THE ENFORCEABILITY OF THE INTERNATIONAL COMMERCIAL ARBITRATION, USING INDONESIA AS A CHOICE OF PLACE OF ARBITRATION

I. Introduction

Indonesia, like the other countries in the Asia Pacific region, has recognized the growing importance of a modern legal framework for international arbitration. Indonesia has actually legislated the laws and regulations regarding arbitration since 1849 where it was under the Dutch colony. It has also has ratified the 1968 New York Convention on the Recognition and Enforcement of Foreign Arbitral Award and the 1968 Washington Convention dealing with the dispute on investment. Like in any other arbitration law of countries throughout the world and of many international conventions, the arbitration proceeding under Indonesian law is always initiated by an agreement made by the parties to settle the dispute by the arbitration proceeding. It means that the arbitration agreement is of the essential legal basis to start the proceeding by the arbitration tribunal. This agreement may be made before or after a dispute has arisen, including an arbitration clause provided in the relevant contract.

The most important element of an arbitration agreement is the rule on of the place of arbitration. Why? because the place of arbitration determine (i) the requirements of the arbitration agreement to be valid and (ii) to determine the award to be enforced . In reality, it is the court to determine those two issues.

Thus an arbitration agreement choosing Indonesia as place of arbitration covering two important issues. It is about Indonesian court in enforcing an arbitration agreement. Firstly, the court will examine whether or not an arbitration agreement is valid. Secondly, if it is valid, the courts will proceed to enforce the arbitral award made by the arbitration court.

In accordance with that approach, this essay is discussing on the Indonesian legal system governing the arbitration proceedings and subsequently the enforcement of arbitral award by the Indonesian courts.

This essay will be limited to an arbitration agreement with the following natures: (i) it is made between parties in different jurisdiction, (ii) it is to settle the dispute arising from the contract made by the parties in the area of commercial transactions, (iii) it uses Indonesia as place of arbitration, (iv) it may be using either foreign or local (Indonesia) arbitration tribunal according to its each of rules and procedures. For easy reference, the agreement qualifying those abovementioned conditions will be further referred in this essay as sufficiently the "International Arbitration Agreement".


II. Commercial Arbitration according to Indonesia Law

As already explained in the Introduction above that the International Arbitration Agreement will bring the consequence of the existence of the court in examining the question of law, the courts are playing the important role to (i) examine whether or not the International Arbitration Agreement is valid and therefore, if it is valid, (ii) to enforce the arbitration award according to applicable Indonesian law. In relation thereto, the Indonesian legal system is needed to be set out below, as a background to understand, most particularly, the court system in Indonesia.

II.A. Indonesian Legal System
Indonesia law can be characterized as part of the civil law system. It has inherited its system of government and much of its laws from Dutch. Until very recently, some provisions of the Dutch law such as Civil Code and Commercial Code are still valid and applicable. The Dutch colonial law and national law co-exist in modern Indonesia. For example, commercial code enacted by the Dutch colony in the year 1847, is still applicable but also supplemented by a large number of new laws enacted since the independence of Indonesia in 17 August of 1945 like the Banking Law 1992 (amended in 1998), Company Law 1995, Capital Market Law 1995.

The modern Indonesian legislation came in number of forms. They are divided by the hierarchy which means that the legislation which in the lower ranks can not contravene with the higher ones stipulating the same subject. The supreme law is the Constitution Year 1945, which applies to all Indonesia citizen throughout all territories in Indonesia. It is the "People Consultative Assembly" who is of the body which has the legislative power in Indonesia. As stated above, any laws and regulations can not be made in contravention with this constitution.

II.B. The Judicial System
Indonesia have several types of courts under the oversight of the Supreme Court, being the highest court in the Indonesian court system. Most disputes appear before the courts of general jurisdiction, with the court of first instances being the District Court. Appeals from the state court are heard before the High Court. Appeals from the High Court, and in some instances from the District Court, may be made to the Supreme Court. The Supreme Court can hear a cassation appeal which is a final appeal from lower courts. It can also conduct a case review if, for example, new evidence is found which justifies a re-hearing.

