Revisiting foreign arbitral awards

Author: | Published: 26 May 2017
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Yozua Makes and Prawidha Murti of Makes & Partners examine the practical challenges found when a party attempts to enforce a foreign arbitral award in the Indonesian courts

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It has been 36 years since Indonesia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Award by virtue of Presidential Decree 34 of 1981. It has also been 27 years since the enactment of Indonesian Supreme Court Regulation 1 of 1990 concerning the Procedures of Enforcement of Foreign Arbitration Award (Perma 1/1990), which, as a consequence of ratifying the New York Convention, sets out the procedure for the enforcement of foreign arbitral awards. It has further been 18 years since the introduction of Law 30/1999 on Arbitration and Alternative Dispute Resolutions, which established the concrete legal framework for arbitration law and which also covers in particular the enforcement of foreign arbitral awards.

From 1981 to date, Indonesia has developed into a jurisdiction with a more open and receptive attitude towards international business arrangements and cross-border commercial transactions. Not only is Indonesia more welcoming to foreign investors, but also increasingly, Indonesian investors are looking outwards into regional markets such as Asean and North East Asia as fertile ground for further investment.

Such international business arrangements or transactions are often equipped with an arbitration clause that designates a choice of foreign law and international arbitration forum. Therefore, it is common for the enforcement of foreign arbitral awards in Indonesia to become a relevant consideration for any foreign parties doing business with Indonesian parties (and vice versa, the Indonesian parties will have to consider the issue of enforcement of foreign arbitral awards in its business partner's jurisdiction).

It is a common view that the enforcement of foreign arbitral awards is a challenge in Indonesia. Indeed, foreign business stakeholders have often expressed the various problems they have encountered in doing business in Indonesia. Such issues range from the complex and time-consuming procedures in enforcing foreign arbitral awards, to the refusal to enforce awards by the Indonesian courts. This raises concerns about the certainty of being able to effectively enforce foreign arbitral awards in the country.

This article discusses the general challenges typically found at the practical level when a party attempts to enforce a foreign arbitral award in the Indonesian courts. In particular, it will provide views on: the challenge against the jurisdiction of the matter under arbitration; the claim of 'public order' as a ground to declare the unenforceability of the foreign award; and the claim to annul the foreign arbitral award.

Basic framework

Domestic versus foreign arbitral award

Law 30/1999 provides guidance on the distinction between international (or foreign) arbitral awards versus domestic awards. An international (or foreign) arbitral award is an arbitral award rendered by an arbitration institution in any jurisdiction outside the Republic of Indonesia (article 1.9 of Law 30/1999). As such, an arbitral award is considered domestic if rendered within the territorial area of the Republic of Indonesia.

Both domestic and foreign arbitration awards must satisfy the registration requirements as stipulated in Law 30/1999 before it becomes recognisable and enforceable.

The registration of foreign arbitral awards

Under the 1958 New York Convention and Law 30/1999, in order for a foreign arbitral award to be recognised and enforced within the jurisdiction of the Republic of Indonesia, it must satisfy the following requirements:

  • The award is rendered by an arbitration body or an arbitrator in a country which is bilaterally bound to Indonesia or jointly bound with Indonesia by an international convention on the recognition and enforcement of foreign arbitration awards. Its enforcement is based on the principle of reciprocity.
  • The foreign arbitration award is only limited to awards which, according to Indonesian law, fall within the scope of its commercial law.
  • The foreign arbitration award does not contravene the public order.

When registering the foreign award, there are several supplementary documents that must be attached, among others (Article 67(2) of Law 30/1999):

  • an original/authentic copy of the arbitral award which complies with the requirements for the authentication of foreign documents, along with the official Indonesian translation;
  • an original/authentic copy of the underlying arbitration agreement which complies with the requirements for the authentication of foreign documents, along with the official Indonesian translation;
  • statement from the Indonesian diplomatic office from the country where the foreign award is rendered, declaring that such country is bound under bilateral or multilateral agreement to Indonesia with respect to the enforcement of international arbitration.

It must be highlighted that under Indonesian law, the arbitrator(s) is the required party to submit arbitral awards for registration at the district court. This applies for both domestic and foreign arbitral awards. This is different from other jurisdictions where registration can be carried out by the parties.

