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Contracts & Business Law

Indonesian Law and Legal Certainty

Highly suspect legal decisions, both civil and criminal, are frequently handed down by Indonesian courts. The Indonesian court system has stubbornly resisted reform, and for the most part, it remains "business as usual."

High-profile court cases involving prominent figures from the New Order regime have repeatedly failed to mete out justice. Mysteriously, these failures have frequently been due to technical legal 'flaws' of a rather semantic nature in cases presented by the prosecution or plaintiffs.

The court system in Jakarta is particularly rotten, to the extent that the government plans to relocate more than 70 percent of Jakarta's judges to rural areas, replacing them with judges from areas outside the capital claimed not to be as corrupt. Payment for judgments is rampant throughout the court system. Unfortunately, judges of any honesty and integrity were removed by the Soeharto regime. What was left behind was a court system that used the symbolic forms and the language of law, but which dispensed precious little actual justice.

There is a critical shortage of clean, skilled judges in Indonesia, leading to the suggestion that judges be imported from Indonesia's former colonizer, the Netherlands, to hear commercial cases. Whilst the suggestion was not followed up, it does demonstrate the Indonesian Government's exasperation in dealing with Soeharto's legacy in the legal system.

Before 1998, Indonesia did not really have an effective bankruptcy process. The weak bankruptcy laws that existed in Indonesia before 1998 dated from 1906, a legacy of the former Dutch colonial administration. Technically, these laws only applied to non-indigenous Indonesians; Europeans, Chinese and Arabs. Consequently, the 1906 laws were used extremely infrequently, and "bankruptcy" as it is generally understood was rarely ever applied to a company or person. The Indonesian loan word ‘bangkrut' is used to indicate an absence or loss of money, or an inability to pay, rather than referring to a legal process to assist in meeting obligations to creditors. The level of understanding of bankruptcy processes in Indonesia is quite low.

At the insistence of the International Monetary Fund (IMF), Indonesia was forced to introduce new bankruptcy laws, which it did in April 1998. A number of specialist commercial courts were established to hear bankruptcy cases, and judges in these courts underwent training in commercial law. In addition, a number of ad-hoc judges from outside the court system also were appointed to these new courts. These ad-hoc judges are lawyers who specialize in commercial law, thus competent to understand business matters.

To date, sadly, outcomes from commercial courts have been very disappointing. Strange decisions have been common, partly because judges are still coming to grips with the concept of bankruptcy; with few precedents it was probably inevitable. Bankruptcy laws may well have been reformed, but it seems that Indonesian courts are still reluctant to protect creditors from debt-ridden Indonesian companies, especially, it appears, when those creditors are foreigners.

The chances of a foreigner or a foreign company getting a fair hearing in an Indonesian court are not good. Corruption, cultural misunderstanding and misplaced nationalism, among other factors, often conspire to put foreigners at considerable disadvantage should their case ever get to court.

Given the state of the legal system, one might be forgiven for giving Indonesia a wide berth as an investment or business destination. Fortunately, absence of law does not mean an absence of order and justice. This is due to two factors: the ‘musyawarah,' and local community vigilance, more negatively expressed in the phenomenon of mob rule.


Notwithstanding all that has been said in other articles in this Web site about the legal system, contracts still have a very important place in Indonesian business, recording in written form understandings that have been reached as a consequence of proper mutual consultation between parties.

The relatively cold, contractual, legalistic nature of Western business transactions make clear distinctions between personal and business realms, notwithstanding that there is, more often that not, an element of mutual personal trust between the contracting parties. In the West, the attitude of "a deal is a deal" means that once an agreement has been reached and signed, it is then generally closed for further renegotiation. Western business tends to emphasize textual agreements using the language of law where rights and responsibilities are clearly laid out in writing and binding; no matter the circumstances.

Contracts and agreements in Indonesia tend to be much less detailed, and contain much more "unwritten text" relying upon the context upon which the agreement was made. Much more emphasis is placed upon flexibility; contracts are softer, and rely upon mutual understanding of the discourse that has occurred between the parties over a period of time, and the trust and interdependency that has built up between them.

Contracts can be subject to constant renegotiation and reinterpretation. Securing agreements and maintaining contracts in Indonesia requires more than mere written documents. It requires maintaining relationships at as many different layers as possible; personal, business, government and community. Networks should be maintained at as many levels as is practical and, ideally, these networks should interweave and overlap with those with whom you do business. Social pressure for contracting parties to act fairly and honestly towards one another is of much greater value in securing agreements in Indonesia than a wad of legal documents.

Although many satisfactory contracts can be made without the assistance of a notary, it is obvious that the more important a contract, the more important it is to secure the maximum amount of legitimacy for the agreement, whatever it might be. A contract drawn up and cosigned by a notary has more weight in the minds of most Indonesians than a contract drawn up by a non-notary. Signing ceremonies, overly formal - even trite - though they may seem to the Westerner, have important symbolic power, serving to increase the prestige and legitimacy of the contract.

It should be noted that the majority of an Indonesian notaries day-to-day work is in the preparation of land titles, wills and the drawing up of property lease agreements. The average Indonesian notary is less than familiar with more esoteric work involving such matters as company incorporation, foreign investment laws, business licenses and residency permits. Unfortunately, however, very few notaries will reject the opportunity to undertake such tasks despite their lack of knowledge or experience in these areas.

Notaries abound in Indonesia, however their ability levels are highly variable as are their fees, and there is not necessarily a correspondence between the two. A bad choice of a notary in some matters can cause considerable loss of time and money. There are plenty of horror stories of company incorporation taking up to two years to complete at the hands of inexperienced and/or incompetent notaries. Indonesia-based business consultants will normally use their own notaries already proven in these fields.

Vitally important to be clear

Language can often present problems in Indonesia, and this has consequences for contracts. While English is widely understood among educated Indonesians, the level is not always particularly high. An ability to speak English is often a point of pride among Indonesians, indicating their educated status. It often happens, however, that an Indonesian may seem to be listening to and understanding to what is being said in English, but sometimes critical details are being missed. Complicating matters is the fact that many Indonesians will rarely ask for repetition when something is unclear to them, partly because it is thought impolite, and partly because of embarrassment. These comments also apply to professional Indonesian interpreters, who might feel that they will lose face if they have to ask you to repeat something.

It is very prudent in the Indonesian context to often repeat important details during the course of discussions so that your meaning is completely clear. Indonesians, Javanese especially, will often say "yes" purely as an indication that they are listening; "yes" in this context does not necessarily indicate understanding or agreement with what is being said.

At higher levels of Indonesian business, contracts written in English are common enough, thus present no problems, at least for the Western side. However, for the most part, contracts are drawn up in Indonesian, and where required, an English translation made. For especially critical agreements it would be wise to obtain more than one translation as a double check.

Thanks to Okusi Associates for permission to reproduce this material.

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