Jonathan Somba

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Business Law Assignment

Lecture 3: Alternative Dispute Resolution & Foreign Investment
1. Basic Arbitration Knowledge
Definition of Lex Arbitri
The lex loci arbitri is the Latin term for "law of the place where arbitration is to take place"
in the conflict of Laws. Conflict is the branch of public law regulating all lawsuits involving
a "foreign" law element where a difference in result will occur depending on which laws
are applied.
he lex loci arbitri is the law of the place where arbitration is to take place and the
opportunity of having to apply it to the arbitral proceeding thus not automatically regulate
the entire proceedings of the arbitral tribunal as it mostly permits ample space for the
application of the rules of other legal systems. The scope of its application is basically
determined by the lex arbitri. The existence and the measure of the freedom of the parties
in respect of the regulation of the arbitration proceedings are determined by the lex arbitri
which
should
be
taken
as
the
starting
point
Definition of Situs Arbitri
The lex situs arbitri is the place where the thing is, a term of private international law. In
a conflict of laws situation, a court may have to apply the lex loci situs, viz. the legal rules
of the place where the property in question is situated (or in some cases where it was
situated at the time of some legally relevant transaction). In other references, it is stated
that the lex loci rei sitae (Latin: law of the place where the property is situated) is a doctrine
which states that the law governing the transfer of title to property is dependent upon, and
varies with, the location of the property for the purposes

Definition of Choice of Law

Choice of law is a procedural stage in the litigation of a case involving the conflict of laws
when it is necessary to reconcile the differences between the laws of different legal
jurisdictions, such as sovereign states, federated states (as in the US), or provinces.
Choice of laws refers to the area of law in which the court where an action is brought
determines whether to apply the law applicable in that court (forum state law) or apply the
law applicable in another jurisdiction which has an interest in the controversy. This
situation often arises in contract disputes in which the state in which the contract was
entered into is different from the state in which the wrong occurred. Generally, the courts
will apply their own procedural rules regardless of the choice of state law on the substantive
issues.

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Determination of Choice of Forum

The choice of forum is a provision in a contract which the parties stipulate that any lawsuit
between them arising from the contract shall be litigated before a particular court or in a
particular jurisdiction.
A choice of forum clause (also called a forum selection clause) is a contractual provision
which predetermines the forum for any dispute involving the contract. Usually,
the forum will be one that is convenient to one of the parties.

Forum selection clauses are prima facie valid, and are enforceable absent a strong
showing by the party opposing the clause "that enforcement would be unreasonable or
unjust, or that the clause invalid for such reasons as fraud or overreaching.

The bar for establishing the unreasonableness of a forum selection clause is high:

A forum selection clause is unreasonable if (1) its incorporation into the contract was the
result of fraud, undue influence, or overweening bargaining power; (2) the selected forum
is so gravely difficult and inconvenient that the complaining party will for all practical
purposes be deprived of its day in court; or (3) enforcement of the clause would contravene
a strong public policy of the forum in which the suit is brought.

Procedural Rules
Procedural law or adjective law comprises the rules by which a court hears and determines
what happens in civil lawsuit, criminal or administrative proceedings. The rules are
designed to ensure a fair and consistent application of due process (in the U.S.) or
fundamental justice (in other common law countries) to all cases that come before a court.
Substantive law, which refers to the actual claims and defenses whose validity is tested
through the procedures of procedural law, is different from procedural law. In context of
procedural law; procedural rights may also refer not exhaustively to rights to Information,
rights to justice, rights to participation which those rights encompassing, general Civil and
Political rights. In environmental law, these procedural Rights have been reflected within
the UNECE Convention on "Access to Information, Public Participation in Decisionmaking and Access to Justice in Environmental Matters" known as the Aarhus Convention
(1998).
In short, Procedural rules are the rules of legal process such as the rules of evidence and of
procedure in enforcing a legal right or obligation.