Exequatur

A foreign arbitration award may be enforced in Indonesia after a copy of such award is deposited with, and an exequatur (writ of execution) has been obtained from, the chairperson of the Central Jakarta District Court.

Even after the registration of the foreign arbitral award (as discussed above) is completed, there are no procedural rules in place for the issuance of the exequatur. After the registration is conducted, the exequatur process can proceed by filing a request to the chairperson of the Central Jakarta District Court. Based on the exequatur request, the chairperson of the Central Jakarta District Court will decide whether to grant or refuse the exequatur. The process of granting an exequatur is not clear, since the losing parties may, in many instances, challenge the process by challenging the jurisdiction of the arbitration, by claiming non-enforcement of the arbitral award, or by claiming annulment of the arbitral award. Such challenges may intervene or halt the issuance of the exequatur.

In the absence of clear procedures, the Indonesian court will be obliged to hear these claims while delaying the enforcement of the award. Further, during this time, the losing parties may be taking steps to dissipate the object of the award, for instance assets belonging to the losing parties. Thus, even if an exequatur is eventually obtained, it is rendered ineffective and useless through such dissipation of assets.

The absence of comprehensive procedural rules creates uncertainty as to the timing of a challenge against an enforcement order. In Astro Nusantara International B.V et al v PT Ayunda Primamitra et al (the Astro case) the challenge against the enforceability of the award was submitted during the issuance of the exequatur. Meanwhile, in PT Raga Perkasa Ekaguna v Merck GmbH (the Merck case), the challenge against the enforceability of the award was submitted after the exequatur was issued.

Common legal challenges in exequatur

Challenging the jurisdiction of the arbitration forum

Law 30/1999 stipulates that only disputes in the commercial sector, which concern rights fully controlled by the parties in dispute, can be settled by arbitration. The areas that are typically considered to be within the commercial sector are among others, trade and commerce, finance and banking, and direct investment, industry and intellectual property. In practice, the parties tend to argue that the matter being contested is outside of these areas and as such, the option of arbitration should not be available to the parties.

Pursuant to articles 3, 11(1) and 11(2) of the Law 30/1999, a written arbitration agreement obviates the rights of the parties to bring a dispute in the Indonesian district court, which would otherwise retain jurisdiction over civil disputes. Further, based on said law, such court has no authority to hear disputes where parties are bound by an arbitration agreement and is required to reject and not to participate in the resolution of disputes which have already been adjudicated by arbitration, except in limited circumstances as provided in the Law 30/1999.

In general, Indonesian courts should honour such arbitration agreements. However, there have been precedents where parties who have lost (or expect to lose) an arbitration, attempt to by-pass an arbitration agreement or award by bringing a lawsuit before an Indonesian district court on a claim of tort or fraud, and the Indonesian courts have accepted the lawsuit on such basis despite the clear agreement by the relevant parties to arbitrate.

Public order as a ground to reject enforcement

As briefly discussed above, one of the requirements for recognising/registering (and therefore enforcing) a foreign arbitral award in Indonesia is that the award must not contravene with the public order. However, to date, a clear definition of public order (or public policy) is still lacking. Article 66 of Law 30/1999 is silent on the definition, and the court has taken a very loose approach in its interpretation.

For example, in PT Pertamina (Persero) v Karaha Bodas Company LLC and PT PLN (Persero) (the Karaha Bodas case), the Central Jakarta District Court annulled a Swiss arbitral award, citing: public order grounds; denial of procedural and substantive fairness; and violation of natural justice. It is still not clear whether 'public order' in this mater referred to the government's national policy to suspend an electricity project (which was the basis of the dispute) as a result of the 1997 monetary crisis, and whether such policy constituted public order as the ground for annulment.

A similar argument can be found in the matter between Pertamina (Persero) and Pertamina EP v Lirik Petroleum (the Lirik case). Lirik Petroleum submitted the case to arbitration to challenge Pertamina's decision to approve the commercial development of certain oil fields. Among others, Pertamina argued that the decision was made in line with Pertamina's sovereign authority in the oil and gas sector representing the state (Republic of Indonesia). Therefore, the arbitral award (that was against Pertamina) was declared by the Central Jakarta District Court as violating Indonesia's sovereignty principle.

