By: Aditya Parameswary; Julissa Pertiwi Hasan Mustafa


Intellectual property has been an intangible right since a long time, and the music industry plays a major part in it. Intellectual property’s development might have not changed dramatically however due to the rapid evolution of technology, certain laws governing it might well follow its changes.

In the case of technology, the way we listen to music has changed drastically. For instance, just in the 20th century music was heard from concerts, but due to the rapid growth of technology, music was heard from different media ranging from radios, television and currently music streaming. Such music streamline applications include Spotify, HOOQ, Apple music and amazon music that have a subscription fee mechanism.

Similar goes to one of music’s’ mogul, as part owner of “Tidal” another music streamline application; Jay-Z’s decision to withdraw his digital copyright from competitors by making his music “exclusive”. This is not limited to Jay-Z as he has pulled in supports of a number of A-list music artists to his agenda and ask them to do the same; to withdraw their collective digital rights in order to make private and exclusive deals with Tidal.

After the disputes (simply speaking) faced by two of the three biggest music publishers with America’s collective management organization and Internet radio business on competitive rates; this opens another question. If antitrust laws cannot govern competitive rates on intellectual property and most especially in the music industry, which may corner competitors, how does the protection of competition occurs?

In today’s society, online music streaming such as Pandora, Spotify, Apple Music and Beats, Amazon Music and ultimately, Tidal all have experiences in success. All these companies compete one another to give the best services for their consumers through building business strategies. Their business however goes through a lengthy process in order to obtain the licenses required to comply with the regulations and later they need to compete with one another to gain profit. When Tidal was announced back in 2015[1] much hype and anticipation was received since support was received from prominent musicians such as Alicia Keys, Win Butler, Regine Chassange of Arcade Fire, Beyoncé, Calvin Harris, Chris Martin of Coldplay, Daft punk, Jack White, Jason Aldean, J. Cole, Jay-Z, Kanye West, Deadmau5, Madonna, Nicki Minaj, Rihanna and Usher. These support suggested the confidence needed for Tidal and since it claims to pay royalty rates of 75%[2], higher than most music online streaming services. Certain features that has once put Tidal in the top spot; when they released Kanye West’s newest album exclusively one week before it became available for purchase elsewhere.[3]

Jay-Z’s action is just the tip of the iceberg. True, popular music does affect your business, but so does the number of licenses owned by certain parties that play a “dominant” role in the business. This important role is held by powerful licensors; they may use their considerable market power and later pose supra competitive rate on a licensee leaving them with two choices: agree to the proposed rate or face revocation of songs by the licensor which may put the licensee’s business down the drain. This scenario was somewhat felt in Pandora vs. ASCAP, but before we discuss it, we need to understand different parties and their roles in the music licensing business.

First, there exists collectives; they are bodies which operate under the government’s consent decree and established from concerns of anticompetitive behavior such as supra competitive pricing from a handful of copyright holders (in Indonesia’s case is due to administer the collection of royalties). They serve an important function in making the content’s access available for prospective licensees who is willing to pay an agreed-upon and transparent rate. Second there are licensors, who own a particular licensed content and may obtain royalties. Lastly there are licensees, or parties that need the licensed content most likely for business purposes, in this case examples of licensees are Tidal, Pandora, Spotify etc.

The content/goods in question is a “song(s)”, keep in mind that each song is unique. Beyoncé’s song is different to Beach House, making it not truly substitutable. A single song itself has 4 attached licenses to it such as (i) the master license to the sound recording; (ii) the public performance right to digitally transmit the sound recording; (iii) the right to publicly perform; and (iv) the right to reproduce and distribute non-dramatic musical work. The process in acquiring it is further complicated since multiple parties hold the license’s ownership in (most likely) different territories. The process of obtaining the first 3 licenses is made simple through compulsory music license through PROs/collectives.[4] In this case for every time a song is played (in the music streaming) royalties are given to the parties that are entitled to it.

The system now works like this (overly simplified), the licensed content(s) are given to collectives in order to collect the royalties entitled. Licensees on the other hand may use the content but pay a certain amount of fee to the collectives and finally the collectives would pay the royalties owed to the licensors. This is all done transparently.

Problem however arises when these licensors decide to revoke their license from the collective (as seen in Pandora Vs. ASCAP) in order to make private dealings. This causes several problems: first, the negotiations and prices are not transparent; second, if there is no deal the licensee may be forced to accept a one sided deal or face less content rendering them in a difficult position to compete with their competitors. This may happen if the party holding the negotiation holds considerable power in the business leaving it in an unhealthy competition. Below the case concerning Pandora vs. ASCAP is discussed.

Back in July 2005, Pandora and ASCAP (collective) negotiated for a blanket license that ran from 2005 but later Pandora canceled it in 2010.[5] After nearly two years negotiating with ASCAP on a particular rate without making a deal, Pandora then filed a rate court.[6]

ASCAP is known for its high administrative costs, and since technology has made it easier to manage digital music; music publishers had the idea and proposed in withdrawing their digital rights from collectives[7]. The proposed withdrawal by the “big members” puts ASCAP in an uncomfortable situation since it would lose revenue from its larger members, and the heavy administration costs will be the burden of independent songwriters and less powerful publisher members.[8] In order to satisfy their needs, the major music publishers needed ASCAP to amend the regulation in order for parties to remove their digital rights.[9] The major music publishers later agreed ASCAP handled the distribution (but not its negotiation or collection of digital royalties).[10] The mechanism they proposed (in their understanding) makes them able to negotiate for higher rates in private dealings. This “higher rate” will then be presented as “evidence” to the rate court as a new “market rate”.[11] This “market rate” will in turn allow collectives to charge a higher rate for all of its members.[12] All of this may only be done if the regulation within ASCAP is amended, which it did, on April 27, 2011.[13] The ASCAP Board voted to amend its governing articles to allow a member to remove their digital rights but are then welcomed to rejoin.[14]

Not long after the amendment, EMI publicly announced its withdrawal of digital rights followed by Sony in 2012 and Universal in 2013.[15] The major music publishers had understood the limits of ASCAP and had withdrawn their digital rights in order to increase profits.[16] Later by December 2012, another amendment was made in ASCAP’s side, allowing the music publishers to revoke their digital rights selectively[17] (This is where Jay-Z’s role plays an important part). Pandora on the other hand faced a higher stake in which they had to deal with private “dealings” with the major music publishers as opposed through ASCAP (and its compulsory license).

Pandora then filed a rate court petition against ASCAP, which angered the major music publishing companies such as Universal. Universal’s representative had at that time communicated with both ASCAP and other music publishers, who were handling private negotiations with Pandora[18] in order to “push” them into “paying more”.[19] By late November 2012, when Pandora thought that it had finally reached an agreement with ASCAP and whilst waiting for the board to terminate the rate court,[20] in the behind scenes, Sony had threatened to sue ASCAP if it reached an agreement with Pandora and would then revoked all rights owned by Sony (including the analogs). Due to the pressure made by both Sony and Universal, the ASCAP Board had rejected the terms with Pandora.[21]

By the time Sony controlled about 30% of the market for musical composition[22], (which was not deemed threatening by the FTC) at the end of October 2012, Sony had then negotiated with Pandora, leaving them with two choices: agree to Sony’s rate; or remove all of Sony’s content or else face copyright infringement litigation.[23] Pandora had anticipated this and raised this concern to the Federal Trade Commission (FTC)[24]but with the unanticipated reaction. In this case, Pandora would not survive competition if a combined of 30% of content were to be revoked.