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2. Case Study : Karaha Bodas Final Arbitration Decision

a. Chronology of the case
The origins of this dispute lie in two contracts to construct a power plant in Indonesia.
Pertamina is an oil, gas, and geothermal energy company that is wholly owned by the
Government of Indonesia (GOI). KBC is a Cayman Islands limited liability private
power development company established to develop geothermal resources, including
the construction and operation of electric power generating facilities.5 In November
1994, KBC entered into two contracts with Pertamina to develop the Karaha-Bodas
Geothermal Project (the Project), which included the building of a geothermal power
plant in West Java, Indonesia. Under the first agreement, the Joint Operation Contract
(JOC), KBC contracted with Pertamina to develop geothermal energy resources from
two geothermal fields in Indonesia. In the second agreement, the Energy Sales
Contract (ESC), KBC, Pertamina, and Pt. PLN (Persero) (PLN), an electric
company wholly owned by the GOI,6 agreed that Pertamina would sell the KBCproduced electricity to PLN.
In 1997, the Indonesian economy suffered during the Asian financial crisis. In
January 1998, after a brief suspension and a temporary restoration of the Project, the
President of Indonesia issued a decree suspending the Project indefinitely as part of a
national effort to stabilize the Indonesian economy. KBC declared force majeure and
ceased performance under the contracts.
The contracts contained almost identical comprehensive consultation and arbitration
clauses which required the parties to arbitrate any disputes in Switzerland pursuant to
the Arbitral Rules of the United Nations Commission on International Trade Law (the
UNCITRAL Rules).
In April 1998, KBC initiated arbitration proceedings in
Switzerland, claiming that Pertamina had breached the contracts. Pertamina opposed
arbitration on various grounds, which included a challenge to the composition of the
arbitration panel. The panel rejected those objections and proceeded to conduct a
hearing on the merits in June 2000. In December 2000, the panel ruled that Pertamina
and PLN had breached the contracts and awarded damages to KBC exceeding $260
million.7
In February 2001, Pertamina appealed the Award to the Supreme Court of Switzerland.
While that appeal was pending, KBC initiated the instant proceedings in federal district
court to enforce the Award. Pertamina responded by challenging enforcement on four
grounds under Article V of the New York Convention: (1) The arbitration panel was
improperly composed (Article V(1)(d)); (2) the arbitration procedures were not
otherwise in accordance with the agreement (Article (V)(1)(d)); (3) Pertamina was
deprived of its right to present its case (Article V(1)(b)); and (4) the arbitral award
violated United States public policy (Article V(2)(b)).8 The district court denied
Pertamina's motion to stay pending its appeal to the Supreme Court of Switzerland and

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directed the parties to proceed with summary judgment briefing.

