top of page

Indonesia's Legal System

As explained above, the scope of the investment sector in Indonesia is quite diverse. Since the government wishes to accommodate this diversity, they issued additional regulations to accommodate the existing law to fit within the need of the existing investment sectors. Therefore, to ensure the ease and compliance of investment, it is essential to understand the legal system.

The Hierarchy of Laws

Hierarchy Theory

Hierarchy theory, introduced by Hans Kelsen, is a theory concerning the level of legal norms (Stufentheorie) which argued that these norms are tiered and layered in a hierarchical structure. On the top of this structure exists the hypothetical basic norm, otherwise known as ‘Grundnorm’, from which every other law in the lower tier emanates from.  As the point of origin, this basic norm does not rest upon any other norms to support its legitimacy. Therefore, in this theory, a pyramid of norms exists with the arrangement of the basic norm – higher norm – lower norm.

This pyramid structure (Stufentheorie), which was Hans Kelsen’s most prominent theory, was further developed by one of his students, Hans Nawiasky. Nawiasky's theory is called Theorie Von Stufenufbau Der Echtsordnung. According to this theory, the arrangement of norms are as follows: 

  • fundamental norms of the state (Staatsfundamentalnorm);

  • basic rules of the state (Staatsgrundgesetz);

  • formal legislation (FormellGesetz); and

  • implementing regulations and autonomous regulations (Verodnung En Autonome Satzung).

Level Legal Norms Comparison between Hans Nawiasky and Hans Kelsen

Level Legal Norms Comparison between Hans Nawiasky and Hans Kelsen

Source: Maria Farida Indrati S., 2007, “Ilmu Perundang-Undangan”, PT Kanisius: Yogyakarta, p. 42.

Before advancing further into Indonesian laws and regulations, it is essential to establish an understanding on Indonesia’s ideology; namely Pancasila or the Five Pillars. The validity of the constitution and other norms rests upon these Five Pillars. Furthermore, all values that exist in Indonesia are accumulated highlighted in Pancasila.  As such, to ensure that law and regulations in Indonesia reflect the nation’s philosophy of life, Pancasila must be used as a point of reference in forming these laws and regulations. 

Laws and Regulations Hierarchy in Indonesia

Following Hans Kelsen and Hans Nawiasky’s level legal norms, it is possible to view Indonesia’s laws and regulations within the pyramidical hierarchy, the contents of which can be found in Article 7 (1) jo. Article 2 of Law No. 12/2011. The hierarchy consists of the following:

Laws and Regulations in Indonesia

Laws and Regulations in Indonesia

Source: Law No. 12/2011.

From Graph V.2. above, we can observe that the Pancasila serves as the basic norm or ‘grundnorm’ upon which all the following laws emanate from. This structure ensures that the laws and regulations in Indonesia, especially the legal instruments produced by the lower state institutions have a continuous chain of legitimacy, flowing from the top to the bottom. 


Furthermore, laws and regulations in Indonesia consist of:

1945 Constitution

The 1945 Constitution is a written basic law or state constitution, which is the basis and source of other regulations or laws in force in the territory of the Republic of Indonesia. The 1945 Constitution is a document that consists of two parts: the preamble and the body. The preamble of the 1945 Constitution consists of 4 (four) paragraphs, and the body consists of 16 (sixteen) chapters, 37 (thirty-seven) articles, 3 (three) articles of transitional rules, and 2 (two) paragraphs of additional rules.

Assembly Decree​

Initially, the Assembly Decree was regulated in TAP XX/MPRS/1966. As stated in its attachment, the Assembly Decree maintains a strong position in the hierarchy, which is also falls under the 1945 Constitution. Then in 2000, the Assembly issued TAP III/MPR/2000, causing TAP MPRS Number XX/MPRS/1966 to be declared revoked and no longer valid. 

TAP III/MPR/2000 continues to hold a position within the hierarchy of laws and regulations. However, after amendments were made to the 1945 Constitution regarding the Assembly (seen in the provisions of Article 1 (2) of the 1945 Constitution), sovereignty rests with the people and is carried out according to the Constitution. This has resulted in the Assembly no longer being the highest state institution. Furthermore, in the third amendment of the 1945 Constitution, the Assembly’s authority to formulate the 1945 Constitution and the Broad Outlines of State Policy was revised to state that "The Assembly [only] has the authority to amend and enact the Constitution." 

The loss of the Assembly's authority in determining the Broad Outlines of State Policy has impacted the Assembly's authority to make regulatory legal products. This has made the position of the Assembly Decree within the hierarchy of laws and regulations in Indonesia to be unclear. Moreover, Law No. 10/2004 changes the types and hierarchies of laws and regulations, causing the Assembly Decree to have absolutely no position in the hierarchy of laws and regulations. However, after the government issued Law No. 12/2011, the Assembly Decree has reclaimed its position in Indonesia's hierarchy of laws and regulations. The has had a big and significant as it has meant that the Assembly Decree has become a source of formal and material law. 


Laws or Government Regulations in Lieu of Law

A law is a rule established by the House of Representatives with joint approval from the President.  The House of Representatives and the President will discuss each bill of law, seeking mutual approval.  The need for the approval of the House of Representatives regarding law formation is grounded in its status as the legislative body that represents that Indonesian population. Additionally, the House of Representatives performs a legislative function mandated by the 1945 Constitution, in which it holds the power to form laws.  Therefore, every formation of law must go through the House of Representatives, the legislative body that is endowed with the authority to enact laws.

Furthermore, Government Regulations in Lieu of Law is a law that has been enacted by the President in matters of urgent necessity, requiring the submission of the bill to the House of Representatives.   The discussion on the bill of law concerning the enactment of Government Regulations in Lieu of Law follows the same mechanism that is utilized for the deliberations of a regular bill of law. 

