Clarifying Indonesia’s Arbitration Law: A step in the right direction

Introduction

Indonesia-seated arbitrations are governed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (Arbitration Law). On October 17, 2023, the Supreme Court of the Republic of Indonesia passed Regulation No. 3 of 2023 on the Appointment of Arbitrators by Courts, Challenges to Arbitrator Appointments, Arbitral Awards (SCR 3/2023). SCR3/2023 is derivate regulation that clarifies the Arbitration Law whilst addressing some of its gaps. It has been praised as a progressive step towards arbitration reform. In this article, we examine how SCR 3/2023 will change the arbitration landscape in Indonesia and consider the implications for parties involved in Indonesia-seated arbitrations.

Indonesia ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) in 1981. However, Indonesia is not a Model Law jurisdiction, and the Arbitration Law departs from the UNCITRAL Model Law in several key respects. Indonesia has set ambitious targets for economic growth and trade and has recognized the importance of a transparent, efficient and consistent dispute resolution system to improving economic competitiveness and encouraging foreign investment. Against this background there have been increasing calls to reform and modernize the Arbitration Law (which has been largely unchanged in 24 years) to bring it in line with international best practice and to align Indonesia with leading arbitral seats in the region.

SCR 3/2023 forms part of a broader effort by the Supreme Court and the central government to improve Indonesia’s business and investment climate. In a recent speech, Justice I Gusti Agung Sumanatha, Chair of the Civil Chamber of the Supreme Court, emphasised that SCR 3/2023 aims to:

“[F]urther strengthen the implementation of the arbitration mechanism in Indonesia, and increase trust and confidence [sic] business actors regarding the use of Indonesian arbitration as a mechanism for resolving cross-border disputes…”

The changes

SCR 3/2023 introduces six key changes to the operation of the Arbitration Law:

• It streamlines the process for appointment of arbitrators. Under the Arbitration Law, parties can petition the District Court to appoint an arbitrator or arbitral tribunal if they are unable to reach agreement, but the Arbitration Law does not stipulate the procedure for making such a request. Under SCR 3/2023, a request is made by parties to the District Court, where the Chairman will, via determination, make an appointment within 14 days. There are also procedures for parties to object to appointments in circumstances where there are sufficient reasons or credible evidence raising doubts as to whether the arbitrator will perform their duties objectively and will be independent and impartial.
• It outlines a clear procedure for registration and enforcement of national and international arbitral awards. Under SCR 3/2023, the tribunal must apply online for registration of an arbitral award by the Registrar of the Court. SCR 3/2023 removes the 30-day deadline for applying to register an international arbitral award in Indonesia (although that deadline remains for national awards). The Registrar must then carry out registration of an award within three days in the case of a national award and within 14 days in the case of an international award. An application for registration of an international award must be accompanied by the arbitration agreement in the Indonesian language and a statement from the diplomatic representative of Indonesia in the country where the award was rendered, stating that the country is bound by an agreement with Indonesia regarding the recognition and implementation of arbitral awards. Finally, SCR 3/2023 allows institution-appointed arbitrators to register the award by the institution or by proxy, resolving an ambiguity in the Arbitration Law. If a registered award is not complied with voluntarily, a party can make an online application for enforcement which must be determined within 30 days (for both national and international arbitration awards). An application for enforcement must meet the requirements set out in the Arbitration Law and must be assessed as not contrary to decency and/or public order. There are special provisions for international awards where Indonesia is a party.
• It clarifies the procedure for applications to annul arbitral awards. Under SCR 3/2023, parties must submit an application for annulment to the Court within 30 days of the award being registered. An award will only be annulled where there is evidence of forgery, deliberate concealment of documents or deceit. SCR 3/2023 allows for annulment rulings to be appealed to the Supreme Court and requires that applications for appeal be filed within 14 days from the decision on annulment. The Supreme Court has 30 days to consider and decide on the appeal.
• It introduces a procedural guideline for the enforcement of arbitral security seizure. Following the issue of the arbitral order, the arbitrator(s) must register the order with the court, and subsequently may file an enforcement request. SCR 3/2023 obliges the court to provide notification to the tribunal within two days of enforcement. All costs arising from the security seizure are charged to the applicant. It is not yet clear whether these provisions apply only to domestic arbitral orders or also extend to orders made in international arbitrations.
• It introduces a definition of ‘public order’ for purposes of refusing enforcement of an award on the basis it would be contrary to public order. Uncertainty about the meaning of ‘public order’ has been an issue for parties seeking to enforce or resist enforcement of an international arbitral award (see, for example, Astro Nusantara BV et al v. PT Ayunda Prima Mitra et al; Bankers Trust International v. PT Mayora Indah (Supreme Court Decision No. 01/K/Ex’r/Arb.Int/Pdt/2000) and E.D & F. Man (Sugar) Ltd v. Yani Haryanto (Supreme Court Decision No. 1205 K/Pdt/1990)). However, SCR 3/2023 defines ‘public order’ under the Arbitration Law as “anything which constitutes the foundations required for the implementation of the legal, economic and socio-cultural system of the Indonesian society and nation.” This definition is broad and contains no threshold or clear test by which to determine whether something is or is not contrary to public order. The definition therefore still affords courts considerable discretion to resist enforcement on the basis of opaque public order imperatives.
• Finally, SCR 3/2023 distinguishes between a conventional arbitration, and a Sharia arbitration. Jurisdiction for registration and enforcement of arbitral awards issued by Sharia arbitration centres is vested in the Religious Court of Central Jakarta (in the case of an international Sharia arbitration award), or in the religious court having jurisdiction over the respondent (in the case of a national Sharia arbitration award).

Implications

SCR 3/2023 is a move in the right direction and introduces some helpful improvements to the Arbitration Law.

In particular, SCR 3/2023 will:

• alleviate delay for parties by introducing deadlines for the registration and enforcement of arbitral awards by a court;
• clarify the role of institutions in applying for registration of an award;
• facilitate enforcement of awards in international arbitrations by abrogating the 30-day deadline for registration of an international arbitral award; and
• promote certainty by introducing a practical guideline for the enforcement of arbitral security seizure orders.

Conclusion

While SCR 3/2023 is not a panacea for all of the problematic aspects of the Arbitration Law, it represents significant improvement. Perhaps more importantly, it signals an appetite for reform of Indonesia’s arbitration laws with a view to facilitating the effective and efficient resolution of cross-border disputes within Indonesia and to more closely align with international standards. Efforts to streamline and improve dispute resolution mechanisms should help to promote foreign investment and enhance Indonesia’s appeal as an attractive arbitration jurisdiction.

With assistance from Eibhlin Murrant