By January 17 2013, Sony and Pandora had “agreed” of an undisclosed advance and a rate 25% higher than ASCAP’s going rate[25] the rate proposed however was made known to public. Universal heard it and went to make a similar deal; by February 2013 its private negotiations with Pandora successfully pulled a rate of 50% higher than ASCAP’s previous rate.[26] By July 1, 2013, the “deal” was made to a rate of 7.5% (just under double the ASCAP rate) for a six-month period.[27] In comparison, Universal charged Pandora’s competitor iHeartRadio a rate of 1.7%, lower than ASCAP’s going rate.[28] Both Sony and Universal presented the provisional agreement as evidence of “market rate” to the court proceeding, and so did Pandora (prior being reluctant) whom presented 1.70% or slightly less than the ASCAP rate. This “evidence” rate was then to be considered as a “bench mark” for the rates of the “market”.

After the evidence was presented, the court then made its final decision by mentioning several points. First, ASCAP had failed to prove that the deals of Pandora with the major music publishers constitute fair benchmarks.[29] Second, both Universal and Sony (along with ASCAP) had used their considerable market power to extract supra-competitive prices and acted in a troubling coordination as opposed to being competitors.[30] In the end, the rate court set a rate of 1.85% of revenues, the same rate currently under ASCAP’s 5.0 blanket license for every year of the license term (from 2011 to 2015).[31] The rate court had also noted that that if the publishers were to withdraw their digital rights, they must also withdraw all of their rights (including its analog) which was hard to maintain and administer. This effectively invalidated Sony and Universal’s attempted withdrawal of their digital rights only.[32]

In Jay-Z’s case, his actions may affect the business if he is in a position of “dominance” in the music industry. The term of “dominance” [33], arises where a particular party (most likely company) “has the power to behave to an appreciable extent” independently of its competitors, its customers and ultimately of the consumers allowing it to prevent effective competition being maintained on the relevant market. The ironic thing is, a party who owns an IPR essentially enjoys a significant legal “monopoly”.[34]In this case, since Jay-Z does not Sony or Universal, this does not put him in the category of “dominant”. However, if digital rights are allowed to be revoked and that includes specific licenses (specific artists and songs), then Jay-Z and his supporters may have the upper hand in private dealings, but maybe not enough to hold or drive the market in posing supra-competitive prices.

No matter how popular the song is, the amount of songs you own in the market puts you in the important “dominant” role that can put you in charge of driving the “market”. This position in this case is held by powerful licensors (and in the case above by Sony and Universal) and was used to pose supra competitive rate on a licensee. This is the mechanism that we hope to avoid. From the case above, both music publishers that were supposed to compete with one another ended up aligned with common interests and subsequently beaten the licensee in terms of deals. The problem that arise with private dealings are that: one, the negotiations and prices are not transparent, and two, if there is no deal the licensee may be forced to accept a one sided deal or face less content rendering them hard to compete; three, this mechanism can be of choice by the dominant market, in order to push out a certain company, they may work in tacit collusion in order to push other companies. The fact is seen when Iheartradio accepted a deal that was favorable and a rate lesser compared to the one received by Pandora.

Imagine if three of the companies (major music publishers) have access to 80% percent of the music available and work together to maintain a rate that is beneficial for one another and not acting as competitors. It will be hard for the licensee to remain competitive. With the demand of revoking the publisher’s content, not identifying the content and threats of massive copyright litigation, this coordinated effort is therefore seen as “tacit collusion”.[35] This highly concentrated music licensing industry has a high risk to control competition posed by coordination. If or when a few large powerful firms dominate a market that may impact other firms it may constitute as an oligopoly.[36]

Such tacit collusion results from the major music publishers “have a meeting in the mind” where (supposed to be) competitors end up in their collective best interests to set price or quantity equal to the collusive level,[37] and later creates a parallel pricing.[38]

By having ASCAP grant the right to perform all of the compositions to prospective licensees gives access for companies such as Pandora to compete in the industry and target their efforts more in their marketing. By prohibiting discrimination (through ASCAP/collectives), Pandora wont need to worry if they had received a better or worse price from their competitor since the rate is transparent.

What can be done? To stop this from happening (again… or in certain countries have not yet happened) certain regulation can fix and maintain competition. The proposed mechanism in this case is by maintaining both compulsory licensing and private ordering,[39] but only if a certain amount of competition is evident. First through compulsory licenses, make the access of content available still in collectives. Second, private ordering may only be used if the party that wishes it can prove there is a relevant and evident competition in the market.[40] If private ordering is wished, they must go through a mechanism of petitioning or obtaining a certain approval by a government body (separate to a collective). This solves 2 points, first by leaving the content accessible, and second, a lengthy process that will need to prove competition for those who wish for private ordering.

Other than remedial regulation, certain bodies should also ensure certain intervention or supervision on certain dealings, such as the role of the FTC or in Indonesia the KPPU. Even if intellectual property itself poses a sort of “legal monopoly”, however there should always be a certain intervention from government bodies so that the mechanism doesn’t get to far in order to create monopoly.

In Indonesia’s case itself, the anti-monopoly law or law no. 5 year 1999 has an emphasis that it does not regulate in relation to Intellectual Property Rights such as licensing, patent, trade mark, copy right, design industry etc. and in the case of FTC in Pandora vs. ASCAP; the FTC did not make a move when Sony acquired EMI’s catalog list (later owning 30% of the content) only to point out that there was no market in the first place.[41]

It is important to determine and maintain the structural market in order to prove that there is an evident trace of anti-competitiveness. Another point for consideration is that anti-competitive acts are difficult to prove and may be costly. The music industry itself right now still gives way for this limited “monopolies”. However so, the ever-changing technology will eventually push the change from understanding the market on only property rights and shift towards intellectual property rights. In my opinion, the FTC or in this case the KPPU holds an important role to dig information, especially if there is a report of an alleged anti-competitive conduct. The only difference there is since there is a little to none amount of cases to be found on the said topic, it will be hard to prove and may be costly when brought into court.

In the case of Indonesia, since certain aspects of intellectual property is still in its development stage, such as the recent establishment of the collective body, this opens a bigger chance for it to learn from previous cases. First by the application of the compulsory license for open access and second, for the KPPU in digging and maintaining a watch on competition of the music licensing industry in hopes that if many reports are found, may in turn change the laws and regulation on monopoly and move towards watching competition into intellectual property rights.



Jay-Z’s acts in this case may not be considered as monopoly since he does not stand in a dominant position, however he is still a prominent and influential artist that if he manages to somehow provoke major licensors such as Sony or Universal and the mechanism of private ordering may be maintained as to the Pandora vs. ASCAP case, then he may be in a position of dominance.

