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International Arbitration Law Review

2009

Case Comment

Indonesia: Government of the Republic of Indonesia v PT Newmont Nusa

Tenggara: specific enforcement of contractual obligations
Karen Mills
Subject: Arbitration. Other related subjects: Company law. Mining
Keywords: Commercial arbitration; Divestiture; Foreign investment; Indonesia; Mineral rights; Share
sales
Legislation: Constitution of Indonesia 1945
Case: Indonesia v PT Newmont Nusa Tenggara Unreported March 31, 2009 (Arbitration)

*Int. A.L.R. N41 Facts

PT Newmont Nusa Tenggara (respondent) entered into a Contract of Work (CoW) with the
Government of the Republic of Indonesia (claimant) in December of 1986 pursuant to which the
respondent was appointed as contractor to explore and develop copper and gold mineral deposits in
a certain area of the western end of the island of Sumbawa, in the Eastern Islands of Indonesia,
known as West Nusa Tenggara. Pursuant to the Indonesian Constitution, which confirms that all
mineral and other wealth contained within the earth belongs to the people of Indonesia and may only
be developed by the State for the greatest benefit of the people, the CoW requires that the the project
company (respondent) ensure that its foreign shareholders divest a portion of their shares in the
project company gradually after the fifth year of production until foreign interests hold not more than
49 per cent of the project company. The foreign shareholders of the respondent are subsidiaries of
Newmont of the United States and Sumitomo of Japan. Because there was already an Indonesian
shareholder to the extent of 20 per cent, the foreign shareholders are required only to divest a further
31 per cent: 3 per cent in 2006 and 7 per cent in each of 2007-10.
The respondent's foreign shareholders failed to effect the required divestment for 2006, 2007 and
2008, despite clear instructions from the claimant as to which entities were to take up the shares and
despite agreement having been reached between the parties as to the price for the 2006 and 2007
divestiture. The respondent claimed the right to approve the intended purchaser of the shares,
rejecting the designations by the claimant, as well as their financiers; and further claimed that they
could only deliver shares already pledged to respondent's lenders, so no transfer could be made free
and clear of encumbrances. The claimant finally commenced arbitration, pursuant to the dispute
resolution provisions of the CoW, to seek termination of the CoW, as provided in the CoW, as a result
of the respondent's defaults.

Held
The Tribunal found the respondent to be in default of its divestment obligations for 2006, 2007 and
2008, which defaults entitle the claimant to terminate the contract unless the respondent cures its
defaults within 180 days of the date of the Award, which was issued on March 31, 2009. The Tribunal
held that shares must be transferred free and clear of any encumbrances whatsoever, and also that
the designation of the purchaser of the divestment shares and the financing arrangements are entirely
a matter for the Government (claimant) and of no concern to the respondent. The Tribunal further
ordered the respondent to reimburse the claimant for a major part of its costs in the arbitration.

Commentary
This is the first time that Indonesia has had to enforce its rights against an investor through arbitration
or litigation. It is hoped by the Government that other contractors will learn from this decision and
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respect their obligations, particularly those mandated by the Constitution for the benefit of the people.
The rationale behind this constitutional requirement was *Int. A.L.R. N42 the history of continual
control and removal of Indonesia's mineral wealth during colonial days with no opportunity for
Indonesia to gain the technical expertise to develop its own resources. Along with the divestment
comes the right to participate in the management of the operations, so that when the contracts expire,
in most cases 30 years after commencement of extraction operations, Indonesia will have the full
knowledge and experience to develop its own natural resources without needing to depend upon
foreign contractors.
Int. A.L.R. 2009, 12(3), N41-42
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