The court
acknowledged, however, that it slowed the proceedings in deference Pertamina's
request. The Swiss court eventually dismissed Pertamina's appeal on procedural
grounds and denied its motion for reconsideration. In December 2001, the district court
granted KBC's motion for summary judgment (the Judgment) to enforce the Award.
Pertamina appealed the Judgment but declined to post a supersedeas bond. In January
2002, the district court entered an order allowing KBC to commence execution of the
Judgment, and the following month that court granted KBC leave to register the
Judgment in New York, Delaware, and California. KBC also brought actions under
the Convention in Hong Kong, Canada, and Singapore to enforce the Award in those
jurisdictions.
In March 2002, Pertamina filed an application in the Central District Court of Jakarta
to annul the Award (the Indonesian annulment action). Pertamina also sought an
Indonesian injunction and penalties to prevent KBC from seeking to enforce the Award
(the Indonesian injunction). The Indonesian court scheduled a proceeding for 10:00
a.m. on Monday April 1, 2002 to hear argument on the proposed injunction. In
advance of the Indonesian hearing, however, KBC filed a motion in the district court
on Friday, March 29, 2002, for a temporary restraining order to enjoin Pertamina from
seeking injunctive relief in Indonesia. In a telephonic hearing that same evening,10
the court determined that KBC would suffer irreparable harm if the Indonesian court
issued an injunction to prevent KBC from enforcing or executing the Judgment.
The district court orally ordered Pertamina to withdraw its application for injunctive
relief at or before the hearing in the Indonesian court and to take no substantive steps
in that court. The district court did not, however, prohibit Pertamina from proceeding
in Indonesia entirely; rather, it prohibited Pertamina from taking any substantive steps
(e.g., submitting legal arguments) but permitted Pertamina to take any ministerial steps
necessary to maintain the cause of action. The court subsequently explained that it
issued the TRO (1) to preserve the integrity of its judgment, which had become final
and was on appeal to us without bond, and (2) to maintain the parties' positions as they
stood prior to Pertamina's initiation of the Indonesian annulment action.
Claiming that it lacked sufficient time to do so, Pertamina did not withdraw its request
for injunctive relief, and the Indonesian court issued a provisional injunction
prohibiting KBC from seeking to enforce the Award. Later that day, Pertamina's
president-director issued a statement to the effect that Pertamina would not attempt to
enforce the Indonesian court's order with respect to KBC's enforcement actions in the
United States.
KBC immediately filed a motion in the district court to hold Pertamina in contempt of
the TRO. Agreeing with KBC, the district court (1) again ordered Pertamina to
withdraw its Indonesian application for injunctive relief against KBC, (2) found
Pertamina in contempt of the TRO, and (3) ordered Pertamina to indemnify KBC for
any fines resulting from the Indonesian injunction. Pertamina notified the Indonesian

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court of the district court's order but did not request that the Indonesian court vacate or
suspend its injunction as directed by the district court.
KBC next filed a motion in the district court for a preliminary injunction to prohibit
Pertamina from further pursuing the Indonesian injunction and the Indonesian
annulment action. In response, Pertamina filed a motion to purge the contempt order
on the ground that the statement by Pertamina's president was sufficient to establish
substantial compliance with the TRO. In subsequently granting KBC's motion, the
district court issued seven orders: (1) It enjoined Pertamina from enforcing the
Indonesian injunction; (2) it enjoined Pertamina from collecting any fine or penalty
from KBC as a result of this injunction; (3) it extended the indemnification aspects of
its earlier contempt order;12 (4) it enjoined Pertamina from taking any substantive
steps to prosecute the Indonesian annulment action; (5) it ordered Pertamina to advise
the Indonesian court that Pertamina cannot and will not take any action to pursue the
Indonesian annulment action; (6) it dissolved the provisions of the TRO and contempt
order to the extent those orders differed with the preliminary injunction; and (7) it
denied Pertamina's motion to purge contempt.
On May 7, 2002, Pertamina informed the Indonesian court of the district court's
preliminary injunction and, pursuant to that injunction, requested the Indonesian court
to suspend the proceedings indefinitely. A week later, the Indonesia court rejected
Pertamina's request to suspend the litigation, in part because PLN, which was also a
party to the Indonesian litigation, filed an objection to postponement, and in part
because the court concluded that it retained the authority to adjudicate the case.
Pertamina timely filed its notice of appeal to this court. In May 2002, we denied
Pertamina's emergency motion for a partial stay of the district court's preliminary
injunction. On August 27, 2002, while the matter was still under our review, the
Central Jakarta District Court concluded that it had primary jurisdiction under the New
York Convention and annulled the Award on grounds that it was contrary to the
Convention and Indonesian arbitration law. The Indonesian court also permanently
enjoined KBC from seeking to enforce the Award and imposed a fine of $500,000 for
each day that KBC violated the Indonesian injunction.
In March 2003, the High Court of the Hong Kong Special Administrative Region Court
of First Instance issued an order enforcing the Award in Hong Kong. Subsequently, the
district court addressed Pertamina's Rule 60(b) motion to set aside judgement pursuant
to our remand. The court reaffirmed its summary judgment in favor of KBC,
concluding again that under the Convention the courts of Indonesia are not competent
to annul the Award.
In this appeal, Pertamina argues that the district court lacked authority to issue the
preliminary injunction and, in the alternative, that the court abused its discretion by
doing so. Pertamina also appeals the district court's contempt order, again arguing

