Jurisdiction - Indonesia
Reports and Analysis
Indonesia – Court Rules That Contracts Written In English Language Are Void.

11 November, 2013

 

 

The West Jakarta District Court ruled recently that a loan agreement between an Indonesian borrower and a foreign lender was void because it was written in English rather than Bahasa Indonesian and it was, therefore, in violation of Indonesia ‘s Law No. 24 of 2009 concerning Flag, Language and Symbol of State and National Anthem (“Law 24/2009”).

 

More generally, the Court stated that all agreements involving an Indonesian private or public entity entered into after 9 July 2009 which are not in Bahasa Indonesian will similarly be in violation of Law 24/2009 and therefore void.

 

The decision may be reversed on appeal or overtaken by amendments or clarifications to the law. Until then, we expect an increase in cases that rely on this argument to challenge liabilities under English language contracts. The prudent response is to ensure that all contracts with Indonesian counterparties are written in Bahasa Indonesian or in both languages, but not in English alone.

 

1. Law 24/2009

 

Law 24/2009 came quietly into force on 9 July 2009. It took the legal and business communities by surprise, as there had been no general consultation or prior warning but several of its provisions appeared to have significant business impact.

 

Amongst other things, Law 24/2009 requires that all contracts entered into with an Indonesian party (public or private) are to be made in Bahasa Indonesian. Article 31 provides:

 

(1) Indonesian language must be used in a memorandum of understanding or an agreement which involves the State, Government Agencies of the Republic of Indonesia, private entity or individuals having Indonesian nationality.

 

(2) For a memorandum of understanding or an agreement as referred to in paragraph (1) which involves a foreign party, the memorandum of understanding or agreement may also be made in the national language of such foreign party and/or in English.

 

The Law required the Government to issue a detailed implementing Regulation within 24 months and it was hoped that this would clarify the extent and impact of the new requirements. Regrettably, that Regulation has still not been issued.

 

However, informal guidance was provided later in 2009 by the Ministry of Law and Human Rights. The Ministry suggested that agreements written in English, or in both languages but with English as the ruling text, would remain valid and enforceable on the basis that the language requirements of Law 24/2009 were formalities that applied to all Indonesian contracts, but it wasn’t a substantive requirement that affected the basic status and enforceability of a contract.

 

2. Recent Practice 


The Ministry’s clarifications had no legal force but they provided some comfort to the legal and business communities. Whilst it has become quite common to see contracts with Indonesian counterparties written in both English and Indonesian in order to comply with the Law (the two texts are frequently written in parallel columns down the left and right sides of the page), the translation requirements can be burdensome and for this or other reasons, it is also common practice for contracts to be written in English alone but with a requirement for the parties to re-sign an Indonesian language version if this is required for any reason.

 

3. The Facts of the Recent Case 


PT Bangun Karya Pratama Lestari (“BKPL”) and Nine AM Ltd (“Nine AM”) entered into a Loan Agreement whereby Nine AM lent US$ 422,000 to PT BKPL. Pursuant to the Loan Agreement, the parties also concluded a deed of fiduciary guarantee. The Loan Agreement was governed by Indonesian law and written only in English while the deed of fiduciary guarantee was made in Bahasa Indonesian. 

 

A dispute arose between the Parties in relation to the Loan Agreement following BKPL’s repayment default. Nine AM filed a claim with the West Jakarta District Court seeking payment of the overdue amount. BKPL responded (among several arguments) with an unlawful act claim challenging the validity of the Loan Agreement on the basis of non-compliance with Law 24/2009.

 

4. The Decision of the Court 


The Court ruled that the Loan Agreement was void on the basis that it was not executed in Indonesian language and was therefore in violation of Law 24/2009. In summary, the Court reasoned as follows:

 

  • Law 24/2009 imposes a clear obligation that Bahasa Indonesian must be used as the language of any contract involving the State and Government Agencies of the Republic of Indonesia as well as private entities and individuals with Indonesian nationality.

 

  • The Loan Agreement was therefore in violation of Law 24/2009. As such, it did not fulfill the four conditions for lawful contracts prescribed under Article 1320 of the Indonesian Civil Code, in particular the requirement that contracts must be entered for a lawful cause i.e. not in violation of any laws/regulations.

