Indonesian Court Strikes Down Agreement on Language Grounds In a disquieting ruling (the Decision ) that has been noted internationally, the West Jakarta District Court recently annulled a contract between an Indonesian borrower and a non-indonesian lender on the grounds that an Indonesian-language version of the agreement had not been executed, in contravention of Article 31(1) of the Indonesian National Language, Flag, Coat of Arms and Anthem Act 2009 (the Act ). The Decision, which was issued on 20 June 2013, is currently on appeal to the Jakarta High Court. Under Indonesian law, a judicial decision pending appeal is not enforceable until such time as a final and conclusive judgment is issued, which is a process that could take up to three years. Nevertheless, the Decision serves as a wake-up call to both practitioners and business people that Indonesian statutory provisions that have often been viewed as merely being aspirational in nature, in that no implementing regulations have been promulgated to govern how such statutory provisions are to be applied in practice, can in fact have very serious practical implications if not complied with according to the letter of the law. Background The facts of the case PT Bangun Karya Pratama Lestari v Nine AM Ltd (Decision Number 451/Pdt.G/2012/PN.Jkt Bar.) are as follows. The plaintiff borrowed USD 4,422,000 from the defendant based on a loan agreement (the Agreement ) that was drafted solely in English and which the parties expressly agreed would be governed by Indonesian law. The Court accepted that the Agreement had been drafted in its entirety by the defendant, with the plaintiff s role being confined to its actual signing. In consideration of receiving the loan, the plaintiff pledged a number of units of heavy machinery as collateral, but subsequently repudiated the Agreement and sought to have it set aside by the Court on a number of grounds, one of which was that the Agreement was void from the outset by virtue of Article 31(1) of the Act. Substantive Issues Article 31(1) of the Act reads as follows: Bahasa Indonesia shall be used in a memorandum of understanding or agreement to which one of the parties is a state institution, Republic of Indonesia 1 Rajah & Tann LLP
government institution, Indonesian private entity or Indonesian citizen. The Act contains no sanctions for breaches of Article 31(1). In addition, Article 40 of the Act states that further provisions governing the application of Article 31(1) shall be established by Presidential Regulation. However, no such implementing regulation has been issued to-date. Nonetheless, under Indonesian law, a requirement created by statute is effective as of the time of the statute s enactment. Furthermore, a lower-level regulation (such as a Presidential Regulation referred to in Article 40) cannot circumscribe or expand such requirement. In this respect, the requirement created by Article 31 is quite clear in imposing an obligation to execute an Indonesian language version of any agreement which is in a language other than Bahasa Indonesia and to which an Indonesian entity or person is a party. If issued, the Presidential Regulation cannot diminish the scope of the requirement, but may only fill in the details as to how the requirement is to be applied. Whilst some legal practitioners had previously argued that the language requirement would be inoperative until such time as a Presidential Regulation was issued (an argument which was partly supported by guidance issued by the Indonesian Ministry of Law and Human Rights see discussion below), the conservative view has been to treat the language requirement as operative from the outset, premised on the concern that the Indonesian courts would, in the event of any dispute where the application of Article 31(1) of the Act is an issue, be inclined to take a literalist view and find that an agreement not executed in the Indonesian language would violate the Act and thereby fail to satisfy one of the key requirements for a valid agreement, namely, that the agreement is for a lawful cause. This is despite the fact that the lawful cause requirement has traditionally been applied solely to the subject matter of agreements (for example, a contract to pay a bribe would fall foul of the lawful cause requirement). It appears that the conservative position has prevailed in the Decision, with the West Jakarta District Court taking the drastic step of setting aside the Agreement, ruling it to be void from the outset. The Court held that as the Agreement had not been drafted in the Indonesian language, as required by Article 31(1), it therefore failed to satisfy the lawful cause requirement and was void from the outset, meaning that a valid and binding agreement had never existed. In a further dictum, the Court pointed out that even if a Presidential Regulation were to be issued, as mandated by Article 40 of the Act, this would not be sufficient to defeat the words shall be used, as they appear in Article 31(1), as a Statute is superior in the hierarchy of laws to a Presidential Regulation The Court concluded by stating that the only way in which the words shall be used could be removed from Article 31(1) would be through a challenge to their constitutionality in the Indonesian Constitutional Court or the amendment of the Act by the Indonesian House of Representatives. 2 Rajah & Tann LLP