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that the district court lacked authority to enjoin Pertamina from proceeding in Indonesia
and, in the alternative, that Pertamina substantially complied with the order.13

b. Parties involved
Karaha Bodas Company LLC, Perusahaan Pertambangan Minyak dan Gas Bumi Negara
(Pertamina), PT. PLN (Persero), Himpurna California Energy Ltd (Himpurna).
c. Cause of the dispute
The origins of this dispute lie in two contracts to construct a power plant in Indonesia.
Pertamina is an oil, gas, and geothermal energy company that is wholly owned by the
Government of Indonesia (GOI). KBC is a Cayman Islands limited liability private power
development company. IT was established to develop geothermal resources including the
construction and operation of electric power generating facilities. In November 1994,
KBC entered into two contracts with Pertamina to develop the Karaha-Bodas Geothermal
Project, which included the building of a geothermal power plant in West Java, Indonesia.
Under the first agreement, the Joint Operation Contract (JOC), KBC contracted with
Pertamina to develop geothermal energy resources from two geothermal fields in
Indonesia. In the second agreement, the Energy Sales Contract (ESC), KBC, Pertamina,
and Pt. PLN (Persero), an electric company wholly owned by the GOI agreed that
Pertamina would sell the KBC-produced electricity to PLN.

d. Claims or demands of each parties

Karaha Bodas Company (KBC)
In April 1998, KBC initiated arbitration proceedings in Switzerland, claiming that
Pertamina had breached the contracts. Pertamina opposed arbitration on various grounds
which included a challenge to the composition of the arbitration panel. The panel rejected
those objections and proceeded to conduct a hearing on the merits in June 2000. In
december 2000, the panel ruled that Pertamina and PLN had breached the contracts and
awarded damages to KBC exceeding $260 million.
In February 2001, Pertamina appealed the Award to the Supreme Court of Switzerland.
While that appeal was pending, KBC initiated the instant proceedings in federal district
court to enforce the Award. KBC immediately filed a motion in the district court to hold
Pertamina in contempt of the TRO.

Agreeing with KBC, the district court (1) again ordered Pertamina to withdraw its
Indonesian application for injunctive relief against KBC, (2) found Pertamina in contempt

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of the TRO, and (3) ordered Pertamina to indemnify KBC for any fines resulting from the
Indonesian injunction.

Pertamina
In February 2001, Pertamina appealed the Award to the Supreme Court of Switzerland.
While that appeal was pending, KBC initiated the instant proceedings in federal district
court to enforce the Award. Pertamina responded by challenging enforcement on four
grounds under Article V of the New York Convention: (1) The arbitration panel was
improperly composed (Article V(1)(d)); (2) the arbitration procedures were not otherwise
in accordance with the agreement (Article (V)(1)(d)); (3) Pertamina was deprived of its
right to present its case (Article V(1)(b)); and (4) the arbitral award violated United States
public policy (Article V(2)(b)).8 The district court denied Pertamina's motion to stay
pending its appeal to the Supreme Court of Switzerland and directed the parties to proceed
with summary judgment briefing. The court acknowledged, however, that it slowed the
proceedings in deference Pertamina's request. The Swiss court eventually dismissed
Pertamina's appeal on procedural grounds and denied its motion for reconsideration.

PLN (Persero)
Contract between KBC and Pertamina and between KBC, Pertamina and PLN are
separated contract. However, KBC accused PLN and Pertamina eventhough the contract
between KBC and Pertamina and PLN (ESC) have not been launched yet if the former
contract (JOC) wasn't not launched. So, in this case, PLN hasn't get engaged with any
parties yet with KBC because the contract hasn't been launched yet.