 

  • As the Loan Agreement did not satisfy this basic requirement for a lawful contract under the Indonesian Civil Code, it must necessarily be void. Thus the Court did not agree with the earlier (non-binding) advice from the Ministry that Article 31 of  Law 24/2009 was merely a formalistic requirement and not a matter going to the validity and enforceability of the contract.

 

  • As the Loan Agreement was void, any agreement entered into pursuant to the Loan Agreement – for example, the deed of fiduciary guarantee – must also be void. The Parties were required to be restituted to their original state prior to entering into the Loan Agreement.

 

  • As Law 24/2009 has been in force since 9 July 2009, all contracts involving an Indonesian entity which were entered into after 9 July 2009 and which were not made in Bahasa Indonesian must similarly be in violation of Law 24/2009.
 

The Court recognized that Law 24/2009 mandated the publication of a Regulation to address these issues in more detail. However, the Court found that the non-existence of the Regulation did not affect the obligation to execute an agreement in Indonesian as required by Article 31 of Law 24/2009. The Court stated that if the parties disagreed with the use of the word “must” in the legislation, they should file a judicial review before the Constitutional Court to seek an amendment to the law; meanwhile, the Court must enforce the law as it stands. 


5. Discussion 


It has been reported that Nine AM filed an appeal on Monday, 14 October 2013. Appeals are common in the Indonesian system and are typically pursued up to the level of the Supreme Court.


Given the appeal, there are grounds to believe that this judgment may eventually be overturned. The Court’s reasoning is surprising and controversial in places and Indonesian lawyers identify several aspects where a different conclusion could be justified. At the least, it may be hoped that higher courts will recognize an economic imperative in ruling that the decision should only apply prospectively to future contracts, instead of a retrospective ruling that undermines four years of economic activity across all sectors. It may also be decided that Article 31 only applies to contracts that are subject to Indonesian governing law, instead of the recent broader interpretation that Article 31 applies to all contracts with Indonesian parties including contracts under foreign laws.


Meanwhile, however, the Court’s decision stands as the first decision on the impact and effect of Article 31 of Law 24/2009. Although Indonesia is a civil law country which does not follow a system of case law precedent, court judgments can have persuasive value and – perhaps more importantly in practice – they can indicate a possibly useful argument for others who seek to achieve similar results. Until the decision is reversed or overridden by a higher court or by new laws or regulations, or until there is a clear trend for other courts to reject such arguments, the case may provide inspiration and fuel for other parties to Indonesia-related contracts to challenge the validity of an agreement on the basis that it wasn’t written in Indonesian.


6. Our View and Precautionary Recommendation 


In light of this decision, it will now be prudent for any foreign company entering into a contract with an Indonesian counterparty to execute the contract in Bahasa Indonesian or at least to create a bilingual agreement with one of the languages being Bahasa Indonesian (the other may be English or any other foreign language).


Although the recent decision did not specifically address the question of which language should prevail in a dual language contract, the most prudent approach would be to state that in case of doubt or conflict between the two versions, the Indonesian text will prevail.


Where contracts with Indonesian counterparties have already been concluded (after July 2009) in English language only, it may be prudent to re-execute Bahasa Indonesian versions of those agreements. However, this raises issues concerning the relationship between the parties: they may not agree to re-execute a Bahasa Indonesian version or there may be commercial risks in bringing the issue to their attention. A more liberal approach is to have the English version translated into Bahasa Indonesian and have the Bahasa Indonesian version enclosed with the English version.

 

 

For further information, please contact:

 

Alastair Henderson, Partner, Herbert Smith Freehills
[email protected] 


Haydn Dare, Partner, Herbert Smith Freehills
[email protected]

 

David Dawborn, Partner, Herbert Smith Freehills
[email protected] 


Maurice Burke, Partner, Herbert Smith Freehills
[email protected] 


Chalid Louis Heyder, Partner, Hiswara Bunjamin & Tandjung
[email protected] 


Brian Scott, Partner, Herbert Smith Freehills
[email protected] 


Shaun Langhorne, Herbert Smith Freehills
[email protected] 


Kritika Venugopal, Herbert Smith Freehills
[email protected]

 

Hiswara Bunjamin & Tandjung Banking & Finance Practice Profile in Indonesia


Banking & Finance Law Firms in Indonesia 

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