Indonesian Contracts Law 101: Elements of Contracts Formation

Contracts is a fundamental part of any business and commercial activities, even in Indonesia where contracts law are notoriously unreliable and uncertain. Many contracts are still made informally through verbal agreement without an official written and signed version, which makes enforceability difficult.

Foreigners and foreign companies who come to Indonesia with little knowledge of the domestic legislation, local customary laws (which often hold more authority than the actual legislation), and or inadequate legal counsels are in risks of huge financial lost or even their businesses entirely.

This article will explain what it takes for contracts to be formed in Indonesia.

Elements of Contracts Formation

The source of Indonesian contracts law can be found in the Book 3 of the Indonesian Civil Code. According to article 1320 of the Civil Code, there are 4 elements of contracts formation – consent, capacity, certain subject, and lawful purpose or admissible cause.

1. Consent

Indonesian law adopts the doctrine of pacta sunt servanda, meaning any agreement that is validly executed binds the parties as if it were a statute. Both parties are required to consent to the terms and agreements in the contract. And unlike in Australia, there is no requirement for the contract to have a quid pro quo element or bargaining element where there is an exchange of benefits or detriments involved.

2. Capacity

Only legally competent parties have the capacity to contract, and a party lacking capacity can apply within five years to have the contract annulled. Article 1330 of the Civil code defines ‘incompetent persons’ as a person under official guardianship or otherwise prohibited by law from performing certain legal obligations. They also include ‘children’, of which the definition is inconsistent. Article 330 of the Civil Code, defines a ‘child’ as a person under the age of twenty-one years who is not married, yet the Supreme Court ruled that Law 1 of 1974 on Marriage defined that anyone who is married or is eighteen years of age or more should no longer be regarded as a child. This leaves age as an uncertain criterion to determine capacity. Additionally, corporations also have capacity to contract.

3. Certain Subject

Articles 1332 to 1334 provide that contracts must have an agreed and clear subject, whether it is for goods or services. As for the specific amount of goods, article 1333 states that the precise amount of goods need not to be specified if quantifying them is possible at a later stage.

4. Lawful Purpose

Article 1337 dictates that contracts must have a legal purpose and must not violate public order or morality. Subsequently, a contract that involves clauses that contravene morals or are prohibited by law are invalid, and agreements relying on them are void (article 1254 of Civil Code).

These 4 elements are necessary to create a legally binding contracts in Indonesia. If you have further questions, please contact us here.

Salam,

Phoebe

Sources:

1. Kitab Undang-Undang Hukum Perdata [Indonesian Civil Code]

2. Tim Lindsey and Simon Butt, Indonesian Law (Oxford Scholarship Online, 2018).