UNCITRAL tribunal finds denial of justice by Indonesian courts, but denies claimant damages due to unclean hands
Hesham T. M. Al Warraq v. Republic of Indonesia, UNCITRAL
In an award dated December 15, 2014, an UNCITRAL tribunal found a denial of justice in Indonesia’s criminal proceedings in absentia for claimant Hesham T. M. Al Warraq, a Saudi citizen.
Despite a finding that Indonesia breached its fair and equitable treatment (FET) obligations under the investment agreement of the Organization of the Islamic Conference (OIC Agreement), the majority of the tribunal determined that Warraq’s expropriation claim was inadmissible as he violated his obligation under the OIC Agreement to observe Indonesian laws. The tribunal dismissed Indonesia’s counterclaims on the merits and ordered the parties to bear their own legal expenses and split arbitration costs.
Background
In 2004, Warraq became the sole shareholder in First Gulf Asia Holdings Limited (“FGAH”), a Bahamian company, which had acquired shares in three Indonesian banks that eventually merged into Bank Century. At the time of the arbitration, FGAH held approximately US$14 million worth in shares in Bank Century.
In October 2008, Bank Century was experiencing liquidity issues. Warraq, as its majority shareholder, and other shareholders signed a letter of commitment to Bank Indonesia, the central bank of Indonesia, to execute turnaround strategies. In November 2008, Bank Century requested short-term liquidity support from Bank Indonesia, which approved a bailout of Bank Century and placed it under “special surveillance” and, later, under the administration of Indonesia’s Deposit Insurance Agency.
Several investigations were commenced to address public claims surrounding the legality of the bailout. Bank Indonesia reported Warraq to the National Police for banking irregularities. These were followed by a criminal investigation of Warraq and others in connection with the collapse of Bank Century. A warrant was issued for Warraq’s arrest in December 2008, and in March 2010 he was charged with banking fraud, mismanagement and illegal transfer of banking funds. He did not travel to Indonesia for the court proceeding, fearing he would not be afforded a fair trail. His trial was conducted in his absence, he was convicted of various crimes on December 16, 2010, and approximately US$230,000 of his assets were seized as a result. Warraq initiated arbitration on August 1, 2011.
Warraq qualifies as an “investor” under the OIC Agreement
Warraq argued that he qualified as investor through his ownership of FGAH and his Saudi citizenship, while Indonesia countered that the OIC Agreement only afforded protection for “direct investments.” Reasoning that the OIC Agreement did not explicitly require investors to hold capital directly, the tribunal agreed that Warraq qualified as an investor “ by his indirect shareholding in Bank Century through FGAH” (para. 517).
Tribunal rejects claim that 2008 bailout constituted an expropriation
The tribunal then examined the claim that Bank Indonesia’s bailout of Bank Century and its resulting equity holding in Bank Century amounted to an expropriation of Warraq’s investment. Siding with Indonesia, the tribunal held that Warraq had full knowledge of and consented to the terms of the bailout and still maintained control over his pre-bailout shares. It further held that Indonesia had the discretion and authority to initiate the bailout.
Bank Indonesia’s supervision of Bank Century was not negligent
Warraq argued that Bank Indonesia’s negligent supervision of Bank Century amounted to expropriation. Supported by the statement of Indonesia’s expert, who affirmed that the weaknesses in the supervision did not reach the threshold level of negligence, the tribunal dismissed this claim, finding that Bank Indonesia exercised “sufficient diligence in its supervisory functions” (para. 538).
Legitimate expectations and adequate protection and security claims dismissed
Warraq raised a legitimate expectations claim based on Bank Indonesia’s supervision of Bank Century. The tribunal rejected the claim declaring that Bank Indonesia’s primary duty of care was to the depositors and not to portfolio investors such as Warraq.
It also dismissed the claim that Indonesia breached its duty to provide “adequate protection and security” during the bailout and its supervision of Bank Century. The tribunal stated that the host country had an obligation to provide “no more than a reasonable measure of protection, which a well administered government could be expected to exercise in similar circumstances” (para. 625), and that Indonesia met this standard.
Finally, it dismissed Warraq’s claim that Indonesia breached its adequate protection and security duty when it violated his due process rights during his trial, because it determined protection only extended to “investments” and not “investors.”
