CORPORATE & BUSINESS LAW

Lectures 2, 3 & 4

Indonesia
Formation of Contracts

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Key Topics – Lectures 2, 3 & 4

A. Overview of Civil Code

B. 4 Elements of a Valid Contract
• Consent of parties
• Capacity to contract
• Subject matter is certain
• Lawful purpose
C. Formation of Contract

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Key Topics – Lectures 2, 3 & 4

D. Performance of Contract
E. Remedies for Breach
F. Termination of Contract

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A. OVERVIEW OF CIVIL CODE

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Structure of Civil Code
Consists of 4 books:
• Book I: concerning family and inheritance, which
applies only to non-Muslim citizens.
• Book II: concerning assets and lien.
• Book III: concerning contracts. Parties can waive these
provisions.
• Book IV: concerning evidence and procedural law.

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Law of Contract
• Book III of the Civil Code is optional:
• by inserting provisions in their contracts which deviate from
or even contrary to those provisions laid down in Book III,
• except that they cannot deviate from the basic rules of
legality, justice, good intentions and fairness.
• The general principles in the Civil Code for the law of
contracts form the principles for:
• contracts regulated in the Civil Code; and
• contracts regulated in the Commercial Code and in other
special acts or regulations.

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Meeting of the Minds
• The ”consensual principle” or ”the meeting of the minds”
forms the basis of contract law under the Civil Code
(CC).

• Pursuant to Article 1320 CC, a contract is valid only if it

fulfills the following requirements:
• Consent of the parties • Subject matter is certain
• Capacity to contract • Lawful purpose

• A contract that fulfills the above requirements is legally

binding to the parties; it cannot be terminated without
the consent of the parties (Article 1338 CC).
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B. 4 ELEMENTS OF A VALID
CONTRACT

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1ST ELEMENT: CONSENT

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General Rule
▪ For a contract to be valid, the parties must consent to the
basic matters in the agreement.

▪ If one party is physically forced to sign the agreement eg.

if someone else holds his hand and force him to make a
signature on the paper:
▪ There is no consent; and
▪ The contract is invalid.

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Exceptions
▪ A contract may still be valid if consent is obtained by:
1. Duress,
2. Mistake, or
3. Fraud.

▪ The contract is voidable upon the application of the

victim.

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1. Duress
▪ Mental intimidation not permitted by law eg.
• A threat of physical violence
• Blackmail
• Undue influence over a person in a weakened state of
mind.
▪ If the threat involves an action permissible at law eg.
bringing a law suit, there is no duress.

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2. Mistake
Two types of mistake:
•Mistake about the identity of the subject matter of the
contract
• eg. the Piscasso painting is not really a Picasso painting
•Mistake about the identity of the person with whom the
contract is made
• eg. “I thought I was signing a contract with John, but
instead it was Peter signing the contract”

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2. Mistake (cont’d)
For the contract to be voidable due to mistake:
• The party must have been aware of the mistake
• The party must at least have known that the other party
was entering into the contract and was mistaken as to
the subject matter of the contract or party

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3. Fraud
Fraud is an active action act performed by one party prior to
the formation of he contract, with the intention of:
• deceiving the other party; and
• inducing the other party into concluding a contract which
he would otherwise not have concluded.

False
Sratement

Fraud
Deceitful
Act
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3. Fraud – deceitful act
Conditions for a deceitful act:
1. The deceitful act must be carried out by (or in the name
of) the contracting party.
2. The person carrying out the deceitful act must intend to
deceive.
3. The act must be an active action (rather than an
omission).
• Example of active action: Changing the serial number on a
machine
• Example of omission: Failure to inform the buyer of a
hidden defect
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3. Fraud – deceitful act (cont’d)
4. The act must be of such a nature that the deceived party
would not have entered into the contract but for that
deception

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Legal action
• A suit to avoid a contract (on grounds off duress,
mistake or fraud) may only be initiated by the injured
party.
• The action must be brought within 5 years from:
• the cessation of the duress; or
• The discovery of the fraud or mistake

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2ND ELEMENT: CAPACITY

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Capacity
• Parties must have the capacity to enter into a contract.

