Governing Law Clauses in Indonesian Contracts: What U.S. Businesses Must Know to Protect Their Agreements

Table of Contents

The Main Legal Question

Can parties to an Indonesian contract freely choose foreign governing law, and will Indonesian courts respect that choice?

Yes, parties to a contract involving Indonesia may generally choose foreign governing law. However, Indonesian courts will only respect that choice to the extent it does not conflict with mandatory Indonesian law, public policy, or statutory requirements such as language rules. In practice, a governing law clause is effective only when it is drafted with a clear understanding of Indonesia’s civil law system and regulatory limits.

Legal Explanation

What Is a Governing Law Clause?

A governing law clause determines which country’s substantive law governs the interpretation, validity, and performance of a contract. For U.S. businesses operating internationally, this clause is often treated as routine. In Indonesia, however, governing law must be approached carefully.

Indonesia follows a civil law system, not a common law system. Judges rely primarily on statutes, not precedent, and they will not automatically defer to party autonomy if it conflicts with Indonesian law.

Party Autonomy Under Indonesian Law

Indonesian contract law recognizes freedom of contract, but that freedom has boundaries. Parties may choose foreign law only if:

• The contract does not concern matters governed by mandatory Indonesian law
• The choice does not violate public order or morality
• The contract is not purely domestic in nature

In purely domestic contracts—such as employment agreements, land transactions, or consumer contracts performed entirely in Indonesia—Indonesian law will override any foreign governing law clause.

Governing Law vs. Jurisdiction vs. Arbitration

U.S. businesses often confuse these concepts:

• Governing law: which substantive law applies
• Jurisdiction: which court hears disputes
• Arbitration: private dispute resolution outside courts

In Indonesia, choosing foreign governing law without arbitration often creates enforcement problems. Indonesian courts may accept foreign law in theory but apply Indonesian law in practice.

Legal Basis

1. Indonesian Civil Code (Burgerlijk Wetboek)

Official name: Indonesian Civil Code

• Article 1320 – Requirements for a Valid Contract

A contract must have:

1. Mutual consent
2. Legal capacity
3. A specific subject matter
4. A lawful cause

Practical meaning:
If a governing law clause results in an unlawful cause—such as avoiding mandatory Indonesian protections—the entire contract or clause may be invalid.

• Article 1337 – Lawful Cause Requirement

A cause is unlawful if prohibited by law or contrary to public order or morality.
Practical meaning:
Foreign governing law cannot be used to bypass Indonesian mandatory rules.

• Article 1338 – Freedom of Contract

Legally made agreements bind the parties as law.
Practical meaning:
Freedom of contract exists, but only within statutory limits.

2. 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:
A governing law clause is irrelevant if the contract itself is unenforceable due to language violations.

3. 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 decline jurisdiction when a valid arbitration agreement exists

Practical meaning:
Foreign governing law clauses are most effective when paired with arbitration.

4. 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 that disguise ownership or violate investment rules

Practical meaning:
Foreign governing law cannot legalize prohibited nominee arrangements.

Risks and Legal Consequences

1. False Sense of Security

Many foreign investors assume that choosing New York or English law guarantees enforceability. It does not.

2. Mandatory Law Override

Indonesian courts may override foreign law clauses in:

• Employment contracts
• Land and property agreements
• Distribution and agency relationships

3. Enforcement Failure

Even if foreign law is recognized, enforcement through Indonesian courts may still apply Indonesian procedural rules.

4. Contract Invalidity

If the governing law clause is used to evade Indonesian law, courts may invalidate the clause or entire agreement.

Case Examples

Case 1: English Law Clause in Employment Contract

A foreign employer used English law to govern an Indonesian employment agreement.
Outcome: Indonesian labor law applied regardless of the clause.

Case 2: Singapore Law with Arbitration

A supply contract used Singapore law with SIAC arbitration.
Outcome: Clause respected and award enforceable.

Case 3: Nominee Agreement with Foreign Law

A nominee share agreement used foreign governing law.
Outcome: Declared void under Investment Law.

What Can Be Done

1. Assess Whether Foreign Law Is Appropriate
Not all contracts benefit from foreign governing law.

2. Pair Governing Law with Arbitration
Arbitration increases predictability and enforceability.

3. Use Bilingual Drafting
Always include Bahasa Indonesia and English versions.

4. Respect Mandatory Indonesian Law
Do not attempt to contract around statutory protections.

5. Obtain Legal Review
U.S. businesses should consult an Indonesian-qualified advocate using the contact details available in this website’s navigation.

Conclusion

Governing law clauses in Indonesian contracts are powerful tools—but only when used correctly. Indonesia recognizes party autonomy, but it does not allow foreign law to override mandatory domestic rules.

For U.S. businesses, the safest strategy is not to insist on foreign law at all costs, but to align governing law, dispute resolution, and contract structure with Indonesian legal realities.

Frequently Asked Questions (FAQ)

Can Indonesian contracts use U.S. law?
Yes, but only for appropriate commercial contracts and with limitations.

Is arbitration required for foreign governing law?
Not required, but strongly recommended.

Will Indonesian courts apply foreign law?
Sometimes, but mandatory Indonesian law prevails.

Are employment contracts allowed to use foreign law?
No. Indonesian labor law is mandatory.

What is the safest governing law strategy?
Use Indonesian law or foreign law with arbitration, depending on the transaction.