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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 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 legal 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, the 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 rechtsordnung. The arrangement of norms according to the theory are as follows

  • Fundamental norms of the state (Staatsfundamentalnorm);

  • Basic rules of the state (Staatsgrundgesetz);

  • Formal legislation (Formell Gesetz); and

  • Implementing regulations and autonomous regulations (Verordnung 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 in Pancasila. As such, Pancasila must be regarded as a point of reference in forming laws and regulations in Indonesia, to ensure that they reflect the nation's philosophy of life.

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., 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

1945 Constitution is a written basic law or state constitution which is the basis and source of other regulations or other laws in force in the territory of the Republic of Indonesia. The 1945 Constitution is a text which consists of two parts, namely the preamble and the body. The preamble of 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, Assembly Decree has a strong position in the hierarchy which is also under the 1945 Constitution. Then in 2000, the Assembly issued TAP III/MPR/2000, then TAP MPRS Number XX/MPRS/1966 is declared revoked and no longer valid. 

TAP III/MPR/2000 still has a position as part of the hierarchy of laws and regulations, but after amendments were made to the 1945 Constitution regarding the Assembly which can be seen from the provisions of Article 1 (2) 1945 Constitution which states sovereignty is in the hands of the people and is carried out according to the constitution, causing the Assembly to no longer be the highest state institution. Furthermore, in the third amendment of 1945 Constitution, the provisions regarding the authority of the Assembly to stipulate the 1945 Constitution and the Broad Outlines of State Policy were changed to "The Assembly 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 an impact on the Assembly's authority to make regulatory legal products. This causes the position of the Assembly Decree in 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. This change causes the Assembly Decree to have absolutely no position in the hierarchy of laws and regulations. But after the government issued Law No.12/2011, the Assembly Decree reclaims its position in the hierarchy of laws and regulations in Indonesia. The implication is big and significant, because the Assembly Decree become a source of formal and material law.



Law is rules established by the House of Representatives by joint approval with President. Every bill of law is discussed by the House of Representatives and the President for mutual approval. It is not without reason why the formation of a law must obtain the approval from the House of Representatives. This is because the House of Representatives is a legislative body that represents the Indonesian people and has a legislative function as mandated by 1945 Constitution that states The House of Representatives holds the power to form laws. Therefore, every law formation must go through the House of Representatives as a legislative body that is given the authority to form laws.

Government Regulation

Government regulations are rules that set by the President to implement the Law as it should. In the concept of law, government regulations set as subsidiary rules and only exists if ordered by Law.  The authorized party to issue government regulations is the President.

Presidential Regulation

Presidential Regulation is a statutory regulation stipulated by the President to carry out the order of higher laws and regulations or in carrying out government powers. The contents of the Presidential Regulation in Article 13 Law No. 12/2011 contain: (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 as: (i) delegation regulations; (ii) implementing regulations; and (iii) independent regulations.

Provincial Regulation

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


Regency/Municipality Regulation

Regency/Municipality Regulations are statutory regulations made by the District/City Regional People's Representative Council with the approval from Regent/Mayor. Furthermore, Article 14 Law No.12/2011 explains the content of Regency/Municipality Regulation containing material in the context of implementing regional autonomy and co-administration tasks as well as accommodating special regional conditions and/or 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.



Regulation is a law which nature is in the abstract or general norm, meaning that it regulates general matters and is binding publicly and indiscriminately. Theoretically, the term “regulation” has 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 are the result of the formation of regulations, both at the central and regional levels.  

For the purpose of this section, regulation means all the applicable laws in a country. Based on the elucidation Article 1 (2) jo. Article 7 jo. Article 8 of Law No. 12/2011, laws and regulations refer to all regulations which are publicly and legally binding, that are issued by the people’s assembly jointly with the government, either at the central or regional level, as well as all decrees issued by an administrative body or official, either at the central or regional levels, which are also publicly and legally binding.

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 other hand, a decree is defined as a one-sided public legal action carried out by state administrative bodies. What distinguishes 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, that is of concrete, individual, and final nature, and effected a legal consequence upon an individual or a private entity.  

According to the said definition, the identifiable characteristics of a decree are as follows: (i) 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) causing legal consequences in the field of administrative law. Here are some decrees examples: birth certificate, marriage certificate, land ownership certificate, and etc.

Attribution, Delegation, and Mandate

State institutions also require a source of legitimacy. The authority vested within a state institution must originate from somewhere else, particularly for lower state institutions.Therefore, within the field of administrative law, there are three ways through which a public institution gains legitimacy and authority, which are attribution, delegation, and mandate.


The first way of gaining 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 the granting of authority to government agencies and/or officials by virtue of the 1945 Constitution or a legislation. It is elaborated further that attribution creates a new authority that had not exist previously, and that Attribution is granted to a governmental body or a public official.


The second way of gaining authority is through delegation, 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 the responsibility and liability being fully transferred to the recipient of the delegation.



Lastly, a public body or official may gain authority through mandate, defined as the delegation of authority from superior government agencies and/or officials to inferior government agencies and/or officials, whereby the responsibility and liability remain with the mandate giver.

The nature and consequences of both mandate and delegation differences can be seen as follows:

Comparison between Mandate and Delegation

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 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 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. 

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.

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

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.

Temporal Contracts

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.

Disjunctive Contracts

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. 

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.

Joint Contracts

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. 

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.

Divisible and Indivisible Contracts

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.  

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

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.


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 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.  

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.

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.

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.


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

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

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.

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.  

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.

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.  

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 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. 

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. 

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

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.

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. 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.

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.

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