Use of Dispute Avoidance and Adjudication Boards

Disputes are inevitable in any relationship and may occur apart from the involved parties’ efforts to prevent them, because each party is inclined to defend its own interests and standing. The interest of an employer, for example, is to avoid budget deficits or cost overruns, while a contractor’s interests are to increase revenue as much as possible, minimizing loss and maximizing profits. In Law No. 18/1999 (Law 1999) of the Republic of Indonesia concerning construction services, there are some alternative dispute resolution methods that can be chosen—mediation, conciliation, and arbitration. In the more recent Law No. 2 (Law 2017), in certain cases mediation and conciliation can be replaced with the appointment of a dewan sengketa (DS). A DS is a modification of a dispute board (DB), which has already been used in some projects funded by multilateral development banks (MDB), that is, the World Bank, Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), and other aids agencies.

By using a model contract of the Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract: MDB Harmonised Edition (2010), dispute boards as an alternative method of dispute resolution prior to arbitration proceedings have already been in existence, but without any “law shelter” (Hardjomuljadi 2016) in Indonesia. Therefore, the use of DBs in Indonesia is still not as popular as expected, especially among government institutions and state owned companies, who hold the opinion that the existence of a DB only lengthens the time needed for the dispute resolution process (Hardjomuljadi 2016), because any decision made can still be challenged in arbitration, and because an arbitration tribunal can also be challenged in court, as stated in Law No. 30/1999 (Law 1999) concerning arbitration and alternative dispute resolution. In Indonesia, arbitration proceedings may take up to 184 days, and there is no time limit for mediation, conciliation, and expert determination; however, for dispute boards there is a time limit of 84 days for issuing a decision in accordance with Dispute Resolution Board Foundation (DRBF) practices and procedures (DRBF 2007) and procedural manuals from other institutions (CIARB 2014, ICC 2015, JICA 2012). Most arbitration tribunal proceedings have two main drawbacks: (1) the likelihood that the unsatisfied party will submit an appeal to the court, and (2) the proceeding not being able to be implemented because it is not supported by other regulatory requirements which are also in force (Hardjomuljadi 2006). Based on the foregoing facts, this study was made in order to find the best possible method for resolving disputes and, whenever possible, reducing and avoiding disputes, guiding disputing parties to avoid confusion in choosing a suitable dispute resolution method, one that is acceptable by the parties and in line with applicable laws.

A three step case, district court—high court—supreme court, from the Supreme Court decision No. 1400.K/Pdt/2012, in which the dispute resolution began in the district court is shown in Fig. 8. From the time the plaintiff filed the case in the district court until a decision was issued by the Supreme Court, about 40 months elapsed. In the district court, the plaintiff, KBP&CG, was the winner. GOI appealed to the high court as the plaintiff, but the appeal was rejected. Then, GOI submitted cassation to the Supreme Court to set aside the high court’s decision and, consequently, cause the decision of district court to be automatically rejected by the Supreme Court.

A three step case, arbitration-high court-supreme court. The case of PT Angkasa Pura I (AP I) v. PT Hutama Karya (HK) regarding the Runway and Supporting Facilities of the Lombok International Airport Project from Supreme Court decision No. 500 231.K/Pdt.Sus/2011 dated 12 January 2012. From the time the plaintiff filed the case with the district court until the issuance of the decision by the Supreme Court, about 20 months elapsed. This case is shown as a three-step case, from district court to high court to supreme court, in Fig. 9. HK filed the case in the district court, but AP I, as the losing party, then filed a lawsuit in the high court as a plaintiff, to set aside the decision; instead, the high court of south Jakarta strengthened the decision (326/X/Pdt.Sus/2009). AP I as the plaintiff then brought the case to the Supreme Court, applying for cassation; this was rejected as well.

The study showed that the process of litigation in Indonesia is three steps plus; in other words, it follows the hierarchy of courts in Indonesia from district court to high court to supreme court, and there are unlimited additional steps that can be taken for a case to be appealed for judicial review. The study concluded that the average time consumed from the first filing to the district court until a decision by the Supreme Court is more than 2 years, and the time needed for further judicial review cannot be predicted, all those criteria above are not being fulfilled such that the process is time consuming, legal certainty is indefinite, cost is unpredictable, and create unpleasant relationship.

