Arbitration Agreements & Choice of Law Rules

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The principle source of the law of arbitration in Indonesia is Law No. 30 of 1999 concerning Arbitration and Alternative Dispute Resolution (August 12, 1999) (the “Indonesian Arbitration Law”). Where appropriate, this paper will also address the Rules of Arbitration Procedure of the Indonesian National Arbitration Body (Badan Arbitrasa Nasional Indonesia or “BANI/BANI Rules”).

The legal requirements of an arbitration agreement under the Indonesian Arbitration Law are as follows:

a)    The agreement to arbitrate must be in writing and signed by the parties or in notarial deed form (Articles 4(2), 9(1) and 9(2) of the Indonesian Arbitration Law).
b)  If the agreement is made prior to the dispute, the agreement (i.e., the arbitration clause) must clearly state that all disputes arising out of a particular legal relationship between the parties shall be settled through arbitration (Article 2 of the Indonesian Arbitration Law).

To avoid any unnecessary legal risks, the arbitration clause should be in Indonesian if both parties to the agreement are Indonesian, although the agreement may be in English or a national language used by one of the parties with an Indonesian translation if at least one of the parties is foreign (Article 31 of Law No. 24 of 2009 regarding the National Flag, Language and Emblem and the National Anthem.

Based on Indonesian arbitration practice, an arbitration agreement should also specify:

1)    the arbitration rules (if any) to be followed;
2)     the language of proceedings;
3)     the place of arbitration; and
4)     whether the award is to be made on the basis of law or
5)    fairness and appropriateness (ex aequo et bono).

A written arbitration agreement obviates the rights or the parties tobring a dispute in the District Courts, which would otherwise have jurisdiction over civil disputes (Article 11(1) of the Indonesian Arbitration Law). The District Courts have no authority to hear disputes where parties are bound by an arbitration agreement (Article 3 of the Indonesian Arbitration Law), and are required to reject, and not participate in the resolution of, disputes which have already been adjudicated by arbitration, except in limited circumstances as provided in the Arbitration Law (Article 11(2) of the Indonesian Arbitration Law). Indonesian courts honour arbitration agreements with increasing frequency. It is nonetheless not uncommon for parties who lose (orexpect to lose) an arbitration, and in particular an international arbitration, to attempt to bypass an arbitration agreement or award by bringing a suit in a District Court on a theory of tort or fraud. The argument is that the purported tort or fraud renders thearbitration agreement unenforceable or occurs outside the scope of the arbitration agreement. It is possible that a suit on this basis may initially enjoy success in the District Court, although this is not always the case and decisions along these lines are frequently reversed on appeal and/or cassation.

Choice of Law Rules
The Indonesian Arbitration Law concerns questions of procedural Law and not substantive Law. The Law applicable to the substance of a dispute is determined under general rules governing the choice of Law, which are not clear.  If the parties to an agreement have elected a choice of Law, then that choice of Law will generally be honoured by the Indonesian courts under the principle of freedom of contract, embodied in Article 1338 of the Indonesian Civil Code. The choice of Law may be challenged if it is in violation of statute or contrary to good morals or public order, as per Article 1337 of the Indonesian Civil Code. The choice of Law applies only to matters of contract (i.e.,matters governed by Book III of the Indonesian Civil Code) and not to matters of person (Book I of the Indonesian Civil Code), property (Book II of the Indonesian Civil Code) or statutory Law. If a contract does not stipulate a choice of Law, then Indonesian choices of Law rules apply. Indonesian Law does not specifically prescribe a rule for determining the governing law of a contract. A court will be likely to apply the rule applicable to legal acts generally, namely that the Law governing a legal act is the Law of the jurisdiction in which the act occurs.