{"id":7470,"date":"2015-05-21T23:20:26","date_gmt":"2015-05-22T04:20:26","guid":{"rendered":"https:\/\/iisd.org\/itn\/?p=7470"},"modified":"2024-08-09T18:26:06","modified_gmt":"2024-08-09T16:26:06","slug":"uncitral-tribunal-finds-denial-of-justice-by-indonesian-courts-but-denies-claimant-damages-due-to-unclean-hands","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2015\/05\/21\/uncitral-tribunal-finds-denial-of-justice-by-indonesian-courts-but-denies-claimant-damages-due-to-unclean-hands\/","title":{"rendered":"UNCITRAL tribunal finds denial of justice by Indonesian courts, but denies claimant damages due to unclean hands"},"content":{"rendered":"

Hesham T. M. Al Warraq v. Republic of Indonesia<\/em>, UNCITRAL<\/span><\/em><\/h2>\n

In an award dated December 15, 2014, an UNCITRAL tribunal found a denial of justice in Indonesia\u2019s criminal proceedings in absentia<\/em> for claimant Hesham T. M. Al Warraq, a Saudi citizen.<\/p>\n

Despite a finding that Indonesia breached its fair and equitable treatment (FET<\/span>) obligations under the investment agreement of the Organization of the Islamic Conference (OIC Agreement), the majority of the tribunal determined that Warraq\u2019s expropriation claim was inadmissible as he violated his obligation under the OIC Agreement to observe Indonesian laws. The tribunal dismissed Indonesia\u2019s counterclaims on the merits and ordered the parties to bear their own legal expenses and split arbitration costs.<\/p>\n

Background<\/strong><\/p>\n

In 2004, Warraq became the sole shareholder in First Gulf Asia Holdings Limited (\u201cFGAH\u201d), a Bahamian company, which had acquired shares in three Indonesian banks that eventually merged into Bank Century. At the time of the arbitration, FGAH held approximately US$14 million worth in shares in Bank Century.<\/p>\n

In October 2008, Bank Century was experiencing liquidity issues. Warraq, as its majority shareholder, and other shareholders signed a letter of commitment to Bank Indonesia, the central bank of Indonesia, to execute turnaround strategies. In November 2008, Bank Century requested short-term liquidity support from Bank Indonesia, which approved a bailout of Bank Century and placed it under \u201cspecial surveillance\u201d and, later, under the administration of Indonesia\u2019s Deposit Insurance Agency.<\/p>\n

Several investigations were commenced to address public claims surrounding the legality of the bailout. Bank Indonesia reported Warraq to the National Police for banking irregularities. These were followed by a criminal investigation of Warraq and others in connection with the collapse of Bank Century. A warrant was issued for Warraq\u2019s arrest in December 2008, and in March 2010 he was charged with banking fraud, mismanagement and illegal transfer of banking funds. He did not travel to Indonesia for the court proceeding, fearing he would not be afforded a fair trail. His trial was conducted in his absence, he was convicted of various crimes on December 16, 2010, and approximately US$230,000 of his assets were seized as a result. Warraq initiated arbitration on August 1, 2011.<\/p>\n

Warraq qualifies as an \u201cinvestor\u201d under the OIC Agreement<\/strong><\/p>\n

Warraq argued that he qualified as investor through his ownership of FGAH and his Saudi citizenship, while Indonesia countered that the OIC Agreement only afforded protection for \u201cdirect investments.\u201d Reasoning that the OIC Agreement did not explicitly require investors to hold capital directly, the tribunal agreed that Warraq qualified as an investor \u201c by his indirect shareholding in Bank Century through FGAH\u201d (para. 517).<\/p>\n

Tribunal rejects claim that 2008 bailout constituted an expropriation<\/strong><\/p>\n

The tribunal then examined the claim that Bank Indonesia\u2019s bailout of Bank Century and its resulting equity holding in Bank Century amounted to an expropriation of Warraq\u2019s investment. Siding with Indonesia, the tribunal held that Warraq had full knowledge of and consented to the terms of the bailout and still maintained control over his pre-bailout shares. It further held that Indonesia had the discretion and authority to initiate the bailout.<\/p>\n

Bank Indonesia\u2019s supervision of Bank Century was not negligent<\/strong><\/p>\n

Warraq argued that Bank Indonesia\u2019s negligent supervision of Bank Century amounted to expropriation. Supported by the statement of Indonesia\u2019s expert, who affirmed that the weaknesses in the supervision did not reach the threshold level of negligence, the tribunal dismissed this claim, finding that Bank Indonesia exercised \u201csufficient diligence in its supervisory functions\u201d (para. 538).<\/p>\n

Legitimate expectations and adequate protection and security claims dismissed<\/strong><\/p>\n

Warraq raised a legitimate expectations claim based on Bank Indonesia\u2019s supervision of Bank Century. The tribunal rejected the claim declaring that Bank Indonesia\u2019s primary duty of care was to the depositors and not to portfolio investors such as Warraq.<\/p>\n

It also dismissed the claim that Indonesia breached its duty to provide \u201cadequate protection and security\u201d during the bailout and its supervision of Bank Century. The tribunal stated that the host country had an obligation to provide \u201cno more than a reasonable measure of protection, which a well administered government could be expected to exercise in similar circumstances\u201d (para. 625), and that Indonesia met this standard.<\/p>\n

