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.

Facts:

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.