Legal Alert: Contracts in Indonesia

Date: 16/08/2018
Author: Jacqueline Tan
Source: UK P&I Club - Legal Team
Legal Alert: Contracts in Indonesia

Contracts in Indonesia – on 31st August 2015, in the case of PT Bangun Karya Pratama Lestari v Nine AM Ltd, the Indonesian Supreme Court handed down a decision that a contract not drafted in the Indonesian language is null and void.

Although this decision was issued a couple of years ago, the issues therein remain very relevant for our Members entering into contracts such as LNG Terminals’ Conditions of Use, charterparties or contracts of carriage with Indonesian entities.

Background

For several years, Indonesian law (Article 31, Law Number 24 of 2009 on National Flag, Language, Emblem and Anthem, known as “the Language Law") has required that memoranda of understanding, contracts or agreements which involve Indonesian government institutions, Indonesian private entities or Indonesian citizens shall be in Bahasa Indonesia, i.e. the Indonesian language ("Bahasa"). Article 31 (2) of Law 24/2009 explicitly allows execution of an agreement in more than one language. Whilst this law seeks to regulate the use of Bahasa, in practice it means that any contract with any governing law, as long as it involves an Indonesian party, must be drafted in Bahasa, in addition to the foreign language.

Law 24/2009 further provides that the implementation of the law will be further stipulated by an implementing regulation, which will be issued within two years after the release of Law 24/ 2009. We understand that, to date, this implementing regulation has not been released.

On 28 December 2009, the Minister of Law and Human Rights issued a Clarification to Law Firms, where the Minister opined that Article 31(1) of Law 24/2009 did not apply to private commercial agreements and that accordingly, these could continue to be drafted in English in accordance with parties’ intentions. The Minister was also of the view that the actual implementation of Article 31(1) would have to await the issuance of a Presidential Regulation, as mandated by Article 40. Until such time as the Presidential Regulation was issued, the language requirement under Article 31(1) would essentially be unenforceable.

Despite the Clarification to Law Firms issued by the Minister, in June 2013, the West Jakarta District Court held a loan agreement between an Indonesian borrower and a foreign lender unenforceable for failure to comply with the Language Law. The loan agreement concerned was drafted in English only.

The Court determined that Article 31 of Law 24/2009 required every contract involving an Indonesian party, whether public or private, to be made in Bahasa. In the absence of a Bahasa translation, the loan agreement violated Article 31 of Law 24/2009, which resulted in the contract having an illicit cause. Although Law 24/2009 does not expressly set out the consequences if it is not complied with, the Court relied on Article 1335 read with Article 1337 of the Indonesian Civil Code to find that the loan agreement was null and void. Article 1335 provides, amongst other things, that a contract concluded pursuant to an illicit cause is invalid. Article 1337 further states that a cause is illicit if it is prohibited by law or if it violates morality or public order.

The Court ordered the parties to be reinstated to the same position they would have been in had the agreement not been entered into.

Although the West Jakarta District Court’s reasoning in that decision is open to criticism, it was affirmed by the Jakarta High Court and subsequently by the Indonesian Supreme Court in Judgment No. 48/Pdt/2014/PT.DKI dated 7th May 2014 and Judgement No. 601 K/Pdt/2015 dated 31st August 2015 respectively.

The Supreme Court’s Decision - Issues

The contract between the Indonesian borrower and the foreign lender was governed by Indonesian law and subject to Indonesian jurisdiction. It is an open question whether a similar outcome would result for contracts subject to other laws or jurisdictions. Nevertheless, it seems likely that, as long as an Indonesian is party to the contract, regardless of jurisdiction, failure by the parties to execute a Bahasa version may provide grounds for nullification.

In the context of shipping, the vast majority of contracts for the international carriage of goods between foreign and Indonesian entities will not be subject to Indonesian law and jurisdiction. However, the provisions of Law 24/2009 cannot be ignored if contracting with an Indonesian counterparty. If a dispute were to arise under such a contract and it were to be arbitrated, for example in London and subject to English Law, it may nevertheless be necessary in due course to enforce that award in Indonesia against the Indonesian entity. The provisions of Law 24/2009 may be an issue at the enforcement stage.

Recommendations to Members
 
The decision of the Supreme Court highlights the potential risks faced by Members who have contracts with Indonesian entities, which are not also written in Bahasa.

Whilst Indonesia is a civil law jurisdiction and the courts are not bound by previous case law, in light of the Supreme Court's decision, Members are advised to make, prepare and execute bilingual versions of all commercial contracts involving an Indonesian party, regardless of the governing law. Members may also wish to obtain legal advice on whether it is necessary to have documents notarised and translated into Bahasa

If Members have already entered into contracts with Indonesian entities without a Bahasa translation, Members may wish to consider executing Bahasa translations of such contracts, in particular if they are high value contracts.

Note also that although Law 24/2009 requires the use of Bahasa, the law does not require Bahasa to be the governing language. The parties may execute the agreement that sets a foreign language as the prevailing language in the agreement as long as there is a Bahasa translation set out in the agreement. That said, in the absence of clear regulatory provision, it is difficult to predict the Indonesian court’s position on the issue of the governing language.

Whilst having an accurate translation may be an expensive exercise, it is worth bearing in mind that not being able to enforce the contract may turn out to be far more expensive.

We would also recommend that Members, who know that cargo is destined for Indonesian ports, have a binding law and arbitration clause in their bills of lading. If, for example, a non-Indonesian shipowner is obliged to defend a claim brought in the Indonesian Courts, the Indonesian Courts may accept jurisdiction and apply Indonesian law if the bill of lading is silent on law and jurisdiction. If so, the lack of a binding law and arbitration clause may be a double-edged sword. It would be open to either party to argue that the bill of lading was void as it was not translated into Bahasa.

In addition, if the Master believes that it is necessary to clause the bills of lading in relation to, for example, the condition of the cargo upon loading, it is recommended that the clause or remarks are written in English and Bahasa.

If Members have any questions on the above, their usual contacts at the UK Club will be pleased to assist them.

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