• As a general rule, all persons have the capacity to enter

into contracts, except for:
• Minors (persons under 21 years of age); and

• Persons placed under guardianship.

• Associations and businesses which qualify as legal

bodies or legal entities (badan bukum) within the
meaning of Article 1653 of the Civil Code and other
relevant legislation have capacity to enter into contracts.
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Incapable Persons
• Contracts with incapable persons can be annulled by a
court of law, upon application of the incapable person or
his lawful representative.

• Must be brought within 5 years of the termination of the

incapacity.

• The obligations of the other party to the contract

remains unaffected by the incapacity until and unless
the contract is annulled.

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Married Woman
• Article 108 CC: a married woman was without capacity
to enter into contracts, unless she was “assisted” in the
making of the contract by her husband.
• Traditionally, this meant that her husband had to be
present when the contract was made. Or she must obtain
his written consent before entering into the contract.

• In 1963, the Supreme Court issued a circular letter

which noted that Article 108 was no longer in force.
• No case has been decided by the Supreme Court yet.

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3RD ELEMENT: SUBJECT
MATTER IS CERTAIN

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Subject matter is certain
• The subject matter of the contract must be
determinable. Otherwise, the contract is void.

• “Subject matter” refers to:

• The object of the performance (eg. the goods to be
delivered)
• The performance itself (eg. the delivery)

• It is not necessary to state the precise quantity of the

goods to be delivered. It is sufficient to refer to “all the
TVs that can be packed into one truck”.
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Subject matter’s existence
• Subject matter may be rights, services, goods or things,
whether existing or yet to exist, so long as they are
determinable.
• Example: a contract to sell a portrait that has not yet been
painted is valid.

• A contract which is impossible to perform (at the time it

is executed) is void.
• Example: a contract to build an office building on a piece
of land. But the land was compulsorily acquired back by
the government.

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No need for reciprocity
• The Civil Code specifically provides that a person may
obliged himself to another party without obtaining
anything in return.
• Example: A contract is valid if Peter agrees to drive John
to work every day, for free.

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4TH ELEMENT: LAWFUL PURPOSE

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Lawful purpose
• The contract must have a lawful purpose.

• The contract will be void if:

• If the object of the contract is unlawful; or

• If the contract is contrary to good morals or public policy.

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Case – unlawful purpose
• Sugar contract case of the Indonesian merchant Yani
Haryanto versus the English firm MAN Sugar Ltd.

• Supreme Court held that the contract of sale and

purchase of sugar to the Indonesian merchant was:
• unlawful and had no good cause,
• as it was contrary to the government regulation that only
BULOG (the Indonesian Logistics Bureau) could import
sugar into Indonesia.

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C. FORMATION OF CONTRACT

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When is a contract formed?
• In theory, a contract is formed when the parties’
intention coincides  meeting of the minds.
• In practice, we look at the actual declaration by the
parties.
• A contract is concluded if the declared intentions of the
parties coincide.
• Of course, the declarations must be really intended.

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Offer and Acceptance
• An example of actual declaration is:
• when an offer is made; and
• the offer is accepted.
• The offer and acceptance can be in writing, made
orally or by conduct.
• A written acceptance is effective upon receipt.

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Legitimate Offer
• An offer must be legitimate. Only legitimate offers are
valid.
• If a price is quoted in a newspaper advertisement is so
low as to be obviously a misprint, then the advertisement
does not constitute a legitimate offer  it is not
reasonable to believe that the declaration was really
intended.
• Compare with: If the price in the advertisement is a
misprint but is not so low as to be obviously a misprint,
the offer is still considered legitimate.

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Legitimate Offer - Period of Validity
• A legitimate offer is irrevocable unless a power to
revoke has been reserved.
• If the offer is not accepted during the period of its
validity, it terminates automatically on the expiry of that
period.
• If the offer has no specific duration, it is deemed to be
in force for a reasonable time, depending on
circumstances.

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Formalities
• As a general rule, no formal requirements (writing,
registration etc) are required for a contract to be
binding.
• Mutual consent of the parties is sufficient
• Mutual consent is demonstrated when one party makes
an offer and the other accepts.