Indonesian courts do not apply the principle of precedent which is so familiar among common law jurisdictions.

As the enforcement of International Arbitration Agreement under Indonesian law needs courts' involvement, this essay is necessarily to set out the functions and powers of those courts, which are as follows:

(i) The District Court: it serves a Court of First Instance and had jurisdiction to preside over and to decide civil and criminal cases. It has jurisdictions over municipalities or regencies, and sits in their respective capitals.
(ii) The High Court: it serves as a Court of Appeal and has jurisdictions to preside over and decide civil and criminal cases in the second instance. It has jurusdiction over provinces and sits in their respective capitals.
(iii) The Supreme Court: it is the highest judicial institution within the Indonesian and sits in the Indonesian capital, Jakarta. It has jurisdictions to preside over and decide (a) cassation requests, (b) disputes over jurisdiction and (iii) civil reviews againsat a final and binding Court judgement.

II.C. The Legislation of Arbitration
The arbitration law was originally provided by the Dutch code of civil procedure namely "Het Herzienne Indonesisch Reglement" or RV. However, until now, there are some new laws or legislation related to the arbitration rules, to be the supplements of RV or even to replace it when RV is inconsistent with such new legislations. Those are Law Number 1 Year 1950 on the Supreme Court and the Law Number 30 Year 1999 on Arbitration and Alternative Dispute Resolution. Indonesia has also ratified the 1958 New York Convention by a Presidential Decree Number 34 Year 1984. In relation with the 1958 New York convention, the Supreme Court Number 1 in 1990 has issued a regulation confirming that Indonesia was bound by the New York Convention ("Circular Letter of Supreme Court 1990").

Law Number 1 Year 1950 importantly provided the possibility of challenging the arbitral award by the party by lodging an appeal to the Supreme Court of Indonesia.

Circular Letter of Supreme Court Number 1 Year 1990 stipulated that a foreign arbitral award must meet a number of conditions before it can be enforced in Indonesia, among other, the award must have arisen as a result of a commercial dispute in a country which is a signatory to the 1958 New York Convention, or which has a bilateral agreement with Indonesia. The scope and definition of a "commercial" dispute apparently is left to the discretion of the Supreme Court. The party seeking enforcement is required to obtaine a document a writ of execution (exequator) from the Supreme Court. The exequator is only issued if the Supreme Court is satisfied that the enforcement of award is not against either "public policy" or the "basic principles of the entire legal system". Recognition and enforcement of a foreign arbitral award can be refused by the Supreme Court.

The Law Number 30 Year 1999 is the newest law replacing any provision in RV and any other legislation whenever they are inconsistent with this law.

III. International Arbitration Agreement according to Indonesian Law
The enforcement of International Arbitration Agreement in Indonesia needs Court's intervention. Regarding The courts' intervention in enforcing of arbitration agreements and awards, it was said by Chaterine Kessedjan that there are four basic categories of domestic court decisions affecting international commercial arbitration, they are, (i) a decision taken by the court as to the validity of arbitration agreement; (ii) court decisions on provisional measures, or in support arbitration, taken during the arbitral proceedings; and (iii) court decision setting aside the award and (iv) court decision declaring an award enforcement in one country.

Similar with Chaterine's view, the Indonesian court, before enforcing International Arbitration Agreement must ensure the validity of that agreement and enforcing a foreign arbitral award as the outcome of that agreement within Indonesia jurisdiction afterward. Those issues are set out on the following paragraphs.

III.A. Validity of International Arbitration Agreement according to Indonesian Law
Under Indonesian law, the validity of International Arbitration Agreement is provided in the Law Number 30 Year 1999. It was said in the article 3 that in the event the parties, after the dispute has arisen, agrees to choose the dispute settlement by way of arbitration proceeding, the agreement of such must be made in written and signed by the parties.

