Language of Agreements

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If your agreement with an Indonesian counterparty is not written in the Indonesian language, you run the risk that your agreement will be held invalid and unenforceable by an Indonesian court.

Imagine: your company is a telecommunications hardware and software technology engineering and manufacturing company with offices in Hong Kong, Dallas and Dubai and manufacturing facilities in China and India. A prominent and powerful Indonesian telecommunications equipment distributor reaches out to your Dallas office, via an email written in English, expressing interest in your products and asks whether your technology can be re-engineered to suit consumer equipment interface requirements in Indonesia. Without the benefit of obtaining the advice of competent Indonesian counsel, your Dallas office proceeds in good faith and engages in all technical and commercial discussions and correspondence with your Indonesian counterparty exclusively in English (“Discussions“). This results first in an agreed letter of intent, also written exclusively in English (“Letter of Intent“), and then a term sheet, also written exclusively in English (“Term Sheet“), and then an engineering, manufacturing and sales agreement, also written exclusively in English (“Sales Agreement“).

Your company assumes that Indonesian counsel is not required because the Sales Agreement specifically states that Singapore law will govern the interpretation, validity and enforceability of the agreement; the engineering phase of the Sales Agreement will be performed in Dubai, the manufacturing works will be conducted in India; the sales and purchase revenue stream will be paid to your Hong Kong trading company’s Hong Kong bank account; all shipments are FOB; and the Sales Agreement also provides that all disputes will be finally and exclusively resolved through arbitration in accordance with the rules of the Singapore International Arbitration Centre (“SIAC“).

After spending a year and five million dollars on research and development in close coordination with your Indonesian counterpart, with all communications exclusively in English, your Company begins production and commences delivery. After the first deliveries are made and an invoice is sent for two million dollars, your Indonesian counterparty decides that it doesn’t like the commercial terms of the Sales Agreement and, with the understanding that your company is now in the hole to the tune of seven million dollars, your counterpart feels empowered to extract concessions.

Let us also assume, as is most often the case, that your Indonesian counterparty has no assets outside of Indonesia. Thus, your company must rely on the enforcement mechanisms of the Indonesian court system to satisfy any SIAC arbitration decision your Company may win.

It will come as a big surprise when you discover that the Sales Agreement and the arbitration clause contained therein may be unenforceable in Indonesia because the Sales Agreement was not written in Indonesian. Several court decisions have decided against enforceability. And, more are expected particularly in light of misconstrued Indonesian regulatory developments.

The primary arguments made in favor of avoidance are based on Article 31 of Law No. 24 of 2009 concerning Flag, Language and State Symbols as well as the National Anthem (Undang-Undang No. 24 tahun 2009 tentang Bendera, Bahasa, dan Lambang Negara, serta Lagu Kebangsaan) (“Law 24/2009“), Article 26 of Presidential Regulation No. 63 of 2019 concerning the Use of the Indonesian Language (“Perpres 63/2019“) and Articles 1320, 1321, 1322, 1335 and 1337 of the Indonesian Civil Code (Kitab Undang-undang Hukum Perdata) (“ICC“).

The relevant provisions of law provide as follows:

Article 31 of Law No. 24/2009:

  1. Bahasa Indonesia wajib digunakan dalam nota kesepahaman atau perjanjian yang melibatkan lembaga negara, instansi pemerintah Republik Indonesia, lembaga swasta Indonesia atau perseorangan warga negara Indonesia.
  2. Nota kesepahaman atau perjanjian sebagaimana dimaksud pada ayat (1) yang melibatkan pihak asing ditulis juga dalam bahasa nasional pihak asing tersebut dan/atau bahasa Inggris.

My free translation:

  1. The Indonesian language must be used in memoranda of understanding or agreements that involve state institutions, instrumentalities of the government of the Republic of Indonesia, private Indonesian institutions or individual Indonesian state citizens.
  2. Memoranda of understanding or agreements as intended by paragraph (1) that involve foreign parties are also to be written in the national language of the foreign party and/or the English language.

Article 31 of Law 24/2009, when read in conjunction with the Elucidation of Article 31 of Law 24/2009, does not prohibit private agreements involving private law matters involving foreign parties to be written exclusively in the national language of a foreign party.

The Elucidation of Article 31 of Law 24/2009:

“Ayat (1)
“Yang dimaksud dengan “perjanjian” adalah termasuk perjanjian internasional, yaitu setiap perjanjian di bidang hukum publik yang diatur oleh hukum internasional, dan dibuat oleh pemerintah dan negara, organisasi internasional, atau subjek hukum internasional lain. Perjanjian internasional ditulis dalam bahasa Indonesia, bahasa negara lain, dan/atau bahasa Inggris.

“Khusus dalam perjanjian dengan organisasi internasional yang digunakan adalah bahasa-bahasa organisasi internasional.

“Ayat (2)
“Dalam perjanjian bilateral, naskah perjanjian ditulis dalam bahasa Indonesia, bahasa nasional negara lain tersebut, dan/atau bahasa Inggris, dan semua naskah itu sama aslinya.”

My free translation:

Paragraph (1)
That which is meant by “agreement” includes international agreements, namely every agreement in the field of public law that is regulated by international law, and is made by a government and state, an international organization, or another international legal subject. International agreements are written in the Indonesian language, the language of another state, and/or the English language.

Especially in agreements with international organizations that which is to be used is the languages of the international organization.

Paragraph (2)
In bilateral agreements, the text of the agreement is to be written in the Indonesian language, the national language of the other aforementioned state, and/or the English language, and all of those texts are the same as its original.

Article 26 of Perpres 63/2019:

  1. Bahasa Indonesia wajib digunakan dalam nota kesepahaman atau perjanjian yang melibatkan lembaga negara, instansi pemerintah Republik Indonesia, lembaga swasta Indonesia, atau perseorangan warga negara Indonesia.
  2. Nota kesepahaman atau perjanjian sebagaimana dimaksud pada ayat (1) yang melibatkan pihak asing ditulis juga dalam bahasa nasional pihak asing tersebut dan/atau bahasa Inggris.
  3. Bahasa nasional pihak asing dan/atau bahasa Inggris sebagaimana dimaksud pada ayat (2) digunakan sebagai padanan atau terjemahan Bahasa Indonesia untuk menyamakan pemahaman nota kesepahaman atau perjanjian dengan pihak asing.
  4. Dalam hal terjadi perbedaan penafsiran terhadap padanan atau terjemahan sebagaimana dimaksud pada ayat (3), bahasa yang digunakan ialah bahasa yang disepakati dalam nota kesepahaman atau perjanjian.”

My free translation:

  1. The Indonesian language must be used in memoranda of understanding or agreements that involve a state institution, an instrumentality of the government of the Republic of Indonesia, a private Indonesian institution, or an individual Indonesian citizen.
  2. Memoranda of understanding or agreements as intended by paragraph (1) that involve a foreign party shall be written also in the national language of the aforementioned foreign party and/or in the English language.
  3. The national language of the foreign party and/or the English language as intended by paragraph (2) shall be used as the equivalent or translation of the Indonesian Language to equalize the understanding of memoranda of understanding or agreements with foreign parties.
  4. In the event a difference in interpretation arises in relation to the equivalence or the translation as intended by paragraph (3), the language that will be used is the language that is agreed in the memorandum of understanding or agreement.

Article 1320 of the ICC:

“Supaya terjadi persetujuan yang sah, perlu dipenuhi empat syarat:

  1. kesepakatan mereka yang mengikatkan dirinya;
  2. kecakapan untuk membuat suatu perikatan;
  3. suatu pokok persoalan tertentu;
  4. suatu sebab yang tidak terlarang.”

My free translation:

In order for a valid agreement to arise, four conditions must be fulfilled:

  1. the agreement of those who bind themselves;
  2. capacity to create an obligation;
  3. a specific subject matter;
  4. a purpose/subject that is not prohibited.

Article 1321 of the ICC:

“Tiada suatu persetujuan pun mempunyai kekuatan jika diberikan karena kekhilafan, atau diperoleh dengan paksaan atau penipuan.”

My free translation:

There is no agreement that has force if given due to mistake, or obtained by force or fraud.

Article 1322 of the ICC:

“Kekhilafan tidak mengakibatkan batalnya suatu persetujuan, kecuali jika kekhilafan itu terjadi mengenai hakikat barang yang menjadi pokok persetujuan.

“Kekhilafan tidak mengakibatkan kebatalan, jika kekhilafan itu hanya terjadi mengenai¬∑diri orang yang dengannya seseorang bermaksud untuk mengadakan persetujuan, kecuali jika persetujuan itu diberikan terutama karena diri orang yang bersangkutan.”

My free translation:

Mistake does not result in an agreement being void, except if that mistake concerns the nature of the goods which are the subject of the agreement.

A mistake does not result in cancellation, if that mistake only arises concerning the identity of the person with whom a person intends to make an agreement, except if that agreement is given primarily because of the identity of the relevant person.

Article 1335 of the ICC:

“Suatu persetujuan tanpa sebab, atau dibuat berdasarkan suatu sebab yang palsu atau yang terlarang, tidaklah mempunyai kekuatan.”

My free translation:

An agreement without a purpose/subject, or made on the basis of a false or prohibited purpose/subject, does not have force.

Article 1337 of the ICC:

“Suatu sebab adalah terlarang, jika sebab itu dilarang oleh undang-undang atau bila sebab itu bertentang dengan kesusilaan atau dengan ketertiban umum.”

My free translation:

A purpose/subject is prohibited, if that purpose/subject is against the law or if that purpose/subject is against decency/morality or public order.

Arguments in Favor of Voidability

Violation of Public Order Argument

The most common arguments presented in favor of the avoidance of an agreement that has not been written in the Indonesian language follow the following general structure (non sequitrus included):

  1. For a valid agreement, Article 1320(4) of the ICC requires a lawful purpose/subject.
  2. An agreement that violates the law cannot be deemed to have been made for a lawful purpose/subject.
  3. Article 31 of Law 24/2009 and Article 26 of Perpres 63/2019 require that an agreement must be made in the Indonesian language if it involves an Indonesian party.
  4. Article 31 of Law 24/2009 and Article 26 of Perpres 63/2019 are intended to protect Indonesian parties from overreaching by foreign parties and misunderstandings of the meaning of agreements arising out of lack of foreign language fluency.
  5. An agreement negotiated and executed only in a foreign language violates Article 31 of Law 24/2009 and Article 26 of Perpres 63/2019 and thus such an agreement violates public order.
  6. An agreement that violates public order cannot be deemed to have been made for a lawful purpose. Such an agreement is void and unenforceable in Indonesia pursuant to Articles 1335 and 1337 of the ICC.

Counterargument
The defect in the argument that a violation of a law dictating the language of agreements constitutes a breach of public order substitutes form for substance. The language of an agreement is a component of the form of the agreement; not the purpose or subject of the agreement. The purpose or subject of an agreement refers to what the parties to the agreement have agreed to do or to exchange. For instance, one party may agree to paint the other party’s house for Rp1,000,000. The purpose/subject of such an agreement is to paint the house and to pay and receive Rp1,000,000.

The language used to express the terms and conditions of an agreement is not relevant to the purpose or subject of the Agreement.

A subject or purpose of an agreement that is prohibited and violates public order as intended by Articles 1320(4), 1335 and 1337 of the ICC refers to agreements that, for example, promise to perform a criminal act such as theft, rape or murder, or that violate a civil law prohibiting such an agreement, for example, an agreement to hold shares in a limited liability company for and in the name of another person (See Article 33(1) and (2) of Law 25 of 2007 concerning Capital Investment).

Mistake Argument
Another argument often made is that an agreement should be voidable if the Indonesian party did not adequately understand the agreement due to the expression of its terms in a foreign language. On its surface, this is a more plausible argument under Article 1322 of the ICC.

Counterargument
However, this argument is only applicable in the event the mistake concerns the nature of the goods which are the subject of the agreement. And, in any event, the counter argument to the argument of mistake is simply that the Indonesian language speaking party should have and always could have obtained a translation or requested a bilingual agreement in the event the Indonesian language speaking party doubted their ability to understand the language of the agreement.

Arguments against Voidability
Several arguments exist in favor of rejecting the interpretation that Article 31 of Law 24/2009 and Article 26 of Perpres 63/2019 permit the avoidance of an agreement on the basis of the language used in negotiations and drafting.

Hierarchy of Laws and Regulations
Indonesian law is designed based on a hierarchy that renders law superior to regulations. Regulations must follow the principles set forth in law. A regulation cannot exceed or contradict a principle set forth in a law.

Article 31 paragraph (1) and the Elucidation of Article 31 paragraph (1) of Law 24/2009 make clear that the “agreements” referred to in Article 31 paragraph (1) are “international agreements” meaning “every agreement in the public sector that is regulated by international law”.

