The District Court of West Jakarta (the Court) has declared an English language loan agreement between a non-Indonesian lender and an Indonesian debtor null and void by operation of law since it did not contain an Indonesian language version. As a background, on 9 July 2009, the Indonesian Government enacted the Law No. 24 of 2009 on National Flag, Language, Emblem and Anthem (the Language Law) that requires Indonesian language to be used in contracts involving Indonesian entity/individual, in addition to English or any other foreign language, if any. That particular requirement provokes somewhat of a controversy amongst the business community and legal profession alike as it raises the question on the validity of non-Indonesian language contracts, in lack of clear provision regarding the same. Prior to enactment of the Language Law, it is rather a common practice in Indonesia to use only English language in contracts made between Indonesian companies with their foreign counterparts.
In their grounds for decision, the Panel of Judges considered that the use of English language as the sole language in a contract involving Indonesian party(ies) is a violation of the Language Law. Further, the absence of Indonesian language was also deemed as non-compliance with the requirements of a valid contract under the Indonesian Civil Code (the Civil Code).
The Court decision on this case is still subject to the process of appeal and therefore has yet to become final and binding.
II. The Case
The case was initiated by the Indonesian debtor, PT Bangun Karya Pratama Lestari (BKPL), who submitted a claim to the Court against the non-Indonesian lender Nine AM Ltd. (Nine AM), demanding nullification of the US$ 4,442,000.00 loan agreement entered into by the parties on 23 April 2010 (after enactment of the Language Law). BKPL’s rationale in its claim was, among others, that the use of English language as a sole language of the loan agreement contravenes the provision of Article 31 paragraph 1 of the Language Law which provides that Indonesian language must be used in a memorandum of understanding or an agreement involving Indonesian state & government institution, Indonesian private institution or an Indonesian citizen. On the basis of the foregoing, BKPL asserted that the alleged violation of the Language Law (by not using Indonesian language in the loan agreement) should be seen as lacking a lawful cause, which under Indonesian law is one of the mandatory requirements of a valid contract. Consequently, the loan agreement, having not fulfilled the requirement of a lawful cause to constitute a valid contract, must be declared null and void by operation of law.
In response to BPKL’s claim, Nine AM argued that there is no provision under the Language Law which explicitly challenged the validity of a contract as a consequence of not using Indonesian language. Nine AM further argued that the mandatory use of Indonesian language is still subject to the impending issuance of implementing regulation in that respect, by referring to the provision of Article 40 of the Language Law. In addition to the above, Nine AM also referred to a certain letter from the Ministry of Law and Human Rights of the Republic of Indonesia dated 28 December 2009 regarding clarification on the implication and implementation of the Language Law (Ministry Letter), which supports the view that the use of English language in an agreement will not be deemed as violation of the requirements stipulated under the Language Law, pending the issuance of the implementing regulation in that respect.
III. The Grounds for Decision
In their consideration, the Panel of Judges shared among others, the following views:
1. The lack of explicit consequences under the Language Law for the failure to use Indonesian language in a contract does not undermine the mandatory nature of using Indonesian language.
2. The Ministry Letter does not have the power to supersede the obligation to comply with the Language Law and the lack of implementing regulation cannot be used as an excuse of not using Indonesian language in a contract.
3. All contracts or agreements made after the enactment of the Language Law (i.e. after 9 July 2009) must be in compliance with the provisions of the Language Law.
4. Any objection regarding the mandatory use of Indonesian language as provided in the Language Law is supposed to be submitted to the Constitutional Court to undergo the process of judicial review.
In light of the above consideration, the Panel of Judges decided that the loan agreement is null and void by operation of law. The Panel of Judges also apparently considered that since the main loan agreement is declared null and void, the fiduciary security agreement, which is supplemental in nature to the main loan agreement, is also null and void.
IV. The Impact
The Court’s decision on this case raises a significant concern for the business community in Indonesia, particularly those who may have executed non-Indonesian language contracts in the past. The Ministry Letter which was issued to confirm the validity of non-Indonesian language contracts was considered powerless by the Court, seeing as that it is not a product of government legislation. Although the decision has not become final and binding, it has definitely caught attention and Indonesian language is starting to be seen as an inevitable necessity in a contract, either as the sole language or part of a dual language.
Whatever the final decision is, we must treat this as a lesson towards implementing cautious measure and making sure that Indonesian language version is always inserted in contracts involving Indonesian entity or individual, however time-consuming it may be.
This publication is a summary overview prepared by Indrawan & Santoso team to serve as general information and for discussion purposes. The summary captures selected issues and is not intended to be relied upon as legal advice. For further information on the above subject, please contact our team.