Indonesia: Enforceability issues

A long-running and tempestuous legal wrangle between two of Southeast Asia's largest corporate groups, Malaysia’s Astro and Indonesia’s Lippo, hit a dead end last month. Astro, which had won arbitration awards against Lippo, had earlier appealed to the Indonesian Supreme Court against the Central Jakarta District Court’s refusal to enforce the awards, but the Supreme Court had thrown the appeal out on a number of grounds, including that it was “contrary to public order” and “violate[d] the principles of the State and legal sovereignty of Indonesia.” Sahat Siahaan and Ulyarta Naibaho of ABNR discuss the enforcement of international arbitral awards in Indonesia.

What is the current situation with regard to enforcement of international arbitral awards in Indonesia?

International arbitration awards require recognition and execution orders from the District Court of Central Jakarta to be enforceable in Indonesia. Under Indonesia’s Arbitration Law, there are certain conditions to be fulfilled in order for an international arbitration award to become enforceable, including one that states that “the award is not contradictory to public policy” and another that “the disputed objects fall under the scope of commercial law.”

We have seen that Indonesian courts tend to view public policy as justification for their decision to reject the application of the winning party to obtain an execution order. Such a result is most likely a consequence of the fact that Indonesia’s Arbitration Law does not set out any definition and/or limitation of public policy which may be used to argue that a foreign arbitral award is not enforceable within Indonesian territory. The judges have no clear grounds when evaluating whether an award is contradictory to public policy or not. Hence, a judge is entirely free to interpret the definition of public policy in relation to the application of recognition and enforcement of international arbitration awards in Indonesia.

As regards to the scope of arbitration in Indonesia being limited only to commercial matters, this also seems to have been seen differently by Indonesian judges. There are judges who are broad-minded and are able to distinguish what falls under the commercial scope. However, there are also many who view that commercial scope under Indonesian Arbitration Law only covers what is mentioned therein, and thus tend to reject the enforcement of awards rendered in regard to other types of commercial activities.

What are the complications related to the enforcement of cross-border awards?

Winning an international arbitration case has a tendency of being viewed just as a mere win on paper if the winning party fails to obtain an execution order from an Indonesian court. The most common reason used to reject the execution order application is that the international arbitration award is contradictory to Indonesian public policy.

The complication of the enforcement of cross-border awards is usually derived from the differing views of Indonesian judges while considering public policy and their rigidity in interpreting statutes, particularly when handling an execution order application. It seems that there is a fear that when an international arbitration award is ordered to be enforced in Indonesia, it will violate the jurisdiction and sovereignty of the country. As the result, there is some reluctance to automatically grant an execution order. However, efforts are being made to improve Indonesia’s perception as an arbitration-friendly country with judges recently being trained on the importance of granting execution orders for the enforcement of an international arbitration award, so that winning a case does not merely remain on paper.

What general advice does your firm provide in this regard?

Each case usually has its own red flags. Indonesian case law has shown that enforcing an international arbitration award can be difficult, but it is important to highlight why the awards were not enforced. In some cases, the legal practitioners lacked the requisite knowledge, and in other cases, the enforcement applications were affected by matters which were not immediately apparent. Having said that, it would also be fair to note that difficulties in enforcement of arbitral awards notwithstanding, there have also been many instances in which arbitral awards have been enforced. Even though Indonesian has not exactly gained a reputation as an arbitration-friendly jurisdiction, it has certainly accepted the need to enforce arbitration awards, even if not wholeheartedly.

Malaysia: Back on track

Despite having one of the oldest arbitration centres in Asia, Malaysia seemed to have fallen behind in Asia’s arbitration race, particularly with the rise of newer hubs like Singapore. But since 2010, a combination of legislative and judicial support, a growing economy, and the rejuvenation of the KLRCA has seen Malaysia regain much of its lustre. Ranajit Dam reports

Malaysia is back on track. Home to one of Asia’s oldest arbitration centres – the Kuala Lumpur Regional Centre for Arbitration (KLRCA), which was established in 1978 – the country had seen its star dip in the past few decades, as regional competitors like Singapore and its Singapore International Arbitration Centre (SIAC) gained in prominence. But since 2010, Malaysia has begun to see something of a turnaround.

From an average of between 10 and 20 new arbitration cases a year until barely three years ago, the KLRCA, Malaysia’s foremost arbitration centre, saw more than 100 cases last year. And when you add the number for other arbitration forums in the country – statistics for which were not immediately available – it is evident that Malaysia is witnessing something of an arbitration boom.

And lawyers are feeling it too. “I think we can see and feel the growth in terms of the increasing number of cases,” says Chang Wei Mun, a dispute resolution partner at Raja, Darryl & Loh (RDL), who specialises in construction and energy disputes. “The current arbitration practitioners are getting increasingly busy, and there seem to be newer ones entering the market all the time.”

In Malaysia, the construction industry is among the heaviest users of arbitration. “In that industry alone, you can see the number of claims consultants that have sprung up over the past few years,” says Chang. “You can see that the pie is steadily growing. There’s also been an increase in arbitration in oil and gas, and that’s because of a rise in the economic activity in that field.” Four yours ago, RDL’s construction arbitration team had only four lawyers; now it has eight as the firm looks to cope with the increasing demand.

Muralee Nair, a partner at Shearn Delamore, says that while he wouldn’t use the term “phenomenal growth,” there has certainly been a steady increase. “I think it’s a healthy development that we don’t have a sudden spike in figures, as support facilities are gradually coming on board and taking shape,” he says.

Reinvigorated KLRCA

When asked about the main factors behind the growth in arbitration in Malaysia, Chang cites three. “One is the steady growth of the economy,” he says. “The second factor would be better government support, both in terms of financial support – as the government is putting more funding into arbitration – and also statutory support, in the form of the very arbitration-friendly Arbitration Act of 2005.”

The third, he says, which is “quite major” is a “reinvigorated” KLRCA. “If you ask any practitioner in Malaysia, much of the country’s recent progress in arbitration is due to the tireless efforts of the director Sundra Rajoo who came on board about three years ago,” Chang says. “He’s been really marketing Malaysia domestically and internationally as an arbitration venue, and KLRCA has come up with a lot of new products as well.”

Nair agrees. “Undoubtedly the leadership of the KLRCA under Sundra Rajoo has been a major factor,” he says. “Rajoo has really promoted KLRCA as a leading arbitration centre. His continued efforts to market KLRCA are really paying off now, as you can see more and more parties using KLRCA and its rules.” He adds that client attitudes have changed as well. “At one point of time, clients used to shy away from the KLRCA. This is something that has changed in the last two or three years,” says Nair.

On its part, the KLRCA has been innovative in terms of developing its rules as well as new products. Last year, the centre released the second edition of its Fast Track Rules, as well as its sharia-compliant i-Arbitration Rules. “Through the KLRCA fast-track rules, you can get your entire arbitration completed within 160 days,” says Nair. “Also the arbitrators’ and tribunals’ fees are all capped and costs are also capped. These have also helped arbitration move forward in Malaysia.”

Key amendments

In March 2006, Malaysia passed its current Arbitration Act. “The 2005 act, while in line with the UNCITRAL Model Law and its rules, still had some minor shortfalls,” says Nair. In 2011, a number of amendments were made to the act that served to iron out some of the kinks.

Nair picks the amendments to sections 10 and 11 of the 2005 act as the most notable. “Section 10 is where you go before a court to stay the proceedings in order to refer the matter to arbitration, while Section 11 relates to whether the court can grant a party any interim measures related to discovery of documents, interim custody of items and so on,” he says. “Previously, because the act only applied when the seat of the arbitration was in Malaysia, if you had an international arbitration and went to the court for relief and interim measures, you wouldn’t get it. However, with the amendments that have come into play from 2011, Section 11 states that it can also apply in the case of international arbitrations, where the seat of the arbitration is not in Malaysia. So if you have two parties fighting a matter in London, and you need some interim preservation of property or something like that, you can seek that relief from Malaysian courts.” Nair adds that as Section 10 has also been amended in this way, “the parties are quite happy.”

Chang says that the amendments have been “very helpful” in that they have “cleared ambiguity and reaffirmed the government policy of being non-interventionist.” For him, two amendments stand out in particular. “One is Section 8, which states that the courts cannot interfere unless it is specifically provided for in the act,” says Chang. “The other part is that if you file legal proceedings in breach of an arbitration agreement, there used to be two grounds to do so. One was when the arbitration agreement is void, and the second ground was whether there was a dispute between the two parties. In 2011, the dispute part was taken out, so there really is only one ground to actually prevent court action from being stayed pending arbitration, and that is that the arbitration agreement is invalid.”

