INDONESIA

Andi Yusuf Kadir, Zarina Marta Dahlia, and Nabila Farhani Oegroseno

A. LEGISLATION AND RULES

A.1       Legislation

International arbitration in Indonesia continues to be governed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (“Arbitration Law”), to which no legislative amendment was made in 2020. Indonesia ratified the New York Convention through Presidential Decree No. 34 of 1981.

A.2       Institutions, rules and infrastructure

A.2.1    Arbitration Institutions in Indonesia

Subject to the nature of the dispute, parties that choose arbitration as a dispute settlement forum in Indonesia have a number of choices on where to arbitrate. Indonesia has a number of arbitral institutions, including: (i) Badan Arbitrase Nasional Indonesia (the Indonesian National Board of Arbitration or BANI), (ii) Badan Arbitrase Syariah Indonesia (the Indonesian Sharia Arbitration Board or BASYARNAS), which specializes in commercial disputes governed by Sharia law and (iii) Lembaga Alternatif Penyelesaian Sengketa Perbankan Indonesia (the Indonesian Banking Alternative Dispute Resolution Agency or LAPSPI), which specializes in banking disputes. Among the arbitral institutions in Indonesia, BANI, which was established in 1977, has been considered by the public as one of the most prominent alternative dispute resolution forums.

As discussed in the previous issue of the International Arbitration Yearbook (2020), in 2016, another arbitration institution named Badan Arbitrase Nasional Indonesia was established, which resulted in an existential struggle and competing jurisdictions between the two arbitration institutions, particularly regarding which BANI is the ‘real’ BANI. In order to distinguish the two institutions named BANI, they are now referred to by the public in accordance with their locations (i.e., the original BANI is referred to as BANI Mampang, and the newly established BANI as BANI Sovereign).

In light of the developments regarding arbitral institutions in Indonesia, the Otoritas Jasa Keuangan (Indonesian Financial Services Authority or OJK) is planning to introduce a consumer protection portal application, which which will showcase their new integrated dispute resolution forum, i.e., Lembaga Alternatif Penyelesaian Sengketa (Alternative Dispute Resolution Institution or LAPS). The portal is expected to launch in early 2021. This application aims to integrate many other alternative dispute resolution institutions in Indonesia, specifically financial services consumer disputes.

The establishment of this portal was spurred by the large number of hybrid financial services products, such as banking with insurance, insurance with investment, etc. The OJK found that consumers are confused about which dispute resolution institution to approach, particularly concerning the financial services industry. With this application, consumers are directed to the OJK, which automatically forwards the complaint to the appropriate financial services actors. After the public reaches out to the OJK, regulators will mediate with financial services actors. If the consumers are still not satisfied, then the consumers can take legal steps or ask for help from a dispute resolution institution as directed by LAPS.

There are currently six financial services sector dispute resolution institutions that are planning to be integrated into LAPS: (i) Badan Arbitrase dan Mediasi Perusahaan Penjaminan Indonesia (Indonesian Guarantee Corporation Arbitration and Mediation Board or BAMPPI), (ii) Badan Mediasi Pembiayaan dan Pergadaian Indonesia (the Indonesian Fiduciary and Financing Mediation Board or BMPPI), (iii) Badan Mediasi dan Arbitrase Asuransi Indonesia (Indonesian Insurance Mediation and Arbitration Board or BMAI), (iv) Badan Arbitrase Pasar Modal Indonesia (Indonesian Capital Market Arbitration Board or BAPMI), (v) Badan Mediasi Dana Pensiun (Pension Fund Mediation Board or BMDP) and (vi) LAPSI. It remains to be seen how this will be implemented and how the application will function in practice.

A.2.2    Arbitration Institutions in light of the global pandemic

In light of the COVID-19 pandemic, many arbitral institutions, including BANI Mampang, have shifted proceedings online. Prior to its shift online, BANI Mampang temporarily suspended all arbitration processes in March 2020. However, to provide legal certainty for disputing parties, BANI Mampang made adjustments to its arbitration mechanism during the pandemic through Decree No. 20.015/V/SK-BANI/HU concerning the Rules and Procedures for Electronic Arbitration in May 2020 (BANI Rules for Electronic Arbitration 2020). The key points are as follows:

  1. The arbitration can be carried out electronically in the event of a disaster emergency and special circumstances (which fulfills the threshold under Law No. 24 of 2017 concerning Disaster Management).
  2. Electronic arbitration rules and procedures will be administered if the disputing parties have agreed on it.
  3. Proceedings may be conducted using internet-based telecommunication facilities, including but not limited to teleconferences, video-conferences, or virtual conferences using a platform agreed on by the parties.
  4. Parties that will hold the proceedings electronically are obliged to carry out technical preparations for the proceedings, such as the preparation of the platform equipment that will be used and convey who will attend the proceedings.
  5. The provisions in the BANI Rules and Procedures 2020 (BANI Rules 2020) shall remain in effect unless stipulated otherwise in the BANI Rules for Electronic Arbitration 2020.

