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Law Digest - Construction Services Contract

Law Digest - Construction Services Contract

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To build or not to build. That seems to be one of the most pressing questions, especially in Indonesia. No doubt, Indonesia’s economy has improved and its sovereign rating has been upgraded to investment grade. Therefore, infrastructure investments are concequently more attractive to investors. This has also prompted further relevant legislation. In fact earlier this year, Indonesia enacted the new Construction Services Law No. 2 of 2017 (“Construction Law”).

Under the Construction Law, foreign and local construction companies that operate in Indonesia are required to ensure that all the contracts entered into after the 12th of January 2017 comply with the new requirements. The Construction Law regulates several provisions that every construction contract must contain in order to be in full compliance. Those provisions include:

  • Indentity of the parties
  • Defaults
  • Third Party Protection
  • Works Description
  • Dispute Settlement
  • Environment Aspect
  • Solvency periode
  • The Termination of Construction Work Contract
  • Risk Guarantee
  • Rights and Obligations
  • Circumstances Force
  • Construction Dispute Settlement Alternative
  • Certified Construction Manpower
  • Building Failure
  • Payment Method
  • Construction Manpower Protection

  • The Construction Law also regulates the following specific requirements:

    ‣ Incentive Agreement (optional)

    ‣ Intellectual Property Rights provision for Planning Services (mandatory)

    ‣ Provisions concerning sub-services providers which include the suppliers material, the building, and/or the apparatus must comply with the applicable standards (mandatory)

    ‣ Transfer technology for a Contract conducted by foreign entities.

    Governing Law and Language of the Construction Contract

    The Construction Law strictly mandates that the Construction Contract be written in the Indonesian Language. Further, the law regulates that for any contract that involves a foreign business entity, the contract shall be constructed in both the Indonesian and the English languages. Moreover, in the event of a dispute arising from the contract, the Indonesian Language shall be prevail.

    This provision has led to some issues, especially when a foreign construction company is only willing to use their standard construction contract form, as no official Indonesian translation may be available. Many multinational construction companies have come to our firm and asked several questions related to this issue. Within this Law Digest, we would like to provide a general question and answer (“Q&A”) resource related to construction contract issues.

    General Q&A for Construction Service Contracts

    1. In the event the Contract uses a non-English language as the foreign prevailing language (e.g. Chinesse Language), is the Contract executable?

    Legally speaking, the contract language is regulated under Law No. 24 of 2009 regarding the National Flag, Language, Emblem and Anthem of Indonesia (“Law No. 24/2009 / Language Law”). According to Art. 31 par. (1) of Language Law, it is “mandatory” that the Indonesian language be used in a memorandum of understanding or an agreement that involves national institutions, government institutions of the Republic of Indonesia, Indonesian private institutions, or Indonesian citizens. However, the language law does not require Bahasa Indonesia to be the governing language. Therefore, English and/or another language can prevail as the governing language (except for the Construction Contract), so long as the Indonesian language version is also executed, and the execution of the contract is subject to any other particular formalities obliged under the law and regulation.

    As for Construction Contract, the Art. 50 of Law No. 2 of 2017 regarding Construction Services Law (“Construction Law”), stipulates that in the event the contract involves foreign parties, the contract shall be written in both the Indonesian and English languages. Moreover, in the event the language is conflicting, the Indonesian language will prevail. Therefore, as per the question, the Chinesse language could not be used as the prevailing language. Even though the contract has been executed, the judge would consider the Indonesian language as the prevailing language.

    2. If the whole contract is annuled, how does the judge examine the legal truth and fact?

    In general practice, even though the contract was annuled, the judge would consider the legal truth and fact based on the “act of tort”. For example, if Party A and Party B were engaged in a Construction Contract which violated the Art. 50 of Construction Services Law and Art. 31 par. (1) of Indonesian Language Law. The judge would find that the Construction Contract didn’t use the Indonesian Language; therefore, the judge would annul the whole of the contract. However, if the judge also finds that Party B has caused loss and/or damages to Party A, even though the contract has been anulled, the judge could decide that it has been proven that Party B has committed a civil wrong. Thus, as a consequence, the judge could decide that Party B has the legal liability to pay compensation to Party A for the loss that occured.

    3. About the contract language, are there any mandatory regulations about bahasa Indonesia which must be written in a non-constructional contract, such as a purchase contract, lease contract, etc.?

    Yes there are. The mandatory use of the bahasa Indonesia language is regulated under the Art. 31 par. (1) of Indonesian Language Law. However, this law does not regulate that the Bahasa Indonesia version shall be the prevailing language.

    4. If both parties consent to give up the application of bahasa Indonesia in the contract, would this provision or statement be considered valid?

    No, that provision would not be valid. According to Art. 1320 of the Indonesian Civil Code, the Agreement shall only be valid if not it does not conflict with Law and Regulation. Therefore, any statement waiving the provisions of law or that conflicts with Indonesian law and regulation shall be deemed voidable and unenforceable.

