Client Update: Mining Industry January 2013

AUSTRALIAN COURT HOLDS CONTRACT NOT FRUSTRATED BY INDONESIAN MINING LAW Overview On 6 December 2013, the Supreme Court of Queensland (Supreme Court) published its decision in PT Arutmin Indonesia (Arutmin) v PT Thiess Contractors Indonesia (Thiess) (Decision).1 Arutmin operates coal mines in South Kalimantan under a Coal Contract of Work (CCOW). Since 2000, Arutmin has engaged Thiess as a mining services contractor to provide services until the expiry of the CCOW or the end of the economic life of the mines. In accordance with their “Amended and Restated Operating Agreement Mining Services” agreement (AROAMS), Thiess was responsible for mining, treating, handling and transporting coal. Article 124 of Law No.4 of 2009 (Mining Law) provides that the holder of a mining business licence (Izin Usaha Pertambangan, IUP) or a special mining business licence (Izin Usaha Pertambangan Khusus, IUPK) must employ a local and/or national mining services company. On 30 September 2009, Ministry of Energy and Mineral Resources (MEMR) Reg 28 of 20092 was promulgated. On 9 October 2012, it was amended by Reg 24 of 2012.3 Article 5 of Reg 28 of 2009 (as amended) provides that an IUP or IUPK holder must give preference to local or national mining services company. Thiess is neither. Thiess held a mining services business permit (IUJP) and a certificate of registration (SKT). On 17 March 2011 its IUJP was extended for 3 years, but it did not permit Thiess to undertake coal getting and processing activities as contemplated by the AROAMS. As a result of Reg 28 of 2009 and Thiess’ IUJP, and because the law of the AROAMS was the law of Queensland, Arutmin sought a declaration from the Supreme Court that the AROAMS was frustrated by supervening illegality and impossibility of performance. The Supreme Court held that the relevant contracts were not frustrated as they had sufficiently provided for what was to happen in the event of such circumstances. Therefore, the Supreme Court declined to grant the requested declaration. While the Decision reflects the application of orthodox principles of Australian common law of contract, it offers interesting findings in relation to Indonesian mining law. Conclusions •

A contract which applies the law of one jurisdiction (eg, Queensland) may require the courts of that jurisdiction (eg, the Supreme Court) to consider the law of another jurisdiction (eg, Indonesian mining law).

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At least in this Decision (based on the parties’ expert evidence), the Supreme Court determined that Article 5 of Reg 28 of 2009 applied to pre-existing contracts and that

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PT Arutmin Indonesia v PT Thiess Contractors Indonesia [2013] QSC 332 (Jackson J). MEMR Regulation No.28 of 2009 on the Administration of Mineral and Coal Mining Services Business. MEMR Regulation No.24 of 2012 on the Amendment to MEMR Regulation No.28 of 2009 on the Administration of Mineral and Coal Mining Services Business. Wisma GKBI, Level 9, Jl. Jenderal Sudirman No.28, Jakarta 10210, Indonesia Phone  (+6221)  574 0088 ●  Fax (+6221) 574 0068 ●  E‐mail: [email protected] ●  www.soemath.com 

the DGMC guidance constituted a binding State Administrative Decision under Indonesian law. •

In accordance with Australian common law of private international law, an Australian court may decline to determine the validity of the exercise of power by a foreign jurisdiction (eg, Indonesian’s DGMC guidance), at least where it is open to the party alleging invalidity to seek a determination of that issue in the appropriate court of that foreign jurisdiction.

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Finally, under Australian common law, a claim that a contract is frustrated by supervening illegality and impossibility of performance is likely to be unsuccessful if the contract sufficiently provides for what is to happen in precisely these circumstances. In accordance with orthodox principles of freedom of contract, an Australian court is likely to simply give effect to the terms of the relevant contract.