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Formalities - exceptions
• The Civil Code has exceptions.
• Certain contracts must be in writing and executed in
the form of an authentic deed drawn up by a notary or
another authorised public official
• Articles of Association of a limited liability company
• Some contracts eg. conveyance must be registered.
• Some contracts become binding only upon the delivery
of the subject matter of the contract eg. deposit.

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Formalities – for companies
• It is not necessary for an Indonesian company entering
into a contract, to use its company seal.
• When the contract is signed in a country other than
Indonesia, it should be authenticated by:
• an Indonesian consulate in the country where the
contract is signed; and
• the necessary officials designed by he law of that country
for the authentication of signatures.

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Formalities – for civil suits
• A contract must be set out on stamped paper or with a
government stamp before it may be entered as
evidence in a civil suit.

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D. PERFORMANCE OF
CONTRACT

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Performance
• All contracts which are validly formed are legally
binding on the parties. The contracts cannot be
revoked unless:
• there is mutual consent of the parties; or

• There are reasons authorised by law (Article 1338 CC)

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Parties’ Obligations
• The parties’ obligations are set out in the contract and
where relevant, include:
• obligations set out in the statutes,

• obligations imposed by customary practices,

• obligations that are considered reasonable

• In general, the order of priority: Contractual provisions

 statutory provisions  customary practices 
reasonableness test

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Parties’ Obligations - Example
Example:
•It is customary for a lessor to collect his rent at the
premises of the tenant.
•But Article 1393 CC provides that a debtor is bound to
make payment at the creditor’s premises.
•The lease agreement does not state the place of
payment/collection/
•Article 1393 CC prevails over customs.

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Good Faith
A contract must be performed by the parties in good faith.

To ensure good faith, a judge in a civil suit has authority to

supervise the implementation of the contract and to invoke
principles of reasonableness and justice in doing so

In practice, this means that a judge can deviate from the

letter of the contract to ensure that the contract is
performed in good faith.

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Good Faith – 1955 Case
The Supreme Court refused to allow land which has been
pledged for Rp50 prior to World War II, to be redeemed at the
same price. The court proceeded to devise its own formula for
redemption (even though the contract clearly stated that Rp50
was the redemption price).

Noting that the price of gold had increased 30 times over the
years, the court was of the view that justice required the parties
to be bear the risk of currency fluctuations equally.

The court ordered the plaintiff to pay Rp750 for the land (1/2 x
30 x Rp50).

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Third Parties’ Liability and Benefit
• As a general rule, the Civil Code provides that only
named parties to a contract are bound by, and are
allowed to benefit, from the contractual obligations.
• A contract cannot impose liability on a third party, and
a third person cannot acquire rights under a contract to
which he is not a party.

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Third Parties’ Liability and Benefit
BUT there is an exception:
Article 1317 CC provides that a contract can impose
liability on a third party, and a third person can acquire
rights under a contract to which he is not a party if:
• the contract stipulates that it should benefit a named
third party; and
• the third party ratifying the stipulation before it is
revoked.

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Example
• A agrees to sell his car to B for $1,000 on the condition
that B lets C use the car for 6 months.
• B agrees.

• The contract states A’s condition and B’s agreement

clearly. C makes known his intention to rely on A’s
condition and use the car.
• Under Article 1317 CC, C acquires an enforceable right
against A and B.

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E. REMEDIES FOR BREACH

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Civil Code
Various remedies are set out in the Civil Code to
indemnify or compensate losses of the innocent party if
one party defaults on the contract:
1. Specific Performance
2. Damages

3. Dissolution

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1. Specific Performance
• As a general rule, a party to the contract is always free
to sue for specific performance of the contract if
performance is still possible.

• This includes the mandatory performance of contracts

for the sale of land and other contracts.

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2. Damages
• In addition to (or in lieu of) performance, the innocent
party may sue for damages.
• Expenditure (biaya, kosten)
• Losses (rugi, schaden)
• Interest (bunga, interessen)
• As a general rule, a party to the contract is always free to
sue for specific performance of the contract if
performance is still possible.

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2. Damages - expenditure
• Expenditure includes all expenses and costs actually
incurred by the innocent party in reliance on the
contract.

• Example: A is a concert promoter. A signs a contract

with B (a singer) to pay B $1,000 for a 1-hour concert.
A paid $300 to hire a concert venue. If B breaches the
contract and fails to perform at the concert, A can sue
B for the $300.

