Indonesia’s Law No. 24 of 2009 regarding Flag, Language and Symbol of State and National Anthem (“Law 24”) came quietly into force on 9 July 2009. The bill was not promoted by the economic ministries and took the legal profession and business community by surprise. Below we discuss the requirements and note market practice in light of recent comments made by Indonesian Government officials on the subject.

Contents of Law 24:

The provisions of Article 31 of Law 24 that have caused most concern amongst foreign investors and creditors provide that:

  • Indonesian language must be used for a memorandum of understanding or an agreement which “involves” Indonesian parties. This includes not only Indonesian State Owned Enterprises and government institutions, but also Indonesian companies and individuals.
  • For a memorandum of understanding or an agreement involving a foreign party, the parties may, in addition to the Indonesian language, also use the national language of the foreign party and/or the English language.

The Indonesian text used in these provisions is very vague and not capable of precise interpretation in many respects. However, Law 24 requires the Government to issue an implementing regulation within 24 months to detail what is prescribed by the above general provisions.

Views on the requirements differ widely and the appropriate approach for foreign parties to take in response to these requirements depends on whether the contractual document is governed by foreign law or Indonesian law and as to whether a foreign language or Indonesian language is used to govern interpretation of the document.

Indonesian law vs. Foreign law Documentation

Until such time as implementing regulations on Law 24 are issued and/or there is greater clarity on the scope and effect of the requirement to use the Indonesian language for agreements involving Indonesian parties, the current view of our associated firm in Indonesia (Hiswara Bunjamin and Tandjung (HBT)) is that, as a matter of prudence, private commercial/financing agreements that are entered into between a foreign party and an Indonesian party and which are governed by Indonesian law should be drawn up in two languages, one being an Indonesian language version.

For private commercial/financing agreements between a foreign party and an Indonesian party which are governed by a foreign law e.g. English law, HBT is of the view that Law 24 as it stands (and pending the required implementing regulation being issued) should not affect the enforceability of such agreements and such agreements may still be negotiated and written in the language of the parties’ choice. HBT views this as the correct legal analysis as the Indonesian parliament does not in principle have authority to regulate foreign law governed contracts. In terms of general legal principles, the analysis would be further assisted if the foreign law governed contract is to be performed predominantly outside Indonesia and/or is also signed outside Indonesia (although these factors are not referred to as considerations in Law 24 itself).

Language of Contractual Interpretation

Law 24 is silent on whether Indonesian law must be the prevailing language of the contract. Whilst this is not stipulated specifically in Law 24, HBT's view is that Article 31(1) only requires that agreements be written in Indonesian. If this is satisfied, for both foreign law and Indonesian law governed agreements, the view is that parties should be free to agree the prevailing language of the contract.

The basis for this view is a literal reading of the words of Article 31, namely that Law 24 does not specify which language should be the governing language. Support for this view has been reinforced by comments in recent clarification letters provided by the Director of Laws and Regulations (the "Director") at the Ministry of Law & Human Rights (the Ministry”) in relation to enquiries from specific issuers. These letters appear to concur with the view that parties to an agreement are free to select which language version will govern the interpretation of an agreement. It should be understood, however, that the Ministry does not have any specific legal authority to issue opinions binding on the parties or other government authorities/the courts. Therefore such letters do not have general regulatory force and may not be followed in a dispute context, even in relation to the specific transactions for which the letter was issued.

Sanctions for non-compliance

There are no sanctions or legal consequences specified in Law 24 for any violation of Article 31. HBT's view is that the worst case legal scenario (with which they do not agree) would be that in practice an Indonesian court could refuse to enforce an agreement that violated Law 24 and would therefore nullify the transaction. In various seminars held to discuss Law 24, officials of the Ministry have expressed a view that the Indonesian language requirement in Law 24 is guidance only and is voluntary on the basis that there is no stated sanction for non-compliance. This approach has also been confirmed in the letters referred to above. However, these verbal comments and letters of the Director do not have regulatory force and therefore cannot be relied on.

Impact on existing Agreements

In the clarification letters referred to above the Director has commented that, as the implementing Presidential Decree required under Article 40 of Law 24 has not yet been issued, agreements written only in the English language remain valid. Moreover, he confirms based on general principles of statutory interpretation that Law 24 cannot be applied retrospectively to existing agreements. However it should be re-iterated that this only represents the view of a single official, and such statements do not have regulatory force.

Approach going forward

As will be apparent from the above comments, the impact of Law 24 remains uncertain and Indonesian law firms continue to be nervous about its potential scope.

Law firms are also commonly being required to translate transaction documents and provide confirmation on the accuracy of the translations. However it should be appreciated that accurate legal translation is always a very difficult task and many common law legal terms are not capable of exact translation into Indonesian. Therefore, any comments on the accuracy of translations must necessarily reflect those realities.

In our recent experience of foreign law governed offshore financing transactions by Indonesian companies, the intending lenders are requiring that Indonesian language versions of the governing English language agreements are prepared. Although this approach adds materially to transaction costs, until the interpretation of the Law 24 becomes clearer, it is hard to argue with this cautious approach.

HBT do, however, believe that parties are entitled to designate in their contracts whichever language version they prefer as the language to govern the interpretation of agreements.

As mentioned above, further implementing regulations are required to be issued in relation to these general principles in Law 24 within 24 months from now and the implementing regulations, once issued, may result in a change in the above views and practices. We will be continuing to monitor the situation and provide updates in the event of developments.