Contracts & Business Law

Indonesian Law and Legal Certainty

Indonesia's courts have been reformed on paper and remain risky in practice. Since the fall of Suharto, the constitutional amendments of 1999-2002 restructured judicial power, court administration was consolidated under the Supreme Court (the "one-roof" reform), and new institutions arrived: the Constitutional Court, the Corruption Eradication Commission (KPK), and the Judicial Commission (Komisi Yudisial), which monitors judges' conduct. This is real institutional change, not the unreformed New Order system it replaced.

It has not made the courts trustworthy. In March 2025 the Central Jakarta Corruption Court acquitted three palm-oil groups in a major export-permit graft case; prosecutors then arrested the presiding judges and a district-court chief over some Rp60 billion paid for that verdict. The system also self-corrected, the Supreme Court annulling the acquittal in September 2025. That is where things stand: first-instance decisions can still be bought, and appeal sometimes puts them right. Rely on neither.

Bankruptcy is now governed by Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (PKPU), not the 1998 emergency law or the colonial ordinance it replaced. Cases run through five specialised Commercial Courts, in Central Jakarta, Medan, Semarang, Surabaya and Makassar. The threshold to declare a debtor bankrupt is deliberately low: two or more creditors and a single debt that is due and payable, established by summary proof. The PKPU restructuring track suspends payment for up to 270 days while a debtor puts a composition plan to its creditors. Foreign creditors may file, nationality being no bar, but Indonesia has not adopted the UNCITRAL Model Law, so its courts will not recognise a foreign insolvency order or a foreign judgment. Your remedy is a local proceeding where the debtor holds assets.

None of this should scare a business away, because the absence of a reliable court is not an absence of order. Two forces fill the gap: musyawarah, the practice of resolving matters through patient mutual consultation, and the weight of community and reputation. Most disputes here are settled by negotiation and relationship rather than litigation, which is usually the wiser first resort in any case.

Contracts

Contracts matter in Indonesia, but they carry a different weight than in the West. Western practice treats a signed document as closed: "a deal is a deal", the terms fixed whatever happens afterwards. Indonesian agreements are typically shorter and softer, resting on the shared understanding built up between the parties and the trust behind it, and they can be reopened and reinterpreted as circumstances change.

This means a contract alone secures little. What secures an agreement is the relationship around it, maintained at as many levels as possible (personal, business, government, community) and ideally interwoven with the people you deal with. Social pressure to behave fairly is worth more here than a thick file of legal paper.

The paper still has its place, and the more important the agreement, the more legitimacy is worth buying. A deed drawn up and cosigned by a notary carries more authority in most Indonesian minds than a private document, and the signing ceremony, formal to the point of seeming trite to a foreigner, has genuine symbolic force. Company incorporation is no longer a notary's improvisation but a codified, largely electronic process: a notary executes the deed of establishment under Law No. 40 of 2007, and licensing runs through the government's Online Single Submission (OSS) system, which issues the single Business Identification Number (NIB) on which permits hang. It remains specialist work, best handed to a practitioner who does it routinely. For the current rules on foreign-owned company establishment, Okusi Associates is the authoritative next step.

Language and the bilingual-contract rule

Language is the sharpest practical risk. English is widely spoken among educated Indonesians, and speaking it is a point of pride, but comprehension is often thinner than it sounds, and critical details slip past. Many will not ask for something to be repeated, from politeness or embarrassment; the same is true of professional interpreters, who may not want to lose face by asking. Repeat important points, and confirm them. A Javanese "yes" frequently means only "I am listening", not "I understand" or "I agree".

There is also a legal dimension that catches many foreign parties out. Bahasa Indonesia is not an optional courtesy translation. It is a statutory requirement. Under Article 31 of Law No. 24 of 2009, and its implementing Presidential Regulation No. 63 of 2019, any agreement involving an Indonesian party must be made in Indonesian; where a foreign party is involved, a foreign-language version may sit alongside it. The Supreme Court has voided an English-only contract on exactly this ground (Nine AM Ltd v PT Bangun Karya, 2015). A 2023 Supreme Court circular softened matters, so that a missing Indonesian version no longer voids a contract automatically unless bad faith is shown, but the obligation itself stands. Execute important contracts bilingually, sign both versions together, and state plainly which language prevails.

Thanks to Okusi Associates for permission to reproduce this material.

Have comments or corrections? Please email editor [at] livinginindonesia.info.