Reed Smith Client Alerts

Authors: Richard G. Swinburn Siân Fellows

Type: Client Alerts

In 2010 we reported on legal developments affecting Indonesia’s coal mining industry [click here to view the alert]. Since then, Indonesia – the fourth most populous country in the world with a US-dollar economy in excess of one trillion – has continued to attract foreign investment, with more than US$20 billion invested in Indonesia in 2012 (and more expected and more from 2013 expected to be reported). Much of this investment targets the infrastructure for exporting the country’s natural resources – nickel ore, copper, tin and bauxite in addition to thermal coal – which has continued to gain a progressively greater share of the global traded market whilst Australian exports have become increasingly more expensive. Likewise, oil and agricultural commodity inflows to support Indonesia’s large and increasingly wealthy population provide opportunities for many investors.

This client alert reports on two developments in the issues identified in our earlier alert. The first is a not-so-recent Indonesian court decision on the “Language Law” that has gained a lot of recent attention. The second relates to the Indonesian government’s ban on exports of raw mineral ores, under the “Mining Law”, which is due to take effect on January 12.

The Language Law decision – do contracts really have to be written in the Indonesian language?

The decision

The District Court of West Jakarta ruled on 10 July 2013 that a loan agreement between an Indonesian company and a Texas-based lender was void because it was drafted only in English. The court appears to have based its reasoning on Indonesian Law No. 24/2009 (the “Language Law”), which was passed in 2009.
Article 31 of the Language Law provides that:

  • Indonesian language must be used for an agreement which involves Indonesian parties – including government institutions, state-owned enterprises, private companies – and individuals; and
  • Where an agreement involves a foreign party, the parties may, in addition to the Indonesian language, also use the national language of the foreign party or English

The West Jakarta Court decision is the first public indication from lawmakers or the courts as to the consequences should the contracting parties fail to write their contract in the Indonesian language. The decision, however, is not yet binding on any other Indonesian courts as it is subject to appeal and will not be binding until the appeal process is over.

Although the case concerned a contract governed by Indonesian law, the court made obiter comments that all agreements involving an Indonesian private or public entity entered into after 9 July 2009 that are not in Bahasa Indonesia, would be void.

There are doubts that the West Jakarta Court decision is correct under Indonesian law, nonetheless, the decision should be taken into account when doing business with Indonesian entities. As anticipated in our 2010 client alert, there is now a judicial basis for Indonesian entities to challenge the validity of international contracts, under the Language Law. Until the position has been ruled on by the higher courts in Indonesia or by the Indonesian government, we recommend that clients keep in mind the potential for counterparties to argue that contracts not in the Indonesian language should be rendered void by the Indonesian courts. As mentioned above, this potentially affects not only Indonesian law-governed contracts but all contracts (irrelevant of the governing law) including those where any claims, awards or judgments against such counterparties would have to be enforced through the Indonesian courts. No doubt many international businesses may wish to contact their government representatives and chambers of commerce in Jakarta to express their concern with this issue.

Clarifying the effect and scope of the Language Law

It is easy to become alarmed about the potential effect of the Language Law on existing and future contracts, but there are many contracts that in theory should not be impacted:

  • The Language Law does not restrict the contracting parties from agreeing the governing law of their contract.
  • The only agreements which are required to be written in Bahasa Indonesia are those which are:
    (a) Governed by Indonesian law and –
    (b) Entered into by at least one Indonesian party.
  • Agreements which are:
    (a) Governed by foreign law and –
    (b) Entered into by an Indonesian party and a foreign party, do not, in theory, have to be written in Bahasa Indonesia, as Indonesian law should not apply (but where they may need to be enforced in Indonesia, as a prudent precaution, they should be).
  • The requirement is only that contracts are written in Indonesian; there is nothing to prevent contracts involving a foreign party from also being written in English and the English version having priority over the Bahasa Indonesia copy, or a translation of the contract being attached.
  • Implementing regulations that were promised, and which are common in Indonesia to supplement new regulations, have not yet been issued.

