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.

HOME | ABOUT | NEWS | TRIALS | RESOURCES | CONTACT