Tribunal rejects argument that the OIC Agreement entitles investors to a fair trial
Article 10 of the OIC Agreement provides “basic rights” for investors. Claimant argued that these encompassed “fundamental rights” and “human and civil and political rights codified in international law” (para. 519), including the right to a fair trial under Article 14 of the International Convention on Civil and Political Rights (ICCPR).
The tribunal determined that “basic rights” referred only to “basic property rights” related to the ownership, use, control, and enjoyment of the investment. However, it noted that it would revisit the argument when it examined the FET claim.
FET provision imported through MFN clause
Although the OIC Agreement contained no FET provision, Warraq sought to import the FET obligation contained in the United Kingdom–Indonesia bilateral investment treaty (BIT) by way of the most-favoured-nation (MFN) clause in the OIC Agreement. Indonesia countered that the MFN provision only applied within the context of the same economic activity and that the two treaties addressed different activities. The tribunal imported the FET clause, reasoning that the object and purpose of the OIC Agreement, as emphasized in the preamble, was investment promotion and protection, which conferred a broad range of rights on investors.
FET and the ICCPR
The tribunal emphasized that states had no obligation under international law to provide a “perfect system of justice but a system of justice where serious errors are avoided or corrected” (para. 620). It stressed that there was a high bar for a finding of a denial of justice and declared that a denial of justice constituted a violation of FET. According to the tribunal, the ICCPR was a relevant vehicle to measure the Indonesian courts’ conformity to international standards on due process to determine whether a denial of justice had occurred. For this determination, without elaboration on the elements of the FET standard itself, the tribunal relied heavily on the ICCPR, which it interpreted as containing binding legal obligations for Indonesia as a state party. It also determined that, beyond explicit provisions, the ICCPR incorporated a binding general “good faith” principle on states.
The tribunal stated that “all persons charged with a criminal offence have a primary, unrestricted right to be present at the trial and to defend themselves” under the ICCPR (para. 564), but qualified that a trial in absentia was not an automatic violation of the ICCPR. It found that Warraq was not properly notified of his criminal charges or conviction, was not examined as suspect, and was barred from appointing legal counsel at his trial and during the appeal process. Thus, Indonesia failed to comply with the basic procedural safeguards outlined in the ICCPR, constituting a denial of justice in breach of FET.
The tribunal dismissed Warraq’s claims that alleged solicitation of bribes by Indonesian officials constituted a FET breach citing both a lack of evidence and a lack of connection between the alleged conduct and deprivation of Warraq’s investment.
Claimant’s breach of the OIC Agreement renders damages claim inadmissible
Article 9 of the OIC Agreement explicitly obligates investors to observe certain norms of conduct and abstain from illegal activity.
The tribunal found that Warraq engaged in six types of banking fraud and breached his Article 9 obligation not to act in a manner “prejudicial to the public interest” by not having full awareness of his obligations under Indonesian law as the sole member of the Board of Commissioners of Bank Century.
Invoking the doctrine of “clean hands,” a majority of the tribunal held that, because Warraq violated Indonesian law, he deprived himself of the protections under the OIC Agreement, and his damages claim was rendered inadmissible. One arbitrator disagreed that the “clean hands” doctrine rendered Warraq’s claims inadmissible, as his illegality did not relate to the acquisition of his investment. He stated that Warraq should be entitled to damages for legal expenses he incurred connected to his wrongful conviction.
Tribunal affirmed jurisdiction over counterclaims, but dismissed all on the merits
Based on a specific authorization in the OIC Agreement, the tribunal affirmed jurisdiction over Indonesia’s counterclaims regarding Warraq’s alleged banking fraud. Although the counterclaims were closely related to both the investment and the claims involving the bailout, they failed at the merit stage because Indonesia failed to define Warraq’s personal liability separate from all relevant individuals and entities not parties to the arbitration.
Notes: The tribunal was composed of Bernardo M. Cremades (President appointed by agreement of the co-arbitrators), Michael Hwang (claimant’s appointee), and Fali S. Nariman (respondent’s appointee). The final award is available at http://www.italaw.com/sites/default/files/case-documents/italaw4164.pdf.
Marquita Davis is a Geneva International Fellow from University of Michigan Law and an extern with IISD’s Investment for Sustainable Development Program.