Context to Decision Guidance From May 2010, Arutmin and Thiess entered into discussions regarding Reg 28 of 2009. Article 36(2) of Reg 28 of 2009 provides that the holder of a CCOW that uses a mining services company under the previous laws and regulations must adjust to comply with Reg 28 of 2009 within 3 years of it coming into effect. With this transition period ending on 30 September 2012, Arutmin and Thiess sought written assurance from the Directorate General of Minerals and Coal (DGMC) that Thiess would be permitted to lawfully continue to provide mining services under the AROAMS despite Reg 28 of 2009. On 11 September 2012, DGMC advised that: •

contracts between the holder of a CCOW and a mining services company before Reg 28 of 2009 are still valid but must be adjusted by 30 September 2012;

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Thiess may engage in activities based on the licences it held;

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when Arutmin gives new work to mining services companies, the process must be in accordance with Article 5 of Reg 28 of 2009; and

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if in future a mining services company which works at Arutmin does not do so in accordance with the licences it holds, sanctions will be imposed according to law and regulations.

On 5 November 2012, in response to a request from Arutmin for clarification, DGMC advised: •

according to Article 36 of Reg 28 of 2009, Arutmin may continue to utilize the mining services contract with Thiess, however its activities must accord with Article 10 (which, as amended, regulates the mining activity that an IUP or IUPK holder must perform and what might be delegated to a mining services contractor); and

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if Arutmin assigns new work to other mining services companies, the process must be in accordance with Article 5.

AROAMS amendment Arutmin and Thiess agreed to amend the AROAMS to remove coal getting services and agreed to Thiess providing coal getting equipment (operated and serviced) under a separate “Wet Rental Agreement”. The negotiations were otherwise unsuccessful.

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Litigation On 2 April 2013, Arutmin commenced proceedings in the Supreme Court. Initially, Arutmin sought a declaration that a Termination Event had arisen under the AROAMS, although this claim was abandoned during the hearing. Instead, Arutmin sought a declaration that the AROAMS was frustrated by supervening illegality and impossibility of performance. Arutmin claimed: •

since 1 October 2013, Thiess performing any of the services under the AROAMS contravenes Article 5 of Reg 28 of 2009;

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since 1 October 2013, Thiess performing any of the services under the AROAMS (except for stripping of overburden or equipment use through a rental mechanism) contravenes Article 10 of Reg 28 of 2009; and

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since 17 March 2011, Thiess performing processing activities under the AROSM contravenes Thiess’ IUJP.

A counterclaim by Thiess for a failure by Arutmin to remedy a failure to pay for services under the AROAMS will be the subject of a separate trial. Decision Arutmin’s case was that the AROAMS, the law of which is Australian common law, is invalid and unenforceable if the performance of the contract in Indonesia is unlawful under Indonesian law. The Supreme Court held that the principle of frustration by supervening illegality and impossibility of performance can be excluded by express provisions in the contract which either: •

specify the effect of the supervening event on the contractual obligations of the parties; or

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sufficiently provide for what is to happen in the event which has actually occurred.

The Supreme Court held that while Thiess may be unable to provide coal getting and processing activities (including because of Article 10 and the terms of Thiess’ IUJP), this did not have the effect that the AROAMS was frustrated because its express provisions sufficiently provided for what is to happen in the event of such circumstances, namely requiring and providing a mechanism for variation to the scope of services. Decision findings on Indonesian mining law Status of CCOWs The Supreme Court noted that the status of CCOWs under Indonesian Law was not entirely clear on the evidence, but the parties proceeded on the basis that it had at least contractual effect. Validity of Reg 28 of 2009 The Supreme Court noted that Reg 28 of 2009 appears to have been made pursuant to Article 127 of the Mining Law, which contemplates mining services as referred to in Article 124 being subject to ministerial regulation. The Supreme Court noted Thiess’ evidence that Reg 28 of 2009 is invalid, but as Thiess did not pursue this contention the Supreme Court did not consider it further.

