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Case: [UNCITRAL] Himpurna California Energy Ltd. v. Republic of Indonesia Interi...Page 1 sur 85

Interim award of 26 September 1999 and final award of 16 October 1999

Parties: Claimant

Himpurna California Energy Ltd. (Bermuda)

Defendant

Republic of Indonesia

Arbitrator(s):

Jan Paulsson President Antonino Albert de Fina H. Priyatna Abdurrasyid (1)

Place of

Jakarta Indonesia

arbitration: Published in:

15 Mealey's International Arbitration Report (February 2000) pp. A-1 - A-20 and B-1 - B-20

Subject matters: • Interim Award • default in submission of evidence • effect of Terms of Appointment • effect of injunction restraining arbitration • relationship state and state-owned company • evidentiary hearing outside place of arbitration • challenge of arbitrators • departure of arbitrator • imputability of court injunction to state party to arbitration • Final Award • truncated tribunal • letter of comfort v. binding legal obligation Facts Two project companies, Himpurna California Energy and Patuha Power Ltd., both indirect subsidiaries of Mid-American Holding (USA), entered into contracts, most significantly an Energy Sales Contract (ESC) with the Indonesian state electricity corporation, PT. (Persero) Perusahaan Listruik Negara (PLN), to explore and develop geothermal resources in Indonesia. The contracts entitled the project companies to build two power plants in Indonesia and sell the power to PLN. In the wake of the economic crisis which occurred in 1997 in Indonesia, PLN failed to purchase the energy supplied. Relying on a clause calling for arbitration under the UNCITRAL Rules in the ESC contract, Himpurna submitted a request for arbitration seeking to recover a total of US$ 2.3 billion in damages. In the Final Award of 4 May 1999, the Arbitral Tribunal held that PLN had breached the ESC and awarded damages of approximately US$ 392 million. In a similar award in favour of Patuha, which had claimed approximately US$ 1.4 billion in damages, the Arbitral Tribunal awarded approximately US$ 180 million. The “Himpurna” award is reported in this Yearbook at pp. 13-108. The “Pathua” award, which is virtually identical to the “Himpurna” except for the amounts claimed and awarded, is not reproduced.

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After PLN refused to pay damages, Himpurna and Patuha revived the arbitral proceedings which had been commenced against the Republic of Indonesia (ROI) and held in abeyance pending the proceedings against PLN on the understanding that the existence of liability would first be determined in the arbitrations involving PLN as a precondition of proceeding against ROI. Himpurna and Pathua relied on ROI's pledge to ensure PLN's performance, as expressed in a letter from the Minister of Finance of Indonesia of 4 April 1996 (MoF letter). Himpurna and Patuha based their claims against ROI on the statement in the MoF letter: “... the Government of the Republic of Indonesia will cause Pertamina and PLN, their successors and assigns, to honor and perform their obligations as due in the abovementioned contracts”. ROI submitted that the letter was a non-binding comfort letter not intended to create a binding legal obligation. Himpurna and Patuha filed their statement of claim with the Arbitral Tribunal on 26 May 1999. On 4 June 1999, Himpurna and Patuha were served with notice of two law suits in the Central District Court of Jakarta (Jakarta Court), one brought by Pertamina seeking enjoinment of arbitral proceedings, the other brought by ROI seeking annulment of the final awards of 4 May 1999. On 22 July 1999, the Jakarta Court issued an injunction ordering the suspension of the proceedings. The injunction provided, inter alia, for a fine of US$ 1 million per day for breach of the order to suspend the arbitral proceedings until the merits of Pertamina's suit have been decided by the court. The arbitral tribunal called for additional hearings at the Peace Palace, The Hague on 2223 September 1999, in a procedural order dated 7 September 1999. Attempting to block these hearings, ROI sought an injunction from the President of the District Court of The Hague, forbidding the claimant(s) and the arbitrators from participating in the hearing subject to a fine of US$ 1 million per day. The application was heard on 20 September 1999. The District Court announced the following day that the application had been denied. This decision is reported in this volume at pp. 469-474. Neither the Indonesian co-arbitrator, Professor Priyatna, nor representatives of ROI appeared at the hearings. A detailed account of the circumstances of Professor Priyatna's arrival in The Hague and return to Indonesia is given below at [95]-[102]. In an Interim Award pp. 112-186, the Arbitral Tribunal gave a detailed account of the events and exchanges of correspondence regarding the schedule for submission of pleadings and evidence, particularly in light of ROI's perceived dilemma in proceeding with the submission of evidence in violation of the Jakarta Court injunction. This was followed by the text of a statement made by the President of the Arbitral Tribunal at the evidentiary hearing held in the Peace Palace on 22 September, recounting the circumstances of Professor Priyatna's absence. The Arbitral Tribunal concluded that the injunction of the Jakarta Court, which in its eyes was a consequence of the refusal of ROI to submit to an arbitration to which it had previously consented, did not, under Art. 28 of the UNCITRAL Rules on the submission of evidence, excuse ROI's default. Moreover, the injunction was not to be understood as containing an implicit extension to constrain the arbitrators. In their Final Award (pp. 186-215), the Arbitral Tribunal first addressed the question of the truncated tribunal, finding that a truncated tribunal may proceed and make an award. If the arbitrator did not participate without a valid excuse, the appropriate solution was to continue in his absence, rather than to remove and replace him. Accordingly, as Professor Priyatna's non-participation was found to be without valid excuse, the arbitral tribunal retained the authority to render an award.

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On the merits, the Arbitral Tribunal found that the MoF letter created a duty for ROI to ensure that PLN honoured and performed its obligations under the ESC and under any arbitral award rendered pursuant to it. Concluding that ROI had breached that duty, the Arbitral Tribunal ordered ROI to pay damages equal to the amount of the unpaid PLN award. As the text of the “Himpurna” and “Patuha” awards are virtually identical except for the amounts claimed and the damages awarded, only the “Himpurna” award is reproduced here. Excerpt – Interim Award of 26 September 1999 I. Introduction [1] “This arbitration concerns a claim brought under a letter, dated 4 April 1996, addressed to the claimant and signed by the Minister of Finance of the Republic of Indonesia (hereinafter referred to as the MoF Letter). The claimant submits that the MoF Letter makes the Republic of Indonesia liable for the non-payment by PT. (Persero) Perusahaan Listruik Negara, the Indonesian State Electricity Corporation (hereinafter referred to as PLN) of an arbitral award in the claimant's favour rendered on 4 May 1999 in the amount of US$ 391,711,652. [2] “The award of 4 May 1999 (hereinafter referred to as the PLN Award) partially accepted claims in excess of some US$ 2.3 billion under a so-called Energy Sales Contract signed on 2 December 1994 (hereinafter referred to as the ESC). The ESC contemplated the supply of electricity from the Dieng geothermal field in Java to PLN, and provided the legal foundation for a large investment by the claimant in wells, plant and other infrastructure necessary to generate electricity from the Dieng reservoir. In particular, the ESC committed PLN to pay for electricity thus made available for a period of 30 years, and to do so in US dollars. This obligation was a crucial element in a project finance structure which, to be commercially viable, had to satisfy a consortium of international banks. [3] “The Republic of Indonesia has denied that the MoF Letter created a legally enforceable obligation, and submits that it was a non-binding comfort letter. [4] “Pursuant to Terms of Appointment agreed among the Parties and the Arbitral Tribunal on 6 October 1998, this case was heard in parallel with the arbitration brought before the same Arbitral Tribunal against the Republic of Indonesia by Patuha Power Ltd. (Bermuda), an affiliate of the claimant, under another letter, identical in its terms to the MoF Letter, under which Patuha Power Ltd. seeks to hold the Republic of Indonesia liable for the non-payment of an award against PLN in the amount of US$ 180,570,322. (....) [5] “The PLN Award(2) held that PLN had breached the ESC, and in consequence of the breach allowed recovery of nearly US$ 274 million of the claim for sunken costs (approximately 87% of the amount claimed), some US$ 117 million of the claim for lost profits (approximately 6% of the amount claimed), and costs of the arbitration. PLN was thus ordered immediately to pay to the claimant the sum of US$ 391,711,652.” (....) II. The MoF Letter

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[6] “In its entirety, the MoF Letter reads as follows: ‘Dear Sirs: We refer to the Energy Sales Contract (ESC) and Joint Operation Contract (JOC) dated 17 November 1995 [sic – corrected by letter dated 9 April 1995 to “2 December 1994”], made between Himpurna California Energy Limited (“Deliverer”), PT.PLN (PERSERO) (“PLN”) and Pertamina (“Seller”). Pursuant to the ESC and JOC, Deliverer will design, finance, construct, own and operate a Geothermal power plant (the “Plant”) at Dieng, Central Java, and PLN will purchase the electrical energy to be produced by the plant. We have received the JOC and ESC. As long as the Deliverer's material obligations which are due under the ESC and JOC have been fulfilled, the Government of the Republic of Indonesia will cause Pertamina and PLN, their successors and assigns, to honor and perform their obligations as due in the above-mentioned contracts. Any dispute or claim arising out of or relating to this letter shall be settled by arbitration under UNCITRAL Arbitration Rules in effect at the time of the arbitration, in Jakarta and otherwise in accordance with the procedural provisions set forth in Sect. 8.3 of the ESC. REPUBLIC OF INDONESIA By: _____________ (signature) Minister of Finance'”

(....) III. Jurisdiction [7] Sect. 8.3 of the ESC, as referred to in the MoF Letter, provided for arbitration under the UNCITRAL Rules with Jakarta, Indonesia, as the site of the arbitration. Failing appointment by the party-appointed arbitrators, the Chairman of the Arbitral Tribunal would be appointed by the Secretary-General of the International Centre for Settlement of Investment Disputes (ICSID). In addition, Sect. 8.3 ESC provided: “In accordance with Sect. 631 of the Indonesian Code of Civil Procedure, the Tribunal need not be bound by strict rules of law where they consider the application thereof to particular matters to be inconsistent with the spirit of this Contract and the underlying intent of the Parties, and as to such matters their conclusion shall reflect their judgment of the correct interpretation of all relevant terms hereof and the correct and just enforcement of this agreement in accordance with such terms.” The Terms of Appointment for the arbitration also provided for the application of the UNCITRAL Rules and that the seat of the arbitration shall be Jakarta. (....) IV. Procedure [8] “By letter dated 22 April 1998, counsel to the Republic of Indonesia indicated that the

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name of their firm had been changed from Kramadibrata Karim Sani Manihuruk to Karim Sani. The Power of Attorney signed by the Minister of Finance on 18 September 1998 refers to a number of individuals, including Messrs Arsul Sani and Iswahjudi A. Karim. [9] “The PLN Award was rendered on 4 May 1999. On the same day, the claimant handdelivered a letter to PLN demanding payment of the amount awarded. The claimant also delivered on the same day a letter to the Minister of Finance of the Republic of Indonesia informing him of the Award and demanding that the Government of Indonesia either cause PLN to pay the Award, or pay on its behalf, failing which the claimant expressed its intention to commence an arbitration promptly. [10] “The claimant sent the Minister of Finance a ‘second and final demand’ on 24 May 1999. [11] “The claimant has declared that neither PLN nor the Minister of Finance answered any of these three letters. The Republic of Indonesia has not denied this affirmation. [12] “By a letter dated 26 May 1999, the claimant provided the Arbitral Tribunal with its Statement of Claim, which was served on Karim Sani as well as on the Ministry of Finance in Jakarta, as the letter itself indicated, the following day. [13] “On 28 May 1999, Karim Sani wrote a letter to Latham & Watkins, which in its entirety read as follows: ‘We have yesterday received two documents entitled “claimant's Statement of Claim” prepared by your firm, purporting to commence arbitration against our client by your captioned clients. As you are surely aware, these have been served in contravention of the Terms of Appointment executed by us on behalf of our said clients on 6 October, 1998. We therefore consider these as invalid and unauthorised and are returning these documents by hand delivery to the office of your clients in Jakarta, seeing that they were hand delivered to us by a foreign person who did not identify himself, nor were they covered by any transmittal letter to identify their source. This is without prejudice to any other rights or action our client may have in this matter, and we reserve such rights, including the right to consider that, by abrogation of the aforesaid Terms of Appointment, the same are no longer of any force and effect.’

[14] “Latham & Watkins reacted to this letter on the same day, asserting in a letter to Karim Sani that ‘Although you have offered little to support your conclusory assertions, your position is indefensible’, and applying to the Arbitral Tribunal for a ruling: ‘that service of the Statements of Claim was effective and is now complete, that the conditional 30-day period described in Sect. 5(a) of the Terms does not apply in light of the findings by the Tribunal in the arbitrations between HCE and PT. (Persero) Perusahaan Listrik Negara (“PLN”) and between PPL and PLN (the “PLN Arbitrations”) and that the GOI Arbitrations are therefore ripe and have now commenced, and that the GOI has until June 21, 1999 to serve its Statements of Defense in the GOI Arbitrations and fails to do so at its peril’.

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[15] “On 31 May 1999, Karim Sani responded to Latham & Watkins, insisting that under the Terms of Appointment ‘PLN was to be afforded a period of 30 days in which to satisfy any award that might be rendered before your clients would have a right to commence an arbitral reference against the government.’ [16] “On 2 June 1999, the Arbitral Tribunal wrote to Karim Sani in the following terms: ‘The Arbitral Tribunal has reviewed your recent correspondence with Messrs Lathams & Watkins, and in particular your letters dated 28 May 1999 and 31 May 1999. I have discussed each of these letters, as well as this response, with my co-arbitrators. Your letters raise three serious issues which do not necessarily call for any immediate reaction on your part, but which the Arbitral Tribunal hopes you will bear in mind in the interest of a constructive debate. First, although you acknowledge having physically received Statements of Claim, you have decided to treat their delivery to you as a non-event. It is for the claimants to decide whether they accept the position you have taken in this instance, i.e. treating the service of the Statements of Claim as not having occurred. At the same time, the Arbitral Tribunal reminds you that you act formally as counsel of record in these proceedings. You are free to make any contentions you wish with respect to the defects you may perceive in communications from the claimants. Such contentions would be fully considered and decided by the Arbitral Tribunal in conformity with Art. 15 of the UNCITRAL Rules. But it is not, in the clear view of the Arbitral Tribunal, open to you to decide which communications you accept and which you ignore. You are in no position to “reject service”. Pleadings delivered to your offices will henceforth be treated as properly communicated in accordance with Art. 4(b) of the Terms of Appointment whether you decide to retain them physically or not. These comments are naturally without prejudice to the respondent's right to raise any jurisdictional pleas, but not later than in its Statements of Defence, pursuant to Art. 21(3) of the UNCITRAL Rules. Secondly, your letter of 31 May asserts that a part of the discussion during the October 5/6 procedural meeting went off the record “against our objection”. In fact, no such objection was made at that time, nor in connection with the signature of the Terms of Appointment, nor yet again in any subsequent correspondence. The reason a part of the meeting was not recorded was because it developed into a drafting session with proposals and counterproposals for the wording of the Terms of Appointment. The Arbitral Tribunal considered that this would have resulted in an incomprehensible transcript, which would at any rate be pointless inasmuch as an agreed text was to eventuate – as it did. Contrary to your affirmation, no Party raised any objection. It was, moreover, made clear that the transcript could be resumed “at any time”. No request to that effect was made by any Party. Counsel are admonished not to make unsubstantiated assertions of this nature. Thirdly, your letter of 31 May states that it is copied to the three arbitrators

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as individuals and not as a tribunal. You refer to the discussion on 5/6 October 1998, but you do not note your own explicit statement, as Counsel to the Republic of Indonesia, to the following effect: “We would be happy to agree to this panel to be put on hold.” (emphasis added)

More important than the lengthy discussions of various possibilities which appear in the transcript is the explicit text of the Terms of Appointment as ultimately signed. They referred to the two present arbitrations, and contained the following statement: “The Parties have agreed that the following Tribunal has been validly appointed” (emphasis added) followed by the names of Prof. Priyatna Abdurrasyid, Mr. A.A. de Fina, and myself. The word “Tribunal” appears throughout the document signed on behalf of the Republic of Indonesia. There could hardly have been any ambiguity as to the proposition that an Arbitral Tribunal was empanelled. Certainly there seemed to have been no doubt in your minds as Counsel to the Republic of Indonesia: – on 8 January 1999, you sent a letter to the “Arbitral Tribunals”, naming the three individual arbitrators sitting in the present cases (as well as Mr. Setiawan SH, who sat only in the cases involving PLN as the respondent), referring to the arbitrations involving PLN as well as the present proceedings involving the Republic of Indonesia as the respondent, and making submissions “in our capacity as counsel for the Government of the Republic of Indonesia in second-mentioned captioned arbitrations”; – on 22 April 1999, you even more unequivocally sent a letter to the “Arbitral Tribunal” dealing with the cases brought against the Republic of Indonesia. This discussion is probably academic, since at any rate the Arbitral Tribunal's role upon service of the Statements of Claim is defined in the Terms of Appointment. Nevertheless, as a matter of principle Counsel should consider whether they do not have a professional duty, when appearing before any tribunal, to abide by standards of consistency and faithfulness to the record. Naturally the Arbitral Tribunal considers that such standards apply equally to both sides.’

[17] “On 3 June 1999, Latham & Watkins wrote to Karim Sani: ‘Rather than engage in any further arguments and/or interpretations of the award, we are reserving upon you and upon the Ministry of Finance, claimants' Statements of Claims today, June 3, 1999. Respondents' Statements of Defenses will be required to be served on Monday, June 28,

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1999.’

[18] “On 7 June 1999, Latham & Watkins informed the Arbitral Tribunal that the claimant had, on Friday 4 June 1999, been served with notice of two law suits filed in the Central District Court of Jakarta (hereinafter referred to as the Jakarta Court). One was brought by Pertamina, listing the claimant, PLN, and the Republic of Indonesia as defendants and requesting that these arbitral proceedings be enjoined. The other was brought by PLN against the claimant, seeking annulment of the PLN Award. In their letter, Latham & Watkins wrote: ‘claimants request an order from the Tribunal directing the GOI to cause its two wholly-owned and controlled entities, PLN and Pertamina, to cease their present efforts to use the Indonesian judicial system to enjoin or otherwise interfere with the GOI arbitral proceedings. Specifically, claimants ask the Tribunal to order the GOI to cause PLN and Pertamina to withdraw the pending actions in Jakarta Central District Court.’

[19] “On 9 June 1999, Karim Sani wrote to oppose the claimant's application, stating in particular that Latham & Watkins were ‘completely mistaken' in believing that the Government of Indonesia fully controlled Pertamina and PLN. Karim Sani also affirmed that ‘we do not represent PLN or Pertamina’. In a second letter the same day, Karim Sani asserted that they were not ‘involved in the court cases’. They also suggested that Latham & Watkins should issue a ‘clear and humble letter of apology' for having accused the Government of Indonesia and its counsel of having ‘manipulated' the Indonesian court system, in return for which they would ‘advise our client against bringing defamation action’. [20] “The same day, Latham & Watkins sent the Arbitral Tribunal a photo-copy of PLN's complaint before the Jakarta Court, showing that it was signed by Mr. Arsul Sani as counsel. [21] “The Arbitral Tribunal ruled on Latham & Watkins' application on 9 June 1999, writing as follows: ‘... the Arbitral Tribunal does not deem it appropriate to issue orders reactive to unilateral initiatives which may or may not be of any consequence. The Arbitral Tribunal is entirely unaware even of the existence under Indonesian procedural law of the kind of injunctive judicial relief which has been described to us. At the same time, given the frequent and sharp exchanges of correspondence in the recent days, it would behoove both sides to consider carefully the wider context and the long-term consequences of the present conflict. A few comments of a general nature may assist their reflection. The Arbitral Tribunal's respect for the sovereignty of the Republic of Indonesia is complete. But it is precisely by the exercise of an attribute of sovereignty that a State accepts binding international undertakings; numerous arbitral tribunals have so held.

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In this case, the undertaking of the Republic of Indonesia has taken the form of Terms of Appointment which themselves are to be applied in conformity with the UNCITRAL Arbitration Rules. The claimants now allege that the Republic of Indonesia is seeking to use the instrumentality of its own court system to subvert the Terms of Appointment. If this allegation is accepted by the Arbitral Tribunal as a factual matter, Counsel for the Republic of Indonesia are reminded that international law forms a part of Indonesian law, and that under international law: “... the judgment given by a judicial authority emanates from an organ of the State in just the same way as a law promulgated by the legislature or a decision taken by the executive”.

This passage is reproduced from a well-known set of lectures given by the late Eduardo Jiménez de Aréchaga, a former President of the International Court of Justice, “International Law in the Past Third of a Century,”Recueil des Cours, I-1978, p. 278. In other words, transgressions of a contract signed by a State, like the Terms of Appointment, are not necessarily insulated from critical inquiry and decision simply because they emanate from, or are abetted by, a judicial authority of that State. The present Arbitral Tribunal would prefer not to have to pass judgment on procedural initiatives of the Republic of Indonesia, but neither will it shirk, if the issue arises and is pressed, from its own duties under the Terms of Appointment. The gravity of such an issue as a matter of international bona fides is fully appreciated by the Arbitral Tribunal, which can only hope that counsel does so as well. It is one thing for a Party to seek to avail itself of such remedies it believes to be at its disposal once an award has been rendered. It is quite another for instrumentalities of a Party to be used to prevent the implementation of a pending procedure to which it has agreed.’

[22] “On 14 June 1999, Karim Sani referred to the fact that ‘all Government personnel are inordinately busy at this time' and requested that the deadline for the Statement of Defence be set for 5 July 1999. [23] “The same day, Latham & Watkins noted that they had reserved the claimant's Statement of Claim on 3 June, and asked that the Republic of Indonesia be directed to file its Defence by 28 June 1999. [24] “On 16 June 1999, Karim Sani requested that the Arbitral Tribunal exclude in advance the appearance of any expert witnesses, or the submission of any witness statements, on Indonesian law, leaving such matters entirely for argument of counsel in order ‘to reduce cost and expedite the reference’. [25] “On 18 June 1999, the Arbitral Tribunal responded to the effect that: ‘Sect. 3(e) of the Terms of Appointment relates to the “appearance” of

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witnesses, not to a priori rulings as to the admissibility of written statements or proffers of testimonial evidence. The respondent's method for proving Indonesian law may be a good one, but there are others. There is no basis on which the Arbitral Tribunal can at this stage impose the manner in which a party presents its case. This observation is made without prejudice to ultimate admissibility.’

[26] “On 21 June 1999, Karim Sani wrote to the Arbitral Tribunal to request that ‘this reference be dismissed for lack of jurisdiction' on the grounds that the MoF Letter, ‘and all rights and obligations of the claimants relating thereto’, had been assigned to lenders, with the result that ‘the claimants have no standing to bring the arbitration against the Government’. In the alternative, Karim Sani asked that the Arbitral Tribunal: ‘require all financing documentation, including the assignments of the MOF letters to the lenders to be provided to counsel for respondents forthwith; and suspend all further proceedings until the lenders have joined themselves as a claimants in this matter or otherwise fully and properly authorised the captioned claimants to act on their behalf herein’.

[27] “The Arbitral Tribunal responded as follows on 24 June 1999: ‘The Arbitral Tribunal had not forgotten the Republic of Indonesia's jurisdictional objections and fully intends to deal with them. In the normal course of arbitral proceedings, however, it would be expected that jurisdictional objections would be included in a respondent's Statement of Defence and would not necessarily of themselves lead to a stay of the proceedings. In these particular proceedings, this conclusion is buttressed – if not compelled – by the fact that the jurisdictional objections were raised by counsel for the Republic of Indonesia prior to its signature of Terms of Appointment which do not envisage stays of the arbitrations, but rather, refer to Statements of Defence. Accordingly, the Arbitral Tribunal expects that any and all jurisdictional objections raised, or to be raised, by the Republic of Indonesia will appear in its Statements of Defence in addition to its defences to the merits of the claims brought against it. The Arbitral Tribunal will thereafter administer the marshalling of the evidence and draw any required conclusions from requests for disclosure of documents and the responses thereto.’ [28] “The same day, Karim Sani acknowledged the Arbitral Tribunal's answer and wrote further: ‘We would have no difficulty with continuing of these references and leaving this jurisdictional matter to decision by the tribunal based upon the submissions in the normal course of the proceedings, as you suggest in your telefax were it not for a very serious concern in this regard on which we would

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be appreciative of your views. As the MOF letters were requested of our client in order to satisfy the claimant's lenders, and were, according to claimants representations to our client at the time, and with the consent of our client, assigned to the lenders, whether or not it is determined by this Tribunal that the claimants have any right to make claims under the MOF letters, it would certainly seem that the lender would have the right to make claims against our client if the claimants should default, or have defaulted, under the terms of their financing. Should this occur our client would be facing two separate claims under the same instruments. This is one of the reasons why we believe it is essential that we view the terms of both the financing and the assignments in order to determine to what extent, or whether, our client faces “double jeopardy” in these matters. This is not simply a matter of jurisdiction, but presents a clear danger to our client. If possible, we would like to have a ruling on exactly what party has standing to bring any action with regard to these letters before we put our client to the expense of our defending one reference which may be inappropriate, and then may have to make additional such expenditures to face a second one, which may or may not be appropriate. However, if the Tribunal does not wish to make a preliminary finding on this matter, we do believe that we should be entitled to view these financing documents and the assignment before, and for the purpose of, preparation of our submission on this matter, and we request the Tribunal to require that these be provided to us.’

[29] “On 25 June 1999, the Arbitral Tribunal replied as follows: ‘Your stated anxiousness to avoid any danger that your client may be held liable twice on account of the same undertaking is understandable. But in the absence of any claim having actually been raised by third party lenders, we are dealing only with suppositions. I do not see how it is possible for the Arbitral Tribunal at this stage to determine whether the position of such third parties could in fact have an effect on the standing of the claimants. You may certainly state – or rather reiterate – your apprehensions and reserve your position pending such explanations and documentation as the claimants may provide in due course. Certainly there is no danger that the Arbitral Tribunal will make determinations as to the Parties’ obligations before the evidence is in and you have had an occasion to comment on it. This does not however justify postponement of the submission of the Statements of Defence. The Terms of Appointment were signed after careful deliberations, and, you will recall, significant time for reflection. You have mentioned no new facts with respect to your concerns for “double jeopardy”. The situation is as it was at the time you first raised objections in this regard. Since the Terms of Appointment were signed in light of that situation, there is no basis on which to alter the procedure agreed in the Terms of Appointment, e.g. by interrupting the timeline moving toward the Statements of Defence.’

