The District Court of West Jakarta rendered decision No. 451/Pdt.G/2012/ PN.Jkt.Bar. on 10 July 2013. The Court ruled that a loan agreement between an Indonesian limited liability corporation (PT) and a Texas-based lender was void on the grounds of illegal cause. The court reasoned that the loan agreement was drafted in the English language, thereby violating Article 31 of Law No. 24 of 2009 (Law 24), which mandates all contracts and MOUs involving an Indonesian national or entity to be written in Indonesian. As a consequence, the agreement was set aside, deemed to have never existed, and the Court ordered the parties to reinstate each other.
Article 31 of Law 24 attracted controversy from the outset, as it risked voiding of agreements written solely in English or in English as the determinative language with a non-binding Indonesian translation. In 2009, the Ministry of Law and Human Rights issued two letters in response to clarification requests from a number of lawyers on the effect of Law 24 on agreements written in English. The Ministry stated (see here, and here) that such agreements would remain valid and enforceable, reasoning that the language is a formal instead of substantive requirement.
The West Jakarta District Court was not persuaded by this, giving the word “wajib” (must/is required to) a wide interpretation. More importantly the court equated the requirement to use the Indonesian language as a cause for the purpose of Article 1320 of the Civil Code and a breach of the requirement consequently serving as a basis to set aside the agreement on the grounds of illegality.
The court’s reasoning is arguably shaky and lacks elaboration. Such decisions will typically be appealed and should be expected reach the Supreme Court. Nevertheless, for the avoidance of lengthy litigation it would be advisable to have English language contracts translated into Indonesian and to stipulate that the Indonesian version is the determinative version.
The Ruling of the Court
In reaching its decision, the Court advanced two questionable points. First, it considers the Indonesian language requirement as a “cause“ within the meaning of Article 1320 of the Civil Code. Second and most crucially, it rules that breach of this provision (i.e. agreements written in a non-Indonesian language) as a prohibited cause for the purpose of Articles 1335 and 1337 of the Civil Code, thus rendering the agreement void. This newsletter will now analyze the two points in turn.
Treating Indonesian Language Requirement as a Cause
A fundamental inconsistency of the decision is treating the requirement of language as a “cause” for an agreement. A “cause” under Article 1320 refers to the objective of the parties in entering the agreement and the respective performances they are bound to undertake. In this case, the cause of the agreement is a loan of money in exchange for repayment plus interest. For the defendant lender the performance it must undertake is providing and disbursing the sum of money agreed to the borrower and the repayment of the principal plus interest for the claimant borrower. Both performances are legal and well accommodated under Articles 1765-1769 of the Civil Code.
The judgment is effectively treating the parties as though they had contracted for a “contract to be written in the English language.” This places the language of the contract as a mere formality, instead of the substance of the contract. The scope of Article 1337 of the Civil Code, on the other hand, covers only the material aspect, not the formality. The decision, nevertheless, fails to explain why the Court had blurred the two elements.
This blurring sets a dangerous precedent. It opens the floodgate to render void an agreement for breach, violation or non-conformity to applicable law, even where such law or regulation is not mandatory or lacks enforcement provisions.
Setting the Agreement Aside on the Grounds of Illegality
The most striking aspect of the decision is arguably the effect of breaching the language provision. The court took a broad interpretation of the consequence, not only stating that “writing a contract in a non-Indonesian language” is in itself a cause and that “the particular cause is illegal” but also that as a consequence of the illegality the agreement must be set aside.
Law 24 has no provision on penalty for breaching the Indonesian language requirement and no implementing regulations to this effect have been issued. This is in contrast, for example, with the prohibition of nominee arrangement under the Investment Law, which explicitly stipulates that a contract for the purpose of nominating a person to own shares on behalf of another person is illegal and void by law.
Source: District Court of West Jakarta Decision No. 451/Pdt.G/2012/ PN.Jkt.Bar., 10 July 2013
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