Pick a Wisdom from Karaha Bodas Case

Edition of Sinar Harapan 8 May 2007.

Non edited version

By: Sulistiono Kertawacana
Legal practitioner in Jakarta



In Mid-March 2007, the Cayman Islands court awarded that Pertamina breached the Joint Operation Contract (JOC) to Karaha Bodas Company (KBC), the contractor of Power Geothermal (PLTP) of Karaha. Pertamina must pay compensation to KBC as the implementation of the international award Geneva, Switzerland December 18, 2000.

In fact, the Arbitration has been punishing Pertamina and PLN. Pertamina and PLN decided to break Energy Sales Contract (ESC), and Pertamina has violated JOC. Therefore, Pertamina and PLN together and each sentenced to pay compensation KBC some U.S. $ 261,100,000 (U.S. $ 111,100,000 for the costs suffered by KBC and U.S. $ 150 million for profits have accrued to KBC), including 4% interest per annum, commencing from January 1 2001.

Negligent of Legal Aspects

Two projects of PLTP Karaha have been signed on 28 November 1994 i.e JOC and ESC. JOC (Pertamina and KBC) set Pertamina to be responsible for managing the operation of the geothermal and KBC as a contractor. KBC must develop geothermal energy and built, owns, and operates power plants. While the ESC (KBC, Pertamina, and PLN), KBC (as Pertamina and the Contractor under JOC) will supply and sell electricity to PLN. The choice of law, both JOC and ESC are Indonesian law.

However, there is an odd clause which escaped from Pertamina’s and PLN’s attention. Article 15.2 (e) JOC (contained similar contents with Article 9.2 (e) ESC) that the "events of Force Majeure shall include, but not limited to: ... (e) with respect Contractor only, any Government Related events' (events that caused by Force Majeure, including but not limited to: ... (e) only applies to the Contractor (KBC-pen), any action relating to the Government).

Supposedly, the parties involved in the JOC and ESC (Pertamina, PLN, and KBC) prohibited acts in violation of Indonesian law including government actions relevant provisions issued by the project that is binding on all parties. Article 1320 of Indonesian Civil Code stated that "(one of the legal requirements) because the agreement is lawful". Article 1339 of Indonesian Civil Code stated that "the agreement binds not only what is expressly stated therein, but also everything that according to the nature of consent required by (among others-writer) Law".

Furthermore, Article 1337 of Indonesian Civil Code states that "a cause is forbidden if it is prohibited (inter alia- writer) by the Law". The meaning of the Lawt is the legislation, including the government's decision to suspend the project Karaha PLTP. Referring to Article 1335 of Indonesian Civil Code, an agreement with a prohibited reason, does not have the force of law.

This means, according to Indonesian law, Article 15.2 (e) JOC and Section 9.2 (e) adverse ESC Pertamina and PLN is not valid. Force Majeure for Pertamina and PLN should include measures relating to the government.

Pick a Wisdom

At least, there are 3 lessons learned from this incident. First, consider a deep study of law before the government shall suspend / cancel state projects. Therefore, many of the awards have been hurt Indonesia due to cancelation, as the case of Patuha PLTP and PLTP Dieng.

Therefore, if the essence of force majeure clause is similar to JOC and ESC, the cancellation should be submitted by the state through the courts, despite a presidential decree issued on the suspension of the project. This is for testing of force majeure clause of validity of this model according to Indonesian law. This way is more secure. A stronger reason for the state if the cancellation of the contract, sued the foreign investors. Because of the glass eyes of the law of contract cancellation by a court, decision is more neutral than the Presidential Decree.

Second, the Minister of State Owned Enterprises (SOEs) needs to issue a circular letter (accompanied by the legal review) to all SOEs that SOE must reject the proposed force majeure clause in the construction of such clause stated on JOC and ESC. The goal is so that easier for SOEs in negotiations with partners to avoid paying compensation in the future.

Third, it is not enough to suspend / cancel the service-learning project indicated (Corruption, Collusion and Nepotism). Instead, the investigations of corruption come before the cancellation / suspension of the project. The reason of IMF recommendations, almost certainly because of the high cost of the project indicated that the state's financial burden. The goal, if in the midst of corruption investigations, pending projects, international positive perceptions that Indonesia canceled in order to eradicate corruption.

It Has Ever Tried

President Habibie has formed Team 7 Ministers (consisting of the Coordinating and Development Supervision Administrative Reform (chairperson), Finance, Minister of Industries and Trade, Minister of Mining and Energy, State Minister for Research and Technology / Head of BPPT, Minister for National Development Planning / Head of National Development Planning Agency, and State Minister for Administrative Reform of SOEs. The team was given the task to review the various private power contracts (about 27 cases) are considered harmful to Indonesia.

By appointing an advocate i.e Adnan Buyung Nasution (getting power of attorney from Pertamina and PLN), the government intends to cancel the private power contracts through the courts in Indonesia. The reason, the existence of causa and creation are not permitted because accomplished through Corruption Collusion, and Nepotism (CCN-KKN). The strategy is that before it was canceled by the district court, cases of corruption and dirty game of dismantled first. However, this attempt failed because the Attorney General (Andi M Ghalib) did not cooperate to make this effort.

Many private power contracts made with forced and under pressure, according to Indonesian law that parties may feel pressured to cancel the agreement. Paiton case is an early precedent for this. The lawsuit filed in the Central Jakarta District Court dated October 9, 1999. Legal team was ready to provide proof that the contract was full deception and corruption. Former President Director of PLN (Zuhal) was ready to testify that that how he was called on Cendana by Suharto, but he could not come in and just told to wait outside, while the Minister of Finance, Marie Muhammad and the Coordinator Minister S. Affif entered to meet Suharto and. They conferred on the inside, and then Suharto had decided the price, and Zuhaln was forced to sign. Actually, Zuhal disagreed, but Suharto had decided (Adnan Buyung Nasution: 174; 2004).

Furthermore, when President Abdurrahman Wahid (Gus Dur) era came many the pressures from foreign parties, including Ambassador to the United States (U.S.) in Indonesia, and various emissaries who came to Indonesia (U.S. Vice President, Secretary of State, and Henry Kissinger). Also when Wahid visited the United States, he was pressured by the U.S. businessmen and U.S. Senator. Indonesian Ambassador in the U.S., Dorodjatun Kuntjorojakti also was pressed to give advice to the government of Indonesia to revoke Paiton case. Minister of Mining and Energy (it was Susilo Bambang Yudhoyono) did not escape the pressure. Through the IMF, World Bank, and UNDP also launched pressure.

The Indonesian government could not resist and ordered the Director of PLN (it was Adhi Satriya) revoked the cancellation of contract lawsuit toh Paiton. Adhi Satriya refused; still intend to continue the lawsuit. Unfortunately, Adhi Satriya choosed to resign as Managing Director of PLN than wait 'fired' and to fight in court due to differences with the shareholders (the government) for and on behalf of PLN and the public interest. This step is important to test the absolute authority of shareholders of the company when the directors consider harmful and common interests.

We could learn from a Dutch jurisprudence which known as the Forum of Bank Arrest, Arrest Reported January 21, 1955 (N.J 1959 N.43). The court received the lawsuit and canceled the decision of the Board of Directors Meeting. The reason, Annual General Meeting of Shareholders decisions contrary to propriety and good faith.

Two important opportunities for the development of Indonesian law has been lost. Indonesian economy still slumped and stumbled sideways between the international perception of the investment climate and legal certainty Indonesia. We must note that investors from the country's famous anti-corruption, has applied double standards when fighting corruption a loss. Be aware !!!