Should a foreign investor have its assets expropriated (whether directly, or through creeping expropriation or regulatory encroachment), the investor may have access to claims under any applicable investment treaties.
While judicial protection for foreign investors exists in Indonesia, it has varying degrees of consistency and predictability. This has made international arbitration an obvious choice for many foreign investors. A map of those treaties to which Indonesia is a party can be seen HERE.
Indonesia has terminated approximately 30 BITs in recent years. However, it is party to the ASEAN Comprehensive Investment Agreement and ASEAN free trade agreements that include investment chapters. This means that many foreign investors retain the ability to invoke investment treaty protections (for example unlawful expropriation or fair and equitable treatment (FET)) in the face of government interference in their investment.
Notably, some of the investment protections are more restrictive, particularly those negotiated recently. For example, investment protections are denied to investors who do not have a substantial business operation. FET is limited to the minimum standard of treatment recognized in public international law. In some treaties, claims must be brought within three years.
At the same time, the exceptions to investment protections have been broadened. For example, the ASEAN Hong Kong China SAR Investment Agreement extends exceptions to measures relating to the conservation of natural resources.
In addition, investors may have access to claims in the domestic courts. In Indonesia, various forms of judicial protection are available to foreign investors. These protections are aimed not only at attracting and facilitating foreign investments, but also at providing investors with recourse in case of violation of their rights. The country’s prevailing statute on investment is Act No. 25 of 2007 on Investment (“Investment Act”). This legislation is supplemented by various presidential, ministerial, and local governments’ regulations, as well as regulations of the Investment Coordinating Board (“BKPM”), the country’s single-window agency for investment matters.
Article 32 of the Investment Act provides broad options to investors to settle their disputes with the government, namely good offices, arbitration, and/or court proceedings.
In practice, while most disputes involving foreign investors are submitted to international arbitration, foreign investors may also submit claims to the State Administrative Courts (“PTUN”) and General Courts. Further, judicial protection for foreign investors is also available in non-contentious cases; the Supreme Court and Constitutional Court have the power to conduct judicial reviews to ensure constitutional and regulatory consistency.
State Administrative Courts
PTUN hear claims of violations of good governance principles by public officials submitted by individuals or private corporations, including ad hoc governmental decisions. As such, many of the cases heard by PTUN involving investors relate to their licenses.
For example, in late November 2019, the Indonesian subsidiary of a multinational mining company filed a lawsuit with PTUN against the Ministry of Energy and Mineral Resources (“MEMR”). It alleged that MEMR had asked it to pay a royalty for its sales of cobalt, in contravention with its license called Contract of Work, which the company said only obliged it to pay a royalty for nickel matte sales.
In another case, an Indonesian-South Korean joint venture filed a lawsuit in 2018 with PTUN against BKPM, alleging that BKPM had unilaterally revoked its existing Agreement on Forest Utilization (PPPKH) by issuing a License on Forest Utilization (IPPKH).
PTUN is an option available to foreign investors not only to challenge governmental decisions in respect of their business licenses, but also to reaffirm those decisions. For instance, in April 2019, the Jakarta PTUN decided in favor of BKPM, which had issued an approval to upgrade the gold mining license at exploration level of an Australian company’s subsidiary, to a mining license at operation and production level.
The court rendered this decision after examining a lawsuit by two environmental NGOs that had sought to annul the BKPM decision on the ground of environmental damage. The court opined that the allegation was premature, since the company had not even commenced operation and production.
There have been instances in which citizens filed lawsuits with PTUN to request the revocation of investors’ licenses on the ground of environmental concerns. For example, upon receiving its mining license from the MEMR in 2014, the Indonesian subsidiary of a Hong Kong group was sued by local residents of Bangka Island, who petitioned the Jakarta PTUN to revoke that mining license. The court granted such a request, and the decision was reaffirmed by the PTUN Appellate Court, which was subsequently upheld by the Supreme Court. The lawsuit alleged that the company had caused environmental damage, including coastal excavation and land reclamation near coral reefs.
Besides PTUN, investors have also, at times, submitted their claims to General Courts, consisting of District Courts, which are courts of first instance, and High Courts, which are appellate courts. The Supreme Court is the court of final appeal.
For example, in July 2019, a South Korean company’s subsidiary filed a lawsuit with the District Court of Kuningan, West Java against the Local Government of Kuningan. The company alleged, among other things, that the lengthy process of the issuance of licenses for its textile business in Kuningan had caused uncertainty to the company. Consequently, it demanded nearly USD 2 million as compensation.
The judiciary has the power to conduct judicial review to ensure constitutional and regulatory consistency. The Constitutional Court also has the power to decide upon disputes over competence between governmental institutions.
For example, in 2008, the Supreme Court decided to strike down a 2004 decision by the Ministry of Forestry, which designated a 108,000-hectare land as a national park that overlapped with the land for which an Australian-Indonesian joint venture had obtained a mining license. The court found that the ministerial decision had violated the 1999 Forestry Act, as amended in 2004, which stipulates that all licenses for mining activities in the forest that had been granted before the enactment of the Forestry Act are still valid until the expiry of those licenses.
In 2012, the Constitutional Court heard a dispute between the President, the House of Representatives, and the Supreme Audit Board over who had the competence to buy minority shares of a multinational corporation’s Indonesian subsidiary, which was obliged to offer its shares to the government. The court decided that the President alone could not buy the shares, as he had to seek the House of Representatives’ approval, have the House oversee the share purchase and buy the shares transparently and responsibly. This judgment imposed additional requirements on the government for buying the shares of foreign investors, thereby providing extra protection to investors to ensure their rights are respected during divestment process.