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2. Damages - loss
• Loss refers to the injury to the property of the innocent
party, arising from the breach of contract.
• Covers both (a) injury to the goods which are the
subject of the contract and (b) injury to other property
arising from the default. Example:
• C and D signs a contract whereby D will build a house
for C.
• D breached the contract by using poor quality cement
and materials to build the house. The house collapsed.
• C can sue for the loss of the house + the damage
caused by the collapse to his furniture in the house.
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2. Damages - interest
• The word “interest” is a misleading translation of the
Dutch word “interessen”. It actually means lost profit.
• Example:
• E and F signs a contract whereby E will sell apples to F
for $25, with delivery on 1 January.
• On 1 January, the market value of the apples is $30.
• E fails to deliver. F sues E for the $5 lost profit.

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2. Damages - Limitations
• The Civil Code imposes certain limitations on the
amount of damages which can be claimed.
• Damages are limited to those injuries which are a direct
result of the breach of contract.
• Damages are limited to those injuries which were
foreseeable at the time of contract formation.
The scope of loss and possibility of injury must be
foreseeable.
• Interest for late or non-payment is capped at a 6% per
year*.

*This % figure may be amended by State Gazette from time to time.

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3. Dissolution
• As a general rule, a contracting party is not free to
unilaterally rescind the agreement when the other
party breached the contract.
• Even where the contract provides for automatic
termination, the actual dissolution must await the order
of court (Article 1266 CC).
• In practice, this Article 1266 is usually excluded from the
contract.

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Degrees of Fault
• The Civil Code establishes different degrees of fault
which have to be met for different types of contracts.
• For example:
• if one party has undertaken to deliver something, the
rather vague standard of care imposed on him is that of a
“good father” (goed buisvader).
• a keeper of goods that were entrusted to him, must
protect the goods as if they were his own (Article 1706
CC).

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Degrees of Fault (cont’d)
• In an agreement to borrow a certain object, the borrower
must treat the borrowed object as a reasonably prudent
person would under the same circumstances (Article
1745 CC).

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F. TERMINATION OF CONTRACT

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10 Ways to Terminate a Contract
Article 1381 of the Civil Code recognises ten ways in
which a contractual obligation can be terminated:
1. Performance;
✓
2. Certified tender plus deposit;
3. Novation; We will examine items
✓ 1, 3, 4, 6 and 7.
✓ Compensation (net-off);
4.
5. Confusion (merger);

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10 Ways to Terminate a Contract
6. Remission of debt (release);
✓
7. Destruction of subject matter;
✓
8. Dissolution;
9. Occurrence of a resolutory condition; and
10. Prescription.

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1. Performance
• The performance must be executed at the time and
place prescribed by the contract.

• If a place is not determined, and the contract involves

particular goods or items that are specifically identified
in the contract:
• then performance must be carried out at the place where
the goods were located at the time the contract was
made
• Otherwise, performance is due at the residence of the obligee.

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3. Novation

• A particular obligation can also be discharged by the

creation of a new obligation intended to replace it.

• The novation can occur in 3 ways:

a. The old contract is replaced by a new one;
b. The old obligor is replaced by a new one; or
c. The old obligee is replaced by a new one.

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4. Compensation (net-off)
• When two persons owe each other similar obligations,
the two debts cancel one another - up to the amount of
the lesser of the two.

• Example: A owes B $12. B owes A $5. B's debt to A will

be discharged, and A’s debt to B reduced to $7.

• For the "compensation" or "set-off" to occur, the

obligations must be of a similar type and concern similar
objects.

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6. Remission of debt (release)
• As a general rule, an obligor is always free to release his
obligee from an obligation.

• To be valid, the remission must be affirmatively proved.

• The Civil Code provides that voluntary delivery by the
creditor to his debtor of the original, signed copy of the
agreement is sufficient evidence of release.

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7. Destruction of Subject Matter
• If the goods which are the object of a contract are:
• damaged beyond repair,
• are lost, or
• have perished,
and the seller himself is not responsible for this loss or
disappearance, he is discharged from his obligation to
deliver.

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THANK YOU.

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