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Contract Law in Indonesia

Introduction to Contract Law in Indonesia

The Civil Code was promulgated in 1848. The general laws of contracts and obligations are laid down under Book III of the Civil Code, covering four chapters, from Article 1233 to Article 1456. Further, Articles 1457 to 1850 deal with 'nominated' contracts or special contracts.

In 1855, pursuant to Article 131 of the Netherlands Indies State Laws, the population of Indonesia was legally divided into three groups, namely:
  1. Europeans,
  2. Foreign Orientals, and
  3. Indigenous Indonesians.

Per Article 163 of the Netherlands Indies State Laws, the Civil Code and the Commercial Code did not apply to the Indigenoaus Indonesians. The Indigenous Indonesians were governed by Adat law, i.e., the customary law, which is an unwritten, ununiform and not a statutory law that evolves as per the needs of the village community. However, under Adat law, the requirement of a contract is the real agreement � one which is actually performed.

With the introduction of the foreign investment laws in Indonesia, in 1967, the contract laws stipulated under the Civil Code were made applicable to the Indigenous Indonesians.

General Provisions Governing Contracts
The law of contracts is an 'open' system which entails that everybody is free to enter into any kind of contract. Thus, all contracts that have been legally concluded, have the same force as the legislative act for the parties to the contract, thus making provisions of Book III of the Civil Code optional in nature.

Therefore, the contract may deviate from the provisions of Book III of the Civil Code. However, the contract needs to adhere to the basic principles of contract law � legality, justice, good intention and fairness.

Article 31 Paragraph (1) of Law 24/2009 provides that the Indonesian language shall be used on MOU or agreements that involve state institutions, agencies of the government of the Indonesia, Indonesian private institutions or individuals of Indonesian nationals.

Thus, all contracts are mandatorily drawn up in Indonesian (Bahasa Indonesia). As a matter of practice, contracts are often negotiated and executed in dual language (most commonly English and Indonesian).

Often a clause is added in the contract executed in English requiring the parties to translate the contract into Bahasa Indonesia.

Further, to avoid issues arising due to inconsistencies between the bilingual versions of the contract, a clause is provided that the English version of the contract will prevail.

Termination of a Commercial Contract
  • If Article 1266 of the Civil Code is not waived by the parties to the contract, then it is mandatory for the parties to approach the local Courts to get the contract terminated.
    A void condition is deemed to have been included in reciprocal agreements, in case a party does not fulfill his obligation.

    In such case, the agreement is not void by law, but voidance must be requested to the Court.

    The request must also be made, even though the conditions of voidance concerning the non-fulfillment of an obligation is included in the agreement.

    If the conditions of voidance is not included in the agreement, then the judge, considering the situation, upon the defendant's request, has the discretion to fix a timeframe to fulfill such obligations, but such timeframe may not exceed one month.
  • Thus, in order to avoid the route through courts, parties usually add specific language in the agreement to waive the applicability of Article 1266 where the Indonesian law is the governing law.
  • However, please note that contracts may waive statutory provisions categorized as facultative law, but cannot waive imperative laws.
  • Imperative law of contracts which cannot be waived by the parties by mutual agreement includes fundamental principles which are also stipulated in Article 1320 - consent, capacity, certain object, and lawful purposes, and provided under Article 1338 - principles of pacta sunt servanda and freedom of contract.
  • Thus, only facultative laws which are complementary in nature may be waived.
  • Article 1266 of the Civil Code provides for a claim of cancellation of the contract against a debtor who is in default to fulfil his obligation and this cancellation is provided as a punishment for a debtor who has neglected his duties. Thus, Article 1266 provides that the court could allow a period of grace to the debtor to give him an opportunity to perform.
  • When the court is of the opinion that a cancellation of the contract will be disastrous to the debtor, while the default is not serious, the court will refuse to cancel the contract, though, possibly the court may entertain a claim for compensation.
  • Further, the creditor also has a right to ask for termination along with compensation. Over all rights of the creditor arise from the Article 1238 read with Articles 1239 and 1267 (provides for costs, damages and interest).
  • In the absence of the clause on waiver of Articles 1266 and 1267, the parties have to approach the court to terminate the obligations under the contract.

The Way Forward
In light of the above principles of contract laws in Indonesia, to terminate the contract, the parties must do as follows:
  1. Due diligence of the terms of the contract
    To determine whether Article 1266 of the Civil Code has been explicitly waived.

    Proforma clause:
    For the purpose of termination of this Agreement, the Parties agree to expressly waive the provisions of Article 1266 of the Civil Code to the extent that the Parties agree not to seek any approval from the courts or require the other Party to seek any approval from the courts in order to effectuate the termination of this Agreement.

    • Due to diverse precedents on clauses of waiver and unclear views related to which statutory provisions of the private law that could be waived by a contract, the parties must:
      1. put in waivers, including waiver of Articles 1266 and 1267 of the Civil Code, and
      2. add a severability clause.
    • If during the performance of a contract, no issue arises among the contracting parties, then debates as to the validity of the waivers would not occur in the first place. If in the unwanted event where disputes do arise and the validity of the waivers is challenged, then any determination of invalidity of such waiver would not invalidate the whole agreement as the waiver would be severed from the contract.
    • Thus, if the contract has a waiver clause, which is not challenged by the parties, a notice of termination may be served upon the defaulting party as per the agreed terms and the contract may be terminated on mutual terms.
    • In the absence of such waiver, or the waiver clause being disputed by the parties, the recourse is to get the contract adjudicated in a court of law.
  2. Adjudication of the Contract in Court of Law
    • In the absence of the waiver clause, the injured party has to take recourse of the court proceedings to terminate the contract and until the final and binding decision of the court is declared, all the contracting parties are obliged to fulfil their obligations under the contract.
    • Pursuant to Article 1267, the injured party may further claim compensation, damages and interest from the defaulting party, in addition to the prayer for termination of the contract.
    • Please note that the law in Indonesia does not explain the legal consequences of termination of contract. However, according to the general principles, if a contract is terminated or declared null and void, then it will be returned to its original condition as at the time the contract was concluded. Thus, if one of the parties has fulfilled its obligations, then it is considered as undue payment as stipulated in the Article 1359 of the Civil Code and it must be returned. However, this may lead to additional issues in the event the obligations under the contract are staggered and are carried out in stages.

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