Judicial support

One other important factor has been the strong support shown by Malaysia’s judiciary. “The judiciary has moved to a more pro-arbitration stance,” says Rajoo. “It is also noteworthy to mention that the current Chief Justice of Malaysia, Tun Arifin Zakaria, and his predecessor, Tun Zaki Azmi, have been fully supportive of the KLRCA’s efforts, attending and speaking in events organised by the KLRCA.”

Chang says that another major change has been an increase in the efficiency of the Malaysian courts. “This came about when our old Chief Justice Tun Zaki came on board,” he says. “He revamped the system, created new civil courts, and now if you go to court seeking judicial support for arbitration, the application will be filed by way of originating summons, and if it’s not contested, you get your order within three months. Even if it is contested, you can get a decision typically in less than six months. That has made Malaysia a more attractive destination when it comes to efficiency for matters in support of arbitration.” Says Nair: “Courts move faster in Malaysia now. So you get decisions in six to nine months, maximum a year, and in courts at all levels, you can get matters disposed off within a decent time.”

Nair adds that judges have also been directed to attend arbitration courses delivered by international speakers. “You also see judges these days attending conferences, like the CiArb conference in Penang two months ago, which three or four judges attended in entirety,” he says. “Attitudes have also changed. In the last few years, judges have taken the approach that they should not interfere; since parties have chosen their arbitrator, they must live by his decision, unless there’s been something really wrong. That lack of interference in arbitral decisions is a good sign.”

Rajoo states that another important factor has been the Malaysian Bar becoming “a major stakeholder as they are at the frontline, and we have been able to improve based on feedback provided by them.” But more than that, it appears that all the various players have bought into the shared vision of assisting in the growth of arbitration. “There has also been greater discourse and knowledge sharing among arbitrators, professionals, experts, academics through seminars, conferences, talks and so on, and it really does seem like everyone wants to get involved in developing arbitration in Malaysia,” he adds.

Choosing Malaysia

Malaysia has a number of things going for it as an arbitration hub: It is a signatory to the New York Convention, which enables KLRCA’s arbitral awards to be enforceable in 149 countries, and it has a sound legal framework that supports arbitration. Foreign lawyers are exempt from the Legal Profession Act in that they are allowed to appear in arbitral proceedings, and there are no restrictions to the entry of foreign legal counsel representing arbitration in Malaysia. It also has one other thing going for it: Cost. “As a destination, Malaysia is considerably cheaper than Singapore in terms of hotels, transportation and so on,” says Nair of Shearn Delamore. “A lot of Indian and Indonesian parties that would earlier go to Singapore have been saying that Singapore is becoming quite expensive, so they are looking at alternatives now.”

Chang of RDL agrees. “If we compare ourselves to Singapore or Hong Kong, we can offer everything that they can offer,” he says. “The legislative framework and UNCITRAL Model Law, or UNCITRAL rules, so there’ll be familiarity for international players. We have judicial support and enforceability, we have first-class infrastructure, but I think what we can offer that Singapore may not be able to compete so well with is that we are much more cost effective. So you get the same things, but for a fraction of the cost.”

Chang adds that another reason could be the fact that Malaysia is attractive to parties from all around the world. “If you’re an Asian party, then Malaysia is a part of Asia,” he says. “If you’re from the West, you’d feel comfortable in Malaysia because we’re a modern and progressive nation, and our judicial and legal systems are based on English common law. If you’re from a Muslim country, you’d feel comfortable as well, because we are a moderate Muslim nation and we also have the new product called i-Arbitration. If you’re from Africa, Malaysia is a member of the Asian-African Legal Consultative Organization. I think most parties would be comfortable with Malaysia as a venue for their arbitration.”

Looking ahead

Given the encouraging progress that arbitration in Malaysia has made in the past two or three years, there is no doubt that it will continue to grow in importance. And Rajoo pledges: “There will be a lot more efforts to promote arbitration to truly get Malaysia’s name on the world map.”

As far as the KLRCA in concerned, as part of its expansion plans, it expects to build on its portfolio of rules as well as improve services “as part of the effort to make Malaysia the preferred alternative dispute resolution hub in this region.” Rajoo says that it has set itself the aim of arbitrating 250 cases per year by 2016, and it is currently working with stakeholders and industry players to grow ADR in the maritime, sports and financial industries in Malaysia.