Both parties, instead of entering into an arbitration agreement, can also provide a clause inserted into the relevant contract which stipulates that any dispute arising from that relevant contract or agreement will be settled by arbitrators. When the dispute arises, a written notice must be made by one party to another informing that the terms and conditions of the arbitration agreement is thereby applying. However, that notice only constitutes of the technical condition to start the proceeding and does not constitute a condition precedent of the enforceability of the arbitration agreement. It is still valid in the absence of such notice.

The arbitration agreement should expressly includes the substance of dispute, name and resident of the parties, name and residents of the arbitrators, place or location where the arbitration award will be made, name of the secretary, period of the proceeding, statement from the arbitrators that they are willing to be arbitrator and a statement from the parties in dispute that bear any costs of the proceeding. The absence of one and all of those conditions will be resulting the arbitration agreement invalid. However, the arbitration agreement should not become invalid if the following conditions occurred: (i) one of the parties is passed away; (ii) one of the parties is bankrupt or to be winding up or under insolvency, (iii) novation of the contract , (iv) the contract is assigned as a matter of testamentary or is assigned to the third party by the approval of that third party, (v) the contract is terminated or cancelled by the parties.

Once the arbitration agreement is validly made by the parties, the parties shall not have rights to bring the dispute to the courts to be settled. The court is obliged for not to make any intervention with the settlement of that dispute unless otherwise provided by the laws.

Conclusively, to be declared valid by the court, the International Arbitration Agreement must follow the mentioned above terms and conditions. If it is valid, the courts will proceed to enforce the arbitral award made by the arbitration tribunal. The enforcement of arbitral award is analyzed in the following part.


III.B. Enforcement of Foreign Arbitral Award by Indonesian Courts
Foreign arbitral award is the most important outcome of International Arbitration Agreement which uses international arbitration tribunal and apply the international rules of arbitration. Based on Law No 30 Year 1999, the recognition and the enforcement of foreign arbitral award must be conducted through the District Court of Central Jakarta..

Foreign arbitral award can only be recognized and enforced in Indonesia if satisfying the following conditions:
(i) The arbitral award is issued by the arbitration court a country which is reciprocally bind by an agreement (or the international conventions) made by the respective country and Indonesia;
(ii) The foreign arbitral award is the outcome of the transaction which has the commercial nature.
(iii) The foreign arbitral award must not against the public policy under the concept of Indonesian laws;
(iv) The foreign arbitral award has obtained the exequatur from the District Court of Central Jakarta;
(v) If one of the party is the Indonesian Government, the execuatur should be obtained from the Supreme Court of Indonesia.

The Law Number 30 Year 1999 stipulates that an arbitration award fulfilling above conditions is final and binding and can not be appealed. However, an arbitration award can be appealed and set aside limited to the grounds of (i) falsified document; (ii) discovery of a significant document after the awards was rendered which may have affected the decision; or (iii) the award was rendered by virtue of deceit by the other party.


IV. Concept of Arbitration Agreement Under ICC and ICSID

It is relevant to set out the concept of arbitration agreement under international convention and rules of arbitration like ICC and ICSID. This is to prove that an arbitration agreement is considered to be the most important basis to start all of arbitration proceedings in accordance with those international arbitration body and convention.

Basically for a dispute to be submitted to International Chamber of Commerce ("ICC") arbitration, the parties must have agreed to either in advance or after the dispute has arisen.

However, under ICC rules, when the Secretariat of the ICC Court of arbitration agrees to notify a request for arbitration, which is not based on an arbitration agreement, still the matter can not proceed without the agreement of other party. The arbitration agreement must be made in writing by the parties. The arbitration agreement also includes the arbitration clause. However Under ICC rules, if the arbitration agreement is poorly drafted, it is still valid as long as the institution the parties intended to designated is clearly expressed.