As an antidote however, anti competitive activities in the music licensing industry may be done by the following: by maintaining compulsory licenses through collectives, and by maintaining private ordering through sufficient evidence by the party who wishes it and last but not least, through government bodies such as the FTC/ KPPU (in Indonesia’s case) by watching and making a move if there appears any reports on the music licensing being anti-competitive.


  1. Facilitating Competition by Remedial Regulation. (2016). Berkeley Technology Law Journal, 31:1, 185.
  2. IN DEFENSE OF COPYRIGHT: RECORD LABELS, CREATIVITY, AND THE FUTURE OF MUSIC. (2011). Seton Hall Journal Of Sports And Entertainment Law,21(1), 62.
  3. (2017). Retrieved fromhttp://ssrn.com/abstract=547802
  4. Intellectual Property and Competition Law, Exploring Some Issues of Relevance to Developing Countries. (2007). Carlos M. Correa. ICTSD Programme on IPRs and sustainable Development.
  5. Like Running Water?-The Interplay Between Antitrust and Online Misoc Licensing. Nuni Carrolo dos Santos. 2012. Instituto de Direito Economico Financeiro e Fiscal.

[1] (“Facilitating Competition by Remedial Regulation”, 2016)

[2] http://themusic.com.au/news/all/2015/05/01/tidals-75-per-cent-royalty-rate-not-exactly-what-jay-z-made-it-out-to-be/ “Tidal’s ‘75%’ Royalty Rate Not Exactly What Jay Z Made It Out To Be”, theMusic, accessed on 2 August 2017, 22:13.

[3] https://www.engadget.com/2016/02/14/kanye-west-the-life-of-pablo-tidal-exclusive/ “Kanye West’s new album is streaming exclusively on Tidal”, Engadget, accessed on 1 August 2017, 22:03.

[4] (“Facilitating Competition by Remedial Regulation”, 2016) p.192

[5] ibid p. 198

[6] ibid

[7] ibid p. 200

[8] ibid p. 213


[10] ibid p. 63

[11] (“Facilitating Competition by Remedial Regulation”, 2016) p. 206

[12] ibid p. 201

[13] ibid

[14] ibid p. 202

[15] ibid p. 201

[16] ibid

[17] ibid p. 202

[18] ibid p. 206

[19] ibid p. 203

[20] ibid

[21] ibid p. 204

[22] ibid p. 235

[23] ibid p. 206

[24] ibid p. 204

[25] ibid p. 205

[26] ibid p. 206

[27] ibid

[28] ibid

[29] ibid p. 207

[30] ibid

[31] ibid p. 207

[32] ibid p. 208

[33] (Following the legal standard established by the European Court of Justice)

[34]  (“Facilitating Competition by Remedial Regulation”, 2016) p. 189

[35] ibid p. 219

[36] ibid p. 220

[37] ibid

[38] ibid

[39] ibid p. 256

[40] ibid p. 236

[41] ibid pg. 233



Oleh: Julissa Pertiwi Hasan Mustafa

Tahun ini ASEAN akan berulang tahun ke 50, dan sebagai komunitas yang
senantiasa progresif, masih banyak perkembangan dan permasalahan yang
harus dibenahi, terutama dalam bidang ekonomi, dan politik. Demi
mendukung perekonomian, dibentuklah Masyarakat Ekonomi ASEAN (MEA) pada tahun 2015  dengan tujuan mempermudah peredaran jual-beli barang, jasa dan investasi antar para anggota. Hal ini bertujuan demi
mengurangi batasan-batasan jalur peredaran pasar, sehingga diharapkan
dapat mengoptimalisasi dan mengurangi biaya seperti perpajakan dan tarif-tarif tertentu. Dalam esai ini saya bermaksud memberikan
pandangan perkembangan lewat kacamata regulasi, kebijakan dan hal-hal yang bersifat umum.

Bentuk perdamaian di ASEAN dilakukan dengan cara menjaga stabilitas regional lewat kerjasama ekonomi, oleh karena itu, untuk mendukung ekonomi regional perlu ditingkatkannya persaingan yang sehat. Beberapa regulasi terkait hukum persaingan perlu diperbaiki demi menciptakan harmonisasi kegiatan ekonomi Negara ASEAN baik ditingkat nasional maupun regional. Hal ini juga harus didukung oleh mekanisme
institusional beserta bantuan teknisnya. Dalam kenyataannya, sangat
sulit menciptakan suatu kebijakan yang senada antar Negara, hal ini
dibatasi oleh kedaulatan masing-masing, namun harmonisasi kebijakan
persaingan diperlukan apalagi mengingat peredaran jual beli barang
maupun jasa sifatnya lintas batas. Dalam penyelarasan kebijakan harus
bisa dinegosiasikan ASEAN maupun dalam Perjanjian Perdagangan Bebas.
Poin-poin persaingan yang bersifat universal wajib ada.

Kedua, perlunya perlindungan konsumen terkait informasi produk dan
standar keamanannya. Hal ini harus terakomodir dalam kerangka
perlindungannya, diperbaiki pelaksanaannya serta diterapkannya
mekanisme penyelesaian sengketa bagi konsumen. Kegiatan perlindungan
konsumen dapat dilaksanakan untuk beberapa sektor yakni: keuangan,
e-commerce, transportasi udara, energi dan telekomunikasi. Khusus
untuk sektor e-commerce yang banyak berurusan dengan identifikasi,
tandatangan dan otorisasi elektronik perlu mekanisme perlindungan data
personal yang dapat diandalkan.

Bergerak ke perjanjian perdagangan bebas, ASEAN turut memegang peran
sebagai ekonomi keenam terkuat di dunia. Hal ini penting perannya
mengingat ASEAN menjadi salah satu pihak dalam negosiasi yang
berlangsung yakni dalam Regional Comprehensive Economic Partnership
(RCEP) dimana calon anggotanya diwajibkan untuk menyetujui beberapa
regulasi, salah satunya terkait Hak Kekayaan Intelektual. Penekankan
tersebut dititik beratkan pada paten eksklusif dalam hal obat-obatan,
maupun Genetically Modified Organisms (GMO). Disini saya berpendapat bahwa ASEAN perlu membenahi kembali regulasi Hak Kekayaan Intelektual di Negara masing-masing yang sifatnya melindungi rakyat kecil (sebagai contoh, petani kecil). Hal ini dikarenakan dalam mekanisme merit GMO memang dapat membuahkan lingkaran pendanaan penelitian dan
pengembangan; namun disisi lain, apabila Negara ASEAN belum siap
mengakomodir penelitian dan pengembangan (Research and Development) maka pihak yang diuntungkan adalah pihak asing yang siap. Sisi negatifnya, GMO dapat mengkriminalisasikan petani kecil yang
mengembangkan panennya melalui benih yang sudah di patenkan. Agar
ASEAN dapat mengantisipasi hal-hal diatas, perlu disadarkannya
masyarakat akan Hak Kekayaan Intelektual lewat program pemerintah yang mendukung hak-hak rakyat kecil.