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[30] “The Republic of Indonesia's Statement of Defence was submitted on 5 July 1999. Paragraph 30 thereof made the following statements concerning the Indonesian court actions: ‘With regard to the court actions instituted by Pertamina against the claimants, the respondent and PLN in the District Court of Central Jakarta seeking an injunction to restrain this arbitral reference to proceed, in the event that such injunction were to be granted and the claimants nonetheless should seek to proceed with this arbitration and the Tribunal should accede to such request, respondent reserves the right to apply to the Indonesian courts or other Authorities for an Order declaring contempt of court and for sequestration of the claimants' assets, not limited to any rights (any such are denied) which they may have under the Awards; and for orders for fines upon the claimants and/or imprisonment.’

[31] “On 7 July 1999, Latham & Watkins informed the Arbitral Tribunal of developments in the Indonesian courts: – affirming that the Government of Indonesia ‘failed to use its status as a nominal defendant in the court actions to oppose Pertamina's request in any way’, and – providing the Arbitral Tribunal with a translation of written pleadings by PLN stating that PLN ‘will take legal actions against [Mr. Job Taylor of Latham & Watkins] both privately and criminally’ because of statements attributed to him in the Jakarta Post which PLN considered to be insulting and defamatory to the ‘court institution of Indonesia’. [32] “The Republic of Indonesia's conduct, according to the claimant, was a ‘naked use of ... powers to deny claimants effective representation’. The claimant accordingly asked the Arbitral Tribunal that in the absence of ‘unequivocal assurances that the claimant's employees, witnesses, counsel and the arbitral tribunal itself will be free from harassment or arrest ... we will request that the Tribunal convene the hearings at another appropriate location in accord with Art. 16 of the UNCITRAL Rules’.

[33] “By a letter dated 9 July 1999, Karim Sani sought to explain the passage from the Republic of Indonesia's Statement of Defence quoted in [30] as follows: ‘Any obvious act to disregard a court order may be subject to contempt of court and criminal proceedings under Art. 216 of the Indonesian Criminal Code. A party who knows about such order, but allows another party to commit a violation of the Criminal Code without reminding him or reporting to the Authorities about such violation may also be subject to criminal investigation for letting a crime takes place. Our paragraph 30 must be understood in this light, and we must question claimants’ sincerity in misinterpreting it.’

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[34] “As for PLN's threat of legal action against the claimant's counsel, Karim Sani castigated the claimant's ‘paranoid ravings’ and ‘hysteria’, and wrote: ‘Neither the Ministry of Finance nor the Government is a party to PLN's suit, nor is PLN a party to these references. It is totally inappropriate for Mr. Taylor to whine to this Tribunal in such regard. His only conceivable purpose must be unjustly to try to confuse and prejudice this tribunal against our client.’

[35] “In its letter to the Parties of 12 July 1999, the Arbitral Tribunal replied as follows:

‘the Arbitral Tribunal wishes first of all to remind counsel that these are extremely serious proceedings involving large financial stakes and, directly or indirectly, bilateral relations between two important countries. Your clients are entitled to a respectful debate. The claimants are part of a publicly traded company whose shareholders are entitled to a resolute defence of their economic interests; the Republic of Indonesia is equally entitled to a resolute protection of its own position. The economic problems at the heart of this case have hurt many people, and each side must understand that the other has weighty responsibilities. This is a most inappropriate forum for counsel to indulge in inflammatory rhetoric which the Arbitral Tribunal finds neither helpful nor humorous. Misplaced similes (“like wayang puppets”), illconsidered metaphors (“ever ready to rattle the government's saber”), or chatty language used for sarcastic effect (“whine to this Tribunal”, “we are not qualified in psychiatry”) have no place before this Arbitral Tribunal, and will not advance the interests of either side. The Arbitral Tribunal is interested in precise and reliable factual information, and in cogent arguments of law. Counsel would make a better impression on the Arbitral Tribunal if they resisted the temptation to speculate on the motives of opposite counsel, and did not proffer lectures on proper forensic behaviour. The Arbitral Tribunal feels it must admonish you that you are crossing the line of acceptable discourse. This being said, the concerns raised by Messrs Lathams & Watkins are serious, and have not, behind the rhetoric, been assuaged by Messrs Karim Sani's letter of 9 July. As that letter itself recognises, there may be exceptional circumstances when the physical venue of proceeding under the UNCITRAL Rules is moved. (Of course Karim Sani does not accept that they are extant in this case, but that does not affect the principle.) If the Republic of Indonesia fails to disprove the claimants' contentions that, as a matter of fact: – a government-controlled entity has instituted legal proceedings in Indonesian courts designed to obstruct the implementation of the Terms of Appointment signed by the Republic of Indonesia; – although a party to those proceedings, the Republic of Indonesia has not only failed to oppose this attempted obstruction, but has to the contrary

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manifested a degree of complicity; – another government-controlled entity has threatened to bring a criminal complaint against the claimants' counsel on account of comments on the dispute attributed to him – but denied by him – which as a matter of principle could lead to a sentence of imprisonment; – government officials have harassed the claimants, with the result that witnesses have been intimidated; – although the Republic of Indonesia says it will formally oppose the motion for injunction, it nevertheless reserves the right to initiate court actions for “fines ... and/or imprisonment” if the arbitrators were to proceed in accordance with the Terms of Appointment; and ultimately – rather than use its judicial and governmental processes to implement the Terms of Reference signed by it, the Republic of Indonesia is attempting to use them to divest this Arbitral Tribunal of its jurisdiction; the Arbitral Tribunal must seriously reconsider the physical venue for any hearings in this case. Messrs Karim Sani are therefore invited to furnish any further factual information that would bear on these issues, in particular proof as to the position taken by the Republic of Indonesia in relation to the Indonesian court proceedings, such as previous pleadings; previous correspondence between the Government, on the one hand, and Pertamina and PLN, on the other hand; or any other evidence of the respondent's sincerity in seeking to implement the Terms of Appointment as signed.’

[36] “On 13 July 1999, Karim Sani responded that ‘We are implementing the Terms of Appointment ... Any court action brought by Pertamina and/or PLN has not been done with the complicity of the government.’

[37] “The letter asserted that Ministry of Finance lawyers ‘are indeed trying to defend their position and their obligations under the Terms of Appointment' and that the Arbitral Tribunal would be provided with a copy of the Government's 'written defense' against Pertamina's application to enjoin the arbitral proceedings once Karim Sani had it in hand. As for the position of Pertamina, the Republic of Indonesia took the following position: ‘Pertamina is a state-owned company, but it is not under the control of the government for any and all aspects of its activities. Moreover, Pertamina is very much at loggerheads with the government over a number of matters, as can be seen from almost every issue of every newspaper here. To illustrate just the most recent example, we attach an article from the Jakarta Post of yesterday concerning the fact that the Government had engaged PriceWaterhouseCoopers to audit Pertamina, and the result showed up over six billion United States dollars of losses due to graft.’

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[38] “On 13 July 1999, the Arbitral Tribunal offered the Republic of Indonesia a brief suspension of the proceedings for consultation, an offer which was ‘greatly appreciated' and accepted by a letter from Karim Sani the same day, while Latham & Watkins, in their letter of the following day, stated ‘our objections to the delay in the proceedings’. At any rate, Latham & Watkins agreed to file the claimant's ‘documentary evidence' as contemplated in paragraph 5(e) of the Terms of Appointment at the end of the suspension, by 26 July 1999. [39] “On 16 July 1999, Karim Sani confirmed that ‘if Mr. Paulsson instructs that the claimants file their evidence on 26 July, it would be our understanding that respondent's evidence would be filed on 10 August’.

[40] “On 20 July 1999, the Arbitral Tribunal wrote to the parties that ‘The claimants are ... instructed to submit their documentary evidence, including any witness statements, on 26 July. On the assumption that the claimants' submissions are communicated to Messrs Karim Sani on that day, the respondent's documentary evidence, including any witness statements, shall be submitted on 10 August. The Arbitral Tribunal does not believe that the application for a change of venue is ripe for decision; the Arbitral Tribunal will be meeting internally to consider all issues relating to the future of these proceedings.’

[41] “On 22 July 1999, Latham & Watkins advised the Arbitral Tribunal that the Jakarta Court had that day issued an injunction ordering the suspension of these proceedings. [42] “Karim Sani confirmed this information by letter of 23 July 1999, in which they also said that the Republic of Indonesia intended to lodge an appeal against the injunction. They added: ‘it is our intention to continue working on our defense in the normal course, until a formal order is served’. [43] “In apparent contradiction with the letter noted in the previous paragraph, on 26 July 1999 Karim Sani wrote to the Arbitral Tribunal: ‘According to Indonesian procedural law, as long as all parties are in the court when an injunction is declared, the effectivity of such injunction commences immediately and it is not necessary for service of a written order to be made for a party with direct knowledge to be bound. However, upon our request, our client has consulted with the court as to whether we may continue to correspond on such matters as are necessary effectively to suspend the proceedings. Our client was told by the court that we may do so, but that no submissions may be made, nor may other substantive matters of the proceedings be dealt with.’

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[44] “The same day, Latham & Watkins informed the Arbitral Tribunal that their correspondents in Jakarta had sought to deliver the claimant's documentary evidence to Karim Sani but that Mr. Sani had refused to accept service ‘on the grounds that it might violate the injunction issued by the Central Court of Jakarta’. The claimant's attempt to serve the documentary evidence on Neil Kaplan Q.C. was refused by his Clerk, who wrote that Mr. Kaplan ‘is not authorised to, does not and will not accept service of documents on behalf of the Republic of Indonesia’. [45] “In the meanwhile, the claimant's documentary evidence was delivered to members of the Arbitral Tribunal.... [46] “On 27 July 1999, Karim Sani wrote: ‘We had originally assumed that, as Indonesian lawyers involved in this arbitration, we would be notified by the court to stop activities with respect thereto. But since our client appeared at the court when the injunction was proclaimed, the court then told our client to advise us to discontinue all proceedings forthwith. The court further clarified to our client that correspondence relating to effecting such discontinuation only is permitted. Service of documentation in furtherance of the arbitral process or, we are assuming, acceptance of such service, after 22 July, constitutes a violation of the injunction, regardless of the jurisdiction in which such service is made. Claimants have, as they admit in their aforesaid correspondence, already violated the injunctions by attempting to effect service upon us in Jakarta, and also upon Mr. Kaplan in London. ... to avoid contempt of court we all have no choice but to suspend all further activities in furtherance of these references. ... Unless the Tribunal requires further clarification or information from us we do not believe it necessary to engage in further correspondence, and we deem it improper to engage in any activities in furtherance of the arbitration, for the present time.’

[47] “The Arbitral Tribunal responded in the following terms on 28 July 1999: ‘Your letter of 27 July asserts that you have refused service of the claimants’ evidentiary submission, which the Arbitral Tribunal has received and which the claimants attempted to communicate to you. You also express your intention not to “engage in any activities in furtherance of the arbitrations, for the present time”. It seems a fair inference that you are therefore not intending to submit your own evidentiary submission as called for under the Terms of Appointment. In your letter of 23 July you had affirmed your “intention to continue working on our defense in the normal course, until a formal order is served upon us or our client”. Your letter of 26 July, however, stated to the contrary that “according to Indonesian procedural law” an injunction produces its effects immediately upon its being pronounced, without the need for a formal order. Even if this were so (and no legal authority has been proffered), it would not be obvious what the injunction entails. This is the evident explanation why, as

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your letter of 26 July recounts, you requested the Republic of Indonesia to “consult” with the court, with the result that the court “told” the Republic of Indonesia that correspondence necessary to effect suspension of the proceedings was acceptable, “but that no submission may be made, nor any other substantive matters of the proceedings be dealt with”.

It thus appears that the Republic of Indonesia had ex parte “consultations” with the Indonesian court and was given indications of an oral nature, or so it would seem, which can be neither examined nor analysed by either the claimants or the Arbitral Tribunal. Even if all of this were perfectly acceptable, it still would not explain why the injunction should be held to exclude receipt of submissions. On this further point, your letter of 27 July states that you “assume”– on no expressed basis whatever – that acceptance of service after 22 July (date of the injunction) would violate the injunction. We now seem to be approaching a situation of exceptional gravity in which the Republic of Indonesia will default under the Terms of Appointment. It is well understood that the Republic of Indonesia will contend that such a default is justified by the injunction. It should however be equally understood that a party seeking to justify default bears the burden of persuading the Arbitral Tribunal. The arbitrators are most certainly not bound by a disputant's ipse dixit founded on unverifiable ex parte communications between government officials and court officials, let alone by duly authorised counsel's “assumption” that they are entitled to refuse service. (The Arbitral Tribunal is unlikely to share this risky “assumption” and the unilateral manner in which it has been acted upon, given the obvious proper alternative of receiving the submission and immediately applying to the Arbitral Tribunal for authorisation not to respond in substance, thereby respecting the Arbitral Tribunal's authority to deal with issues which are obviously controversial.) The purpose of these observations is to invite you to measure the consequences of the position you are taking on the basis of interpretations or assumptions which, to say the least, are not prima facie compelling.’

[48] “In answer to the Arbitral Tribunal, Karim Sani wrote on 29 July 1999: ‘... our client advised us that we were to cease any commerce with the Tribunal and the other parties in furtherance of the arbitration itself. Correspondence relating to implementation of the suspension of the reference as a result of the injunction, however, had to be permissible. Our own internal preparations, however, did not have to be affected, as that is only our workproduct ... We believe that the injunction also enjoins the Tribunal from considering claimant's evidence in the interim ...

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We, ourselves, are not entirely clear whether the injunction would exclude physical receipt of submissions but, as practicing lawyers of Indonesia, we must taking the conservative approach that the injunction would not allow formal acceptance of service. Our concerns are based not only upon the penalties set out in the injunction, as well as possible liability for fines and criminal action under Art. 216 of the Indonesian Penal Code, but also on the possibility that the Chief Justice could enjoin us from practicing [sic] altogether were we to violate a court order. We still have not received written copies of the injunctions, but we would expect to receive them soon. If these are not clear, or if there is further delay, in order to make matters fully clear we would like to suggest that the Tribunal, together with us and claimants or their counsel, visit the court and ask for full clarification together. That might make it easier for us all to determine who to deal with our conflicting obligations in the interim time while the reference is in suspension due to the injunction. ... In this case the court's order does not abrogate the Terms of Appointment, but only suspends its effectivity for the duration it takes to adjudicate Pertamina's court action.’

[49] “The same day, the Arbitral Tribunal wrote to Karim Sani briefly as follows: ‘Thank you for your letter of 29 July 1999. The Arbitral Tribunal will examine the situation further upon receipt of the text of the Court decision. The situation is unusual, has significant implications, and requires careful analysis. You should not, barring unforeseen developments, expect directions from the Arbitral Tribunal before the week of 9 August.’

[50] “On 30 July 1999, Karim Sani wrote: ‘We have this morning received Mr. Paulsson's telefax of 29 July, 1999, but would like to request some slight clarification. Mr. Paulsson states that we may expect further directions after 9 August. However, in his previous telefax he still appeared to expect us to file our evidence by 10 August or risk default. Please be kind enough to confirm whether the Tribunal recognises the fact that we have not received any of the claimants' evidence and that therefore we are unable fully to prepare our responding evidence and, in any case, are enjoined from submitting same. Thus we will not be permitted, nor indeed able, to make any submissions on 10 August. Your confirmation that you are not expecting any submissions from us at this time, would be appreciated.’

[51] “On 31 July 1999, the Arbitral Tribunal responded:

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‘My letter of 29 July, to be precise, stated that the Parties should not expect further directions before the week of 9 August. Whether any such directions will be required depends on the positions taken by the Parties, their actual conduct, and the information available to the Arbitral Tribunal at that time. For now, it should be obvious that the Arbitral Tribunal does not recognise that the respondent has “not received” the claimants' submission of evidence, which was in fact proffered but refused by counsel. The responsibility for that refusal lies with the respondent, just as it is a matter for the respondent whether it wishes to reconsider its position and retrieve the materials submitted from the claimants' counsel. A failure by the respondent to file its submission by 10 August 1999, a prima facie default, is also a matter of its responsibility. You may certainly not take it as established that the respondent has a valid excuse. It is most surprising that anyone could have imagined such an inference from prior correspondence, which is plainly to the contrary effect.’

[52] “On 5 August 1999, Karim Sani communicated to the Arbitral Tribunal a copy of the injunction issued by the Jakarta Court on 22 July, as well as a ‘rough translation of the relevant part’, which made clear that the Court had indeed ordered: (1)

suspension of the execution of the PLN Awards until the merits of Pertamina's suit have been decided by the Court,

(2)

suspension of the present proceedings, likewise until the merits of Pertamina's suit have been decided by the Court,

(3)

that a breach of the Court's second order would result in a daily fine (known as dwangsam) of US$ 1 million.

[53] “Karim Sani's covering letter stated: ‘Referring to Mr. Paulsson's telefax of 31 July, 1999, we wish to point out that we have not received service of claimants' evidence and we are astounded that the Tribunal deems that we have constructive service. Claimants themselves refused to leave the documents without our signing a formal acceptance of service, which it was then our understanding, and is now confirmed, would have been a violation of the injunction. We shall, of course, be awaiting any further communication from the Tribunal, as indicated in Mr. Paulsson's 29 July telefax. It is our duty under the laws and regulations of Indonesia, however, to advise the Tribunal any direction to the effect that the arbitration shall proceed notwithstanding the injunction will constitute a violation of the injunction and contempt of court. We are advised that there will be a further hearing on this matter in the Central Jakarta District Court on 10 August, and, on behalf of our client, we invite the Tribunal to attend such hearing should further clarification be required. It is, however, now very clear that were the Tribunal to order submission of

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our evidence at any time before the injunction is lifted, such order would indeed constitute such violation. Furthermore, should the Tribunal thereafter declare us in default for obeying an order of the court with authority over this matter, in particular where we have not had the benefit to know what is the case against us, and issue a default award against us, not only would such an award constitute a violation of the injunction, but could hardly be expected to be enforceable, seeing that it was illegally issued.’

[54] “Also on 5 August, Latham & Watkins submitted an 18-page, single-spaced letter in support of its application to the effect that ‘the Tribunal is clearly empowered to act and should continue to exercise its jurisdiction in this matter and reach the merits of the dispute currently before it.' The letter enclosed a 46-page Opinion by Professor Pierre Lalive of the Geneva Bar which reaches the same conclusion. [55] “On 6 August 1999, Karim Sani reacted to these materials, stating: ‘This is a submission which was not advised in advance and has not been authorised by the Tribunal and, as such, is not appropriate with regard to captioned arbitral references. We therefore hereby request the Tribunal to disregard it. However, if the Tribunal rejects our above request and will consider claimants' said submission, we shall require an equal opportunity to respond to such and present an opinion of counsel in opposition. We shall require time to locate and brief counsel and for counsel to prepare his or her opinion. In light of the fact that most of the appropriate counsel are on vacation at this time, we submit that we shall need at least two weeks for this purpose.’

[56] “Latham & Watkins responded on 6 August 1999, giving a number of reasons why, in their view, ‘no additional time is appropriate’, and addressing: ‘the extraordinary argument in respondent's August 5, 1999 letter that respondent's refusal to accept service of claimants case-in-chief should operate as an excuse from default. To state that argument is to refute it; one violation of the rules cannot excuse another.’

[57] “On 9 August 1999, Karim Sani wrote: ‘... we are pleased to advise you that we have today requested Mr. Andrew Rogers, Q.C. to review Professor Lalive's opinion, as well as some of the other documentation in this matter, and to provide an opinion on the matter for your consideration. ... he has agreed to review this and to endeavour to prepare his opinion by the end of next week .... We trust that the Tribunal will reserve its decision as to how to proceed until we have had the opportunity to present Mr. Rogers' views as failure to take these into consideration would clearly represent unequal treatment and failure

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to afford us the opportunity to present our case. ... we are bound by any order of the Indonesia courts. Even were claimants or the Tribunal to offer to indemnify us against any liability this would not suffice, as we might be subject not only to fines, but also to imprisonment for contempt of court were we to disobey the court's order. We have no doubt that any outside counsel which we may engage would also be unwilling to violate the order of the Indonesian courts were you to order that the arbitral reference must be heard elsewhere now, in violation of the court's injunction, as they, too would be subject to court sanctions for contempt.’

[58] “The same day, Latham & Watkins answered: ‘At [sic] time continues to pass, it is claimants that are being deprived of their rights under the Terms of Appointment. Claimants consented to a modification of the strict fast-track dispute resolution provisions in the performance undertakings only in return for respondent's written agreement that it would comply with the specific deadlines in the Terms of Appointment. According to that schedule, respondent should be submitting its evidence tomorrow. Instead, it had refused to receive service of claimants' case-in-chief, asserted that it is unable to proceed and powerless to lift the injunction prohibiting its participation, and now seeking yet additional time to make a submission in a proceeding in which it had repeatedly announced it will not participate. ... The Tribunal should resolve the jurisdictional issue this week, as planned, and the arbitration should proceed.’

[59] “Latham & Watkins followed up with another letter on 10 August 1999: ‘Under the Terms of Appointment, respondent's case-in-chief was due today. Respondent did not serve its case-in-chief. In light of the fact that respondent's failure to serve its evidence was without sufficient cause, as argued in claimants' 5 August 1999 letter, claimants request that the Tribunal proceed with the arbitration pursuant to Art. 28 of the UNCITRAL Rules.’

[60] “In view of the extraordinary circumstances and at considerable inconvenience to its members due to the holiday season, the Arbitral Tribunal met to consider these developments. After extensive deliberations, it instructed the parties by the following letter and Procedural Order dated 11 August: ‘Enclosed herewith is a Procedural Order of the Arbitral Tribunal, which is intended to resolve the present apparent procedural impasse, and to afford the Parties an opportunity to present their reasoned position with respect to the following critical issues now before the Arbitral Tribunal: Is the Republic of Indonesia in breach of the Terms of Appointment? Do the 22 July 1999 orders of the Central District Court of Jakarta impede these two

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arbitrations? If the answer to (2) is negative, is it appropriate to hold hearings outside Indonesia? The Arbitral Tribunal has been dissatisfied with the content of the flurries of correspondence which has dealt with these issues over the past several weeks, because it has consisted mainly of partisan conclusions rather than meaningful analysis, let alone legal research. The Arbitral Tribunal therefore welcomed the claimants' detailed letter of 5 August 1999 as well as the legal opinion of Professor Lalive attached thereto. The Procedural Order offers the Republic of Indonesia an opportunity to present a similarly comprehensive exposition. In addition, there are some difficulties perceived by the Arbitral Tribunal which the Parties are specifically invited to address. In order that the Arbitral Tribunal's concerns be properly understood, the arbitrators express the following provisional views, which should not be understood to reflect any substantive decision, but as indications of matters viewed by the Arbitral Tribunal as particularly important, and with respect to which the Parties may take any position they wish in the knowledge that no final decision has been taken. The Arbitral Tribunal wishes to impress upon the Parties that the present Order has been prepared after substantial study and discussion by the arbitrators, who wish to be assisted by analytical and not rhetorical responses from the Parties. The Arbitral Tribunal would be pleased to have the views of Professors Lalive and Rogers to the extent that the issues pertain to their area of expertise. The Arbitral Tribunal agrees with the Republic of Indonesia that the materials made available to the expert before his opinion is given should be listed. (Naturally what Professor Lalive has already written need not be repeated.) Breach of the Terms of Appointment? It is an objective fact that the Republic of Indonesia failed to submit any documentary evidence, as required under Art. 5(f) of the Terms of Appointment, by the deadline of 10 August 1999. The Republic of Indonesia, through its counsel, seeks to justify its failure by invoking injunctions issued by the Central District Court of Jakarta. These injunctions, however, were obtained at the instigation of Pertamina. The Republic of Indonesia has utterly failed to persuade the Arbitral Tribunal that it is not in a position to control the activities of Pertamina. Messrs Karim Sani's letter of 13 July 1999, asserting that Pertamina “is not under the control of the government for any (sic!) and all aspects of its activities”, argues that a Governmentcommissioned audit has revealed corruption by Pertamina officials, and that this proves that Pertamina does not obey the Indonesian Government. This argument is incredible – just as incidents of army supply officers engaging in illegal procurement would not support the conclusion that a Government does not control its Army and therefore is not responsible for its actions. The Republic of Indonesia's representations to the Arbitral Tribunal seem to be at striking variance with what it has in fact been pleading before the Indonesian court. The Arbitral Tribunal has seen no evidence that the Republic of Indonesia has genuinely sought to convince the court that the injunction should not be granted. To the contrary, the Republic of Indonesia has ominously written that it “reserved the

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right” to apply for an order of contempt of court if the claimants should seek to proceed with these arbitrations. The Arbitral Tribunal understands that the Republic of Indonesia owns Pertamina, and that the President of the Republic of Indonesia appoints its Commissioners and Managing Directors. The claimants have pointed out that the Head Director is authorised, under Art. 23(1) of Law 8 of 1971, to represent Pertamina in court, and that a Director may be dismissed, under Art. 21(b), for acting in conflict with the interests of the Government of Indonesia. The respondent has not contradicted these statutory references. The Republic of Indonesia has not shown any evidence of its having instructed (or even sought to persuade) Pertamina to act in a manner that would ensure compliance with the Terms of Appointment signed by the Republic of Indonesia. Most of all, the Republic of Indonesia has not even attempted to demonstrate that it used its legal dominion to prevent Pertamina from pursuing a judicial initiative which is fundamentally at variance with the Republic of Indonesia's undertakings. In other words, the Republic of Indonesia seems to excuse its failure by invoking an event which it could have prevented. Such an excuse has, prima facie, little chance of being accepted. The respondent is formally put on notice that unless it forthwith makes a compelling demonstration to the Arbitral Tribunal that it is powerless to influence the actions of Pertamina, it will be held to be in breach of the Terms of Appointment and will have to face the full consequences of that breach. The Arbitral Tribunal will not be satisfied with formalistic assertions. It should be noted that the Arbitral Tribunal is unconvinced of the existence of a legitimate autonomous interest on the part of Pertamina in having sought the injunctions. This comment is not made because the Arbitral Tribunal purports to exercise any jurisdiction over Pertamina as such (and it expressly does not so purport), but because Pertamina as a third party has purported to interfere with the workings of this international Arbitral Tribunal. The Arbitral Tribunal's concerns under this head primarily require comment by the Republic of Indonesia, as claimants' views have been fully expressed. Effect of the injunction The Republic of Indonesia has taken the position that the Arbitral Tribunal is automatically paralysed by the court orders of 22 July 1999. In so doing it has failed to address the consequences of a number of factors inherent in the following questions: – is it not a presumption that the Arbitral Tribunal, operating under the UNCITRAL Rules and the specific Terms of Appointment, should fulfil its mandate? – is an Arbitral Tribunal powerless to consider whether court orders purporting to inhibit the arbitrators' fulfilment of their mandate lack a legal basis (whether jurisdictional or substantive), or are inconsistent with international treaty obligations such as those of Art. II(1) of the New York Convention? – whatever might be the general effects of such court orders, do they apply in the circumstances where the only party wishing to suspend the proceedings is the very State of which the court is an instrumentality? – why should the Arbitral Tribunal consider itself prevented from going forward when the claimants have taken the position – with whatever ultimate consequences to them as may eventuate – that they wish to proceed, and the Republic of

