Annulment of an Arbitral Award: Attendance at Arbitration Proceedings does not Constitute Acceptance of Arbitration Agreement

Questions concerning the validity of an arbitration agreement remain critical under Indonesia Arbitration Law, particularly when the absence of a written agreement becomes the basis for the annulment of an arbitral award. This article examines court jurisprudence affirming that participation in arbitral proceedings does not constitute acceptance of an arbitration agreement that lacks formal validity.

Arbitration Agreement as the Basis for Dispute Settlement

Article 4 paragraph (1) of Law Number 30 of 1999 on Arbitration and Alternative Dispute Resolution (“Arbitration and ADR Law”) has essentially stipulated that in the event that both parties have agreed that the dispute between them will be settled through arbitration and both parties have delegated the authority, then the competent arbitrator shall determine in the award regarding the rights and obligations of both parties, in case such matters were not addressed in their agreement. Resolving a dispute through arbitration presupposes the existence of an arbitration agreement.

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When a dispute has been agreed to be resolved through arbitration by means of an arbitration agreement, thus, only the arbitration institution is strictly authorized to adjudicate such dispute. In accordance with Article 1 number 3 of the Arbitration and ADR Law jo, Article 1 number 2 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”), an arbitration agreement itself is defined as a mutual consent in the form of an arbitration clause contained in a written agreement made by the parties before the dispute occurs, or a separate arbitration agreement made by the parties after the dispute has occurred.

These provisions demonstrate that an arbitration agreement constitutes the fundamental basis for resolving disputes through arbitration. The existence of an arbitration agreement cannot be merely considered as a formality. That would mean that all elements constituting an arbitration agreement must be fully met and subject to the applicable provisions, in order to be fully enforced effectively.

Validity of an Arbitration Agreement

In regard to its validity, an arbitration agreement must be made in writing. Moreover, similar to agreement in general, the validity of an arbitration agreement is also subject to the fulfillment of valid conditions of an agreement as stipulated under Article 1320 of the Indonesian Civil Code. Accordingly, the fulfillment of elements of legal capacity of the parties, a lawful cause, a certain object, and mutual consent of the parties must all be present to ensure the validity of an arbitration agreement.

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A valid arbitration agreement serves as a legitimate legal basis for the relevant parties to have their disputes resolved and adjudicated through arbitration. In the absence of an arbitration agreement and/or if the arbitration agreement is invalid, it will eliminate the arbitral institution’s authority in adjudicating such dispute.

Concerning the sufficiency of an arbitration agreement, when referring to the context where the court examines an arbitral award which registered with the court due to one party’s failure to voluntarily comply with the award, the court has the authority to verify the existence of the arbitration agreement. Furthermore, Article 62 of the Arbitration and ADR Law essentially stipulates that the Chief of District Court, prior to the deliverance of an execution order of an arbitral award (exequatur), ensure, among other things, whether there is an arbitration agreement between the parties.

Nevertheless, what happens in a situation where, upon a dispute that has been adjudicated through arbitration, certain issues are later discovered on the underlying arbitration agreement? Will there be any legal remedies available?

When referring to the legal remedies of annulment of an arbitral award, the provision under Article 70 of the Arbitration and ADR Law jo. Article 24 paragraph (4) of the Supreme Court Reg. on Arbitration, essentially limits the grounds to file a petition for annulment of an arbitral award, namely a document submitted during the proceeding is declared to be fake, a decisive document is discovered after the award was rendered which concealed by the opposing party, or the award was obtained through fraud (tipu muslihat) committed by one of the parties.

Therefore, by strict interpretation of the provisions under the article, an arbitral award may only be annulled if one of the above three grounds is fulfilled. Nonetheless, how should an annulment petition based on the absence of an arbitration agreement be treated? Can an arbitral award be annulled on the ground that there was no arbitration agreement between the disputing parties, even if the party concerned is present in the arbitral proceedings?

PT. Identrust Security Internasional, PT. Bursa Komoditi dan Derivatif Indonesia v. PT. PT. Royal Industries Indonesia, Commodity Futures Trading Arbitration Body (Badan Arbitrase Berjangka Komoditas/BAKTI), Jurisprudence Number 367 K/Pdt.Sus-Arbt/2013 jo. 1142/Pdt.P/2012/PN.Jkt.Bar

In this case, an arbitration petition was filed against two Respondents, whereas only one of the two Respondents who was bound by an arbitration agreement. Both Respondents appeared before the arbitral tribunal until the award was rendered. After the arbitral tribunal rendered the award, the objection was filed, arguing, among other things, that there was no arbitration agreement between the arbitration Claimant and one of the arbitration Respondents.

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Upon such annulment petition, by affirming the legal consideration and the decision of the Judex Facti, Judex Juris in Decision Number 367 K/Pdt.Sus-Arbt/2013 considers that:

“That there is no written Arbitration Agreement or Arbitration Clause binding the Appellant and Appellee II, whereas the provision of Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution expressly stipulates that in order for a dispute to be submitted to arbitration it must be based on a written Arbitration Clause or Arbitration Agreement;

“That subsequently Appellee II became a disputing party before the Arbitral Tribunal…, such situation cannot be interpreted as a submission, since the Arbitration Law expressly states that the Arbitration Agreement must be in a writing form.”

As a result of such legal consideration, the arbitral award was declared null and void.

Assessment of Arbitral Award Annulment due to the Absence of the Arbitration Agreement

Through the jurisprudence above, the court has affirmed that an arbitration agreement shall only become valid when it is made in writing and attendance in an arbitration proceeding does not constitute submission to an arbitration agreement that does not bind them from the outset. In addition, it can also be understood that, despite the basis for the annulment petition of the arbitral award is due to the absence of an arbitration agreement that falls outside of the grounds explicitly provided in Article 70 of the Arbitration and ADR Law, the annulment was nevertheless upheld by the court.

Such conditions occur because, fundamentally, all disputes adjudicated through arbitration must be based on a valid arbitration agreement. Moreover, this is in line with the Chief of District Court’s obligation to assess, during the registration of an arbitral award, whether the award meets its essential requirements, namely the arbitration agreement, as discussed above. In addition, the court’s acceptance of such annulment should not be considered as an overreach of the court’s authority. Whereas it merely reflects the court’s authority to ensure the formal validity of an arbitral award without having to assess the substantive aspects of the relevant dispute that has been examined previously by the arbitral tribunal.

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Reference

• 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 367 K/Pdt.Sus-Arbt/2013;
• West Jakarta District Court Decision Number 1142/Pdt.P/2012/PN.Jkt.Bar