• Indonesia's Language Law: What Does It Mean for Your Business Agreements?
  • December 26, 2013 | Authors: Mahareksha Dillon; Richard D. Emmerson
  • Law Firm: SSEK - Jakarta Office
  • In a landmark decision on June 20, 2013, the West Jakarta District Court annulled a Loan Agreement entered into between a local borrower and an offshore lender because it was executed in English only. The decision is not controversial in our view since all agreements entered into by an Indonesian party must be executed in the Indonesian language or in a bilingual format, and the subject Loan Agreement was expressly governed by Indonesian law. Quite rightly, the court ordered the borrower to return the loan funds to the lender. However, the case is important for various reasons.

    Background: Under Article 31 of Law No. 24 of 2009 regarding Flag, Language, National Emblem and Anthem (the "Language Law"), the Indonesian language, or a bilingual format, must be used in an MOU or agreement that involves government institutions of Indonesia, Indonesian private institutions (e.g., companies) or Indonesian citizens. The plaintiff argued that the Loan Agreement violated the Language Law and therefore did not fulfill the requirements of a valid agreement under Article 1320 of the Indonesian Civil Code. The Court agreed.

    Significance of the Decision: The decision is a wake-up call. It is the first time the courts have annulled an agreement under the Language Law. Some practitioners had been hoping that Article 31 did not yet apply since the implementing regulation contemplated by Article 40 has not yet been issued. The decision also clarifies that annulment is the remedy whereas the Language Law itself does not expressly indicate the consequence of violating Article 31.

    Key Outstanding Matters: First, the Indonesian Ministry of Law and Human Rights issued a policy statement in December 2009 clarifying, inter alia, that if parties execute an agreement in a bilingual format, they may agree that the foreign language version prevails in the event of a conflict or inconsistency between the two language versions. Whether the courts will enforce such a provision remains to be seen. For practical purposes, we would expect an Indonesian court to rely upon the Indonesian version in any event.

    Second, it is arguable that the Indonesian Language Law requirement does not apply if the parties have made a valid choice of a foreign law to govern their contract. For example, why would the Indonesian Language Law requirement apply if the parties have validly chosen the laws of Ontario to govern the contract? Under Indonesian choice of laws rules, the Indonesian courts should enforce a contract governed by the laws of a foreign jurisdiction provided that there is a sufficient nexus between the parties or place of performance and the jurisdiction of the chosen governing law, and provided that doing so would not violate Indonesian public policy or order. However, whether the Indonesian courts will impose the Language Law requirement despite an otherwise valid choice of a foreign law remains to be seen.

    And finally, we note that the above-noted District Court decision is under appeal.

    Take Away: All contracts governed by Indonesian law involving Indonesian legal entities and citizens must be executed in the Indonesian language or a bilingual format. Go ahead and provide that the English version prevails but make sure that the Indonesian version is a perfect translation since the Indonesian courts will almost certainly render their decision based on the Indonesian wording. For a contract governed by a foreign law, the parties should seriously consider executing it in a bilingual format if there is any chance of litigation in the Indonesian courts and if the value of the contract warrants the additional expense.