Government Regulation

Based on Article 1 Law No. 12/2011, government regulations are rules set by the President to ensure the proper implementation of the law.   Within the legal framework, government regulations are set as subsidiary rules and only exist when mandated by the Law.  The authorized party to issue government regulations is the President.  

Presidential Regulation

Presidential Regulation is a type of statutory regulation, stipulated by the President, to carry out the order of higher laws and regulations or to carry out government powers.  Article 13 Law No. 12/2011 delineates the contents of Presidential Regulations, encompassing: (i) materials ordered by law, and materials for implementing Government Regulations; or (ii) materials for implementing the administration of government power.  Based on the article, it can be concluded that the Presidential Regulation has three functions, namely: (i) delegation regulations, (ii) implementing regulations, and (iii) independent regulations.

Provincial Regulation

Provincial Regulations are laws and regulations made by the Provincial Regional Legislative Council with the approval from the Governor.  Furthermore, Article 14 Law No. 12/2011 explains the content of Provincial Regulations to contain material for the implementation of regional autonomy and co-administration tasks, as well as, accommodating special regional conditions and/or a further elaboration of higher legislation.  


Regency/Municipality Regulation

Regency/Municipality Regulations are statutory regulations made by the District/City Regional Legislative Council subject to the approval from the Regent/Mayor.   Furthermore, Article 14 Law No. 12/2011 explains the contents of Regency/Municipality Regulations, emphasizing its role in implementing regional autonomy and co-administrative tasks. Additionally, the Regency/Municipality Regulations can be used to account for special regional conditions, as well as the further elaboration of higher legislation. 

The Characteristics of Regulation and Decree

Furthermore, it is important to distinguish between regulation and decree. The difference between the two can be found in the nature and objective of these instruments.



A Regulation is a law whose nature lies in the abstract or general norm, meaning that it regulates general matters and is binding publicly and indiscriminately.  Theoretically, the term “regulation” has 2 (two) meanings: (i) the process of forming state regulations, both at the central level and at the regional level; and (ii) all the applicable laws in a country, which is the result of the formation of regulations, both at the central and regional levels.  

For the purpose of this section, regulation refers to the secondary definition, meaning all the applicable laws in a country. Article 1 (2) jo. Article 7 jo. Article 8 of Law No. 12/2011 provides that laws and regulations refer to all legislation that is publicly and legally binding, of which had been issued by the house of representative in conjunction with the government. Decrees that are also issued by an administrative body or an official fall within the definition of law and regulations. Both of these are applicable at both central and regional levels. 

From the abovementioned definition, it can be concluded that the characteristics of the laws and regulations are: (i) general and comprehensive; (ii) universal; (iii) pre-emptive; and (iv) having the power to correct and improve by itself.


On the contrary, a decree is defined as a one-sided public legal action carried out by state administrative bodies. The greatest feature that distinguishes a decree from regulation is its nature of specificity and particularity. In issuing a decree, the administrative body addresses a particular individual with a particular matter.  Based on Article 1 (3) Law No. 5/1986, an administrative decree is a written decision issued by an administrative body or an administrative official, consisting of administrative law based upon the prevailing laws and regulations. These decrees are of concrete, individual, and final nature, and impose a legal consequence upon an individual or a private entity.  

According to the aforementioned definition, the identifiable characteristics of a decree are as follows: (i) the unilateral declaration of will; (ii) issued by government organs; (iii) based on public legal authority; (iv) intended for a specific issue or a concrete and individual matter; and (v) cause legal consequences in the field of administrative law. The following are some examples of decrees: birth certificate, marriage certificate, land ownership certificate, and so forth.

Attribution, Delegation, and Mandate

State institutions also require a source of legitimacy. The authority vested in a state institution must originate from an external source, particularly for lower state institutions. Therefore, in administrative law, there are 3 (three) ways through which a public institution can acquire legitimacy and authority: attribution, delegation, and mandates. 


The initial method of obtaining legal and institutional authority is through attribution. As the name suggests, attribution is the granting of authority, by legislators, to government organs through the constitution or legislation. Attribution is granting authority to government agencies and/or officials by virtue of the 1945 Constitution or legislation.   Furthermore, it can be said that attribution creates a new authority that did not previously exist, of which is granted to a governmental body or a public official. 


The second method of acquiring authority is through delegation, which is defined as “the delegation of government authority from one body to another”. Delegation is the transfer of authority from superior government agencies and/or officials to inferior government agencies and/or officials, whereby responsibility and liability is being fully transferred to the recipient of the delegation.  



Finally, a public body or official may obtain authority through a mandate, which is defined as the delegation of authority from superior government agencies and/or officials to inferior government agencies and/or officials, whilst the responsibility and liability remains with the mandating entity. 

The distinctions in nature and consequences between mandates and delegation can be observed as follows:


Comparison between Mandate and Delegation

Source: Ridwan HR., “Hukum Administrasi Negara”, (Depok: PT RajaGrafindo Persada, 2018), p. 107.

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.

Definition of Contract

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. 

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.

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

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. 

Temporal Contracts

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. 

Disjunctive Contracts

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. 

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. 

Joint Contracts

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. 

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. 

Divisible and Indivisible Contracts

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.  

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

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. 

Validity of Contract

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

The Consent of Both Parties 

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. 

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.   

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. 

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

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. 

Performance of Contract

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

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

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

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.

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.  

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.

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.  

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:




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. 

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. 

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

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. 

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.

Cessation of Contract


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

  • 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.

bottom of page