Legal Risks When Making Contract Agreements in Indonesia

With making contract agreements in Indonesia, there is little or no room for mistakes. Whether you are a supplier or a customer, making sure that your contracts with third parties protect your business, and knowing what protection your business have can sometimes be daunting.

While many businesses incorporate agreed terms and conditions in the form of long-term or partnership agreements, many other businesses are still dependent on informal or even vague terms and conditions on a purchase order.

You should always be careful when drafting contracts when doing business in Indonesia – from initiation to signature to execution. In every stage of the process has risk associated and sometimes they can be hard to identify.

In this article that there are some simple aspects you can use to identify and eliminate risk within the contracting cycle.

1. Understanding the Transaction

One of the greatest challenges in contract management in Indonesia is whether the proposed transaction is permitted by Indonesian Law.

Indonesia’s contract law is drafted in Indonesia Civil Code, or Kitab Undang-Undang Hukum Perdata in Indonesian.

For instance, a foreigner who is not an Indonesian national is not allowed to possess land in Indonesia, i.e. the law prohibits the direct freehold ownership of land by foreigners in Indonesia.

However, do not lose hope as there are alternatives for non-Indonesians to own a property in the country and a reliable law firm such as Cekindo will always be able to provide you with professional assistance.

2. Clear Payment Terms

Money issues are always sensitive during the entire contracting cycle. Therefore you must be extra careful and look into all details when money is involved, i.e. specifying the payer and payee, payment due date, payment method, late payment penalty.

If you do not have this type of agreement, you can get into troubles with cash flow and unwanted conflicts. Basically, the terms and conditions of payment are agreed mutually among the parties in Indonesia to prevent potential litigation.

3. Specified Clause of Termination

Of course, nobody would like to terminate their contracts as most of the time it means something has gone wrong and the contract was breached.

Therefore, having a termination clause in your commercial contract gives either side the right to terminate it if things go south.

According to Article 1266 Civil Code of Indonesian Law, the judicial decision is required for any termination of a commercial contract in Indonesia. Both parties can waive Article 1266 Civil Code upon mutual agreement.

4. Language Matters for Contract Agreements

Based on Article 31 Number 24 of 2009 of Indonesian Law or the Language Law, if contracts or agreements involve Indonesian entities and organisations, Indonesian citizens or Indonesian government institution, they are required to be drafted in Indonesian (Bahasa Indonesia).

In order to comply with this law, most companies will prepare their contracts in dual languages, usually in both Indonesian and English. If your contract is made in a foreign language other than Indonesian, this contract will become invalid or ineffective immediately.

In Conclusion

Be meticulous while making contract agreements in Indonesia and know both corporate and contract laws. Or hire a professional agency with lawyers who will help you to draft and review contracts based on your needs.

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