Another shot in the arm for the KLRCA is expected to be its new home in the Sulaiman Building in Kuala Lumpur, with the move expected to happen next year. “The increase in the number of cases administered by the arbitration centre gives rise to the need for a solid structural support, and this includes having proper facilities to handle disputes,” says Rajoo. “A world class facility would not only enable a case to be carried out smoothly, but will also serve as a great marketing tool to attract international parties to bring their case to Malaysia. As such, KLRCA is excited to be moving into the Sulaiman Building by next year as it would go a long way towards helping us realise our potential.”

Disputes amid the dispute: The aftermath of the CIETAC split

The drama that started since the independence of the Shanghai and Shenzhen Sub-commissions from the China International Economic and Trade Arbitration Commission (CIETAC) continues. A local court dismissed the award rendered by the newly independent Shanghai International Arbitration Centre (SHIAC), and this has added some more uncertainties to the situation. How the Supreme People’s Court settles the dispute over the arbitration institutions’ jurisdiction is being watched closely. Liu Zhen reports

On Sep. 22, the Shenzhen Court of International Arbitration (SCIA) officially opened at the city’s Qianhai Economic Zone, 15 months after its launch in June 2012 - the latest episode in the ruthless battle among China’s arbitration bodies.

The two former sub-commissions declared independence from CIETAC, as reported by ALB reported last year. And now, they have metamorphosised into the SCIA and the Shanghai International Arbitration Centre (SHIAC) respectively, and started administering dispute cases under own rules.

In August, the Beijing-headquartered China International Economic and Trade Arbitration Commission (CIETAC) announced the opening of its new Shenzhen and Shanghai branches, accepting cases designated to be submitted to “CIETAC South China (Shenzhen) Sub-commission” and “CIETAC Shanghai Sub-commission.”

Contrary to the CIETAC announcement, the SCIA and the SHIAC also claim their ownership to the disputes originally agreed to be administered by CIETAC South China (Shenzhen) or Shanghai. SCIA’s claim is backed by a November 2012 decision by Shenzhen Intermediate People’s Court, which held that the SCIA has the jurisdiction over a case where the arbitration clause specified CIETAC Shenzhen.

SHIAC’s claim, on the other hand, has been facing challenges after a judgment made by the Suzhou Intermediate People’s Court (Suzhou IPC) which refused to enforce a SHIAC award.

The Suzhou case

The dispute between business partners LDK Solar Co and Canadian Solar Inc (CSI) broke out in 2010. As stipulated by the arbitration agreement signed by both in 2008, the two companies submitted the request for arbitration to the CIETAC Shanghai Sub-commission. And the procedure lasted for more than two years, with the award, in favour of LDK, being finally rendered in December 2012.

And in the middle of this period, the Shanghai Sub-commission (later SHIAC) declared independence from CIETAC. Consequently, in May 2012, the Suzhou IPC rejected LDK’s request to enforce the award.

In its judgment, the Suzhou Court found that in their agreement, the parties had chosen CIETAC as the arbitration commission to resolve their disputes. When the parties filed for arbitration in 2010, CIETAC Shanghai Sub-commission was an integral part of CIETAC. So it was capable of acquiring the jurisdiction. However, since CIETAC Shanghai obtained a registration certificate of an independent arbitration commission on Dec. 8, 2011, it is now no longer part of CIETAC, the commission originally selected by the parties.

The Court held that the CIETAC Shanghai Sub-commission ought to inform the parties of the change of its nature as an arbitration body, and ask the parties to confirm whether they would like to continue with SHIAC or select another arbitration commission. Since CIETAC Shanghai failed to perform these obligations, it went against the original intention of the parties.

The Suzhou IPC’s decision “makes sense,” as the judgment’s emphasis on “the jurisdiction of the arbitration commission comes from the consensus of the parties” is a key point in modern arbitration, according to Christine Kang, partner at Jun He Law Offices.

“In this case, the Suzhou Intermediate People’s Court did not comment or decide on the debate over the effectiveness of the arbitration institutions’ independence between CIETAC and SHIAC/SCIA. Instead, the court examined the validity of the arbitration award based on party autonomy,” says Kang.

 Localism

The fact that Shenzhen and Suzhou IPC gave completely opposite judgments based on similar circumstances provoked heated discussion. Technically, the rulings of IPCs do not represent the opinion of any higher court, and are not binding on other same-level courts in China.