The case involving the development of the Plaza Pajajaran Building, Sumedang, PT Padjadjaran Indah Prima (PIP) v. PT Pembangunan Perumahan (PP), is an example of a longer process because the dissatisfied party filed for judicial review, as follows: from arbitration to district court to supreme court for cassation to supreme court for judicial review. Arbitration tribunal decision No. 03/2007/BANI/Bandung, dated March 17, 2008, was in favor of the plaintiff, PIP. PP then filed a lawsuit to the district court as the plaintiff and asked the court to set aside the decision of the arbitration tribunal with the understanding that the arbitration tribunal’s decision was unfair. The district court, by decision No. 10/Pdt. G/2008/N.Smd., dated June 12, 2008, granted the plaintiff’s (PP’s) demand and set aside arbitration decision No. 03/2007/BANI/Bandung, dated March 17, 2008. PIP was not satisfied with this decision and filed another lawsuit with the Supreme Court as the plaintiff, applying for cassation. The Supreme Court granted the plaintiff’s (PIP’s) petition, setting aside district court decision No. 10/Pdt.G/2008/PN.Smd., dated June 12, 2008, and further strengthened arbitration decision No. 03/2007/BANI/Bandung, dated March 17, 2008. Again, PP was dissatisfied and request for judicial review of the lawsuit as a plaintiff, in which, finally, the Supreme Court rejected the plaintiff by setting aside the district court’s decision No. 10/Pdt.G/2008/PN.Smd., dated June 12, and strengthened the decision of arbitration tribunal, No. 560 03/2007/BANI/Bdg, dated March 17, 2008. The time elapsed from the arbitration tribunal until the second decision of the Supreme Court for the judicial review was about 40 months, as shown in Fig. 10.

A case concerning the supply and installation of a curtain wall in the Jakarta Stock Exchange Building (JSEB), PT Danareksa Jakarta International (DJI) v. PT Indalex, is shown in Fig. 11. PT Indalex, as a plaintiff, filed a case with the arbitration tribunal; the result was arbitration decision No. 5/XII-13/ARB/BANI/1999, dated December 3, 1999, and was in PT Indalex’s favor. DJI was not satisfied the decision and filed a case with the district court of Surabaya, which rejected the plaintiff’s request (in decision No. 783/Pdt.G/1999/PN.SBY) for cancellation of the arbitration tribunal’s decision and strengthened the arbitration tribunal’s decision. DJI appealed to the high court, which also rejected the request, automatically strengthening the arbitration tribunal’s decision. Once again, DJI filed for cassation with the Supreme Court; the result was decision No. 915.K/Pdt/2012, dated February 15, 2008, in which the court rejected the plaintiff. DJI further filed for judicial review, which also was rejected (in decision No. 53 PK/Pdt/2012, dated May 29, 2012) in favor of PT Indalex as the defendant after 149 months. This was an interesting case, because when DJI filed the case with the district court, they also named BANI, the arbitration tribunal, as the second defendant.

The case of PT Geo Dipa Energi (GDE) v. PT Bumi Gas Energi (BGE), which concerned the development of the Patuha Geothermal Power Plant, is a complex one, as shown in Fig. 12. The process went from arbitration to district court to Supreme Court for cassation to Supreme Court for judicial review to district court to Supreme Court for cassation to Supreme Court for judicial review 1 to Supreme Court for judicial review 2, taking a total of 83 months. The case was first submitted to arbitration in early 2008; decision No. 271/XI/ARB – BANI/2007, dated July 17, 2008, was in favor of GDE as the plaintiff. The losing party, BGE, filed a lawsuit with the district court of Jakarta Selatan; decision No. 267/Pdt.P/2008/PN.Jkt.Sel, dated January 15, 2009, was still in favor of GDE, strengthening arbitration tribunal’s decision. Then, BGE applied to the Supreme Court for cassation and was further rejected in decision No. 250 K/Pdt. Sus/2009, dated May 19, 2009. BGE appealed for judicial review, which was rejected in of judicial review decision No. by 143 PK/Pdt. Sus-Arbt/2013, dated May 25, 2010.