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Indonesia, which seeks to halt the proceedings, was in a position to prevent the orders from having been sought? – should the Arbitral Tribunal give no weight to the fact that Pertamina has agreed to arbitration with the claimants under the contracts it entered into with them? – should the Arbitral Tribunal give no weight to the fact that Pertamina has asked the Indonesian court to declare that the Ministry of Finance letters, which are the focus of the ultimate issue for determination in these arbitrations, are not enforceable contracts notwithstanding that Pertamina is not a party to these arbitrations? Generally, the Republic of Indonesia is asked to state whether it considers that this Arbitral Tribunal must obey whatever an Indonesian court says irrespective of the arbitrators' mandate and duty under the UNCITRAL Rules. If that is not its position, the Republic of Indonesia is invited to define the circumstances under which it believes that proposition would be untrue, and explain why in its view they do not obtain here. The Arbitral Tribunal invites the claimants to explain more fully why it should make no difference in the present arbitrations that the court decisions disregarded by the arbitral tribunals cited on page 8 of their letter of 5 July did not emanate from courts in the place of arbitration ... Change of venue? On the assumption that the Arbitral Tribunal decides to proceed: The claimants are asked to state their views as to the appropriate venue. The Republic of Indonesia is asked to state whether it considers itself precluded from attending a hearing and presenting any witnesses it wishes to call. Any views of the Republic of Indonesia as to the venue are unlikely to be given weight unless the Republic of Indonesia expresses a commitment to full substantive participation (i.e. excluding participation of counsel for limited purposes only). The Arbitral Tribunal is unconvinced by the claimants' assertion, at page 17 of their letter of 6 August, that the “selection (of Jakarta) was without jurisdictional significance”. The arbitrators understand the claimants’ argument about lex arbitri, but this argument does not resolve the issue of post-award control: do the claimants contemplate an award formally rendered “as at” Jakarta, subject to such challenge as may be extant there, or one formally rendered in a different venue – and reserving the possibility of challenge before the courts of that country? This is perceived by the Arbitral Tribunal as a matter of “jurisdictional significance”. The claimants must consider that even if the Arbitral Tribunal were to grant a change of physical venue for practical reasons this decision may be without legal prejudice to Jakarta as the formal place of arbitration. The Parties are asked to state their views of what arrangements should be made for rendering and depositing the awards under this hypothesis. Caveat The Arbitral Tribunal finally reminds the Republic of Indonesia that it would have been unacceptable for it to base its course of conduct on the unilateral presumption that the procedural contentions it has raised before the Arbitral Tribunal are well founded. If the Arbitral Tribunal holds to the contrary, the Republic of Indonesia is hereby put on formal notice that it will then be required to file the documentary evidence, which was due on 10 August, immediately; there would be no further

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accommodation of a party which has, ex hypotheosi, caused an unwarranted interruption of the proceedings. In other words, the Republic of Indonesia may find itself without any excuse for not having prepared documentary evidence ready for submission at the time the Arbitral Tribunal makes its ruling. The claimants have not only been willing, but eager, to communicate its submissions to the respondent – and presumably remain prepared to do so. If the respondent persists in ignoring these materials, and therefore has voluntarily placed itself in a position where it is unable to prepare a fully responsive counter-submission, that is a consequence to be borne entirely by the Republic of Indonesia. Similarly, both Parties are forewarned that in the event the Arbitral Tribunal decides to go forward it will convene a hearing with limited advance notice and that in the circumstances it is unlikely to have regard to the convenience of counsel. Timing The Arbitral Tribunal contemplates rendering its decisions on the issues dealt with in this letter by 7 September 1999.’ PROCEDURAL ORDER OF 11 AUGUST 1999 The claimants are directed on or before 16 August 1999 to provide a list of the materials relating to this case which were made available to Professor Lalive before he prepared his Opinion of 5 August 1999. The Republic of Indonesia has asked to be given a time limit until 20 August 1999 to respond to the claimants' letter of 5 August and to the Lalive Opinion, in particular via the expert opinion sought from Professor Rogers. The claimants have objected to any further delay. In the exercise of its discretion, desirous of affording the respondent full opportunity to present its views, and wishing to have the benefit of Professor Rogers' considered views, the Arbitral Tribunal believes it appropriate to grant the Republic of Indonesia more time than it asked for, and therefore directs the respondent to file its response (taking account of the provisional views expressed in the letter from the Arbitral Tribunal which accompanies this Procedural Order), as well as any Opinion by Professor Rogers, by 31 August 1999. The claimants may also, by 31 August 1999, add observations on points arising from the Arbitral Tribunal's provisional views which they consider were not already covered by Messrs Latham & Watkins' letter of 5 August and the Lalive Opinion. The submissions called for hereinabove are to be communicated by telecopy.’

[61] “On 13 August 1999, Karim Sani wrote to say: ‘We thank Mr. Paulsson for his telefax of yesterday and for allowing us and Professor Rogers some time to prepare our response to Professor Lalive's opinion and to the assertions of claimants in that regard.... With regard to claimants' evidentiary submissions, we thought that we had made it clear in our previous correspondence that we have never rejected delivery of these. We are prohibited by the injunction from formally accepting service, but were claimants simply to deliver the parcels to our office and not insist upon a signed receipt,... we would be extremely grateful to have access to such materials. This claimants have refused to do, despite our several such invitations. The Tribunal's statements that: (i) “claimants have been

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willing and eager to communicate its submissions ...” to us, and that (ii) we “... persist in ignoring these materials ...” are both patently untrue.’

[62] “The same day, the Arbitral Tribunal answered Karim Sani as follows: ‘I acknowledge receipt of Messrs Karim Sani's letter dated 13 August 1999, and note only that the Arbitral Tribunal quite obviously has no first-hand factual information about who did or said what on the occasions of the aborted service to the respondent's counsel of claimants' documentary evidence. Therefore: Messrs Karim Sani's letter of 13 August is interpreted (by reference to the words “extremely grateful”) as a request for communication of the documentary evidence; if this interpretation is incorrect Messrs Karim Sani are instructed so to state by 16 August 1999; assuming no letter from Messrs Karim Sani on 16 August, Messrs Latham & Watkins are instructed to make their claimants' documentary evidence available once again, and to inform the Arbitral Tribunal of the circumstances in which this was done; once this has been done, Messrs Karim Sani are instructed to confirm to the Arbitral Tribunal that they are in physical possession of the claimants’ documentary evidence.’

[63] “On 18 August, Latham & Watkins wrote to say that another set of the claimant's documentary evidence had been delivered to Karim Sani on 18 August. [64] “On 19 August, Karim Sani confirmed that ‘we are now in possession of claimants’ evidence’. [65] “On 26 August, Karim Sani submitted a seven-page single-spaced latter giving reasons why the Arbitral Tribunal should not proceed and in any event should not meet elsewhere than Jakarta. The letter was accompanied by an eight-page memoranda from Karim Sani entitled ‘Can the Government control Pertamina?' as well as extracts from various publications. [66] “Karim Sani's letter of 26 August 1999 affirmed that the Arbitral Tribunal's letter of 11 August was: ‘full of statements which it is difficult to fit within the definition of “provisional”. At the top of page 2 the Tribunal has stated “the Republic of Indonesia has utterly failed to persuade the Arbitral Tribunal that it is not in a position to control the activities of Pertamina”. ... we wish to place on record our strongest objection to the tone and thrust of Mr. Paulsson's letter, and its many mis-characterisations.’

[67] “The Arbitral Tribunal answered on 27 August 1999: ‘In light of some comments made in your letter, the meaning of the word

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“provisional”, as used in my letter of 11 August on behalf of the Arbitral Tribunal, appears to require clarification. “Provisional” means “temporary” in the sense of being subject to change. It does not mean “tentative”. The Arbitral Tribunal intended to give you notice of the conclusions it would have reached if it had to decide the relevant issues on 11 August, in light of the evidence and arguments put before the Arbitral Tribunal as of that date. The Arbitral Tribunal however was still open to persuasion, and alerted the Parties to what they must overcome to prevail on various issues of particular moment to each of them. Such indications are generally perceived as constructive and helpful. Whether they were so or not in this case is an open question. But they cannot be taken as reflecting closed minds; the sense of the word provisional is precisely the opposite.’

[68] “On 31 August 1999, Karim Sani submitted a 30-page Opinion signed by The Professor The Honourable Andrew Rogers Q.C. concluding that the Arbitral Tribunal does not have the authority to proceed in light of the Jakarta Court's injunction. [69] “Karim Sani's covering letter indicated: ‘we would be prepared to attend a hearing, solely for the purpose of having the two Professors appear, so that the whole question of the validity of the injunction and place of arbitration can be decided after adequate expert exchange and further deliberation by the Tribunal. We should emphasise that such a hearing must be solely for discussing the injunction issue so that no one attending will be breaking the terms of the injunction. We would suggest that such a hearing, if deemed appropriate, might be held in London if possible, on a date convenient to all concerned.’ [70] “Also on 31 August 1999, Latham & Watkins submitted a 25-page single-spaced letter in support of its position that the Arbitral Tribunal should proceed ‘promptly, with or without the participation of respondent’. To this letter were attached a 19-page Additional Opinion by Professor Lalive as well as some legal materials. [71] “On 3 September 1999, Karim Sani wrote to comment on the submissions from Latham & Watkins, and to provide a seven-page Opinion from Mr. M. Husseyn Umar of the Jakarta Bar, a participant in the preparation of the Indonesian Arbitration Law which came into effect on 12 August 1995, and whose conclusion is: ‘An arbitral reference held in Indonesia under UNCITRAL rules is a domestic arbitration’. [72] “The same day, Latham & Watkins wrote to object to the materials submitted by Karim Sani ‘after the deadline' and to decline the suggestion of a hearing of Messrs Lalive and Rogers. Latham & Watkins concluded: ‘The issues have now been thoroughly briefed and the only purpose that would possibly be served by the suggested activities would be to afford respondent additional time in which to obtain further improper rulings from its own courts. ... The matter is now ripe for decision and the Tribunal should reach a decision on this matter by 7 September 1999 as planned. ...

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Claimants wish to point out for the record that it has now been more than 15 days since respondents took delivery of claimants' case-in-chief. As the Tribunal is aware, service was initially effected on 26 July 1999 but respondent failed to submit its response as required by the Terms of Appointment. At the Tribunal's direction, claimants re-delivered their case-inchief to respondent's counsel on 17th August (to Mr. Kaplan) and 18 August (to Karim Sani). Even if we were to assume, arguendo, that service was not effective until the latter date, respondent has again failed to submit any response within the deadlines set forth in the Terms of Appointment. Accordingly, respondent is now in default for the second time.’

[73] “After extensive deliberations amongst all its members, the Arbitral Tribunal delivered the following Procedural Order on 7 September 1999: ‘PROCEDURAL ORDER OF 7 SEPTEMBER 1999 Considering the written submissions of the Parties, as well as the expert opinions presented by them; considering that the Republic of Indonesia has neither demonstrated to the satisfaction of the Arbitral Tribunal that Pertamina had a legitimate interest in seeking to enjoin these arbitral proceedings, nor disproved that the Republic of Indonesia has statutory dominion over Pertamina and that the statutory purpose of Pertamina is to act in the interest of the Republic of Indonesia; considering that the courts of Indonesia are the instrumentalities of the Republic of Indonesia and that it has long been established that: “If there ever was a faint suggestion that acts of the judicial officers of a State were so aloof and independent that they were not acts personal to the State, today, ‘There can be no doubt ... that a State is responsible for the acts of its rulers, whether they belong to the legislative, executive or judicial department of the government’.” Bin Cheng, General Principles of Law (1953, Grotius reprint 1987, 194); considering that it has more recently and specifically been affirmed by an authoritative commentator that “the responsibility of the State for acts of judicial authorities may result from ... a decision of a municipal court clearly incompatible with a rule of international law ... [and from] a denial of justice”, Eduardo Jiménez de Aréchaga, “International Law in the Past Third of a Century”, 159-1 Recueil Des Cours (General Course in Public International Law, The Hague, 1978, 278-279); considering that the purported injunction violates the Republic of Indonesia's undertakings in the Terms of Appointment by which the present international Arbitral Tribunal was established, whereas the sanctity of agreements is a fundamental rule of international law; considering that to prevent an arbitral tribunal from fulfilling its mandate in accordance with procedures formally agreed by the Republic of Indonesia is a denial of justice; considering that the Terms of Appointment were agreed on 6 October 1998; considering that the arbitration agreement accepted by the Republic of Indonesia calls for the resolution of disputes within 60 days; considering that this time period has been extended at the request of the Republic

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of Indonesia; considering that paragraph 5(f) of the Terms of Appointment calls for the Republic of Indonesia to submit its documentary evidence within 15 days of the claimants' documentary evidence; considering that the claimants presented their documentary evidence on 26 July 1999; considering the letter dated 11 August 1999 by which the Arbitral Tribunal cautioned the Republic of Indonesia that if it were held in default it would be given no further time to prepare its documentary evidence; considering that the Arbitral Tribunal does not presume to instruct the Republic of Indonesia as to what it must do in relation to Pertamina or its courts, or indeed as to what it can or cannot do in this regard at this time, but recognising that recent events may have impeded adequately deliberated decision-making processes, the Arbitral Tribunal hereby decides and orders that: The Republic of Indonesia is in default under the Terms of Appointment. Hearings are hereby convened in the small Hall of Justice in the Peace Palace, The Hague, beginning at 10.30 a.m. on Wednesday 22 September and continuing as far as necessary the two following days. Given the Republic of Indonesia's default, as well as its affirmation that it will not participate in the arbitration, the convenience of its counsel, or such witnesses as it might have presented if it had not been in default, will not be taken into account. The Arbitral Tribunal will test the evidence presented by the claimants, who will be required to prove their case to the satisfaction of the arbitrators irrespective of the default of the Republic of Indonesia; and will consider all arguments raised by the Republic of Indonesia. The Arbitral Tribunal has chosen the place for this hearing in the exercise of its authority under Art. 16(2) of the UNCITRAL Rules(3) without changing the legal seat of the arbitration, which, in accordance with paragraph 3(c) of the Terms of Appointment, remains Jakarta. In the exercise of its procedural discretion the Arbitral Tribunal hereby informs counsel to the Republic of Indonesia that in the event they formally advise the Arbitral Tribunal on or before 17 September 1999 that the injunction has been withdrawn, and that they are authorised to stipulate that the Republic of Indonesia will fully and irrevocably participate in these arbitral proceedings, then the schedule would be modified as an extraordinary accommodation to the Republic of Indonesia. If said stipulation is made to the Arbitral Tribunal, the Republic of Indonesia's submission of documentary evidence, including statements of all witnesses upon whom it intends to rely, as defined in paragraph 5(f) of the Terms of Appointment, should also be made on 17 September 1999, and the hearing would be rescheduled thereafter.’

[74] “On 9 September 1999, Karim Sani wrote to the following effect: ‘We cannot accept this order, not only on account of its content but also its form. This order purports to emanate from the full Tribunal, yet it has been signed only by the Chairman, and it contains no indication as to the disposition of the

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other arbitrators on the matter. We are not prepared to accept that this is a reasoned decision of all three arbitrators and, in accordance with Art. 32(4) of the UNCITRAL rules,(4) require that the order be signed by all arbitrators or, if not agreed to by all, that the reasons of the dissenting arbitrator be clearly stated in writing. As to the content of the purported order, we are outraged that a tribunal sitting in a dispute governed by the law of Indonesia has deemed it unnecessary to give any consideration to such laws, and has deemed it appropriate not only to disregard an order of, but to issue official insults to, the courts of such jurisdiction. Furthermore, the tribunal's failure to deal with the substantial points made by us supported by Professor Rogers shows, as we suspected, that at least two members of the tribunal are biased and have made up their mind prior to hearing from us. The chairman's self-serving letter playing with words such as “provisional” and “tentative” was a philological charade. Furthermore, the language used in the chairman's letter dated 11th August 1999 clearly indicates a closed mind. That the tribunal, or at least the chairman thereof, has given no consideration whatsoever to submissions by the respondent, including opinions of eminent lawyers, and instead has simply deemed that his own personal opinion, which is totally at variance with the legalities and the reality of the situation, must prevail, is nothing short of astonishing and, in our view, constitutes misconduct, bias and abuse of the arbitral system in the gravest possible manner, and a miscarriage of justice that can only present arbitration in a very negative light. As no evidence was submitted by claimants to counter Professor Rogers’ view that Pertamina had a legitimate interest in applying to the Jakarta court to obtain the injunction, there was in fact no evidence before the tribunal to justify its outrageous conclusions that the government of Indonesia has not demonstrated that Pertamina had a legitimate interest in enjoining these proceedings. We will be considering what further action to take in more detail after we have had further time to consider this order, but in the meantime we will certainly be considering apply both to ICSID and the Jakarta court for appropriate relieve [sic] based, inter alia, on the express bias of the chairman and/or the whole tribunal. Accordingly all of our client's rights are reserved in all jurisdictions. In particular the respondent will contest enforcement of any award made following such a blatantly unfair and prejudicial procedure.’

[75] “On 13 September 1999, the Arbitral Tribunal answered: ‘Your letter of 9 September 1999 purports to “require” that the Arbitral Tribunal's Procedural Order of 7 September 1999 be signed in accordance with Art. 32(4) of the UNCITRAL Rules. No Procedural Orders in these proceedings have been rendered under Art. 32 of the UNCITRAL Rules, which concerns awards. Your “requirement” is therefore not accepted by the Arbitral Tribunal. All Procedural Orders,

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including that of 7 September 1999, were rendered pursuant to paragraph 3 (b) of the Terms of Appointment, and in conformity with Art. 31 of the UNCITRAL Rules.(5) The Procedural Order of 7 September 1999 self-evidently has the further specific basis of Art. 28 of the UNCITRAL Rules. A number of important issues have been dealt with by the Arbitral Tribunal under my sole signature without demur. Taking the month of June alone, I refer you to letters signed by myself, announcing decisions of the Arbitral Tribunal, on the 9th, 15th, 16th, 18th, 24th, and 25th. For you to affirm at this late date that you find the procedural order of 7 September to be unacceptable is difficult to square with Art. 30 of the UNCITRAL Rules.’

[76] “On 14 September, Karim Sani wrote to Latham & Watkins, inviting them to consent to the ‘removal' of the Arbitral Tribunal. Anticipating that there would be no such consent, Karim Sani invited the members of the Arbitral Tribunal to resign, failing which Karim Sani indicated that the Republic of Indonesia would apply to ICSID for ‘removal' of the Arbitral Tribunal ‘and shall make a like application in the Indonesian Court.' Karim Sani explained the Republic of Indonesia's position as follows: ‘The grounds on which we are taking this step is that the Tribunal has displayed express bias against our client, the Republic of Indonesia; is acting with a closed mind, in contempt of an Order of the Court of competent jurisdiction of Indonesia suspending the parties' arbitration, and threatening to proceed, in breach of natural justice, to hear the parties arbitration in circumstances where our client has been restrained by the Courts of Indonesia from attending and presenting its case; and has behaved in a manner in which the Republic is entitled to have lost confidence in the Tribunal's fairness, impartiality and respect for the law.’

[77] “Among 18 ‘principal relevant circumstances upon which we rely' was the contention that: ‘The Tribunal's strident and irrelevant exhortations to international law are wholly misplaced in the context of a domestic Indonesian arbitration. The extreme vituperative and one-sided language in which the Tribunal has expressed its thoughts through the Chairman, in particular in a letter, dated 11 August 1999, have displayed a mind set to reject any argument from the Republic of Indonesia. The insulting slight of hand with which the evidence advanced by the Republic of Indonesia, inter alia in the form of Professor Rogers' Opinion, not even considered by Professor Lalive, has been totally ignored by the Tribunal in its so-called Procedural Order, an order unsigned by two if its members, showing that this Tribunal does not shrink from blatantly biased, nakedly one-sided and ill-considered unfairness.’ [78] “The final of the 18 ‘circumstances' related to an enquiry which Karim Sani had

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previously made in relation to professional services which the law firm of which the President is a partner may have rendered to clients in the Indonesian power industry, but had not pursued after detailed responses from him. Now Karim Sani wrote as follows: ‘A further ground for removal of Mr. Paulsson which was previously dismissed by Mr. Paulsson as irrelevant, has recently come to light once again, with indications that Mr. Paulsson does now, even if he did not at the time, have a conflict of interest which would indeed make it impossible for him to act independently and impartially, even were he otherwise inclined to do so, which clearly he is not. We have been approached by two separate international law firms, neither of which were aware of our representation of the respondent in this action, asking whether we would be free to act as their Indonesian counsel were they to be the successful tenderer to represent one of the other private power providers in an action against PLN and, perhaps eventually against our client as well. This company is a major client of Mr. Paulsson's firm, Freshfields, and although Freshfields is apparently not intending to act as lead counsel because of a conflict (clearly Mr. Paulsson's), the invitation to tender includes as a requirement that the firm chosen is willing and able to work with Freshfields, indicating that such Freshfields [sic] is presently involved in negotiations with PLN. It is understood that, as regular counsel to this company, Freshfields will take an active role in briefing and supporting chosen counsel with respect to evidentiary, strategic and other matters should the renegotiations fail. Thus it is clear that a major client of Mr. Paulsson's firm has a substantial interest in the outcome of this arbitration and that Mr. Paulsson's statement that there is no dispute between such client and the respondents in this and the PLN matter is no longer true, even had it been true at the time. We take no position as to whether or not Mr. Paulsson's bias against our client is influenced by the above-mentioned conflict situation. However, should this Tribunal, under Mr. Paulsson's leadership, find against our client in the present arbitrations, such a perception on the part of the rest of the world will be inescapable.’

[79] “The following day, on 15 September 1999, Karim Sani wrote to the Arbitral Tribunal that ‘since we have not heard from you, we shall be submitting our application for removal to ICSID’. The letter added: ‘In the event that ICSID does not grant our request and you are not otherwise prevented and thus do hold a hearing commencing on the 22nd of September, we hereby ask that you confirm that the hearing will be recorded and a true and complete transcript prepared and that a copy of such transcript will be sent to us forthwith upon its being prepared.’

[80] “Later that day, Karim Sani provided a copy of the Republic of Indonesia's application to ICSID, essentially restating the grounds articulated in Karim Sani's letter of

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14 September 1999 to Latham & Watkins. [81] “Also on 15 September 1999, the Arbitral Tribunal responded to Karim Sani: ‘In answer to your letter dated today referring to your not having heard from the Arbitral Tribunal in response to your letter dated yesterday, allow me to point out that yesterday's letter was addressed to Latham & Watkins. Secondarily, it made an application to the Arbitral Tribunal which was contingent on Latham & Watkins' response. The Arbitral Tribunal therefore needs to know the claimants' position before answering. Moreover, one would hardly think it excessive for the claimants to take 24 hours to respond to a seven-page single spaced letter. Finally, as always I require some time for consultation with my co-arbitrators. This being said, if Latham & Watkins answer in the course of this day I shall immediately endeavour to ascertain the views of the co-arbitrators and revert to you tomorrow or at the latest Friday. As to your last query, we have engaged the services of Smith Bernal court reporters who will prepare a verbatim transcript of next week's hearings. It will be couriered to you whether or not you are in attendance.’

[82] “The final communications of 15 September 1999 were two letters from Latham & Watkins to Karim Sani and to ICSID dispatched well after closing hours in the domiciles of the members of the Arbitral Tribunal. The letter to Karim Sani stated that the claimant would not accede to the Republic of Indonesia's request and added: ‘What is troubling to us in addition to the fact that your request is baseless and untimely is the fact that you did not extend the professional courtesy of allowing us even twenty four hours (we note that you did not provide the Tribunal with even twenty-four hours or the benefit of our response to your request) to consult with our client and consider your request (which was contained in a seven page, single spaced letter). One must question why respondent even bothered to make the request of claimants in the first instance.’

[83] “The letter to ICSID articulated the claimant's opposition to the Republic of Indonesia's request for removal of the arbitrators. [84] “In a letter to the Secretary-General of ICSID dated 20 September 1999, Karim Sani asserted that the Arbitral Tribunal was contaminated by ‘bias and lack of independence' in that the President of the Arbitral Tribunal ‘is well known throughout the arbitration community to be in a constant crusade to elevate international arbitration, and thus the power of international arbitrators such as himself, to a level above and beyond the jurisdiction of any court in the world. He has now found himself in a situation in which he believes he can prove his theory and ignore the rightful jurisdiction of the Indonesian courts, at the same time preventing such courts

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from engaging in their proper and legal authority to review his previous decision.’

[85] “The letter asserted that the President of the Arbitral Tribunal: ‘has completely ignored all submissions that counter his theory that once an arbitrator is seized with a reference, he has all-encompassing devine [sic] and uncontestible [sic] powers over every aspect of the matter, regardless of the scope of the dispute that has been referred and regardless of any governing law to the contrary...’, referred to his alleged ‘fixation with the supremacy of international arbitration’, and to the alleged ‘lack of respect that the Tribunal, or at least its Chairman, has for the governing law and for the government and courts of Indonesia’.

[86] “Finally, the letter referred to submission by opposing counsel as an ‘insulting tirade’, and a ‘constant stream of baseless defamatory accusations, insults and innuendos ...’

