Some reflections on investor-state arbitration post-Newmont

Some reflections on investor-state arbitration post-Newmont John Lumbantobing  ;   The writer has just completed his Master of Law degree at the University of Cambridge, focusing on international dispute settlement

JAKARTA POST, 18 September 2014

                                                                                                                       

                                                      

Some two weeks ago PT Newmont Nusa Tenggara and Nusa Tenggara Partnership BV withdrew their arbitration suit against the Indonesian government concerning the export restriction of copper concentrate from the ICSID (International Centre for Settlement of Investment Disputes), a World Bank body that administers the settlement of disputes between foreign investors and their host state. This was quickly followed by the signing of a Memorandum of Understanding (MoU) with the government whereby the mining companies made numerous concessions in terms of export duties and royalties, among others. In return, the company was able to obtain its export permit again. Of course, one hopes that the MoU will be observed in good faith. Otherwise, the dispute may continue, bringing more hardships to thousands of employees and local communities who lost substantial income during the halt in the Batu Hijau mine’s operations. Obviously, that would also put a dent in Indonesia’s reputation as a good place for foreign investment. MoU aside, many seem to rejoice at a perceived victory for Indonesia; a proof that the government cannot be bullied by foreign investors. Going forward, we may see strong aversion to investment arbitration persist among government officials, politicians and the media. However, we should be more reflective before loudly decrying investment arbitration as a device that makes vulnerable developing countries bow to the demands of foreign investors. The reality is much more nuanced than that. Indonesia has faced only six ICSID claims so far. The first one was a 1980’s case involving Amco Asia Corp. and its takeover of the old Kartika Plaza Hotel, which was owned by a foundation affiliated with the armed forces. Another claim in 2004 was brought by Cemex Asia Holding Ltd. of Mexico concerning its purchase of 25 percent shares in the state-controlled company, PT Semen Gresik. The dispute was eventually settled out of the ISCID after Cemex withdrew its lawsuit Admittedly, recent years have seen a spike in investment claims. In 2010, a claim was brought by the disgraced former owner of Bank Century, Rafat Ali Rizvi. Indonesia won that case. Now there are two ongoing claims from Churchill Mining Plc. and its subsidiary concerning mining licenses that were revoked by the regent of East Kutai, East Kalimantan. Lastly, there was the Newmont claim. Outside the ICSID forum, there are at least three notable investment-related international arbitrations concerning Indonesia: Karaha Bodas against PT Pertamina and Himpurna against PT PLN following the 1998 economic crisis; as well as a UNCITRAL (United Nations Commission on International Trade Law) arbitration between the Indonesian government and PT Newmont Nusa Tenggara in 2009 concerning the divestiture of Newmont’s shares. While Pertamina and the PLN lost their respective cases, the outcome of the Newmont arbitration was generally seen as favorable to both parties.  All in all, it can be argued that Indonesia’s performance in investment arbitration is not particularly poor. The Cemex case shows that it is still possible to settle investment disputes amicably despite the investor’s arbitration claim. Meanwhile, the government has prevailed in cases where its actions were truly lawful and just. The situation is not only reflective of Indonesia, but the globe as a whole. According to the latest official ICSID statistic, in 2014, 36 percent of ICSID claims were settled or discontinued by the investor claimant. Perhaps surprisingly, only 46 percent of ICSID final awards upheld investors’ claims (either in part or in full). That means more than half of investment claims decided by ICSID panels were unsuccessful. On a more conceptual level, investment arbitration should not always be viewed with outright hostility. One should realize that initiating an investment arbitration claim is an enormous undertaking, involving massive amounts of effort, time and money. Each case will likely last years and legal fees for lawyers and arbitrators will amount to tens of millions of dollars. It is indeed, in most instances, a last resort. In this sense, arbitration is an avenue through which disputes can be resolved through an impartial third party. This is the case especially if there have been protracted negotiations that have not yielded satisfactory results for both parties. Quite often, businesses have already been disrupted and have suffered substantial losses by the time arbitration is commenced (for instance, Newmont halted exports in January and stopped operating in June this year). Investment arbitration is always based on consent, in an investment treaty or contract. Hence, there is no reason for an unwarranted view that instituting international arbitration claims against the government encroaches upon Indonesia’s sovereignty. Instead, it is a mechanism already agreed upon in the beginning by the Indonesian government in the event a dispute arises with foreign investors. As president-elect Joko “jokowi” Widodo said before the election last July, his administration will respect and observe the contracts that the government had concluded with mining companies. In this context, that may include settling investment disputes through arbitration. Finally, the latest Newmont saga serves as a reminder that international arbitration only goes part of the way in balancing an environment that largely favors the government. This goes for Freeport as well, where the mining giant finally relented by making some concessions in its MoU with the government. It brings to mind the words of Judge Stephen Schwebel, former president of the International Court of Justice, “[…] the government of a state has many means, legal and not, for bringing pressure to bear upon the foreign investor. The government has not only the police power; it has the police. It can bring the weight of its bureaucracy, and its politicians, to bear. It can prescribe, delay, decree, tax […]” In this vein, we should reflect and ask whether it is justified to continue with the fiery nationalistic rhetoric when it comes to investment arbitration. To be sure, there remain many controversial aspects in the investment arbitration system. However, we should also see it for what it is: an agreed-upon mechanism to settle investor-state disputes. ●