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 litigation.

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 Indonesia.

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 Careful.