A Comprehensive Guide to  Indonesian Contract Law

A Comprehensive Guide to Indonesian Contract Law

Written By
Joy Cunanan
Updated on
January 22, 2024
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minutes

Indonesia, a diverse archipelago with a burgeoning economy, has witnessed remarkable growth in recent years. With increased economic activities, the need for a robust legal framework has become imperative, particularly in the realm of contract law. This blog will provide an overview of Indonesian contract law, exploring its principles, key elements, and notable case law. 

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Foundation of Indonesian Contract Law

The bedrock of Indonesian contract law is the Indonesian Civil Code, promulgated by publication in April 1847. The Code draws heavily from Dutch civil law, a legacy of Indonesia's colonial past. It serves as the fundamental legal framework for contractual relationships, embodying principles that have endured over time.

The Dutch influence is evident in the codification of civil law principles, providing an initial framework that has since adapted to meet Indonesia's socio-cultural and economic needs. Legislative amendments and judicial interpretations have further refined this legal landscape, aligning inherited principles with the dynamics of a growing economy.

The principles embedded in the Civil Code address contractual relationships, obligations, and rights, offering stability in the face of contemporary business engagements. The legal pluralism embraced in Indonesia, recognizing customary and religious laws alongside civil law, adds complexity to the foundation, reflecting the nation's cultural diversity.

Indonesia's legal pluralism can be traced back to various historical factors. The nation's religious landscape evolved over time, encompassing animism, Hinduism-Buddhism, Islam, and Christianity in chronological order. Additionally, the deep-rooted presence of indigenous jurisprudence, known as adat, particularly prevalent in rural areas, contributes to legal diversity. The overlay of Islamic law, including the Syariah and hadith, further compounds the legal landscape. Dutch colonial rule introduced legislation and apartheid practices, impacting legal norms based on race and national origin. Attempts at legal reform were made during Dutch rule, emphasizing a "debt of honour" approach. British and Japanese occupations during specific periods also influenced legal systems. Finally, Indonesia's independence from Dutch rule marked a pivotal moment in shaping the nation's legal framework, with enduring influences from its complex historical and cultural amalgamation.

Recent legislative efforts signal an intent to modernize Indonesian contract law, addressing challenges posed by digital transactions and cross-border agreements. This adaptability underscores a commitment to maintaining a legal environment conducive to commerce and foreign investment.

Key Principles

Freedom of Contract

The cornerstone of Indonesian contract law resides in the principle of freedom of contract, allowing parties the autonomy to negotiate and establish agreements on terms of their choosing. This is implicitly stipulated in Article 1338 (1) of the Indonesian Civil Code which provides that “all legally executed agreements shall bind the individuals who have concluded them by law.” This principle, however, is not absolute and is circumscribed by legal constraints and considerations of public policy. It emphasizes the significance of contractual freedom while recognizing the necessity for safeguards to prevent exploitation or agreements contrary to the public interest.

Good Faith

Integral to the fabric of Indonesian contract law is the principle of good faith, dictating that parties engage in contractual dealings honestly and fairly, as provided in Article 1338 (3) of the same Code. Courts may intervene when a party is found to be acting in bad faith, thereby upholding the integrity of contractual agreements.  This principle serves as a safeguard against opportunistic or unethical behaviour, fostering a sense of trust and fairness in contractual relationships.

Consensus ad Idem

At the heart of contract formation lies the principle of consensus ad idem, or the meeting of minds. This principle mandates a mutual understanding between parties concerning the essential terms of the contract. It underscores the necessity for clear and unambiguous communication, ensuring that both parties share a common understanding of their respective rights and obligations. The enforceability of a contract is contingent upon the presence of consensus ad idem.

Legal Certainty

The principle of legal certainty is a linchpin in Indonesian contract law, demanding clarity and precision in contractual terms. Ambiguity is to be avoided, as clear and unambiguous agreements contribute to the predictability of contractual relationships. Legal certainty ensures that contractual intentions are accurately reflected, reducing the scope for disputes and providing a stable framework for business transactions.

Formation of Contracts

Subjective Requirements

These requirements pertain to the contracting parties and make the contract voidable if not satisfied. Voidable contracts are those that remain valid until annulled under a court of law after one of the parties invokes grounds for annulment. 

Mutual Consent

Contractual relationships under Indonesian law commence with the interplay of offer and acceptance. An offer, an unequivocal expression of intent to be bound by specific terms, sets the stage. The subsequent acceptance, mirroring the terms of the offer, culminates in the creation of a legally binding contract. The clarity and specificity of these elements are imperative to prevent ambiguity and ensure a mutual understanding between the contracting parties. Consent is then manifested when the offer is accepted by the other party

Generally, the mutual consent of the parties makes the contract binding. The law admits a few exceptions however, such as the delivery of the thing in contracts of depository (Article 1694), loan for use (Article 1749), and loan for consumption (Article 1754). Formal or written requirements also apply to deeds of donation (Article 1692) and contracts of compromise (Article 1851). Mutual consent must also be manifested without duress, error or fraud (Article 1449).

Legal Capacity 

Contractual capacity is a foundational principle, stipulating that parties entering into an agreement must possess the legal competence to do so. Article 1330 enumerates those who are incompetent to conclude agreements: minors and individuals under guardianship (Article 1446), married women, in the events stipulated by law, and in general, individuals who are prohibited by law from entering into contracts. Corporations and associations classified as legal or juristic entities may also contract the same way a natural person can through their board of management. This safeguard ensures that contracts are entered into by parties who comprehend the nature and consequences of their commitments, preserving the integrity of the contractual relationship.

Objective Requirements

These relate to the contents or object of the contract. 

Certain Subject Matter

The third essential element for a valid contract is a certain or definite subject matter. The term "subject" refers to the content of the contract, requiring a clear specification of the type of goods to be delivered. While it is not mandatory for contracting parties to precisely outline the quantity of goods at the time of contract formation, a basis for determining quantity in the future must be provided.

In a broader context, the subject of a contract can encompass rights, obligations, services, goods, or other entities, whether already in existence or anticipated to come into existence, as long as they are ascertainable. For instance, in Indonesia, it is customary for a buyer to place an order for a car with a car dealer. A contract to sell a car not yet in the possession of the dealer is considered lawful, provided that, at the time of performance, the car belongs to the dealer, granting the authority to deliver the vehicle to the buyer.

However, a contract that is impossible to perform at the time of execution is deemed void. Notably, there is no requirement of reciprocity, as stated in the Civil Code, allowing a person to obligate oneself to another without expecting anything in return. This is referred to as a pro bono agreement under Article 1314, where one party provides a benefit to another party without receiving any consideration in return. This contrasts with the common law doctrine of consideration, where a contract lacking consideration is not legally binding.

Lawful Purpose

Another prerequisite as provided under Article 1335 is lawful purpose or cause. Any agreement to the contrary, or concluded with fraudulent intent, shall not be enforceable. If the contract's content is unlawful or goes against moral standards or public policy, the contract is rendered void. One illustrative case law is found in the District Court of Central Jakarta's decision in the Perusahaan Listrik Negara v. Paiton Energy case No.517/PDT. G/1999. The court deemed the Power Purchase Agreement void as it contravened Article 33 of the 1945 Constitution. This was due to PLN purchasing electricity from Paiton in US Dollars and selling it to Indonesian consumers in Rupiah, in violation of President Regulation Number 37 of 1972, which mandates that prices must be in Rupiahs. It should be noted that under the Indonesian Civil Code, valid conveyance must be based on legal title and performed by a person with the right or authority to convey the same.

Performance and Breach

Performance

The fulfilment of contractual obligations, known as performance, is the cornerstone of any contractual relationship in Indonesian law. Contracting parties are obligated to execute their agreed-upon duties in accordance with the terms stipulated in the contract. The principle of strict adherence to contractual terms underscores the significance of meeting obligations on time and as specified. Performance is not limited solely to the delivery of goods or services; it extends to all actions that the contract prescribes.

In instances where the contract does not explicitly detail performance requirements, Indonesian law implies a duty of good faith and fair dealing. This overarching obligation requires parties to act honestly, transparently, and reasonably to ensure the realization of the contract's purpose. The legal machinery stands ready to enforce specific performance when necessary, compelling the breaching party to fulfil their contractual duties.

Breach

Breaches of contract may occur in four different ways: (1) non-performance, where the debtor does not fulfil his or her obligations under the contract; (2) partial or incomplete performance, where the debtor performs his duty but not according to the standard of completion required under the agreement; (3) late performance, where fulfilment was done but beyond the deadline; and (4) when the debtor acts in contravention to the contract.

Breach of contract occurs when one party fails to fulfil its contractual obligations as outlined in the agreement. The affected party, commonly referred to as the injured party, is entitled to seek legal remedies for the harm suffered due to the breach. In the event of a breach, Indonesian law provides several avenues for recourse. The injured party may pursue monetary compensation, known as damages, to recover the financial losses incurred as a result of the breach. Additionally, specific performance may be sought, compelling the breaching party to fulfil their contractual obligations as originally agreed.

The legal response to a breach is contingent on factors such as the nature and severity of the breach, the presence of any contractual remedies specified in the agreement, and the legal discretion of the courts. Timely communication of the breach and adherence to prescribed dispute resolution mechanisms, if any, are crucial steps in navigating the aftermath of a contractual breach.

Indonesian courts, in resolving disputes related to performance and breach, aim to restore parties to the position they would have been in had the breach not occurred. The legal framework emphasises fairness and equity, promoting just outcomes that take into account the specific circumstances of each case.

Elevate Your Contracting with Lexagle. 

We have unravelled the intricacies inherent in the foundation of contractual relationships, the key principles guiding these agreements, and the critical elements of contract formation, performance, and breach under Indonesian contract law. Getting ahead of the curve requires not just being informed, but also being equipped – which is where Lexagle comes in. 

From the initial stages of contract creation and negotiation to the ongoing monitoring of performance and, if necessary, navigating the intricacies of dispute resolution, the Lexagle contract management software seamlessly integrates into the fabric of diverse industries. Its commitment to compliance, coupled with its adaptability to the ever-shifting legal landscape, distinguishes the platform as a comprehensive solution for enterprises striving not merely for operational efficiency but strategic advantage. Book a demo with Lexagle to find out more. 

A Comprehensive Guide to  Indonesian Contract Law
Author
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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