During the second round, BGE started by filing a lawsuit using another viewpoint with the district court, which rejected the plaintiff with regard to setting aside arbitration decision No. 271/XI/ARB- BANI/2007 in decision No. 194/Pdt.G/2012/PN.Jkt.Sel, dated January 30, 2012. BGE again applied to the Supreme Court for cassation, which was granted in Supreme Court decision No. 586.K/Pdt.Sus/2012, dated May 30, 2012, in favor of BGE as the plaintiff. GDE then applied for judicial review 1, resulting in decision No. 143 PK/Pdt.Sus-Arbt/2013, dated February 20, 2014, which rejected the plaintiff’s request. GDE appealed for a second judicial review; the result was decision No. 45 PK/Pdt.Sus-Arbt/2015, dated May 28, 2015, again rejecting the plaintiff and strengthening cassation decision No. 586.K/Pdt.Sus/2012, dated May 30, 2012, which automatically rejected the BANI decision. This legal process is still ongoing after more than 12 years.

The most famous case of this decade is a case of arbitration at the Singapore International Arbitration Court in 2009, PT Perusahaan Gas Negara (Persero) (PGN) v. PT CRW Joint Operation (CRW), which was covered in an article in the DRBF Forum, Volume 19, Issue 2 (June/July 2015) by Gerlando Butera (Butera 2015) and an article in Fenwick Elliot International Quarterly, Issue 01 (Winter 2011) by Frederic Gillion (Gillion 2011). It involved a contract agreement between a publicly owned Indonesian company (the employer) and an Indonesian joint operation company (the contractor) for gas pipeline construction. The agreement was based on FIDIC conditions of contract and was governed by Indonesian law. The parties referred the dispute to a single DAB, which valued the variations and ordered the employer to pay the contractor. The employer refused to do so and issued a notice of dissatisfaction with the DAB decision. The contractor filed a request for SIAC arbitration, seeking to oblige the employer to “promptly give effect” to the “binding” DAB decision, in accordance with Subclause 20.4 of the FIDIC conditions of contract.

A majority of the arbitration tribunal found that the DB decision was binding and was to be given immediate effect by the parties and that the contractor was entitled to immediate payment of the sum. The other coarbitrator issued a dissenting opinion on separate grounds (Butera 2015). The losing party filed a case with the high court and then with the Singapore court of appeal, including two judicial reviews. The case took about six years until a decision was issued by the Singapore court of appeal. However, the decision cannot be executed unless the procedure of center Jakarta court as stated in Law No.30, 1999 the Republic of Indonesia is followed.

In a case involving power plant construction development in Palembang, PT PLN (Persero) Pembangkit Sumatera Bagian Selatan (PLN-SBS) v. PT Muba Daya Pratama (MDP), arbitration tribunal decision No. 894/X/ARB-BANI/2016, dated June 15, 2017, found in favor of the plaintiff. MDP then filed a lawsuit with the district court as the plaintiff and asked the court to set aside the decision of the arbitration tribunal with the understanding that the arbitration tribunal’s decision was unfair. The district court, in decision No. 144/Pdt.Sus-Arbt/2017/PN.Plg, set aside arbitration tribunal decision No. 894/X/ARB-BANI/2016, dated June 15, 2016. PLN-SBS was not satisfied with the decision and filed a lawsuit as the plaintiff for cassation with the Supreme Court. In this case, the Supreme Court, in decision No. 441 B/Pdt.Sus-Arbt/2018, dated June 28, 2018, found for the plaintiff, PLN-SBS, by setting aside the decision of the district court, No. 144/ Pdt.Sus-Arbt/2017/PN.Plg. This automatically strengthened the decision of the arbitration tribunal, No. 894/X/ARB-BANI/2016. The time spent to close the case, from the arbitration tribunal until the supreme court decision, was about 30 months; once again, the losing party filed for judicial review for this case with unexpected time for the final stage. It is noteworthy that the arbitration tribunal’s decision was set aside by the district court but finally the Supreme Court set aside the district court’s decision, considering that the decision of arbitration tribunal was final and binding. The case is shown in Fig. 13.

A case involving the construction of Sima Office Tower, PT Grage Trimitra Usaha (GTU) v. Shimizu Corporation and PT Hutama Karya (Persero) (SC HK JO), is shown in Fig. 14. GTU, as the plaintiff, filed a case in arbitration tribunal with arbitration’s decision No. 854/V/Arb-BANI/2016 dated 24 May 2016. SC HK JO DJI was not satisfied the decision and filed a case with the district court as the plaintiff; district court decision No. 513/Pdt.G.ARB-BANI/2016, dated September 23, 2018, was in favor of the plaintiff, but with some demands rejected. SC HK JO was unsatisfied with the decision and filed for cassation with the Supreme Court as the plaintiff, which finally agreed by the decision of Supreme Court No104 B/Pdt.Sus-Arbt/2019, dated January 31, 2019. GTU filed a case for judicial review which is still in progress. This is noteworthy, because SC HK JO as the plaintiff submitted two appeals, first to the district court and then to the Supreme Court because they were unsatisfied with the first decision of the arbitration.

The foregoing case studies show that the process of arbitration in Indonesia should be final and binding, based on Law No. 30/1999; however, most unsatisfied plaintiffs file the case again in the courts.

DBs were already mentioned in FIDIC Conditions of Contract: MDB Harmonised Edition (FIDIC 2010). However, in Indonesia there is still some reluctance to use DBs for construction works; this matter is being studied in this paper. DBs issue a determination within 84 days according to FIDIC conditions of contract; within 90 days according to the International Chamber of Commerce (ICC) standard (ICC 2015); and within 84 days according to the Japan International Cooperation Agency (JICA 2012), the Institution of Civil Engineers (ICE) (ICE 2012), and the Chartered Institute of Arbitrators (CIARB 2014). The time required to resolve a dispute with a DB is shorter than the time required for arbitration, which needs 184 days; in addition, in some arbitration cases, the dissatisfied party will bring the case to litigation, which is more complicated and time consuming. The author conducted a study in 2017 by distributing questionnaires during the DRBF annual conference in May 2017 in Madrid, Spain to 65 respondents, consisting of both employers (30) and contractors (35) who have experience with being engaged in an international project utilizing a DB as an alternative dispute resolution method with the result of criteria are cost, time, legal certainty and maintaining relationship of choosing the dispute resolution which will be used for further study. Fig. 15 shows that there are differences in the opinions of employers and contractors, depending on their own interests. There are completely different expectations between employers and contractors with regard to the use of dispute resolution. Further study was made by the author in August 2017 by distributing the questionnaire to the audience of the DRBF regional conference in Bali, Indonesia, to 45 respondents, without grouping by the RII; the results are shown in Fig. 16 RII on reluctance to use the Dispute Board as ADR in Indonesia to answer the question of what are the causal factors of the reluctances to use the DB in the construction services contract in Indonesia. It was found that the dominant factors were a lack of understanding about the function of dispute boards; hesitation to have expenses before a dispute occurs; dispute boards being considered expensive; no “law shelter” and/or law stating the use of dispute board; and decision of dispute board is not final and mostly challenged by arbitration. The results could be classified into first group being technical; second group financial, and third group is law and legal support. Referring to the results, the action was taken for dissemination of dispute board to technical group with trainings, workshops and conferences and the legal group by the issuance of Law No. 2/2017 as a law shelter.

The author conducted an additional study in January 2020, with additional variables, on the occasion of the DRBF regional conference in Jakarta, Indonesia, with questionnaires distributed to two groups, employers and contractors; the results for employers (45 valid answers) and contractors (80 valid answers) are shown in Figs. 17 and 18, respectively. Employers’ opinions on dominant causal factors are (1) lack of trusted and respected persons suitable for appointment to DBs, (2) doubts with regard to the impartiality of the persons being appointed to the DBs, (3) problem which may have occurred with national auditors, (4) difficulty in finding DB candidates who have construction contract knowledge, and (5) DB being considered expensive. Contractors’ opinions on dominant causal factors are (1) DBs being considered expensive, (2) lack of trusted and respected persons to appoint to DB, (3) doubts with regard to the impartiality of the persons being appointed to the DBs, (4) hesitation to have expenses before a dispute occurs, and (5) lack of dissemination about DB.

