Rob Palmer
and Debby Sulaiman highlight five of the most
significant of these.

Translation turmoil
Indonesian Law No 24 of 2009 on its National Flag,
Language, Emblem and Anthem (known as the
"Language Law") still raises eyebrows among global
professionals doing business in Indonesia
Indonesians and foreigners alike. Recent judicial
decisions have revived concerns about the effect of
this law on the enforceability of contracts in Indonesia.
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.
During the legislative process, Article 31 was extended
by lawmakers to ostensibly cover contracts with
private enterprises. A generous reading of the context
might suggest that this was intended to cover
contracts between private enterprises and Indonesian
governmental bodies. Many government officials
expressed this view and the expectation that
implementing regulations would clarify the impact.
However, industry's worst fears were realised when, in
a 2013 decision1, 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
In association with Ashurst

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 May 2014, the High Court of Jakarta upheld this
decision on appeal. There is an additional level of
appeal to the Supreme Court, so it is still possible that
the case will be overturned.
Some have downplayed the importance of the case,
saying that it concerned an Indonesian law contract
subject to Indonesian jurisdiction, and that it shouldn't
impact those foreign law contracts for which disputes
are determined by foreign tribunals. These arguments
neglect the possibility that a failure to comply with the
Language Law could be viewed by Indonesian courts
as a fundamental question of public policy which could
lead to refusal to enforce a foreign arbitral award.
Indeed, in an interview with litigator Hotman Paris
Hutapea, there was no doubt how this would be
argued if the question came up in an enforcement
context: "A litigator would be negligent to ignore this
argument. There is a clear ground under law and a
clear precedent. If I don't raise it I would not be
representing my client properly."
The result is that 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.

A new threat to enforcement of


domestic awards in Indonesia?
A recent decision of the Indonesian Constitutional
Court2 has clarified the process for annulment of
domestic arbitration awards. However, in doing so, it
has also removed an obstacle to annulment.
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 the case of a domestic
award (or a foreign award where the law of the
arbitration proceedings, or lex arbitri, is stated to be
Indonesian law), Article 70 of the Arbitration Law
allows a party to apply to annul an award 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, time constraints are imposed on a party


seeking to set aside an award on this basis: an
application to annul must be made within 30 days
after registration of the award. A decision must then
be made by the court within 30 days after the
application is received. There may be an appeal to the
Supreme Court, but this must also be decided within
30 days after the appeal is lodged.
Like many Indonesian statutes, the Arbitration Law is
accompanied by a non-binding "Elucidation" which is
designed to guide the courts' interpretation of the
legislation. The Elucidation has been viewed as
problematic for two main reasons: Firstly, by
suggesting that the grounds for an application to annul
an award under Article 70 are not exhaustive.
Secondly, by requiring that a party can only apply to
annul an award which has been registered, and must
possess a court judgment proving the fraud which is
alleged to have occurred under Article 70. That
judgment may then be considered by the court
deciding the matter of the annulment. The
ramifications of the Elucidation for parties applying to
annul an award were considered by the Indonesian
Constitutional Court in the course of a recent petition
for judicial review of an arbitration award.

The Petitioner sought judicial review of an arbitration


award claiming that the Elucidation prevented it from
exercising its rights under Article 70. The Petitioner
argued that not only did the Elucidation create
ambiguity in the law, but it also created a new legal
requirement, which was not otherwise found in the
Arbitration Law.
In effect, the Elucidation required a party applying to
annul an award to first obtain a criminal court ruling in
respect of the fraud which was alleged to have
occurred under Article 70. Given the length of time it
takes in Indonesia to obtain a final and binding
judgment, including any appeal or cassation, it would
in most cases be impossible for a party to comply with
the 30 day time frame prescribed for the annulment
process under the Arbitration Law. As a result, a court
would be bound to reject the application for annulment
on the basis of insufficient evidence of fraud. The
Petitioner argued that the Elucidation therefore
infringed its rights under Article 70.
The Indonesian Constitutional Court found for the
Petitioner, holding that Article 70 of the Arbitration
Law was sufficiently clear and did not need to be
interpreted in light of the Elucidation, and that the
inability of a party to avail itself of its rights under
Article 70 was a violation of Article 28(D) (1) of the
Indonesian Constitution3.
The cancellation of the Elucidation has removed the
ambiguity which had arisen in relation to the
interpretation of Article 70 of the Arbitration Law, but
also has the consequence of removing an obstacle to
the annulment process. The impact of the decision
should not, however, be overstated. In fact the
grounds for setting aside an award under Article 70
are much narrower than those contained in the
UNCITRAL Model law. Nonetheless, parties who
consider choosing Indonesia as the seat of arbitration
should be aware of the increased potential for
defendants to invoke this annulment process to avoid
enforcement.

