PRESS RELEASE: Jakarta court sets aside Karaha Bodas arbitration award against Pertamina

Following is a press release from Pertamina:

The Central Jakarta District Court on Tuesday set aside a $261 million award that Pertamina had been ordered to pay to former business partner Karaha Bodas Co. L.L.C. (KBC) in an arbitration in December of 2000.

"This is important confirmation that the arbitration award was fundamentally flawed," said Matthew D. Slater of the Washington, D.C., office of Cleary, Gottlieb, Steen & Hamilton, Pertamina's attorney. "Under the treaty that applies to international arbitration awards, the Jakarta court's decision should be respected in other countries in which KBC is seeking to enforce the award."

Pertamina, Indonesia's oil and gas enterprise; PT PLN (Persero), Indonesia's electric utility; and KBC, a Cayman Islands shell company controlled by Florida-based FPL Group and Caithness Energy L.L.C. of New York, signed agreements in November 1994 for a geothermal project in West Java, Indonesia. The project was suspended by the Indonesian Government in January 1998, under pressure from the International Monetary Fund, because of the country's crippling economic problems and as a condition of IMF economic assistance.

"Based on the parties' agreements, the Indonesian courts have a supervisory responsibility for the arbitration, which the Jakarta court took seriously and executed fairly, giving KBC ample opportunity to present its case," said Mr. Slater.

Background

At the time of its suspension, the KBC project was still in the exploration and development phase, and no plant had been built. The bulk of the $261 million award that the Jakarta court set aside today was for assumed future profits from generating capacity that had never been constructed, contracted, or paid for by KBC.

After the project was suspended by the Government, KBC immediately took the issue to arbitration in Switzerland. The contracts by their terms are governed by Indonesian law and are subject to Indonesian arbitration law.

The Swiss arbitral panel failed to follow the procedures for arbitration agreed to by KBC, Pertamina, and PLN in their contracts. The panel also exceeded its power by failing to follow Indonesian law for lost profits and by failing to recognize force majeure, since the suspension of the project at IMF insistence was a circumstance beyond Pertamina's or PLN's control. In addition, by penalizing Pertamina and PLN for adhering to Indonesian law, the award violated Indonesian public policy.

Although Pertamina has disputed any liability for the project's suspension, the company has offered to negotiate an amicable resolution, which KBC has categorically rejected. KBC has brought lawsuits in the United States, Canada, Hong Kong, and Singapore seeking to enforce the award, which Pertamina is resisting. The only other court that has considered the merits of whether to enforce the award is in the United States, and its decision is currently on appeal. Under relevant international law, the Jakarta court's decision should now be respected in other countries and enforcement of the award should be declined.

Source: Pertamina; Contact: Bob Conrad of Potomac Communications Group, +1-202-466-7391, ext. 1123, for Pertamina.