Tidak bisa dipungkiri bahwa dalam 10 tahun kedepan kemajuan ekonomi
regional dapat didukung oleh Hak Kekayaan Intelektual (hal ini
termasuk hak cipta, hak merek, desain industri, desain sirkuit, paten,
indikasi geografis dll.). Hal ini selaras dengan perkembangan globalisasi dan teknologi yang membuat suatu barang tidak berwujud mempunyai nilai jual yang bermakna. Dengan memperbaiki regulasi dan sistem HAKI menjadi lebih efektif, efisien dan dapat mendorong pihak asing dalam menanamkan investasinya. Salah satu hal yang dapat diterapkan yakni perbaikan sistem infrastruktur HAKI (untuk paten, hak merek dan desain industri) dengan membuatnya efisien, efektif, terintegrasi dalam sistem regional serta mengurangi duplikasi aktivitas, mempercepat status penetapan dan proses pendaftaran yang dapat dilakukan secara online. Program training dalam bidang hak merek, paten dan desain industri sangat diperlukan dan berfokus pada Kamboja, Laos dan Myanmar.

Masih dalam topik HAKI, selain perbaikan disektor pemerintahan, perlu
dilaksanakan kerjasama di sektor privat, salah satunya penambahan
praktisi HAKI. Dengan pergerakan baik di bidang publik dan privat
diharapkan kesadaran HAKI dalam masyarakat meningkat sehingga dapat
mempromosikan perlindungan baik pada sektor kreatif, komersialisasi
produk indikasi geografis, genetic resources, traditional knowledge
dan traditional cultural expressions (GRTKTCE) mengingat ASEAN
memegang erat begitu banyak kekayaan intelektual yang nilainya dapat dikomersialisasikan. Hal ini turut membantu perlindungannya di ASEAN
maupun pasar asing. Diharapkan juga regulasi terus dijaga dan di-review demi keselarasan dan dukungan terhadap persaingan sehat dan non-diskrimintif.

Dari segi umum, ekonomi harus didukung oleh infrastruktur yang baik;
hal ini agar mengurangi biaya transportasi pengantaran barang/goods.
Saya berharap agar Negara ASEAN dapat meningkatkan infrastruktur jalan
tol, Mass Rapid Transportation (MRT) dan pelabuhan sebagaimana
dilaksanakan Indonesia dan Thailand. Pemerataan pembangunan
infrastruktur di Filipina dan Kamboja turut diperlukan.

Kemudian masalah dalam hal dibukanya akses bebas terampil kerja antar Negara dapat menimbulkan persaingan pekerjaan. Meskipun realisasinya baru 1.5%  dan terkait dibidang tertentu, hal ini dapat melemahkan pekerja berkualifikasi rendah. Saya mengharapkan bahwa pekerja kurang terampil tersebut dapat diberikan pembekalan terkait bahasa, keterampilan, kepemimpinan dan kerjasama agar dapat produktif dalam memajukan ekonomi regional.

Ekonomi juga sangat dipengaruhi oleh politik; apabila terjadi gejolak
politik hal ini menakutkan bagi penanam modal sehingga mereka dapat
menarik kembali investasinya. Hal ini menyiratkan bahwa kestabilan
politik Negara ASEAN memegang peran yang sangat penting termasuk
menyikapi peristiwa politik seperti halnya peluncuran misil Korea
Utara dan perebutan jalur di Laut Cina Selatan; saya berharap ASEAN
mengambil posisi netral. Kembali perlu diinget bahwa ASEAN bukanlah
badan supra nasional yang memiliki parlemen maupun forum penyelesaian
sengketa sendiri sebagaimana Uni Eropa, karena latar belakang Negara
anggota ASEAN relatif baru dan sejarah pembentukannya berbeda sehingga
beberapa pendekatan secara hati-hati dan perlahan yang diambil. Integrasi ASEAN sengaja berkembang perlahan dan tidak sampai pada bentuk integrasi moneter maupun politik; namun sudah ditetapkan 3 pilar yang diharapkan dapat mendukung pertumbuhan ASEAN: Masyarakat ASEAN Sosio-Kultur, Masyarakat Politik-Keamanan ASEAN (APSC) dan Masyarakat Ekonomi ASEAN.

Terakhir meskipun terdapat perbedaan etnis, budaya, bahasa, agama dan
sejarah politik antar masing-masing negara, ASEAN harus bersatu
sebagaimana pepatah “Together we stand”; dengan bersatu kita dapat
memperkuat posisi politik yang netral dan damai. Hal ini masih menjadi
tantangan, namun saya berharap ditingkatkannya kerjasama antar Negara dibidang budaya dan pendidikan sehingga masyarakat ASEAN dapat mengidentifikasi dirinya sebagai masyarakat ASEAN pertama dan nasionalitas masing-masing kedua demi memajukan spirit ASEAN.

What to Expect on the Convention on the Physical Protection of Nuclear Material, Its Entry into Force and its Amendment

Julissa Gozali

The history of nuclear energy dates back to the discovery of Uranium in 1789 by Martin Klaproth[1] which then developed from the science of atomic radiation, atomic change and nuclear fission from 1895 to 1945 and has since then grown into the technology we know today.

Nuclear technology is a two-sided coin, beneficial and dangerous. On the danger side, the technology can be used as a weapon; however, on the bright side, the technology helps in giving a solution as an alternative source of energy, and its reliance have increased.[2] Even so, the effects it has may be catastrophic when accidents or misuse happen, for example take the Fukushima Daiichi incident that happened in 2011 caused a major level-7 disaster.  

The usage of high impact technology requires legal instruments to regulate its security and safety. The dangers fortunately have already been anticipated since steps have been taken such as United Nations’ first resolution in 1946 on nuclear weapons; its goal is to eliminate atomic weapons and weapons of mass destruction. Keep in mind that there will always exist a flaw in legal instruments since nuclear technology is complex and change is yet to come. There are legal instruments that have been issued, the problem however is that some are binding and some are not.

Before moving to the details to nuclear related legal instruments, we take into mind there is the difference between nuclear security and nuclear safety. Taken from the International Atomic Energy Agency (IAEA), nuclear security is the prevention and detection of, and response to, theft, sabotage, unauthorized access, illegal transfer or other malicious acts involving nuclear material, other radioactive substances or their associated facilities.[3] ‘Safety’ on the other hand is the achievement of proper operating conditions, prevention of accidents and mitigation of accident consequences, resulting in protection of workers, the public and the environment from undue radiation hazards.[4]

Since the two definitions have different but interrelated meanings, the instruments on each concern have different legally binding nature. The security-related instruments that are binding under the IAEA are: Convention on the Physical Protection of Nuclear Material and the 2005 amendment, Safeguards Agreements between the Agency and States Required in Connection with the Treaty on the Non-Proliferation of Nuclear Weapons, Model Protocol Additional to Agreement(s) between State(s) and the Agency for the Application of Safeguards, Convention on Early Notification of a Nuclear Accident, Convention on Assistance in the Case of a Nuclear Accident or Radiological Emergency, Convention on Nuclear Safety, Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management.[5]

The UN have also adopted binding international instruments such as: United Nations Security Resolutions 1373 (2001) and 1540 (2004), Treaty on the Non-Proliferation of Nuclear Weapons (NPT) and International Convention for the Suppression of Terrorist Bombings (UNGA Resolution 59/290) (2005).[6] There also exist regional agreements and regional Non-Proliferation and Nuclear Weapons Free Zone Treaties such as Treaty of Tlatelolco and Treaty of Rarotonga.[7]

