The US District Court for Texas entered two orders on July 22, reaffirming Karaha Bodas Company’s (KBC) right to obtain payment on an international arbitral award rendered in 2000. The court also ordered Pertamina, Indonesia’s state oil and gas company, to immediately halt a lawsuit it filed in Jakarta, Indonesia, which has been described as an effort to escape liability on the arbitral award.

The US Court, for the second time, warned that Pertamina’s failure to comply with its orders could serve as grounds for rulings of contempt and other sanctions against Pertamina. The court already found Pertamina in contempt in April for failing to withdraw a request for an Indonesian court injunction, in direct violation of the court’s order.

In its orders, the US Court refused Pertamina’s request that KBC stop pursuing collection of the arbitral award in the United States, and it ordered Pertamina to halt legal proceedings the company initiated in Jakarta to avoid its obligations to KBC. The Court stated that Indonesia “lacks a legitimate jurisdictional interest in the litigation initiated by Pertamina,” and that Pertamina’s suit “lacks legal foundation under applicable treaties,” including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Court concluded that Pertamina’s own past conduct made it clear that Switzerland, not Indonesia, is the only place to seek annulment.

The US Court noted that Pertamina turned to the Indonesian court “after agreeing to hold the arbitration in Switzerland, after representing to various courts that Swiss arbitral law applied, after pursuing an appeal of the Arbitral Award in Switzerland, after appearing in this Court and actively opposing KBC’s complaint for enforcement of the Award without [requesting the] opportunity to pursue an annulment proceeding in Jakarta, and after the final entry of judgment in (the matter).”

The US Court emphasised that it “has not issued any directive to the Indonesian Court.” Its orders are directed solely to Pertamina and its representatives.

The Court further directed Pertamina to “unequivocally and strenuously request” the halt of its legal proceedings in Jakarta pending the resolution of Pertamina’s appeal in the United States. Pertamina had planned to file its final written legal arguments (known as “conclusions”) in Jakarta on July 25, but the US Court orders prohibit Pertamina from making any such filing.

“This dispute was heard and decided under international law. KBC’s arbitral award against Pertamina has been confirmed in Courts in the United States, Hong Kong and Singapore,” said Christopher Dugan, partner, Jones, Day, Reavis & Pogue, and chief litigator for KBC. “By continuing its lawsuit in Jakarta, Pertamina is trying to avoid international law and the results of a multi-year legal process in which it fully participated. Pertamina’s belated efforts to use an Indonesian court to avoid its debts to KBC under international law are the types of action that lead foreign investors to question Indonesia’s long-term viability as a safe place to invest.”

Karaha Bodas Company, L.L.C. (KBC) was formed in 1994 to develop and operate two geothermal power plants on the Indonesian island of Java. KBC entered into a joint operating contract with Pertamina and an energy sales contract with Pertamina and PLN, Indonesia’s state-owned electric utility on November 28, 1994. The goal of the project was to provide sustainable source of clean energy.

Before its suspension by the Indonesian government, KBC invested more than US $100 million dollars to identify over 400MW of geothermal energy reserves and develop infrastructure and community resources in the area surrounding the project.

Caithness Energy, L.L.C. and FPL Energy, L.L.C., a subsidiary of FPL Group, Inc., are majority owners of KBC. Caithness and FPL Energy are leading developers and operators of renewable power generation technology. The companies operate geothermal, wind and solar power generation facilities throughout the US.

In January 1998, former Indonesian President Suharto issued a Presidential Decree that suspended the development of numerous geothermal projects then under development in Indonesia. Following the decrees, PLN and Pertamina breached their contractual obligations to KBC. In the parties’ contractual agreements, KBC, PLN and Pertamina agreed to settle all disputes before an international arbitral tribunal in Geneva, Switzerland, operating under United Nations rules.

All parties presented their cases to the Arbitral Tribunal, which awarded KBC US $261 million in December 2000 for proven and uncontested expenditures, lost profits, and the costs and expenses of arbitration. Pertamina failed in two attempts to appeal the ruling in Switzerland. The award was confirmed in the U.S. District Court for Texas in last December.