An arbitration award that prohibits the right to submit a lawsuit in Indonesia can also be considered against the public order. In this respect, in the 2013 Astro case, Astro Nusantara International et al failed to enforce the awards against PT Ayunda Primamitra et al, having had an appeal to the Indonesian Supreme Court dismissed on grounds that the arbitral awards between the parties were: contrary to public order; interfered with Indonesian judicial process; and violated the sovereignty of Indonesia. In this case, the award was considered against the public order because it prohibited PT Ayunda Primamitra from submitting a lawsuit in Indonesia as the dispute had been settled in the arbitration proceeding.

This matter raised intense debate in Indonesian legal circles, because, according to Indonesian procedural laws (article 134 HIR and Law 30/1999), when both parties have agreed to settle the dispute by reference to arbitration, it would have been coherent for the award to prohibit subsequent submission of the disputes to the Indonesian courts. The District Court, however, was of the view that such prohibition violated an individual's right to seek redress in Indonesia. The District Court found that such a prohibition should have been decided by the local court, and not the foreign arbitral tribunal. As such, the arbitral award violated the principle of state sovereignty.

In the above cases, it can be seen that 'public order' can be substantive or procedural, but all cases underline a nationalistic approach to the enforcement of foreign arbitral awards – heavily citing the principle of state sovereignty.

The annulment of (foreign) arbitral awards

Law 30/1999 does not create any distinction between the annulment of domestic and foreign arbitral awards. Article 70 of the Law governs the annulment of both.

Pursuant to article 70 of Law No. 30/1999, an application to annul an arbitration award may be made if any of the following conditions are alleged to exist:

  • letters or documents submitted in the hearings are acknowledged to be false or forged or are declared to be forgeries after the award has been rendered;
  • after the award has been rendered, documents are found which are decisive in nature and which were deliberately concealed by the opposing party; or
  • the award was rendered as a result of fraud committed by one of the parties to the dispute.

The elucidation to Article 70 states:

"The basis for the annulment petition as mentioned in this article shall be evidenced by a court decision. If a court decides that the basis for the petition is with or without merit, then this court decision may be used as grounds for a judge to grant or reject the petition."

Further, pursuant to article 72 (2) of the Law 30/1999, if the application (for annulment) is granted, the Chief Judge of the relevant Indonesian district court shall determine further the consequences of the annulment of the whole, or a part, of the arbitration award.

The failure to make such distinction between foreign and domestic arbitral awards creates a problem because of its inconsistency with the 1958 New York Convention. According to article V(1)(e) of the Convention, the annulment (or setting aside or suspension) of an arbitral award shall be the jurisdiction of the competent authority of the country in which, or under the law of which, that award was made. Since a foreign arbitral award is not rendered in Indonesia, various experts have contested the authority of an Indonesian domestic court to annul a foreign award.

In Karaha Bodas, one of the most landmark cases concerning foreign arbitration in Indonesia, the District Court of Central Jakarta decided to annul the ad hoc arbitration proceeding held in Geneva, Switzerland, by claiming that such award was against Indonesia's public order. However, the Supreme Court later overturned the District Court decision, by stating that only the country of origin (Switzerland) has the authority to annul the foreign arbitral award.

However, this position is not always adopted by the Supreme Court. For example, Supreme Court Decision 03/Arb.Btl/2005, in a matter between PT Comarindo Expres Tama Tour & Travel v Yemen Airways (rendered May 2006) has often been cited by various other decisions to allow open interpretation of Article 70, and to give authority to the District Court to find other grounds for annulment. With respect to the annulment of foreign arbitral award, this case was cited in the legal consideration to annul the arbitral award in the Merck case.

Expected changes to the legal landscape

Law 30/1999 and the 1958 New York Convention clearly state that foreign arbitral award can be executed and enforced in Indonesia. However, practical challenges remain present, both at procedural and substantial level. Amidst the increase of international business transactions that depend on international arbitration as the forum to resolve disputes, revision to the law is inevitable to promote legal certainty.