The instruments mentioned are based on the principles of nuclear law such as: safety, and the prevention principle in order to prevent damage and to minimize any effects resulting from misuse and accidents. Other nuclear law principles include security, responsibility, permission continuous control, compensation, sustainable development, compliance, independence, transparency and international co-operation.[8]

Concerning safety, the Convention on Nuclear Safety was adopted in Vienna on 17 June 1994 and entered into force on 24 October 1996.  The main aim is to maintain a high level of safety by setting international benchmarks. Its main target is to have committed participating States, which operates land-based nuclear power plants. The obligations mentioned in the convention include siting, design, construction, operation, the availability of adequate financial and human resources, the assessment and verification of safety quality assurance and emergency preparedness. There also exist obligations for “peer review” in which the parties are to submit reports on the implementation of their obligations.[9]

The next issue regarding nuclear security is absorbed through the Convention on the Physical Protection of Nuclear Material (CPPNM). It was signed in Vienna and New York on 3 March 1980, and is the only international legally binding instrument on physical protection of nuclear material. The obligations set in the convention concerns prevention, detection and punishment of offences relating to nuclear material. It was adopted on 26 October 1979 and entered into force on 8 February 1987. [10]

It is important to mention that the CPPNM is restricted to nuclear material used for peaceful purposes while in international nuclear transport.[11] The scope was limited since it does not cover nuclear facilities or nuclear material other than that in transportation.[12] Due to that matter, in 1999, a member of the contracting States called for the CPPNM to be amended. 

The amendment was also through concern of risks such as the invasion of nuclear by terrorists or risks of nuclear smuggling. The background itself originated by the events of 11 September 2001 which had promptly called the United Nations Security Council to adopt resolution 1373 as the “Counter Terrorism Code.”[13] The legal framework against nuclear terrorism was constituted by resolution 1540, which then reached out to the CPPNM (2005 amendment) and the International convention for the suppression of terrorist Bombings. 

The obligations binding to State parties by the resolution is to adopt and enforce appropriate effective laws which prohibit any non-state actor to manufacture, acquire, possess, develop, transport, transfer or use nuclear, chemical or biological weapons and their means of delivery.[14] Consequently, states are also required to “renew and fulfill their commitment to multilateral cooperation, in particular within the framework of the international Atomic Energy Agency, the organization for the prohibition of chemical weapons and the biological and toxin weapons convention.”[15]

Whilst in IAEA’s September 2001 sessions, the Board of Governors adopted a series of policy decisions and the Director General proposed measures that could be implemented without delay (Due to the events of 11 September 2001). Since then, this issue had been observed by the IAEA for the long run and has been a part of its initiatives.[16] Through the apprehension of transporting nuclear material across borders in an era of global terrorism, international cooperation has increased significantly. This also led to the necessary ratifications for the CPPNM amendment and finally entered into force on 8 May 2016. The big difference through the entry into force of the CPPNM amendment demands all contracting States to be obligated as a matter of international law to ensure that their respective national legislation implements the additional CPPNM amendment obligations. 

The obligations mentioned in the amendment covers mitigation on sabotage, cooperation and information sharing in relation to locate and recover stolen or smuggled nuclear material and of course to regulate punishment on the said offences.[17] Whenever there is an offence related to nuclear material, State parties shall in accordance with their national law, provide co-operation and assistance in the recovery and protection of such material to any state that so requests.[18] Keep in mind the purpose of the convention is to achieve world and effective physical protection of nuclear material and nuclear facilities both used as peaceful purposes.

With the CPPNM amendment’s entry into force the contracting States are required to:

–         Establish, implement and maintain an appropriate physical protection regime applicable to nuclear material and nuclear facilities under its jurisdiction, with the aim of protecting against theft, and other unlawful taking of nuclear material in use, storage and transport; [19]

–         Ensuring measures taken to locate any missing or stolen nuclear material, and take steps as mentioned in the convention when the material is located outside its territory. [20]

–         Protect nuclear material and facilities against sabotage and mitigate radiological consequences of sabotage.

–         Commitment in establishing a legal and regulatory framework to govern physical protection and establish competent authority for it.

–         Apply fundamental principles such as: Responsibility of the State, Responsibilities During International Transport, Legislative and Regulatory Framework, Competent Authority, Responsibility of the License Holders, Security Culture, Threat (current evaluation on threat), Graded Approach, Defence in Depth, Quality Assurance, Contingency Plans, Confidentiality.

–         Take appropriate steps of any theft, robbery nuclear material and in doing so, the parties concerned shall exchange information with each other and coordinate through agreed and diplomatic channels, render assistance and ensure the return of recovered nuclear material stolen or missing.

–         Take appropriate measures to protect the confidentiality of any information received by virtue of the provisions.

–         Request for extradition or for mutual legal assistance based on the said offence may not be refused on grounds concerning political offence or connected to it.

–         Ensure the prime responsibility for the implementation of physical protection of nuclear material or of nuclear facilities rests with the holders of the relevant licenses or of other authorizing documents.

–         Acquire emergency plans to respond to unauthorized removal of nuclear material or sabotage of nuclear facilities or nuclear material should be prepared and appropriately exercised by all license holders.

–         Undertake not to export or import nuclear materials or to allow transit through their territories of such materials unless they have received assurances that these materials will be protected during international transport in accordance with the aforementioned levels of protection determined by the CPPNM,[21]

–         Specified acts to be punishable in national law concerning nuclear material including unlawful possession, theft, embezzlement, unlawful transporting, as a threat, or transport of nuclear material theft, using or threatening to use nuclear material to cause harm and interfering with operations of nuclear facilities with the intent to cause harm.

It is true that states, which are parties to the CPPNM must follow the obligations set out in the CPPNM however, the process does not end there. States would then need to ratify the obligations towards their nuclear regulations, but this also means that it imposes obligation towards license holders (whether nuclear facility operators, nuclear material shippers or others). In order to comply with both this prime responsibility and the CPPNM amendment more broadly, license holders will need to[22]:

–         Review regulations on issuing licenses and nuclear security policy by working within license holder organizations; This also includes policies on unauthorized disclosure of information which could compromise the physical protection of nuclear material and nuclear facilities;[23]

–         Work with IAEA and other relevant regulators in order to review or make adaptations within the design, maintenance and improvement of systems of physical protection of nuclear material and nuclear facilities;[24]

–         Ensure the existence of several layers and methods of protection that must be overcome or circumnavigated by any adversary;[25]

–         If necessary, revise or develop, emergency procedures and arrangements;

–         Review, license and if necessary revise or develop, a positive, institutional nuclear security culture policy within license holder organizations; 

–         Work with regulators to ensure that the license holder’s arrangements satisfy the relevant CPPNM requirements.[26]

The CPPNM and its amendment have addressed the current ongoing issues in times of peace, not to mention whatsoever nuclear technology on weapons or in times of war, this is to be dealt by humanitarian law, but that also leaves a gap. Whether nuclear technology should be used as non-peaceful purposes or in a time of non-peace should be discussed at another time. 


