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 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 persisted 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 the type of obligation, which includes: (i) to provide something; (ii) to do something; (iii) to not do something. 

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A contract to provide something imposes the obligation to 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 to do or not do something entitles the creditor to compensation in case of the debtor’s default. The creditor is also entitled to reverse the act of the debtor which damages the creditor’s interest through the court, or to perform the obligation itself if the debtor is unable to discharge their obligations. These rights do not diminish the debtors obligation to compensate the creditor, and to reimburse the costs of the creditor in case they have to reverse the breach of contract on their own.
 

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 which validity and conclusiveness are dependent upon a future or uncertain event.

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Temporal Contracts

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Temporal contracts stipulate the temporal condition for 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 the maturity.  The determination of maturity 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 obligation if they had delivered either one of the two goods in the contract. However, they are not allowed to offer the creditor the partial performance of either two, and then offer them as one. A disjunctive contract will become a normal contract if either one of the two goods are hindered from being the subject matter of the contract, or if either good were lost, or due to debtor’s fault the goods is no longer deliverable. The debtor is obliged to repay the lost goods commensurate to the last good that was lost. 

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

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Joint Contracts

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A joint contract between creditors entails that each creditor in a conference of creditors have the right to claim on behalf of the others for the performance of a contract to a debtor. The debtor is also given the freedom to choose to which creditor they wish to perform the obligation. However, it is important to note that the performance to a certain creditor only relieves the obligation towards that creditor.

 

A creditor is also allowed to claim their right to any given debtor, or any other debtor they so wish, and the debtor could not request for their debt to be divided. 

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In case of a joint contract between debtors, in which a conference of debtors has a joint liability and joint obligation to a performance, the performance of a debtor shall relieve the rest of the debtors.  The creditor is allowed to impose different conditions to each debtor relating to the performance of their contract.

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Divisible and Indivisible Contracts

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Divisibility of a contract concerns the divisibility of the performance depending upon its nature, which could be physical or not.  However, even if a performance is by nature divisible, shall not be deemed divisible if the contract demands the performance in its entirety. Moreover, a divisible contract shall be performed in such a manner that treats the contract as indivisible, unless it concerns inheritors of a party to the contract, which are responsible only to each 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 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 debtor who are responsible to a divisible performance shall be responsible to it in its entirety, even though the contract was not a joint contract.
 

Contracts with Penalty

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A penalty clause may be inserted in the contract to prevent the debtor from defaulting their obligation, in 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, since the penalty was devised only 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 relieve the debtor from 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

 

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 upon open and consensual agreement between the contracting parties, to ensure the performance of contracts are completely voluntary. Therefore, contracts concluded due to error, duress, or fraud lose legal validity. In the case of error, the invalidity of contract is only possible in cases which concern the subject matter of the contract.

 

Furthermore, a contract concluded under duress causes the contract to be invalid.  Any form of action which evokes the feeling of fear in a reasonable person, that they, their family, and their property, are in immediate danger, shall be understood as 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 has allowed the time stipulated by law for re-instatement of the contract to lapse in due time.  

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Lastly, fraud as a ground of invalidity is understood when one party used deceit to conclude the contract, so much so that it could be conceived that the other party would not have concluded the contract had they not been deceived. Fraud must be proven and that 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 able to enter into contract, except for underage children and persons under the care of someone else. The incapacity of children and people under care are absolute and not objectionable.

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The certainty of object matter

 

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

 

Based upon a lawful cause of contract

 

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

 

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Performance of Contract

 

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

 

The implementation of good faith

 

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.

 

The object of performance

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The contract does not only bind matters clearly 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 the dispute of a contract based upon the principles beyond the rules stipulated under the contract.

 

The subject of performance

 

By design, only the contracting parties are subject to the contract.  However, exceptions could be made when a third party is involved to be a second bearer of right to performance by the debtor, or when a third party is involved to be a second bearer of obligation to performance to 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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The methods of interpretation commonly used in the legal field includes: (i) grammatical or literal; (ii) systematic or contextual; (iii) teleological or purposive; (iv) historical. Each method are used by the ICC in its rules concerning contract interpretation, as will be demonstrated in the following paragraphs.

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If the wording of a contract is unequivocally clear, deviations through interpretation are not permitted.  However, there will always be a conflict of interpretation between the parties concerning a certain clause within the contract. Therefore, the first step is to seek recourse to the intended meaning the contracting parties established in the first place.  

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If the clause has more than a single meaning, the meaning that demands the most feasible performance of t

hat clause takes precedent over the other meanings,  or whichever meaning aligns with the nature of the contract best.  Clauses which have more than a single meaning must be explicated according to the local custom.

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The interpretation of the contract must be conducted jointly, and not severally, in such a manner that treats the clauses as inseparable parts of a whole.  Furthermore, a contract must be interpreted at the cost of the party demanding the contract and the benefit of the party who entered into the contract.  Irrespective of how widely interpretable the wording of a clause, it only binds the matters within the meaning that was intended by the contracting parties during the 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 in default occurs when the debtor fails to fulfil its end of the contract. This could be in the form of: (i) the failure to perform something; (ii) delay in performance; (iii) incorrect or incomplete performance; or (iv) performing something 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 that deems the debtor to be in default. 

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It follows that the creditor is entitled to demand the performance of the obligation, even if the debtor is already declared in default.  Furthermore, they are also entitled to 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 so that only the costs reasonably expected when the contract was concluded and only the loss suffered directly caused by the default, that are compensated. 

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In case of a joint contract where a property was destroyed due to the fault of a debtor, the rest of the debtor 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 requested to be annulled by the court due to default.  This annulment is for the purpose of restitution or restoring all the parties to its original state as if the contract never existed.  This must be executed through the court, despite the contract providing an annulment clause.

 

Force Majeure

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A breach of contract, such as failure or delay in performance, caused by an unforeseen event shall not make the debtor liable. The same also applies if the debtor is impeded from performing their obligation due to an inevitable and incidental event. A force majeure event also removes the liability from the debtor if it so happens that the event causes the object of contract to perish. Moreover, even if the objects were destroyed after the debtors default, if it could be proven that the objects would have been destroyed anyway if the creditor is in 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. 

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The latter, on the other hand, entails the ability to deliver the performance, but with extraordinary cost and effort. 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 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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