Friday, June 14, 2024

How-to understand construction of legal contract in Indonesia

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In the business, contracts are used by many people in various business collaborations. In fact, almost all business activities generally begin with making a contract first, even though the contract looks very simple. In business practice, it turns out that there are still many contracts whose contents are unclear, vague, overlapping and so on. Such a thing can happen if the parties who make the contract do not understand the interpretation of the Indonesian Civil Code (KUHPer) and how to interpret the contract in an effort to get clarity on the meaning or meaning contained in the contract.

Governing law and regulation 

Indonesian Civil Code (KUHPer)

General points of contract

  • The parties 
  • Introduction 
  • Definition of Statements and Guarantees 
  • Contract Contents 
  • Price 
  • Terms and Payment Methods
  • Payment 
  • Obligations
  • Time & Assignment 
  • Rights 
  • Responsibilities and Compensation 
  • Notice 
  • Force Majeure 
  • Period of Contract
  • Default
  • Transfer 
  • Confidentiality 
  • Dispute Resolution 
  • Applicable 
  • Jurisdiction 
  • Waiver
  • Closing 
  • Appendix

Parts of contract

  • Introduction section. In this section, sometimes it can be divided into several sub-sections including the opening sub-section, explanation and inclusion of the Identity of the Parties.
  • Contents section. In this section, several clauses will usually be regulated including:

  1. Definition clause, which is an article that regulates various definitions, interpretations and constructions in the agreement. An example of a definition clause is as follows:

“Calendar Day” is every day in 1 (one) year according to the calendar including Saturdays, Sundays and national holidays which are determined from time to time by the government and ordinary working days which due to certain circumstances are determined. by the government as a non-working day.

  1. Transaction clauses are articles that regulate transactions carried out by the parties. An example of a transaction clause is as follows:

Based on the information and guarantees as well as the ability of the parties as referred to in this Agreement and depending on the fulfillment of the requirements for the Registration Statement to be Effective and all permits and requirements required to offer and sell the Shares to the Public, the Issuer hereby agrees to issue and place shares to be offered and sold to the public through a Public Offering, which will then be listed and traded on the Stock Exchange.

  1. Specific clauses, namely articles that regulate things that are specifically recognized in the transactions carried out. An example of a specific clause is as follows:

“In addition to the obligations of the Lender mentioned in other articles of this Agreement, the obligations of the Lender under this Agreement include, among others: a. Lenders are required to comply with the provisions of the applicable laws and regulations, including but not limited to provisions concerning anti-money laundering and terrorism financing …”

  1. General provisions clause, namely articles that regulate anticipatory matters. An example of a general provision clause is as follows:


The borrower pays and indemnifies the lender for all costs, fees and expenses incurred in connection with the preparation, signing, execution and enforcement of the loan agreement, including but not limited to costs, losses , penalties, expenses, or any other amount that has been paid or must be paid by the lender as a result of the occurrence of any Default condition.

  • Closing Section. The closing section usually includes the closing remarks and the placement of the signature
  • Annex. This is situational depending on the needs of the Parties. Usually the Annex is there when there is an upcoming agreement but it has been negotiated as well as a description of the goods or services to be transacted. Examples of the contents of the Annex are legal opinions, financial statements, and others.

Contract drafting steps

  1. Ensure the Identity of the Parties. In accordance with the principle of personality, the identity of the parties must be correct because the existing legal subject is a legitimate party and has the authority to sign the agreement.
  2. Ensure Listing the General Points of the Contract. Even though the Indonesian Civil Code (KUHPer) adheres to the principle of freedom of contract, it is still necessary to follow the applicable norms and laws so that the general points that are important to be written in the contract are known.
  3. Listing Terms and Achievements Clearly. It is necessary to ensure that the rights and obligations of the parties are stated in detail and clearly in the agreement. The use of sentences and language in the contract must also try not to have multiple interpretations.
  4. Avoiding One-sided Contracts. In some cases, there are parties who have a more dominant position, and there are also those who are weaker in a contract. However, the contents of the contract must still be sought to accommodate the interests of the parties in the contract in a balanced manner. 
  5. Observing the Necessary and Unnecessary Contracts to Use Notary Deeds. There are several contracts that require a Notary Deed to be valid before the law, one of which is a land sale and purchase agreement. This is related to the validity of the contract as evidence in the event of a dispute, where the Notary Deed (authentic deed) has strong evidentiary power before the law so that it cannot be denied its existence in court, while contracts that do not use a Notary Deed can still be used as evidence but can be denied by the parties who made it.

Contract review

Contract review is the process of rational analysis of a contract. This process includes clarifying the facts regarding the contract, measuring the feasibility of the contract, and estimating the risk of the contract. In this process, an exploration of the needs of the parties, the limitations of the parties, and the validity of the contract with applicable laws and regulations is carried out. Things that need to be considered when reviewing contracts:

  1. Mitigation of Risks that can Arise. The view of business actors on contracts is usually limited from the point of view of profit and loss, marketing and other business aspects. In fact, the existing clauses must also be able to mitigate conflicts in the future.
  2. Influence of Contracts on Business Activities in the Future (going concern). The parties must explain the impact of certain clauses on business activities in the long term and help anticipate the potential gains (or losses) associated with business activities in the future.
  3. Agreement Conformity with Applicable Law Although the parties have the freedom to make an agreement, they are still limited by the applicable legal provisions. So, it must not violate or conflict with the applicable provisions.
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