A Comparison Of The Use Of The Public Policy Defence By Different Countries To Resist The Enforcement Of International Arbitral Awards – A Rising Star Or Setting Sun?

A Comparison Of The Use Of The Public Policy Defence By Different Countries To Resist The Enforcement Of International Arbitral Awards – A Rising Star Or Setting Sun?

The adoption of national public policy exceptions to permit the enforcement of foreign arbitral awards’ in Indonesia, as in many other developing countries, has been shown to be “a very unruly horse”. The Indonesian courts have given a wide interpretation to the public policy defence and have on several occasions even been averse to referring disputes to the arbitration tribunal on the ground that the agreement containing the arbitration clause is in violation of Indian public policy. One of such occasions was seen in the case of Perusahaan Listrik Negara (PLN) v. Paiton, where the courts denied the submission by the defendant that the court had no jurisdiction to try the dispute because the agreement between the parties contained an arbitration clause. The Court in denying his submission stated that the agreement containing the clause was the subject matter of the dispute and that if the agreement is void, every clause in it is in essence also void. The court blatantly disregarded the “separability” doctrine recognized by the new Indonesian law of arbitration and of which a former Chief Justice of the Republic of Indonesia stated thus:

“The arbitration clause is independent and separate from the main contract so that invalidation of the main contract does not automatically nullify the arbitration clause.”

It declared that an Indonesian court is permitted to examine and render a decision on the merits even though the agreement between the parties included an arbitration clause, when the agreement has contravened Indonesian public policy (the contract containing the arbitration clause was invalid).

Additionally and quite unfortunate is the use by Indonesian courts of violation of public policy as a basis, not just for denying recognition or enforcement of a foreign award, but for purporting to annul a foreign award (which of course is a prerogative reserved to courts of the arbitral seat) .

Moreover, Indonesian courts appeared to have imposed constraints using the concept of “the national interest” to protect economic goals. An example is the Indonesia’s central district court’s annulment of an award granted by the arbitration panel in Geneva, Switzerland in Karaha Bodas v Pertamina and PLN. In this case the International Court of Commerce tribunal ordered Pertamina to pay $261 million to Karaha Bodas Company LLC as compensation for cancelling a power project in 1998; Pertamina refused to comply and sought to annul the award in Switzerland. The Swiss court rejected Pertamina’s application twice, without delving into the merits of the case. However, when Karaha Bodas began to enforce the award by seizing Pertamina’s assets in the United States, Hong Kong, Singapore, and Canada, Pertamina petitioned the Jakarta Central District Court to annul the award under Indonesian law. The Indonesian court asserted jurisdiction over the dispute between the parties, and then annulled an award on the ground of economic protection. This case constitutes the municipal court’s affirmation to set aside an international arbitration award using the rationale of economic protectionism. Thankfully the award was later overturned by the state’s Supreme Court thus making the arbitral award enforceable within Indonesia. The Supreme Court in coming to this conclusion found that the decision of the lower court violated the “separability” principle which is expressly recognized in the Arbitration Law of Indonesia.

Funke Adekoya

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