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Indonesian Supreme Court rules that commercial agreements which are not in the Indonesian language are void

The Supreme Court of Indonesia recently set a precedent which should be of interest to any international brands and foreign investors which are doing business in Indonesia or plan to do business in Indonesia.

The Supreme Court upheld a lower court ruling which nullified and voided an inter-company loan agreement. The original loan agreement, between an Indonesian mining company (BKPL) and an American lender (Nine AM), regulated a USD 4.4m loan facility to be provided to BKPL by Nine AM (the "Loan Agreement").

Article 36 of the Indonesian constitution states that the national language is Bahasa Indonesia; confirmed in 2009 by the passing of Law 24/2009 on the "National Flag, Language, Seal and Anthem". This stated that the Indonesian language "must be used in memoranda of understanding or agreements involving state institutions, government agencies of the Republic of Indonesia, Indonesia's private institutions or individual Indonesian citizens" (the "Language Law").

BKPL, deciding to rely on the Language Law, sought declaratory relief that the Loan Agreement was null and void as it was only executed in English, without an Indonesian translation. Indonesia's Minister of Law and Human Rights issued an opinion letter, highlighting that in his view English language agreements between private parties which are performed in Indonesia did not violate the Language Law. The Supreme Court, however, decided to apply a strict interpretation of  Language Law, noting that the "Indonesian language must be used". As such, the court rejected the Minister's arguments, stating that legislation is superior to the Minister's nonbinding interpretation.

International brands and foreign investors which are doing business in Indonesia or plan to do business in Indonesia should take heed of the Language Law. Failure to ensure that the parties enter into an Indonesia language version of the commercial agreement may provide an aggrieved party with grounds for nullifying the contract. This is clearly a significant risk where one party is licensing its intellectual property, as in a franchise arrangement, as it will expect the licensee to comply with obligations regarding confidentiality and non-competition.

This does of course create an additional cost to getting a deal done, but one surely worth taking if it ensures that the contract is enforceable.

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