Australian entities doing deals in Indonesia should
remember the A (for Agreement), B (for Bahasa) and C (for Courts)
of contracting. ABC also stands for Always Be Careful.
Entering into an agreement with an Indonesian entity may appear
simple, however if it gives rise to a contract under Indonesian
law, as with all jurisdictions it's prudent to know the
potential foreign legal risks and consequences.
A = AGREEMENT
Australian entities should be aware that in Indonesia an
agreement to agree (ATA) or a memorandum of understanding (MOU) may
be legally enforceable against them and that they must perform
contracts in good faith.
Under Australian law, ATAs or MOUs are unlikely to be legally
enforceable. In contrast, provided an ATA or MOU satisfies the
requirements for a valid contract under the Indonesia Civil Code
(ICC), these may be legally enforceable.
Valid contracts are legally binding on the parties and cannot be
revoked except in accordance with their terms, by consent of all
parties or on specific legal grounds.
While the application of any good faith obligation to a contract
under Australian law depends upon the relevant contract and
circumstances, under the ICC all contracts must be performed by the
parties in good faith. A failure to perform a contract in good
faith may be a basis for a civil claim.
B = BAHASA
Indonesia law requires agreements to be in Bahasa
Indonesia or at least bilingual versions.
In Indonesia, any agreement involving a state institution,
Indonesian government institution, Indonesian private entity or
Indonesian citizen must be made in Bahasa Indonesia, although
bilingual agreements are permitted.
In reality, many agreements are negotiated in English, and as
bilingual versions entail additional cost and delay, a common
practice is to draft agreements in English with a general clause
requiring the parties to translate the agreement into Bahasa
Indonesia if the law requires them to do so.
It is has also been common practice to provide that in the event
of any inconsistency between these bilingual versions, the English
version will prevail.
In the absence of any implementing regulations or relevant court
decisions, it has been unclear whether the inclusion of such
generic clauses is effective.
However, in June this year, the West Jakarta District Court
determined that a contract between an Indonesian company and a
foreign company which was only in English was void. This decision,
which is being appealed, gives rise to further doubt about whether
including generic clauses is enough to ensure the validity of
contracts only in English.
C = COURTS
Australian entities should consider their preferred
dispute resolution mechanisms, include the appropriate clauses in
their contracts and generally seek to avoid
In Indonesia, contractual disputes may be resolved through
mediation, conciliation, arbitration and/or civil proceedings in
the relevant court.
Civil proceedings may seek specific performance, financial
compensation or termination of the contract, however they're
best avoided where possible.
Indonesian courts have a broad discretion to resolve disputes
without being bound by previous decisions. As such, court
proceedings can be unpredictable. Court proceedings are also costly
and time consuming. Financial compensation is generally limited to
actual loss that can be proved, as opposed to anticipatory or
potential loss. All legal claims expire after 30 years.
While non-Indonesian court judgements are not enforceable in
Indonesian courts, both domestic and international arbitration
awards are recognised.
Commercial transactions often select the Indonesian National
Board of Arbitration (BANI) as the arbitration forum. Although more
complicated to enforce domestically, international arbitration,
such as through the Singapore International Arbitration Centre
(SIAC), is a common alternative for large commercial transactions
that involve foreign parties or assets located outside of
Ultimately, it is the relationship between the parties which is
critical to achieving a satisfactory outcome in any deal or
dispute. In business, relationships are important everywhere, but
they are particularly crucial in Indonesia.
Australian entities entering into agreements with Indonesian
entities should be aware of the potential legal risks and Always Be
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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