BIT by BIT Indonesia's changing


stance on Investment Treaties
Foreign investors were unsettled in March 2014 by
suggestions that Indonesia would terminate all of its
Bilateral Investment Treaties (BITs), starting with the
Indonesia-Netherlands BIT.
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.
In March 2014, the Dutch Ministry of Foreign Affairs
reported that Indonesia would not be renewing the
Indonesia-Netherlands BIT, which will now expire on 1
July 2015. This was accompanied by a statement that
Indonesia also intends to terminate all of its other
BITs.
Indonesia's action can be interpreted as a response to
the increasing number of treaty claims being brought
against it by foreign investors. In particular, a tribunal
has recently ruled that claims of some US$1bn can be
brought against Indonesia under its BITs with the UK
and Australia4.
Soon after the Dutch announcement, Indonesia's Vice
President Boediono indicated that "Indonesia will
create a new bilateral investment agreement that will
be adjusted to recent developments". In other words,
it appears that Indonesia may not be resiling from its
regime of investment treaties entirely, but allowing
existing BITs to lapse, so that it can renegotiate them.
Furthermore, at least in the short term, the impact of
termination of its BITs for 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 IndonesiaNetherlands 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 (generally within a
defined period prior to a renewal date; for example,
the Indonesia-Singapore BIT will automatically extend
to June 2026 absent any notification of termination
prior to June 2015). 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. Indonesia also continues to
participate in negotiation of the Regional
Comprehensive Economic Partnership (RCEP)
agreement between ASEAN and its trading partners.
Again, drafts of this agreement contain 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
options available to them while those options still
remain open.
Such options may include structuring investments
(and, in particular, domiciling the investing entity
appropriately) to take advantage of alternative
protections, including those under the ASEAN
Comprehensive Investment Agreement or under BITs
which are not subject to renewal in the near future
and so have a long "shelf life". Depending upon the
strategic importance of an investment, it may also be
open for an investor to negotiate a suitable investment
agreement with the Government of Indonesia which
incorporates appropriate protections and arbitration
provisions. Finally, we continue to recommend the
inclusion of arbitration agreements (and appropriate
waivers of sovereign immunity against suit and
enforcement) as routine in contracts relating to
investments in Indonesia.
Meanwhile, Indonesia's BITs up for renewal in 2015
include those with France and with Italy. We, like
many others, will await Indonesia's next move with
interest.

Indonesia's corruption conundrum


Indonesia's corruption woes have continued in 2014,
with two high profile cases damaging the country's
record.
The first involved former Chief Justice of the
Constitutional Court, Akil Mochtar, who in October
2013 was arrested and charged with accepting bribes
to fix two cases of disputed district-head elections. In
June 2014, the Jakarta Anti-Corruption Court
convicted and sentenced Mr Mochtar to life in prison, a
sentence which was upheld by the High Court in
November 2014.
On passing the sentence, the most severe of its kind
in Indonesian history, the first instance Judge noted
that "[Mr Mochtar] was the chairman of a high-level
state institution that was the last bastion for people
seeking justice. His actions have resulted in the
collapse of the authority of the Constitutional Court."

No less troubling is the recent conviction of Rudi


Rubiandini, former head of the Indonesian energy
regulator SKKMigas. Mr Rubiandini was convicted and
sentenced to 7 years in prison for taking bribes from a
Singaporean company seeking a contract to sell the
government's crude oil overseas.
While these cases highlight the deep extent of
Indonesia's corruption problem, the silver lining is
perhaps the strong stance being taken against the
offenders and the hope that this may deter others.

