Beyond Arbitration: When Public Order Decisively Trumps Arbitral Awards

An arbitral award is binding, yet it can be annulled if proven to involve fraud, forged documents, or if it violates public order.

Annulling the Arbitral Award

Article 70 of Law Number 30 of 1999 on Arbitration and Alternative Dispute Resolution (“Arbitration and ADR Law”) jo. Article 24 paragraph (4) of the Supreme Court Regulation Number 3 of 2023 on the Appointment of Arbitrator by Court, Repudiation Rights, Examination on the Enforcement and Annulment Petition of Arbitral Awards (“Supreme Court Reg. on Arbitration”), essentially stipulated that annulment petition to an arbitral award may be made if the award is alleged to contain the following elements:

• Letters or documents submitted in the hearings which are admitted to be forged or are declared to be forgeries after the award has been rendered;
• After the award has been rendered documents are founded which are decisive in nature and were deliberately concealed by the opposing party; or
• The award was rendered as a result of fraud (tipu muslihat) committed by one of the parties to the dispute.

Thus, in essence, when there is a party in an arbitration dispute who considers that the award given contains at least one of the three elements mentioned above, such party may file an application for annulment. The Arbitration and ADR Law along with the Supreme Court Reg. on Arbitration have further stipulated that an application for the annulment of an arbitral award must be submitted to the District Court in the form of a petition. Such petition must be submitted no later than 30 (thirty) days from the submission and registration of the arbitral award with the Court Registrar. Furthermore, the petition shall be addressed to the Chief of District Court.

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In accordance with these provisions, prior to the filing for the annulment petition of an arbitral award, such award must be first registered. In this matter, if, with respect to an award that has been registered with the District Court, there is party who fails to voluntarily comply with the registered arbitral award, then, upon the application of one of the disputing parties, the award will be enforced based on the Chief of District Court order. However, it should be noted that before an enforcement order is issued, Article 62 paragraph (2) of the Arbitration and ADR Law jo. Article 9 of the Supreme Court Reg. on Arbitration stipulated that the Chief of District Court must first assess whether the arbitral award is not in conflict with morality and public order.

Understanding Public Order

It is important to note that public order has been defined through Article 1 number 9 of the Supreme Court Reg. on Arbitration, as follows:

“Public Order is anything which constitutes the foundations required for the implementation of the legal, economic and socio-cultural system of the Indonesian society and nation.”

In this regard, what if an application for the annulment of an arbitral award submitted to the District Court is based not only on the three annulment elements, but on the violation of public order? This is especially relevant when the court, in fact, grants a petition over an arbitral award by taking into account the element of public order as its main consideration. A further discussion of this issue, will be addressed through the following jurisprudence.

Head of the Jakarta Transportation Agency v. PT. Ifani Dewi, Jurisprudence Number 266 B/Pdt.Sus-Arbt/2016 jo. 273/Pdt.G.Arb/2015/PN.Jkt.Pst

In this case, an annulment petition was filed on the grounds of documents which decisive in nature, namely a corruption criminal court decision, with a claim (petitum) for the arbitral award to be declared legally unenforceable. The contract that formed the basis of the arbitration petition and which has been adjudicated in the arbitral award, was allegedly obtained through corruption.

Previously, the Indonesian National Board of Arbitration (“Badan Arbitrase Nasional Indonesia/BANI”) under its award Number 615/IX/ARB-BANI/2014 between the Appellant and Respondent I, essentially grants the arbitration petition partially and states that the Appellant has committed a breach of contract (wanprestasi) by failing to fulfill its payment obligations to Respondent I.

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On the basis of the said arbitral award, the Appellant had previously filed an application for annulment with the Central Jakarta District Court. In addition to asserting its objection to the a quo BANI Award on the ground of the discovery decisive documents (as regulated under Article 70 of the Arbitration and ADR Law) in relation to an alleged criminal act of corruption, the Appellant also invoked Article 62 paragraph (2) of the Arbitration and ADR as the basis for the application. In this case, the Appellant argued that, if the a quo BANI Award were to be enforced, it would conflict with morality and public order, since “the criminal act of corruption constituted as a crime that is the common enemy of society and has caused suffering to the people.”

