Indonesia announces renegotiation of BITs

Since the Dutch government’s announcement last year that Indonesia had terminated the 1995 Bilateral Investment Treaty (BIT) between those countries, speculation has been rife regarding the status of Indonesia’s remaining BITs, signed with more than 60 countries.

On 12 May 2015, The Jakarta Post reported that the Indonesian Government intends to renegotiate its BITs, to bring greater certainty both to foreign companies doing business in Indonesia and to the Indonesian government. In particular, The Jakarta Post quotes Azhar Lubis, deputy director for investment monitoring and implementation at the Indonesian Investment Coordinating Board (BKPM), as suggesting that Indonesia may seek to restrict access to Investor State Dispute Settlement under its treaties to cases where the government has expressly consented that disputes with a particular investor may be referred to arbitration. Lubis stated that such a revision would be consistent with Indonesia's 2007 Direct Investment Law, which stipulates that international arbitration claims should be filed based on an agreement between both parties.

Hikmahanto Juwana, international law expert at the University of Indonesia, told The Jakarta Post that provisions in existing BITs that permit one party to commence arbitration without the other party’s consent disadvantage Indonesia, which has often experienced losses in international arbitration.

Indonesia's position is not entirely surprising, in light of Churchill Mining Plc v Indonesia (ICSID Cases ARB/12/14 and 12/40), in which it sought to challenge the tribunal’s jurisdiction on the basis that the Investor State Dispute Settlement clause in the Indonesia-Australia BIT had not been triggered. The government submitted that a further positive act was required before Indonesia could be said to have consented to arbitration. On 24 February 2014, the Tribunal rejected Indonesia’s jurisdictional challenges, leaving it susceptible to a claim for damages of not less than US$1.05bn, excluding interest.

As noted in a previous post, UNCTAD recognised in a 2013 report a possible trend away from bilateral arrangements and towards wider, regional, multilateral agreements involving greater economic integration and free trade obligations. This may ultimately impact on whether Indonesia is willing to expend resources on negotiating or renegotiating bilateral agreements, when the trend worldwide seems to be towards negotiation of "mega-regional" agreements, such as the Transatlantic Trade and Investment Partnership, the Trans-Pacific Partnership and the ASEAN Regional Comprehensive Economic Partnership. If Indonesia, and other states, shift their focus from BITs to such multilateral agreements, we may see a dramatically different investment protection landscape in future.

For further information, please contact Antony Crockett, Senior Associate, Catherine Eglezos, Solicitor, or your usual Herbert Smith Freehills contact.