[87] “On 17 September 1999, the Arbitral Tribunal wrote to Karim Sani: ‘With reference to comments made in your letter dated 9 September 1999, and considering your failure to avail yourself of the opportunity given to the Republic of Indonesia by the Arbitral Tribunal to reverse its default posture by 17 September (as I write it is midnight in Jakarta and the end of the business day in Paris), I view it as appropriate to record that your speculation about Procedural Orders reflecting the President's “personal opinion” or the possibility that there might be a “dissenting arbitrator”, are quite unfounded. All submissions of the Parties have been considered and discussed by all three arbitrators. Although it would be entirely inappropriate to reveal the inner workings of the Arbitral Tribunal, I can inform you that the Procedural Orders of 11 August and 7 September 1999 were the fruit of extensive discussion, and even in-person deliberations, of all three arbitrators. The text of this letter itself has been reviewed by, and discussed with, both of my coarbitrators. It is improper for any party to probe the secrecy of deliberations. That confidentiality, a fundamental element of the arbitral process, is intended to

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ensure that each arbitrator is able to exercise his or her independent judgment in a collegial context free of any outside influence. I shall not comment on any criticisms of my personal conduct, but as President of the Arbitral Tribunal I find it disturbing that your letter pervasively focuses on what you imagine to be individual positions of the arbitrators. My coarbitrators are to be treated as persons of independent mind, and your statement that “as we suspected, ... at least two members of the tribunal are biased” is quite unacceptable. As for your letter dated 14 September and with further reference to Latham & Watkins' letter of 15 September, you are hereby advised that the Arbitral Tribunal shall not resign. Your allegations of bias on the part of the Arbitral Tribunal, which has carefully considered all submissions of the Parties (including legal opinions), are perceived by the arbitrators to have as their sole substantive basis – looking beyond your colourful choice of language – your disagreement with determinations of the Arbitral Tribunal. That is no reason to ask for the removal of an arbitral tribunal. I find it surprising that you seek once again – as the 18th and final “circumstance” justifying your application for the arbitrators to resign – raise the matter of an alleged conflict of interest in my particular case.

to

Although you write that this matter was “previously dismissed by Mr. Paulsson as irrelevant”, a more accurate statement would be that in my letter of 10 July 1999 I disclosed, without prompting, what I knew of the matter, that I assured the Parties that I did not cling to office and would step down if asked to do so by the Parties jointly or directed to do so by the relevant Appointing Authority, and that the Republic of Indonesia decided not to make a challenge within the relevant deadline. In the same letter, I stated that “during the pendency of the present arbitrations, Freshfields would not represent any party in an arbitration or litigation against either the claimants or the respondent”. This was an unqualified statement which I stand by. I have no reason to respond to hearsay accounts of your discussions with “two separate international law firms”. If everything you say were entirely accurate and complete, however, the account would appear to prove that the unnamed parties you have in mind have selected wholly independent counsel. If my firm had any surreptitious involvement, we obviously would have ensured that our supposed co-counsel did not contact Karim Sani – the very firm which had raised the questions that led to my assurance that Freshfields would not undertake representation.’

[88] “In the afternoon of 17 September 1999 (a Friday), the law firm of Loeff Claeys Verbeke, acting on behalf of the Republic of Indonesia, issued summonses against the claimant as well as against the arbitrators individually, calling upon them to appear at 10 a.m. on Monday 20 September 1999 before the President of the District Court of The Hague. The summons, transmitted with supporting documents in a 116-page telefax, indicated that the Republic of Indonesia was seeking an injunction forbidding the claimant and the arbitrators from participating in a hearing, or ‘at least' to forbid them from doing so within the Kingdom of The Netherlands, and to forbid them ‘from entering the Peace

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Palace and the area surrounding the Peace Palace at The Hague at the Carnegieplein 2 in order to hold such a hearing’, all subject to a penalty of US$ one million per day. [89] “At the time this summons was sent, both co-arbitrators were in transit for The Netherlands. [90] “The President of the Arbitral Tribunal asked Professor Albert Jan van den Berg of the Amsterdam Bar to present himself at the injunction hearing, and to be of any assistance required of the President of the District Court. (Before attending, Professor van den Berg received clearance from the Deken (Head) of the Amsterdam Bar Association, Mr. F.D.W. Bannier, to ensure that his position as a partner in the same law firm as the President of the Arbitral Tribunal would not, as a matter of propriety, inhibit his appearance.) [91] “The matter was pleaded as scheduled on the morning of 20 September 1999. At approximately 9 a.m. on 21 September 1999, the District Court announced that the Republic of Indonesia's application for injunction had been denied. [92] “On 20 September 1999, Karim Sani communicated to the Arbitral Tribunal the text of a 17-page opinion dated 19 September 1994 under the letterhead of the Hong Kong office of Latham & Watkins addressed to two international banks, relating to another project but serving, or so Karim Sani contended: ‘... to demonstrate that Messrs Latham & Watkins are, and have from the outset been, well aware that the letters for the Minister of Finance were not intended to be, and are not, without the backup of further undertakings which have not been issued, legally binding obligations of the Republic of Indonesia’.

[93] “Karim Sani explained that this opinion ‘has just today come into our possession’. [94] “The hearing of witnesses before the Arbitral Tribunal, scheduled for 22-23 September 1999, was aborted due to the non-appearance of one of the co-arbitrators. The claimant presented itself at the appointed time at the Small Hall of Justice in the Peace Palace. The Republic of Indonesia did not appear. Mr. Constantine Partasides, an English solicitor based in the Freshfields Paris office, attended as Secretary to the Arbitral Tribunal. A verbatim transcript of the event was produced by Smith Bernal, court reporters of London, and sent to both Party's [sic] counsel. [95] “The President of the Arbitral Tribunal made the following self-explanatory statement: ‘You will notice that the Arbitral Tribunal does not appear before you in its full formation. Mr. de Fina is here with me, but Professor Priyatna is absent. I recognise that the claimant, its legal team, and its witnesses have been put to considerable inconvenience to cross the Atlantic to attend this hearing. I owe to them such explanations as I am in a position to give. Secondly, we must draw conclusions from the unexpected absence of Professor Priyatna with respect to the further progress and conclusion of this case. As to my explanations: The members of the Arbitral Tribunal have since October 1998 maintained regular contacts, as the circumstances required, characterised by

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cooperativeness, openness and collegiality. All procedural decisions have been fully deliberated. The efforts made by the respondent's counsel to identify individual positions within the Arbitral Tribunal constitute an affront to the independence of the arbitrators. I will certainly not indicate whether particular decisions have been unanimous or not. I do affirm that they have been formalised in accordance with the Terms of Appointment, and received by the Parties as such for the past several months without demur, or so things stood until I announced our decision of 7 September 1999. I have been in frequent telephone contact over the past four weeks with Professor Priyatna as well as with Mr. de Fina. Most recently, I had two lengthy conversations with Professor Priyatna last week. The second of these conversations took place early on Friday, 17 September. He told me that his flight would arrive in Amsterdam on Monday morning, 20 September. His ETA was shortly before 8 a.m. I then confirmed to him that I would make hotel reservations for him at the Carlton Ambassador Hotel in The Hague starting Monday. We agreed that we would speak Monday. We also agreed that we would continue internal deliberations of the Arbitral Tribunal immediately after the hearings here at the Peace Palace. On Monday morning the personnel at the Carlton Ambassador reported that Professor Priyatna had not arrived. Indeed, they claimed there was no booking in his name. This came as a surprise to me as I had made the booking myself. After verifying the Carlton Ambassador answered that the booking had been cancelled, not by Professor Priyatna but by a man whose name was recorded as “Hosen”, which, it seems, is a Dutch phonetic rendering of “Husein”. On Monday a message was left for me at the Carlton Ambassador, between 11.45 and 12.15, stating that “Mr. Priyatna cannot come to the hotel to meet you.” Neither the name nor the number of the caller was given. A second message for me was recorded at 14.30 stating “Mr. Abdurrasyid does not come”, this time identifying the caller as Mr. Hosen without a number. Professor Priyatna has all my professional and personal telephone numbers, and I have been easily contactable at all times since I spoke to him last. He has not contacted me, and I have been apprised of no messages from him left for me anywhere. That is the sum of the wholly unsatisfactory explanation I am personally in a position to give as to the extraordinary circumstances in which we find ourselves today. I now know, by the first-hand observations of three eye-witnesses, that Professor Priyatna did reach Amsterdam, and that he left for Jakarta yesterday evening in circumstances that make me fear that an outrage has been perpetrated upon the personal integrity of Professor Priyatna, and thus upon this Arbitral Tribunal. I will read into the record the signed statements of two of these eye-witnesses. The third eye-witness is Mr. de Fina, who will shortly declare what he saw and heard. I wish to record my dismay at the increasing insistence with which counsel to the respondent have seen fit to characterise all decisions of the Arbitral Tribunal with which they disagree as being insulting to the nation of

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Indonesia. Not later than Monday, they wrote to the Secretary-General of ICSID to complain of “the lack of respect that the Tribunal, or at least its Chairman, has for the governing law and for the government and courts of Indonesia”. I wish also to record my dismay at the intolerable manner in which counsel to the respondent have sought, in their correspondence with the Arbitral Tribunal, to compromise the independence of Professor Priyatna, whether by their frequent calls for him to confirm to the other arbitrators the accuracy of factual allegations made on behalf of the Republic of Indonesia; or by their attempts to ascertain the individual position of arbitrators on controversial matters. This behaviour of counsel is contrary to the spirit and purpose of Resolution 31/98 of the United Nations adopted by the General Assembly on 15 December 1976. Until it is proven otherwise, I refuse to believe that this behaviour has the approval of the Minister of Finance of Indonesia or any other senior officials of the Government, for whose high duties I have the greatest respect. Indonesia is one of the great nations of the world, and personally I do not mind saying that on a general human level I feel greater sympathy for its people, in this time of upheaval, than for the shareholders of the claimant. The mandate of an arbitral tribunal is not, however, to be a philanthropist with other people's money. All I need to say is that the animosity toward the Arbitral Tribunal expressed in recent correspondence from counsel to the Republic of Indonesia is entirely unilateral. I wish finally to record my profound sympathy for Professor Priyatna. He has my full understanding in the circumstances. Given the extraordinary pressure that has been brought to bear on him, I find it impossible to criticise him. He is ordinarily a man of infinite courtesy. His conduct in this case, until Sunday evening, unfailingly evidenced conscientiousness and respect for both parties as well as for his fellow arbitrators. As a matter of human decency I accept that the true causes of his absence, whatever they may be, must be compelling. Now to the consequences of the circumstances in which we find ourselves. The Arbitral Tribunal announced its fully-deliberated decision to the effect that the Republic of Indonesia is in default by its letter of 7 September 1999. Under the UNCITRAL Rules, a decision under Art. 28 does not require articulation in a formal award. Nevertheless, the Republic of Indonesia, in its letter dated 20 September 1999 to the Secretary-General of ICSID, has taken the view that this decision is “more in the nature of an interim award than a mere procedural order, and, as such, requires signatures or indications of dissent of the entire tribunal”. The allegation that an indication of dissent is required is profoundly mistaken; it has no place in the UNCITRAL Rules. Nevertheless, the Arbitral Tribunal shall, ex abundante cautela, render an Interim Award on the subject of default, so that the Parties may satisfy themselves that their submissions were indeed taken into account. The members of the Arbitral Tribunal had agreed to meet immediately after these hearings to finalise and sign an award. The Tribunal's intention was that this award should be final and comprehensive, and be preceded by

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deliberations taking account of such questions as might have been put by the arbitrators in the course of today and tomorrow to the witnesses, on the basis of their previously submitted written statements. (These statements were obviously not relevant to the Arbitral Tribunal's decision on the issue of default.) Mr. de Fina and I do not wish to put any questions to the witnesses. We do not know if Professor Priyatna would have wanted to do so, nor will we deliberate now on the merits of this case without him. The decision on default is, however, already taken after full deliberations involving all three arbitrators. What remains is simply to consider the text of the detailed reasons. We still have some hope that Professor Priyatna might join us later this week as previously agreed. If so, he will have an opportunity to sign what will thus be an Interim Award, final as to what it decides but not comprehensively dispositive of the merits of the dispute submitted to the Arbitral Tribunal by virtue of the Terms of Appointment. If he does not appear, I will invite Mr. de Fina to sign the Interim Award with me. Professor Priyatna's absence under these circumstances will not prevent the Interim Award from being rendered.’ [96] “The President also read out two signed statements of citizens of the Kingdom of Netherlands, the first from Professor van den Berg, the other from Mr. Jan-Hein Dissel, a student at the University of Amsterdam and part-time chauffeur. Both gentlemen were present and formally confirmed the content of their statements. [97] “Professor van den Berg's statement reads as follows: ‘The undersigned, Albert Jan van den Berg, domiciled at Bussum, the Netherlands, Heuvellaan 28, makes the following statement to my conscience and belief. I am a partner of Freshfields in the Amsterdam office and attorney at law admitted to the Amsterdam Bar. I became involved in this case when, on Friday afternoon, 18 September 1999, my partner Jan Paulsson in the Paris office called me in his capacity of President of the Arbitral Tribunal in the above captioned case. He asked me to be present in summary court proceedings that had been instituted earlier that day by the Republic of Indonesia against the claimants and all three arbitrators in that case with the purpose of enjoining the holding of a hearing determined by the arbitral tribunal to take place in the Peace Palace on Wednesday 22 September 1999. The hearing in the summary proceedings was scheduled for Monday 20 September 1999, 10.00 a.m. before the President of the District Court at The Hague. Mr. Paulsson informed me that he could not reach the two other arbitrators as they were travelling to The Hague. As precautionary manner, and in view of the little time left, I drafted the pleadings notes and the cover page for the exhibits in such a manner that, next to Mr. Paulsson, the two other members of the Arbitral tribunal, Mr. Antonino Albert de Fina (“Mr. de Fina”) and Professor Dr. Priyatna Abdurrasyid (“Professor Priyatna”), were included in the

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representation as well. I have known Mr. de Fina for long time. I also know Professor Priyatna from an arbitration in Indonesia two years ago where he appeared as an expert witness. Whilst in the car to the District Court at The Hague on Monday morning 20 September 1999, Mr. Paulsson telephoned me, informing me that he still had not been able to contact his co-arbitrators, so that I could not formally represent them in Court. Accordingly, I crossed out their names on the pleading notes and the cover page for the exhibits and stated before the President of the District Court that I was able to represent Mr. Paulsson only. After the court hearing was over, on Monday evening, 20 September 1999, Mr. Paulsson told me by telephone he had been able to reach Mr. de Fina but that the Carlton Ambassador Hotel at The Hague had advised that the reservation for Professor Priyatna had been cancelled. On Tuesday morning, 21 September 1999, I received a telephone call at about 09.10 a.m. from The Hague District Court, informing me that all injunctions sought by the Republic of Indonesia had been rejected. I relayed this information to Mr. Paulsson in Paris. He then asked me to pick up Mr. de Fina at Schiphol Airport in order to appraise him of the outcome of the Dutch Court proceedings. Accompanied by my driver, Mr. Jan-Hein Dissel, I picked Mr. de Fina up at the airport at approximately 14.00 hours. We brought Mr. de Fina to The Hague. During the trip, I informed Mr. de Fina of the court proceedings. During the same trip, Mr. de Fina told me that he had tried to contact Professor Priyatna at the Carlton Ambassador Hotel at The Hague on Monday, 20 September 1999, but was advised by the hotel that another gentleman had cancelled the reservation of Professor Priyatna and that a message was left for him at the hotel in which it was said that Professor Priyatna would not come. We arrived at the Carlton Ambassador Hotel at approximately 15.15 hours. Mr. de Fina wanted to know what had actually happened with the cancellation of Professor Priyatna's reservation and wanted also to have more information about the messages. Both of us then spoke with Ms. Arjanne van Beelen, the front office manager, and thereafter with Ms. Karen de Hey, a trainee who had both received the telephone calls and messages. Ms. van Beelen told us two telephone calls had been received with respect to Professor Priyatna, one in the morning between 11.45 and 12.15 hours, which she had taken, and one in the afternoon at around 14.30 hours which had been taken by Ms. de Hey. Ms. van Beelen told me that the person who had called her was Mr. R [ossidi] M. “Hosen” (her phonetic spelling for “Husein”) from the Embassy of the Republic of Indonesia. She recognised his voice as she had spoken with him before at other occasions in relation to other reservations for the Embassy of the Republic of Indonesia. During that conversation, Mr. Husein said, according to Ms. van Beelen, that he wanted to leave a message for Mr. de Fina and Mr. Paulsson that “Mr. Priyatna cannot come to the hotel to meet you” and that he cancelled the reservation. According to Ms. de Hey, Mr. Husein called at 14.30 hours, informing her that “Mr. Abdurrasyid” would not come to the hotel and that his reservation could be cancelled. According to

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Ms. De Hey, after she had found out that “Mr. Abdurrasyid” was the same as Professor Pryatna, when she asked whether the reservation should be cancelled for the other three days, Mr. Husein answered that these days should be cancelled as well. According to Ms. de Hey, Mr. Husein asked her to give a message to Mr. de Fina and Mr. Paulsson that “Mr. Abdurrasyid does not come.” A copy of the messages, which Ms. Van Beelen handed over to me, is attached hereto as exhibits 1 and 2. Thereupon, Mr. de Fina and I went to the Embassy of the Republic of Indonesia at the Tobias Asserlaan 8, at The Hague (at five minutes distance from the hotel) in order to deliver a copy of the pleading notes and exhibits submitted in the aforementioned court proceedings at The Hague. A copy of the envelope and business card which we wanted to hand over to Professor Priyatna c/o Mr. R. Husein at the Indonesian Embassy is attached hereto as exhibit 3. We arrived at the Embassy at approximately 15.45 hours. I asked the guard to see Mr. Husein. The guard answered that he had gone to Schiphol Airport. I then asked whether he knew where Professor Priyatna was. The guard answered that he did not know of Professor Priyatna. I said that I had an urgent message for Mr. Husein and would like to have his mobile telephone number. The guard wrote down for me the mobile telephone number of Mr. Husein which I attach hereto as exhibit 4. Back in the car, I tried to call Mr. Husein on my mobile but there was no answer. Two minutes later I received a call from Mr. Husein who wanted to know who had called and why (this is possible of caller identification in The Netherlands). I asked Mr. Husein whether Professor Priyatna was with him since I wanted to give him documents. Mr. Husein answered that Professor Priyatna was not with him. I asked him then whether he knew where he was. Mr. Husein answered that he did not know but that he would call me if he knew where he was. I then asked him whether he was in the airport. He answered that he was bringing other people to the airport. I then asked whether he had seen Professor Abdurrasyid before. Mr. Husein answered that he had seen him yesterday morning (Monday 20 September 1999) when he was waiting for another guest at the airport Schiphol. He further said that he knew and recognised him and was asked to cancel his hotel reservation. Mr. Husein further told me that he had cancelled the hotel on Monday. I asked Mr. Husein whether he knew where Professor Priyatna had gone. Mr. Husein answered that he did not know. Mr. Husein repeatedly said to me that when he would know where Professor Priyatna was, he could call me back and, upon his request, I gave him my mobile number. After this telephone conversation, I obtained information by phone through the airlines booking system that Professor Priyatna was booked on a flight from Amsterdam to Jakarta the same evening (Tuesday 21 September 1999): KL 837, departure time 20.20 hours. Mr. de Fina and I then proceeded to Schiphol Airport, where we arrived at 17.15 hours. Together with my driver (Jan-Hein Dissel), we waited at the KLM check in counter in the departure hall. At around 17.50 hours we noticed two people of possible Indonesian nationality, but not Professor Priyatna. We

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followed them from the check in counter and saw them going to a group of approximately 8 Indonesian looking persons, one of whom was Professor Priyatna. Professor Priyatna immediately shook hands with Mr. de Fina and myself and both went some 10 meters aside for a conversation. In the meantime, I shook hands with the Indonesian looking persons, one of whom introduced himself as Mr. Husein with whom I had the aforementioned telephone conversation. A number persons of the group thereafter spread out through the departure hall, watching us closely. My driver took position in the middle. After having been with what was left of the group of Indonesian looking persons, I walked over to Professor Priyatna and Mr. de Fina. That part of the conversion was to the following effect. I informed Professor Priyatna that the injunctions sought by the Republic of Indonesia had been rejected by the District Court. When I told him that these injunctions meant that the Dutch Court does not prevent him from attending the hearing on 22 September in the Peace Palace, Professor Priyatna said that a person had travelled from Jakarta to Washington to read him a letter that the person said was from a Minister, asking him not to take part in the arbitration, and that he felt obliged to return to Jakarta. He told me also that another person had travelled from Jakarta to Amsterdam who waited for him when he arrived from Washington in Amsterdam on Monday morning, 20 September 1999, and that that person read him the same (or similar) letter. When Mr. de Fina asked him for a copy of the letter, Professor Priyatna answered that the letter had not been handed over to him but that he would fax a copy when he will have gotten the letter. I told Professor Priyatna that I had a copy of the pleadings and the documents submitted in the aforementioned District Court proceedings with me for him, but he declined to accept them. Professor Priyatna also said that he considered Mr. de Fina and Mr. Paulsson as his friends and did not want to lose friendship but that he could not continue the case. When I inquired about the hotel were he stayed, he answered the Ibis hotel at the airport. During the conversation, which lasted approximately 10 minutes, Professor Priyatna appeared to be quite shaken and at certain moments I noticed that he was on the verge of crying. After this conversation, Professor Priyatna rejoined the group of Indonesian looking persons and when my driver left his position to follow us, the other persons of apparent Indonesian origin also rejoined the group. Mr. de Fina and I were then driven by my driver to my office where we immediately recorded our respective statements. Thus made in Amsterdam on 21 September 1999, Albert Jan van den Berg.’

[98] “Mr. Dissel's statement reads as follows: ‘The undersigned, Jan-Hein Dissel, domiciled at Amsterdam, the Netherlands, Koninginneweg 58 II, student at the University of Amsterdam in business

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economics, being a part-time chauffeur, make the following statement according to my conscience and belief. On Tuesday 21 September 1999, I was hired by Professor A.J. van den Berg to drive him that day to Schiphol airport and The Hague. Around 2 o'clock, we picked up a gentleman I understand to be Mr. Antonino de Fina. We then drove to the Carlton Ambassador Hotel at The Hague where I waited outside. At approximately 3.45, Professor van den Berg and Mr. de Fina asked me to drive them to the Embassy of Indonesia at the Tobias Asserlaan 8 at The Hague. I saw both gentlemen speaking with the guard at the Embassy. After some three minutes they came back in the car. Professor van den Berg tried to call someone. A few moments later, he was called and what I hear from the conversation in Dutch was that Professor van den Berg was looking for a certain Professor Priyatna. Professor van den Berg then asked me to drive to Schiphol Airport. At the airport, Professor van den Berg asked me to position myself with his briefcase next to the KLM check-in counter. After some time, I saw two men with an Indonesian appearance who went to the check in counter and Professor van den Berg and Mr. de Fina followed them. I stayed at the check-in counter. I then saw that Professor Van den Berg and Mr. de Fina followed the two Indonesian men at some distance. The two men went to a group of other persons with an Indonesian appearance in the corner of the departure hall. The group consisted of some 8 persons. Mr. de Fina and Professor van den Berg shook hands with one person who immediately went away with Mr. de Fina from the group at a distance of about 10 metres. Professor van den Berg stayed with the group and shook hands. I then walked towards the middle of the two groups where I stayed. At that moment, a number of the group walked at other places in the departure hall. Professor van den Berg then joined Mr. de Fina and the Indonesian person (who I was told later to be a certain Professor Dr. Priyatna Abdurrasyid). He looked very tense and frightened. It also appeared to me that he was really relieved to have the conversation. He even embraced Mr. de Fina. The conversation lasted approximately 10 minutes. The atmosphere was very frightening. The eyes of all Indonesian like persons were fixed on Mr. de Fina, Professor Priyatna and Professor van den Berg. The Indonesian like persons appeared to be perplexed and surprised about the meeting. At the end of the conversation, Mr. de Fina, Professor Priyatna and Professor van den Berg shook hands and left. At that moment, Professor Priyatna went back to the group and when I left my place, the other Indonesian looking persons at other places in the departure hall also went back to the group. We then went to the office of Professor van den Berg where I made this statement. Made in Amsterdam, on 22 September 1999 according to my conscience and belief. Jan-Hein Dissel.’

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[99] “Mr. de Fina then read out a statement signed by himself (introductory paragraph omitted): ‘On Saturday, 18 September, I spoke by telephone from London to Professor Priyatna who was then in Washington, USA and arranged to meet him in The Hague on Monday 20th September for the purposes of preparation for hearings in the above stated arbitrations scheduled to commence in The Hague on Wednesday 22nd September. During the telephone discussion, Professor Priyatna advised me that he was scheduled to fly from Washington the next day and anticipated arriving at the Carlton Ambassador Hotel in The Hague at about 8 a.m. on Monday 20th September. I advised Professor Priyatna that I would not be arriving until late that day but that I would telephone him at the hotel from London at between about 9 and 10 a.m. I did not in fact call the hotel until about 11 a.m. and was told the Professor Priyatna was not there. I called the hotel approximately 1 hour later and was told there was no booking for Professor Priyatna as it had been cancelled earlier. I was also advised that there was a message for me from a Mr. Husein that Professor Priyatna would not be coming. I arrived at Schiphol airport at approximately 1.45 p.m. on Tuesday 21 September and there met Professor Albert Jan van den Berg and travelled with him to the Carlton Ambassador Hotel in The Hague. In company with Professor van den Berg I interviewed Miss De Hey and Miss van Beelen respectively trainee and office manager at the hotel and who had received messages from a Mr. Husein cancelling the hotel booking for Professor Priyatna and leaving the message for me relating to Professor Priyatna. I accompanied Professor van den Berg to the Embassy of the Republic of Indonesia in The Hague where we requested to see Mr. Husein and Professor Priyatna. The staff advised that they had no knowledge of Professor Priyatna but provided a mobile telephone number for Mr. Husein. In my presence, Professor van den Berg called the Husein number which did not answer. Shortly thereafter a person who identified himself as Husein called back and I was able to clearly hear the conversation occurring between Professor van den Berg and Mr. Husein in which Mr. Husein among other things denied that he was with or knew the whereabouts of Professor Priyatna. In company with Professor van den Berg I travelled to Schiphol Airport and waited at the book in counters for the Garuda Indonesia flight to Jakarta scheduled to leave at 18.30 hours in the evening. Also with Professor van den Berg and myself was Mr. Jan-Hein Dissel, Professor van den Berg's driver. At about 17.50 hours, I noticed 3 persons of Indonesian appearance who were apparently together and booking in business class. They moved away

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from the book in counter and towards another small group of persons of Indonesian appearance standing some 20 meters away. I identified one of the persons as Professor Priyatna whom I immediately approached and shook hands. Three persons standing with him appeared taken aback but did not try to interfere. Professor Priyatna and I moved away from the group whilst Professor van den Berg engaged one or more of them in conversation. I noticed that other persons of Indonesian appearance, also apparently part of the group immediately spread out generally surrounding but within reasonable proximity of Professor van den Berg and myself although Professor Priyatna and I were separated from the main group by some 10 metres. Professor Priyatna was visibly upset and said words to the effect that we had worked closely together as colleagues he hoped we would still be friends and that he was sorry but hoped I would understand that he had to leave. I told him that a court ruling in The Hague delivered earlier that day had not stayed the arbitrations and that therefore the hearings could continue. He replied that when he was about to leave Washington on Sunday an Indonesian whom he did not know but who presented himself as coming that day from Jakarta to read to him a letter said to be from a Minister warning him not to go forward with the arbitrations. He was not given a copy of the letter. Professor Priyatna informed me that when he arrived at Schiphol airport on the morning of Monday 20th September he was met by a Mr. Warrow who had come from Jakarta to read to him the same letter instructing him not to attend the arbitration hearings. With Mr. Warrow was Mr. Husein of the Indonesian Embassy. Professor Priyatna apologised and said he had been told he could not telephone or contact either Mr. Paulsson or myself and was placed in the Ibis Hotel at the airport with Embassy personnel. He identified to me at the airport Mr. Warrow, Mr. Husein, and a Mr. Hadianto also of the Embassy. Professor Priyatna told me he was being accompanied back to Jakarta. At about that time Professor van den Berg joined Professor Priyatna and me. Professor Priyatna repeated to Professor van den Berg in an abbreviated form what he had said to me. He was visibly upset throughout the entire discussion with me which lasted about 10 minutes, and for some period was close to tears. Professor Priyatna said that he would send a copy of the Ministry letter to him if he got a copy. Professor van den Berg and I then ceased our discussion with Professor Priyatna and he returned to the group that he was originally with. Professor van den Berg, I and Mr. Dissel then went immediately to the office of Professor van den Berg to record this statement. 21 September 1999 A.A. de Fina.’

