Subject: AFR: Bright Dawn, Dark Days In East Timor

Received from Joyo Indonesia News

Australian Financial Review

Monday, June 23, 2003

Bright Dawn, Dark Days In Timor

East Timor won huge goodwill as it launched into independence. But Asia- Pacific editor Rowan Callick has discovered, in investigating a deeply troubled Australian venture there, that the tasks of winning business confidence and creating the rule of law are, for now, proving too hard.

Rowan Callick

A family-owned Queensland construction firm, JJMcDonald & Sons, thought it was doing the right thing for East Timor and for itself when it spent $3 million on setting up a business there to help the country's reconstruction.

Today, three years into the company's first venture beyond Australia, it is anxiously awaiting a court verdict on June 25.

This could result in it losing everything it has built up in East Timor following a move by its former joint-venture partner, Timorese citizen Foo Hau Kiun, to seize the firm's assets.

The venture has been plagued by bizarre episodes, including the burglary of its offices in Dili and those of its barrister in Darwin - when documents about the court case were targeted - and the registration of a company of the same name by the husband of the presiding judge.

Responding to fast-mounting concern about the country's legal system, President Xanana Gusmao said recently: "I call upon the officers of justice to strip themselves of all kinds of xenophobia. The development of our country will depend, essentially, on a policy of openness to foreign investment and on the application of a justice system that is honest, impartial and professional." He was speaking at the swearing-in of the first president of the court of appeal. But the court still has no judges, so cannot hear appeals.

JJMcDonald & Sons (JMS) has had turnover this financial year of almost $60million. Revenue in East Timor - where the firm has ranged, depending on the projects in hand, between the biggest and third-biggest private sector employer in the country - has contributed between 10 and 20 per cent of the total. But legal costs will drive the East Timor operation into the red this year.

This has been JMS's first venture overseas. Chairman Chris Greig, who has had considerable experience in the Asia-Pacific region and beyond, says it will be the last in a developing country.

"The risks hadn't been properly considered when we became involved," he says. "It won't stop us going offshore, but our experience there will make us assess critically the risks, and the legal framework, before making a move."

When JMS went to look at opportunities in East Timor following the militias' violent rampage, senior officials from the United Nations Transitional Administration in East Timor said that in order to gain some of the business of reconstructing buildings and roads, it should find a local joint-venture partner.

The partner it chose was Foo. He was one of only a few local builders with his own quarry and graders, although some had been damaged by militants. They named the joint company East Timor Constructions.

The Australian partner was to fund the venture, provide the personnel and most of the equipment, and build premises. It contributed $3 million in plant and funding. Later, it was envisaged, the partners would share the profits or losses after tax in the normal way.

The partnership quickly broke down. Foo failed to turn up to meetings. But the Australian partner fixed his damaged equipment, used it, and paid all taxes and outgoings.

They had agreed at first that there was no point in paying rent for using Foo's equipment until the joint venture was making a profit, or it would drain the business further. After 12 months, he began to demand rent for the use of his equipment. The firm said that since it had not yet made a profit, it could not pay - and that when it did make a profit, he too would receive a payout.

Foo terminated the joint venture in April 2001, little more than a year after signing the agreement, initiating a legal action claiming $3.23 million rent for plant, an amount 20 times more than the agreed rate.

Since then, the Australian firm has continued to operate the business. But Foo wants to take it over. He re-established his own construction business and took his equipment back - which had been repaired at no cost to him by his former Australian partner. He called his new firm Timor Constructions.

The court ordered the seizure of equipment as security in case Foo was successful. It would be extraordinarily difficult to get this equipment off the island, and the Australian-owned business depends on it, yet Foo succeeded in having the equipment seized and on occasion confined to the compound. The business, which has a constant struggle for court permission just to use its own equipment, consequently lost contracts.

Foo has also issued a criminal complaint against the directors on the same issues, claiming fraud. At the start of JMS's operation in Timor there was no bank in Dili, so the money was kept in its Australian accounts, with "hooks" attached so it could be kept separate and tagged. As soon as ANZ opened a branch in Dili, an account was opened there instead.

But Foo has claimed this as fraudulent. The UN police investigated and found no grounds to pursue the matter. But Foo persuaded the deputy prosecutor in Dili that his complaints were indeed reasonable.

Since then, the company's senior staff and directors have been constantly called in for questioning, sometimes for days. On some occasions they have been held in the country, released, and summonsed to fly back. Similar questions have been asked over and over again.

Greig, the chairman, is among those who have been interrogated in the police station as well as at the court. "We can't adopt any kind of strategy while this has been going on," he says. "We haven't known whether to take on new contracts or build a new business or to try to extract ourselves."

This confusion appears to arise in part from the law itself, and from its implementation in Timor, which has been eccentric at best.

The East Timor constitution preserves the law as it stood at independence, unless it is modified by parliament. In place at independence was Indonesian law, backed up by UNTAET regulations. The prevailing code is thus a Dutch/French version of civil law, hinged around the role of an examining magistrate. It is inquisitorial rather than adversarial, and there are no juries.

As in the Bali bombing cases, most of the questions are directed by the judge, after which the lawyers may have an opportunity to follow up. To Australian eyes, it looks and sounds more like a commission of inquiry conducted by judges than a common law trial.

The judges determine which witnesses they see. They can call witnesses and reject those put forward by the parties, and can determine the order in which they are heard.

Barrister Tim Lindsey, director of the Asian Law Centre at Melbourne University, is part of JMS's legal team, and has been assisted by Colin McDonald, a QC from the Northern Territory. Lindsey is an expert on Indonesian law and has trained hundreds of judges in Indonesia.

