On 29 December 2023,  the Supreme Court of the Republic of Indonesia issued Circular Letter No. 3 of 2023 providing guidance on interpreting Article 31 of Law No. 24 of 2009 on National Flag, Language, Emblem and Anthem, commonly referred to as the Language Law. This law plays a pivotal role in determining the language requirements for agreements involving Indonesian entities and foreign counterparts.

Article 31 mandates the use of Bahasa Indonesia in agreements in agreements involving Indonesian state agencies, government institutions, private entities, or individual citizens. It also stipulates that agreements involving foreign parties should be written in both the national language of the foreign party and/or in English. This provision aims to ensure clarity and understanding among parties from different linguistic backgrounds.

However, interpretations of Article 31 have varied, leading to inconsistencies in judicial rulings. In the case of PT Bangun Karya Pratama Lestari v Nine AM Ltd., the West Jakarta High Court  deemed a loan agreement entered into solely in a foreign language to be null and void. The decision was subsequently upheld by the Supreme Court in August 2015. Yet other more recent decisions have shown some shown inconsistencies, with some judges opining that the absence of an Indonesian language version should not necessarily invalidate an agreement.

The circular seeks to address these discrepancies and provide clarity in judicial interpretation. According to the circular, Indonesian private institutions and individuals engaging in agreements with foreign parties in foreign languages, without accompanying Indonesian translations, may not automatically lead to the annulment of the agreement. However, annulment may occur if bad faith is proven on the part of either party.

It is important to note that the circular's guidance has limitations. It emphasizes the necessity of an Indonesian translation only, suggesting that agreements can be conducted solely in a foreign language or English. Moreover, the circular does not define what constitutes bad faith, leaving it to the discretion of the judges to determine on a case-by-case basis.

Compliance and legal risks

While the Supreme Court's circular aims to streamline judicial decisions and promote consistency, its implications and how it will interact alignment with the Language Law remain subject to debate.

Moving forward, parties must navigate these legal intricacies prudently to ensure compliance and mitigate potential legal challenges in their business dealings in Indonesia. Foreign parties engaging with Indonesian entities should always prepare an Indonesian version of the agreement and opt for bilingual agreements to ensure compliance and mitigate legal risks.

Authored by Chalid Heyder, Teguh Darmawan, and Nigel Sharman.