Are Contracts Enforceable in Indonesia? A Practical Legal Guide for U.S. Businesses and Foreign Investors

Table of Contents

The Main Legal Question

Are contracts legally enforceable in Indonesia, especially for foreign companies and U.S. investors?

Yes. Contracts are enforceable in Indonesia provided they meet the formal and substantive requirements of Indonesian law. Courts will uphold agreements that comply with statutory contract principles, but contracts that ignore local legal rules, language requirements, or mandatory provisions may be partially or entirely unenforceable.

In practice, Indonesia is not a “no-contract” jurisdiction. The real issue is not whether contracts are enforceable, but whether they are drafted and structured correctly for Indonesian courts and regulators.

Legal Explanation

Indonesia follows a civil law system, not a common law system like the United States. This difference has major implications for how contracts are interpreted, enforced, and litigated.

How Indonesian Courts View Contracts

Indonesian courts do not treat contracts as purely private bargains. Instead, a contract is enforceable only if it:

• Complies with statutory requirements
• Does not violate mandatory law
• Reflects good faith and fairness

Judges rely more heavily on legislation than on case precedent. Even a carefully negotiated agreement may be overridden if it conflicts with mandatory provisions of Indonesian law.

Freedom of Contract—With Limits

Indonesia recognizes freedom of contract, but it is not absolute. Parties may agree on most commercial terms, but they cannot contract around:

• Mandatory labor protections
• Foreign ownership restrictions
• Public policy rules
• Language and formality requirements

Written Contracts Are Essential

While oral contracts may theoretically exist, written contracts are essential in practice, particularly for foreign parties. Indonesian courts require clear documentary evidence, and informal arrangements are extremely difficult to enforce.

Legal Basis

1. Indonesian Civil Code (Burgerlijk Wetboek)

Official name: Indonesian Civil Code (inherited from the Dutch Civil Code)

• Article 1320 – Legal Requirements of a Valid Contract

Article 1320 sets out four essential elements:

1. Consent of the parties
2. Legal capacity
3. A specific subject matter
4. A lawful cause

Practical meaning:
If any of these elements is missing, a contract may be void or voidable. For example, agreements involving illegal nominee arrangements or prohibited business activities fail the “lawful cause” requirement.

• Article 1338 – Pacta Sunt Servanda
• Agreements legally made apply as law to those who make them.

Practical meaning:
Courts will enforce contracts—but only if they are legally valid and compliant with mandatory law.

2. Law No. 40 of 2007 on Limited Liability Companies

Official name: Law of the Republic of Indonesia Number 40 of 2007 concerning Limited Liability Companies

• Article 97: Directors may be personally liable for losses caused by unlawful acts

Practical meaning:
Contracts signed outside corporate authority or in violation of law may expose directors to personal liability.

3. Law No. 25 of 2007 on Investment

Official name: Law of the Republic of Indonesia Number 25 of 2007 concerning Investment

• Article 33: Prohibits agreements intended to conceal share ownership

Practical meaning:
Side agreements contradicting official ownership records are unenforceable, even if signed.

4. Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution

Official name: Law of the Republic of Indonesia Number 30 of 1999 concerning Arbitration and Alternative Dispute Resolution

• Article 3: Courts must refuse cases subject to valid arbitration agreements

Practical meaning:
Well-drafted arbitration clauses are generally enforceable and often preferred by foreign parties.

5. Law No. 24 of 2009 on the National Flag, Language, State Emblem, and National Anthem

Official name: Law of the Republic of Indonesia Number 24 of 2009 concerning the National Flag, Language, State Emblem, and National Anthem

• Article 31: Requires Indonesian language in agreements involving Indonesian parties

Practical meaning:
Contracts signed only in English may be ruled unenforceable unless a Bahasa Indonesia version exists.

Risks and Legal Consequences

1. Language Risk

Contracts involving Indonesian parties that are not in Bahasa Indonesia risk being declared invalid or unenforceable.

2. Illegal Subject Matter

Contracts involving prohibited activities (such as nominee shareholding) are void by law.

3. Improper Authority

Agreements signed by individuals without proper corporate authority may not bind the company.

4. Weak Dispute Resolution Clauses

Poorly drafted jurisdiction or arbitration clauses can cause costly procedural disputes.

5. Enforcement Challenges

Even valid contracts require proper litigation or arbitration procedures to enforce.

Case Examples

Case 1: English-Only Shareholders’ Agreement

A foreign investor signed an English-only shareholders’ agreement with an Indonesian partner.
Outcome: Indonesian courts refused enforcement due to the absence of an Indonesian-language version.

Case 2: Nominee Side Agreement

A foreign investor relied on a private nominee agreement to control shares.
Outcome: Agreement declared void under Investment Law.

Case 3: Arbitration Clause Saves Contract

A supply agreement with a Singapore arbitration clause was enforced without Indonesian court litigation.
Outcome: Faster resolution and enforceability.

What Can Be Done

1. Use Bilingual Contracts

Always prepare contracts in both English and Bahasa Indonesia.

2. Ensure Legal Authority

Confirm signatories are authorized under company articles and resolutions.

3. Avoid Illegal Structures

Do not rely on nominee or side agreements.

4. Choose Dispute Resolution Strategically

Arbitration is often more predictable for foreign parties.

5. Seek Legal Review

Foreign businesses should consult an Indonesian-qualified advocate via the contact information in this website’s navigation.

Conclusion

Contracts are enforceable in Indonesia—but only when they respect Indonesian law, language requirements, and mandatory rules. For U.S. businesses, the biggest risks are not corruption or unpredictability, but misalignment between common law expectations and civil law realities.

Well-drafted, bilingual, legally compliant contracts provide strong protection. Poorly structured agreements offer little or none.

Frequently Asked Questions (FAQ)

Are English contracts enforceable in Indonesia?
Only if accompanied by a Bahasa Indonesia version.

Is arbitration better than court litigation?
Often yes, particularly for foreign parties.

Can nominee agreements be enforced?
No. They are illegal and void.

Do Indonesian courts enforce foreign judgments?
Generally no; arbitration awards are preferred.

Should foreign companies always use Indonesian law?
For onshore activities, Indonesian law is usually safest.