Practical guidance

Neither the court’s decision nor the recent commentary has altered our view that, ideally and as a matter of prudence, agreements between Indonesian and foreign parties should be drafted as a dual-language agreement in both English and Bahasa Indonesia, regardless of the governing law. This should deter parties from attempting to render a contract void and prevent enforcement of a foreign arbitration award or court judgment on the grounds of the Language Law. A common alternative approach is to include a clause in an English language contract that states that a Bahasa Indonesia translation will be prepared and attached to the agreement prior to execution, to satisfy the Language Law. Needless to say, those translations should be prepared and attached to avoid the risk of the contract being unenforceable under the Language Law. Of course, when entering into a dual-language agreement, a clause to clarify which version has priority should be included.

The Mining Law – when and how does it take effect and what are the consequences?

The export ban in the Mining Law

Indonesia’s Law No. 4/2009 on Minerals and Coal Mining (the “Mining Law”) included a requirement that mining companies should process their ore domestically, within Indonesia, effectively banning the export of unprocessed ores. The ban – which had a five-year delay from when the Mining Law was introduced – was set to take effect on 12 January 2014 and, when enacted, will affect all mining companies within Indonesia. As the country seeks to derive more value from its natural resources, this requirement intends to develop the domestic processing industries. The current practice is to move large amounts of ore offshore to be processed.

When does the ban take effect?

The government is set to implement the ban from 12 January 2014. However, recent reports from the Ministry of Energy and Natural Resources confirm that the government intends to restrict the forthcoming ban to bauxite and nickel ores only. The reports suggest that for other ores, including copper, manganese, lead and iron ore, the implementation date will be delayed further, to 2017, pending approval from the president. In recent weeks, there has been significant pressure from the large mines and industry groups to delay implementation pending further ministerial regulations. Trade groups feared that the ban could undermine the already volatile coal and iron ore market and further devalue the rupiah, which dropped by 22 per cent in 2013. Unhelpfully, the definition of “processing and purifying” in the Mining Law is not entirely clear, and the Indonesian Supreme Court recently struck down a 2012 ministerial regulation that served as a technical guideline as to the degree to which ores must be processed before being acceptable for export. Pressure from industry groups appears to have worked in relation to non-nickel or bauxite ore interests. The internal discussions between the Ministry of Mines and Natural Resources and the Office of the Coordinating Economic Minister will continue this week, to formalise the expected delay to the ban for those ores.

In respect of nickel and bauxite ores, the ban takes effect this Sunday, 12 January, and is predicted to have the greatest impact in China, which relies significantly on Indonesian bauxite and nickel to produce aluminium and nickel pig iron.

Legal consequences of the ban

When the ban takes effect export sales of ores that are not refined to the required purity levels will become illegal. The ban would force miners to either build smelters within Indonesia or sell their ore to companies with smelters in Indonesia, which would likely be at lower prices than they would otherwise expect. There are reportedly no exceptions being given to companies with contracts existing at the time the ban takes effect – these companies would have to comply. Failure to comply with the ban could result in producer companies losing their licenses to mine. Companies buying or selling Indonesian ores under non-Indonesian law-governed contracts also stand to be affected. The ban on exporting Indonesian ores may significantly impact on delivery obligations in supply contracts.

The ban may leave export sellers unable to deliver or forced to procure unprocessed minerals from other locations at higher cost. Buyers may be left short of minerals required to feed manufacturing operations or to deliver on sale commitments. The liability for these increased costs or losses (including under related shipping, insurance and financing contracts) will often be determined by the provisions of the applicable contracts. Affected parties would be well-advised to review the wording of their contracts carefully, taking note of any relevant procedural requirements, before deciding how to act. Parties in the process of negotiating contracts which might be affected ought to consider whether protective language could be introduced. In any event, for those who trade in nickel and bauxite, we recommend preparing now, since the ban is expected to take place this Sunday.

If you would like further information on the subject matter or on our capabilities in Indonesia, please contact the authors.

 

Client Alert 2014-010