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Commercial Court Competency on a Contract Which Stipulated Arbitration Clause

Commercial Court Competency on a Contract Which Stipulated Arbitration Clause

While the existence of an arbitration clause prohibits any party from filing the dispute to the District Court, Indonesian laws stipulate that any dispute related to bankruptcy can and must be settled before the Commercial Court.

In Indonesia, arbitration is governed within the Law No. 30 of 1999 concerning Arbitration and Alternative Dispute Settlements (“Arbitration Law”). Such law defines arbitration as ‘a method for civil dispute settlement outside of general judiciary, which is based on arbitration agreement that is made in writing by both disputing parties’. Subsequently, it is stipulated that an ‘arbitration agreement’ is not limited to an agreement which stands on its own, but rather may be in the form of a clause within another agreement between both parties. Throughout this article, the terms ‘arbitration agreement’ and ‘arbitration clause’ shall be used interchangeably.

Pursuant to Article 11 of the Arbitration Law, the existence of an arbitration agreement entails the loss of the parties’ right to submit the settlement of a dispute to the District Court. In which case, the District Court must reject and not be involved in the said settlement. However, this provision must be waived in the case of bankruptcy.

Governed by the Law No. 37 of 2004 concerning Bankruptcy and Suspension of Payment (“Bankruptcy Law”), a debtor can be declared bankrupt by the Commercial Court if the elements under Article 2 ¶1 are fulfilled, namely:

  1. the debtor is indebted to more than one creditor; and
  2. the debtor has failed to settle one of the debts which is already due and payable.

Within the Bankruptcy Law, it is stipulated that declaration of bankruptcy may only be decided by the Commercial Courts and cannot be obtained elsewhere through other legal proceedings. This is because the Commercial Courts are regulated as Specialized Courts, which means that Commercial Courts have an exclusive authority to hear and decide certain commercial cases, including the cases of bankruptcy. However, it must be regarded that the Specialized Courts, such as the Commercial Courts, are established under the jurisdiction of General Courts, which are courts that have the authority over general criminal and civil matters for general people.

In Indonesia, the General Courts are divided into three tiers, namely:

  1. District Courts;
  2. High Courts; and
  3. Supreme Court.

While it may seem as if the Specialized Courts are equal to or at least within the jurisdiction of the District Courts, the Specialized Courts should be considered a separate court system altogether. In Indonesia, courts of law are divided into categories based on the competence it holds, i.e. Absolute Competence and Relative Competence. According to an Indonesian scholar, S.F. Marbun (2011), the Relative Competence is the court’s jurisdiction to adjudicate based on the region, whereas the Absolute Competence is the court’s jurisdiction to adjudicate based on the object or subject matter of the dispute.

Each District Court and High Court, which is a General Court, possesses the Relative Competence to adjudicate general criminal and civil matters for general people in its own region. For example, the District Court of South Jakarta has the Relative Competence to adjudicate a tort dispute in South Jakarta.

By contrast, the Specialized Courts possess the Absolute Competence to adjudicate cases based on the object or subject matter of the dispute. In relation to this article, the Commercial Courts possess the Absolute Competence to adjudicate cases whose object is, among other things, declaration of bankruptcy.

Reverting to Article 11 of the Arbitration Law, it is stated that the District Court must reject and not be involved in the settlement of disputes arising from contracting parties who have made an arbitration agreement. This provision means that such contracting parties are only prohibited from settling general civil disputes to the District Court. The reason for this limited interpretation is because as a General Court, the jurisdiction of a District Court is limited to adjudication of general matters for general people.

In the event the parties decide to bring specialized dispute, such as bankruptcy, to a District Court, the District Court would not have any jurisdiction to adjudicate such dispute because the District Court is not authorized to adjudicate a non-general matter, regardless of the existence of an arbitration clause. Prohibiting the parties to bring any specialized dispute to the District Court is considered redundant. Therefore, it can be concluded that Article 11 of the Arbitration Law can only extend to the settlement of general matters.

By the aforementioned inference of Article 11 of the Arbitration Law, it can be concluded that in the event of a dispute related to bankruptcy between parties who are bound by an arbitration agreement, such dispute may – and can only be – settled by the Commercial Courts. This is made enforceable by Article 303 of the Bankruptcy Law, which explicitly states that the Commercial Courts are authorized to adjudicate application for bankruptcy submitted by parties bound by an agreement which contains an arbitration clause, insofar as the debt in question fulfills all the elements mentioned in the Article 2 ¶1. Furthermore, within the Supreme Court Decision No. 45 K/Pdt.Sus/2013, the Supreme Court has found in that an existence of arbitration clause within the agreement between the disputing parties must not preclude one or more of the parties to apply for declaration of bankruptcy to the Commercial Court.

In conclusion, while the contracting parties may agree to have any dispute settled in arbitration by the existence of an arbitration agreement, such agreement only extends to disputes related to the general matters. In the event a dispute related to bankruptcy arises, Indonesian laws stipulate that such dispute can and should only be settled in the forum of Commercial Court, regardless of the existence of the arbitration agreement.

Author: Yohana Veronica Tanjung

Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas include Dispute Resolution.

For further queries and information, please contact us:

+62- 21 2271 8638  | +62 – 811 877 216 |  info@gaffarcolaw.com | www.gaffarcolaw.com

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