Article 26 of Perpres 63/2019 must be interpreted in a manner that is consistent with Law 24/2009. The Elucidation of Article 31 paragraph (1) of Law 24/2009 clearly states that the applicability of the Indonesian language requirement set forth in Article 31 of Law 24/2009 is limited to “international agreements” “in the public sector” that are “regulated by international law”. The elucidation clearly removes the applicability of the Indonesian language requirement from the world of private commercial agreements.

Article 26 of Perpres 63/2019 does not attempt to redefine the scope of Article 31 of Law 24/2009 beyond “international agreements” “in the public sector” that are “regulated by international law”. And, as a matter of law, Perpres 63/2019 would constitute an act exceeding the authority of the President and executive branch of the Indonesian government if the intention of Article 26 of Perpres 63/2019 was to expand the definition of “memoranda of understanding” and “agreements” beyond the scope of “international agreements” “in the public sector” that are “regulated by international law”.

Article 5(2) of the Constitution of 1945 states that the President’s regulatory authority is limited to the stipulation of regulations as may be required to implement laws. The President cannot change the law through implementing regulations.

As a result, Law 24/2009 and Perpres 63/2019 cannot be interpreted to condition the enforceability of a commercial agreement on the basis of the language chosen by contracting commercial parties.

Executive Branch Policy
Notwithstanding some court decisions holding that agreements are void if not written in Indonesian, the Indonesian Executive Branch has certainly come out on the side of interpreting Law 24/2009 and Perpres 63/2019 against avoidance of agreements written exclusively in a foreign language.

One example of the Executive Branch’s interpretation was enunciated by Minister of Law and Human Rights Patrialis Akbar who declared in letter No. M.HH.UM.01.01-35 dated 28 December 2009 regarding the Request of Clarification on the Implication and the Implementation of Law 24/2009 (“Minister Clarification Letter“) that Article 31 of Law 24/2009 on Language does not require the cancellation of a private commercial agreement written in English without also being written in Indonesian. The Minister declared as follows:

“. . . kami berpendapat bahwa Pasal 31 Undang-Undang Nomor 24 Tahun 2009 tentang Bendera, Bahasa, dan Lambang Negara serta Lagu Kebangsaan yang mewajibkan penggunaan bahasa Indonesia dalam perjanjian yang melibatkan antara lain lembaga swasta Indonesia, penandatanganan perjanjian privat komersial (private commercial agreement) dalam bahasa lnggris tanpa disertai versi bahasa Indonesia tidak melanggar persyaratan kewajiban sebagaimana ditentukan dalam Undang-Undang tersebut. . .”

My free translation:

. . . we are of the view that Article 31 of Law 24 of 2009 concerning Flag, Language and State Symbols as well as the National Anthem that requires the use of the Indonesian language in agreements that involve among others private Indonesian institutions, the signing of private commercial agreements in the English language without being accompanied by an Indonesian language version does not violate the mandatory requirements as stipulated in the aforementioned law.

Another example is found in Regulation of the Minister of Trade No. 24 of 2021 concerning Engagements for the Distribution of Goods by Distributors or Agents (“Permendag 24/2021“) (issued two years after Perpres 63/2019). This regulation governs the appointment of distributors and agents of goods and services by foreign and domestic producers. Article 6 paragraph 4 of Permendag 24/2021 states that agreements can be written only in a foreign language. Article 6 paragraph 4 of MOT Reg. 24/2021 on Distributors provides as follows:

“(4) Setiap perjanjian yang hanya ditulis dalam bahasa asing wajib diterjemahkan ke dalam bahasa Indonesia oleh penterjemah tersumpah.”

My free translation:
(4) Any agreement that is only written in a foreign language must be translated into the Indonesian language by a sworn translator.

Permendag 24/2021 clearly anticipates agreements written only in a foreign language, and only requires that a sworn translation be obtained for purposes of submission of the relevant foreign language agreement to the Ministry of Trade.

Based upon this and other examples, as well as the fact that Perpres 63/2019 does not attempt to change the limitation of the application of Law 24/2009 to “international agreements” meaning “every agreement in the public sector that is regulated by international law”, the Elucidation of Law 24/2009 should prevail. The law and these regulations should be interpreted in a constitutionally consistent manner and this interpretation compels the conclusion that the use of the Indonesian language in negotiations, drafting and final execution versions of agreements is not required in order to permit the enforcement of agreements involving Indonesian parties.