Although BANI Mampang has made electronic proceedings available, parties may still choose to continue to conduct physical proceedings. However, this may be done with health protocol restrictions (e.g., a limited number of people in the room and social distancing policies). The method to be used depends on what has been agreed upon and is considered the most effective for the disputing parties.

B. CASES

We note two cases that are significant and worth noting in relation to arbitration in Indonesia, which we set out in this section.

The first case is in relation to a request for an annulment of a BANI arbitral award at the Central Jakarta District Court, where the claimant of the BANI arbitral award highlighted the question of the respondents’ appointed arbitrator’s impartiality and independence. The claimant argued how this resulted in the evidence of “falsification of facts,” which was used as a basis to annul the BANI arbitral award. The Central Jakarta District Court decision was later actually rejected by the Supreme Court.

The second case is a decision rendered by the Permanent Court of Arbitration (PCA) in The Hague between an Indian metal company and the Government of the Republic of Indonesia (“Government”) in relation to the Mining Business License for Production Operation (Izin Usaha Pertambangan Operasi Produksi or IUP OP) owned by the subsidiary of the Indian metal company in Indonesia as issued by the Government. The decision of the PCA not only had a legal impact but a political impact as well, particularly in relation to how the Government was handling the issuance of its Mining Business Licenses to Indonesian mining companies.

B.1       Request for BANI Arbitral Award Annulment based on “falsification of the facts” as a result of an arbitrator’s alleged lack of impartiality and independence

B.1.1    The parties arguments and background

On 12 May 2020, the Indonesian Supreme Court issued a decision[1]. The court annulled the Central Jakarta District Court Decision[2] in relation to a request to annul a BANI arbitral award on 16 July 2019. The claimant in the BANI award is an Indonesian electricity company who filed a request for arbitration to BANI against the respondents, i.e., three Indonesian companies. In the end, the BANI arbitral award was rendered on behalf of the respondents.

The claimant filed for an annulment to the Central Jakarta District Court based on several grounds, one of which is on the basis that there is a falsification of the facts made by the respondents. The claimant argued that it was made aware after the award that the respondents’ appointed arbitrator is an affiliate of one of the respondents’ counsel. The affiliation was evident by the fact that the appointed arbitrator was a promotor in one of the respondents’ counsel’s doctoral examination and that both parties attended the same law school. The claimant became aware of this after checking an online news article on the doctoral examination.

The claimant argued that the appointed arbitrator should have refused to be asked to become one of the arbitrators on the grounds that his impartiality and independence are compromised due to the affiliation. Because the appointed arbitrator did not reject his appointment despite the obvious relationship, it should be suspected that there had been a conspiracy from the start of the arbitration. The claimant viewed that the respondents were feeding false information to the arbitrators, and the arbitrators were accepting them despite being false and misleading purely because they had such a close relationship. The claimant elaborated that this is clearly a valid conspiracy and therefore can be used as a ground to request for an arbitral award annulment, as it is considered as evidence of falsification of facts.

The respondents counter-argued by stating that the appointment of an arbitrator is a right for each party as provided under their arbitration agreement, which is evidently supported under the Arbitration Law as well. In other words, the parties are given an equal right to choose an arbitrator who, according to their belief, has the knowledge, experience, and sufficient background regarding the matter in dispute, in addition to being honest and fair.

The respondents argued that if the claimant had objections to the appointment of the arbitrator examining and adjudicating the case, then both BANI Rules 2020 and the Arbitration Law provide a mechanism to challenge the respondents’ appointed arbitrators. The Arbitration Law provides that any arbitrator can be challenged if there are circumstances that raise doubts as to his/her impartiality or independence. The party wishing to challenge must provide a written notification to BANI within 14 days after the appointment notice or after the basis for the challenge is known to the party. The written submission should include written evidence as well to support the party’s challenge.

The issue of an arbitrator’s impartiality and independence must be filed through this challenge mechanism and not through an annulment request to the Central Jakarta District Court. This is elevated with the fact that the connection that the claimant is referring to as its basis for the annulment between the appointed arbitrator and respondents’ counsel exist before the arbitrator was appointed. The fact that the claimant had only now raised the issue only shows the claimant’s incompetence in its due diligence at the moment the respondents’ arbitrator was appointed.

B.1.2    The Central Jakarta District Court Decision in 2019

With the parties’ arguments, the panel of judges of the Central Jakarta District Court continued to elaborate its views on the matter. The Arbitration Law does not expressly regulate the definition or threshold of an “affiliate” that may warrant the removal of an arbitrator. However, in this particular case, doubts are raised based on the statement letter from the tribunal, which states that the arbitral tribunal has no connection at all with the respondents’ counsel.

