Law and language go hand in hand. Language helps us communicate legal concepts, define rights and obligations in a precise way, and resolve disputes. Where an unfamiliar language is imposed on a financial arrangement, thorny issues are likely to arise. It is no surprise, then, that finance parties and investors continue to raise eyebrows at the requirement to use Bahasa Indonesia, Indonesia’s national language, when contracting with Indonesian parties and at the substantial consequences of failure to do so.
A Short History of Indonesia’s Language Laws
Law No. 24 of 2009 regarding National Flag, Language, Emblem and Anthem of Indonesia (“Language Law”) provides that Bahasa Indonesia shall be the official language of transactions in Indonesia for private Indonesian entities (including foreign investment companies), Indonesian citizens, SOEs and government bodies even where a contract is expressed to be governed by a law other than Indonesian law. The rationale for the Language Law is said to stem from Indonesia’s constitution, which contemplates a law regulating Bahasa Indonesia. Presently there is no implementing or clarifying regulation.
From 2009 to August 2015, market practice was to have finance documents in English and Bahasa Indonesia, with interpretative provisions to say that in the event of an inconsistency, the English version would prevail. During this period, the Indonesian Minister of Law and Human Rights published an opinion confirming that dual-language documents were acceptable to comply with the Language Law, including having the English version prevail and that failure to have a Bahasa Indonesia version would not affect that document’s validity. Such opinions do not have the force of law in Indonesia but naturally gave foreign investors some comfort. Parties often took a relaxed approach to the Bahasa Indonesia version, including to have it executed as a condition subsequent or even not at all, unless requested by a party from time to time. The Language Law itself does not impose any penalties nor specify the consequences of failure to comply with the translation requirement.
Then came Supreme Court decision 601K/PDT/2015 dated 31 August 2015. Proceedings were initially initiated in a West Jakarta district court by an Indonesian borrower, in respect of a secured financing provided by a US lender. The lender had been secured by means of a fiducia security. The plaintiff argued that the loan agreement was null and void because it was in English without a Bahasa Indonesia translation, violating Paragraph 1 Article 31 of the Language Law, and therefore it did not need to repay the loan . The plaintiff also argued that the fiducia security was null and void. This case was appealed through various levels of courts until it reached the Supreme Court.
Understandably, when the Supreme Court upheld the decision to declare that the loan agreement was invalid because it was not in Bahasa Indonesia, shockwaves resonated throughout the financial community. Legal translators, suddenly bestowed with an abundance of work, rushed to prepare Bahasa Indonesia versions of transaction documents which had otherwise been gathering dust in an office cabinet.
Supreme Court Reasoning
The Supreme Court held that the use of Bahasa Indonesia relates to the fundamental contractual principle that contracts have a “legal function”. Having a “legal function” or “legal cause” is one of the four elements for a valid contract under the Indonesian Civil Code. Judges linked this “legal function” to the Language Law, arguing that failure to comply with the Bahasa Indonesia requirement prescribed by the Language Law gave that contract an illegal function. This illegal function was also linked to other articles of the Indonesian Civil Code. As security documents are considered to be ‘accessories’ to a loan agreement, all security relating to an “illegal” loan will also be null and void.
Whilst we do not have the benefit of the judges’ full reasoning, as Indonesia does not officially publish court decisions, on its face it is difficult to identify a strong legal argument for this position.
Nevertheless, the fact that Language Law has been linked to such a fundamental principle of contract at a Supreme Court level has meant that market participants often treat this decision as law or quasi-law, especially given the potential risk of an unenforceable loan agreement and security package. This is notwithstanding that Indonesia does not have a judicial system of precedent.
In light of these developments, our top 5 tips on the Language Law are as follows:
- Best practice is to execute the Bahasa Indonesia version of a contract first. Even the prior signing of an English version may suggest non-compliance with the Language Law. The Language Law may be held to apply in situations, amongst others, where a foreign law contract is signed by an Indonesian party (for example, a borrower or security provider) or involves Indonesian assets subject to enforcement in the Indonesian courts.
- Use a competent and reputable translator (preferably a lawyer). It can be difficult to translate finance documents into Bahasa Indonesia, given that the language structures of English and Bahasa Indonesia are different. You should also consider planning ahead as good translations of complex contracts may take considerable time to prepare. Whilst the Language Law is silent on whether it applies to contracts entered into prior to 2009, you may wish to consider executing Bahasa Indonesia translations of high value contracts which have only been executed in English.
- A practical work-around is to state that to the extent permitted by the Indonesian law the English version prevails, and the Bahasa Indonesia version will be deemed to be amended to reflect the English version to the extent of any inconsistency. However, this is not an ideal solution, and caution is advised when using it. Such clause may also include an obligation of parties to prepare a formal amendment to the Bahasa Indonesia version of a contract, upon request.
- A Language Law provision should be inserted into each finance document involving an Indonesian party, regardless of whether the prevailing language is English or Bahasa Indonesia. Things become more complex when English language is purported to prevail. This Language Law provision might cover items such as a representation and warranty from each party that the execution of the contract in the English language will not affect the validity, binding effectiveness and enforceability of that contract; that each party agrees not to challenge the contract on the basis of the Language Law, and a deemed effectiveness provision of the Bahasa Indonesia version (if executed later than the English version).
- Consider using an arbitration agreement as the agreed method of dispute resolution. Bahasa Indonesia requirements become an issue when a party attempts to enforce its rights in the Indonesian courts or potentially where enforcing a foreign arbitral award in Indonesia against the Indonesian assets of a judgement debtor. Whilst using arbitration is a risk mitigant, there is still a risk that an arbitral award may not be enforceable in Indonesia on the basis of a ‘public policy’ argument related to the Language Law.
It is hoped that the uncertainties around Indonesia’s Language Law requirements will be clarified soon by way of further regulation or circular from the Ministry of Law and Human Rights or other Indonesian authorities. Finance parties and investors may take some solace from the fact that everyone is in the same position. In the meantime, however, this is an in-country risk that should be considered for any Indonesia transaction.