After what can only be described as an inordinate delay of 10 years, a Presidential Regulation (the “Regulation,” effective 30 September 2019) has finally been issued to give effect to key language provisions of Law No. 24 of 2009 on the National Flag, Language, Coat of Arms and Anthem (“Law 24/2009,” often referred to as the Language Law), which came into force on 9 July 2009.
What is primarily of interest to business are the Regulation’s provisions on contractual language, as they refer to the controversial Article 31 Law 24/2009, section (1) of which may freely be translated as follows: “The Indonesia language must be used in a memorandum of understanding or agreement to which one of the parties is a Republic of Indonesia state institution or government agency, an Indonesian private entity or an Indonesian citizen.” Article 31(2) further provides that “a memorandum of understanding or agreement, as referred to in section (1) above, that involves a foreign party shall also be written in the national language of the foreign party or in English.”
The sweeping scope of Article 31(1) and (2) Law 24/2009 gives rise to a host of fundamental questions as regards freedom of contract, sanctity of contract, validity of contracts, illegality of contracts and so forth. The Regulation provides no answers to these questions. Article 26(1) and (2) of the Regulation merely reiterate the requirements that an agreement involving an Indonesian party must be in the Indonesian language, and that an agreement involving a foreign party must also be written in the national language of the foreign party or in English.
What is new is that Article 26(3) seems to imply that the Indonesian-language version should be the original or master version, with the English version being a translation of the Indonesian version. Crucially, however, Article 26(4) provides that the parties are free to choose the version that will prevail should differences or inconsistencies be found as between the Indonesian-language version and the foreign-language version.
While the Regulation does not impose sanctions for a failure to comply with its contractual language requirements, a series of controversial judicial decisions on Article 31 Law 24/2009 make it clear that such failure may render an agreement null and void. We shall now discuss these decisions in some detail.
B. Lost in Translation
It was generally a case of business as usual following the enactment of Law 24/2009, with cross-border agreements and contracts involving Indonesian parties continuing to be executed in English.
However, all that changed with the decision of the West Jakarta District Court in PT Bangun Karya Pratama Lestari v Nine AM Ltd, the facts of which may briefly be summarized as follows:
Plaintiff (PT Bangun Karya Pratama Lestari) borrowed USD 4.422 million from Defendant (Nine AM Ltd) based on a loan agreement that was drafted solely in English but which the parties expressly agreed would be governed by Indonesian law. The Court accepted that the loan agreement had been drafted in its entirety by Defendant, with Plaintiff’s role being confined to its actual signing. In consideration of receiving the loan, Plaintiff pledged a number of units of heavy machinery as security, but subsequently repudiated the agreement and sought to have it set aside by the Court on the ground that it violated Article 31(1) Law 24/2009.
The Court agreed with Plaintiff and held that the agreement was null and void (batal demi hukum) for illegality as it was in breach of the statutory requirement to be in Indonesian. Consequently, it was illegal, had never existed and had never been binding upon the parties. The District Court’s decision was upheld on appeal by the Jakarta High Court and in cassation by the Supreme Court.
A finding of null and void means that an agreement is void from the outset or, in other words, that a valid and binding contract never existed. In such circumstances, the court will order the parties to be returned, in so far as possible, to their original positions. However, in reality this is often impossible due to the passage of time or insolvency or some other inhibiting factor, not to mention the difficulty of enforcing judgments in Indonesia. Thus, a finding of void and void can result in considerable injustice.
The full implications of the Nine AM case became apparent with the subsequent decision of the West Jakarta District Court in Blutether v PT Global Mediacom Tbk, dkk, in which the Court found an agreement to be null and void for violating Article 31(1) Law 24/2009, notwithstanding that it contained a choice of law clause (Singapore law) and an arbitration clause (Singapore International Arbitration Centre/SIAC). The trial court’s decision was upheld on appeal by the Jakarta High Court. Blutether then appealed to the Supreme Court. It is interesting to note that the District Court’s judgment was handed down while an arbitration process on the same matter was ongoing in Singapore, and the High Court judgment was entered after SIAC had found in favor of Blutether.
Thus, in both these cases (which were widely reported and criticized in the international business and legal media), the Courts held that Article 31(1) Law 24/2009 constitutes an imperative norm that must be complied with. Consequently, if an agreement involving an Indonesian party is not in the Indonesian language, it runs a serious risk of being found null and void for illegality.
D. ABNR Commentary
We would advise those involved in cross-border transactions to always err on the side of caution. As the decisions in Nine AM and Blutether have shown, the Indonesian courts can be unpredictable and have few qualms about annulling contracts for illegality and procedural defects, despite the injustice that this could potentially cause.
Ideally, therefore, a bilingual version of a contract involving an Indonesian party should be used, or separate Indonesian and English versions should be prepared and executed simultaneously, even if the contract is governed by foreign law or contains an international arbitration clause. Of course, this will often be difficult in practice. Nevertheless, we believe that every possible precaution should be taken to avoid the possibility of a disgruntled counterparty availing of Article 31 Law 24/2009 to escape their contractual obligations.