The Settlement of Legal Disputes in Indonesia
Generally, parties in a civil dispute have the autonomy to choose how they wish to settle the dispute. A dispute settlement clause is one of the key provisions in an agreement that indicates the parties' intention and consent to resolve any disputes arising from the agreement execution through specific settlement methods or to a designated institution. Dispute resolution is divided into 2 (two) categories; litigation and non-litigation (alternative dispute resolution, also include non-adjudication procedures). The scheme below illustrates dispute settlement methods available in Indonesia:
Dispute Settlement Methods
Source: Law No. 30/1999.
Litigation is a dispute settlement method that parties can opt for, especially for civil and/or business-related disputes. In the first instance, a civil lawsuit may be filed to the local district court where the party in which the suit is filed against is living according to the actor sequitur forum rei principle. Alternatively, for disputes involving an object, e.g., land or other immovable and tangible items, a lawsuit may also be brought before the court where the said object is located according to the lex rei sitae principle. Civil cases are categorized into 2 (two) aspects: an event of default (wanprestasi) or tort (perbuatan melawan hukum).
Procedures for Filing Lawsuit on Default and Tort Cases
Source: Indonesian Civil Court Procedure.
Government-Private Investment Disputes
When foreign investors decide to enter the Indonesian market through FDI, they will not only be engaging with Indonesian business entities but also the Indonesian government. FDI involves the transfer of tangible or intangible assets from one country to another to generate wealth. The role of Indonesia as the hosting state becomes more significant from the regulatory standpoint.
Although, in certain cases, foreign investments are still bound by the national laws in Indonesia, such as in respect to maximum investment value and divestment obligation, they are also under strict protection of international law. International conventions, customs, and BITs signed by Indonesia with another state prevail in almost every aspect of foreign investment. Admittedly, FDI does not always free investors from disputing with the hosting state because it is reasonable to expect the hosting state to interfere with businesses taking place in its own territory, especially when FDI always entails the utilization of national resources for substantial foreign wealth gain.
Just like private business disputes, FDI disputes also often seem recourse from alternative dispute resolution by arbitration – mainly to ascertain a dispute resolution method which is flexible and confidential. ICSID and by ad hoc arbitral tribunal established under UNCITRAL are by far the most proposed arbitration forums in BITs, including those signed by Indonesia.
One impartial arbitration institution that facilitates the settlement of FDI disputes arising between a host state with investors of another state is ICSID. ICSID is a distinct organization tasked to settle investment disputes arising between a host state and a foreign investor of another state that operates based on an international convention known as the ICSID Convention. Aside from being a contracting state to the ICSID Convention since 1968, Indonesia also engages in BITs that specifically refer to ICSID as their choice of forum.
ICSID arbitration will only hear disputes that arise from investment, though the term ‘investment’ is not expressly defined in the convention, so the application can remain flexible. The following scheme summarizes the ICSID arbitration procedure in brief:
ICSID awards are binding in nature as other arbitration awards, however, they are not automatically enforceable. In Indonesia, Law No. 30/1999 requires international arbitration awards to be registered and requested for enforcement through the local court. Only awards in commercial disputes rendered in a country with a bilateral agreement with Indonesia and do not violate the national law can be recognized nationally. Specifically for international arbitration awards with the Republic of Indonesia as a party, enforcement is feasible only after attaining an exequatur from the Supreme Court of Indonesia.
Ad Hoc Arbitration under UNCITRAL Rules
Similar to properly established arbitral institutions such as ICSID, ad hoc arbitration practically implements the same approach in settling investment disputes. They are both able to hear disputes, cater to the parties’ needs for settlement, and render awards at the end. The proceeding steps are also identical to those implemented in ICSID arbitration or any other arbitration. The main difference between the two mainly lies in how a case is administered. Ad hoc arbitration reflects the total control and will of the parties without the presence of a designated secretariat or organ to handle the case administration. In that sense, ad hoc arbitration with UNCITRAL Rules in force would provide the parties with even greater flexibility, although in exceptional circumstances can result in a more complex case management mechanism.
