11 August, 2018
Projects in Indonesia involving locally owned private construction service companies rarely refer to a particular contract model. Indonesian law does not require the use of a particular standard form of contract issued by a particular organisation.
Indonesian law recognizes the principle of freedom of contract. This principle is explicitly stated in Article 1338 of the Indonesian 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.
Under the Construction Law, a construction agreement must include provisions on:
- The clear identity of the parties.
- The scope of work, containing a clear description and details of the scope of work, the value of the work (unit price and lump sum) and time limit for the work.
- The coverage period, containing the period of work and maintenance which are the responsibility of the contractor.
- The mutual rights and obligations, including the:
- right of the employer to obtain the results of the construction services, and its obligation to comply with the agreed conditions;
- the rights of the contractor to obtain information and receive service fees, and its obligation to perform the construction services.
- The use of construction workers, including the obligation to employ certified construction workers.
- The method of payment, including the obligation of the employer to complete the payments for the construction services, along with guarantees of the payment.
- Default, including liability if one of the parties does not meet its agreed obligations.
- Dispute resolution procedures in case of a dispute.
- Contract termination on non-compliance by one of the parties with its obligations.
- Force majeure.
- Building failure, containing provisions on the obligations of the contractor and/or employer on a building failure, as well as the period of responsibility for building failure.
- Worker protection, containing provisions on the obligations of the parties in implementing worker health and safety, as well as worker social security obligations.
- Protection against third parties other than the contract parties and their workers, including the obligation of both parties on an event that causes losses, or injury and/or death.
- Environmental aspects, including the obligation of the parties to comply with environmental requirements.
- Guarantees for risks that arise and legal responsibilities to other parties in the implementation of the construction work or from building failure.
Certain types of construction work contracts must also include the following provisions:
- For planning and design services construction work, a provision regarding intellectual property rights.
- For construction implementation services, a provision regarding sub-contractors, material suppliers, building components and/or equipment that must comply with the applicable standards.
- If the work is done by a foreign party, a provision regarding the obligation for the transfer of technology.
Under the Construction Law, construction work contracts must be in Indonesian. When a construction work contract involves foreign parties, the contract must be in English and Indonesian, with Indonesian as the prevailing language.
International projects
When projects involve foreign parties (for instance, where the lender is an international finance institution), there is a trend to use international standard forms of contract, such as those issued by the International Federation of Consulting Engineers (FIDIC). While international standard forms of contract are used, adjustments must still be made to ensure that the contract is consistent with the minimum requirements under the Construction Law.
This is an excerpt from the Indonesia chapter of the Practical Law 2018 Global Guide to Construction and Projects. You can see the full chapter here.