[100] “In response to questions from the claimant, the President indicated that the

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decision on default had already been fully deliberated by the Arbitral Tribunal. A detailed text containing the full reasons would imminently be available for signature by the arbitrators, at the time appointed for their meeting later in the week. If Professor Priyatna were not to appear on that occasion, the document would be signed by two arbitrators, but only as an Interim Award. For now, Messrs Paulsson and de Fina did not wish to deliberate further without Professor Priyatna with regard to matters not yet decided by the Arbitral Tribunal. [101] “In the event, Professor Priyatna did not join the other two arbitrators. The text of the present Interim Award was signed accordingly by Messrs Paulsson and de Fina. [102] “By their endorsement of this Award, the signing arbitrators certify: first, that all procedural directives given to the Parties over the signature of the President emerged from a full exchange of views among all three arbitrators, who deliberated on a number of occasions in Jakarta and Paris, and, secondly, that the Award, rendered under Art. 31(1) of the UNCITRAL Rules, reflects the decision of the Arbitral Tribunal as a constituted body, rather than any individual views.” V. Default 1. Overview [103] “The pleadings of the Republic of Indonesia, and indeed to some extent those of the claimant, have presented the controversy surrounding the Republic of Indonesia's withdrawal from full participation in these proceedings as one pitting the authority of the Arbitral Tribunal against that of the Indonesian courts. [104] “In the letter of its counsel dated 15 September 1999 to the Secretary-General of ICSID (see Paragraph [80]), the Republic of Indonesia chose to speculate as follows on the state of mind of the President of the Arbitral Tribunal: ‘In what appears to be an attempt on his part to further a personal crusade to establish the supremacy and independence of international tribunals of arbitrators, a crusade on which he has for some years embarked, it is apparent that he believes that he has found a case in which to seek to establish his personal views and principle (sic) as correct, and his personal power as superior to that of any court of law ... these are not international arbitrations.’ [105] “The Arbitral Tribunal ignores the implicit slight upon the co-arbitrators (the certification given in Paragraph [102] suffices), but points out that any Party expecting this Award to challenge the authority of the Indonesian courts will be disappointed. This case does not, in the Arbitral Tribunal's view, require general pronouncements on the relative allocation of authority between courts and arbitrators. [106] “The Arbitral Tribunal's analysis is far more prosaic and conventional. [107] “The Republic of Indonesia undertook to participate in these proceedings on the contractual foundation of two documents: the MoF Letter and the detailed Terms of Appointment. It now asserts that it is prevented from doing so by reason of the Jakarta Court injunction of 22 July 1999. The central issue is whether that injunction provided a

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valid excuse. The Arbitral Tribunal here accepts the view of Professor Rogers, expressed on page 14 of his Opinion, that the Terms of Appointment constitute ‘a contractual agreement binding all parties which can be departed from only in accordance with appropriate principles of contract law’.

[108] “Art. 1245 of the Indonesian Civil Code excuses non-performance in the event of force majeure. Art. 1245 is a pure product of the Napoleonic Codes. It was received verbatim from Art. 1281 of the Dutch Civil Code (as it then was numbered), which in turn had been received verbatim from the French Civil Code, where it still appears unchanged as Art. 1148. Alleged impediments do not excuse a non-performing party unless they are insurmountable, irresistible, and external to the will of the defendant. (This last requirement has been referred to as a condition d'extériorité.) [109] “The Arbitral Tribunal has not the slightest hesitation in holding that the Republic of Indonesia had the power to overcome or avoid the impediment which it now invokes to excuse its default. The Arbitral Tribunal also deems Pertamina's initiatives not to be independent of the Republic of Indonesia's will. The consequence of these findings is that the proceedings have gone forward. Under Art. 28 of the UNCITRAL Rules, the Arbitral Tribunal has the authority to do so whenever the defaulting party has not shown ‘sufficient cause' for its failure to produce documentary evidence and to appear at a hearing. [110] “The relevant portions of Art. 28 read as follows: ‘If one of the parties, duly notified under these Rules, fails to appear at a hearing, without showing sufficient cause for such failure, the arbitral tribunal may proceed with the arbitration. If one of the parties, duly invited to produce documentary evidence, fails to do so within the established period of time, without showing sufficient cause for such failure, the arbitral tribunal may make the award on the evidence before it.' (Emphasis added.)

[111] “The position of the Arbitral Tribunal is thus based on its appreciation of the facts of this case, and founded on the authority granted by the Parties when they agreed to arbitrate under the UNCITRAL Rules. [112] “The issue of respect for the Jakarta Court does not enter into the picture. The Court's order of 22 July 1999 is not addressed to the Arbitral Tribunal, but to the claimant and to the Republic of Indonesia. (See the more detailed analysis in Sect. V.4) of this Interim Award) The claimant, which is professionally advised and assumes its own responsibilities, has chosen not to consider the injunction to be an impediment to its participation. The Republic of Indonesia has claimed that the injunction is an impediment. As described in further detail in Sect. V.2), however, it has not discharged its burden under Art. 28 of the UNCITRAL Rules of so proving to the satisfaction of the Arbitral Tribunal. [113] “The Arbitral Tribunal therefore has no choice but to fulfil its mandate. [114] “Nor did the decision to hear witnesses at a location outside Indonesia crystallise

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into any imaginary struggle between the Indonesian courts and the Arbitral Tribunal – to the contrary. The Jakarta Court's injunction purported to forbid pursuit of the arbitration. The jurisdiction of that court is perforce limited to Indonesian territory. Whether or not the Arbitral Tribunal is to be deemed to be ‘international’, it avoided offending the Jakarta court by convening the hearing of witnesses outside Indonesia. It did so pursuant to Art. 16 of the UNCITRAL Rules, with the compelling justification that the cause of this choice of physical meeting place was directly attributable to an event which the Republic of Indonesia could have avoided. [115] “The Republic of Indonesia is in no position to contend that the Arbitral Tribunal was precluded in principle from hearing witnesses outside Indonesia. For not only is such a possibility consistent with Art. 16 of the UNCITRAL Rules, but the Republic of Indonesia itself acknowledged, in the letter of 9 July 1999 from its counsel quoted in Paragraph [33] as well as in the further letter of 26 August 1999 (see Paragraph [65]) that Art. 16 would allow hearings in another location in the event of ‘extraordinary circumstances’. Moreover, as seen in Paragraph [69], on 31 August 1999 the Republic of Indonesia proposed a hearing in London devoted to the expert testimony of Professors Lalive and Rogers, to be followed by ‘further deliberations of the Tribunal’. Having admitted that ‘extraordinary circumstances’ permit hearings outside Indonesia, one of the Parties is not entitled to impose its evaluation of what constitutes ‘extraordinary circumstances’, or to insist that the Arbitral Tribunal bow to its preference for London over The Hague. [116] “It is significant that the Republic of Indonesia, notwithstanding its insistence in principle that these proceedings are subject to Indonesian law, has not alleged that its law on arbitration precludes hearings abroad. [117] “At any rate witnesses were not heard (see Paragraph [94]), so the issue of whether they would have constituted a violation of the injunction is academic. The remaining question is whether the Republic of Indonesia was justified in claiming that it had a valid excuse for not presenting its documentary evidence.” 2. The Republic of Indonesia's Ability to Avoid or Overcome the Injunction [118] “Pertamina's petition to the Jakarta Court squarely contradicted the Terms of Appointment not only in that it called for a halt to proceedings which under point 5(h) of the Terms of Appointment were to be concluded ‘as expeditiously as possible’. but also in its request that the Jakarta Court declare that the MoF Letter did not create enforceable rights – the very merits of the dispute to be resolved by arbitration pursuant to the Terms of Appointment. [119] “The Republic of Indonesia has argued that it was powerless to prevent Pertamina from instituting and maintaining this action. Under Art. 28 of the UNCITRAL Rules, the Republic of Indonesia has the burden of proving that this proposition is correct, for if the Republic of Indonesia could have prevented Pertamina's initiative before the Jakarta Court the injunction would not have eventuated. [120] “The Arbitral Tribunal holds that the Republic of Indonesia has failed to discharge this burden of proof. It submitted no credible evidence to support its assertions. This conclusion suffices to establish the Republic of Indonesia's default under the Terms of Appointment. [121] “The Arbitral Tribunal's decision is based on its factual findings with respect to both Pertamina's juridical subservience to the Republic of Indonesia, and the Republic of

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Indonesia's actual conduct in the course of these proceedings. [122] “Pertamina is constituted under the Indonesian Law No. 8 of 1971 as a state enterprise (perum). Its sole owner is the Republic of Indonesia. The President of Indonesia appoints and dismisses its Board of Commissioners and Managing Directors. Under Art. 21(b) of the Law, one of the stipulated grounds for dismissing a Managing Director is that he or she is acting in a manner inconsistent with the interests of the Government. Art. 23(1) provides that the Head Director is authorised to represent Pertamina in court. [123] “The Republic of Indonesia has sought to convince the Arbitral Tribunal that Pertamina is, in flat contradiction with its organic law, an uncontrollable rogue element of the Indonesian public sector. [124] “For the Republic of Indonesia to argue that it does not have de jure control over Pertamina would be impossible. This explains, no doubt, why it has insisted on its alleged lack of de facto control. As stated in its letter of 26 August 1999, ‘It is common knowledge within Indonesia that Pertamina is a law unto itself.' The attached memorandum entitled ‘Can the Government control Pertamina?' refers to ‘the inability of the central government to command obedience from its alter egos’. The Republic of Indonesia has thus argued that evidence of massive corruption within Pertamina, and evidence of its attempts to obstruct the passage of Government-sponsored legislation affecting its activities, demonstrates the independence of Pertamina. [125] “The issue is not, however, whether the Government controls Pertamina as a matter of fact. Nor does the Arbitral Tribunal base its conclusions on the perception of some improper collusion involving the officials of the Government, Pertamina, or the Indonesian courts. The issue is simply one of legal imputability; not whether the Government does control Pertamina, but whether it is structurally in a legal position to do so. The consequences of its failure to do so is not to be borne by third parties. [126] “It is impossible to see how Pertamina could conceivably take an adversarial position vis-à-vis the Government of Indonesia in contradiction with the latter's international undertakings, given Pertamina's statutory purpose of furthering the interests of the State, and given the statutory mandate of the President of Indonesia to dismiss Pertamina directors whose actions conflict with the interests of the State. It would be a surreal attachment to form to insist that the Republic of Indonesia may not interfere with the exercise by the Pertamina directors of their fiduciary duty to none other than the Republic of Indonesia. [127] “A study of Pertamina by Mr. Robert Fabrikant submitted and relied upon by the Republic of Indonesia indicates that it was precisely because of Pertamina's previous tendency to escape Government control that led to the 1971 Law, which notably removed Pertamina from the exclusive domain of the Minister of Mining and created a Supervisory Board (Dewan Komisaris) consisting of the Ministers of Mining, Finance, and National Planning and given ‘sweeping powers to control Pertamina's activities, including: 1) determining Pertamina's general policy...' Any comparison to a joint stock company with directors elected by a multiplicity of freely substitutable shareholders, and owing a fiduciary duty only to them and to the entity as such, would be a study in contrast, not similarity. [128] “The words ‘the Government of the Republic of Indonesia will cause Pertamina and PLN, their successors and assigns, to honour and perform their obligations' as used in the MoF Letter (see Paragraph [6]) will obviously be crucial when the Arbitral Tribunal comes

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to decide whether there was an intent to create a legal obligation for the Republic of Indonesia. In the immediate context of considering whether Pertamina and PLN may be considered as independent of the Republic of Indonesia, these words are not decisive. One party may undertake to procure action by another, with the consequence that it will be liable if the other does not so act, but without any necessary implication that the other party lacks autonomy. The phrase is nonetheless highly relevant. It is an eloquent illustration of the use to which the Republic of Indonesia puts its statutory dominion over these entities in making representations to third parties, and confirms something which is obvious and decisive: Pertamina and PLN are constitutionally incapable of resisting the will of the Republic of Indonesia. [129] “The Arbitral Tribunal is impressed by the claimant's argument, in its letter of 31 August 1999, that the recognition of Government control implicit in the MoF Letter should bar the Republic of Indonesia ‘from asserting a defence that contradicts it to claimants’ detriment’. This estoppel-based argument is supported, in the claimant's submission, by a number of familiar and well-recognised authorities. The Arbitral Tribunal considers, however, that its decision rests on even firmer ground. [130] “In the first place, the Republic of Indonesia cannot be excused for an alleged inability to exercise its powers effectively. Thus, a government does not escape liability for the actions of its armed forces because it claims that rogue elements are not following orders. See, e.g., Asian Agricultural Products v. Republic of Sri Lanka, ICSID Case 87/3, Award of 27 June 1990, 6 ICSID Review – Foreign Investment Law Journal 526 (1991), (6) noting with approval at page 557 Professor Ian Brownlie's ‘categorical' statement that: ‘There is general agreement that the rule of non-responsibility cannot apply where the Government concerned has failed to show due diligence.’ [131] “Secondly, the Republic of Indonesia has offered no proof of the slightest attempt to rein in Pertamina. This failure is all the more remarkable in that it was preceded by explicit admonitions from the Arbitral Tribunal, which wrote on 28 July 1999 ‘arbitrators are most certainly not bound by a disputant's ipse dixit founded on unverifiable ex parte communications' (see Paragraph [47]) and on 11 August 1999: ‘The Republic of Indonesia has not shown any evidence of its having instructed (or even sought to persuade) Pertamina to act in a manner that would ensure compliance with the Terms of Appointment signed by the Republic of Indonesia. Most of all, the Republic of Indonesia has not even attempted to demonstrate that it used its legal dominion to prevent Pertamina from pursuing a judicial initiative which is fundamentally at variance with the Republic of Indonesia's undertakings. In other words, the Republic of Indonesia seems to excuse its failure by invoking an event which it could have prevented. Such an excuse has, prima facie, little chance of being accepted. The respondent is formally put on notice that unless it forthwith makes a compelling demonstration to the Arbitral Tribunal that it is powerless to influence the actions of Pertamina, it will be held to be in breach of the Terms of Appointment and will have to face the full consequences of that breach. The Arbitral Tribunal will not be satisfied with formalistic assertions.' (See Paragraph [60].)

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[132] “There is no doubt that the Republic of Indonesia, having signed the Terms of Appointment, had the duty to do what was in its power to ensure its performance. The record is conspicuously devoid of any evidence that the Republic of Indonesia sought to direct, or even persuade, Pertamina to refrain from pursuing its application for the injunction from the Jakarta Court. [133] “The various representations made by counsel to the Republic of Indonesia to the effect that it was seeking to comply with the Terms of Appointment, and indeed to resist the issuance of the injunction (see, e.g., Paragraphs [36], [37] and [42]), are contradicted by its actual conduct. [134] “Even before the injunction was issued on 22 July 1999, the Republic of Indonesia repeatedly warned the claimant, and indeed the Arbitral Tribunal, that any party participating in the arbitration in the face of an injunction would be subject to criminal prosecution; thus, in paragraph 30 of its Statement of Defence (see Paragraph [30]), the Republic of Indonesia, rather than indicating how it would resist the issuance of the injunction, ‘reserved' the right to apply to the Indonesian courts for ‘sequestration of the claimant's assets' if such an injunction were to be granted. What interest it could have in seeking financial relief for itself on account of the prospective violation of an injunction sought by an alleged third party, and allegedly resisted by the Republic of Indonesia, was never explained. (The Statement of Defence, it will be recalled, was submitted 17 days before the injunction was issued.) [135] “Nor did the Republic of Indonesia seek to have Pertamina's claim dismissed, whether by reference to its own undertaking to arbitrate, or to Pertamina's similar undertaking pursuant to the JOC. [136] “Moreover, when responding to Pertamina's application to the Jakarta Court, the Republic of Indonesia readily assented to Pertamina's request for a declaration that the MoF Letter did not constitute a legal obligation. In its response to the Court dated 15 July 1999, the Republic of Indonesia affirmed that it: ‘never had an intention to make the letter a guarantee payment letter nor government performance undertaking in any form ...’ that: ‘the meaning of “will cause” legally can be interpreted that the Government will “take some efforts ...”’ and finally that the Republic of Indonesia: ‘is not a guarantor if the parties did not perform their obligations’.

[137] “As seen in Paragraph [60], the Arbitral Tribunal by its letter of 11 August 1999 invited the Parties to state their views on this question: ‘should the Arbitral Tribunal give no weight to the fact that Pertamina has asked the Indonesian court to declare that the Ministry of Finance letters,

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which are the focus of the ultimate issue for determination in these arbitrations, are not enforceable contracts notwithstanding that Pertamina is not a party to these arbitrations'?

[138] “The Republic of Indonesia's answer, per its letter of 26 August 1999, was: ‘We would suggest that the Arbitral Tribunal ignore this fact. We have absolutely no knowledge what prompted Pertamina, or their counsel, to include this point in their complaint, and can see no relevance of this to the issues at hand here.’

[139] “This bears no resemblance to what was argued on behalf of the Republic of Indonesia before the Jakarta Court. [140] “Counsel to the Republic of Indonesia seem to think that there is something extraordinary in the proposition that an arbitral tribunal could take account of organic dependence rather than formal division within the public sector. Many cases show the opposite, as may be seen in surveys such as Karl-Heinz Böckstiegel, Arbitration and State Enterprises (1984), and Esa Paasivirta, Participation of States in International Contracts (1990). Nor are such decisions limited to international tribunals who might be suspected, as counsel to the Republic of Indonesia put it in a letter to the SecretaryGeneral of ICSID on 20 September 1999, to harbour a ‘fixation with the supremacy of international arbitration’. The Arbitral Tribunal notes that the highest civil court in France, the Cour de cassation, in a judgment of 15 April 1970 in the case of Air France v. Trémoulet, Dalloz Sirey 107 (1971) was called upon to consider a claim against the national airline brought by an employee who complained that terms established in his private-law contract of employment were not being respected. Air France's defence was that Ministerial decisions several years after the contract had been signed proscribed the particular benefits being claimed. The court ruled that Air France, being statutorily subject to ministerial control (tutelle), could not – irrespective of its separate legal form – invoke decisions of the Minister of Public Works and the General Secretary of Civil Aviation as events of force majeure. Such decisions, according to the court, were neither ‘unforeseeable' or ‘insurmountable' under the French Civil Code. The criteria of that Code are, in this respect, the same as those of the Indonesian Civil Code. If Air France could not plead acts of its government as an event of force majeure, surely the Government of Indonesia cannot claim that acts of Pertamina have that character. [141] “The Republic of Indonesia has put considerable stress on its arguments to the effect that Pertamina had a legitimate interest in seeking the injunction. (The Arbitral Tribunal notes in passing the contrast between this approval of Pertamina's initiative before the Jakarta Court and the contextually unmistakable accusations of corruption levelled at Pertamina on page 8 of counsel's memorandum entitled ‘Can the Government Control Pertamina?' submitted with their letter of 26 August 1999.) The Arbitral Tribunal has already rejected the argument that Pertamina is an autonomous third party for the purposes of assessing the Republic of Indonesia's actions in the light of Art. 28 of the UNCITRAL Rules. As shall now be demonstrated the Arbitral Tribunal's analysis is that Pertamina did not in any event have a cognisable interest in seeking the injunction. This

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conclusion confirms beyond redemption the default of the Republic of Indonesia. [142] “The focus of this part of the discussion is the Opinion of Professor Rogers, upon which the Republic of Indonesia has placed comprehensive reliance and which indeed is predominantly focused on this topic. [143] “One of the great difficulties the Arbitral Tribunal has with the Rogers Opinion transpires from the very first words of the learned author's text, where he says that the way the arbitration provisions in the ESC were framed placed the arbitrators in the PLN proceedings ‘in an impossible position' to go forward in the absence of other proceedings being instituted under another contract, namely the JOC. The Arbitral Tribunal is unwilling to accept that the claimant was encouraged to make large investments in Indonesia on the basis of contractual provisions later revealed to be impossible to apply. Such a conclusion would suggest a culpa in contratendo on the part of the Indonesian authorities of which the Arbitral Tribunal has seen no evidence, and is unwilling to presume. At any rate, the matter was dealt with in Sect. V.3 of the PLN Award, and this Arbitral Tribunal obviously cannot be called upon to reconsider the res judicata. [144] “The Rogers Opinion is devoted principally to identifying perceived defects in the PLN Award, and elaborating on their ramifications. The Arbitral Tribunal fully understands that the purpose is not to invite the arbitrators to correct the PLN Award. That they are powerless to do. Rather, Professor Rogers suggests that Pertamina's interests were adversely affected by the PLN Award, and that this adverse effect may be aggravated by an award in the present arbitration. Accordingly, the purpose of the Arbitral Tribunal's consideration of the PLN arbitrators' findings is to examine whether they give rise to a legitimate reason for Pertamina to seek the interruption of these proceedings. [145] “The Arbitral Tribunal immediately notes that both of these propositions, although indispensable, are not sufficient to establish Pertamina's legitimate intent in seeking the injunction. It must also be shown that there is some compelling reason (not just an arguable reason, since the Republic of Indonesia bears the burden of proof under Art. 28 of the UNCITRAL Rules) why Pertamina's alleged interest could not abide the end of these proceedings – if indeed it transpired that the Award here affected Pertamina's interest in some actionably adverse manner. It would have to be shown that the proper course for Pertamina would not be to initiate arbitral proceedings at its own behest, and at a time of its choosing. [146] “The Rogers Opinion suggests that if an award is made against the Republic of Indonesia under the MoF Letter, the Government could look to Pertamina for reimbursement. The Arbitral Tribunal sees no need to evaluate the degree of realism inherent in the notion of the Government seeking to recover monies from a wholly-owned entity. Nor need it consider the plausibility of Indonesian Directors of Pertamina clinging – as Professor Rogers considers they should – to the Salomon v. Salomon(7) principle, established over a century ago in England (!), to the effect that Pertamina is a separate legal entity to which they owe fiduciary duties notwithstanding that Pertamina's capital – which is undivided into shares – is a state asset and that they are subject to statutory grounds of dismissal if they fail to act in the interest of the Republic of Indonesia. The arbitrators simply do not accept Professor Rogers' theory per se. (....) [147] “Pertamina's ‘only recourse’, pace Rogers, was not the Jakarta Court. And Pertamina not only did not need injunctive relief, but had promised not to seek it.

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[148] “In sum, the Arbitral Tribunal is compelled to conclude that injunction of the Jakarta Court is the consequence of the refusal of the Republic of Indonesia to submit to an arbitration to which it has previously consented. The injunction therefore does not, under Art. 28 of the UNCITRAL Rules, excuse the Republic of Indonesia's default.” 3. The Imputability of the Jakarta Court's Injunction to the Republic of Indonesia [149] “The conclusion that the Republic of Indonesia defaulted under the Terms of Appointment, in the judgment of the Arbitral Tribunal, finds complete justification in the findings made in Sect. V.2. [150] “The matter to which the Arbitral Tribunal now turns is an alternative ground for holding that the Republic of Indonesia could not avail itself of the injunction as an excuse. This alternative basis is that the injunction emanated from an instrumentality of the Republic of Indonesia. [151] “The claimant expressed its position on this issue in its letter of 5 August 1999: ‘because the efforts to frustrate the effectiveness of the arbitration agreement are violations of public international law caused by, or attributable to, respondent, the Tribunal has the power, and indeed the duty, to proceed with the arbitration’.