Employees move up the bankruptcy


priority chain
In a controversial decision in September 2014,5 the
Constitutional Court declared that unpaid employee
wages take top priority in the bankruptcy or liquidation
of an employer, including taking preference over the
rights of secured creditors.
Article 95(4) of the Indonesian Labour Law stipulates
that if an employer is declared bankrupt or is
liquidated, the payment of the employees' wages shall
take priority over the payment of "other debts."
There is no clarification in the Labour Law as to the
meaning of "other debts", and before this decision, it
was unclear whether "other debts" included secured
debts and other preferential debts.
In coming to its decision, the Court relied on Article
28D of the 1945 Indonesian Constitution, which,
among other things, refers to every person's right to
receive fair and proper remuneration.
The Court held that the Labour Law must be
interpreted consistently with this constitutional right,
and accordingly held that employee rights to unpaid
wages took priority over all other rights in a

bankruptcy or liquidation, including state rights (e.g.


unpaid taxes), the rights of secured creditors, and
preferential/privileged rights (e.g. the rights of
insurance policy holders in the bankruptcy of an
insurance company).
The Court held that other employee rights, on the
other hand, take priority over all other claims except
those of secured creditors. The Court did not specify
what these "other rights" were, but presumably they
include things like severance pay, and allowances for
housing, health care etc.
Unfortunately, the Court neglected to consider how
their decision would operate in practice, and in
particular, how it interacts with the Bankruptcy Law
and secured creditors' rights under that law to sell
secured assets. For example:

Must secured creditors wait for the insolvent


company to pay employee wages before enforcing
their securities? Or must they seek court approval
prior to doing so?
Can a liquidator sell secured assets to pay
employees' wages without reference to the secured
creditor?

These, and other questions, will undoubtedly trouble


lenders in Indonesia until either the Constitutional
Court or the government clarifies the law in this area.
Notes
1
PT Bangun Karya Pratama Lestari v Nine AM Ltd (Decision Number
451/Pdt.G/2012/PN.Jkt Bar.)
2
Decision No. 15/PUU/XII/2014
3
The right to recognition, security, protection and certainty under the
law.
4
These were claims by UK company, Churchill Mining, and its
Australian subsidiary, Planet Mining, in respect of Indonesia's
alleged expropriation their assets.
5
Decision No. 67/PUU-XI/2013.

Further information
If you would like any further information on any of the issues raised in this briefing, please contact:
Rob Palmer

Debby Sulaiman

+65 6416 9504


rob.palmer@ashurst.com

+62 212 996 9219


debby.sulaiman@oentoengsuria.com

Partner, Ashurst Singapore

Partner, Oentoeng Suria &


Partners, Jakarta

Key contacts
Singapore
Ben Giaretta
Partner, Ashurst Singapore
Asia Head of International Arbitration
+65 6416 3353
ben.giaretta@ashurst.com

Rob Palmer
Partner, Ashurst Singapore
+65 6416 9504
rob.palmer@ashurst.com

Baldev Bhinder
Senior Associate, Ashurst Singapore

Akshay Kishore
Associate, Ashurst Singapore

+65 6416 9507


baldev.bhinder@ashurst.com

+65 6416 3343


akshay.kishore@ashurst.com

Katherine McMenamin
Associate, Ashurst Singapore

Michael Weatherley
Legal Manager, Ashurst Singapore

+65 6416 9517


katherine.mcmenamin@ashurst.com

+65 6416 9509


michael.weatherley@ashurst.com

Other contacts in Asia


Gareth Hughes
Partner, Ashurst Hong Kong
Asia Head of Dispute Resolution
+852 2846 8963
gareth.hughes@ashurst.com

Angus Ross
Partner, Ashurst Hong Kong
+852 2846 8909
angus.ross@ashurst.com

Noor Meurling
Senior Foreign Legal Consultant,
Oentoeng Suria & Partners, Jakarta

Debby Sulaiman
Partner, Oentoeng Suria & Partners,
Jakarta

+62 212 996 9202


noor.meurling@oentoengsuria.com

+62 212 996 9219


debby.sulaiman@oentoengsuria.com

Ian Shepherd
Partner, Ashurst Port Moresby

Derek Wood
Partner, Ashurst Port Moresby

+675 309 2030


ian.shepherd@ashurst.com

+675 309 2006


derek.wood@ashurst.com

Jason Brooks
Partner, Ashurst Port Moresby

Chris Bailey
Partner, Ashurst Tokyo
Tokyo Head of Dispute Resolution

+675 309 2023


jason.brooks@ashurst.com

+81 3 5405 6081


chris.bailey@ashurst.com

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
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