When ad hoc arbitration is laid down under the UNCITRAL Rules, one of the more appealing advantages is from the recognition standpoint, especially for disputes involving the Republic of Indonesia. Awards rendered by ad hoc tribunals according to the UNCITRAL Rules may be easier to be requested for recognition and exequatur in Indonesia following the ratification of the New York Convention in Indonesia.
Although, in a similar vein, ICSID awards are still enforceable according to the ICSID Convention, the New York Convention has always been the most well-regarded international convention in Indonesia than the other, which is evident from implementation of the New York Convention in the Indonesian Supreme Court Rule Number 1 of 1990 on the Implementation Procedures of Foreign Arb¬itral Awards and later gave rise to Law No. 30/1999.
Sector-Specific Dispute Settlements
Consumer Dispute Settlement Agency / Badan Penyelesaian Sengketa Konsumsen (BPSK)
Law No. 8/1999 ensures the right of consumers harmed by a business to file a suit. Aside from settlement before the court of law, consumer disputes can also be settled before BPSK that aims to settle the amount of compensation and/or regarding certain actions that need to be taken to ensure that there will be no further losses suffered by the consumer.
The purpose of BPSK is to provide consumer protection based on the principles of mutual benefits, justice, balance, security, and safety of consumers, as well as legal certainty. BPSK consists of representatives of government officials, consumers, and business entities or producers appointed or dismissed by the MoT to handle and regulate consumer issues, examine reports and information, see or request for receipts, lab test results, or other evidence, and render a decision. BPSK decision is final and binding for the parties, but an objection to the decision can be filed at the district court.
In the event that consumer filling a lawsuit through BPSK, the decision issued by the assembly of BPSK shall be treated final and binding. BPSK must issue a decision by no later than 21 (twenty-one) business days after the lawsuit is received. Within a maximum period of 7 (seven) business days after receiving the decision of BPSK, business actors shall implement said decision. Any party may file an objection to the District Court by no later than 14 (fourteen) business days after receiving said decision notification. Conversely, business actors that do not file an objection within such period shall bedeemed to have accepted the decision of BPSK.
Alternative Dispute Resolution Institution on Financing Sector / Lembaga Alternatif Penyelesaian Sengketa (LAPS)
On 14 December 2020, OJK established LAPS with the enactment of OJK Reg. No. 61/2020 that facilitates alternative dispute settlement for disputes between financial services in Indonesia and their consumers. According to Article 1 (2) OJK Reg. No. 61/2020, the financial services sector includes several institutions, including the bank, insurance company, asset management company, and broker. LAPS supersedes the 2 (two) previously renowned dispute settlement bodies, BMAAI in the insurance sector and BAPMI in the capital market sector.
Detailed provision regarding the trial procedures is regulated on such BPSK internal regulations. However, in general, OJK Reg 61/2020 regulated that the Financial Services Sector LAPS can only handle disputes with the following criteria:
complaints have been made deliberation to resolve the financial services provider but rejected by the consumer or the consumer has not received a response to the complaint;
applicated dispute is not a dispute is in progress or has been terminated by judiciary, arbitration, or alternative institutions other dispute resolution; and
the dispute is civil in nature.
Further, dispute resolution through the Financial Service Sector LAPS can be done through:
face to face with the mediator or arbiter;
electronic media; and/or
Within the scope of executing the decision, the Financial Services Sector LAPS is required to supervise implementation of agreements or decisions. Financial Services Sector LAPS is obliged to submit written names of financial service providers and/or consumers who do not comply agreement or decision of the Financial Services Sector LAPS to Financial Services Authority no later than 10 (ten) working days since the time limit for implementing the agreement or decision.
Environmental Dispute Settlement
In environmental disputes, the disputing parties have the right to voluntarily choose whether to settle through court or out of court, except in environmental crime cases. An out-of-court settlement is performed to agree on the following aspects:
the form and amount of compensation;
restoration measures of the pollution and/or damage;
certain measures to assure that the pollution and/or damage does not repeat; and/or
preventive measures of negative impact on the environment.
