Overview

On 29 December 2023, the Supreme Court of Indonesia issued Circular No.3 of 2023 on “The Formulation of Results of a Plenary Meeting of the Supreme Court Chamber in 2023 as Guidelines for the Execution of the Judiciary’s Duties” (Circular 3/2023).

Circular 3/2023 is intended to provide guidance to the judiciary who serve in a wide range of courts across many jurisdictions, including criminal, civil, religious, military and state administrative courts. The guidance involves clarifications made to a variety of matters as well as many procedural issues, partly to ensure consistency of court rulings.

Although Circular 3/2023 covers many different matters, in this client update we focus only on the guidelines regulating agreements involving both foreign parties and Indonesian legal entities or citizens (in particular, whether such agreements can be declared null and void if they are signed only in a foreign language) (Language Law Guideline).

What is the relevant law relating to an agreement’s language?

The Language Law Guideline relates to a requirement under the Indonesian Language Law¹ that agreements entered into between Indonesian parties together with foreign parties that are drafted in a foreign (non-Indonesian) language must also have an Indonesian language version of such agreement.

What does the Language Law Guideline say?

The Language Law Guideline states (in part) that the Indonesian courts cannot use the absence of an Indonesian language version of an agreement (entered into between Indonesian and foreign parties) as a reason to render such agreement null and void, unless it can be proven that the absence of an Indonesian language version was due to one of the parties acting in bad faith².

Our comments on the Language Law Guideline:

• We speculate that the Language Law Guideline may have come about due to the ongoing controversy caused by a 2015 Supreme Court decision (Indonesia’s highest appeal court) (2015 Supreme Court Decision)³, which upheld a District Court ruling that a loan agreement between an Indonesian entity (as borrower) and a foreign entity (as lender) was null and void for the sole reason that the loan agreement was drafted only in the English language, in breach of the Language Law. The Supreme Court Decision judges found (controversially) that the existence of such a breach meant that an essential element for a valid legal agreement under certain provisions of the Indonesian Civil Code⁴ relating to “permissible cause” was absent, enabling the judges to declare the agreement null and void.
• The 2015 Supreme Court Decision resulted in the widespread industry practice of parties in Indonesia adopting either Indonesian language only agreements or, if a non-Indonesian party (or Indonesian party with a foreign shareholding) was present, bilingual agreements using the Indonesian language, together with the relevant foreign language.
• • One of the characteristics of Indonesia’s civil law system is that the courts do not adhere to the doctrine of binding precedent. Therefore judgments such as the 2015 Supreme Court Decision will not bind the Supreme Court or the lower courts (i.e., the District Court and High Court) but can be used as evidence to persuade judges who may hear cases with similar facts. Indonesian judges have the discretion to choose whether or not to be persuaded by the decision of a higher court.
•  Since the Language Law and its main implementing regulation5 do not specify any penalties for failure to comply with the Indonesian language requirement, the courts have been able to determine penalties based on their own jurisprudence (such as was the case in the 2015 Supreme Court Decision).
• We understand the Language Law Guideline to be an effort by the Supreme Court, in its supervisory capacity, to limit the power of Indonesian judges to render null and void (what would otherwise be) a legally enforceable agreement in a foreign language, purely due to the absence of an Indonesian language version, unless evidence of bad faith could be proved.

Conclusions

• The Language Law Guideline would appear to be a positive result for non-Indonesian parties to agreements that are entered into with Indonesian parties that are only signed in the non-Indonesian party’s language (such as English), as long as the absence of an Indonesian version is not due to the bad faith of one of the parties.
• Since there is no binding judicial guidance as to what constitutes bad faith, there is considerable scope for interpretation and legal argument, should the Indonesian party choose to claim that the non-Indonesian party to the agreement acted in bad faith by not providing an Indonesian language version of the relevant agreement.
• Given the lack of binding guidance on the scope of bad faith and the broad discretionary powers of the court, in cases where Indonesian parties and non-Indonesian parties sign an agreement, we would still generally recommend that the agreement should be prepared in bilingual form, not just in the non-Indonesian language.