Thomas So, partner at Mayer Brown JSM, says it remains to be seen whether the courts outside Shanghai and Shenzhen will adopt Suzhou’s approach in determining the enforceability of arbitral awards rendered by SHIAC and SCIA after their declarations of independence.

As shown by the public documents on the independence of the former CIETAC sub-commissions issued by Shenzhen and Shanghai municipal government and judicial administrations, the courts in Guangdong and Shanghai say that SICA and SHIAC, as independent arbitration institutions, respectively hold the jurisdiction over the cases that agreed to be arbitrated by CIETAC South China and CIETAC Shanghai sub-commissions before becoming independent, suggests Kang.

“However, the local courts outside Shanghai and Guangdong may have different standings and attitudes towards such cases and the jurisdictions of SHIAC and SIAC, and may eventually make different decisions,” she says.

A similar opinion was shared by a Herbert Smith Freehills dispute resolution blog which said, “It may be because the local courts in Shanghai and Shenzhen support SHIAC and SCIA while the courts in other provinces have a different attitude. Whatever the reason, the conflicting approaches create yet further uncertainty for parties wishing to submit their disputes to arbitration in China.”

Resolution

Since the start of the argument between CIETAC and SHIAC/SCIA, lawyers have been cautioning their clients about China arbitrations. And the ruling of the Suzhou IPC has sounded another alarm.

For future arbitration agreements, a clause that clearly specifies the chosen seat of arbitration is necessary. And for the parties who have designated CIETAC Shanghai or Shenzhen, amending the existing agreement before any actual dispute arises is urgent. But for the disputing parties who have entered into arbitration stage with CIETAC Shanghai or CIETAC Shenzhen, it would be much more complicated.

The LDK-CSI dispute for instance. It is unlikely to have come anywhere near to an end, according to Yang Haoming, Suzhou-based arbitration partner of King & Wood Mallesons.

As the Suzhou IPC ruled that the SHIAC is not capable to administer or arbitrate this case, the award it rendered might be revoked.

“If the arbitration award is revoked … either to seek a new award or to file for another arbitration would cost both parties much more time and money on both procedure and substance to resolve their dispute. Such avoidable repetitive act would be a trouble to the parties and a waste of judicial resources,” he says.

Generally, parties in similar situations should officially reconfirm their selection of an arbitration institution if they wish to continue with the SHIAC or the SCIA. And while choosing, they must be aware that the award might not be recognised by local courts outside Shanghai and Shenzhen.

Alternately, the parties could submit the case to another arbitration institution. But under this option, the already disputing parties find themselves incapable of even reaching an agreement on which agency to go with. Not to mention have their actual disputes resolved.

Possible solutions include obtaining from the relevant local court a civil judgment on their decision about the agency’s jurisdiction before going to the rightful institution for arbitration.

But it is finally up to the Supreme People's Court (SPC) to completely resolve uncertainties. At present, the SPC is drafting a Judicial Interpretation with a view on the independence and jurisdiction disputes between the quarrelling commissions, which is expected to settle the long-running fight.

“It is envisaged that such a (Judicial Interpretation) will be promulgated in the near future,” say So.

But before the SPC final decision comes out, lawyers have warned that arbitration with any of them could be potentially risky to the parties.

“The parties need to analyse the circumstances of each individual case and synthesise factors with the assistance from legal professionals,” says Kang.

Why CIETAC split?

In the middle of the controversy between China’s most commonly used arbitration body for investors and companies and its Shanghai and South China sub-commissions was the 2012 Amendment of Rules of CIETAC, issued in February 2012, effective from May 1.

Shanghai and Shenzhen was infuriated because it set Beijing as the default location of all arbitrations unless the parties expressed otherwise - instead of allocating cases by regional connection as in the past.

The disagreement also focused on provisions such as raising the arbitration fee and increasing the threshold for the summary procedure. These changes were accused by CIETAC Shanghai (now SHIAC) as being created out of “impure motives” to maximise profits.

Notably, the Shanghai Sub-commission had obtained a registration certificate of arbitration commission from the Shanghai Justice Bureau in December 2011, way before the feud with Beijing went public. Shenzhen also launched the SCIA in June 2012, prior to the suspension of CIETAC authorisation in August.

At present the three institutions have each announced own rules and panels of arbitrators.

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