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Two Conditions to Be Met in Setting Aside an Agreement Through Arbitration

It is common to find arbitration clauses in construction, real estate, transportation, or other commercial agreements which mandate the concerned parties to use arbitration as a method of dispute resolution. This brings consequences if any party wishes to set aside the agreement, it cannot be submitted to the court, but rather to the arbitration.

This is in line with the provision of Article 1266 of Kitab Undang-Undang Hukum Perdata (Indonesian Civil Code):

A void condition is deemed to have been included in reciprocal agreements, in case a party does not fulfill his obligation. In such case, the agreement is not void by law, but voidance must be requested to the Court.

It should be noted that “court” phrase in this provision cannot be rigidly interpreted that any request to set aside an agreement shall be submitted to the district court. Although Article 1226 of Indonesian Civil Code is mandatory (dwingend), it does not mean that what has been written in the Law shall be interpreted textually, but rather contextually.

Referring to the provision of Article 11 paragraph (2) of Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolutions (Arbitration Law), states that the district court has no jurisdiction to try disputes between parties bound by an arbitration agreement. Thus, the district court must refuse any dispute settlement which has been determined by arbitration. This is called the Principle of Judicial Non-Interference.

Requirements which have to be fulfilled to set aside an agreement through arbitration are as follow:

    1. Drafting an Arbitration Clause Properly

Good intentions cannot always be done If there is defect in its submission, as Law is not only containing material aspects, but also formal aspects.

According to Badan Arbitrase Nasional Indonesia (BANI), the arbitration clause in the main contract is the first one to be checked before the case registration. It means that the presence and accuracy in drafting an arbitration clause will determine whether a dispute can be settled under arbitration. Don’t worry, if there is a defect in the clause, you may agree on an arbitration agreement, after the dispute arises, as long as the opponent party agrees (compromise).

The BANI standard arbitration clause is as follows:

Any dispute arising out of this agreement, shall be referred and resolved by Badan Arbitrase Nasional Indonesia (BANI) under the BANI Rule of Procedure, which its arbitral award will be legally binding upon the parties, as the first and final award.

While the Model UNCITRAL (United Nations Commission of International Trade Law) Arbitration Clause is as follows:

Any dispute, controversy or claim arising out of or relating to this agreement, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.”

    1. Object of the Arbitration Agreement is within the commercial sector

Under Article 5 paragraph (1) of Arbitration Law, object of the arbitration agreement is disputes in the commercial sector. The following areas are considered to be within the commercial sector: commerce, banking, finance, capital investment, industry, and intellectual property rights. Meanwhile, Article 5 paragraph (2) of Arbitration Law stated that the disputes which may not be resolved by arbitration are disputes that cannot be settled amicably under Book III, Chapter 18th, Article 1851 to 1854 of Indonesian Civil Code.

Basically, arbitration is absolute. Thus, the dispute which has been covered in arbitration clause cannot be submitted to the district court. Although the arbitral award is independent, final and binding, arbitration is a quasi-judicial forum, which has powers resembling a court of law. Therefore, the registration and enforcement of arbitral award need to be done by district court as the law enforcement body.

It should be noted that every dispute settled by arbitral award cannot be brought to the court of law. However, if there is any element as stated in Article 70 of Arbitration Law, the concerned party may apply for setting aside the arbitral awards to the district court. (Read also: How To Apply For Annulment Of Arbitration Award)

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