"Threats of detention and interrogation by the Dili authorities have now made it too risky to send directors there any more, even though this is essentially just a private complaint," Lindsey says.

"It seems to be a device preventing us from calling our lead witnesses, because we know they risk being detained. And the deputy prosecutor refuses to charge our people - which would enable us to do something to get out of this bind."

The court usually hears the case for one or two days at a time, Lindsey says. The longest hearing has been three days. There have been eight returns so far.

"We often just get two or three days' notice before the next hearing, knowing we will have to fly up from Australia," says Lindsey. "Most of our witnesses and the legal team are in Australia. And it usually costs at least $3000 per person to get to Dili, accommodated, and back. On occasion we've turned up and no one has been there at the court. We have had no formal explanation.

"The court has never sent us any correspondence. The information about the hearings is passed on orally to our local lawyer. Sometimes we have sat there half a day outside the courtroom waiting for the judges to appear, and then gone home. Sometimes the hearings have started late and finished early, or the judges have gone to lunch and not returned, with no explanation.

"This is extraordinarily expensive and unreasonable. And it looks to us like a tactic."

UNTAET granted Lindsey and the JMS solicitor, Jeff Guy from Townsville, the right to appear in court in East Timor. The constitution of independent East Timor expressly provided for such rights to be carried over.

But the court refuses to give the two lawyers standing. They have had to hire an East Timorese representative with limited experience. "It is extraordinarily difficult," says Lindsey. "I sit next to him and advise him, in Bahasa Indonesia, what to say. We have appealed this."

The proceedings are in Indonesian, but some witnesses have given their testimony in English. But Lindsey says the court interpreters make serious errors. "When there was a riot on the street outside the front door of the court room, with people waving machetes, the interpreter said our witnesses should go out the front, instead of the back."

For most of the trial, there has been no transcription, no record of what has gone on. Some judges bring their own tape recorders, but the defence has not heard the results. Yet two of the three judges on the panel have been replaced during the hearings.

Lindsey says: "When we complained that one of the judges had come in after four witnesses had been heard, the presiding judge replied that she would tell him what had been going on. We have appealed that as well.

"We now have six appeals outstanding. But the court of appeal exists in statute only. They have recently sworn in a head of the court, but there are no judges and no indication when it will start hearing cases.

"The court in Dili is out of control."

But the appeals cannot, now, be heard until after the judgement.

Foo claimed that the joint venture was not registered properly. But the business registrar said the paperwork was correct. As the defence team was at the registry, it noticed that the presiding judge's husband had registered the same business name: East Timor Constructions.

Lindsey says: "We handed up the copies of the registration, and the bench noticed the name of the husband of the presiding judge, yet they said they didn't want to hear from the registrar, nor did they formally wish to look at the register.

"We have appealed this as well. We said she shouldn't hear this case because there was a bias, or a reasonable perception of one. We reported it all to the superior council of the judges, seeking her disqualification due to a massive conflict of interests. The case, though, continues. No one will intervene."

The company stands to lose its $3 million investment and the business it has built up. The equipment would be seized. The joint-venture partner would, in effect, take it over.

"It's the most outrageous case I've ever been involved in," says Lindsey.

"Someone even broke into the business office in Dili and stole files relating to this case, setting fire to some documents. The filing cabinet was attached to the floorboards, which they removed. Original documents, confidential memoranda and advice on the case were stolen. They knew just what they were looking for. But the police never found out who it was. The QC's office in Darwin was also broken into.

"Our local counsel in Dili has signed an affidavit that a lawyer from the other side attempted to bribe him to throw the case, for a percentage of the other side's winnings, plus a trip to the USA."

The bottom line, says Lindsey, is that "the rule of law doesn't exist. There's a bitter anti-foreigner feeling throughout the system. It is politicised. What incentive is there for people to invest?"

The company has made representations right across government, but has been told the situation is beyond anyone's control.

"Our opponent," says Lindsey, "identifies himself as a good East Timorese businessman, who should therefore be supported. Identity politics are strong."

The judges have had very brief training programs. None had been a judge before independence, since the Indonesian system did not use East Timorese as judges. Some were legal aid activists, some academics in Indonesia and some were law students. Most had little or no experience in a courtroom before they became a judge, says Lindsey.

"I have some sympathy for them. They're trying to find their way beyond their competency. But they have no grasp of procedure or how systems should work."

Nevertheless, Greig says that if the court verdict came down for the company, and that the recent period is viewed as an aberration, then his company would be a long-term investor in East Timor: "The only proviso is maintaining the security of our people."

In hindsight, he says, there was a misalignment of the expectations of the partners in the joint venture. "We were cautious," he says. "We refused to make corrupt payments. We paid our Timorese staff well, and invested in training them. But we didn't, as a result, make a profit in our first year.

"When I met Mr Foo, he said, 'I want money, I want money.' Then he stopped communicating with us, and started taking legal actions."

Vital dos Santos, the lawyer representing Foo, says his client's chief complaint is that JMS did not register Foo's name as an equal partner, as was agreed in forming the joint venture.

He says that "to my best knowledge, the court has facilitated equal opportunities to both sides to present their arguments, evidence and witnesses."

Foo says the joint-venture agreement unfairly prevents his companies from operating in competition with East Timor Constructions, even though he has worked in the construction industry there for 18years.

And he says that just $33 in monthly rent was paid by ETC for the use of his vehicles, whereas it was paying a daily rent of $200 a day to another firm. He says ETC "totally destroyed" some of his equipment.

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