The annulment petition of the arbitral award was rejected in the first instance on the grounds that the criminal corruption court decision has yet to obtained a permanent legal force. Subsequently, the Appellant filed an appeal to the Supreme Court which disagreed with the Judex Facti’s decision and consideration by overturning its decision.

The Judex Juris considers under Decision Number 266 B/Pdt.Sus-Arbt/2016:

“That the Judex Facti’s reasoning that there is no final and binding decision stating that the Director of the Defendant in Opposition I has been proven to have committed a criminal offense, thereby rejecting the claim of the Claimant in Opposition’s (in casu Appellant) claim in the a quo case, is a faulty reasoning because at the time the decision of Defendant in Opposition  II (in casu BANI) in the a quo case was read, the Director of Defendant in Opposition I (in casu Respondent I) had already been designated a s a suspect in a corruption case related to the procurement of Busway bus fleets as the basis for the procurement contract for busway between Defendant in Opposition I and Claimant in Opposition, which in a separate case, the relevant parties, namely the Chairman of the Busway Procurement Committee and the Commitment Officer at the Claimant in Opposition office had been proven through the Corruption Court proceedings to have committed corruption, and concurrently with these rulings, Defendant in Opposition I has also been found by the KPPU RI to have violated the provisions of Article 22 of Law Number 5 of 1999 therefore by sound reasoning, the ruling of Defendant in Opposition II is contrary to public order as referred to in the provisions of Article 62 paragraph (2) of Law Number 30 of 1999 on Arbitration and Alternative Dispute Resolution.”

Furthermore, the decision stated that the a quo BANI Award is unenforceable.

Public Order as a Ground for Canceling the Arbitral Award

When examining the considerations of the Panel of Judges adjudicating the case at the appellate level, it appears that the basis of consideration relied upon focused more on the application of Article 62 paragraph (2) of the Arbitration and ADR Law, with an emphasis on the aspect of public order. However, unlike when relying on the three elements under Article 70, in this decision, there was no declaration annulling the a quo BANI award. Rather, it merely stated that the award could not be enforced.

From this decision, a concise question arises. Can Article 62 paragraph (2) then be used as a legal basis for a claim objecting to arbitral award? In fact, when examining Article 62 paragraph (2) directly, in principle, the provision should primarily be constructed as imposing obligation upon the judge to ensure that a registered arbitral award is not in conflict with public order, which is to be carried out only if, in the event of non-voluntary compliance with the arbitral award, one of the disputing parties submits an application for enforcement. Nevertheless, in this case, the provision was found to be applicable as one of the grounds to challenge an arbitral award.

What is important is that in this case, the decision of the court declaring one party of corruption, was not yet final and binding. This causes the Judex Facti to argue that the arbitral award as valid. But in contrast, Judex Juris advised tribunal to have issued the provisional decision to postpone the arbitral proceeding until the decision on the corruption allegation has reached final and binding nature.

The tribunal must resolve the dispute not longer than 180-days after the constitution of the tribunal. That period may only be extended if all disputing parties agree to it or under the provisions of Article 33 of Arbitration and ADR Law. One of the reasons are provisional decision was issued by the tribunal. Hence, the Judex Juris’ arguments were sound and can be implemented. Nevertheless, this is only possible when the tribunal understands the situation prior to issuing the provisional award. Expecting that the tribunal will understand for itself on the alleged corruption issue is surely illogical.

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Sources:

• Law Number 30 of 1999 on Arbitration and Alternative Dispute Resolution.
• Supreme Court Regulation Number 3 of 2023 on the Appointment of Arbitrator by Court, Repudiation Rights, Examination on the Enforcement and Annulment Petition of Arbitral Awards.
• Supreme Court Decision Number 266 B/Pdt.Sus-Arbt/2016.
• Central Jakarta District Court Decision Number 273/Pdt.G.Arb/2015/PN.Jkt.Pst.