By Deborah Lockhart and Katlyn Kraus
Originally published in: LexisNexis | Australian Alternative Dispute Resolution Law Bulletin
Indonesia is the third largest democracy in the world and as the largest of the Association of Southeast Asian Nations (ASEAN), it is an increasingly significant economic and regional partner for Australia. Particularly important for both nations is the two-way trade of goods and services, which continues to rise each year. In 2014, that trade exceeded $15.6 billion. Austrade estimates that there are over 400 Australian companies operating in Indonesia and many more Australian companies have the potential to do so.
As with all commercial relationships, inevitably disputes arise and parties need to manage and resolve them in an appropriate and productive way. This is particularly important where there are long-term business relationships people wish to maintain. Issues that can arise in the context of cross-border commercial relationships include issues with enforcing foreign judgments, court interference in arbitral proceedings, cultural barriers, language barriers and various delay issues with enforcement proceedings.
At a recent Australian and Indonesian Business Leaders Forum held at the Australian Disputes Centre in Sydney, four leading lawyers and alternative dispute resolution (ADR) practitioners discussed the best approach to effective dispute resolution for Australian and Indonesian companies who would like to do business together. This article presents a collation of their insights drawn from significant professional experience and research in cross-border matters, with a particular focus on understanding the Indonesian ADR landscape.
Mediating in Indonesia
Indonesia has all of the dispute resolution options Australia has, but it is fair to say that some function better than others. Indonesian culture is based on consensus and discussion; with the society working very much on a relationship-based model and not a rights-based one. Mediations take place in Indonesia from village level up to complex commercial matters, as has been the position historically. However, mediation is still not well understood in the more formal sense that is familiar to those in Australia.
In rural areas of Indonesia you can expect to experience significant variations in the mediation model. For instance, it is not unusual for the head of the local police, the local district attorney or a lawyer from the Attorney General’s office, who act for a state owned enterprise, to arrive and say “let’s have a mediation”. In these circumstances, parties need to clarify the precise capacity in which the police or the district attorney may be acting (and whose interests they represent). At the end of the day, parties will need good legal advice to guide them through these regional differences.
Indonesian courts are becoming increasingly involved in mediation and it is a requirement of Indonesian law that you mediate before you go to court. Nevertheless, its use by the courts is still relatively limited.
Similarly, mediation in the international context remains underutilised in Indonesia, as one may say it still does in Australia.
International commercial arbitration
Australian firms often link into Indonesia through oil, mining and gas operations. The conventional wisdom is that in order to have the greatest protection and insurance that your contractual rights will be enforceable, it is prudent to provide for international arbitration in your contracts. The rationale is that an international arbitration clause will confer the benefit of enforceability under the New York Convention, provided that the arbitration is seated in a New York Convention country. Thus, the conventional wisdom continues to hold that contracts provide for a seat of arbitration in an arbitral friendly jurisdiction such as Australia, Singapore or Hong Kong.
Institutional arbitration is commonly used in Indonesia and brings with it significant advantages in ensuring effective housekeeping in the management of proceedings.
Issues around translation and the use of experts are as alive in Indonesia as they are in other cross-border disputes. For example, translation problems mean that although on paper an expert comes across well, they may not translate so well in front of an international tribunal. Thus, parties and their legal representatives need to consider if they are going to put forward their 108 Australian alternative dispute resolution bulletin December 2015 expert. One can always do simultaneous translation, but it is an expensive process and experience suggests that “something is always lost in translation”.
Tailoring the arbitral process
Foreign parties come together in arbitral proceedings to create a process that works for them. Do Indonesian parties present procedural elements that would surprise an Australian party?
Arbitrations in Indonesia generally resemble how a court would approach the dispute, but with multiple short hearings with the arbitrator. Typically, there is a far greater focus on the documents and only limited time is allowed for examination of witnesses (eg four experts and four factual witnesses may all give evidence in one day because they were each allocated 15 minutes).
Arbitrators will generally explore the prospects of parties settling their dispute, but an Indonesian arbitrator will see it as a big success if the parties settle early on. The objective is not as much about who is right or wrong but about achieving a resolution. This can create problems in complex disputes where the Australian expectation is that you would go through all the documents forensically.
Cultural differences also come into play in arbitral proceedings. There is a greater readiness in Indonesia to delegate decision making to someone else. One would be reluctant to use in Indonesia the aggressive approach that someone in Australia may be enthusiastic about adopting. Face saving is important in Indonesian culture and there is no enthusiasm for wanting to make people look bad.
When Indonesian law is the governing law of the contract, most often the Indonesian party will insist that the arbitration is conducted in Indonesia. A useful compromise is to have the arbitration occur in Indonesia but adopt United Nations Commission on International Trade Law (UNCITRAL) rules.
Enforceability of mediation settlements and arbitral awards in Indonesia
There is a view that enforceability of mediated settlements may be simply a lawyer’s concern. In mediation, generally people want their problems to go away and to move on. Experience indicates that parties either will not agree or the agreement will stand. This sentiment is echoed both in Indonesian and Australian mediated matters.
