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American Indonesian

Chamber of Commerce

�for business and understanding�

To: All Members and Friends

From: Wayne Forrest, Executive Director

 

A Case to Watch

 

What follows is my account of a recent court proceeding that is part of a case that could have important implications for US-Indonesia business relations. Hopefully, this memo gives a fuller picture than the press coverage to date. This is a preliminary analysis as there is pending litigation and appeals.

 

On Friday, April 5, I attended a proceeding in the court of the Southern District of NY involving Karaha Bodas Company (KBC) (a joint venture of Florida Light & Power and Caithness Group et al) vs Pertamina/PLN. At this hearing a US federal judge was asked to rule on whether funds deposited in a Bank America trustee and paying agent account (TPA) (holding receipts of LNG sales from the Bontang gas project) were property of Pertamina (a state-owned company) or the Government of Indonesia.� KBC is seeking access to similar funds in other jurisdictions as well as payments to Pertamina from US oil companies.� Litigation is pending in these related cases.

 

KBC had invested $100 million in a geothermal power project involving Pertamina that was shelved by Indonesia after the financial crisis of 1997. Although recently Indonesia decided to reschedule the project, KBC has so far rebuffed the offer.

 

KBC, having won a $260 million Swiss based arbitration against Pertamina, subsequently had the judgment (currently under appeal) recognized by US Federal court in Houston. (KBC claimed force majeur and was awarded lost profits for the full length of their project although they had not commenced construction of their geothermal facility.)� KBC then moved to freeze the funds in the New York TPA account and sought access to them to satisfy their $260 million claim. KBC, having won an arbitration award, is perfectly within its rights to look for assets. How the judge resolved the question of ownership would be key.� If they were Pertamina's, conceivably it could lead to payments to KBC.�� Although he hasn't published his ruling, the judge said orally that the Indonesian government (GOI) did have property rights over a majority of the funds in the TPA account (95%) based on a 1982 Indonesian government regulation and that this portion could not be claimed by KBC.� He said it was "hornbook law" to look beyond Pertamina and its contractors to others (including the Indonesian government) that had property rights.

 

The Indonesian government, having entered into negotiations or settled almost all other problematic power projects, believes that the Swiss arbitration is flawed for several reasons: improper reference to Indonesian law applicable (by contractual agreement of both sides) in the case, improper appointment of a single arbitration without Pertamina' or PLN's consent when several different arbitrations should have been arranged, the arbitration itself was not conducted in a manner ever consented to by Pertamina and PLN and violated their due process and procedural rights, the arbitrators failed to apply Indonesian law.� Pertamina is seeking to have the $260 million award nullified.� KBC believes the arbitration was fair and now that it has won, it deserves to be paid.

 

A short summary can't cover all the issues and points of law in the case, but here are the implications as I see them:

 

1.� Although in this case Pertamina's (a state-owned enterprise) liability abroad was shielded by the decision of the judge that the principal owner of the TPA funds was GOI, there may be other cases where those that have won arbitral awards may seek to attach these funds to satisfy their awards because they believe their agreement is with the government or guaranteed by it, not just a state-owned enterprise such as a Pertamina or PLN. The legal arguments in such a case would bump into sovereign immunity law.

 

2. Pertamina has many TPA accounts that cycle hundreds of millions of dollars in oil and gas revenues.� KBC cannot gain access to revenue due US firms.� However, it has established that 5% of monies owed to GOI from these accounts are Pertamina's and if they can successfully gain access to the funds it would have a negative impact on Pertamina's balance sheet.

 

3. This case should probably be viewed in isolation; investors in just about all of Indonesia's rephrased power plants have chosen to renegotiate. Some have already settled amicably.� The Indonesian government does have an excellent track record of paying claims arising from a mutually agreed arbitration if a final judgment is rendered against them.� The KBC case so far presents no challenge to this policy.

 

4.� Indonesia, for whatever reason, has taken a few public relations hits in this case thus far.� However, extrapolating that the investment climate has actually suffered is probably going too far. Indonesia's past record in settling arbitrations could be better known and but erroneous perceptions may develop.��� Indonesia has not in this case or in others ever said that it wouldn't recognize and abide by a final and binding arbitration.�� In this case, Indonesia has not exhausted its right to seek annulment.� But, if past history is any indication, if they ultimately lost, they would pay.

 

5.� Finally, it would be premature to conclude that the position of US energy companies in Indonesia and Pertamina has yet been damaged.