One matter should be considered at the most by parties in drafting the arbitration agreement is where the arbitration should be held. The parties should ensure that the arbitration agreement provide a binding obligation in the agreed place and that award rendered under the jurisdiction of that place is able to be enforced. When choosing the place of arbitration, the parties must take into account on the issue whether the courts in relevant jurisdiction have the power to review and annul the international awards rendered in that relevant place or country. The parties should ensure that the power of the relevant courts on the review and annulment can be limited or anticipated.

In April, the Council of ICC adopted new arbitration rules that will enter into force on 1 Janury 1988, however the new rules do not alter the concept of arbitration agreement.

Meanwhile, under the arbitration rules regulated by the International Center for Settlement of Investment Disputes ("ICSID") based on the "Convention on the Settlement of Investment Disputes Between States and Nationals of Other States" that an arbitration agreement is a precondition for the arbitration process by ICSID to be conducted.

According to ICSID, the validity of arbitration agreement according to ICSID, however the validity of arbitration agreement is concerning (i) the issues in dispute; (ii) the identity of the parties; and (iii) their consent to arbitration. The Secretary General will refuse to register the application if one or more issues mentioned above is not met.

The ICSID rules stresses out that the disputes under its jurisdiction must be arising from the investment transaction and the parties must be the Contracting State . The contravention of these requirements will make ICSID have no jurisdiction over the disputes.

The other important provision of ICSID is that when the arbitration agreement is signed, the party is not yet a Contracting Sate, the arbitration agreement will remain ineffective. As to the place of arbitration proceedings, ICSID provides that the proceedings should be held at the center of ICSID, or at any other place approved by the Tribunal after the consultation with the Secretary General. This means that once the parties agreed in the arbitration agreement that the selected rules and regulations is ICSID rules, the place of arbitration must be automatically the center of ICSID. The parties therefore can not provide the place of arbitration other that Washington, unless approved by the Commission or Tribunal.


V. International Arbitration Agreement in Reality

The enforcement of International Arbitration Agreement under Indonesia law is not that simple. The judgement of the Indonesian court on (i) the validity of the International Arbitration Agreement and (ii) the enforcement of the foreign arbitral award is vary from one case to another case. There were some cases in relation with the enforcement of the International Arbitration Agreement in Indonesia, where the Indonesian Court decided that the International Arbitration Agreement was not valid as the choice of the arbitration court or the arbitral tribunal was not clear, it therefore had no jurisdiction over the dispute. Thus it was the court which had the jurisdiction,

The case between Pertamina, a state owned enterprise engaging in oil and gas producer in Indonesia and a Cayman Islands registered company namely Karaha Bodas Co where The parties agreed in written to bring any dispute by arbitration proceeding under Indonesian Law and pursuant to Indonesian arbitration procedure. However, the arbitration in fact has been conducted in Zwitzerland. This violated the arbitration agreement and Pertamina has the right to bring the dispute to Indonesian Court. Exercising its legal rights, Pertamina filed a request to the Jakarta court to issue an injunction ordering KBC to stop its effort to seize Indonesian assets by the Houston Court in United States of America.
Not to mention which party had the idea to bring the case to the arbitration tribunal in Switzerland, it had shown that there was a party who was acting not in good faith.

The other case is between PT Perusahaan Dagang Tempo and Swiss pharmaceutical company namely Roche. It was about the different interpretation between parties on the scope of legal dispute stipulated by the arbitration clause in the contract between parties. When Roche brought the case to the arbitration, Tempo argued that the scope was limited to technical business matters, the dispute on other matter than those should be settled by the Indonesian court. However Roche claimed that the dispute occurred was under the arbitration tribunal jurisdiction.
This case had shown the existence of the uncertainty of the scope of substance of disputes covered by the arbitration agreement.