[152] “It must be perceived that this contention builds on an element which was not relevant with respect to the decisive issue examined in Sect. V.2, namely the existence of a violation of international law. [153] “It is thus in this connection, and this connection only, that the opinion of Mr. H. Husseyn Umar to the effect that these proceedings constitute a domestic arbitration falls to be examined. There is no doubt that a denial of justice is a violation of international law, but does the agreement to arbitrate in this case entitle the arbitrators to examine alleged breaches of international law? General comparative practice gives an affirmative answer to this question, and hardly considers it controversial. In his general summary, Esa Paasivirta, for one, writes: ‘to apply international law it is usually considered that at least one of the parties is a State’, Participation of States In International Contracts, at 8-9 (1990). The issue then arises whether some specific feature of Indonesian law contradicts this conclusion. [154] “Mr. Umar concedes that arbitrations may be considered as ‘international' even if they are conducted within Indonesia, provided they are so recognised under Indonesian law. This conclusion, he further opines, was true under the Supreme Court Regulation No. 1 of 1990, and remains true under the Arbitration Law which went into effect on 12 August 1999. [155] “Mr. Umar then asserts, however, that the only circumstance under which an arbitration having its seat in Indonesia might be considered international would be upon an application to the Supreme Court for such recognition. He gives no authority for this statement. He concedes that to his knowledge no such application has ever been made. [156] “This opinion is surprising, to say the least. Mr. Umar does not explain whether the type of application he has in mind must be joint, or whether criteria exist for the Supreme

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Court's consideration of such an unprecedented application. [157] “The effect of Mr. Umar's opinion seems to be that there likely has never been an international arbitration in Indonesia. [158] “Mr. Umar does not hesitate to opine that the choice of arbitration rules, including specifically those of UNCITRAL, play no role in the characterisation of an arbitration as international or domestic. If an arbitration takes place in Indonesia, it is domestic unless and until the Supreme Court makes an unprecedented declaration – which even then, it appears, would apply only in that instance. [159] “As against Mr. Umar's unsupported declarations, the claimant has provided, attached to Latham & Watkins' letter of 31 August 1999, a study prepared by Mr. M. Yahaya Harahap, also a member of the Jakarta Bar, published in 1991 in a compilation entitled Arbitrase. (As noted, Mr. Umar concedes that the legal situation in 1991 was not materially different from the one that results from the new law.) [160] “Although it can hardly be said that Mr. Harahap's study contains explicit authority for the proposition he advances, it is a far more detailed effort and – above all – was prepared at a time when there could have been no possible thought of the present case. Mr. Harahap expresses the view that awards are ‘foreign’ either if they are rendered outside Indonesia or if they are based on‘konvensi international'. Just as would have been the case if the French word convention had been employed, this expression may be translated into English as either ‘international treaty’ or ‘international agreement’. (See J.M. Echols & H. Shadily, Kamus Indonesia – Inggris (dictionary), 3d ed. 1992, p. 308.) Since Mr. Harahap gives as examples of foreign awards those which are issued pursuant to the UNCITRAL Arbitration Rules, the contextual meaning must be “international agreement”. Mr. Harahap goes on to give the concrete examples of awards issued in Jakarta under the ICC Rules or the ICSID Rules. Such proceedings, he concludes, are not considered arbitrase‘domestik' (at page 440). [161] “The Arbitral Tribunal cannot conceive of any reason why an ICC arbitration conducted in Jakarta would be different from an UNCITRAL arbitration, unless perhaps the parties were to choose an Indonesian Appointing Authority – which is not the case here. [162] “The Republic of Indonesia cannot reasonably believe that it has proved, by Mr. Umar's opinion, that UNCITRAL arbitrations having a formal seat in Jakarta are domestic. At best, the Republic of Indonesia might argue that Mr. Umar's opinion is entitled to as much weight as that of Mr. Harahap. [163] “The criteria for considering an award to be international are familiar, and have emerged in comparative law as a result of the international success of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. See the often-quoted article of Philippe Fouchard, Quand un arbitrage est-il international? 1970 Revue de L'arbitrage 59. It was soon recognised that although states having signed the Convention were to some extent free to devise national standards for the enforcement of awards, the same was not true with respect to the enforcement of agreements to arbitrate, which are covered by Art. II of the Convention. This familiar evaluation is described and analysed by Professor Albert Jan van den Berg in his standard text, The New York Arbitration Convention of 1958 (1981), at pages 56-71. The author concludes that where agreements provide for arbitration in the territory of the relevant forum, Art. II of the Convention is applicable: ‘(a) if at least one of the parties is a foreign national, or (b) if the underlying

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transaction is international’. (p. 71)

[164] “The claimants have had no difficulty in making their argument: ‘It cannot seriously be disputed that these proceedings take place in the realm of international arbitration. The sovereign off-take performance undertakings were issued by the Minister of Finance of the GOI to two foreign private corporations. The performance undertakings were issued in the contact of transnational project finance in exchange for and as an inducement to claimants' promise to develop the Dieng and Patuha projects. They caused the inflow of both funds and technical expertise by reducing the risk that future cash flows from the projects would be harmed by respondent's exercise of its control as sovereign over geothermal independent power producers. And, perhaps most importantly, the performance undertakings exclude the jurisdiction of the Indonesian courts by requiring all disputes to be submitted to final and binding arbitration under the UNCITRAL Rules.’

[165] “The claimants might have added that the arbitration agreement does not adopt Indonesian law as the governing law of the arbitration; that neither the agreements nor the proceedings are in the Indonesian language (Bahasa), but in English; and that the Appointing Authority is not based in Indonesia. It might have pointed out that when a state agrees to UNCITRAL arbitration, it should be deemed to be aware of the 1976 UN General Assembly resolution (31/98) by which the UNCITRAL Rules were adopted, and the first words of which read: ‘The General Assembly, Recognizing the value of arbitration as a method of settling disputes arising in the context of international commercial relations.' (Emphasis added.)

[166] “Indonesia acceded to the New York Convention on 7 October 1981. [167] “There can be no doubt that these are international arbitration proceedings. [168] “The precise terms of the original arbitration clauses to which the MoF Letter refers provide for application of the UNCITRAL Rules without envisaging any supervisory role for the Indonesian courts, or any overriding applicability of Indonesian procedural law. The Terms of Appointment said nothing more nor less, the claimant observes, under point 3 (a). [169] “The Republic of Indonesia nevertheless argues in effect that the decision of the Jakarta Court paralyses its undertaking under the Terms of Appointment. It has often been held that a state may not avail itself of internal legislation as a basis for disavowing its agreement to arbitrate. Thus, in Erich Benteler KE and Another v. Belgium, 8 European Commercial Cases (1985) 101,(8) the arbitral tribunal held that ‘a State which has signed an arbitration clause or agreement would be acting contrary to international public policy if its subsequently relied on the incompatibility of such an obligation with its internal legal system’. The Republic of Indonesia's reliance on a court injunction rather than a

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legislative enactment is not based on a significant distinction: ‘... the judgment given by a judicial authority emanates from an organ of the State in just the same way as a law promulgated by the legislature or a decision taken by the executive’. Eduardo Jiménez de Aréchaga, ‘International Law in the Past Third of a Century': Recueil des Cours I-1978, page 278. [170] “Counsel to the Republic of Indonesia has conceived the notion that any arbitral tribunal which holds a state responsible for the action of its courts is necessarily biased against that state. This is the proposition put to the Secretary-General of ICSID under point 10 of the letter dated 20 September 1999 in support of the application to remove the Arbitral Tribunal as a whole. Counsel speculate: ‘Had such an order been issued by a court of the United States or the United Kingdom or of Sweden or France, we doubt very much the Tribunal would pay it so little heed or respect.’ [171] “This passage suggests an unhelpful lack of familiarity with the basic principle articulated by Judge Jiménez de Aréchaga, as well as unawareness of its reaffirmation in an important recent award of the Iran-United States Claim Tribunal, sitting in plenary session (all nine judges, including three U.S. nationals), in the case of Islamic Republic of Iran v. United States of America, Award No. 586-A27-FT of 5 June 1998 (generally known as ‘Award A27').(9) [172] “The Tribunal there held, in favour of Iran, that the United States had violated its obligation under the so-called Algiers Declarations to ensure that awards of the Tribunal would be treated as final and binding. The violation of that international agreement was consummated by the refusal by the US Court of Appeals for the Second Circuit to enforce an award of the Tribunal. It made no difference that the Second Circuit Court is probably the most distinguished of all US federal courts of appeal, or that the Second Circuit held the award to violate fundamental principles of procedural fairness in that the losing US party had not been given an adequate opportunity to present its case. The Tribunal held notably, in a pellucid formulation: ‘It is a well-settled principle of international law that any international wrongful act of the judiciary of a state is attributable to that state’. [173] “If the Republic of Indonesia relied in this context on the Rogers Opinion, it was misled. Referring to a letter by the claimant's counsel, the Opinion offers the view that: ‘It is in the highest degree offensive to the Indonesian court to seek to identify the court as one with the State.’

[174] “Apart from begging the question of why it should be offensive to be identified with the Republic of Indonesia, this passage simply ignores – as does the Rogers Opinion in its entirety – the basic principle of international law discussed above. When the Opinion continues to posit rhetorically that ‘it would be interesting to observe the signatories to the Latham & Watkins letter, no doubt very distinguished lawyers, submitting to a United States District Court that its judgment is an act of a state origin on the same footing as an “executive decision”’, the irony fails. For in light of authority and precedents like Award A27, the prospect of US lawyers making such arguments, in order to impress on US courts the need for US judges to avoid violation of undertakings by the State, should not be called ‘interesting’, by which the author apparently means ‘unlikely’, but perfectly predictable. [175] “The issue thus becomes whether there is any reason to accept that these

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proceedings are insulated from the imperatives of international law. The Republic of Indonesia argues that the Arbitral Tribunal is operating in the context of a domestic arbitration, and therefore must act as though it were subservient to the Indonesian legal order. [176] “This contention would necessarily imply that the Arbitral Tribunal must defer to the decision of the Jakarta Court. In other words, it does not content itself with denying that the Arbitral Tribunal has a higher authority than the national court with respect to the dispute with which the Parties entrusted the arbitrators; it even rejects the equality of the Arbitral Tribunal and reduces it to an inferior role. [177] “Thus, the Republic of Indonesia would paralyse the arbitrators' ability to consider whether there has been a violation of international law – which is a part of the law of Indonesia – if such consideration might lead to disregard of an Indonesian court decision. [178] “The claimant has invoked two important legal authorities – salient among numerous sources in support of the same proposition – which vigorously oppose such a purported evisceration of the arbitral process, on the grounds that it violates legitimate expectations and good faith. [179] “First the claimant cites the writings of F.V. Garcia Amador, who 40 years ago affirmed, in Responsibility of the States for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights, 1959, quoted in S. Schwebel, International Arbitration: Three Salient Problems 103-4 (1987): ‘The mere fact that a State agrees with an alien private individual to have recourse to an international mode of settlement automatically removes the contract, at least as regards relations between the parties, from the jurisdiction of municipal law ... [A]greements of this type imply a “renunciation” by the State of the jurisdiction of the local authorities. If an arbitration clause of this type were governed by municipal law, it could be amended or even rescinded by a subsequent unilateral act of the State, which would be inconsistent with the essential purpose of stipulations of this type, whatever the purpose of the agreement or the character of the contracting parties. Accordingly, as the obligation in question is undeniably international in character, non-fulfillment of the arbitration clause would directly give rise to the international responsibility of the State.’

[180] “Secondly, the claimant invokes Professor Arthur von Mehren's description of what he calls ‘a fundamental proposition' of the Institute of International Law's Santiago de Compostela Resolution, namely that: ‘...juridically speaking, the adjudicatory authority of arbitrators does not emanate from a discrete sovereign but rather from an international order. This order, which rests on a broad consensus, allows those engaged in international commercial and economic intercourse to establish a dispute resolution process – and to stipulate for its use a body of substantive rules and principles – that exists and operates independently of national legal orders.’

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Arbitration between States and Foreign Enterprises, 5 ICSID Review – Foreign Investment Law Journal 54, at 57 (1990). [181] “Art. 2 of the Resolution, which is a foundation stone of the perceived autonomy, reads: ‘In no case shall an arbitrator violate principles of international public policy as to which a broad consensus has emerged in the international community.’

[182] “The claimant fails to note that the Resolution was not unanimously adopted. Dr. Ibrahim Shihata voted against its adoption. His published explanations make clear that he was uneasy about the danger of overly broad references to public policy which might lead to ‘an arbitrator substituting his own views of justice for the parties’ directions’. Comment, 5 ICSID Review – Foreign Investment Law Journal 65, at 66 (1990). Dr. Shihata then indicates his preference for what might have been described as ‘objectively ascertainable norms of jus cogens international law where applicable’. [183] “What is common to both the Resolution and to Dr. Shihata's view is that arbitrators must uphold the norm – however formulated – irrespective of what another jurisdiction may seek to have them do, or refrain from doing. [184] “The present Arbitral Tribunal considers that it is a denial of justice for the courts of a State to prevent a foreign party from pursuing its remedies before a forum to the authority of which the state consented, and on the availability of which the foreigner relied in making investments explicitly envisaged by that state. As the Arbitral Tribunal has reminded the Parties (see Paragraph [73]), a state is responsible for the actions of its courts, and one of the areas of state liability in this connection is precisely that of denial of justice. [185] “Are the arbitrators authorised – or compelled – to evaluate the Jakarta Court decision on this foundation, or should they abstain in the feeling that the matter does not rise to the level of ‘ascertainable' jus cogens? [186] “This is a point with respect to which Professors Lalive and Rogers are, exceptionally, in agreement. Professor Rogers makes it explicit when he writes, on pages 25-26 of his Opinion, that he agrees with Professor Lalive's view that ‘the real question' is whether the Jakarta Court had jurisdiction in this case, and if so ‘within what limits, and for what purpose’. If that is the ‘real’ question, the arbitrators must have the authority to answer it. And if they have the authority to answer it, that authority cannot be limited to endorsing the actions of the national court. [187] “The Arbitral Tribunal considers that the exercise by the Jakarta Court of its purported injunctive powers (as to which no statutory authority has been presented to the Arbitral Tribunal, thus leaving the arbitrators wondering, for example, how an Indonesian injunction to be carried out on Indonesian territory can be expressed as subject to fines in a foreign currency, or why it was that the Republic of Indonesia was reduced to ex parte communications with the Court to determine what the injunction entailed, or even when it entered into effect – see Paragraph [195]) is a denial of justice. Moreover, the arbitrators consider that the Jakarta Court's jurisdiction is, as explained in Sect. V.3, excluded by the arbitration clause in the JOC, and contradicted by Indonesia's international undertakings pursuant to Art. II of the New York Convention on The Recognition and Enforcement of Foreign Arbitral Awards.

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[188] “Professor Rogers' ‘real question' cannot be open to the arbitrators only on the footing that they agree with him.” 4. Lack of Proof That the Injunction Even Purports to Constrain the Arbitral Tribunal [189] “In paragraph 88 of his Opinion, Professor Lalive affirms that: ‘the Arbitral Tribunal is not bound in any way by an injunction that is not addressed to it’. [190] “Professor Lalive's conclusion is based on the simplest possible fact: the injunction is not directed to the arbitrators. [191] “Professor Rogers, on the other hand, responds by saying...: ‘Professor Lalive appears to be unaware that it is standard practice of judicial tribunals to address injunctions to parties and not to tribunals whether they be inferior courts or arbitral tribunals. This is simply out of respect for a tribunal and its members.’

[192] “It must be said that the latter view requires more explanation than the former, because its purport is that the injunction means something more than what it says. The only relevant ‘standard practice of judicial tribunals' would be that of the courts of Indonesia, and there is no basis on which the Arbitral Tribunal could conclude that Professor Rogers claims expert knowledge in that regard. [193] “If the Republic of Indonesia needed to obtain evidence outside the country on this point of Indonesian law, it would more credibly have turned to The Netherlands – the source of Indonesian law – than to Australia. Indeed the Republic of Indonesia has counsel in The Netherlands, namely the firm of Loeff Claeys Verbeke, which applied for an injunction in The Hague District Court against the claimants as well as all three arbitrators individually (see Paragraph [88]), thus showing that the Republic of Indonesia was not inviting the Hague Court to follow Professor Rogers’ alleged ‘standard practice’. [194] “The Arbitral Tribunal cannot accept that the Jakarta Court's injunction must be understood to carry within it an implicit extension to constrain the arbitrators. There has been no effort to adduce evidence of the Indonesian law of injunctions to this effect. [195] “The Republic of Indonesia itself was seemingly thoroughly confused by the injunctions' intended meaning even for the Parties, both as to its timing and its consequences. The day after the injunction was issued, its counsel wrote that they would continue ‘in the normal course' until a formal notice is serviced; three days later, they wrote to the contrary that injunctions are effective immediately ‘as long as all the parties are in the court' and that their client had subsequently ‘consulted' with the court and been told that counsel may engage in correspondence relating to the suspension, but make ‘no submissions' or deal with ‘other substantive matters'; the following day they wrote that ‘we are assuming' (emphasis added) that ‘acceptance of service' of documentation ‘in furtherance of the arbitration process ... constitutes a violation'; and, finally, on the eve

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of the hearings on 20 September 1999 they wrote to the Arbitral Tribunal addressing the merits of the dispute and attaching a document which they sought to submit as evidence in respect thereof. (See Paragraphs [42]-[48] and [92].) [196] “The impression created is that of an unprecedented event with respect to which no one knew how to react. No evidence has been given to the arbitrators of any similar injunction ever having been granted by an Indonesian court. No explanation was given for the curious fact that the penalty sought and accepted was expressed in a foreign currency, and no evidence was given that Indonesian courts have the authority to do so. [197] “If the purported meaning of the injunction was so unclear to the very Republic of Indonesia under whose authority the Indonesian courts are organised and in whose name the laws and regulation they apply are edicted, and which was a party named in the order, the Arbitral Tribunal will not conclude by inference that the injunction purported to prevent the arbitrators from carrying out the explicit Terms of Appointment signed by the Republic of Indonesia.” VI. Award [198] “For the reasons stated above, and rejecting all contentions to the contrary, the Arbitral Tribunal holds with definitive effect that: (i)

the Republic of Indonesia has defaulted under the Terms of Appointment by failing to submit its documentary evidence, as required under paragraph 5(f) of the Terms of Appointment, by 10 August 1999,

(ii)

the Republic of Indonesia has failed to ‘show sufficient cause for such failure' for the purposes of Art. 28(3) of the UNCITRAL Rules, with the result that the Arbitral Tribunal ‘may make the award on the evidence before it’.

[199] “A further award will be required before the Arbitral Tribunal has discharged its mandate. [200] “Costs are reserved.” VII. Deposit of the Award [201] “The Arbitral Tribunal communicates an original version of this Interim Award, certified as such below by a manuscript notation of its President, to Messrs Latham & Watkins and Karim Sani. [202] “As indicated under point 3 of its Procedural Order of 7 September 1999, the Arbitral Tribunal has rejected the claimant's request to change the legal seat of the arbitration, which accordingly remains Jakarta. [203] “Paragraph 5(h) of the Terms of Appointment contemplates that the Arbitral Tribunal ‘shall deposit the award with the Central District Court of Jakarta’. The Parties have not agreed how this deposit should be effected. The claimant has indicated that it wishes to preserve the option of depositing the award by means of an authorisation to that effect from the Arbitral Tribunal; the Republic of Indonesia in default has contributed nothing to the Arbitral Tribunal's understanding of how this step might be achieved. [204] “Authorisation to deposit the Interim Award is therefore given by letters from the

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President dated this day to counsel for both Parties.” Excerpt – Final Award of 16 October 1999 I. Introduction (....)[1] “The general circumstances of the dispute, as well as its procedural record, are described in the Interim Award rendered on 26 September 1999. They will not be reiterated here except as necessary for the purposes of this final phase of the arbitration. (....) [2] “The Statement of Claim was provided to the Arbitral Tribunal by a letter dated 26 May 1999, and the Statement of Defence by a letter dated 5 July 1999. [3] “The Republic of Indonesia produced no witnesses, and did not avail itself of the opportunity to cross-examine the claimant's witnesses. No member of the Arbitral Tribunal expressed a desire to question the claimant's witnesses. Thus no hearings of witnesses took place.” (....) II. Truncated Tribunal 1. Factual Circumstances [4] “On 20 September 1999, two days before a session convened at The Peace Palace in The Hague for the purpose of allowing the Republic of Indonesia and the arbitrators to put such questions as they wished to the claimant's witnesses, agents of the Republic of Indonesia intercepted one of the co-arbitrators, Professor Priyatna Abdurrasyid, at Schiphol Airport in Amsterdam and prevailed upon him to return under escort to Jakarta on the night of 21/22 September 1999. [5] “Professor Priyatna did not subsequently present himself at the appointed time for deliberations. On 26 September 1999, the two other arbitrators accordingly signed the Interim Award with respect to matters already decided and deliberated by all three members of the Arbitral Tribunal. [6] “On 27 September, the Arbitral Tribunal gave the Parties the opportunity to state their views in writing by 5 October 1999 as to the consequences to be drawn from the fact that Professor Priyatna had not been able to confirm his readiness to continue. Comments were duly received from both Parties on that day (see Paragraphs [37]-[39]). [7] “The circumstances of the Republic of Indonesia's interference with Professor Priyatna merit further elaboration. [8] “Until the evening of 19 September 1999, Professor Priyatna's relationship with his two fellow arbitrators was one of cooperativeness, collegiality, and openness. All significant procedural decisions were the product of deliberations among all three arbitrators, who were in frequent contact by telephone and fax, and who met physically in Jakarta and in Paris. [9] “On a number of occasions during the month of June, July and August 1999, Professor Priyatna mentioned to his two fellow arbitrators that various representatives of the Republic of Indonesia had sought to contact him. He attributed these attempts to inexperience and ignorance of proper conduct in international arbitration. He stated that

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he was simply avoiding these attempted contacts. [10] “At one point during this period, in a fax to the President of the Arbitral Tribunal, Professor Priyatna volunteered to contact counsel to the Republic of Indonesia to admonish them about what he referred to as their ‘misconduct’. Messrs Paulsson and de Fina dissuaded him, on the grounds that it was preferable that all communications be channelled through the President of the Arbitral Tribunal. [11] “On 22 July 1999 the Central District Court of Jakarta (hereafter the Jakarta Court) issued an order purporting to prohibit the claimant and the Republic of Indonesia from continuing to participate in these arbitral proceedings. As the Arbitral Tribunal was to hold in its Interim Award, this order did not provide a valid excuse for the Republic of Indonesia's failure to abide by the Arbitral Tribunal, both because (i) the order could have been avoided or overcome by the Republic of Indonesia and therefore could not be accepted as an impediment, and (ii) the Jakarta Court itself, as an instrumentality of the Republic of Indonesia, could not validly neutralise the undertakings accepted by the latter in the Terms of Appointment. [12] “On 11 August 1999, as more fully explained in paragraph [60] of the Interim Award, the Arbitral Tribunal gave explicit notice to the Republic of Indonesia that a finding of default would be imminent, absent a more convincing justification for the Republic of Indonesia's position. [13] “From this point on, communications from counsel to the Republic of Indonesia became increasingly strident. They made clear that any finding that the Republic of Indonesia was in default would be deemed by them to be an affront to the State. They submitted an opinion dated 27 August 1999 from a former Australian judge, who stated that ‘one of the arbitrators is a national and resident of Indonesia, amenable to the jurisdiction of the Indonesian Courts and susceptible to punishment for contempt should he, with knowledge of the injunction, participate in the arbitration in breach of the Court's order’. The Opinion further stated that ‘for the member of the Tribunal who is an Indonesian citizen that is no doubt a matter of great concern’. [14] “The author of this Opinion did not indicate whether he had seen an Indonesian injunction before, or consulted the Indonesian Code of Civil Procedure. Professor Priyatna, on the other hand, is a distinguished Indonesian professor of law, a former Deputy Attorney General, and the current Chairman of the national Indonesian arbitration institution (BANI). [15] “In earlier phases of the proceedings, counsel to the Republic of Indonesia had threatened claimant's counsel with criminal actions in Indonesia and used violent language against the claimant generally.... At the time, such expressions were taken by the Arbitral Tribunal to have been nothing but misplaced sarcasm. [16] “The issuance of the procedural order dated 7 September 1999, which held the Republic of Indonesia to be in default, coincided with Professor Priyatna's departure for Hong Kong and the United States. During his stay abroad, Professor Priyatna was in frequent contact with the President of the Arbitral Tribunal, by telephone and fax. He indicated that he had heard from home that ‘they are looking for me everywhere’, but again ascribed this to ignorance of proper behaviour in international arbitration. [17] “Counsel to the Republic of Indonesia reacted with hostility to the procedural order. In a letter dated 9 September 1999, they ‘require that the order be signed by all arbitrators or, if not agreed to by all, that the reasons of the dissenting arbitrator be clearly stated in writing’. They added that ‘we are outraged’ that the Arbitral Tribunal

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‘deemed it appropriate not only to disregard an order of, but to issue official [sic] insults to, the courts of such jurisdiction’. Finally they expressed the unexplained suspicion that ‘at least two members of the tribunal are biased’. The Arbitral Tribunal read this letter not only as an unacceptable intrusion into its internal workings, but as a heavy-handed warning to Professor Priyatna who had put himself out of reach of improper direct contacts. [18] “On Friday, 17 September 1999, Professor Priyatna and the President of the Arbitral Tribunal spoke for the last time. The President informed Professor Priyatna, who was then in Arlington, Virginia, that lodging had been reserved for him at the Carlton Ambassador Hotel in The Hague. Professor Priyatna said he would arrive early Monday morning, proceed immediately to the hotel, and be available for preparatory discussions later in the day. Professor Priyatna also expressed his desire to proceed expeditiously with the case, and confirmed his availability to remain with the two co-arbitrators as long as necessary in order to deliberate and sign the final award before returning to Indonesia. [19] “Upon leaving Washington D.C. on Sunday evening, Professor Priyatna was intercepted at the airport by Indonesian officials unknown to him who told him to proceed to Amsterdam, where he would be met by other Government personnel, and that he was not to participate further in these proceedings. [20] “When he arrived the next morning in Amsterdam, Professor Priyatna was met by an Indonesian delegation. He was told that he would be kept in a hotel in the airport until it was time for him to be escorted back to Jakarta, that his reservation at the Carlton Ambassador would be cancelled, and that he was not to make contact with his fellow arbitrators. [21] “While Professor Priyatna was being intercepted at the airport, Dutch lawyers for the Republic of Indonesia were seeking to obtain an order from the District Court of The Hague to the effect that the hearings scheduled for 22 September should not be held. Since the three arbitrators had been served by summons the preceding Friday afternoon, the President of the Arbitral Tribunal asked Professor Albert Jan van den Berg, a member of the Amsterdam Bar and a law partner of the President of the Arbitral Tribunal, to attend the session of the District Court, which commenced at 10 a.m. on Monday 20 September. (As related in paragraph [90] of the Interim Award, Professor van den Berg obtained prior clearance from the head of the Amsterdam Bar to ensure that the circumstance of his being a partner of the President of the Arbitral Tribunal would not be considered improper.) Professor van den Berg was instructed to describe the basis on which the Arbitral Tribunal had made its procedural order, and to offer any other explanation requested by the District Court. [22] “The session before the District Court lasted four and one-half hours. The following morning, at 9 a.m., the Court issued its judgment, rejecting the Republic of Indonesia's request for injunction. The written judgment disposed of, inter alia, the two following arguments raised by the Republic of Indonesia: (i)

that the Arbitral Tribunal had violated its mandate by determining that a hearing should take place in The Hague; the District Court rejected this argument by noting that Art. 16(2) of the UNCITRAL Rules ‘explicitly permits arbitrators to hear witnesses and to hold meetings “at any place it deems appropriate.”’

(ii)

that the Republic of Indonesia was being put in an impossible situation because if it were to participate in the hearings it would be subject to a daily penalty of US$ 1

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million per day; this argument was rejected on the grounds that the Republic of Indonesia had ‘put itself in the present situation by its own act' and had failed to lodge an appeal which would automatically have suspended the Jakarta Court's injunction.

