Noteworthy trends to hinder Indonesian arbitration

by: Panji Prasetyo & Dandi Andila Hamid.

To promote good arbitration practices, Indonesia enacted Law No 30/1999 on Arbitration and Alternative Dispute Resolution (the ‘Arbitration Law’) and ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’). However, good arbitration practices have yet to be achieved in Indonesia due to, mainly, the misapplication of provisions within the Indonesian civil law regime, comprised of, inter alia, the Indonesian Civil Code (the ‘Civil Code’), Het Herziene Indonesich Reglement (the ‘Civil Procedural Law’) and Law No 37/2004 on Bankruptcy and Suspension of Payment (the ‘Bankruptcy Law’). This article discusses noteworthy (and often unhelpful) tactics used in Indonesia under these laws to frustrate the arbitral process.

Indonesian Civil Code on the validity of an agreement

Under Article 1320 of the Civil Code, an agreement shall be valid when it meets certain subjective and objective criteria:

Subjective

  • Concluded based on the free will of the parties;
  • Concluded by legally competent parties.

Objective

  • Agreed upon a definite object;
  • Agreed upon a lawful purpose.

When the subjective criteria are not met, the agreement becomes voidable. When the objective criteria agreement becomes null and void. There is no obligation to perform the said agreement and there is no legal cause to claim any rights before the court. Judges are required ex officio to declare a contract null and void, even if the parties do not invoke the ground for nullity.

Article 1320 provides a basis for seeking to annul contracts in court. Parties have attempted, through this article, to annul contracts containing arbitration agreements – despite the fact that Article 10 of the Arbitration Law clearly states that whenever an agreement embedded with an arbitration agreement becomes null and void or voidable, that nullity does not affect the arbitration agreement.

In cases where there is an enforceable pre-existing contract that contains an arbitration clause or agreement, the Civil Code requires the court seized of the dispute arising under that contract to declare that it has no jurisdiction to consider the dispute. This is in accordance with Article 11 of the Arbitration Law.

Despite the fact that the Indonesian Arbitration Law clearly provides that cases in which the subject matter is covered by an arbitration agreement shall not be decided in the civil courts, parties do regularly attempt to litigate such cases.

Indonesian Civil Code on tort lawsuits

Under the Civil Code, a party may lodge a contentious civil lawsuit on two bases, that is, breach of contract and an unlawful/tortious act.

A breach of contract claim requires a pre-existing contractual relationship between the parties. A tort claim, on the other hand, requires a broader legal relationship. Almost any act of the defendant that causes the plaintiff to suffer direct consequential losses may serve as the basis of a tort lawsuit. According to Article 1365 of the Civil Code, an unlawful or tortious act is not only an act that violates written rules, but also an act that is contrary to: (1) the subjective rights of another party; (2) decency; and (3) the principle of appropriateness, preciseness and carefulness. Accordingly, despite the presence of the pre-existing contractual relationship between parties, the court can accept cases that satisfy the requirements of Article 1365 of the Civil Code.

The broad terms of Article 1365 of the Civil Code may also be utilised in this regard by lodging a lawsuit against an arbitrator after the award is issued. For example, in a civil case between Domestic Insurance Company (respondent in Arbitration) v its Sole Arbitrator (in Arbitration) the respondent filled a lawsuit alleging that the arbitrator acted unlawfully during the proceeding, even though Article 21 of Arbitration Law stipulates that:

‘The arbitrator or arbitration panel may not be held legally responsible for any action taken during the proceedings to carry out the function of arbitrator or arbitration panel, unless it is proved that there was bad faith in their action.’

Bankruptcy Law on supremacy of bankruptcy proceeding

Article 303 of the Bankruptcy Law, when read in conjunction with Articles 22 and 23 of the same law, stipulates that once a party is declared bankrupt, all ongoing legal proceedings related to the bankrupt party’s assets, including arbitration proceedings, shall be suspended and claims must instead follow the bankruptcy procedure set out in the Bankruptcy Law. Therefore, when a debtor has been declared bankrupt, any arbitration proceeding initiated by the debtor may, at the request of the respondent, be suspended so as to give the Trustee in Bankruptcy the opportunity to assume control of the proceedings and determine whether to continue the proceeding. Where the debtor is the respondent in an arbitral proceeding, to the extent the award would be satisfied from the remaining assets of the debtor, the proceedings will be terminated while the claimant may continue to pursue its claim by following the procedures outlined in the Bankruptcy Law. There are frequent attempts to use the Bankruptcy Law to avoid arbitral proceedings.

Enforcement of an arbitral award under civil procedural law

Based on Article 69 (3) of the Arbitration Law, the enforcement of either domestic or international arbitration awards in Indonesia shall follow the procedure set out in the Civil Procedural Law. According to the Civil Procedural Law, a decision (including an arbitral award) – if not voluntary satisfied by the losing party – can be enforced by obtaining a writ of execution issued by the head of the relevant court. Under the Civil Procedural Law, there is no mandatory time frame for the court to issue the writ of execution. Consequently, in practice, the relevant district court may easily delay the issuance of writ of execution of an arbitral award, particularly where there is an ongoing case before the court related to the subject matter covered by the arbitration award or a case related to the arbitrator issuing the award.

Conclusion

There are at least four tactics that a party may employ to hinder arbitration in Indonesia: (1) lodging a civil lawsuit before the Indonesian Civil Court; (2) lodging a tort lawsuit against the arbitrator; (3) submitting a bankruptcy petition; and (4) filling a lawsuit to annul the arbitration agreement. These tactics may substantially interfere with an arbitration at all phases – from the arbitration proceeding until the enforcement of an award.

 

This article appears on “Arbitration News” Publication of the International Bar Association Legal Practice Division –Vol. 21 No. 1 February 2016