Finally, it dismissed Warraq\u2019s claim that Indonesia breached its adequate protection and security duty when it violated his due process rights during his trial, because it determined protection only extended to \u201cinvestments\u201d and not \u201cinvestors.\u201d<\/p>\n

Tribunal rejects argument that the OIC Agreement entitles investors to a fair trial<\/strong><\/p>\n

Article 10 of the OIC Agreement provides \u201cbasic rights\u201d for investors. Claimant argued that these encompassed \u201cfundamental rights\u201d and \u201chuman and civil and political rights codified in international law\u201d (para. 519), including the right to a fair trial under Article 14 of the International Convention on Civil and Political Rights (ICCPR).<\/p>\n

The tribunal determined that \u201cbasic rights\u201d referred only to \u201cbasic property rights\u201d related to the ownership, use, control, and enjoyment of the investment. However, it noted that it would revisit the argument when it examined the FET claim.<\/p>\n

FET provision imported through MFN<\/span> clause<\/strong><\/p>\n

Although the OIC Agreement contained no FET provision, Warraq sought to import the FET obligation contained in the United Kingdom\u2013Indonesia bilateral investment treaty (BIT<\/span>) by way of the most-favoured-nation (MFN) clause in the OIC Agreement. Indonesia countered that the MFN provision only applied within the context of the same economic activity and that the two treaties addressed different activities. The tribunal imported the FET clause, reasoning that the object and purpose of the OIC Agreement, as emphasized in the preamble, was investment promotion and protection, which conferred a broad range of rights on investors.\u00a0<\/em><\/p>\n

FET and the ICCPR<\/strong><\/p>\n

The tribunal emphasized that states had no obligation under international law to provide a \u201cperfect system of justice but a system of justice where serious errors are avoided or corrected\u201d (para. 620). It stressed that there was a high bar for a finding of a denial of justice and declared that a denial of justice constituted a violation of FET. According to the tribunal, the ICCPR was a relevant vehicle to measure the Indonesian courts\u2019 conformity to international standards on due process to determine whether a denial of justice had occurred. For this determination, without elaboration on the elements of the FET standard itself, the tribunal relied heavily on the ICCPR, which it interpreted as containing binding legal obligations for Indonesia as a state party. It also determined that, beyond explicit provisions, the ICCPR incorporated a binding general \u201cgood faith\u201d principle on states.<\/p>\n

The tribunal stated that \u201call persons charged with a criminal offence have a primary, unrestricted right to be present at the trial and to defend themselves\u201d under the ICCPR (para. 564), but qualified that a trial in<\/em> absentia <\/em>was not an automatic violation of the ICCPR. It found that Warraq was not properly notified of his criminal charges or conviction, was not examined as suspect, and was barred from appointing legal counsel at his trial and during the appeal process. Thus, Indonesia failed to comply with the basic procedural safeguards outlined in the ICCPR, constituting a denial of justice in breach of FET.<\/p>\n

The tribunal dismissed Warraq\u2019s claims that alleged solicitation of bribes by Indonesian officials constituted a FET breach citing both a lack of evidence and a lack of connection between the alleged conduct and deprivation of Warraq\u2019s investment.<\/p>\n

Claimant\u2019s breach of the OIC Agreement renders damages claim inadmissible<\/strong><\/p>\n

Article 9 of the OIC Agreement explicitly obligates investors to observe certain norms of conduct and abstain from illegal activity.<\/p>\n

The tribunal found that Warraq engaged in six types of banking fraud and breached his Article 9 obligation not to act in a manner \u201cprejudicial to the public interest\u201d by not having full awareness of his obligations under Indonesian law as the sole member of the Board of Commissioners of Bank Century.<\/p>\n

Invoking the doctrine of \u201cclean hands,\u201d a majority of the tribunal held that, because Warraq violated Indonesian law, he deprived himself of the protections under the OIC Agreement, and his damages claim was rendered inadmissible. One arbitrator disagreed that the \u201cclean hands\u201d doctrine rendered Warraq\u2019s claims inadmissible, as his illegality did not relate to the acquisition of his investment. He stated that Warraq should be entitled to damages for legal expenses he incurred connected to his wrongful conviction.\u00a0<\/em><\/p>\n

Tribunal affirmed jurisdiction over counterclaims, but dismissed all on the merits<\/strong><\/p>\n

Based on a specific authorization in the OIC Agreement, the tribunal affirmed jurisdiction over Indonesia\u2019s counterclaims regarding Warraq\u2019s alleged banking fraud. Although the counterclaims were closely related to both the investment and the claims involving the bailout, they failed at the merit stage because Indonesia failed to define Warraq\u2019s personal liability separate from all relevant individuals and entities not parties to the arbitration.<\/p>\n

Notes<\/em>: The tribunal was composed of Bernardo M. Cremades (President appointed by agreement of the co-arbitrators), Michael Hwang (claimant\u2019s appointee), and Fali S. Nariman\u00a0(respondent\u2019s appointee). The final award is available at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw4164.pdf<\/a>.<\/p>\n

Marquita Davis<\/strong> is a Geneva International Fellow from University of Michigan Law and an extern with IISD<\/span>\u2019s Investment for Sustainable Development Program.<\/p>\n