Further, the case between British Trust International ("BTI"), a British company and PT Mayora Indah, an Indonesian company. They made a contract regulated certain financial transactions. The document of contract attached some schedules integrally. The contract stipulated that any dispute arising from the contract well be settled by the arbitration. A dispute on matters related to the contract then arose. When the dispute was on the process by the abitration tribunal, PT Mayora Indah challenged that the arbitration tribunal had no jurisdiction because the dispute arose from the schedules of the contract not from the contract itself. A such, Mayora commenced proceeding in the Indonesian court. BTI then sought injuction from the English Court and argued that the arbitration agreement is wide enough to cover the provisions made in the schedules of contract as well.
This case had shown the importance of certainty on the substance of dispute, whether or not it was arising from the main document or it also included the schedules attached to the main contract.

The cases as set out above would not have happened if the parties provide the arbitration agreement in a very clear and proper way, so that it can avoid the invalidity of arbitration tribunal's jurisdiction over the case. It is relevant to look on some experts suggestion on how the arbitration agreement should be made properly, without prejudice to the Law Number 30 Year 1999, It has to consider the following elements:

(i) Capacity of the parties: the parties are ensured to be capable of contracting;
(ii) Arbitrability: some disputes may not be capable of settlement by arbitration;
(iii) Separability of arbitration clause;
(iv) Choosing the law of the arbitration agreement and place of arbitration;
(v) The clause and the agreement to arbitrate should be expressly and clearly stated (a) the need for a dispute to exist, (b) the fact that existing or future of or in connection with this agreement creating abroad capability for a dispute to be considered and (d) a consequence matter shich are not necessarily contractual may also provided in the arbitration agreement.


VI. Conclusion and Recommendation

The conclusion could be drawn that the International Arbitration Agreement is valid if (i) it is made in written and signed by both parties, (ii) the dispute must be a matter capable to be settled through an arbitration proceeding, (iii) there is the certainty of the arbitration court and the arbitration rules of proceeding and (iv) importantly it should mention the place of arbitration.

The enforcement of the International Arbitration Agreement in Indonesia involves the big role of the court, that is, (i) the court will examine, prior to the enforcement of the arbitration award, the validity of the International Arbitration Agreement and (ii) if the International Arbitration Agreement is valid, the court will execute the award which is final and bind the parties. The court's decision on the enforcement of that foreign arbitral award can not be appealed by the parties except it is proved to be against the public policy as defined by the applicable relevant laws and regulations.

The improper and unclear International Arbitration Agreement resulting the invalidity of arbitration jurisdiction as happened in the cases set out in part VI above. It is important to be noted by a foreign party doing business in Indonesia: (i) to provide the arbitration agreement with more clearly and comprehensive ways not only considering to the provisions stipulated in Law Number 30 Year 1999 but also considering some practical issues suggested by some experts in above Part V; and (ii) further, he or she should also understand on the concept of public policy under applicable laws and regulations in Indonesia and also under practice in Indonesia. This is to ensure that the arbitral award he or she wants to seek is enforceable in Indonesia.
Thus, simply there are two issues mentioned in preceding paragraph which must be strongly considered to smooth the enforcement of arbitration agreement particularly and the business as a whole.

In relation to that, this essay would like to argue that likely it was quite wrong that the enforcement of International Arbitration Agreement, particularly about the enforcement of foreign arbitral award by the Indonesian court was problematical . The laws have clearly expressed, particularly in the Law number 30 Year 1999 that such enforcement is possible and the steps to do it is just simple. It was also quite wrong to say that the courts in Indonesia ignored the arbitration's jurisdiction fro some extents. What is really the issue is that the parties involved in some cases mentioned in Part V above was not having a good faith in respecting the arbitration agreement they made and in respecting the Indonesian law in enforcing such agreements. Note should be drawn that the cases set out above was not caused simply by the uncertainty on the laws and regulations of enforcing the arbitration agreement but simply caused by the absence of a good faith from the parties.

 


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