[1]“Outline History of Nuclear Energy”, last modified March, 2014 http://www.world-nuclear.org/information-library/current-and-future-generation/outline-history-of-nuclear-energy.aspx

[2] Ben McRae “The Convention on Supplementary Compensation for Nuclear Damage: Catalyst for a Global Nuclear Liability Regime”, accessed on August 30, 2016. https://www.oecd-nea.org/law/nlb/nlb-79/017-035%20-%20Article%20Ben%20McRae.pdf

[3]“Meaning of (nuclear) Security”, accessed August 31, 2016, http://www-ns.iaea.org/standards/concepts-terms.asp

[4] “Meaning of (nuclear) Safety”, accessed August 31, 2016, http://www-ns.iaea.org/standards/concepts-terms.asp

[5] “The Binding IAEA security-related instruments are”, accessed August 31, 2016. http://www-ns.iaea.org/security/legal_instruments_list.asp?s=4&l=28

[6] “Other binding international and regional instruments which have been adopted under UN or other auspices are”, accessed August 31, 2016. http://www-ns.iaea.org/security/legal_instruments_list.asp?s=4&l=28

[7] International Nonproliferation Organizations and Regimes, Center for Nonproliferation Studies “South Pacific Nuclear-Free Zone Treaty (Treaty of Rarotonga),” last modified Mei 5, 2011, http://www.nti.org/media/pdfs/Treaty_of_Rarotonga_Text.pdf

[8] Stoiber, Carlton; Baer, Alec; Pelzer, Norbert; Tonhauser, Wolfram, Handbook on Nuclear Law, (Austria: IAEA, July 2003) page 5.

[9] “Convention on Nuclear Safety”, accessed August 25, 2016, https://www.iaea.org/publications/documents/treaties/convention-nuclear-safety

[10] “Convention on the Physical Protection of Nuclear Material”, accessed August 25, 2016, https://www.iaea.org/publications/documents/conventions/convention-physical-protection-nuclear-material

[11] “Convention on the Physical Protection of Nuclear Material”, article 2.1, accessed August 25, 2016, https://www.iaea.org/publications/documents/conventions/convention-physical-protection-nuclear-material

[12] Shearman & Sterling LLP “Amendment to the Convention on the Physical Protection of Nuclear Material Enters into Force”, last updated May 9, 2016, http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/05/Amendment-to-the-Convention-on-the-Physical-Protection-of-Nuclear-Material-Enters-Into-Force-PDF-050916.pdf

[13] Walter Gehr, “The Universal Legal Framework Against Nuclear Terrorism” Accessed August 10, 2016, https://www.oecd-nea.org/law/nlb/nlb-79/005-015%20-%20Article%20W.%20Gehr.pdf

[14] United Nations Security Council Resolution 1540, S/RES/1540 (28 April 2004), available from http://www.ipu.org/splz-e/civ1540/1540.pdf

[15] ibid 

[16] Shearman & Sterling LLP “Amendment to the Convention on the Physical Protection of Nuclear Material Enters into Force”, last updated May 9, 2016, http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/05/Amendment-to-the-Convention-on-the-Physical-Protection-of-Nuclear-Material-Enters-Into-Force-PDF-050916.pdf

[17] Mark Fitzpatrick, “Promoting Nuclear Safety and Nuclear Security in the Middle East Region”, last modified November, 2012, http://www.nonproliferation.eu/web/documents/backgroundpapers/fitzpatrick2.pdf

[18] Convention on the Physical Protection of Nuclear Material, Article 5, available in https://www.iaea.org/sites/default/files/infcirc274.pdf

[19] Amendent to Convention on the Physical Protection of Nuclear Material, 2005, Article 2A, available in https://www.iaea.org/sites/default/files/infcirc274r1m1.pdf

[20] ibid

[21] Amendent to Convention on the Physical Protection of Nuclear Material, 2005, Article 4, available in https://www.iaea.org/sites/default/files/infcirc274r1m1.pdf

[22] ibid 

[23] ibid

[24] ibid

[25] ibid

[26] ibid


Stran Greek Refineries and Stratis Andreadis v. Greece


Back in 1972 when Greece was governed under a military Junta, Mr. Andreadis proceeded to construct a crude oil refinery in the Megara region near Athens. The contract with Greece was dated on July 22, 1972, was ratified and published in the official gazette by July 26 that same year.

Stran Greek Refineries would perform the project; a company soon to be established. The total cost for it was 76 million US Dollars, all rights and obligations were to be transferred upon the incorporation of the company.

One of the obligations mentioned in the contract was that the State was to purchase a plot of land for the purpose of the refinery. The deadline for it was the end of year 1972. Through the issuance of Royal Decree no. 450, the State has authorized Mr. Andreadis to import 58 Million US Dollars to finance the project.

Issues however occurred as the State was not able to purchase the plot of land. This was expressed through a press conference by the end of February 1974. The failed purchase was due to the government’s (followed by the Ministers of Industry and Agriculture) decision to return land that had already been expropriated. The following day, the Megara police ordered that the work in the plot of land should cease. Stran nevertheless protested and issued an extra judicial summons inviting the State to ratify the purchase of the land in question. The State still refused to revoke the Megara police order.

After Greece’s democracy was restored, the contract and decree no. 450 was reviewed since it was considered harmful to the national economy. The State intended to terminate the contract by relying on law no. 141/1975 on “termination of preferential contracts concluded under the military regime”. This particular law possessed superior force.

By Mid November 1975, the Applicants were called upon by the Minister of Coordination to either revise or terminate the contract; however it followed with no response. Prior to the contract termination in October 14, 1977, Stran had demanded expenditures in connection with the project since it had taken out loans.

The dispute rose on November 10, 1978, in which Stran brought an action in the Athens Court of first instance, demanding a claim of a certain sum. Stran argued that the State had breached its obligations; first, by prohibiting the ongoing work in the refinery construction and second, the failure to purchase the land required. Stran also sought for the return cheque of 240 million drachmas as security for the proper performance of the contract; and claimed reimbursement of the commission and the fiscal stamp fee.

The State responded by challenging court’s jurisdiction and implied that the dispute should be brought to arbitration as mentioned in the contract. The court however rejected the challenge since the arbitration clause was void due to the contract termination.

The State then made its next move on June 12, 1980, by appointing an arbitrator in hopes for the compensation declared by the Athens Court of First Instance to be unfounded. Stran, however argued (after appointing their own arbitrator) that the arbitration court lacked jurisdiction and requested the arbitration to wait until the proceedings in Athen’s court of first instance ended.

The arbitration court however found that it had jurisdiction to the dispute since the total failure to perform the contract was also subject to arbitration. Through evidence set out in Athens court of first instance, the arbitration court found that the responsibility of the loss sustained by Stran was shared 30% and 70% to Stran and the State respectively. Stran was burdened part of the loss due to working on the expropriated land without the necessary permits. Regarding the cheque, the arbitration court is of opinion that the cheque lodged as security was retained unlawfully by the State.

This is where it gets complicated: after the arbitration proceedings and award of February 27, 1984; the State then asked the Athens Court of First Instance to set aside the arbitration award. The State argued that the arbitration court lacked jurisdiction, since the limit of jurisdiction concerns the performance, interpretation, rights, and duties deriving from the contract. Therefore, the arbitration court lacked jurisdiction was confirmed by the fact that Stran’s claims against it and had become statute-barred following the termination of the contract.

