The Settlement of Legal Disputes in Indonesia
Generally, parties in civil disputes have the autonomy to choose how they wish to settle the dispute. A dispute settlement clause is one of the key provisions to be added into an agreement, which indicates the parties' intention and consent to resolve a dispute through specific settlement methods or to a designated institution in that matter. Specifically, 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 that exist 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 lawsuit may be filed to the local district court where the party in which the suit is filed against is living. An exemption to this rule applies for disputes arising due to an object, e.g., land or other immovable and tangible items. Where this exemption applies, the lawsuit should be filed in the local district court of the object’s location. Civil court cases are divided into 2 (two) aspects, namely an event of default or tort.
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.
Unlike cases about defaults that strictly refer to a contract, tort cases focus on the harm or losses suffered by a party caused by an unlawful act of others as defined by Article 1365 ICC. The presence of a contract prior to the loss is not mandatory for tort, but the party who has suffered must initiate the claim and prove that the loss suffered is caused by an unlawful act of another party.
A person may be held accountable for unlawful acts if their actions detriment the rights of others, contrary to their own legal obligations, or contrary to public decency and the law. 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 led to the losses suffered. In other words, a causal link must be proved.
The following scheme illustrates the district court procedure in examining both default and tort cases in Indonesia:
Procedures for Filing Lawsuit on Default and Tort Cases
Source: Indonesian Civil Court Procedure.
Arbitration in Indonesia and BANI Arbitration Center
Arbitration in Indonesia falls under Law No. 30/1999, which only caters to commercial disputes. Similar to arbitration in industrial relations dispute as elaborated in Chapter IX, the arbitration for commercial disputes also adopts the same or even higher 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.
In Indonesia, BANI Arbitration Center facilitates national arbitration that can be held in Jakarta or 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 has to adopt Indonesian civil procedural law during cross-examination of the witness and expert testimony phase. The rest of the procedure should not be too farfetched from civil court procedural law, as illustrated in the previous sub-section.
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. The purpose of negotiation is to negotiate the best outcome possible out of a case or dispute. Second, mediation is held with an addition of a third-party person acting as a mediator. The purpose of a mediator is to facilitate the negotiation between the disputing parties without any authority to intervene or provide any decisive inputs of the dispute. 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.
Specific for disputes on consumer rights, Law No. 8/1999 regulates that a consumer who is harmed by a business may file a suit through the institution tasked with resolving disputes between consumers and businesses or through the judiciary. Although a suit may be brought before the court, consumer disputes can also be settled at BPSK aimed to reach an agreement on 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 Indonesian 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.
On 14 December 2020, OJK established LAPS with the enactment of OJK Reg. No. 61/2020 that facilitates alternative dispute settlement for disputes arising 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.
The LAPS supersedes the 2 (two) previously renowned dispute settlement bodies, BMAAI in the insurance sector and BAPMI in the capital market sector.
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 really defined in the convention, so the application can remain flexible. The following scheme summarizes the ICSID arbitration procedure in brief:
ICSID Arbitration Proceedings
Source: ICSID Convention.
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 Arbitral Awards and later gave rise to Law No. 30/1999.