Monday, February 17, 2014

A Practical Approach to the Mandatory Use of Indonesian Language in Contracts

A couple of months ago, the West Jakarta District Court annulled a contract between an Indonesian party and a foreign party made entirely in English on the ground that it contravenes the provisions of Law No. 24 of 2009. You can read the Court's decision here. The Court said that based on Article 31 (1) of Law No. 24 of 2009, the use of Indonesian language is mandatory in contracts involving an Indonesian party and therefore, the failure of having an Indonesian version of the contract caused the contract to be annulled by operation of law based on Article 1335 of the Indonesian Civil Code.

I won't discuss in this article whether the Court's decision was correct since I have already made my analysis here. What I would like to analyze now is the practical issues relating to the case and my prediction on whether we will see a lot of similar cases in the future.

First of all, this is generally a case about a debtor that was getting caught by a loan shark. If you read the case carefully, the interests attached to the debt was very huge. No wonder the debtor tried to annul the contract using various cheap tactics, including arguing that the failure of using Indonesian language in the contract can be used as a valid reason to annul such contract.        

But should we treat this case as a disaster? That parties will no longer be able to enter into foreign language contracts? I don't think so. The issue can be mitigated easily if only the parties entered into a dual language contract. The Court only said that the main problem in this case is the fact that the Indonesian version of the contract was not available.

In general, there are no prohibitions for Indonesian parties to enter into foreign language contracts, they just need to prepare the Indonesian version to be safe. Moreover, there are no clear rules on the governing language of contracts, so I will stick to my old opinion that parties are free to choose foreign language as the governing language of their contracts.

The issue here is that having dual language contracts tends to be costly. Although it is good for the lawyers' business, it imposes unnecessary costs in contract drafting. I need to admit that in drafting contracts, I also prefer the use of English over Indonesian language.  This was not caused by lack of nationalism. It was simply because English can capture more terms needed in our contracts compared to Indonesian language. In addition, we have a lot of precedents in English, making it more efficient to draft the contracts in English compared to Indonesian language.

If you think that I am wrong, try to translate the Indenture (the document generally used for issuing bonds under New York Law) into Indonesian language and see by yourself whether you can be satisfied with the result when you compare the Indonesian version with the English version. Monstrous.

Finally, I do not think that we will see a lot of similar cases. In practice, creditors are very prepared nowadays. When dealing with first time debtors, they will insist on having the Indonesian version at the same time with the English version of the contract. With repeated debtors or debtors that have good reputation, the Indonesian version will be provided later on but as soon as possible.

More importantly, no sane debtors will ever try to do the same thing with the debtor in our case above. You will simply be blacklisted by most of the creditors and you will never receive credits unless you replace all of your management and change your name. The stain stays with you forever.

To give you an example: Indonesia was famous among investment bankers as a country where an ordinary SPV structure for global bonds issuance was annulled by the Supreme Court because it was deemed to breach the public policy of Indonesia. The case involved a US$500 million bonds and the debtor successfully run away from its obligations. Since 2006 until today, there are only two cases have ever reached the Supreme Court, both are from the same group company, and both have different results (one was annulled and one was enforced).

I always describe the above case in the risk factors section of my client's offering documents but I have never seen similar case to occur despite the fact that Indonesian issuers are quite aggressive in getting foreign financing. Why? Because we all know what happen to the executives of the company described above. The company cannot get any new financing (at least from foreign banks) and even if the executives have moved to another company, if the banks know about this, they will simply cancel or break the deal so that the new company cannot get any financing.

In conclusion, this crazy move to annul debts based on frivolous reasons can only be done by debtors rich enough so that they can sustain themselves without ever getting new financing or desperate enough so that they choose to abruptly end their adventure in the financing world. Apparently, most debtors are sane enough not to choose the above way.       

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Wednesday, February 12, 2014

The Jewelry, The Child, and The Misleading Question

2013 was a really bad year for my blogging activities. In fact, it is my worst year of blogging within the last 5 years and I am committed to ensure that this will not happen again. Let's start the 2014's first article by analyzing a misleading story.

A couple of days ago I read the following short story: a child asked her/his mom whether the mother would ever leave her precious jewelries and purses full with money with the maid. The mother's answer was no, explaining further that she does not trust the maid. Then the child replied: why do you leave me with the maid then? End of story.

I hate this kind of story, simply because it tends to be misleading most of the time. The quick reaction on the mother would be: how could you leave your child with the maid when you actually don't trust her? Are you saying that the jewelries and money are more valuable than your own child? Typical. But this quick reaction is completely wrong. If you read it further, you will realize that making a comparison between the child and the jewelry is misleading in the first place. Why?

First, from the mother's perspective, when she said that she does not trust the maid, she wasn't talking about the maid's capability to take care of the child. She was basically saying that the probability of the maid to escape the house with her jewelries and money are higher than the probability of the maid to stay at the house, guarding the jewelries.

Second, from the maid perspective, the costs of badly treating the child are generally higher than stealing the jewelries and money. If you treat the child badly, you can be held liable and you may lose your job and salary, or even go to the prison (if it turns out to be a criminal activity). Meanwhile, if you steal the jewelries, although there is also a probability of going to the prison for stealing, at least you gain something to compensate the costs, i.e. jewelries and monies. Ultimately, the maid will need to do cost-benefit analysis: will getting the jewelries and monies be more beneficial compared to the costs of penal sanction multiplied with the probability of getting caught? 

Given the above incentives of the maid, it would really make sense for the mother to trust the child to the maid but not her jewelries. So yes, that's the answer to the child question. If you think that this answer is too long, I have prepared a shorter answer for the child: "nak, pertanyaanmu gak nyambung."  

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