In carrying out this form of settlement, Article 86 (1) Law No. 32/2009 prescribes that the public may establish an independent and impartial institute providing services for the settlement of environmental disputes.
Whereas for in-court settlement, the court has the power to decide whether a person in charge of a business and/or activity has committed an unlawful act in the form of environmental pollution and/or damage that cause harm to other people or the environment, and if proven, is obliged to pay compensation and/or take certain actions, in the form of:
installing or improving waste treatment units so that the waste meets the stipulated quality standard of the environment;
restoring the environmental functions; and/or
eliminating or destroying the causes of environmental pollution and/or damage.
The court may also order payment of dwangsom (mandatory payment to be made every day ordered by the court) that is charged daily for the delay of the court decision execution.
Construction Services Dispute Settlement
According to Article 1 (1) Law No. 2/2017, Construction Service is defined as construction consultancy and/or construction work service, which involves the following parties: (i) Service User, which is the owner or employer who uses Construction Services; (ii) Service Provider, which is the provider of Construction Services; and (iii) Sub-service Provider, which is the provider of Construction Services to the Service Providers.
Article 88 (1) Law No. 2/2017 stipulates that any disputes arising from a construction contract shall be settled using the basic principles of deliberation to reach a consensus. In the event that the deliberations of the parties fail to reach a consensus, the parties may undertake settlement mechanisms as agreed in the construction contract, in the following stages:
Additionally, disputing parties may opt to form a dispute council. By principle, the dispute council has the authority to prevent and resolve disputes that arise, by way of carrying out following tasks:
preventing disputes between the parties;
resolving disputes through the provision of appropriate aspect-specific professional judgment; or
resolving disputes through the formulation of formal conclusions as outlined in the decision of the dispute council.
Procedurally, the process and decision of the dispute council are based on the principle of justice. In the event that there is no objection within a period of 28 (twenty eight) calendar days, the decision of dispute council is final and binding on both parties. Should there be an objection from either or both parties, they may resolve the dispute by referring back to the dispute settlement clause through mediation, conciliation, and arbitration.
In the alternative, Elucidation Article 47 (1) (h) Law No. 2/2017 states that it is also possible for disputing parties to draw up a provision in the construction contract to settle any environmental disputes in court.
Event of Default
A lawsuit can be filed in court when another party in an agreement is allegedly in the event of default, meaning they have failed to carry out duties agreed within a contract accordingly. Such a failure can be in the form of inaction, such as by not doing something as they should as required in the contract, or in the form of action, such as doing something that is prohibited by the contract, delivering goods with less quality per agreed, or delay of delivery.
The party that is harmed or suffered losses due to the event of default of the other party can demand compensation (materially or immaterially) or even request the court to cancel the agreement entirely. in following hereunder:
Fulfillment of agreements;
Fulfillment of agreements with compensation;
Cancellation of agreements;
Cancellation of agreements with compensation.
Based on abovementioned explanation, it can be argued that consequently any forms of losses that arise specifically need to refer to the agreement. Thus, it can also be argued that an event of default may only implemented in an agreement that already includes the event of default clause.
Aside from that, calculation of the determination of compensation is regulated in Article 1239 and Article 1243 ICC, which are detailed as follows:
Costs are any money (including costs) that must be actually incurred by the injured party, in this case as a result of an act of default.
Loss is a condition decline (decrease) in the value of creditors' assets as a result of a default on the part of the debtor.
Interest is profit that should have been obtained but not obtained by the party creditor due to default on the part of the debtor.
As a notes, Article 1266 ICC essentially regulates that in the event that one of the parties to an agreement does not fulfill the agreement, then the agreement is considered cancelled. However, the agreement cannot be considered cancelled until requested by the court to be terminated so that the agreement can be considered cancelled.
Tort cases focus on the harm or losses suffered by a party caused by an unlawful act of others as defined under Article 1365 ICC. Contrary to events of default, the presence of an agreement is not mandatory for tort – instead, the party whom suffers loss must prove that the loss is caused by an unlawful act of another party.