The Responsible Party
If Law 24/2009 and Perpres 63/2019 are interpreted to “require” agreements to be in Indonesian, who should be responsible for ensuring that this “requirement” is satisfied?

As between foreign and Indonesian counterparties, each party should be responsible for ensuring that the provisions of their agreement do not violate and in fact comply with the laws of their respective jurisdictions. It is a standard representation and warranty in agreements that the agreement, when executed and delivered, is or will be legal, valid, binding and enforceable in accordance with its terms. This should be considered an implied term in every agreement in Indonesia pursuant to Article 1339 of the ICC which provides that agreements are not only binding in relation to those matters that are expressly set forth within them, but also for all matters that, according to the nature of the agreement should be implied based on fairness, custom and the law.

The courts should impose the burden of complying with an Indonesian law or regulation of such an esoteric application on the Indonesian counterparty. The courts should not allow an Indonesian counterparty to avoid its obligations to a foreign counterparty on the basis of the existence of an Indonesian law that should be deemed to be known by the Indonesian counterparty and not know by the foreign counterparty. The fact is usually Indonesian business people do know of the existence of Law 24/2009 (though less know of Perpres 63/2019) and in any event should be deemed to bear the responsibility of knowing the content of their own national laws. They know of Law 24/2009 but nevertheless often remain silent and did not inform the foreign counterparty of the Indonesian language requirement. Such behavior should be deemed to be bad faith. If courts condone this and permit contract liability avoidance, the result is that the Indonesian language “requirement” is nothing more than a trap, enabling the Indonesian party to lie in wait, ready to spring the avoidance snare whenever a renegotiation or avoidance of debt or other obligations becomes desirable. If permitted, the courts will continue to send a clear message to foreign investors and contract counterparties that Indonesian law stacks the deck against foreign interests without regard to justice and fairness.

Statutes of Frauds
Indonesian law requires many different kinds of agreements to be set forth in writing, either in notarial deed form or simply in writing and signed under hand by the parties. Examples include agreements to arbitrate disputes; certain intellectual property rights transfers; deeds of establishment, amendments to articles of association, deeds of mergers, consolidations, acquisitions and separations of limited liability companies; pre- and post-marital agreements; partnership agreements, real property transfers, testamentary dispositions; and, among others the imposition of security encumbrances.

Even if Law 24/2009 and Perpres 63/2019 are interpreted to require drafting and/or execution of agreements involving Indonesian counterparties to be in Indonesian, if the law does not require the agreement to be in writing to be valid, there is no reason to permit the avoidance of an agreement on the basis that it was written in a language other than Indonesian. The agreement as written, because the law did not require it to be in writing, should not be considered invalid. The written iteration of the agreement should be considered as persuasive evidence of the intentions and agreements of the parties.

Sanctions
Neither Law 24/2009 nor Perpres 63/2019 provide a sanction for the failure to use Indonesian in a commercial agreement. Neither the law nor any regulations state that such an agreement is void or voidable as a matter of law.
However, other regulations do in fact provide sanctions when provisions governing agreements are not in compliance. For example, Article 33(1) and (2) of Law 25 of 2007 concerning Capital Investment expressly provides that an agreement to hold shares in a limited liability company for and in the name of another person is void as a matter of law. The legislature certainly knows how to express this sanction and does so when intended. Such an expression should not however be inferred from the language of Law 24/2009 or Perpres 63/2019.

Conclusion and Advice
Perpres 63/2019 will certainly be used to bolster the argument that commercial agreements that do not use the Indonesian language are void or voidable. Even though this argument is unfounded, it will create substantial expenses in the dispute resolution process, thereby providing the party seeking avoidance considerable negotiating power.

With that in mind, a foreign commercial party should certainly understand the risks inherent in executing foreign language only agreements; and thus ensure that agreements entered into with Indonesian commercial counterparties are bilingual. The parties should expressly designate which of the languages used in an agreement will govern in the event of an ambiguity arising in translation. This choice is expressly permitted by Article 26(4) of Perpres 63/2019.
Thus, when contracting with Indonesians, always always always be sure that your contracts are drafted in a bilingual or multi-lingual format that includes the Indonesian language.

 

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Satrio Law Firm » Commercial Transactions » Language of Agreements

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