IISD | 13 March 2017
ICSID tribunal dismisses claims brought against Indonesia based on forged mining licences
by Inaê Siqueira de Oliveira
Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil
After rendering separate decisions on jurisdiction—one for the case brought by British company Churchill Mining PLC under the United Kingdom–Indonesia bilateral investment treaty (BIT), and another for Australian company Planet Mining Pty. Ltd.’s case under the Australia–Indonesia BIT—the arbitral tribunal consolidated the two arbitrations, as both were based on the same facts, and issued a single award.
The requests of both claimants had relied on the same set of documents, which the arbitral tribunal deemed to be forged. Thus, the tribunal considered all claims inadmissible, ordering the claimants to bear all arbitration costs and to reimburse 75 per cent of Indonesia’s legal expenses.
Factual background and claims
A group of seven Indonesian companies—the Ridlatama group¾introduced the mining project East Kutai Coal Project (EKCP) to the claimants, to explore a large coal deposit in the Regency of East Kutai, Indonesia. The claimants invested in EKCP by acquiring all shares of PT Indonesian Coal Development (PT ICD), a company registered in Indonesia.
Later, certain companies within the Ridlatama group obtained (fraudulently, as the tribunal later concluded) mining licences for large areas in the EKCP. These companies had Pledges of Shares Agreements and Cooperation Agreements with PT ICD, which would plan, set up and perform all mining operations in exchange for 75 per cent of the generated revenue.
Conflicts began as of 2010. The areas of certain licences granted to the Ridlatama group substantially overlapped with those of licences that had been given to other companies. At the recommendation of the Indonesian Ministry of Forestry, the Regent of East Kutai revoked all licences belonging to Ridlatama companies.
The Ridlatama group initiated proceedings against Indonesia before Indonesian courts, while the claimants resorted to the International Centre for Settlement of Investment Disputes (ICSID) in 2012, seeking full compensation for the expropriation of their investment.
Applicable law—and a “duty to adopt principles established in a series of consistent cases”
As the BITs were silent on the legal consequences of forgery, the tribunal deemed appropriate to apply, in addition to the BITs, Indonesian law and international law (para. 235). As to the relevance of previous decisions, the tribunal reasoned that, although it was not bound by previous decisions, it should pay “due consideration” to them because it had a “duty to adopt principles established in a series of consistent cases” in order to contribute “to the harmonious development of international investment law” (para. 253).
Fraudulent scheme to forge mining licences
Indonesia opposed the authenticity of 34 documents. In substance, the dispute centred on the signature in those documents. Government records showed that officials typically sign important documents (such as the ones related to mining licences) by hand, while all the signatures in the disputed documents had been mechanically reproduced.
In addition to the signature issue, several troubling oddities in ancillary elements also pointed to a fraudulent scheme put in place to fabricate documents. Other documents existed in more than one version, did not contain signatures or initials of officials, or were not registered in the government database. There was no paper trail regarding the licence application process, and ten days after the Regent of East Kutai had revoked the licences of the Ridlatama companies a supposed Re-Enactment Degree was issued to declare the licences valid again. The oddity did not escape the arbitral tribunal: “Why should a government revoke a licence one day and reinstate it ten days later?” (para. 441). All things considered, the arbitral tribunal “found that a fraudulent scheme permeated the Claimants’ investments in the EKCP” (para. 507).
As to whether the claimants had taken part in the fraudulent scheme, the arbitral tribunal noted that the record pointed “towards Ridlatama rather than the Claimants in relation to the forgery of the contentious documents” (para. 476).
Legal consequences of forgery
The arbitral tribunal resorted to international law and investment case law to establish the legal consequences of forgery. It conducted a large review of cases and concluded that, depending on the circumstances of each case, fraud could affect the tribunal’s jurisdiction (as in Phoenix v. Czech Republic, Inceysa v. El Salvador and Europe Cement v. Turkey), could affect the admissibility of the claim (as in Plama v. Bulgaria) or could be addressed in the merits (as in Cementownia v. Turkey, Malicorp v. Egypt and Minnotte v. Poland).
Relying on Venezuela Holdings v. Venezuela, Phoenix v. Czech Republic, Europe Cement v. Turkey and Hamester v. Ghana, the tribunal reasoned that fraudulent behaviour configures abuse of right (or, under certain circumstances, abuse of process), which is contrary to the principle of good faith, because an investor cannot benefit from treaty protection when her underlying conduct is deemed improper.
The arbitral tribunal went further, observing that particularly serious cases of fraudulent conduct, such as WDF v. Kenya and Metal-Tech v. Uzbekistan, have been held as contrary to international public policy. Following that train of thought, it reasoned that “claims arising from rights based on fraud or forgery which a claimant deliberately or unreasonably ignored are inadmissible as a matter of international public policy” (para. 508).
Having established the seriousness of a fraudulent scheme to forge mining licences, the arbitral tribunal turned to the question of whether a wrongdoing committed by a third party (the Ridlatama group) could affect the investors’ claim. To do so, it relied on the test proposed in Minnotte v. Poland to assess whether the claimants knew or should have known of the Ridlatama group’s wrongdoing.
Using the standard of willful blindness (also referred to as “deliberate ignorance”), the arbitral tribunal concluded that the claimants had incurred in remarkable absence of diligence. In the arbitral tribunal’s view, they were aware of the risks involved in investing in the coal mining industry in Indonesia, which had an “endemic problem” of corruption, and, even so, failed to engage in proper due diligence and oversight in their dealings with the Ridlatama group.
In sum, as the fraudulent scheme affected the entirety of the claimants’ investment, the tribunal deemed all their claims inadmissible.
The arbitral tribunal considered it appropriate to adopt the “costs follow the event” approach and order the claimants to bear all costs. As Indonesia had incurred in much greater legal fees and expenses (approx. US$12 million) than the claimants (US$4 million), the arbitral tribunal ordered the claimants to pay 75 per cent of Indonesia’s fees and expenses.
Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the co-arbitrators, Swiss national), Albert Jan van den Berg (claimant’s appointee, Dutch national), and Michael Hwang (respondent’s appointee, Singaporean national). The award of December 6, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7893.pdf. The Decisions on Jurisdiction in Churchill Mining Plc v. Indonesia and Planet Mining Pty Ltd v. Indonesia, both dated February 24, 2014, are respectively available at http://www.italaw.com/sites/default/files/case-documents/italaw3103.pdf and http://www.italaw.com/sites/default/files/case-documents/italaw3104.pdf.