There are 5 (five) cumulative elements that must be met to invoke Article 1365 ICC: A person may be held accountable for unlawful acts if their actions detriment the rights of others, contrary to their own law or legal obligations, or contrary to public decency and precautionary principle in society, detailed as follows:
contrary to the prevailing law, which means the act committed clearly violated the law;
detriment the rights of others, which means the act committed has violated the rights of other people guaranteed by law (including but not limited to personal rights, freedom, material rights, honor, good name or other individual rights;
contrary to their own legal obligations, which means contrary to legal obligations that imposed to the subject both written and unwritten, including public law.
contrary to their public decency, which means violating moral rules or values that are considered sacred to society;
contrary to the precautionary principle in society, which means the act that is contrary to a good value/propriety based on unwritten law (relative) in society to pay attention to the interests of other.
The party who has suffered must be able to prove not only there is an act against the law, but also that an element of wrongdoing committed by the defendant had caused the losses suffered. In other words, a causal link must be proved.
Arbitration and BANI Arbitration Center
Arbitration is an alternative dispute settlement method regulated under Law No. 30/1999 that caters only to commercial disputes. Similar to arbitration in the context of industrial relations in Chapter XI, commercial arbitration also adopts the same level of autonomy that mentions arbitrators shall select the seat of arbitration unless agreed by the disputing parties. Under Article 34 Law No. 30/1999, commercial disputes may be resolved at a national or international arbitral institution depending on the dispute settlement clause or arbitration clause in a contract.
Based on Article 1 Number (8) Law No. 30/1999, Arbitral Institution refers to the institution which is chosen by both disputing parties to render an award concerning certain disputes; such institutions may also provide legally binding arguments concerning a specific legal relationship in case a dispute has not occurred yet. Moderately, arbitral institutions have been comfortable to apply for several reasons-which are also in line with the legislature background of Law no. 30/1999-namely as follows:
the confidentiality of disputes between the parties is guaranteed;
delays caused by procedural and administrative matters can be avoided;
the parties may choose an arbitrator who according to their belief has the knowledge, sufficient experience and background regarding the disputed matter, to be honest and fair;
the parties can determine the choice of law to resolve the problem as well as the process and the venue for the arbitration; and
arbitrator's decision is a decision that is binding on the parties and by means of procedures (procedure) is simple or directly implemented.
In practice, alternative dispute resolution can be carried out in 2 forms of bodies, namely arbitral institutions or ad-hoc arbitration. Based on current prevailing law, Law 30/1999 only regulate the procedure for appointing an ad-hoc arbitrator by submitting it to the District Court in the event that there is a demand for his appointment. Meanwhile, the difference between arbitral institutions and ad-hoc arbitration can be justified in terms of the administration of the bodies. Arbitral institution is an arbitration coordinated by an institution, while an ad-hoc arbitration is formed specifically or incidentally to decide on certain settlements within a certain period of time. Thus it can be understood that an ad-hoc arbitration is formed when the settlement of a dispute as well as if the dispute has ended, the ad-hoc arbitration will also end.
BANI Arbitration Center is an arbitral institution based in Indonesia that facilitates national arbitration in Jakarta or at its few office branches in other cities in Indonesia. BANI Arbitration Center is governed by its own BANI Arbitration Rules that regulate aspects regarding arbitration proceedings, such as arbitration agreement, tribunal members, case examination, and many others. The rules, however, are only applicable in a dispute if disputing parties have agreed on settling the dispute at BANI Arbitration Center and/or selected BANI Rules as the governing arbitration rule.
With the parties' autonomy, there is no universal procedures for hearings in arbitration, including at BANI Arbitration Center. The parties can agree to skip or not have certain procedures chronologically as it would be in court. However, in line with the BANI Rules, Law No. 30/1999 regulates that arbitration must adopt the Indonesian civil procedural law during cross-examination of the witness and expert testimony phase. The remaining procedure thereafter would not significantly differ from civil court procedural law, as illustrated in the previous sub-section.