In the Central Jakarta District Court’s view, strictly looking at the statement letter (i.e., the statement letter of impartiality and independence from each arbitrator in the case) itself, there is reason to doubt its overall accuracy as it is a fact that the appointed arbitrator does actually have a connection with the respondents’ counsel. The Central Jakarta District Court continued to further analyze the nature of the connection and reached a conclusion that as a promotor of the respondents’ counsel’s doctoral examination, it is reasonable to expect that the two individuals are close and are in close communication.

Because of this close relationship, the Central Jakarta District Court viewed that this is sufficient basis to state that the respondents’ were able to interfere with the tribunal’s views and position in rendering its decision. Thus, the claimant’s arguments that the annulment of the BANI award must be annulled based on this reasoning was accepted. The Central Jakarta District Court then rendered the decision that the BANI award is annulled.

B.1.3    The Supreme Court Decision in 2020

The respondents filed an appeal to the Indonesian Supreme Court with regards to the Central Jakarta District Court Decision. On 12 May 2020, the Supreme Court issued a decision annulling the decision of the Central Jakarta District Court. The Supreme Court viewed that the Central Jakarta District Court’s conclusion that the affiliation between the appointed arbitrator and the respondents is only based on an assumption, particularly on the plain fact that the appointed arbitrator was a promotor of one of the respondents’ counsel’s doctoral examination.

With this fact, it does not mean that there is partiality towards the respondents in this case. Therefore, the assumption of an alleged affiliation cannot be proven, and this basis cannot be accepted as a reason to annul the arbitral award.

The significance of the case for clients in practice is that this is to be used as a reference when it comes to challenging arbitrators. As mentioned, the Arbitration Law does not expressly regulate the definition or threshold of an “affiliate” that may warrant the removal of an arbitrator. Further, the Arbitration Law does not adopt any international standard of assessing conflict of interest, such as the 2004 International Bar Association Guidelines on Conflicts of Interest in International Arbitration.

In Indonesia, arbitrator challenges are loosely regulated under the parties’ arbitration agreement (if any), the Arbitration Law, and references to previous courts/tribunal considerations.

B.2       The Government wins in a PCA case in relation to mining licenses

On 29 March 2019, the PCA rendered an arbitration decision in favor of the Government over the claim of the foreign company, Indian Metal Ferro & Alloys Limited or IMFA). The case ran from 2015 until the decision in 2019. The case highlights the Government’s arrangement in the issuance of mining business permits to Indonesian mining companies, with a claim for compensation worth USD 469 million or equivalent to Rp 6.68 trillion. The PCA award was rendered on behalf of the Government, and IMFA was sentenced to refund costs incurred by the Government during the arbitration process.

As a background, PT Sri Rahayu Induk (PT SRI) is registered as an Indonesian legal entity. After the acquisition, Indmet Ltd. (Indmet) Singapore, which is a subsidiary of Indmet (Mauritius) Ltd., became 70% shareholder. Meanwhile, Indmet (Mauritius) Ltd. itself is a subsidiary of IMFA. The dispute was centralized PT SRI’s Mining Business License for Production Operation (Izin Usaha Pertambangan Operasi Produksi), which had been obtained from the Regent of East Barito, Central Kalimantan on 31 December 2009. IMFA was able to get a hold of this Mining Business License after the acquisition, which took place on 7 June 2010 (about a year after the issuance of the Mining Business License).

A claim was issued to the PCA after it was known that PT SRI’s Mining Business License for its concessions area actually overlapped with seven other mining companies. The PCA was chosen under the pretext of the BIT agreement that was made between Indonesia and India in 1999. The problem of overlapping areas in the Mining Business License issued by the Government is argued by IMFA to violate the BIT.

The Government won the arbitration award by assuring that PT SRI had known about the overlapping issue of the IUP area long before being acquired by IMFA, and they were actually aware since the general exploration in 2005. The issue of determining administrative definitive boundaries has indeed occurred, but PT SRI’s mining permits can still be issued. Whilst IMFA, on the other hand, argued that it was only aware of this overlap after the acquisition was completed.

However, the Government succeeded in proving that the loss due to overlapping areas was not the fault of the Government. The Government of Indonesia counter-argued IMFA by emphasizing that in the event that IMFA carries out due diligence correctly, the nature of the Mining Business License will be known by IMFA. The PCA shares the same opinion in that the PCA added that IMFA should have conducted due diligence before making an investment decision in PT SRI.

With the PCA decision, the Government was therefore not liable for IMFA’s negligence in making its investment choices in Indonesia.

 

[1] Indonesian Supreme Court Decision No. 460 B/Pdt.Sus-Arbt/2020

[2] Central Jakarta District Court Decision No. 754/Pdt.Arb/2019/PN.Jkt.Sel.

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