It is very interesting to observe in the results of the study on dominant causal factors in 2020 that the first group was inclined to a psychological point of view (lack of trust and respect, doubts regarding impartiality), while the second group was inclined to a financial point of view (DBs being considered expensive, hesitation to have expenses before a dispute occurs), and the third group was inclined to a technical point of view (difficult to find DB candidates who have construction contract knowledge, and problems that may have occurred with the national auditor).

There was a change of opinion between the 2017 results and 2020 results in that the issuance of Law No. 2/2017 covered the legal matter, and the DRBF, with the author, provided trainings, workshops, and conferences to FIDIC contract users proven to cope with the technical matters, the new matters should be covered is mostly psychological, about the trust and respect which could only be done by improving the personal’s integrity by all the construction community members.

Considering all the results of these studies, the author found that the best approach is to utilize DS as a modified DB to cover the reluctance to use DBs which still be based on the international best practices, Indonesian law, and also Indonesian culture.

To support the conjecture, the author conducted the three services as pilot projects by utilizing a DS as a modified DB. The DS process follows international best practices: from the appointment of DB members, the site visit, the hearing, while during the recommendation stage the author is modifying by the early involvement of the national auditor, who is empowered by Presidential Decree 192/2014 to conduct an audit for each amendment of contract related to additional costs and extension of time. The recommendation process is running very well, because the series of actions become parallel actions that can significantly reduce the time required. Some administrative modifications have also been conducted by requiring a statement to be signed by three parties—the employer, the contractor, and the auditor—that the parties will not appeal against any professional decision made by the national auditor using the recommendation from the DS that has been discussed and agreed by both parties.

DS as an innovation (modified DB) is working well because there will be distribution of responsibilities as appropriate with Indonesian culture. The decision of the auditor is based on the recommendation from the DS, who acts as the construction contract adviser to the auditor, who mostly has an accounting background and not contractual and/or engineering construction experience. The auditor will feel at ease and pleased because the DS is trusted and respected not only by the parties involved but also by all the stakeholders.

The author has implemented DS in three pilot projects: the liquefied natural gas (LNG) Terminal, a steam power plant and a toll road project. The decisions for the LNG terminal and the steam power plant have been executed and completed satisfactorily, and the toll road project is still in process that could be concluded without any further problem.

The main considerations in choosing a method of dispute resolution are to fulfill the criteria of legal certainty, cost, time, and maintaining relationships. From this study it is evident that using litigation, which formerly was the first choice because of legal certainty not fulfil the above criteria anymore, the unsatisfied plaintiff will challenge the decision for the judicial review after district court, high court and supreme court as the final decision.

Arbitration is the choice because of fulfil the criteria of (1) legal certainty, (2) cost, (3) time, and (4) maintain relationship where the result is final and binding, and also its confidentiality, but recently it has become a last resort because most arbitration tribunal decisions can be filed again to the courts.

In the results of the latest study in January 2020, the reasons for the reluctance to use DBs were psychological, financial, and technical; this differs from the former study in 2017, in which the reasons were technical, financial, and legal. This is understandable, because some efforts which are the issuance of “law shelter” and dissemination and training to the construction community on the philosophy and procedure of DB. However, financial concerns follow the rule of demand and supply. To resolve this matter, international institutions such as FIDIC and DRBF as well as national associations and governments should provide training and assessment in order to supply qualified people to serve on DBs and should give beginners opportunities to handle smaller and less complicated projects. Psychological matters could be resolved by improving the integrity to become respectable and trustable people.

To encourage using DBs, which have become popular in recent years, the author suggests the creation of DS as an innovation the use of DBs, which is stipulated in the law and government regulations by involving the national auditor who used to conduct the post audit, to work from the early stage of project implementation, to exercise their mandate and responsibility based on the government regulation to give final recommendation for every claim on additional cost and extension of time to the projects from government of Indonesia and/or state-owned enterprises (SOEs). By using DS, the dispute resolution process is shortened and all criteria with regard to legal certainty, cost, time, and relationships are fulfilled.

Some or all data, models, or code generated or used during the study are available in a repository online in accordance with funder data retention policies. The data used were taken from the Indonesian Supreme Court website (https://putusan3.mahkamahagung.go.id).

This research was fully supported by National Board for Construction Services Development (LPJK) in cooperation with the Ministry of Public Works and Housing, and Mercu Buana University.