[23] “Pending the outcome of the application to the District Court of The Hague, Professor Priyatna was kept incommunicado in the airport hotel. Once the judgment was announced on Tuesday morning – thus removing the potential obstacle to the Wednesday hearing at the Peace Palace – passage was booked for him to be returned with an escort to Jakarta by the next available flight, i.e. Tuesday evening. [24] “As described in paragraphs [95]-[99] of the Interim Award, Professor Priyatna was located by Mr. de Fina and Professor Albert Jan van den Berg at the Schiphol Airport moments before he was escorted back to Jakarta on Tuesday evening 21 September. Professor Priyatna, who knows both Mr. de Fina and Professor van den Berg from past professional experiences, explained his circumstances and conveyed the message that he was in no position to resist the pressures being brought to bear upon him. [25] “In the absence of Professor Priyatna, no witnesses were heard on 22 September 1999. [26] “During the 12 days that followed, neither Mr. Paulsson nor Mr. de Fina heard from Professor Priyatna. In the past, they had had no difficulty in reaching him by telephone. His cellular telephone, in particular, had always been available, at least to leave a message. Ever since his involuntary departure from Schiphol Airport, the line appeared to be disconnected. His home number repeatedly rang unanswered. The persons answering at his office, unknown to Messrs Paulsson and de Fina, expressed no knowledge of his whereabouts. [27] “On 4 October 1999, a two-page letter purportedly from Professor Priyatna, dated 1 October 1999, was received by the President of the Arbitral Tribunal. It was addressed in the informal tone characteristic of the arbitrators' prior collegial exchanges: ‘Dear Jan’. In every other way, it was entirely aberrant. First and foremost, the letter indicated that it was being copied to counsel. This would obviously be unthinkable with respect to true internal communications. In the circumstances, and assuming that the letter was indeed written by Professor Priyatna, the inference is overwhelming that it was prepared, as it were, for an audience which he felt it necessary to satisfy or appease. This conclusion is reinforced when one considers the contents of the letter in context. [28] “First of all, the purported Priyatna letter states: ‘I regret that I was absent and unfortunately somehow gave the impression that I was in some kind of a pressured situation or that my departure was forced on me.' There is no explanation why Professor Priyatna, having informed the President of the Arbitral Tribunal that he was coming and would be available to remain in Europe until the final award was signed, and having flown to Amsterdam, would then spend 36 hours in the immediate proximity of Schiphol Airport and return to Jakarta without ever contacting the President of the Arbitral Tribunal. [29] “The letter continues as follows: ‘The fact was, by letter of the Jakarta Court, I was reminded about the existence of a Court Injunction ordering the parties of this arbitration, not to attend or participate in the furtherance of any hearing, subject to punishment

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and/or fine (US 1 million/day). Indirectly and implicitly this Court Injunction order the Tribunal to postpone any hearing while awaiting the final decision of the High Court. People consider me as a senior within the Indonesian Legal Community, and any violation of said Court Injunction by me could be considered as Contempt of Court and could also harm my national reputation and credibility. Being away from home, my mental feeling was very much troubled by that reminder.’ [30] “The ‘reminder' was apparently a letter from the Central Jakarta District Court dated 17 September 1999 which is attached to the purported Priyatna letter. (It will be recalled that Professor Priyatna left Jakarta on 7 September, and did not return until 22 September.) The letter from the Court is addressed to each of the three arbitrators individually by the Clerk of the Court on behalf of its President. It is in the Indonesian language. It was received by the President of the Arbitral Tribunal by ordinary mail on 14 October 1999 (without translation). The body of the letter merely recites the dispositive language of the Court's order of 22 July 1999 (notably ‘to postpone implementation of every subsequent Arbitration process that is an extension of, or has a connection with' the PLN Award). The only specific language ostensibly addressed to the three arbitrators is the last line: ‘This letter is for your attention.’ [31] “Neither the letter from the Court, nor the purported letter from Professor Priyatna, explain why this message was conceived nearly two months after the Court's order had been issued. The arbitrators were more than fully aware of the order. It had been the focus of extensive deliberations, particularly in early August 1999 when all the arbitrators met during the course of several days, and certainly had not slipped anyone's mind. [32] “Nor was this the letter Professor Priyatna referred to when he spoke to Mr. de Fina and Professor van den Berg at the Schiphol Airport; he then said he had been shown (but not given) a letter from a Minister of the Indonesian Government. [33] “The purported Priyatna letter adopts the Republic of Indonesia's thesis that the Court order ‘indirectly and implicitly' commands the Arbitral Tribunal to suspend the proceedings, and that any violation could be considered ‘as Contempt of Court’. These propositions had of course been carefully considered by the Arbitral Tribunal, and rejected. On this issue, the Arbitral Tribunal particularly relied on Professor Priyatna as its Indonesian member. [34] “If one assumes the purported Priyatna letter to be genuine, one would have to conclude either that Professor Priyatna has been deprived of his autonomy and must support the line adopted by the Republic of Indonesia, or that he has changed his mind with respect to a decision which the Arbitral Tribunal has already made – with his full participation. [35] “Whatever might be the real provenance of the purported Priyatna letter, one thing is clear: it confirms Professor Priyatna's withdrawal from any participation in this arbitration for an indefinite period. Efforts to contact Professor Priyatna directly and obtain a confirmation from him to the contrary have proved unsuccessful. [36] “On 27 September 1999, the President of the Arbitral Tribunal wrote to the counsel for both Parties as follows:

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‘Professor Priyatna has not been able to confirm his readiness to continue. If they so wish, the Parties are hereby given the opportunity to address the Arbitral Tribunal in writing by 5 October 1999 as to the consequences to be drawn in the circumstances under the UNCITRAL Rules.’

[37] “On 5 October 1999, the claimant submitted a letter analysing the facts and applicable principles, and concluding that the Arbitral Tribunal is: ‘unquestionably empowered to fulfill its mandate under the circumstances, in particular because Professor Priyatna's absence is directly attributable to ... the Republic of Indonesia’.

[38] “An opinion from Professor Pierre Lalive was attached in support of the letter. [39] “The same day, the Republic of Indonesia submitted a letter containing its analysis of the facts and articulating its perception of applicable principles. While insisting that Professor Priyatna ‘was not pressured by our client’, this letter admits, in the context of discussing the events at Schiphol Airport, that ‘Indonesian Embassy personnel ... were assisting Professor Priyatna ....' It asserts that the views of the ‘scope' of the Jakarta Court order expressed in the Interim Award ‘are gravely mistaken’, that ‘it is plain that the remaining members of the Tribunal should resign’, and that in any event the arbitral proceedings should be suspended pending a series of applications to the Indonesian courts.” 2. Legal Consequences [40] “In communications subsequent to its unprecedented interference, the Republic of Indonesia has offered no excuse for the outrage perpetrated on the Arbitral Tribunal, but has rather criticised the arbitrators, first for having taken initiatives to locate Professor Priyatna when he did not appear at the appointed time and place on 20 September, which counsel for the Republic of Indonesia have contended reflects bias on the part of Mr. de Fina, and secondly for having assessed the factual circumstances of Professor Priyatna's involuntary departure without giving them ‘notice of these submissions nor opportunity to address them’. [41] “The first criticism hardly merits comment. It was obviously proper for Mr. de Fina to seek to locate his missing colleague, and in this he was encouraged by the President of the Arbitral Tribunal who was gravely concerned for Professor Priyatna's safety. It was moreover obviously proper to seek to apprise Professor Priyatna of the result of the action before The Hague District Court in which he was a co-defendant. [42] “As to the second, it should be recalled that the procedural circumstances of an arbitration are apprehended directly by the Arbitral Tribunal. Unlike factual and legal controversies relating to the substantive dispute between the parties, they are not the object of an adversarial debate. The internal communications of the Arbitral Tribunal are not open to cross-examination or any other investigation by counsel; otherwise the confidentiality of deliberations and the independence of individual arbitrators would be compromised beyond repair. In this case, the Arbitral Tribunal has been in a position to

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establish gross interference by agents of the Republic of Indonesia in the work of the arbitrators, without any need for ‘evidence’ from either Party. [43] “Although the Republic of Indonesia's readiness to sabotage these proceedings gave rise to an extraordinary event, the Arbitral Tribunal has not found it necessary to innovate in order to ensure the fulfilment of its mandate under the Terms of Appointment. The weight of well-established international authority makes clear that an arbitral tribunal has not only the right, but the obligation, to proceed when, without valid excuse, one of its members fails to act, withdraws or – although not the case here – even purports to resign. [44] “The leading authority on this subject is Judge Stephen Schwebel, now President of the International Court of Justice, who has devoted two major studies to this subject, roughly a decade apart. [45] “In one of his much-remarked Lauterpacht Lectures, published under the title International Arbitration: Three Salient Problems (1987), Judge Schwebel addressed in detail the question whether an international arbitral tribunal from which an arbitrator withdraws – which he referred to, in a phrase that has become common parlance, as a truncated tribunal – retains the power to proceed and to render a binding award. He defined ‘withdrawal' in this context to mean ‘sustained abstention from participation in the tribunal's proceedings, whether on the initiative of the arbitrator or the instructions of his government or principal, and whether or not accompanied by resignation' (at page 144). Having surveyed the problem of truncated tribunals as it has developed over the last two centuries, and as it has intensified in recent years in the proceedings of the IranUnited States Claims Tribunal, he concluded, at page 296, that: ‘Withdrawal of an arbitrator from an international arbitral tribunal which is not authorised or approved by the tribunal is a wrong under customary international law and the general principles of law recognised and applied in the practice of international arbitration. It generally will constitute a violation of the treaty or contract constituting the tribunal, if not in terms then because the intention of the parties normally cannot be deemed to have authorised such withdrawal. – Such a wrongful withdrawal may not, as a matter of international legal principle, debar an international arbitral tribunal from proceeding and rendering a valid award. – While the precedents are not uniform, and the commentators are divided, the weight of international authority to which the International Court of Justice has given its support, clearly favours the authority of an international arbitral tribunal from which an arbitrator has withdrawn to proceed and to render a valid award.’

[46] “To reach this conclusion, Judge Schwebel relied on numerous authorities found throughout the past century. [47] “In the Republic of Colombia v. Cauca Company et al, a truncated international tribunal rendered an award that the US Supreme Court held to be ‘sufficient and effective’. (190 US 524 (1903), 527-528; referred to in Schwebel, op. cit. at pages 184193.)

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[48] “In the French-Mexican Claims cases heard by an international commission established by a 1927 Convention between France and Mexico, 23 judgements were rendered by a truncated commission on the basis that ‘to yield to unlawful withdrawal [by the Mexican arbitrator] by holding the commission to be incompetent “would amount to disregarding the general principle of law according to which no one may take advantage, in his own favour, of the non-fulfilment of his engagements”’. (Schwebel, quoting the Commission's President, op. cit. at pages 210-211.) [49] “In the Lena Goldfields arbitration, a truncated international tribunal rendered an award in the absence of the arbitrator appointed by the Government of the Union of Soviet Socialist Republics. The arbitration clause was found to be a fundamental part of the agreement, and the arbitral tribunal held that it could not have been the parties' intention that the claim be susceptible to frustration by the withdrawal of one of the party-appointed arbitrators. (Schwebel, op. cit. at pages 211-214.) [50] “In the Sabotage cases, the withdrawal of the German Commissioner (i.e. arbitrator) in March 1939 from the German-United States Mixed Claims Commission did not stop the Commission from rendering some 153 awards, with the Umpire of the Commission accepting the statement of the American Commissioner that: ‘If it be possible for one National Commissioner, whether under the express order or with the tacit consent of his Government, thus to bring to naught and render worthless the work ... and thus defeat the very purpose for which the Commission was constituted ... such a result would make a mockery of international arbitration.' (Cited in Schwebel, op. cit. at page 220.) [51] “In the Advisory Opinion in Interpretation of Peace Treaties with Bulgaria, Hungary and Romania, the International Court of Justice responded to the refusal by the governments of Bulgaria, Hungary, and Romania to appoint their arbitrators by holding, in relevant part, that: ‘... an arbitration commission may make a valid decision although the original number of its members, as fixed by the arbitration agreement, is later reduced by such circumstances as the withdrawal of one of the commissioners. These cases presuppose the initial validity of a commission, constituted in conformity with the will of the parties as expressed in the arbitration agreement ...’. (Cited in Schwebel, op. cit. at page 229.) [52] “More recently, the question of the power of a truncated tribunal to proceed and render a valid and binding award has been addressed repeatedly by the Iran-United States Claims Tribunal. Implementing a procedural regime closely based on the UNCITRAL Rules, numerous awards were rendered by various chambers of the Claims Tribunal in the absence of the Iranian arbitrator. Thus, by way of illustration, in Cases Nos. 13, 17, 62, 67, 124, 132, 185, and 346, Chamber Three rendered awards in the absence of Arbitrator Sani. Similarly, in Cases Nos. 49, 57, 83, 120, 188, 220 and 449, awards were rendered by Chamber Two in the absence of Arbitrator Shafeiei. In all these cases, the majority decisions of Chambers Two and Three concluded that an award could be finalised and signed despite a party-appointed arbitrator's absence without valid excuse. [53] “Judge Schwebel revisited the question of truncated tribunals in his 1994 Goff Lecture given in Hong Kong and published in 6 ICC International Court of Arbitration Bulletin 1995 (No. 2) under the title ‘The Validity of an Arbitral Award Rendered by a Truncated Tribunal’. Not only did he confirm his earlier conclusion in support of a truncated tribunal's authority to proceed and to render a valid award notwithstanding an individual arbitrator's withdrawal without the Arbitral Tribunal's authorisation or approval, but he noted that ‘since the expedient of absence from the Iran-United States Claims

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Tribunal and its Chambers of a party-appointed arbitrator has not been effective in accomplishing its apparent purpose' the tactic had ‘in a measure' been abandoned. He concluded that: ‘in the Iran-United States Claims Tribunal, it has in effect been recognised on all sides that a truncated tribunal may render an award which will be treated as valid. At any rate, the majority practice of the Tribunal uniformly, repeatedly and emphatically sustains that conclusion’.

[54] “On the subject of the isolated 1991 Swiss decision in the Milutinovic case, annulling an award rendered by a truncated tribunal, Judge Schwebel was uncompromising, judging it ‘deplorable' and ‘inconsonant with the general principle of law that a party may not invoke its own wrong (or a wrong that it adopts) to deprive another party of its rights’. [55] “In sum, the authority supporting a truncated tribunal's ability to proceed and render an award is plentiful. Its pertinence in this arbitration is beyond question. Although some of this authority may be said to relate to public international arbitration, there is no reason to distinguish between public and private arbitration with respect to the question whether an international tribunal may proceed to issue a valid award if one of the arbitrators fails to participate without valid excuse. As to the numerous authorities provided by the Iran-United States Claims Tribunal, they involve disputes between private parties on the one hand and a state party on the other, just as this arbitration does. Moreover, they are governed by rules which for present purposes are the same as the UNCITRAL Rules which apply to these proceedings. [56] “In its submission dated 5 October 1999, the Republic of Indonesia refers to minor differences between the rules governing the Iran-United States Claims Tribunal and the UNCITRAL Rules. But it is generally accepted that the latter also accommodate an arbitral tribunal's fulfilment of its mandate despite one of the arbitrator's absence without valid cause. By way of example, in his address to the ICCA Congress in Stockholm in 1990 Professor Ivan Szasz referred to a number of the provisions of the UNCITRAL Rules as a basis for his conclusion that the Rules ‘permit two arbitrators to make decisions and awards even if the third arbitrator does not participate’. Specifically, he observed that: ‘A key provision of the Rules gives the arbitral tribunal the power to “conduct the arbitration in such manner as it considers appropriate” (Art. 15(1)). The Rules further provide that decisions and awards can be made by two arbitrators (Art. 31(1)) and can be signed by two arbitrators (Art. 31(4)). Further interpretation of the Rules has led to the conclusion that the Requirement of the Rules that the Arbitral Tribunal must treat the parties “with equality” (Art. 15(1)) does not appear to prevent the arbitral tribunal from proceeding without the participation of a party-appointed arbitrator, because the Rules clearly establish that that arbitrator must be independent of the parties (Arts. 9 and 10). Thus there is little basis for a presumption that voluntary absence of a party-appointed arbitrator results in inequality for the party that appointed him. One may argue that while the Rules permit a party to challenge an arbitrator who “fails to act” (Art. 13(2)), this provision which permits a party to take the initiative does not necessarily prohibit the arbitral

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tribunal from conducting the arbitration in such manner as it considers appropriate in the circumstances. (International Council for Commercial Arbitration, Congress Series 5, p. 256.)

[57] “Art. 13(2) of the UNCITRAL Rules deserves particular attention. It provides that: ‘In the event that an arbitrator fails to act or in the event of the de jure or de facto impossibility of his performing his functions, the procedure in respect of the challenge and replacement of an arbitrator as provided in the preceding articles shall apply.’

[58] “This text was the subject of specific comment in the Iran-United States Claims Tribunal decision in Uiterwyk Corp., et al. v. Islamic Republic of Iran, et al (6 July 1988). (10) In response to a dissenting decision by the absent Iranian arbitrator Mostafavi, the two remaining arbitrators, Böckstiegel and Holtzmann, issued a Supplemental Opinion which concluded that Art. 13(2) of the UNCITRAL Rules ‘is not the exclusive procedure for dealing with failure of an arbitrator to act’, and that it ‘cannot be invoked to disrupt the orderly process of the Tribunal or to obstruct its functions’. [59] “This Arbitral Tribunal concurs with that conclusion. A possible course may be to remove and replace an arbitrator who has withdrawn, if the withdrawal takes place at a sufficiently early stage that his replacement would cause only limited disruption. Such a solution is, however, manifestly inappropriate when an arbitrator withdraws at an advanced stage in the proceedings and that withdrawal is found by the Arbitral Tribunal to be without valid excuse. As Ms. Jacomijn J. van Hof puts it in the concluding sentence of the section dealing with this topic in her Commentary on the UNCITRAL Rules (1991), at page 97: ‘If [the arbitrator] refuses to participate, the appropriate solution applied by the Tribunal is to continue notwithstanding his absence.’ [60] “The Arbitral Tribunal thus has no hesitation in finding that, in the circumstances of this arbitration, it has the power to proceed to fulfil its mandate and render an award, since Professor Priyatna's non-participation is without valid excuse. [61] “In reaching this finding, the Arbitral Tribunal notes that it was initially constituted in precise conformity with the will of the Parties as reflected in the Terms of Appointment, and that therefore Professor Priyatna's withdrawal prejudices not the constitution but the continued effective composition of the Arbitral Tribunal. As the International Court of Justice observed in its Advisory Opinion in Interpretation of Peace Treaties with Bulgaria, Hungary and Romania (see Paragraph [51]), and as highlighted by Judge Schwebel in his 1994 Goff Lecture (referred to in Paragraph [53], the distinction is fundamental. Having found Professor Priyatna's withdrawal to be without valid excuse, the Arbitral Tribunal retains the authority to render this award. [62] “To determine that Professor Priyatna's non-participation is without valid excuse, it is not necessary to establish that it is a consequence of the direct interference of the Republic of Indonesia itself. On the contrary, the authorities set out above generally proceed on the basis that the absent arbitrator has acted of his own free will. [63] “That said, the circumstances of Professor Priyatna's indefinite withdrawal from this case suggest that this is an academic point. The purported Priyatna letter affirms that

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Professor Priyatna ‘could not do otherwise, but to observe' the Indonesia court injunction imposed on the parties to the arbitration on 22 July 1999. There are only two possibilities: either Professor Priyatna wrote the letter of his own free will, or it is the result of improper behaviour of agents of the Republic of Indonesia. In the former case (which the Arbitral Tribunal under the circumstances deems unlikely), Professor Priyatna would himself have opened the veil of the arbitral deliberations. In the latter case, the Republic of Indonesia should not benefit from its own wrong. In either case, then, it is appropriate for the Arbitral Tribunal to indicate that Professor Priyatna expressed his full agreement with the Arbitral Tribunal's order of 7 September 1999. When counsel to the Republic of Indonesia write, in paragraph 11 of their letter of 5 October 1999, that ‘Professor Priyatna's letter makes it clear that Messrs. Paulsson and De Fina's views as to the scope of the Injunction under Indonesian Law, which governs these references, are gravely mistaken’, they are therefore entirely wrong. The 7 September 1999 order did not reflect the sole views of the two non-Indonesian arbitrators. To the contrary, it was supported by Professor Priyatna's full concurrence. [64] “In view of the unprecedented revelations concerning the initiatives of agents of the Republic of Indonesia, and the obviously delicate position in which Professor Priyatna has been placed as a result of the allegations of its counsel, the Arbitral Tribunal has placed the relevant elements of the written record of the arbitral deliberations in the vaults of the Banque Nationale de Paris, at 73 boulevard Haussmann in Paris. The file also includes notes pertaining to the incidents of 20/21 September 1999 which have not been revealed for fear of reprisals to Professor Priyatna. The file will be destroyed on 1 November 2004. Until then, it will be released to the Parties either (i) with the written consent of both Parties as well as the written consent of Professor Priyatna or (ii) upon order of either the President of the Tribunal de Grande Instance of Paris, or the President of the Paris Bar Association. [65] “The Arbitral Tribunal finds that even if, arguendo, Professor Priyatna was acting of his own free will when withdrawing indefinitely from these proceedings and writing the letter dated 1 October 1999, there is no valid excuse for his absence. The Arbitral Tribunal has already found, in its Procedural Order dated 7 September, with the full participation and agreement of Professor Priyatna, that the Indonesian court injunction could have been avoided or overcome by the Republic of Indonesia and therefore could not be accepted as an impediment, that it was rendered by an instrumentality of the Republic of Indonesia and therefore was attributable to the Republic of Indonesia, that the Republic of Indonesia was in default under the Terms of Appointment, and that, notwithstanding the court injunction, the arbitration would proceed with a hearing to be convened in the Peace Palace in The Hague. The Indonesian court injunction cannot therefore be a valid excuse for Professor Priyatna's withdrawal justifying the indefinite suspension of these proceedings. [66] “The circumstances overwhelmingly suggest, however, that Professor Priyatna's withdrawal was not of his own free will. The Republic of Indonesia has not even attempted to deny that its agents confronted him on two continents with the intention of ensuring his withdrawal from the arbitration. Such ex-parte communications by a party with its party nominated arbitrator in and of themselves constitute a grave procedural

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transgression. The Republic of Indonesia has not explained why Professor Priyatna's hotel reservation in The Hague was subsequently cancelled by its agents. It has not explained why he was held in an airport hotel by its agents. It has not explained why he was accompanied back to Jakarta by its agents. As to the purported Priyatna letter: (i)

it explains none of the circumstances of Professor Priyatna's arrival in Amsterdam, his 36 hours there, and his departure for Jakarta;

(ii)

it does not contradict the three eye witness accounts of his departure;

(iii)

although it expresses regrets that the ‘impression' was created that ‘my departure

(iv)

it expresses submission to the Republic of Indonesia's position that the Court of

was forced upon me’, it does not deny that such was indeed the case; Jakarta's order paralyses the arbitral proceedings, in stark contradiction with a decision made by the Arbitral Tribunal three weeks before with the full participation and the full assent of Professor Priyatna.

[67] “The Arbitral Tribunal has nothing but sympathy and concern for the position in which Professor Priyatna has been placed. No further comment seems necessary. As a sheer humanitarian matter, on no account has the Arbitral Tribunal wanted to provoke the need for further forced explanations from Professor Priyatna. [68] “The Republic of Indonesia should not benefit from Professor Priyatna's absence. Finding that there is no valid excuse for it, the Arbitral Tribunal proceeds to fulfil its mandate and render this Final Award.” III. Merits (....) 1. Binding Effect of the MoF Letter [69] “The primary rule for construing contracts is set out in Art. 1342 in the Indonesian Civil Code as follows: ‘If the wording of a contract is clear one may not deviate from it by interpretation.’

[70] “In the event of ambiguity, the Code goes on to define a number of secondary rules of interpretation: a purposive reading of contractual terms should be preferred over a literal one (Art. 1343); it should be presumed that terms are not superfluous (Art. 1344); interpretation should be consistent with the nature of the agreement (Art. 1345) and with customary usages (Arts. 1346 and 1347); and terms should be read in context (Art. 1348). The principle of contra proferentum is also to be applied (Art. 1349). [71] “In the present case, the primary rule (Art. 1342) suffices to establish that the MoF Letter created a binding legal obligation. It is confirmed by several of the subsidiary rules, which the Arbitral Tribunal will consider if for no other reason than that the claimant has gone to great lengths to provide relevant evidence.

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[72] “The Republic of Indonesia has denied that the MoF Letter was intended to create legal obligations. It contends that it is merely a letter of comfort, or, to cite point 5 of its pleading of 15 July 1999 to the Jakarta Court (see paragraph [136] of the Interim Award): ‘the meaning of “will cause” legally can be interpreted that the Government will “take some efforts ...”’.

[73] “This argument flies in the face of the simple words ‘will cause ... to honor and perform’. The MoF Letter does not say ‘will try to cause’, or ‘hereby confirms that its usual policy is to cause’, or anything similarly susceptible to equivocation. The Republic of Indonesia undertook to see to it that PLN (and Pertamina) would live up to its bargain. [74] “In its ‘Challenge to Jurisdiction' dated 5 October 1998, the Republic of Indonesia noted that the claimant had on occasion referred to the MoF Letter as a ‘support letter’. It went on to suggest that this term was synonymous with that of ‘comfort letter’, and asserted that such letters ‘are common where exploration companies seek project finance for their subsidiaries without offering recourse to the parent itself. One purpose is to demonstrate to the financial institution(s) that the project being financed is in fact recognised and approved by the government’.