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Application of Article 5 Thiess argued that it was not clear that Article 5 applied to work under a pre-existing contract when Reg 28 of 2009 came into effect, as opposed to new work thereafter. Thiess’ expert evidence was that new laws apply prospectively and do not affect existing legal rights and obligations. This view as also consistent with the DGMC guidance. Both Arutmin and Thiess accepted that Article 10 applied to Arutmin as the holder of a CCOW from when Reg 28 of 2009 came into effect. The Supreme Court noted that any difference in the prospective application of Articles 5 and 10 was not explored and hence reduced the force of Thiess argument that Article 5 did not affect existing legal rights and obligations. The Supreme Court also noted that the expert evidence suggested that Article 36 applied Article 5 to pre-existing contracts when Reg 28 of 2009 came into effect. The Supreme Court held that the evidence to be preferred was that under Indonesian law, Article 5 applies to pre-existing contracts. Guidance Thiess argued that the effect of the DGMC guidance was that Arutmin did not have to comply with Article 5 in relation to Thiess’ engagement under the AROAMS. The DGMC guidance constituted a binding State Administrative Decision under Indonesian law, at least until an Indonesian court determined it was invalid. The Supreme Court noted that there was not dispute that the DGMC guidance advised that Article 5 would not apply to the continued performance of the AROAMS by Thiess after 30 September 2012. The parties’ experts agreed that it constituted guidance under Article 27 of Reg 28 of 2009 (which contemplates Ministerial guidance for IUP or IUPK holders). The respective experts also agreed that if the DGMC guidance constituted a State Administrative Decision, it would be binding under Indonesian law until an appropriate Indonesian court determined it was invalid. Arutmin’s expert evidence was that the DGMC guidance was not final (because it was not express as a formal decision) nor made about the particular facts, hence not determining rights and not a State Administrative Decision. Thiess’ expert evidence was that the DGMC guidance was in the specific context of Arutmin’s questions and the response was directed to whether Article 5 applied. The Supreme Court found that Thiess’ expert evidence was to be preferred. Arutmin had the onus of identifying what about the DGMC guidance was not final nor directed to the particular facts, which it did not do. Therefore, the Supreme Court held that as a matter of fact the DGMC guidance constituted a State Administrative Decision. Arutmin further argued that the DGMC guidance was invalid under Indonesian law if inconsistent with a requirement of Reg 28 of 2009 or the Mining Law and that in fact it is inconsistent with Article 5. Thiess argued that under the Australian common law of private international law, the Supreme Court should decline to pronounce upon the validity of the DGMC guidance. The Supreme Court found that it was not clear from the relevant High Court of Australia authority4 whether the Supreme Court should decline to express an opinion. The evidence did not reveal why Arutmin was prevented from invoking the jurisdiction of an Indonesian court to determine if the DGMC guidance was invalid. Instead, Arutmin was asking the Supreme Court to decide the validity which Indonesian law reserved to the appropriate Indonesian court.

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Moti v The Queen (2011) 245 CLR 456.

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The Supreme Court considered that it would not rush to consider the validity of the DGMC when requested by a company incorporated and carrying on business in Indonesia which has chosen not to have that issue determined in its natural jurisdiction. On this basis, the Supreme Court declined to decide whether it would be found invalid by an Indonesian court. Therefore, Article 5 did not frustrate the AROAMS. Tender process Thiess argued that if Article 5 was otherwise applicable, Arutmin had not conducted the required tender process to identify any local and/or national mining services company, hence Arutmin could not rely on Article 5. Arutmin replied that it was inevitable that a local and/or national mining services company would be available so a tender was not required. The Supreme Court noted Arutmin’s expert evidence was that the DGMC considered that a tender was required to determine if any local and/or national mining services company was available. The Supreme Court also noted that Arutmin had contractual obligations under the AROAMS to Thiess, including obtaining and maintaining all authorizations required for the services to be lawfully provided. As such, if Article 5 applied and Arutmin could comply with it and still permit Thiess to provide the services under the AROAMS, Arutmin was contractually obliged to exhaust that possibility before claiming Article 5 frustrated the AROAMS. This is consistent with the Australian common law of contract that a contract is not frustrated if the state of facts amounting to the alleged frustration is brought about by the default of the party alleging the frustration. The Supreme Court held that Arutmin had not proved that Thiess could not lawfully perform the services under the AROAMS because of Article 5. Disclosure S&T acted for Thiess and Rahmat Soemadiprajda appeared as an expert witness on Indonesian law for Thiess in these proceedings.

Soemadipradja & Taher S&T is one of Indonesia’s leading law firms with a recognised market leading energy, resources and infrastructure practice. If you would like to discuss any aspect of this update, or your mining activities, please feel free to contact us.

Rahmat S.S. Soemadipradja Partner [email protected]

Mochamad Kasmali Partner [email protected]

Robert Reid Foreign Counsel [email protected]

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