Although Indonesia has a reputation for not enforcing arbitral awards, perhaps due to a few high profile cases, the general experience is that enforcement of awards is not a big concern. One reason for this is that the only ground for non-enforcement is if the award is against Indonesian public policy.
Nevertheless, parties may try to delay enforcement. For example, in one recent case, enforcement has taken more than 3 years and in the meantime two sets of parallel proceedings have been commenced. The length of time that it can take for awards to be enforced is strongly dependent on the award’s “appealability” all the way up to the Supreme Court of Indonesia. Thus, parties will need significant resources to bring enforcement proceedings, as it can be a long fight. That said, the courts do ultimately accept most awards.
Contracts and drafting an effective dispute resolution clause
Increasingly, Indonesia’s language law is relevant when advising Indonesian parties or Australian parties in Indonesia. It has been interpreted to mean that contracts with Indonesian parties must be translated into Bahasa. If the contract is not in Bahasa there is a risk that it will be invalid.
Issues with translations do arise with differences in the language between the English and Indonesian counterpart. For example, in one current case, the central issue is one phrase in the contract; the Bahasa version says “without prejudice” and the English version says “notwithstanding”. The corporate lawyer’s solution would be to say that the English version is the governing version.
When looking at the elements of an effective dispute resolution clause it is good practice anywhere, but critical in Indonesia, to clearly define what disputes will go to arbitration. Definitions need to encompass any dispute relating to the contract, including non-contractual disputes. In Indonesia it is also prudent to go a step further and identify particular provisions in the Indonesian Civil Code that are typically used by Indonesia parties trying to avoid arbitration by bringing domestic litigation. The most common one is called an “unlawful act claim”, which is essentially a tort claim. Practice in Indonesia indicates that a large majority of arbitrations will involve parallel proceedings at one point or another.
Australian commercial law is very rights driven and Indonesians can be offended by the way that Australians write commercial contracts. In contrast, Indonesian language is often very flexible. That approach, in turn, fails to provide comfort to Australian lawyers trying to ascertain and advise on possible outcomes from a set of words.
There are no guarantees, but careful drafting of the dispute resolution clause will (or should) help parties to avoid possible litigation.
Judicial decision making
One can say that ADR options may offer greater certainty to Indonesian and Australian parties than court proceedings in Indonesia. Having no system of judicial precedent contributes to this uncertainty. If a question is put to another Indonesian court, that court may look at earlier decisions but not follow them.
Practitioners will note significant reliance on academic writing in Indonesia and, without a long history of judicial reporting, Indonesian academics regularly refer to Dutch perspectives on the Civil Code.
Whether in court or in arbitral proceedings, Indonesian judicial opinions from the 1970s and 1980s are still most quoted because earlier judicial decisions were not published. Yet today, there seems to be an overload of recent judicial decisions on the Indonesian Supreme Court website, with half a million decisions to download. The difficulty is not finding a decision that supports your case, but rather that there is no clear answer as to which cases are superior.
Another challenge for those investing in the resource sector is that judicial proceedings may be based in rural Indonesia, which gives rise to related issues around regional autonomy. For example, it is not always clear what law will govern a particular investment or whether the responsible judiciary will have the requisite experience for complex commercial matters.
The challenge of corruption
Corruption is a significant problem in Indonesia and, despite Indonesia’s strong growth, it remains an economic impediment. Despite its challenges, Indonesia’s Corruption Eradication Commission, established a decade ago, has nevertheless been doing good work. However, it too has come under a cloud (eg the successful prosecution of its Chief Justice caught receiving a bribe).
Arbitrations regularly involve corruption issues in one way or another; either there have been bribes paid during the contract or in the context of the dispute.
Regrettably, judicial corruption is an ongoing issue and challenge. Indonesia has responded with a system of anti-corruption courts but, again, judges have been prosecuted for corruption. The depth of the problem prompted the former Indonesian President to set up a “judicial mafia” task force to seek to manage judicial corruption, but with limited success.
Overall, it remains hard to stamp out corrupt behavior when there is significant self-interest involved.
The Indonesia-Australia trade relationship is an area of increasing commercial interest to Australian businesses and a significant opportunity for ADR specialists.
Indonesia has enjoyed an impressive political and economic track record over the past 10 years and its economy is expecting further growth of some 5% to 6% in 2015.
Where there is international trade, there are cross-border disputes. Tapping into the considerable international expertise of those working in the region — Campbell Bridge SC, Associate Professor Simon Butt, Antony Crockett and Andrea Martignoni — the Australian Disputes Centre’s panel discussion highlights for businesses how they can better manage and protect against the risks of disputes and their resolution, while also understanding the ADR options available to them in protecting commercial interests and maintaining valuable business relationships.
Chief Executive Offıcer, Australian Disputes Centre
Attorney, New York State Bar and Case Manager, Australian Disputes Centre