[75] “The Republic of Indonesia referred to a well known authority, namely Philip Wood, Law and Practice of International Finance, and asserted that this author's conclusion, ‘after a detailed analysis’, was that ‘no serious legal claim can arise from such a letter’. [76] “This is not a fair reading of Mr. Wood's treatise. In the 1980 edition invoked by the Republic of Indonesia, it is correct that the author concludes at page 307 that a statement to the effect that the signatory of a comfort letter is aware of the proposed transaction, and approves of it, is of ‘no legal effect’. But with regard to expressions of support, he writes on page 308 that ‘the terms of the financial support vary widely and their legal effect depends upon ordinary principles of contract law and rules of construction’. The author goes on to warn that if an expression of support is not given effect, ‘the remedy is usually a right of damages rather than a claim for a liquidated sum and there may be difficulties and delays in proving these’ . [77] “It is self-evident that the author here is making it clear to drafters that a letter may be ‘defective' in not achieving as much protection as they want. But it cannot be said that he concludes that such letters do not give rise to legal obligations. To the contrary, the notion of a ‘right to damages' is squarely predicated on the recognition of such obligations. [78] “Two often-cited English judgments among the various authorities cited by the claimant strike the Arbitral Tribunal as relevant in this context. Although the English law of contract is not applicable, the MoF Letter was drafted in the English language. The English cases, which gave rise to much careful debate as to the nuances of the pertinent expressions, are therefore instructive as a reference point for the purposes of establishing the intention of the Parties as expressed in the terms of the MoF Letters. Indeed, the

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second of these cases was invoked by the Republic of Indonesia itself, in its Statement of Defence. [79] “The first case is Chemco Leasing SpA v. Rediffusion plc, [1987] FTLR 201, unreported in first instance, where the relevant letter provided: ‘... [the defendants] will be in a position to exercise sufficient control over the administration and management of [the subsidiary] to ensure that its obligations to Chemco are maintained’. and furthermore: ‘... we are not contemplating the disposal of our interests in [the subsidiary] and undertake to give Chemco prior notification should we dispose of our interest during the life of the leases. If we dispose of our interest we undertake to take over the remaining liabilities to Chemco of [the subsidiary] should the new shareholders be unacceptable to Chemco.’

[80] “The court of first instance, upheld on appeal, found that this language created contractual undertakings sufficiently certain in their terms. [81] “The second case is Kleinwort Benson Ltd. v. Malaysia Mining Corporation Berhad, [1988] 1 WLR 799;[1989] WLR 379, where the relevant letter provided: ‘We refer to your recent discussions with [the subsidiary] as a result of which you propose granting [the subsidiary]: (a) banking facilities of up to £5 million; and (b) spot and forward foreign exchange facilities with a limitation that total delivery in cash will not on any one day exceed £5 million. We hereby confirm that we know and approve of these facilities and are aware of the fact that they have been granted to [the subsidiary] because we control directly or indirectly [the subsidiary]. We confirm that we will not reduce our current financial interest in [the subsidiary] until the above facilities have been repaid or until you have confirmed that you are prepared to continue the facilities with new shareholders. It is our policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements.’

[82] “The court of first instance held that the just-quoted paragraph (3) constituted a ‘crystal clear' undertaking to the effect that ‘it is and will be the defendants' policy to ensure that [the subsidiary] is in a position to meet these liabilities’. The Court of Appeal disagreed on the grounds that the words and will be did not appear in the letter, and should not be inferred. [83] “In its Statement of Defence, the Republic of Indonesia invoked the Kleinwort Benson case in support of the proposition that the MoF Letter ‘merely express the then policy intentions of respondent with respect to PLN. They are not binding in character.’ [84] “This argument misses the self-evident distinguishing feature of the Kleinwort Benson letter when compared with the MoF Letter. The former did no more than to

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confirm knowledge and approval of the transactions, and to express a ‘policy'– i.e. a present intent – to enable the primary obligor to meet its liabilities. These are exactly the kinds of limited terms which, as Mr. Wood has pointed out, may be deemed insufficient to create legal obligations. [85] “The MoF Letter contains two fundamentally different elements: the undertaking to cause PLN to honour and perform its contractual obligations, and the undertaking to submit to arbitration in the event of a dispute under the MoF Letter. One would hardly expect that a mere comfort letter – i.e. an expression of encouragement intended to have no legal effect – would contain a dispute resolution clause. [86] “Finally, the Arbitral Tribunal has noted that the claimant's rights under the MoF Letter were assigned as security to the project lenders, and that the Ministry of Finance, on 26 April 1996 wrote to the claimant, noted the Ministry's understanding that the claimant ‘plans to assign its rights under the [MoF Letter] for the benefit of the Lenders’, and concluded: ‘The Government hereby confirms its consent to such assignment.’

[87] “There would have been no purpose in assigning rights, or in approving their assignment, if the MoF Letter did not purport to create enforceable obligations.” [88] Considering the importance of the MoF letter to the respondent's case, the arbitral tribunal had to determine whether or not the letter was intended to create legal obligations. The arbitral tribunal found that in the context of the complex contractual relationship between claimant and respondent, the MoF letter could not be seen as an informal, non-legally binding document. Before concluding its investigation into the role of the MoF letter, the arbitral tribunal considered the legal opinion of the Hong Kong office of Latham & Watkins presented by the respondent. Although the legal opinion was prepared for a different client and related to a different project, the arbitral tribunal analyzed the opinion as if it referred to the ESC and the MoF letter to preclude any objections on the part of the respondent. The legal opinion stated that the “[l]etter could be construed as one of three things: – a guarantee;– a binding contractual obligation; or– a comfort letter.” Although the legal opinion presented the option that the respondent could argue that the letter is merely a comfort letter but did not say that the respondent would be correct in pursuing this line of argumentation, “[the opinion] merely recommends that a clarification be obtained to exclude ... a future argument. This recommendation is no more than the kind of prudent advice that bankers have received since the first day they consulted lawyers”. (....) 2. Nature of the Undertaking [89] “To say that the MoF Letter created a binding legal obligation does not suffice. The very simplicity of the wording means that it does not resolve important issues relating to the manner in which the Republic of Indonesia's undertaking was to be made effective. For the reasons given below, the Arbitral Tribunal finds (i) that the MoF Letter created a duty for the Republic of Indonesia to ensure that PLN honoured and performed its obligations under the ESC and under any arbitral award rendered pursuant to it, and (ii)

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that the Republic of Indonesia has breached that duty. [90] “A financial institution contemplating a loan to the claimant on the strength of PLN's payment obligations under the ESC would probably not consider the MoF Letter to be ideal. It does not constitute a direct payment obligation. The lender would doubtless prefer to see a continuing undertaking by the Ministry of Finance to the effect that it would satisfy any invoice issued to PLN that was unpaid on the relevant due date. The obligation defined in the MoF letter was not an undertaking to make payment, but, in the words of the very first article on the general Indonesian law of contracts, namely Art. 1316 of the Indonesian Civil Code, ‘an obligation ... to do something'– namely to cause PLN to perform its obligations. The remedy for breach of such an independent obligation is one of damages. A claim under the MoF Letter would, moreover, as an initial matter require a demonstration both that PLN had not ‘honoured and performed' its obligations under the ESC, and that the claimant's ‘material obligations’ were ‘fulfilled’. [91] “Such a prospect would give a lender pause. The ripeness and the determination of a claim for damages under the MoF Letter would obviously be problematic if there were difficulties of performance under the ESC, and if PLN were to take the position that the conduct of the claimant was such that payments were not due, or offset by amounts due from the claimant. It is not difficult to see why Mr. Wood cautions the drafter with respect to the limited efficacy of a promise to procure a third party's performance (see Paragraph [76]), nor to understand why the L&W Opinion recommended a strengthening of the terms of the GOI Support Letter. [92] “The Republic of Indonesia has argued that the MoF Letter may not be construed as a guarantee because it does not contain the express language allegedly required under Art. 1824 of the Indonesian Civil Code. This proposition is doubtful, because Art. 1824 provides simply that the existence of a guarantee may not be established by a presumption. Sufficiency of proof is a matter for the trier of fact. Whether or not particular words are required is academic, however, because Art. 1824 relates to the type of guarantee defined in Art. 1820, and the Arbitral Tribunal does not believe that the MoF Letter may be construed as such. [93] “Art. 1820 provides: ‘A guaranty is an agreement in which a third party, for the benefit of a creditor, obligates himself to perform a debtor's obligation if the debtor fails to perform that obligation.’

[94] “There is thus a precondition (‘if the debtor does not perform'), and the obligor under such an agreement may demand that the creditor first exhaust all remedies of collection against the debtor. In other words, Art. 1820 defines a secondary or ancillary obligation, as is confirmed in Professor R. Subekti's treatise on the Indonesian law of ‘miscellaneous contracts’, Aneka Perjanjian (1975), at pages 170-171. This is what Dutch law knows as borgtocht (see Art. 1857 of the old Dutch Civil Code, which is the equivalent of Art. 1820 of the Indonesian Civil Code); French law knows it as cautionnement (see the equivalent Art. 2011 of the French Civil Code). [95] “Leaving aside the implausibility of the Republic of Indonesia insisting upon the liquidation of PLN as a condition precedent to its own performance, the MoF Letter does not, on its face, establish such a condition; it promises positively that the Ministry ‘will

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cause' PLN to honour and perform it obligations as due under the ESC. The MoF Letter is therefore more appropriately categorised among the undertakings contemplated by Art. 1316 of the Civil Code, which provides that: ‘... a person may warrant the performance of a third party by promising that such third party will do something, but any claim for damages against the warrantor or person so promising will not be less if the third party refuses to do what was promised’.

[96] “This is the translation presented in the Opinion of Mr. Hornick. The second independent clause of the sentence is obviously awkward, and the critical verb ‘warrant' is debatable given its particular connotations in English. Once again, Art. 1316 was received verbatim from the old Dutch Code (Art. 1352), where it in turn was received in translation from the Napoleonic Code. It remains today as Art. 1120 of the French Civil Code. The key expression in the original text is se porter fort pour un tiers, which is best translated as ‘undertake to procure action by a third party’.(11) [97] “The sense of Art. 1316 is therefore, in the opinion of the Arbitral Tribunal, more clearly conveyed thus: ‘... a person may undertake to procure action by a third party, subject to indemnification by the person who so undertook, or who promised to obtain a ratification by the third party, if the latter refuses to do what was promised’.

[98] “This concept is consistent with the language used in the MoF Letter: ‘will cause ... to honor and perform’. Art. 1316 contemplates a direct and primary obligation. As it is put by J. Satrio SH, in his general treatise on the Indonesian law of contracts, Hukum Perjanijian (Perjanjian Pada Umunya) (1992), at page 78, contracts that fall under Art. 1316 ‘stand alone – not accessory’ (berdiri sendiri – tidak accessoir). Unlike the special case of a guarantee governed by Art. 1820, they do not involve the assumption of another party's liability. The Arbitral Tribunal accepts that the MoF Letter is the type of undertaking which under Art. 1316 gives rise to an obligation, as Mr. Satrio puts it, id., to ‘make monetary compensation for loss in the case of nonperformance’. [99] “The performance expected of the Republic of Indonesia here was to ensure that PLN honour and perform the ESC, as well as the Award rendered pursuant to the ESC. Mr. Satrio's analysis is entirely consistent with French jurisprudence under the congruent Art. 1120 of the French Code; the Court of Cassation has held that failure to fulfil an undertaking to procure performance may be sanctioned only by an order to pay damages (judgment of 26 November 1975, DALLOZ 1976.353). Such damages, under the ordinary provision of the Code, include actual expenditures and lost profit. [100] “As seen above, the 1994 L&W Opinion gave two reasons why it considered it unlikely that the ‘GOI Support Letter' with which it was concerned would be interpreted by a court or an arbitrator as ‘creating a guarantee’. [101] “The second of these reasons, namely that the granting of a guarantee might be said to have been invalid under the restriction of Presidential Decree No. 37 of 1992, cannot be entertained.

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[102] “It should be noted, as a formal matter, that this argument was not raised in the Statement of Defence. This is a curious fact, because it did appear – albeit in a subsidiary role, and treated in only a few lines – in the Republic of Indonesia's ‘Challenge to Jurisdiction' dated 5 October 1998. This document was of course prepared prior to the signature of the Terms of Appointment. It may therefore be said not to be a part of the record of this case. (Although the Statement of Defence sought to reserve the Republic of Indonesia's ‘objection to jurisdiction set forth in ... the Challenge to Jurisdiction’, the argument based on Decree No. 37 appears to be directed to the merits and not to jurisdiction, and thus not covered by the reservation.) [103h “The Arbitral Tribunal does not, however, wish to reject the argument on the basis of a formal objection, and therefore gives precedence to two more fundamental considerations. First, although the Republic of Indonesia is free to argue that under its proper construction the MoF Letter meant less than the claimant seeks to establish that it did, it cannot in good faith impugn the authority of the Minister of Finance years after the claimant has made significant investments in reliance on the Republic of Indonesia's undertakings. [104] “Secondly, even if it were assumed for purposes of argument that no Minister was entitled to ignore the terms of the Decree, the Republic of Indonesia has not established that the Decree was violated by the MoF Letter. The Decree is part of the Electricity Law Regime and is therefore inapplicable to the claimant's project, which was subject to the Special Geothermal Regime. (This finding is consonant with the detailed analysis of the PLN Award [citation omitted].) Moreover, even if it were applicable, its terms do not proscribe the undertaking memorialised in the MoF Letter. In the translation provided by the Republic of Indonesia, the relevant Sect. 5 of the Decree is worded as follows: ‘Project finance by private sector enterprises for supply of electric power can only be arranged without government guarantees of the invested capital and repayment of loans.’(12) The MoF Letter guaranteed neither the reimbursement of loans nor the return of investment of capital. It was a promise to ensure the performance of PLN. [105] “That leaves the first of the two reasons given in the L&W Opinion, which merits more extensive discussion. It is put in the conjunctive: ‘the letter does not expressly state that the Government has agreed to guarantee PLN's payment obligations, and the Government rejected specific guarantee language initially proposed by the Sponsors’. (Emphasis added.)

[106] “The second branch of this reason for the L&W Opinion's conclusion cannot be considered here for evident reasons of procedural fairness. The claimant is not on notice of what the Government told another party with regard to another document relating to another project. (At any rate, the Arbitral Tribunal has never seen the text of any such proposals, their rejection, or indeed the final document.) [107] “Under the circumstances, it is difficult to accept that the L&W Opinion contradicts the claimant's position here,(13) because it is not permissible to conclude that the authors of the Opinion would have considered that the first branch of their reason was

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sufficient without the other. Indeed, the syntax suggests that the contrary is true; otherwise the two branches would have been expressed as two separate reasons for the conclusions, and the concern about Presidential Decree No. 37 would have been expressed as a third reason. [108] “Nevertheless, as shown above, the Arbitral Tribunal has been prepared to accommodate the Republic of Indonesia and to test the first branch as though it were a separate tree. [109] “The present issue is quintessentially legal, and would in this case have merited extensive development by written and oral evidence. The Republic of Indonesia determined, however, that it wished to eschew legal evidence, writing in the words of its counsel as early as 16 June 1999 (see Paragraph [24] of the Interim Award): ‘At the outset we are of the view that there is no necessity for expert witnesses on Indonesian law and hereby request that the Tribunal so rule. Both parties are represented by Indonesian counsel and one of the arbitrators is an eminent Indonesian lawyer. Thus the submissions by the parties themselves should suffice on matters of Indonesian law. We did not see the necessity for such experts in the PLN arbitration and, in retrospect, their inclusion only handicapped counsel's ability to present legal issues, added considerably to the costs and duration of the reference, and confused many issues. We therefore move that no expert witnesses, nor witness statements, on Indonesian law be permitted in these references, any matters of law to be presented by Indonesian counsel themselves, who are all fully qualified to in [sic] such matters. We make this motion early in the procedure, before claimants have committed unnecessary funds to any such expert, in an effort to reduce costs and expedite the reference.' (Emphasis added.)

[110] “It is a source of regret to the Arbitral Tribunal that the Republic of Indonesia adopted this position in a case involving such large stakes. [111] “It is an even greater source of regret to the Arbitral Tribunal that the Republic of Indonesia has compounded this failure to assist the Arbitral Tribunal's analysis by defaulting. [112] “This has created a difficult situation not only for the arbitrators, who have had to test the claimant's case with a critical eye and yet without the benefit of the adversarial process; but also for the claimant, which should not be put to the task of overcoming hypothetical arguments which have never been raised. [113] “This being said, those defences which have been raised by the Republic of Indonesia have been given careful consideration. [114] “As seen above, the Arbitral Tribunal does not consider that the MoF Letter was a guarantee of the type contemplated by Art. 1820 of the Indonesian Civil Code, but that it was an independent undertaking of the kind envisaged by Art. 1316. Having failed to procure (or ‘cause’, to use the word of the MoF Letter) PLN's performance, the Republic of Indonesia is in breach, and bound to make monetary reparation. [115] “There is no doubt that in the legal systems which have received the Napoleonic Code, Art. 1120 (or Art. 1316 as it became in Indonesia) has most often been applied to undertakings to procure the ratification of documents – as where a signatory undertakes

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that an absent third party will sign in the future. In such cases, the promise goes no further than to obtain the ratification; once the third party signs, the promise is fulfilled and the promisor has no liability for the third party's subsequent performance. In practice, performance guarantees tend to take the form of secondary or ancillary undertakings such as the mechanism of cautionnement or borgtocht adopted in Art. 1820 of the Indonesian Civil Code. But that obviously does not exclude direct promises to procure performance under Art. 1316, and this is the type of promise made in the MoF Letter.” a. Res Judicata [116] With respect to the effect of the PLN Award, the Republic of Indonesia had objected that there could be no arbitrable dispute under the arbitration clause contained in the MoF letters until the arbitral process had been completed and binding awards rendered against the defendants. During a procedural meeting in Jakarta on 6 October 1998, counsel to the Republic of Indonesia had stated, “we would accept that a final and binding award would define what is meant by the obligations of the PLN in the MoF letters”. After the PLN award was rendered, the Republic of Indonesia retracted this position. The arbitral tribunal held that the position taken by the Republic of Indonesia at the time of the procedural meeting (6 October 1998) was correct. b. Consideration [117] To support the opinion that the MoF was issued “without any intention of providing any guarantee of performance undertaking”, the Republic of Indonesia contended that the MoF Letter was written gratuitously and had received no consideration for it. [118] The Arbitral Tribunal observed that Anglo-American theories on consideration were not directly applicable to Indonesian law. Furthermore, the MoF Letter was written to facilitate international financing for a national project that would benefit the Republic of Indonesia. To assert that such a letter was gratuitous and that the notion of consideration would be applicable runs counter to the intent and the purpose of the MoF Letter. c. Assignment [119] The Arbitral Tribunal considered the Republic of Indonesia's objection that as a consequence of assignments entered into by claimants and their lender, claimants were no longer parties in interest. After determining that New York law (as the law chosen by the parties to the assignment was applicable) the Arbitral Tribunal found that the assignment and security agreements with the lenders did not operate to substitute the lenders for the claimant. d. Breach [120] Finally, the Arbitral Tribunal concluded that the Republic of Indonesia “has failed to live up to its undertaking to cause PLN to respect its obligation under the ESC” as unequivocally required by the MoF Letter. The record showed that the Republic of Indonesia had obstructed the performance of the ECS by regulatory measures and the

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satisfaction of the PLN award “by failing to use its statutory power over PLN and Pertamina to cause them to desist from court actions seeking to set aside the PLN Award and to paralyse this arbitration”. [121] “The Republic of Indonesia is accordingly ordered to pay immediately to the claimant the amount of US$ 391,711,652.” (....) IV. Costs (....)[122] The Arbitral Tribunal, following the presumption of Art. 40(1) of the UNCITRAL Rules, ruled that the costs of the arbitration were to be borne by the Republic of Indonesia as the unsuccessful party. [123] “Under Art. 40(2) of the UNCITRAL Rules, the general principle referred to above does not apply to ‘the costs of legal representation and assistance’. With respect to such costs, there is no presumption that the unsuccessful party shall pay its opponent's costs; the Arbitral Tribunal is simply given discretion to ‘apportion’ these costs between the parties ‘if it determines that apportionment is reasonable’. [124] “The claimant seeks recovery of the sum of US$ 1,938,488 on account of its costs of representation and assistance in this case. There can hardly be any question in the circumstances that the Republic of Indonesia, having failed entirely on the merits and having provoked extraordinary procedural complications, should contribute to its opponent's costs. The situation here is quite different from the one described in the PLN Award, where the Arbitral Tribunal decided not to order PLN to contribute to the claimant's legal costs and noted, in Paragraph [390], the following four relevant factors: ‘– that recovery of significant legal costs is foreign to the legal system of Indonesia, where the parties chose to hold the arbitration; – that both parties come from countries where litigants broadly bear their own costs; – that the claimant is awarded only a fractions of its total monetary claim, and, most of all, – that PLN's failure to fulfil its obligations under the ESC was not the fruit of self-interested calculations, but of its powerlessness in the face of macroeconomic and political developments’.

[125] “In the present case, only the first two of these factors are extant. As for the fourth and most important factor, the PLN Award reveals that PLN defended itself vigorously and successfully without engaging in the kind of obstructionism which has, regrettably, marred these proceedings. Whether or not the Republic of Indonesia can be called ‘powerless in the face of macro-economic development’, therefore, it is certainly responsible for policy choices in dealing with this investor which have directly exacerbated the latter's costs in seeking redress for the breach. [126] “The claimant is therefore entitled to recovery of a substantial portion of its reasonable costs. [127] “The Arbitral Tribunal is in a position to confirm, in view of the effort produced by the claimant, that there is no reason to doubt that the claimed expenditures were

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incurred, and sees no need to require breakdowns of individual time charges, or detailed descriptions of services. The work done is plainly in evidence. [128] “It remains to evaluate whether the costs incurred by the claimant are reasonable. On the one hand, it might be said that the debate on the merits of the exceedingly succinct MoF Letter could have been dealt with in a correspondingly concise fashion which did not require the kind of forensic investments made by the claimant. There is some merit in the Republic of Indonesia's challenge to the cost claim, in so far as its letter of 8 October 1999 criticises the claimant's submission as ‘repetitive’. The charge of ‘unnecessary’ is also to some extent justified; the substantive claims were clearly established and did not strictly require extensive developments. On the other hand, the stakes were high; the issues merited thorough briefing. Many of the most expensive elements of the claimant's costs relate to issues which would never have been addressed if it had not been for the Republic of Indonesia's unsuccessful attempts to argue that the MoF Letter created no legal obligations, and to seek to paralyse the arbitration by court initiatives in Indonesia and in The Netherlands. [129] “Weighing all the circumstances, the Arbitral Tribunal decides, not without the sentiment of considerable indulgence for the Republic of Indonesia, to limit the claimant's recovery under this head to the sum of US$ 1,000,000.” V. Award [130] “For the reasons stated above, and rejecting all contentions to the contrary, the Arbitral Tribunal: (i)

rules that the Republic of Indonesia is in breach of the MoF Letter;

(ii)

rules that the amount of damages caused by this breach and therefore to be paid by the Republic of Indonesia is identical to the total amount of the unpaid PLN Award;

(iii)

orders in consequence that the Republic of Indonesia immediately pay to the claimant the sum of US$ 393,446,652 (three hundred ninety three million four hundred forty-six thousand six hundred fifty-two) United States dollars as damages and cost...;

(iv)

declares that it is an ongoing condition of this Final Award that the Republic of Indonesia shall assume, whether by reimbursement or by direct payment in its stead, any Indonesian tax liability which may be assessed against the claimant as a result of this Award.”

VI. Deposit of Award [131] “The Arbitral Tribunal communicates an original version of this Final Award, certified as such below by a manuscript notation of its President, to Messrs Latham & Watkins and Karim Sani. [132] “As indicated under point 3 of its Procedural Order of 7 September 1999, the Arbitral Tribunal has rejected the claimant's request to change the legal seat of the arbitration, which accordingly remains Jakarta. [133] “Paragraph 5(h) of the Terms of Appointment contemplates that the Arbitral Tribunal ‘shall deposit the award with the Central District Court of Jakarta’. The Parties

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have not agreed how this deposit should be effected. The claimant has indicated that it wishes to preserve the option of depositing the award by means of an authorisation to that effect from the Arbitral Tribunal; the Republic of Indonesia in default has failed to contribute to the Arbitral Tribunal's understanding of how this step might be achieved. [134] “Authorisation to deposit the Final Award is therefore given by letters from the President dated this day to counsel for both Parties.” 1 Professor Priyatna did not avail himself of the opportunity to sign this Interim Award under circumstances described in paragraphs [97]-[101]. 2 Final Award of 4 May 1999, Himpurna California Energy Ltd. v. PT. (Persero) Perusahaan Listruik Negara (PLN)[reproduced in this volume, pp. 13-108]. 3 Art. 16(2) of the UNCITRAL Arbitration Rules reads: “The arbitral tribunal may determine the locale of the arbitration within the country agreed upon by the parties. It may hear witnesses and hold meetings for consultation among its members at any place it deems appropriate, having regard to the circumstances of the arbitration.”

4 Art. 32(4) of the UNCITRAL Arbitration Rules reads: “An award shall be signed by the arbitrators and it shall contain the date on which and the place where the award was made. Where there are three arbitrators and one of them fails to sign, the award shall state the reason for the absence of the signature.”

5 Art. 31 of the UNCITRAL Arbitration Rules reads: 1. “When there are three arbitrators, any award or other decision of the arbitral tribunal shall be made by the majority of the arbitrators. 2. In the case of questions of procedure, when there is no majority or when the arbitral tribunal so authorizes, the presiding arbitrator may decide on his own, subject to revision, if any, by the arbitral tribunal.”

6 Reported in Yearbook XVII (1992) pp. 106-152. 7 “While no citation is given, the reference is obviously to the English House of Lords decision in Salomon v. Salomon & Co., Ltd.[1897] AC 22.”

8 Reported in Yearbook X (1985) pp. 37-38. 9 Reported in Yearbook XXIVa (1999) pp. 512-523. 10 Reported in Yearbook XIV (1989) pp. 398-404. 11 “In one of the first famous commentaries on the Napoleonic Code, Marcade, Explications

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Théoriques et Pratiques du Code Napoléon, published in 1855, the author wrote in Volume IV at page 361: ‘The vague and somewhat barbaric expression se faire fort for a third party, must first of all be well understood. Everyone will agree that se faire fort means to promise, under one's own responsibility, that the third party will do the thing in question; it means to undertake that this third party, who alone is in a position to attain the promised objective, will perform the obligation himself, or, at the least, personally bind himself to do so.’ Since the ESC was already signed on the date of the MoF Letter, the question was not one of causing PLN to sign the ESC but of causing PLN to perform it.”

12 “The translation provided with Mr. Hornick's Opinion is worded as follows: ‘Private sector electric power supply enterprises shall only be realized through financing without government guarantees for the capital invested or the obligation to repay the loans.'”

13 “Independently of the fact ... that the L&W Opinion did not consider the applicability of Art. 1316 of the Indonesian Civil Code.”

[] BOOK: Yearbook Commercial Arbitration, A.J. van den Berg (ed.), Vol. XXV (2000), pp. 11 - 432

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