Contracting with Third Parties

 

In every line of business, contracts occupy a vital and crucial position. The validity of contracts must be guaranteed to ensure the smooth operation of a business. Therefore, the sections below will elaborate on the prevailing contract law in Indonesia.

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Definition of Contract

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The legal regime of private law in Indonesia is contained within the ICC, which has been utilized since the Dutch colonial era. In the context of contracts, the ICC provides the legal basis that is applicable to all contracts undertaken in Indonesia. Article 1313 ICC stipulates that “a contract is a legal act where one person or more binds themselves with another person or more.” There are 3 (three) categories of contract based upon this type of obligation, which includes: (i) to provide certain action; (ii) to perform certain action; (iii) to refrain from certain action. 

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A contract to provide something imposes an obligation upon debtors to deliver and maintain the condition of the goods in the best manner.  The creditor is also entitled to compensation in case of the debtor’s default.

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The contract, whether to perform or refrain from certain actions, entitles the creditor to the right to receive compensation in the event of the debtor’s default. The creditor also has the authority to reverse the actions made by the debtor that may have harmed the creditor’s interests, either through legal channels (the court), or to fulfill the obligation independently if the debtor is incapable of meeting their responsibilities. 
 

Categories of Contracts

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In addition to the abovementioned types, there are 6 (six) types of contracts:

 

Conditional Contracts

 

Conditional contracts are defined as contracts whose validity and conclusiveness depend on a future or uncertain event. 

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Temporal Contracts

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Temporal contracts stipulate the temporal condition for the maturity of a contract.  Creditors are not allowed to claim the performance before the maturity of that contract. Likewise, the debtor cannot claim back a performance which has been discharged before its maturity.  When determining maturity, it must always be in the benefit of the creditor, unless by the nature of the contract, or by the circumstances, the determination was made in the interest of the creditor. 

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Disjunctive Contracts

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This type of contract would release the debtor from an obligation if they have delivered either one of the two goods specified in the contract. However, it prohibits debtors from offering the creditor the partial performance of either two, and then offering them as one.  A disjunctive contract will revert to become a normal contract if either one of the two goods are hindered from being the subject matter of the contract, or if either goods were lost, or due to debtor’s fault the goods are no longer deliverable.  The debtor is obliged to compensate for the lost goods, proportionate to the value of the good lost. 

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The creditor is entitled to the remaining goods in the case that only one of the goods was lost. If the loss was due to the debtor’s fault, the creditor is entitled to the remaining goods or a payment equivalent to the value of the lost good. If both goods were lost, the creditor is entitled to the full payment in the amount of their choice. 

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Joint Contracts

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A joint contract among creditors entails that each creditor in a conference of creditors has the right to claim, on behalf of the others, for the performance of a contract to a debtor.  The debtor also has the freedom to choose which creditor they wish to perform the obligation. However, it is important to note that the performance of an obligation to a specific creditor only by a debtor discharges that same obligation towards that particular creditor.  A creditor is also allowed to claim their right to any given debtor, or any other debtor they so wish, and the debtor cannot request the division of their debt. 

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In the case of a joint contract between debtors, where a conference of debtors shares joint liability and the joint obligation for performance, the performance by one debtor relieves the remaining debtors.  The creditor is allowed to impose different conditions on each debtor, relating to the performance of their contract. 

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Divisible and Indivisible Contracts

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The divisibility of a contract pertains to the divisibility of the performance based on its nature, whether physical or otherwise.  However, even if a performance is naturally divisible, it shall not be considered divisible if the contract requires the performance in its entirety.  Moreover, a divisible contract must be performed in a manner that treats the contract as indivisible, unless it is concerning inheritors of a party to the contract, who are responsible only for their own rights or obligations.  Therefore, an inheritor of a creditor to a divisible performance is not allowed to individually relieve the debtor from their obligation, or take the due payment for their own. If such a case occurred, the rest of the inheritors shall claim their own share, excluding the portion which has already been taken by the first inheritor.  

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In addition, a conference of debtors, who are collectively responsible for a divisible performance, is obligated to it in its entirety, even if the contract is not a joint contract. 
 

Contracts with Penalties

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A penalty clause may be included in the contract to prevent the debtor from defaulting their obligation, taking the form of compensation for damages and loss, and interest.  A creditor is not allowed to claim both the performance of the principal obligation and the penalty, as the penalty was only devised as an alternative in case of the debtor’s default.  However, in case of default, a creditor may demand the performance of the principal obligation instead and, therefore, relieve the debtor from the penalty.  Therefore, the invalidity of the contract shall invalidate the penalty clause, but the relief of the penalty clause does not invalidate the contract. 

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Validity of Contract

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Article 1320 ICC further stipulates the cumulative conditions of a valid contract, which are as follows:

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The Consent of Both Parties 

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It is important that contracts are based on open and consensual agreements between the contracting parties to ensure the performance of contracts is completely voluntary. Therefore, contracts concluded due to error, duress, or fraud lose legal validity. In case of error, the invalidity of contract is only possible when it concerns the subject matter of the contract. 

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Furthermore, a contract concluded under duress renders the contract to be invalid.  Any form of action which induces the feeling of fear in a reasonable person, that they, their family, and their property, are in immediate danger, will be considered coercion.  However, the request for invalidation of contracts due to coercion is no longer accepted once the coercion ceases and the contract is maintained, or when the individual allows the time stipulated by law for reinstatement of the contract to lapse.

 

Lastly, fraud as a ground of invalidity occurs when one party uses deceit to conclude the contract to an extent that the other party would not have entered into the contract had they not been deceived. Fraud must be proven, and it is insufficient to merely speculate or presume that fraud had occurred.   

