Churchill Arbitration: A New Battle?

Prof. Steve K. Ngo (Executive Director Adler Centre for Dispute Resolution Singapore)

Fifiek Mulyana (Managing Partner Mulyana Abrar Advocates)

More than a decade ago, the Government of a large country in the Southeast Asian region was taken to international arbitration by private corporations. To be exact, there were two arbitration proceedings and the claims exceeded US$500 million, which is a huge amount of money then and today.

They won against the Government. This country is the Republic of Indonesia. Now that the name Karaha Bodas and Himpurna California are mentioned, perhaps many would recall this important lesson, which should not be forgotten. Or has Indonesia forgotten?

It is reasonable to question if Indonesia was ever well prepared when faced with the Karaha Bodas arbitration. Is this meant to be an insult? Certainly not! For example, when Singapore and Malaysia went to arbitration over the Pedra Branca island case, both countries were so well prepared for the battle that Singapore’s legal team was able to publish a book chronicling their preparation for the high profile legal battle. Usually, any arbitration is taken very seriously, including involving investor-State arbitration. The Government should not take such matter lightly because they could potentially lose.

Whilst the concept of international arbitration is not too familiar to Indonesia, it is a form of dispute resolution that is very established and has been around for a very long time now. International arbitration can be a very fierce ‘teacher’. Very often, those who take arbitration lightly always end up being punished rather severely and there have been many such cautionary tales all over the world.

For any State to be taken to arbitration is a very serious matter. Even before the arbitration proceedings end, the country would already be subjected to a trial by the global media. Typically, people think that Governments are the big bullies and investors are the victims.

Now, once again, Government of Indonesia is facing major arbitration, and hopefully by now it understands the seriousness of the matter. A foreign mining company listed in the United Kingdom, Churchill Mining Plc,recently filed a US$ 2 billion claim in international arbitration at the International Centre for Settlement of Investment Dispute (“ICSID”) in Washington against the Republic of Indonesia.

The claim arose due to Churchill’s problem in Kutai with the Pemerintah Daerah but to cut a long story short, Churchill is including Indonesia as a country into the dispute. Churchill alleges that Indonesia is in breach of its obligation under the Bilateral Investment Treaty (“BIT”) between the United Kingdom and the Republic of Indonesia, hence the ICSID arbitration. From a tactical standpoint, this strategy adopted by Churchill is not a bad move and the upcoming arbitration proceedings, which can take years, will decide the outcome.

What about Indonesia’s standpoint and preparation? President SBY recently expressed his concern about the upcoming arbitration proceeding (“Presiden Tanggapi Gugatan Churchill Mining”, Hukumonline 28 Juni 2012 dan “SBY Minta respon Untuk Menang Atas Gugatan Churchill Mining”, 28 Juni 2012 laman pers Presiden SBY).

The President is right to say that Indonesia has a strong position in the matter but also cautioned that the matter needs to be taken seriously. Perhaps President SBY still remembers the Karaha Bodas arbitration defeat for Indonesia as he was made the Minister of ESDM in 1999, the time when the arbitration proceedings already started.

Indeed, Indonesia cannot simply sit back and take this matter lightly. This is no matter how strong Indonesia thinks its position is in defeating the claim by Churchill. On one hand, Indonesia may be of the view that this should have been a dispute between Churchill and Pemerintah Daerah, as such there is no locus standi for the investor to include the State in the dispute.

Sure, Indonesia is certainly entitled to these views but these standpoints must now be put forward as the best possible defense and argument for the arbitration proceedings. But before that, Indonesia and the respective government bodies and agencies must first take this matter very seriously and act on it since yesterday, not tomorrow!

Arbitration before ICSID is not a matter to be taken lightly, in fact, the same with any other international arbitration proceeding. Some experts were even of the naïve view that Indonesia can choose not to entertain arbitration claims against them, for these foreign arbitration awards (“putusan arbitrase”) can then be denied enforcement in Indonesia - this is certainly playing with fire.

There is no need to go into a university level lecture on what international arbitration is, but it is suffice to mention two crucial points: firstly, Indonesia is a signatory to the UN Convention of 1958, pertaining to the enforcement of arbitration award; and secondly, look at what happened to the Karaha Bodas arbitration, whereby a successful enforcement was carried out against Indonesia!

Indonesia now needs to take ownership and charge of the matter. There are enough case studies, lessons and examples to learn from. Even if the State is right and has a strong position, it must go into this battle more than prepared and take no chances. This way, the world and the international media will not take the simplistic view of accusing Indonesia as a country that is bad for investment.

The government must lead the battle and constitute its platoon of able fighters and warriors and for that our hopes are high with the Ministry of Law and Human Rights, Amir Syamsuddin, who is a former practicing lawyer, as well as a renowned litigator.

Something good can come out from this arbitration proceeding, although it can be expensive, troublesome, and worrying. Take it as a lesson, and yet be fully prepared for any such challenges coming on their way. After all, this country must start standing up for itself and not allow others decide its future.

The ball is now in the court of the Government. No doubt the President was right to call for the State to win this battle. All stakeholders must first think like winners and behave like winners. There is no room for complacency or even overconfidence.