Even though legally an arbitral award is final and has permanent and binding legal force , there is still a possibility that the losing party does not voluntarily enforce the arbitral award. Therefore, the other party needs to submit a request from the head of the district court to issue an order to execute the award. Before issuing an order to execute the award, the head of the court shall initially examine whether the arbitral award has fulfilled the material and formal value, as well as not in contradictory with decency and public order that is upheld in Indonesia.
Specifically for the execution of international arbitral award, registered arbitrator or his/her proxy submitted the petition for the execution international arbitral award to the registrar of central Jakarta district court. Moreover, such execution petition must submitted along with:
the original document or authentic copy of the international arbitral award, in accordance with provisions relating to the authentication of foreign documents, and the official translation document in Indonesian language;
the original document or authentic copy of the agreement which became the basis of the international arbitral award in accordance with provisions relating to the authentication of foreign documents, and the official translation document in Indonesian language; and
a statement from the diplomatic representatives of the Republic of Indonesia in the country of origin where the international arbitral award was rendered, which states that the claimant’s country is bound with an agreement, either bilaterally or multilaterally, with the Republic of Indonesia concerning the recognition and execution of international arbitral award.
Notably, international arbitral award may only be recognized and executed in the territories of the Republic of Indonesia, if it fulfills the following prerequisites:
international arbitral award was rendered by arbitrator or arbitral tribunal in a country which is bounded with Indonesia through an agreement, either bilaterally or multilaterally, concerning the recognition and execution of international arbitral award;
international arbitral award as referred to in letter a is limited only to award, of which according to the provisions under Indonesian law, is covered in the scope of trade law;
international arbitral award as referred to in letter a which may only be executed in Indonesia is limited to award that is consistent with the public order;
international arbitral award may be executed in Indonesia after securing the exequatur from the Chief of Central Jakarta District Court; and
international arbitral award as referred to in letter a which involves the State of the Republic of Indonesia as one of the disputing parties, may only be executed after securing the exequatur from the Supreme Court of the Republic of Indonesia which will be delegated to the Central Jakarta District Court.
Alternative Dispute Resolution (Non-Adjudication)
Aside from arbitration, Law No. 30/1999 also regulates non-adjudication alternative dispute resolution methods. Some of the known methods in that regard are negotiation, mediation, conciliation, and expert analysis.
First, negotiation is conducted strictly between the two disputing parties or may be represented by an attorney by virtue of a power of attorney. The purpose of negotiation is to reach the best possible outcome for the disputing parties, otherwise known as reaching a ‘win-win solution’.
Second, mediation is held with an addition of a third-party person acting as a mediator to facilitate the negotiation between the disputing parties without any authority to intervene or provide any decisive inputs of the dispute. In line with Article 14 Regulation Supreme Court No. 1/2016, the main idea of mediation is that the disputing parties are to settle the dispute through a neutral party that shall have no power to impose a decision on the parties.
Third, conciliation is, in essence, the same as mediation. The only key difference is the role of the conciliator, whereby the conciliator is expected to give the parties insights and his objective opinion on how the case should be settled. The opinion is not binding, but it is expected to help the parties to make a decision for a settlement.
Lastly, expert's analysis is conducted by seeking an expert in the field relevant to the dispute and request for an objective opinion regarding the dispute. It is comparable with requesting a legal opinion from a lawyer.
When the parties reach a settlement or fail to do so, they are expected to document the result into a settlement agreement. The agreement is binding as a normal contract, but it does not possess execution power, unlike a court's decision.
Therefore, it is assumed that in the event that the losing party does not want to carry out the settlement agreement voluntarily, then the other party can submit a request to the head of the court concerned to issue an execution order (aanmaning) as a form of notice letter with legal force (executorial title) from the court. Furthermore, the form of execution will be adjusted in more detail to the form of the execution, whether in the form of real execution (eksekusi riil) as stated in the settlement agreement; or execution of payment (eksekusi pembayaran sejumlah uang).
Procedures for Filing Lawsuit on Default and Tort Cases
Source: Indonesian Civil Court Procedure.