New regulation on mandatory use of Bahasa Indonesia falls short of expectation

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Indonesian President Joko Widodo walks after his inauguration and a swearing-in ceremony at the House of Representatives building in Jakarta, Indonesia, October 20, 2019.
DECEMBER 09, 2019 - 1:36 PM

TEN years after the enactment of the Language Law, President Joko Widodo finally signed its implementing regulation. When it was first enacted, the Language Law raised alarm because it imposed additional burden on contracting parties by requiring them to translate agreements into Indonesian.

Over time, the Language Law also created uncertainties, which can be broadly categorised into three areas: governing language, timing and consequences of non-compliance.

To address these uncertainties, the market has adopted a set of approaches. While many had hoped that the Regulation would affirm the market approach that helps especially in promoting foreign investment in Indonesia, it seems to do the opposite, while introducing new issues.

Governing language

During the 10-year gap between the enactment of the Language Law and the issuance of the Regulation, the market has adopted a common practice where parties usually prepare and sign the Indonesian version of the agreement after the signing of the non-Indonesian (typically English) version of the agreement. While the Regulation affirmed parties' right to agree on the governing language (which does not have to be Indonesian) in their agreement, there are new questions with regards to the timing of the execution of the Indonesian version.

Timing and practicality

The Regulation states that the native language of the foreign party and/or English language is used as an equivalent or translation of the Indonesian version. A strict reading of the relevant provision of the Regulation would mean that an Indonesian version of the agreement must be prepared first, with a non-Indonesian or English version of the agreement to follow next. In practice, this would be impractical as negotiations are often conducted in English and commonly with last minute changes to an agreement.

Lack of Legal Implication or Consequences and Judge's Discretion 

Further, the Regulation fails to finally clarify the consequences of non-compliance with the Language Law, especially in light of the ruling by the West Jakarta District Court in PT Bangun Karya Pratama Lestari v. Nine AM Ltd, where the court ruled that an agreement involving an Indonesian party that is not in Indonesian language is illegal and therefore null and void.

Thus, an agreement involving an Indonesian party that is not in Indonesian language still carries a severe risk of being found void on the ground that it is illegal.

Unresolved issues under the Regulation

The Regulation also fails to consider market practice and needs with respect to Indonesian parties using English as the governing language of an agreement. Regardless of complexity, if an agreement does not involve a foreign party, Indonesian parties must choose Indonesian language as the governing language.

This also creates uncertainties for foreign direct investment companies (commonly referred to as PT PMA). While PT PMA is treated as a foreign capital under the Indonesian Investment Law, the new Regulation seems to treat them as an Indonesian entity, hence a domestic party.

Thus, even if the agreement entered into by a PT PMA involves a foreign party, for example its officer or shareholder is a foreign party, it cannot choose English as the governing language of the agreement.

Within the context of promoting ease of doing business in Indonesia, the Regulation seems to instead present a hurdle for investment. The objective of the Language Law and its implementing regulation is to conserve and advocate the use of Indonesian as a living language. Arguably, the current market approach is adequate to achieve this objective. But the government seems to think otherwise as it chooses to adopt rigid measures under the Regulation.

Failing to resolve existing uncertainties, this long-awaited Regulation did not offer a solution for advocating the use of Indonesian in commercial agreements, especially in the context of complex corporate transactions that often do not allow any room for delay.

Commentary from Assegaf Hamzah & Partners, a member firm of Rajah & Tann Asia: Although the Regulation offers some clarity on the mandatory use of Indonesian language, it fails to consider the now widely accepted market practice that was developed during the 10-year gap. With the new Regulation, the prudent practice would be for businesses to prepare and execute the Indonesian version of their agreements simultaneously with the governing English version. Thus, businesses would need to take into account the time and resources that they would need to prepare the Indonesian version prior to the closing of a transaction.