Australia: Dispute resolution in Indonesia: arbitration vs. litigation

Australian entities doing business in Indonesia often prefer resolving any disputes in other jurisdictions. The best dispute resolution option may actually be within Indonesia, especially if relevant assets are located there.

Of course the best dispute resolution mechanism is avoiding one in the first place, especially in a foreign jurisdiction with different laws and culture. Still, because some disputes cannot be predicted or avoided, contracts should set out an appropriate dispute resolution mechanism.

Contractual disputes are usually resolved through arbitration or litigation, either in Indonesia or a foreign jurisdiction.

INDONESIAN ARBITRATION

Indonesia's Arbitration Law recognises and regulates both domestic and foreign arbitration. Unlike Australia and other jurisdictions, the Arbitration Law is not based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration.

The Indonesian National Board of Arbitration (BANI) is the principal domestic arbitration institution. BANI was established in 1977 and has its own rules and procedures.

If parties submit a dispute to BANI they are obliged to use BANI registered arbitrators, which include some Australian and other foreign arbitrators.

As a domestic arbitral award, a BANI award is more easily enforced than a foreign award. First, it must be registered with a District Court. If one party does not comply with it, any other party may request the Chief of the District Court to issue an order for compliance. Enforcement then follows the ordinary civil procure.

BANI arbitral awards are usually effectively executed against assets within Indonesia and there is an increasing trend for parties to submit their disputes to BANI. Some 250 matters were submitted between 2007 and 2012.

Other Indonesian arbitration institutions include the Capital Market Arbitration Board for capital market disputes and the Commodities Futures Trading Arbitration Board for futures trading disputes.

INDONESIAN LITIGATION

Litigation can be costly and time-consuming everywhere. This is particularly true in Indonesia, where litigation usually involves numerous formal hearings and parties may delay a case by simply failing to attend such hearings.

A claim in the local District Court, followed by an appeal to the High Court and then a final and binding decision by the Supreme Court may take over 5 years.

Indonesia does not apply a doctrine of precedent where previous court decisions are binding on subsequent decisions, although prior High Court and Supreme Court judgments may be persuasive in a new case.

With Indonesian judges not formally bound by previous judgments, outcomes can be unpredictable. The risk of external influences also complicates this uncertainty.

FOREIGN ARBITRATION

Indonesia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, the Arbitration Law facilitates the enforcement of foreign awards in Indonesia, provided they meet certain criteria.

A foreign award must be registered at the Central Jakarta District Court (CJDC). To enforce it, the Chief of the CJDC must recognise it and issue a writ of execution. If a party does not comply with the writ, any other party may seek an order for compliance. Again, with such an order, enforcement follows the ordinary civil procedure.

Enforcing a foreign award does involve extra steps and is often more difficult than enforcing a domestic award.

In addition, a party may challenge a foreign award by arguing that it does not meet the relevant criteria under the Arbitration Law, for example by alleging it is not a commercial law matter or is contrary to public policy or order.

In the absence of a definition or guidelines on the interpretation of "public policy or order", unsuccessful parties to a foreign award have often sought to avoid enforcement by relying on an alleged breach of this criterion.

Encouragingly, there is an increasing trend of recognising and enforcing foreign awards in Indonesia. In 2007, there was only one application to recognise a foreign award, but by 2013 this had increased to 15 applications. Similarly, in 2012 there were nine applications for the annulment of a foreign award, but none succeeded. In 2013, there were no such applications.

FOREIGN LITIGATION

Indonesian law does not recognise or facilitate the enforcement of foreign judgments. Accordingly, even if a party obtains a favourable foreign judgment, that party must commence new proceedings in Indonesia in order to enforce any rights there. The foreign judgment may be introduced as evidence in the new proceedings, but the Indonesian courts are not bound by the decision of the foreign court.

Therefore, foreign litigation is usually only effective against assets outside Indonesia.

CONCLUSION

Australian entities doing business in Indonesia should make an informed decision on their preferred dispute resolution mechanism.

Ultimately, the relationship between the parties is as important – if not more so – than the contract, in seeking to avoid any dispute or achieving a successful outcome if one arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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