FUTURE ROLE OF DISPUTE BOARD IN INDONESIA A PERSPECTIVE POINT OF - - PDF document

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FUTURE ROLE OF DISPUTE BOARD IN INDONESIA A PERSPECTIVE POINT OF VIEW

Chaidir Anwar Makarim THE BACKGROUND

Figure 1 shows practice of Dispute Board in countries around the world since 1982 with USA comes first. The famous phrase is: “... all dispute had first to be solved by the engineer before they could go to arbitration” Dispute Boards in Practice

Figure 1. DB Projects through 2014 (cumulative figures since 1982) (Source: DRBF)

Indonesia is known as a big country consisted of 17,504 islands with population of about 265 million. As shown on the graph (figure 2) in year 2032 predicted population growth will reach 300 million. The needs and concerns on housing, schools, and infrastructure to support their activities is a big matter as always happened in every developing country. As population increases, enormous projects will be built everywhere in any different island/cities to connect people’s economic and social activities. Therefore, infrastructure development and economic growth is considered as vital and urgent to keep the country integrated politically.

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Figure 2. Projection of Indonesian Population through years (Source: https://www.bps.go.id/)

The connection between one island to another is a problem. Most of the times, it is shorter to reach other countries such as Singapore, Malaysia, Australia, China or even Japan than to reach remote places from for example the capital city of Jakarta to Papua island - either by air, not to mention by boat/road. Therefore, development of government infrastructure construction projects with all its cost and risk could not be avoided. Toll roads, bridges, airport, mass rapid transit (MRT), train, etc, and tall building for government office, tours/tourist facilities had been and will be growing so fast as shown on this graph:

Figure 3. Infrastructure Expenditure allocation of Indonesia’s Government (Source: https://www.indonesia-investments.com/id/bisnis/risiko/infrastruktur/item381?)

Indonesia Population Growth Based on 2010 Projection

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Figure 4. Development of State Budget Allocation in Infrastructure development sector from 2007 to 2013 (Source: https://kajianstrategishms.wordpress.com/2014/09/25/tantangan-pembiayaan-pembangunan-infrastruktur- indonesia/)

The first construction law was introduced on May 7th 1999, i.e: Law No. 18 of 1999. At that time construction dispute will be solved through non-litigation such as mediation, conciliation, and arbitration, or through litigation (Criminal or Civil Law). It addresses potential construction failures due to to four related parties i.e.: The Owner, The Designer, The Contractor, and the management construction with the consequences cases could be brought to Civil/Criminal Law. Parties could also get involved for other reason under the potential “state lost” (kerugian negara). In this case, criminal law/misdemeanor could not be avoided, where responsible party will be brought to justice through litigation. In the new law no government agent should be involved since dispute will be solved amicably through mediation, conciliation, Dispute Board or arbitration. The new law was issued in 12 January 2017 i.e. Indonesia Construction Law No.2 of 2017 on Construction Services, addressed solving disputes through mediation, conciliation, arbitration, as well as through Dispute Adjudication Board. The latest is a completely new thing for Indonesia. When FIDIC published the “Red Book”, it includes the traditional English system for the pre-arbitral resolution of disputes by the engineer this practice is well adopted in common law countries – but unknown in civil law Countries (Indonesia is a Civil Law Country). Infrastructure Budget 2007 – 2013

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THE STORY BEHIND

The Indonesia new construction law is like a new switch of dissatisfaction to the old law, as explained below:

Table 1. The differences on approach to dispute resolution between The Old Law and The New Law (Source: After Directorate General of Bina Konstruksi – Ministry of General Works and Public Housing)

No. The Old Law (Indonesia Construction Law No. 18 of 1999 of Construction Service) The New Law (Indonesia Construction Law No. 2 of 2017 of Construction Service) 1 The decision should be agreed by both parties (final and binding) Disputes solved through “musyawarah” (Indonesia local wisdom of solving conflict) agreed by both parties 2 Litigation (Criminal or Civil Law) Disputes solved through:

• Musyawarah (Discussion Forum)
• Mediation
• Litigation
• Arbitration

3 Non-Litigation (possible help through 3rd party) Outside court:

• Mediation
• Conciliation
• Arbitration
• Dispute Board

Based on the old law, construction or building failures could be caused by faulty design, faulty function, faulty construction, and faulty management. Investigation related to construction failure (during construction process) or building failure (after construction completed) is the typical work done by government personel including police and expert. In government as well as in privately owned construction facilities, police has the right to investigate and bring the case to the court. Investigation is done by the help of certified forensic

• expert. Most of the time, fault was punished in front of court, for proven mismanagement, which

could bring people to jail as one of the punishment, or bring the case to arbitration.

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THE SONG AND THE SINGER

Different then in Australia where Dispute Board concept was first introduced in 1987, or USA since 1926, Indonesia construction law has just adopted principle of solving dispute through Dispute Board recently, in 2017. In the above mentioned two countries data of construction failures or dispute was a lot less than in Indonesia. In Australia, collaborative forms

• f contracting were promoted since 1990 where “No blame/no dispute culture were inter-reliant

in alliancing contract.1 The reason of using Dispute Board concept was based on the following reason:

• Industry dissatisfaction with the traditional method of solving the disputes
• More and more conflicts around the world weren’t satisfied in using DAB especially in USA
• The growing activities of dispute resolution board in facilitating training and promotion of

the use of Dispute Board It is worth quoted that in some countries like Australia, Dispute Board processes are more popular and had been chosen more than arbitration and litigation. In this country, efficiency is number one. They even have proven that Dispute Board was successful not only solving the dispute problem, but also avoided and hereby resolved the paralel dispute problems with most no record of crystallizing into formal dispute. The followings are tips on how the successful procedures of Dispute Board methods was implemented in Australia1:

• Dispute Board is formed at the time the project contract is signed. Dispute Board meeting

could start after that.