Ministerial Guidance Disregarded As mentioned above, despite the enactment of Article 31(1), many legal practitioners continued to accede to client requests that their agreements be drafted in English in circumstances where Article 31(1) appeared to mandate that they be drafted in Bahasa Indonesia. In so doing, such legal practitioners frequently relied on the Clarification to Law Firms issued by the Minister of Law and Human Rights (the Minister ) on 28 December 2009, in which the Minister stated his view that Article 31(1) did not apply to private commercial agreements and that accordingly these could continue to be drafted in English in accordance with the wishes of the parties. The Minister was also of the opinion that the actual implementation of Article 31(1) would have to await the issuance of a Presidential Regulation, as mandated by Article 40, meaning that until such time as such Presidential Regulation was issued, the language requirement under Article 31(1) would essentially be unenforceable. The judgment of the West Jakarta District Court in PT Bangun Karya Pratama Lestari v Nine AM Ltd raises the issue as to the extent to which ministerial or other official guidances, clarifications, explanations, etc., may be relied upon when adduced as evidence in court. Comments and Observations While the Decision is currently on appeal and therefore not enforceable as yet as mentioned above, legal practitioners and those involved in cross-border transactions should attempt to mitigate all possible risks under Article 31(1) of the Act by ensuring that both Indonesian and non-indonesian versions of their agreements are concurrently executed. In practice this is likely to present many difficulties. Thus, whilst it would be preferable for the two versions to be executed simultaneously, it also needs to be stressed that nothing in the Act prohibits the parties from agreeing to execute the Indonesian version of their agreement at a later date, although it remains the case that the two versions should be executed as near in time to each other as possible. The need to execute an Indonesian language version could be incorporated into the agreement either as a condition precedent or condition subsequent (with a condition precedent being preferable). This view is based not only on the fact that the Act is silent with regard to timing, but also the general principle of freedom of contract. As regards governing language, the Act is also silent, so once again the parties should be free to agree on which language will govern interpretation and prevail should a dispute arise. However, it also needs to be acknowledged that in the absence of clear regulatory provisions, there is no way of knowing how the Indonesian courts will rule if there is a dispute on either the timing of execution of the Indonesian language version or the question of governing language. 3 Rajah & Tann LLP
Contacts Assegaf Hamzah & s Ibrahim Sjarief Assegaf D (62)(21) 2555 7825 ibrahim.assegaf @ahp.co.id Eko Ahmad Ismail Basyuni D (62)(21) 2555 7802 eko.basyuni@ahp.co.id Tunggul Purusa Utomo D (62)(21) 2555 7800 tunggul.utomo@ahp.co.id Assegaf Hamzah & s is a full service Indonesian law firm that has expanded rapidly since its establishment in 2001. Representing both Indonesian and international clients operating in a broad cross-section of industries, the firm is committed to providing apt and timely legal advice, and to offering comprehensive and holistic solutions to clients legal and business needs. Ranked as a top-tier firm in many practice areas by The Asia Pacific Legal 500, Chambers Asia and other respected legal publications, both AHP and its lawyers have regularly been recognized as leading firm and leading individuals in various practice areas. 4 Rajah & Tann LLP
Rajah & Tann LLP Cheng Yoke Ping D (65) 6232 0265 F (65) 6428 2196 yoke.ping.cheng@rajahtann.com Ng Sey Ming D (65) 6232 0473 F (65) 6428 2202 sey.ming.ng@rajahtann.com Benjamin Tay D (65) 6232 0390 F (65) 6428 2272 benjamin.tay@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam and Thailand, as well as associate and affiliate offices in Malaysia, Indonesia, Cambodia and the Middle East. Our Asian network also includes regional desks focused on Japan, South Asia and Myanmar. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or e-mail the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP