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28 October 2019
After an inordinate 10-year delay, a presidential regulation(1) has finally been issued to give effect to key language provisions of Law 24/2009 on the National Flag, Language, Coat of Arms and Anthem (the Language Law),(2) which came into force on 9 July 2009.
Of primary interest to businesses are the regulation's provisions on contractual language, as they refer to the controversial Article 31(1) of the Language Law, which can 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 Articles 31(1) and (2) of the Language Law gives rise to a host of fundamental questions as regards the freedom, sanctity, validity and illegality of contracts, among other things. However, the regulation provides no answers to these questions. Instead, Articles 26(1) and (2) merely reiterate the requirements that:
What is new is that Article 26(3) seems to imply that the Indonesian-language version of a contract should be the original or master version, with the English version being a translation thereof. However, Article 26(4) crucially provides that the parties to a contract are free to choose which version will prevail should differences or inconsistencies be found between the Indonesian and the foreign-language versions.
While the regulation does not prescribe penalties for failure to comply with its contractual language requirements, a series of controversial judicial decisions on Article 31 of the Language Law make clear that any such failure may render an agreement null and void.
It was generally a case of business as usual following the enactment of the Language Law, with cross-border agreements and contracts involving Indonesian parties continuing to be executed in English.
However, all that changed with the West Jakarta District Court's decision in PT Bangun Karya Pratama Lestari v Nine AM Ltd,(3) the facts of which are briefly summarised 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 the plaintiff and held that the agreement was null and void as it was in breach of the statutory requirement to be in Indonesian. Consequently, the agreement was illegal, had never existed and had never been binding on the parties. The district court's decision was upheld on appeal by the Jakarta High Court(4) and in cassation by the Supreme Court.(5)
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, insofar as possible, to their original positions. However, in reality, this is often impossible due to the passage of time, insolvency or some other inhibiting factor, not to mention the difficulty of enforcing judgments in Indonesia. Thus, a finding of null and void can result in considerable injustice.
The full implications of PT Bangun Karya Pratama Lestari became apparent with the West Jakarta District Court's subsequent decision in Blutether v PT Global Mediacom Tbk, dkk,(6) in which the court found an agreement to be null and void for violating Article 31(1) of the Language Law, despite the fact that it contained a choice of law clause (Singapore law) and an arbitration clause (Singapore International Arbitration Centre). The trial court's decision was upheld on appeal by the Jakarta High Court.(7) Blutether then appealed to the Supreme Court.(8) Notably, 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 the Singapore International Arbitration Centre had found in Blutether's favour.
Thus, in both cases (which were widely reported on and critiqued in international business and legal media), the courts held that Article 31(1) of the Language Law 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.
Parties involved in cross-border transactions should always err on the side of caution. As the decisions in PT Bangun Karya Pratama Lestari 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.
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, every possible precaution should be taken to avoid the possibility of a disgruntled counterparty availing of Article 31 of the Language Law to escape their contractual obligations.
For further information on this topic please contact Serafina Muryanti Hayu P or Maher Asmoro Putra Sasongko at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email (email@example.com or firstname.lastname@example.org). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.
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