At the procedural level, there is a need to clarify the procedure to obtain a writ of execution pending any challenge to not enforce or annul the foreign award. To date, the legal system in Indonesia does not provide a mechanism to enforce interim relief or an injunction, because under Indonesian law the nature of an injunction is that it is not a final decision, and therefore is not enforceable. In relation to this issue, there have been various discussions to seek to introduce the issue of finality of an injunction/interlocutory judgment in the award to ensure that the award can be executed immediately

At the substantive level, there is also a need for consistent and assertive decisions from the District Court as well as the Supreme Court to ensure coherent application of Law 30/1999 as well as the New York Convention, for example, in the definition of public order which has been invoked regularly as the ground for non-enforcement as well as annulment.

Any party wishing to employ international arbitration as a means of resolving disputes against Indonesian parties should be aware of all of the above issues. This is especially so if the Indonesian parties' assets are based in Indonesia – in such an instance, a more effective legal strategy needs to be formulated from an early stage to hedge against such potential uncertainties.

Parties should hedge against uncertainties

However, despite the challenges it faces, international arbitration is still more effective as a means of dispute resolution for the international parties as compared to foreign court proceedings.

Under Indonesian law, foreign court judgments cannot be directly enforced in Indonesia as cases decided through foreign court proceedings will be re-tried in Indonesia substantively. While such foreign court judgments can be admissible as (non-conclusive) evidence on the underlying claim in Indonesian court proceedings, a de novo examination of the issues would be required before the Indonesian court before a party can seek to enforce any claim on the subject matter of the foreign judgment in Indonesia. This would render any foreign court judgment largely ineffective in light of the de novo examination of the issues before the Indonesian court.

In order to hedge against uncertainties in the enforcement of foreign arbitral awards, it is thus critical for parties to have a clear understanding on the current legal landscape in respect of enforcement of foreign arbitral awards in Indonesia and devise strategies to remedy the risks arising from such legal landscape, when enforcing such foreign arbitral awards.

Parties should embark on such an analysis even prior to the submission of a dispute to arbitration, as this would affect the legal strategies employed in the arbitration. For instance, as mentioned above, an interim injunction obtained in an arbitration may be held unenforceable in Indonesia; and as such, parties may save time and costs seeking alternative methods to preserving the assets such as identifying assets which parties may have outside of Indonesia and viability of taking action against those assets instead.

About the author
 

Yozua Makes
Managing partner, Makes & Partners

Jakarta, Indonesia
T: +62 21 574 7181
E: ymakes@makeslaw.com
W: www.makeslaw.com

Dr Yozua Makes is senior and managing partner at Makes & Partners, a Jakarta-based law firm focusing in the areas of capital markets, transnational mergers and acquisitions, corporate finance, banking, foreign investments, commercial litigation and arbitration. He has over 30 years of experience in these areas and has handled a broad range of complex cross-border commercial transactions. He is an alumnus of the faculty of law of the University of Indonesia, the University of California at Berkeley (Boalt Hall School of Law), the Asian Institute of Management and Harvard Business School. Makes was conferred a PhD in law by the faculty of law of the University of Indonesia in 2016.

Makes is actively involved in various professional and social organisations. He was the first appointed member of the National Commission of Good Corporate Governance and is a member of the board of experts of the Indonesian Publicly Listed Company Association.


About the author
 

Prawidha Murti
Partner, Makes & Partners

Jakarta, Indonesia
T: +62 21 574 7181
E: makes@makeslaw.com
W: www.makeslaw.com

Prawidha Murti is a partner at Makes & Partners' litigation and dispute resolution practice. She has handled high-profile commercial disputes in Indonesian civil and bankruptcy courts, and the Indonesian Arbitration Centre foreign parties. Her strong focus on cross-border disputes gives her experience managing parallel proceedings across multi-jurisdictions. Murti has also been involved in significant cases before the Indonesian courts for the enforcement of international arbitration awards.

Prior to joining Makes, Murti was one of the leaders at the dispute resolution division in one of the leading litigation firms in Jakarta. She was also the founding partner of a niche dispute resolution practice focused on cross-border and competition disputes prior to joining Makes & Partners.

With over 15 years of experience, her experience expands beyond commercial litigation to include cross-border family law, asset settlements and criminal proceedings, as well as niche practice in anti-monopoly proceedings, including hearings before the Indonesian Competition Supervisory Authority.


 


 

 

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