Tuesday, April 16, 2024

Get to know legal aspects of construction project contracts

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According to the National Construction Services Development Board (LPJK) and the Ministry of Public Works and Public Housing (PUPR) reports, it is estimated that IDR 44 trillion (about US$ 3 billion) or about one-third of the total budget allocated for infrastructure projects in 2020, is used to further boost economic development. The government in late 2020 introduced a major law, Law No. 11/2020 regarding Job Creation (Job Creation Law), which improves the ease of doing business and simplifies the licensing process in a wide range of business sectors in Indonesia, including the construction sector. Through this facility, it is hoped that investors and business actors can take advantage of the opportunity to conduct construction projects in Indonesia. The procurement of the construction project must, of course, begin with the creation of a construction contract. Contract making is the most important stage for business actors, especially the construction sector is a business that has a high risk. Through this article, the business actor will know what must be regulated and considered in making a construction contract.

Governing laws and regulation 

  • Indonesian Civil Code (KUHPer)
  • Law No. 2/2017 concerning Construction Services as amended by Law No. 11/2020 concerning Job Creation 

Basic of contract

Indonesian law does not require the use of a particular standard form of contract issued by a particular organization. In general, Indonesian law recognizes the principle of freedom of contract. This principle is explicitly stated in Article 1338 of the Civil Code. Article 1338 provides that parties to a contract are free to include any provisions they wish, subject only to mandatory provisions of Indonesian law. The mandatory provisions of Indonesian law that a contract must not violate derive from Indonesian statutory laws and regulations, public policy and the public order.

Indonesia law also describes the legal requirements of an agreement as regulated in articles 1320-1337 of the Civil Code, namely:

  1. Agreement of the parties.

Agreement means that there is an agreement of free will between the parties regarding the main things desired in the agreement. In this case, the parties must have free will (voluntary) to bind themselves, where the agreement can be stated expressly or tacitly. Freedom here means being free from mistakes (dwaling, mistake), coercion (dwang, dures), and fraud (bedrog, fraud). In a contrario, based on article 1321 of the Civil Code, the agreement becomes invalid, if the agreement occurs because of elements of error, coercion, or fraud.

  1. The competence of the parties.

According to article 1329 of the Civil Code, basically everyone is capable of making agreements, unless determined to be incompetent according to law.

  1. About a certain thing

Certain things mean that what is agreed upon is the rights and obligations of both parties, at least the type of goods intended in the agreement is determined. According to Article 1333 of the Civil Code, the object of the agreement must include certain principal items of which at least the type can be determined. Article 1332 of the Civil Code stipulates that the object of the agreement is goods that can be traded.

  1. The reason is lawful

Because what is lawful is the content of the agreement itself, which describes the goals to be achieved by the parties. The contents of the agreement do not conflict with the law, morality, or public order. This is regulated in article 1337 of the Civil Code.

Construction contract

Based on Law No. 2/2017, the construction work contract must at least include a description of: 

  • the parties, clearly state the identity of the parties,
  • job formulation, containing a clear and detailed description of the scope of work, work value, unit price, lump sum, and implementation time limit;
  • coverage period, contains the implementation and maintenance period which is the responsibility of the Service Provider,
  • equal rights and obligations, containing the rights of the service user to obtain the results of construction services and his obligations to fulfill the agreed terms, as well as the rights of the service provider to obtain information and compensation for services and his obligations to carry out construction services
  • the use of construction workers, containing the obligation to employ certified construction workers;
  • method of payment, containing provisions regarding the obligations of the Service User in making payments for the results of Construction Services, including guarantees for payment;
  • default, contains provisions regarding liability in the event that one of the parties does not carry out the obligations as agreed;
  • settlement of disputes, containing provisions on procedures for resolving disputes resulting from disagreements;
  • termination of the Construction Work Contract, contains provisions regarding the termination of the Construction Work Contract arising from the failure to fulfill the obligations of one of the parties;
  • coercive circumstances, containing provisions regarding events that arise against the will and ability of the parties that cause harm to one of the parties;
  • building Failure, contains provisions regarding the obligations of the Service Provider and/or Service User for the failure of the building and the period of responsibility for the failure of the building
  • protection of workers, containing provisions concerning the obligations of the parties in the implementation of occupational safety and health as well as social security;
  • protection for third parties other than the parties and workers, containing the obligations of the parties in the event of an event that causes a loss or causes an accident and/or death;
  • environmental aspects, contains the obligations of the parties in fulfilling the provisions regarding the environment
  • guarantee for risks that arise and legal liability to other parties in the implementation of Construction Works or as a result of Building Failures; and
  • construction dispute resolution options.

In addition, Some types of construction work contracts must also contain the following provisions:

  • The Construction Work Contract may contain an agreement between the parties regarding the provision of incentives. Moreover, Construction Work Contracts for planning services must contain provisions on intellectual property rights. 
  • For the implementation of construction services, the Construction Work Contract may contain provisions regarding sub-service providers and suppliers of materials, building components, and/or equipment that must comply with applicable standards. 
  • For Construction Work Contracts executed with foreign parties, must contain the obligation to transfer technology.

According to Indonesian Law, a construction work contract must be in Indonesian. If a construction work contract involves a foreign party, then the contract must be in English and Indonesian, with Indonesian as the applicable language.

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