Singapore International Commercial Court rules on Australia-Indonesian JV dispute
BCBC Singapore Pte Ltd v PT Bayan Resources TBK  SGHC(I) 01
In its first decision, the SICC has determined a series of preliminary questions in a Singapore law-governed contract dispute, including questions of illegality under Indonesian law
On 12 May 2016, the Singapore International Commercial Court (SICC) gave judgment on a number of preliminary issues in BCBC Singapore Pte Ltd v PT Bayan Resources TBK. The dispute concerned a binderless coal briquetting JV project in East Kalimantan, between BCBC (a subsidiary of Australian-listed White Energy Ltd) and Bayan Resources, an Indonesian-listed coal miner.
Previously, an interlocutory dispute between the same parties had been litigated to the High Court of Australia. In 2012, BCBC applied to the Supreme Court of Western Australia for a freezing order of shares held by Bayan Resources in Kangaroo Resources Ltd, an Australian-incorporated company. Bayan contended that the WA Supreme Court had no power to make a freezing order in aid of a foreign proceeding, on the basis that such a power was not provided by, and was therefore inconsistent with, the Foreign Judgments Act 1991 (Cth). The High Court dismissed that objection, and upheld the freezing order: PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 325 ALR 168.
The dispute arose under Singapore-law governed joint venture agreements. Having been commenced in the Singapore High Court in 2012, the proceeding was transferred to the SICC shortly after that court was established in 2015. A bench comprising a Singapore judge and retired English and Hong Kong judges (Quentin Loh J; Vivian Ramsey IJ; Anselmo Reyes IJ) heard the preliminary questions in November 2015 and January 2016.
In the early 2000s, BCBC had developed technology for binderless briquetting of sub-bituminous coal, involving the processing of raw coal into briquettes with higher calorific value and lower moisture content. It was approached by Bayan Resources about the possibility of using the briquetting process to upgrade coal produced by Bayan Resources. In 2006, BCBC and Bayan Resources entered into a JV agreement for the construction of a coal briquette processing plant. The JV company, PT Kaltim Supacoal (KSC) was owned 51% by BCBC Singapore and 49% by Bayan.
The project was dogged by serial cost overruns and affected by changes in Indonesian law. By December 2011, the JV parties’ relationship had deteriorated to the point of mutual allegations of breach, service of a default notice by Bayan Resources, and the Singapore proceedings being commenced by BCBC.
The preliminary questions considered by the Court were essentially contractual, and fell into 3 broad topics:
(1) funding issues: Was Bayan obliged to continue to provide funding for construction and/or care and maintenance of the project?
(2) coal supply issues: Was Bayan obliged to procure a supply of coal to the project, and were the coal supply agreements tainted by illegality under Indonesian law?
(3) Bayan’s counterclaim: Was BCBC under implied obligations to exercise reasonable care and skill in the development of the project, or to ensure that KSC would produce 1 MT per annum within a reasonable period of time?
On issues 1 and 3, the court concluded that none of the obligations respectively asserted by BCBC and Bayan existed. On the coal supply issues, the court declined to rule on the extent of Bayan’s obligation to supply coal, because it had insufficient evidence to decide the point at the preliminary stage.
However, the court did address the question whether the coal supply agreements for the project were unenforceable for illegality under Indonesian law. This was the only cross-border legal question that the court was required to address. Here, a novel feature of the SICC’s procedures came into play: the SICC may allow a question of foreign law to be determined on the basis of (written and oral) submissions by the parties’ foreign lawyers, rather than by the customary common law method of witness statement and cross-examination. Indonesian lawyers for both parties thus made oral and written submissions to the court.
In 2008, KSC had entered into a coal supply agreement (the 2008 CSA) with Bara, a subsidiary of Bayan Resources, to supply coal at a base price of US$8.60 per tonne for the first 4 years. The coal supply agreements were governed by Indonesian law. An adviser to KSC subsequently raised concerns about transfer pricing issues. During 2009, the coal supply agreement between KSC and Bara was amended to require supply of coal at the then-market price of US$15 per tonne; but BCBC and Bayan Resources informally agreed that a year-end reconciliation would be made between them to preserve the economic benefit to Bayan of the previously-agreed price.
From 1 October 2010, Indonesian regulations came into force mandating a minimum benchmark price. The coal supply agreement was amended to ensure that the sale price would be the lesser of US$15 or the mandated benchmark price (the 2010 CSA). In 2011, a further side letter was entered into between BCBC, Bayan Resources, KSC and Bara, reiterating that the difference between the sale price under the amended 2010 CSA and the price previously agreed under the 2008 CSA would be credited to KSC as part of the year-end payments reconciliation between the parties.
The question was whether the 2010 CSA and side letter operated together to circumvent the Indonesian regulation setting the benchmark price. The court approached this question applying an orthodox analysis of foreign illegality under Singapore law, which follows the English position. The court concluded that the CSAs were wholly compliant with Indonesian law, and that the 2011 side letter was properly to be understood as a separate agreement, involving different parties. Operating together, the agreements did not deprive the Indonesian authorities of royalties assessed by reference to the benchmark price; and there was no bar under Indonesian law to the JV parties reaching a separate agreement to reallocate the economic burden of the increased price between themselves.
Having answered those preliminary questions, and with both JV parties having had a measure of success, the outstanding factual and legal questions will fall to be determined at trial before the SICC.