Indonesia is a signatory to the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States (ICSID). The new investment law ensures that disputes between the government and investors can now be arbitrated using international laws. It also retains the submission of disputes to ICSID arbitration. The Indonesian court system is seen as weak, lacking in transparency and corrupt by foreign investors. In an attempt to ease the backlog of cases, parties are required to undertake mediation before litigation, although courts do not necessarily fully enforce this rule. As a result, most law firms advise clients not to attempt litigation in the country, with arbitration in another jurisdiction being the preferred method of resolving disputes.
Although the Yudhoyono Administration had made judicial reform and anti-corruption top priorities, the court system does not provide effective recourse for resolving commercial disputes. The judicial system does not have the capacity to effectively decide on commercial cases. The judiciary is nominally independent under the law, and legal practitioners say irregular payments and other collusive practices often influence case preparation and the judicial ruling. GOI recognizes the need for judicial reform, but significant reform is still needed. In several instances, the local courts accepted jurisdiction over commercial disputes despite contractual arbitration clauses calling for adjudication in foreign venues. In addition, criminal laws and penalties may be applied in cases that appear to be covered under civil laws and procedures.
In August 2006 the Constitutional Court stripped the Judicial Commission of its oversight role, questioning its authority to monitor the Supreme Court and Constitutional Court and sent the matter to Parliament and the President to clarify. The Parliament is expected to make simultaneous amendments to three laws, Supreme Court Law, the Constitutional Court Law and the Judicial Commission Law, to restore the authority of the Judicial Commission. A 2006 Indonesian Supreme Court decision upheld a lower court ruling that over US$1 billion in bonds issued by Asia Pulp and Paper were illegal and did not have to be repaid, harming investor confidence. In October 2008, however, the Supreme Court overturned its previous decision through a judicial review (the final judgment on the case), ruling that the bonds were issued legally and Asia Pulp and Paper was responsible for the debts. This was a positive development as the bonds in question follow a common format for international debt and have been used in several other Indonesian investments. So far, only one U.S. investment company has brought a case to the ICSID, which ruled in its favor. Indonesia’s arbitration law recognizes the right of parties to apply any rules of arbitration procedure they may mutually agree upon, and provides default procedural rules that apply if no other rules have been designated. An Indonesian commercial arbitration board, BANI, is available if both parties agree. Companies have resorted to ad hoc arbitrations in Indonesia using the United Nations Commission on International Trade Laws (UNCITRAL) arbitration rules, as well as others. Other companies in Indonesia have used ICC arbitrations.