• Dispute Board workshop and education was optionally provided for the participant who is

unknown to Dispute Boards procedure. On the other hand, the training will learn to shorten the Dispute Board meeting to avoid dispute within the project itself.

• Contract and procedure of related Dispute Board’s role were discussed in shorten the agreed

solution whenever practical disputes arise.

• Dispute Board meetings and communication are confidential/“without prejudice” and has the

privileged from disclosure to any subsequent arbitration or litigation.

• Senior offsite executives, from both sides could attend regular Dispute Board meetings

beside site representatives. Of course, the beautiful and successful “Dispute Board song” practiced by our Australia colleagues could be adopted by the so called Indonesia Dispute Resolution Board Foundation (DRBF). However, since Dispute Board practice is something new for Indonesia, intensive training and procedures and communication should be well introduced by professional association – including practicing in a short course case study. A Value Engineering model of group case study could also be added. This is the task of the Indonesia DRB Foundation. As far as the

1 Donald Charret, (2012), Dispute Board in Australia-Build Law Issue No.15

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“singer” (the DAB Expert) concern, Indonesia has not yet adopted the different remuneration for engineer expert who has special knowledge related to international contract. As Christopher R.Seppälä, legal advisor FIDIC Contract Committee Stated: “... Ad-hoc DABs are less costly than permanent DABs but, arguably, are not true DABs as they cannot perform a dispute prevention function ...” This is also related to the above explanation as far as the “singer”, not

• nly the song that is important.

THE PROSPECT OF DISPUTE BOARD (DB) IN INDONESIA

Recently, we often hear the role of “Dispute Boards” be included in an Multi-hundred million dollar international projects contract which should be made carefully towards a specific project as the experts said. Dispute Boards has already exists in Indonesia Construction Law No. 2 of 2017 for almost 2 years but not yet followed by government ordinance, ministerial decree, and so forth. No wonder the author found in some foreign financed which in the contract include DAB (Dispute Adjudication Board) as a dispute resolution (not yet formed) – but both parties prefers to propose the case to the arbitration. Legal protection of forming the Dispute Boards will later be stipulated in the regulations derived from the Law of Construction Services. It should be noted that the government ordinance as well as the ministerial decree is not yet available until now, although Ministry of Public Works and Public Housing has explained to the owner and contractor to form a Dispute Boards in the formulation of cooperation contract agreements and primarily intended for providers and users of foreign construction services. With the existence of Dispute Boards, it is expected that the arising of Construction problems can be solved through mediation since Dispute Boards have been followed to guarding the cooperation project between the two parties from the beginning, Figure 5 shows timeline for DAB to start from the beginning to the end and begin to consider to possible arbitration if case still unsolved.

Figure 5. Timeline of FIDIC Contracts/Settlement of Disputes by DAB

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(Source: www.fidic.org)

When the parties agree to include Dispute Boards in the contract, jurist suggests to be careful in arranging words in contract draft (relevant wording of the International Federation of Consulting Engineers/FIDIC Red and Silver Books). Basically, the matters that should be noticed are: 1. It is clear that Dispute Boards process is mandatory before arbitration. In fact, the person in construction sector in Indonesia tend to use arbitration as an alternative means to resolving dispute outside the court (regulated in Indonesia Construction Law No.18 of 1999 and Government Law No. 29 of 2000). This is shown in this pie chart below (Figure 6). For the most part, disputes in BANI Arbitration Center Indonesia in 2014 were disputes in construction area (30.8%).

Figure 6. Registered Arbitration Case in BANI during a period of 2009-2013 (Source: BANI, 2014)

Considering technical aspects (regulation), habits of construction society (who solve construction disputes through arbitration and mediation), and human aspects (certificate, training, remuneration/salary), it can be concluded that Indonesia is still not ready to resolve construction disputes through Dispute Boards – as stated in Indonesia Construction Law No.2 of 2017. 2. Prepare a permanent Dispute Board team, unless there are other reasons for the Ad-Hoc Dispute Boards choice. With the existence of a permanent Dispute Boards, it can be ascertained that the possibility of the dispute process shifting to another place will be reduced because the Dispute Board is still ready to function when the potential disputes arise. As far as cost of DABs concern, the following is a quote from Christopher S, Sepällä presentation (2015):

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• For multi-hundred million dolar project, a three-member DAB can cost much less

than 1% of project cost, whereas international arbitration may cost 10 to 15% or more of project cost.

• Ad-hoc DABs are less costly than permanent DABs but, arguably, are not true

DABs as they cannot perform a dispute prevention function. To ensure the execution process of the Dispute Board decision, it is recommended that if the FIDIC Red Book is used, the parties must agree to a statement where if one of the parties fails to fulfill the DAB's decision, it is entitled to be able to go to arbitration without referring to the previous dispute. Finally, the author is in the opinion that Indonesia needs time before applying Dispute Boards system as one of an alternative to resolve dispute in construction area. Intensive training/short courses and thorough understanding on the FIDIC Contract besides remuneration for the DAB Expert should be considered in a very detail manners.