On July 9, 2009 the Government of Indonesia (“Government”) enacted Law Number 24 Year 2009 on the National Flag, Language, Emblem and Anthem (Bendera, Bahasa, dan Lambang Negara, serta Lagu Kebangsaan) (the “Law”). The Law sets forth direction on the use, treatment and application of certain Indonesian identity symbols. It also imposes new requirements regarding use of the Indonesian language in written agreements that may have wide-ranging implications for the way that Indonesian transactions are documented.
The main provision of concern is Article 31 of the Law, which provides that parties must use the Indonesian language in memoranda of understanding or other written agreements with Indonesian counterparties. The Law further provides that if any such agreements involve non-Indonesian parties, the agreements may also be written in the national language of the non-Indonesian party and/or in the English language, and that “all of such texts are equally genuine”.
The Law specifically provides for implementing regulations to be put in place, and so far, the market view has been to take a commercial approach not to interpret the law strictly until the implementing regulations have been produced. However, the Law is arguably valid as it stands and this opens up the risk that it could be used as a defence by Indonesian parties attempting to escape their obligations.
Leading Indonesian lawyers we have interviewed have expressed the hope that the implementing regulations will provide that the law only operates as a defence to the extent that it is clear that a party has not understood the contract due to the use of a foreign language. This type of defence is not unheard of in Indonesia - as an example, in two recent derivatives cases (HSBC v PT Toba Surimi Industries and SCB v PT Nubika Jaya) the Indonesian courts have recently held ISDA based derivatives to be void on the grounds that the Indonesian counterparties did not properly understand them.
We hesitate to recommend a course of action that would involve the cost, expense and inconvenience of preparing and negotiating ‘dual language’ documents with Indonesian counterparties, particularly as the implementing regulations may render this an unnecessary effort. However, we have always recommended that extra care should be taken with key ‘enforcement’ documents with Indonesian counterparties, such as guarantees. Ideally, these should be both notarized and in Bahasa Indonesia to avoid arguments that the parties did not properly understand them. In the case of a loan, we typically recommend a notarized acknowledgement of indebtedness in Bahasa Indonesia, even if the underlying loan documents are in English. We believe these precautions are doubly important in light of the new Law.
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O’Melveny & Myers LLP is not licensed to practice law in Indonesia, and this Client Alert should not be construed as providing advice concerning the laws of Indonesia or of any other country or jurisdiction. The foregoing should not be construed as an opinion on the laws of Indonesia. Readers should consult with Indonesian counsel for legal advice on the matters addressed herein.
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