The Athen’s court of first instance gave judgment on April 21, 1985. They dismissed the State’s argument because the arbitration clause in the contract continued to produce the effects to disputes, which had risen during the validity period of the contract.

On December 19, 1986, Stran withdrew its first action in the Athens court of first instance, but still sought to pursue the cheque lodged as security. The State opposed this discontinuance since it maintained that the latter action would have resulted unfavorable to Stran and that the State had a legitimate interest in seeking a final decision.

Through the Athens court of appeal, they upheld the judgment of April 21, 1985 in which they stated that even though the contract was terminated, the arbitration clause in relation to the contract prevails.

On December 15, 1986, the State appealed to the court of cassation. The hearing was initially meant to be on May 4, 1987 however was postponed to June 1, 1987 due to law 1701/1987 which was issued on May 22, 1987. It entered into force upon its publication in the official gazette of May 25, 1982.

This new law dealt with renegotiation on businesses involving extraction of oil and natural gas in an area of the sea of Thrace. Article 12 of law 1701/1987 however was unfavorable to Stran, since in short it declares that arbitration tribunal has no jurisdiction and that awards shall not be enforceable on claims against the Greek State on contracts that were terminated between April 21, 1967 and July 24, 1974. Lastly, any court proceedings at whatever level pending at time of the enactment of this law are declared void.

The court of cassation took view that article 12 (paragraph 2) was not unconstitutional since it deprived the effects of any arbitration awards made after the termination of contracts. The court of cassation revoked the court of appeal’s judgment and declared the arbitration award of February 27, 1984 to be void.

After the decision and revocation made by the Court of Cassation, Stran Greek refineries and Mr. Stratis Andreadis (the Applicant) took the next step to the commission (European Court of Human Rights) on November 20, 1987. Their arguments were based on a breach of article 6 of the convention for having a non-fair trial within a reasonable time. They also argued that their right of property had been infringed due to article 12 of Law no. 1701/ 1987.

In their submission, the State argued that the Applicant (Stran) had failed to exhaust domestic remedies. If the Athens court of first instance were to dismiss the application filed by the Applicant on December 19, 1986, the Applicant  would then be in a position to plead the incompatibility of article 12 paragraph 3 of law no. 1761/1987, its constitutionality of which had not been determined by the plenary court of cassation. The government also argued that the Applicant should have shown signs of protest against the termination of contract.

The court finds that effective remedies which have not been taken by the Applicant should be mentioned in relation to exhaustion of domestic remedies. The court also notes the arbitration proceeding was initiated by the government rather than taking it through ordinary courts and the Applicant was able to claim damages through the arbitration court. Concerning fair trial, the court notes that in order to be considered as fair trial, each party must be afforded a reasonable opportunity to present his case that does not put him in a disadvantage.

The Applicant then argued that they have been deprived of their property rights. The State responded otherwise since no. 13910/79 and the arbitration award could not be equated. The court however is of opinion that the Applicant’s right of property as guaranteed was interfered since it was impossible for the Applicants to secure enforcement of an arbitration award. The court also concluded that a State does have sovereign power to amend or terminate a contract with private individuals, provided it pays compensation.

The court unanimously declared as follows: (i) Dismisses the government’s preliminary objections; (ii) Holds that there has been a breach to a fair trial; (iii) Holds that there is no breach on the length of proceedings; (iv) Holds that the State must pay the Applicants within three months and (v) Dismisses the remainder of the claim for just satisfaction.

This summary is made based on http://www.menschenrechte.ac.at/orig/95_1/Stran_Greek.pdf

Karaha Bodas Arbitration

The next topic I have recently stumbled upon is Karaha Bodas arbitration. It was hinted on me, and of course I find it interesting since it is related to state owned companies in Indonesia back in 1997-1998. This particular case is closely linked with Himpurna arbitration, since the parties are inter-related. The implementation of the award on the other hand will be discussed later on.


In 1994, Karaha Bodas entered into a joint operating contract (“JOC”) with Pertamina, and had also entered in an energy sales contract (“ESC”) with PLN. Both Pertamina and PLN are state owned companies; Pertamina being oil and gas whilst PLN being electricity. The contracts were meant for Karaha Bodas to first of all develop geothermal energy; later to build, own and operate electricity-generating facilities in which the energy produced was to be sold to PLN.

The Asian financial crisis of 1997 and 1998 caused chaos to the project. Due to these times, three Presidential decrees were issued which meant that both PLN and Pertamina could not perform their obligations. This resulted in postponement of Karaha Bodas’ (“Claimant”) investment. In order to gain relief from their loss, the Claimant with Himpurna took no time in delay by starting arbitral proceedings in the same year of 1998. The arbitral proceedings stated that both PLN and Pertamina had committed a breach of contract and that the Claimant wished for the termination of the contracts and demanded awards for the damages.

The next matter to be discussed is the damages payable. The Tribunal took in the concept of lucrum cessans and dammnum emergens by taking into consideration that both concepts are acceptable in the Indonesian law (in respect of the laws governing both contracts (ESC and JOC), the applicable law was found to be Indonesian law and no mention of international law).  The Claimant posted damages of USD 94,600,000 on capital investment recovery and USD 512,000,000 on lost profits. The number gained from lost profits included the projected cash flow of 30 years energy sales that also included an 8.5% discount. Next, the Claimant also sought for interests dating back from 10 January 1998, the date of suspension of its investment and also the issuing date of the final presidential decree.

Finally, discussing both matters, the Tribunal finds and awards Karaha Bodas USD 93,100,000 in relation to capital investment, cutting down USD 1,600,000 in respect of expenditures that had not been approved. In awarding lost profits, the tribunal fixed the amount to USD 150,000,000. In regard to the interest, the Tribunal agreed only to start the interest claim (lucrum cessans) from the date of the award with a rate of 4%. The Respondent is to pay two-thirds of the costs and expenses of the arbitration.

*This summary is a shorter version of the original case summary that was prepared in the course of research for S. Ripinsky with K. Williams, Damages in Investment Law (BIICL, 2008)

Arbitration at Glance

What is arbitration? The definition itself has not been set in stone, be it national law or conventions regulating them, however their principal characteristics are:

–       A mechanism for the settlement of disputes;

–       Arbitration is consensual;

–       Arbitration is a private procedure; and

–       Arbitration leads to a final and binding determination of the rights and obligations of the parties[1]

How does arbitration work? First, there has to be a dispute. Most disputes arise when one party fails to pay a sum of money owed to the other.[2] Remember that as arbitration is consensual, both parties of the dispute must consent to arbitrate the dispute, meaning that the authority of the arbitral tribunal’s judgment is limited to only certain aspects to which the parties have agreed.[3]

How do we know that we have chosen arbitration as our forum of dispute? Most arbitration agreements are in the form of an arbitral clause in the principal contract. If that is not the case, then there may be an arbitration agreement ongoing with the dispute.