e. Lex Arbitri
The district courth and the Hong Kong court of First Instance suggest at least three potential
bases for finding that Swiss law effectively constitutes the lex arbitri of this case:
(1) Pertamina previously argued in favor of Swiss arbitral law, which may reveal the
parties' original contractual intentions to apply Swiss law in arbitration;
(2) The parties failed clearly to choose Indonesian arbitral law in their agreement, as may
be required by international law when parties want to select an arbitral law other than that
of the arbitral situs; and, finally,
(3) Pertamina may be judicially estopped from arguing otherwise because it contended
strenuously in the district court, proffering arguments on which the court relied, that Swiss
arbitral law applies to this dispute. Whether Switzerland is the only country of primary
jurisdiction (and, impliedly, whether Indonesia could be a proper forum for annulment),
however, is an issue that is not directly before us today. That issue arises under Article

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V of the Convention as a defense to enforcement, which the district court decided earlier,
and which was on separate appeal before another panel of this Court and thereafter before
the district court on remand.

f. Situs Arbitri
In the JOC and ESC, the parties expressly agreed that Geneva, Switzerland would be the
site for the arbitration. This agreement presumptively selected Swiss procedural law to
apply to the arbitration. Under Article 16 (1) of the UNCITRAL rules, the place
designated for an arbitration is the legal rather than physical location of the forum.

g. Choice of Forum
Defendant and plaintiff in the agreement P-2 have agreed on the choice of forum and choice
of law in article 13: that in the event of any dispute between the parties will be resolved by
arbitration under the provisions of UNCITRAL and in article 20: that of the contract P-2
will apply the Indonesian Law.
Then in the P-3 contract, the choice of forum and choice of law has been agreed to in
Article 8 paragraph (2) that in the event of any dispute between the parties to the above it
will be resolved by arbitration under the UNCITRAL arbitration provisions.

h. Judgement/Final Decision
On the basis of the foregoing, the arbitral tribunal finds and decides as follows:
Pertamina and PLN have breached the ESC and Pertamina has breached the
JOG
Pertamina and PLN are jointly and severally condemned to pay US$
111.100.000 million for lost expenditures to KBC, plus interest at the rate of
4% per annum, as from january, 1st, 2001, until the date of full payment.
Pertamina and PLN are jointly and severally condemned to pay US$ 150
million to KBC for loss of profits, plus interest at the rate of 4% per annum, as
from January lot, 2001 until the date of full payment.
Pertamina and PLN re jointly and severally condemned to pay US$ 66.654,92
to KBC for the costs and expenses of this second and final phase of the
arbitration, plus interest at the rate of 4% per annum, as from January lot, 2001
until the date of full payment.
Each party shall bear the costs incurred for its legal representation and
assistance.

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All other claims of the parties are declared moot or dismissed.

i. Recent Development
Finally, the Court's conclusion that the requested discovery is unwarranted at this stage is
supported by statements of Pertamina's counsel at the conclusion of the arbitration hearing.
Counsel stated that "discovery is to prepare for the hearing, it is not to supplement the
record after the hearing" and that Pertamina's discovery request "went to the purported
financial ability, the purported financing that would have been made available and other
things, and I think the record on that has been fully made. I am prepared to rest on that
record, and so I think the discovery requests should no longer be in the picture." Hearing
Transcript, Vol. V, at 807-08.
Even if discovery were appropriate at this late stage in the parties' dispute, and even if the
Tribunal made a factual or legal error, Pertamina has failed to meet its Rule 56(f) burden
to demonstrate why the requested discovery is material. This Court may not disturb the
Tribunal's ruling absent a due process violation, or other ground under the New York
Convention. Pertamina has failed to show that the evidence that could be discovered likely
would lead to a finding that the arbitration process was fundamentally unfair, constituted a
due process violation for some other reason, or violated the New York Convention in some
other way. Thus, Pertamina's discovery request under Rule 56(f) is denied.
This Court sees no reason to revisit the merits of the Tribunal's factual findings or its Final
Award in this regard. The Court concludes that Pertamina has not met its burden to
establish that the award to KBC of lost profits violates public policy. The Court accordingly
holds that Pertamina has not met its burden to show either that the composition of the
Tribunal violated the parties' agreements or that the composition caused Pertamina
substantial prejudice.