    5. How does the Indonesian law decide the jurisdiction? Is it possible to select the court and regulation law under a mutual agreement? Are we able to settle any dispute by choosing to apply Chinese/Singapore law and lodge a lawsuit in China/Singapore?

    In our legal view, the jurisdiction of Indonesian law is applicable within the Indonesian territory for any individuals and legal entities or their activities including business activities. Thus, those within this distinction are obliged to comply with Indonesian Law and Regulation. As for the governing law of the contract, all individuals are given the freedom to choose the governing law. However, a contract that doesn’t choose the Indonesian Law as the governing law would not be applicable in Indonesia, and therefore becomes unenforceable in Indonesia. For example, if Company A chooses Chinese/Singapore law and lodges a lawsuit in China/Singapore, it is possible, however, that the contract may not be valid / enforceable in Indonesia and that China’s/Singapore’s court decree may not be executable in Indonesia. The only solution is to settle the dispute under the arbitral institutional law. According to Indonesian Dispute Settlement Law, the Foreign Arbitral Award could be executed in Indonesia only if such an Arbitral Award does not conflict with Indonesian law and regulation.

    For example, Party A and Party B are engaged in a construction contract. The Singapore Law was applied as the Governing Law. Party A and Party B have a dispute and settle this dispute in Singapore Arbitration. Party A comes out as the winning party and wants the Arbitration Award executed in Indonesia. Party A would ask the Singapore Arbitration to register the Award in the Central Jakarta District Court to obtain “writ of execution”. In the proceeding, the Chief of the Central Jakarta District Court finds that the contract did not use Bahasa Indonesia as the prevailing language, therefore conflicting with Art. 50 of Construction Services Law and Art. 31 par. (1) of Indonesian Language Law. Therefore, the judge would decide that the Arbitral Award is not applicable in Indonesia due to the fact that the contract conflicts with Indonesian Law.

    Pursuant to the above mentioned explanation, it is strongly advisable to use Bahasa Indonesia as the prevailing language and to use Indonesian law as the governing law for any business activities in Indonesia.

    6. If we can not lodge a lawsuit in China and can not apply Chinese regulations, how about arbitration? If we choose to settle the dispute in a Singapore arbitration institute (including but not limited to Singapore International Arbitration Center) or an arbitration institute in China, can we choose the governing law and language in hearing? Is it possible to avoid writing contracts in bahasa Indonesia by choosing the governing laws and/or the governing court/arbitration institute?

    Similar to the explanation in point 5, a company can choose a foreign governing law and a foreign arbitral award. However, if the foreign arbitral award conflicts with Indonesian law and regulation, the foreign arbitral award and the contract are not enforceable in Indonesia. Therefore, we suggest to use Indonesian law and regulation as the governing law. In particular, the construction contract must comply with Indonesian Construction Services Law.

    7. If the opposite contactor is a China-invested enterprise, shall we write the contract in Chinese?

    Pursuant to Art. 50 of Construction Law, any agreement involving foreign entities has to be written in Bahasa Indonesia and English. This means, the Chinese language is only complimentary while both the Bahasa Indonesia and English languages are mandatory. If any language has a conflicting interpretation, the Bahasa Indonesia version will prevail.

    8. Could you please give us some cases in which a contract has been annuled by judge by virtue that contract language has violated Indonesian regulations?

    On June 20th of 2013, the West Jakarta District Court annuled a loan agreement because the agreement was executed in English instead of the Indonesian Language. The case involved a Loan Agreement that was concluded only in English between the Plaintiff and the Defendant, with the Plaintiff asking the court to declare the Loan Agreement and its derivative agreement null and void. The court granted the Plaintiff’s claim and annuled the agreement and also ordered the Plaintiff to return the remaining outstanding loan to the Defendant. As for now, this case has become jurisprudence registered under the Appellate Decision of Jakarta High Court No. 48/Pdt/2014/PT.DKI.

    9. If we subcontract the main construction to other companies, is this illegal? In Indonesia, what kinds of subcontract patterns will be illegal?

    The Construction Law distinguishes between the types of construction services, those that are deemed general and those deemed specialist. According to Art. 53 of Indonesian Construction Services Law, only the work deemed to fall into the specialist category can be subcontracted. According to Indonesian Construction Services Law, the specialist work consists of “The Construction Services Consultant” and “Construction Work Services” business type.

    We hope this has been helpful in clarifying any queries relating to Indonesian construction contracts. As the country develops and cross-border initiatives ensue, many foreign investors should be advised correctly on how to best protect themselves and their investments. So, to build or not to build? We answer: Build! But build with foresight!

    By: Budhi Satya Makmur, S.H., M.H.

    Jakarta, 23 January, 2018

    Law Digest - Construction Services Contract