Introduction to Contract Law in Indonesia
The Civil Code was promulgated in 1848. The general laws of contracts and
obligations are laid down under Book III of the Civil Code, covering four
chapters, from Article 1233 to Article 1456. Further, Articles 1457 to 1850 deal
with 'nominated' contracts or special contracts.
In 1855, pursuant to Article 131 of the Netherlands Indies State Laws, the
population of Indonesia was legally divided into three groups, namely:
- Foreign Orientals, and
- Indigenous Indonesians.
Per Article 163 of the Netherlands Indies State Laws, the Civil Code and the
Commercial Code did not apply to the Indigenoaus Indonesians. The Indigenous
Indonesians were governed by Adat law, i.e., the customary law, which is an
unwritten, ununiform and not a statutory law that evolves as per the needs of
the village community. However, under Adat law, the requirement of a contract is
the real agreement – one which is actually performed.
With the introduction of the foreign investment laws in Indonesia, in 1967, the
contract laws stipulated under the Civil Code were made applicable to the
General Provisions Governing Contracts
The law of contracts is an 'open' system which entails that everybody is free to
enter into any kind of contract. Thus, all contracts that have been legally
concluded, have the same force as the legislative act for the parties to the
contract, thus making provisions of Book III of the Civil Code optional in
Therefore, the contract may deviate from the provisions of Book III of
the Civil Code. However, the contract needs to adhere to the basic principles of
contract law – legality, justice, good intention and fairness.
Article 31 Paragraph (1) of Law 24/2009 provides that the Indonesian language
shall be used on MOU or agreements that involve state institutions, agencies of
the government of the Indonesia, Indonesian private institutions or individuals
of Indonesian nationals.
Thus, all contracts are mandatorily drawn up in Indonesian (Bahasa Indonesia).
As a matter of practice, contracts are often negotiated and executed in dual
language (most commonly English and Indonesian).
Often a clause is added in the contract executed in English requiring the
parties to translate the contract into Bahasa Indonesia.
Further, to avoid issues arising due to inconsistencies between the bilingual
versions of the contract, a clause is provided that the English version of the
contract will prevail.
Termination of a Commercial Contract
The Way Forward
- If Article 1266 of the Civil Code is not waived by the parties to the
contract, then it is mandatory for the parties to approach the local Courts
to get the contract terminated.
A void condition is deemed to have been included in reciprocal agreements, in
case a party does not fulfill his obligation.
In such case, the agreement is not void by law, but voidance must be requested
to the Court.
The request must also be made, even though the conditions of voidance concerning
the non-fulfillment of an obligation is included in the agreement.
If the conditions of voidance is not included in the agreement, then the
judge, considering the situation, upon the defendant's request, has the
discretion to fix a timeframe to fulfill such obligations, but such
timeframe may not exceed one month.
- Thus, in order to avoid the route through courts, parties usually add
specific language in the agreement to waive the applicability of Article
1266 where the Indonesian law is the governing law.
- However, please note that contracts may waive statutory provisions
categorized as facultative law, but cannot waive imperative laws.
- Imperative law of contracts which cannot be waived by the parties by
mutual agreement includes fundamental principles which are also stipulated
in Article 1320 - consent, capacity, certain object, and lawful purposes,
and provided under Article 1338 - principles of pacta sunt servanda and freedom of contract.
- Thus, only facultative laws which are complementary in nature may be
- Article 1266 of the Civil Code provides for a claim of cancellation of
the contract against a debtor who is in default to fulfil his obligation and
this cancellation is provided as a punishment for a debtor who has neglected his
duties. Thus, Article 1266 provides that the court could allow a period of grace
to the debtor to give him an opportunity to perform.
- When the court is of the opinion that a cancellation of the contract
will be disastrous to the debtor, while the default is not serious, the
court will refuse to cancel the contract, though, possibly the court may
entertain a claim for compensation.
- Further, the creditor also has a right to ask for termination along with
compensation. Over all rights of the creditor arise from the Article 1238
read with Articles 1239 and 1267 (provides for costs, damages and interest).
- In the absence of the clause on waiver of Articles 1266 and 1267, the
parties have to approach the court to terminate the obligations under the
In light of the above principles of contract laws in Indonesia, to terminate the
contract, the parties must do as follows:
- Due diligence of the terms of the contract
To determine whether Article 1266 of the Civil Code has been explicitly waived.
For the purpose of termination of this Agreement, the Parties agree to expressly
waive the provisions of Article 1266 of the Civil Code to the extent that the
Parties agree not to seek any approval from the courts or require the other
Party to seek any approval from the courts in order to effectuate the
termination of this Agreement.
- Due to diverse precedents on clauses of waiver and unclear views related
to which statutory provisions of the private law that could be waived by a
contract, the parties must:
- put in waivers, including waiver of Articles 1266 and 1267 of the Civil
- add a severability clause.
- If during the performance of a contract, no issue arises among the
contracting parties, then debates as to the validity of the waivers would
not occur in the first place. If in the unwanted event where disputes do
arise and the validity of the waivers is challenged, then any determination
of invalidity of such waiver would not invalidate the whole agreement as the
waiver would be severed from the contract.
- Thus, if the contract has a waiver clause, which is not challenged by
the parties, a notice of termination may be served upon the defaulting party
as per the agreed terms and the contract may be terminated on mutual terms.
- In the absence of such waiver, or the waiver clause being disputed by
the parties, the recourse is to get the contract adjudicated in a court of
- Adjudication of the Contract in Court of Law
- In the absence of the waiver clause, the injured party has to take
recourse of the court proceedings to terminate the contract and until the
final and binding decision of the court is declared, all the contracting
parties are obliged to fulfil their obligations under the contract.
- Pursuant to Article 1267, the injured party may further claim
compensation, damages and interest from the defaulting party, in addition to
the prayer for termination of the contract.
- Please note that the law in Indonesia does not explain the legal
consequences of termination of contract. However, according to the general
principles, if a contract is terminated or declared null and void, then it
will be returned to its original condition as at the time the contract was
concluded. Thus, if one of the parties has fulfilled its obligations, then
it is considered as undue payment as stipulated in the Article 1359 of the
Civil Code and it must be returned. However, this may lead to additional
issues in the event the obligations under the contract are staggered and are
carried out in stages.