Dispute resolution challenges in Indonesia

Investing in Indonesia has significant challenges. It is an unfamiliar place for many international companies and its legal traditions are likewise unfamiliar to those already operating elsewhere in the Asia-Pacific region.

Indonesia does not perform well on the Transparency International Corruptions Perceptions Index, at 88th out of a total of 167 (with a score of 36 out of 100). In recent years, however, Indonesia’s Corruptions Perceptions Index score has been improving.

A large risk perceived by many potential investors is the layers of bureaucracy that their investments may be subject to, with inconsistent regional and national regulations, broad discretionary powers being held by government departments, and a general lack of certainty in terms of relevant laws and regulations that may apply.

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The Indonesian government announced in 2014 its intention to terminate 60 bilateral treaties that contained investor state dispute settlement (ISDS) provisions, having taken the view that claims made under ISDS provisions are an affront to its sovereignty.

Such provisions allow foreign investors recourse to arbitration at the World Bank-administered International Centre for Settlement of Investor Disputes, if they believe actions taken by a government are in breach of commitments made under an investment treaty (commitments such as to treat foreign investors similarly to domestic investors, and only permitting expropriation for fair and equitable compensation).

The scaling back of investment treaty protections means foreign investors are increasingly required to consider the risks associated with dispute resolution in Indonesia.

Indonesia’s legal system is based upon the civil law tradition of the country’s former Dutch occupiers. Judges are not bound by precedent, trusts are generally not recognised, and contracts are subject to the requirement of good faith – whereas the common law position may differ. For those reasons, the litigation process in Indonesia can be unpredictable and the general nature of the Indonesian litigation process can involve numerous formal hearings and substantial delays. Judges are also frequently subject to allegations of corruption.

In 2015, the World Bank ranked Indonesia 170th (out of a total of 189) in respect of the ease of enforcing commercial contracts. Poor performance was attributed to the high costs of litigation, absence of fast-track procedures for small claims and a low score on the ‘quality of judicial processes’ index.

Accordingly, most international investors prefer to agree on foreign law for their commercial contracts and to resolve their disputes in Indonesia by arbitration.

However, there are some mandatory law requirements that must be complied with, for example:

• Some contracts must be governed by Indonesian law, such as domestic building contracts
• The so-called ‘Language Law’ 2 (Article 31 of Law 24/2009) stipulates that Bahasa must be used in any memorandums of understanding or contracts involving Indonesian government institutions or agencies, Indonesian private institutions or Indonesian citizens.

In that regard, Indonesia’s arbitral landscape has developed somewhat independently from international norms. Indonesia does not have arbitral law based on the familiar United Nations Commission on International Trade Law Model Law on International Commercial Arbitration. Instead, domestic commercial arbitration is regulated by a 1999 piece of legislation – Arbitration in Indonesia Law. Indonesia has three domestic arbitral institutes, the largest of which is the Indonesian National Board of Arbitration, and domestic arbitral awards are suggested to be more readily enforceable in domestic courts.

Although Indonesia is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, domestic courts have been inconsistent with respect to the enforcement of foreign arbitral awards. For that reason, many parties attempt to agree for arbitration under a foreign law to be seated in Singapore, and then first attempt to enforce that award in a foreign jurisdiction (if possible). Indonesia is not currently a party to any convention for the recognition of foreign judgments.

The opportunities presented by Indonesia are increasingly becoming too big to ignore. First movers should rightfully enter the jurisdiction with caution; as always with developing markets, it is vital to understand the domestic framework and how to resolve disputes quickly and efficiently when they arise.