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The Legal Capacity to Engage in the Legal Act

 

The ICC established that every person is capable of entering into a contract, except for underage children and persons under the care of others.  The incapacity of children and those under care are absolute and not subject to objection. 

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The Certainty of Object Matter

 

In regard to the object of the contract, Article 1332 and Article 1333 ICC stipulate that only tradeable objects are allowed to be contracted, as long as the type of the object is determined and calculable. Contracting for objects in the future are also allowed by ICC, except for inheritance.  

Based upon a Lawful Cause of Contract

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The law demands that a contract must be made upon a valid and legal cause.  A cause is valid as long as it does not violate the law, does not offend public decency and does not disturb public order.  It is important to distinguish a cause from the personal motive of the parties involved. Moreover, a cause could be omitted at the moment of the contract’s conclusion if there is an implied valid and legal cause. 

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Performance of Contract

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Furthermore, it is also important to consider certain matters in the performance of contract, to safeguard the interests of both parties. These matters include:

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The Implementation of Good Faith

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The principle of good faith is prescribed by Article 1338 ICC.  This principle essentially demands that both parties undertake the contract in such a manner that does not offend the trust and spirit of either party.  

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The Object of Performance

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The contract binds not only the matters specifically defined in its contents, but also matters that are expected by justice, custom or the prevailing laws.  This is most relevant when a judge considers a contract dispute based upon the principles beyond the rules stipulated within the contract. 

 

The Subject of Performance

 

According to Article 1315 ICC, only the contracting parties are subject to the contract.  However, exceptions can arise when a third party is involved as a second bearer of the right to performance by the debtor, or when a third party is involved as a second bearer of the obligation to perform for the creditor.  This arrangement is irrevocable once the third party consented to it, and does not diminish the right of the creditor to demand performance from the principal debtor. 

 

The Interpretation

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Commonly used methods of interpretation in the legal field include: (i) grammatical or literal; (ii) systematic or contextual; (iii) teleological or purposive; (iv) historical. The ICC employs each of these methods in its rules concerning contract interpretation, as demonstrated in the following paragraphs.

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If the language of a contract is unequivocally clear, deviations through interpretation are not permitted.  However, conflicts in the interpretation often arise between the parties concerning a certain clause within the contract. Therefore, the first step is to revert back to the intended meaning of the contracting parties when it was established in the first place.  

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If the clause has multiple meanings, the interpretation that demands the most feasible performance of that clause takes precedent over the other meanings,  or whichever meaning best aligns with the nature of the contract.  Clauses with multiple meanings should be interpreted according to local custom.

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The interpretation of the contract must be conducted collectively, treating clauses as inseparable parts of a whole.  Furthermore, the interpretation should favor the party demanding the contract and benefit the party entering into the contract.  Irrespective of how broadly interpretable the wording of a clause, it only binds the matters within the meaning that was intended by the contracting parties during the initial drafting of the contract.  

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Breach of Contract

 

Furthermore, it is also important to understand the circumstances that could lead to the breach of contract. These circumstances are as follows:

 

Default

 

A person is considered in default when the debtor fails to fulfill their contractual obligations. This could be in the form of: (i) the failure to perform; (ii) delay in performance; (iii) incorrect or incomplete performance; or (iv) undertaking a matter that has been prohibited by the contract. However, a debtor is only declared in default once they are served by an order or a similar deed, or when a temporal clause in the contract is activated, deeming that debtor to be in default. 

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As a consequence, the creditor is entitled to demand the performance of the obligation, even if the debtor has already been declared to be in default.  Furthermore, the creditor is also entitled to seek compensation, which shall cover: (i) costs incurred by the creditor; (ii) the loss suffered because of the default; (iii) interests; (iv) and the loss of potential profit. The first two former categories must be calculated exactly and narrowly, encompassing only the costs that would have been reasonably expected at the conclusion of the contract and the loss suffered directly caused by the default.  It would only be these costs that are compensated for. 

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In the case of a joint contract, where a property was destroyed due to the fault of a debtor, the remaining debtors are only obliged to bear the shared cost of the property, and not the compensation, interest, and loss.  Creditors are only allowed to claim such payments from the liable debtor. 
 
Furthermore, it is also possible that a contract is to be made null by the court due to a default.  This annulment is for the purpose of restitution, or restoring all the parties to their original state, as if the contract never existed.  Despite the contract providing an annulment clause, this must be executed through the court. 
 

Force Majeure

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Force majeure refers to a breach of contract, such as the failure or delay in performance, that has been caused by an unforeseen event, removing liability from the debtor.  The same principle also applies if an inevitable and incidental event impedes the debtor from performing their obligation.  A force majeure event also removes the liability from the debtor if it is an event that causes the subject matter of the contract to perish.  Moreover, even if the objects were destroyed after the debtor's default, if it can be proven that the subject matter would have been destroyed anyway when in the creditor’s possession of it, the liability is also removed from the debtor.  The insurance claim to the objects, however, must be given to the creditor to compensate for the loss. 

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There are two types of force majeure: (i) absolute; and (ii) relative. The former entails the complete inability of the debtor to deliver the performance due to the force majeure. The latter, on the other hand, entails the ability to deliver the performance, but with extraordinary cost and effort.

 

Additionally, there are identifiable characteristics of force majeure that are widely accepted, which are: (i) an unforeseeable event; (ii) removes the liability from the debtor; (iii) no bad faith intended; (iv) no intention from the debtor; (v) the event obstructs the performance of the contractual obligation; and (vi) the event is beyond the debtors or anyone’s control.

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Cessation of Contract

 

A contract will cease to exist in any of the following cases:

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• Payment or Performance of contract

• Debt payment offering or debt renewal;

• Debt satisfaction or compensation;

• Debt consolidation;

• Debt relief;

• The perish of the object of contract;

• Annulment by law;

• The activation of annulment clause;

• Prescription.

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