Where does arbitration stand? Arbitration is not part of the state’s court system, however it fulfills the same function as litigation.[4] The difference is that arbitration is a one-stage procedure whereas courts have appeals. The end result of arbitration is an award that is enforceable by the courts.[5]

In what aspects is arbitration favorable? Arbitration permits the parties to choose their arbitrators. This gives the advantage to choose specialized knowledge arbitrators. This means that engineers and architects may serve as an arbitrator[6] (in a construction arbitration) as compared to judges that have limited technical knowledge of the dispute. Keep in mind that the freedom to choose arbitrators with specialized knowledge is not available in states that have restrictive arbitration laws.



[1] Bergsten, Eric E. United Nations Conference on Trade and Development, Module on Dispute Settlement International Commercial Arbitration, United Nations, 2005, Page 5.

[2]  Ibid.

[3]  Ibid, page 6.

[4]  Ibid, page 7.

[5]  Ibid.

[6]  Ibid page 14.

Mihaly International v. Sri Lanka

By: J. Gozali

Mihaly International v. Sri Lanka is a case subjected towards investment. The main argument revolves around the domicile of the Company and later towards the definition of “investment” itself.


The government of Sri Lanka (Respondent) wished for its power station to be constructed and operated by private enterprise on a build own transfer basis. Mihaly (Canada) in this case is interested as an exclusive investor to develop a 300 MW thermal power station with the objective of supplying power to the Ceylon Electricity Board (CEB).

Initially 25 groups were interested in the project, however only 5 were selected to enter into negotiations and Claimant was selected as recipient of the Letter of Intent (LOI). The LOI stated a number of principles and the negotiators were to proceed for the project leading to the signing of a contract by the end of the third quarter of 1993. The LOI explicitly states that it does not bind the parties, however it expressed the government shall use its best efforts to take all things necessary to execute the transactions. Later, a Letter of Agreement (LOA) was issued addressing the Mihaly’s (Canada) satisfaction towards the discussions and negotiations with the Respondent.

On July 29th 1999, the Centre received a request (registration) dated a week prior from Mihaly Corporation, established in the United States of America (Claimant) against the Democratic Socialist Republic of Sri Lanka. The dispute rose from the 20th September 1991 Treaty between the USA and Sri Lanka concerning Encouragement and Reciprocal Protection of Investment (BIT). Both USA and Sri Lanka are Parties to the ICSID Convention.

The initial session was held in London, on July 19th 2000, and then continued in Washington DC from April 30th to May 1st 2001. The Respondent’s objections were towards jurisdiction ratione personae and ratione materiae. Regarding ratione personae, the Respondent finds that the claim by Mihaly (Canada) was true, but since Canada was not a party to the ICSID Convention, therefore the case should be dismissed due to lack of jurisdiction. The lack of jurisdiction is due to non-fulfillment of nationality requirement under Article 25(2) of the ICSID Convention.

In their defense, Claimant argued that Mihaly International Corporation was organized under the laws of California, and since USA is a party to ICSID Convention therefore it fulfills the nationality requirement under article 25(2). Claimant also points out the fact that Mihaly International are regarded as partnership and assignment both in Canada and USA, therefore authorizing Mihaly International (USA) to act on behalf of Mihaly (Canada).

The Respondent rejected both theories of partnership and assignment since the personal nature of the transactions and negotiations happened between Respondent and Mihaly (Canada). There was no precluded assignment to Mihaly (USA) without the consent from Respondent.

To conclude both arguments, the Tribunal finds that the jurisdiction of ICSID is solely based on ICSID Convention and rules of general international law. In conclusion, jurisdiction of the Centre has been fulfilled through registration of both parties to the Centre in accordance with article 36 of the convention.

The Tribunal then evaluates the partnership between Mihaly (USA) and Mihaly (Canada) and finds that it has no separate juridical personality. If there exists a partnership, then it’s the capacity of the Claimant Mihaly (USA) to file a claim against the Respondent. The Claimant however in this case is Mihaly (USA), not Mihaly International or the National Partnership (USA & Canada). The assignment to Mihaly (USA) shall not complete the action in accordance to the convention since it would defeat the purpose of the convention. The Tribunal also concludes that if Mihaly (Canada) filed a claim against the Respondent it was defective before appearing in ICSID, since Canada is not a party to the convention.

The next consideration was the expenditure being considered as “investment” without a contract. Both parties failed to mention the precise definition of “investment” and pre-investment expenditures. The Claimant merely cited an opinion in which defines the expenditures during the development phase typically to 2-4 percent of the total cost. In response, the Respondent does not object the inclusion of development expenditures as investment costs, as long as there is an agreement or consent of the host government (Respondent). Claimant’s effort towards proving Respondent’s consent was through the LOI, LOA and the Letter of Extension (LOE). Through these documents, Claimant argues that consent was given based on the convention.

In reply, the Respondent took great care in the documentation relied by Claimant which points out discussions concerning exclusivity upon obligation for building, ownership and operation of the power station. Exclusivity however never in return created a contract. The operation of the SAEC (South Asia Electric Company as the distribution of the supplies of electricity) was dependent on the contract with Respondent, which is why Respondent would not regard expenditures as investment.

The Tribunal finds that all three letters (LOI, LOA and LOE) has no binding obligation on both parties. The Tribunal also finds that all three documents are not to be treated in any way as means of acceptance by the Host State (Respondent) and that the expenditures are not constituted as an investment within the scope of the convention.

Concerning the definition of “investment” for the purpose of ICSID, the tribunal must examine the current and past practice on the definition executed through USA-Sri Lanka BIT. The Tribunal finds that the definition of investment must be found within the conventional or customary law. In this case, Claimant did not point out any evidence of treaty interpretation or the Practice of States that gives out expenditures deemed as investment. The Tribunal also does not accept the meaning of “investment” in the unilateral or internal characterization of certain expenditures by the Claimant in preparation for a project of investment.

The Claimant made reference towards the BIT in which existing “investment” in must be “fair and equitable treatment” and subjected towards “full protection and security”. The Tribunal however finds that the Claimant has not given enough evidence for the said investment that is qualified for full protection and security.


The Tribunal decides in unanimity:

a)      In relation to the preliminary objection ratione personae: the objection must be dismissed.

b)      In relation to the preliminary objection ratione materiae that the objection is sustained in the absence of any proof of admission of an “investment”.

c)      The Tribunal in its powers to entertain the question submitted.


The Tribunal in further decides that the

a)      Costs of the proceedings such as fees and expenses of the arbitrators and the secretariat shall be shared by both parties equally.

b)      Each party bears its own costs and expenses towards legal fees for counsels and their respective costs of Legal fees for counsels for the preparation of the written and oral proceedings.

Individual opinions of Mr. David Suratgar:

Since under article 25(4) states could put investor on notice as to the type of disputes that they would be prepared to have submitted to the Centre and also to define the scope of their advance consent to the jurisdiction of ICSID by means of law or by Bilateral investment treaties such as the United States-Sri Lankan BIT.

In this case, Respondent was given an opportunity to adopt or to define the limited scope defining “investment” for the purpose of consent to the jurisdiction of the Centre. It gave a very general definition of investment for the purposes of the treaty.

(Mihaly International v. Sri Lanka taken from ICSID Reports volume 6, Crawford, James & Lee, Karen, 2004, Cambridge University Press, p. 308-326)