Cross-border investments often involve contractual relationships between foreign investors and companies established in Indonesia, including Foreign Investment Limited Liability Companies (Perseroan Terbatas Penanaman Modal Asing or “PT PMA”). In such relationships, agreements serve as the basis for regulating the rights and obligations of the parties, including payment obligations, the delivery of goods or services, and the implementation of investment projects.

However, problems may arise when an Indonesian company fails to fulfil its contractual obligations or commits a breach of contract (wanprestasi). For foreign investors, this situation may raise important questions regarding which court has jurisdiction to resolve the dispute, which country’s laws govern the agreement, and how a judgment can be enforced when the relevant assets or parties are located in different countries.

Therefore, understanding jurisdiction, choice of law, and cross-border enforcement is essential to ensure that foreign investors have an appropriate legal basis and strategy when dealing with contractual disputes involving Indonesian companies.

Court Jurisdiction in Cross-Border Contract Disputes

In cross-border contract disputes, the determination of court jurisdiction generally requires consideration of the dispute resolution clause agreed upon by the parties in their agreement. Such a clause may designate the courts of a particular country as the forum for resolving disputes (choice of forum) or provide for an alternative mechanism, such as arbitration.

Through such an agreement, the parties essentially determine the forum to be used in the event of a dispute. However, the enforceability of a choice-of-forum clause must still be analysed in accordance with the procedural laws and jurisdictional rules applicable in the relevant country. In the Indonesian context, the existence of a clause selecting a foreign court does not necessarily and automatically exclude the jurisdiction of Indonesian courts.

In addition to the contractual provisions, the determination of jurisdiction must also consider the nature of the subject matter of the dispute. Where a dispute concerns immovable property, such as land located in Indonesia, the principle of Lex Loci Rei Sitae applies. This principle provides that rights in rem over immovable property are, in principle, governed by the laws of the place where the property is situated. In the Indonesian legal context, this principle is relevant to the application of national agrarian law to land located within Indonesian territory.

Accordingly, even where an agreement specifies a foreign choice of forum or choice of law, disputes concerning land rights in Indonesia must still take into account the applicable agrarian laws and jurisdictional provisions in Indonesia. It is important to distinguish disputes concerning proprietary rights over land from contractual claims, such as payment obligations, refunds, or compensation, as the applicable forum and governing law for such claims may depend on the terms of the agreement and the nature of the claims.

Choice of Law in Contracts (Choice of Law)

In cross-border contracts, the parties may include a choice-of-law clause to determine which country’s laws will govern their contractual relationship. For example, a foreign investor and an Indonesian company may agree that their agreement will be governed by Indonesian law, Singaporean law, or the laws of another country selected by the parties.

Such a choice of law provides certainty regarding the legal framework used to assess the parties’ rights and obligations, including the interpretation of the agreement, the performance of contractual obligations, and the legal consequences of a breach of contract. This principle is related to party autonomy, which refers to the freedom of parties to determine the law governing their contractual relationship.

However, this freedom is not absolute. The application of the chosen law must still take into account mandatory legal provisions (mandatory rules), public policy, and the nature of the legal issues arising. For example, where a dispute concerns ownership or rights over land in Indonesia, Indonesian agrarian law remains relevant and cannot simply be excluded through a foreign choice-of-law clause.

Therefore, foreign investors should ensure that the choice-of-law clause is clearly drafted in the agreement and consider whether the selected law can be effectively applied to the types of disputes that may arise.

Cross-Border Enforcement of Judgments

After obtaining a decision in a contractual dispute, the next challenge is enforcing that decision, particularly when the losing party or the assets subject to enforcement are located in another country. In this regard, it is necessary to distinguish between foreign court judgments and international arbitral awards, as they are subject to different recognition and enforcement mechanisms.

In general, foreign court judgments cannot be directly enforced in Indonesia. Pursuant to Article 436 of the Reglement op de Rechtsvordering (Rv), foreign court judgments do not, in principle, have direct enforceability in Indonesia. The successful party will generally need to file a new lawsuit before an Indonesian court. The foreign judgment may be submitted as supporting documentation or evidence in such proceedings, but it does not automatically bind the Indonesian court.

In contrast, international arbitral awards are subject to a recognition and enforcement mechanism under Law No. 30 of 1999 concerning Arbitration and Alternative Dispute Resolution, as well as the 1958 New York Convention, which Indonesia ratified through Presidential Decree No. 34 of 1981. Under these provisions, international arbitral awards may be submitted for recognition and enforcement in Indonesia, subject to the applicable legal requirements, including obtaining an exequatur from the Chief Judge of the Central Jakarta District Court.

In dealing with cross-border contract disputes, understanding the relevant legal aspects and dispute resolution strategies is essential to protecting investors’ interests. Schinder Law Firm provides legal consultation and assistance in relation to commercial agreements, foreign investment, and cross-border dispute resolution, helping investors conduct their business activities in Indonesia with greater legal certainty.

Please contact Schinder Law Firm at info@schinderlawfirm.com for further consultation.

Author:
Budhi Satya Makmur