How Protecting Power Agreements Can Impact Your Business Operations in Indonesia

In a global economy with businesses expanding into new markets and potentially unstable governments, it is important to understand the laws governing your company even in other countries. While most people have probably never heard of a protecting power agreement and may only have a slight idea of what it is, it is imperative to know what these agreements are when it could be the difference between safe passage and being trapped.

A protecting power agreement is a treaty wherein one country looks after the interests of another country’s government that is in foreign territory. For example, if a business is operating in Indonesia, but the company’s home country does not have an embassy in Indonesia, the foreign permanent diplomatic mission of a third country can protect the home country’s interest under a protecting power agreement. Protecting power agreements were established in 1815 at the Congress in Vienna as a way to protect a country’s interests when they have a power or control over a territory. For the United States, protecting power agreements mean that the United States’ embassies will help protect certain small countries. It is a contractual obligation for a third country to protect and look after the need of a country that does not have an embassy under the terms of the protecting power agreement.

International businesses must abide by the laws and agreements of the countries in which they operate. This means that if your business is selling goods in a country and building a marketing strategy to appeal to that country’s citizens, it could be more advantageous to build a permanent office in that country. However, you may not want to invest the money it would take to build the office if the country’s government is unstable and the business could be seized. In this case, you can enter into a protecting power agreement with a neutral country. The agreement provides the third country control of the company’s assets in the unstable country so that if the government attempts to take your assets, the third country will step in and block the action without any risk to the third country. Even though you designated a third country to take care of your assets in a foreign country, in some cases, you cannot designate the government that is taking over the land as a protecting power. However, you may be able to get around the prohibition by making the third country your agent. Both the third country and the country in which the assets are located must agree to the agreement. If your international business is registered in Indonesia, your agreement has to be approved by the United Nations. Therefore, in most cases, you would need a business representative within the country to broker the agreement with a third country. The above being said, it may be better to simply invest the money it would take to protect your business as opposed to taking the risk of potential seizure. Protecting power agreements are not a guarantee to protect your assets and require the country to which you are making the agreement to be neutral.

Indonesian businesses and those operating within Indonesia may have land and assets in other countries that are subject to the laws of the other country. Perhaps you own a resort in Italy. As the political situation within Italy becomes unstable, you may be subject to seizure of your property if you do not have a way to protect your assets. One remedy is to enter into a protecting power agreement with a neutral country to protect the assets from seizure. As mentioned above, you may have to pay your representative in the foreign country to broker the agreement and pay basic fees to the third country. The main benefit for you is the ability to continue operations in an unstable political situation. While you may still lose your assets, knowing that you have a way to stop the government from taking them in an unstable country will make the loss easier.

As an international business entity, perhaps you have decided to take advantage of the benefits that Indonesia has to offer. There are coworking spaces that offer shared office space with different amenities in and around Jakarta. However, what happens when your company’s home country does not have an embassy or representation within the country that you are required to operate? Many of the coworking spaces have representation within the international business spaces in Indonesia that are designed for foreign entities. You can set up office space within the space and gain access to an address for strategic international objective purposes. You can also use the space to work on your strategy to implement a protecting power agreement within your host country. You may be able to consult with an attorney or financial advisor that has offices within the coworking space for your business.

In most cases, your business is going to be either the business in the country with the government not represented or the third-party country within the agreement. However, there have been several high-profile businesses that have utilized protecting power agreements. Taylor Energy has been operating for several decades and owned a drilling operation in the Gulf of Mexico when oil prices dropped, causing operations to halt. The company was granted a permit to operate, however, their operations and oil well were rigged and leaked oil into the Gulf. The company’s field was estimated to be leaking between 10 to 30 gallons of crude oil every day for nearly a decade and a half. As an international business operating in Indonesia, you may see similarities with the situation at Taylor Energy. The company’s situation was complicated with other environmental issues and the company’s lack of involvement with the cleanup process. However, their bonding agency filed a petition to put an end to the cleanup process without the company’s involvement. After a lawsuit with the State of Mississippi, a federal judge agreed with the bonding agency and released them from their obligations to clean up. The State of Mississippi was not happy with the ruling and said agreed with the judge’s ruling, but appealed the ruling in order to prevent the company from paying less than was owed. In order to stem the lawsuit and the claim by the State, Taylor Energy entered into a protecting power agreement with the government of Equatorial Guinea. A newspaper article says that “the agreement allows Taylor to claim that Equatorial Guinea (whose capital is Malabo) has the sovereign right to manage Taylor’s environmental obligations, as well as to oversee the settling of claims and litigation.” Foreign governments and banks do not generally like assets being left out in the open. Foreign banks and governments require collateral on loans they make in order to protect their own investments. Taylor Energy was facing legal issues from two different ends, but with the protecting power agreement, the company was able to mitigate its exposure to legal risks in Mississippi and a likely takeover by an opposing party in court.

While it may be tempting to select a protecting power agreement simply because the government is difficult, it is still necessary to follow the laws of the country. Once you decide that you need to enter into the agreement, you need to determine whether or not it is beneficial to the business. In general, you should select a protecting power agreement whenever: You should be sure that the country with which you are entering an agreement has several factors in place. You also want to consider the future of the business. Will your business still need the protection in a few years? If so, then it is worthy of consideration. If not, you may want to consider taking the risk of managing your affairs without the protection.

It is easy to see how protecting power agreements can impact businesses in Indonesia. If you are a small business operating within Indonesia, you may have plans to expand your business to reduce your dependency on the economy in a single country. While you plan for the future, you may be hiring a foreign workforce and paying costs to obtain visas for your foreign employees. In the future, news like Brexit and deadlock in the European Union may hurt your business if you have invested heavily in Europe and the Middle East. Protecting power agreements would allow you to secure your future in the countries in which you are operating. However, there is no guarantee that the business landscape will remain stable in the future.

Even as an international or foreign business operating in Indonesia, it is wise to have a domestic counsel review your contracts. You may have international business agreements that are enforceable in one country, but would be otherwise unenforceable in another. A business attorney is also knowledgeable about contract law and protecting power agreements. You want to have a qualified attorney review the agreement before it becomes effective. You also want to have a business continuity plan in place. Regardless of how unlikely it may seem, your business could be subject to takeover if the political climate changes. You need to have a plan in place that will allow you and your investors to continue the business even if the business loses its assets in a foreign country.

If you are considering a protecting power agreement, you have to think about the risks. You can work with a business attorney in Indonesia or in your home country to determine the best way to structure the agreement. You could simply modify the custody of your business assets and not take control of the assets for the remainder of the business’s lifecycle in a particular country. You also want to use the agreement as an opportunity to set a timeline for the completion of certain business tasks. Perhaps the business needs to improve its infrastructure and buy a new technical system as a result of the significant loss. You could use the opportunity to set a timeline for the actions and protect your investment. It is important to note that you will still need to get the agreement approved by the United Nations. It may take several months or longer to finalize the agreement based on the circumstances. The United Nations wants all of the facts so that they can make an informed decision about the agreement.

As a result of the recent issues with the United Kingdom, the actions of Russia, and other foreign issues, protecting power agreements are becoming more common. Countries are also trying to amend the agreements to make them more specific and to clarify the timelines. You may also be able to see changes to the protecting power agreement pipeline in the future that has a greater impact on international businesses. All international businesses should take care to enter into protecting power agreements when necessary and to make sure that the terms of the agreement are clear.

For more information on international treaties and agreements, you can visit Wikipedia.