THE CONSTITUTION

The legal basis of the Indonesian state is the 1945 Constitution was promulgated the day after the 17 August 1945 proclamation of independence. The Constitution was essentially a draft instrument hurriedly crafted by the Independence Preparatory Committee in the last weeks before the Japanese surrender. It is important to note that the Constitution was the product of a unitary republic.

As the provisional legal framework for a modern state, the Constitution has proved to be extremely elastic, subject to broad interpretation depending upon the constellation of political forces in control at any given time. Other than outlining the major state structures, the document contains few specifics about relations between citizens and the government, and leaves open basic questions about rights and responsibilities of the citizen and the state. The political struggle from 1945 to 1959 over the constitutional framework of the state stemmed not from the ambiguities of the Constitution or its heavy reliance on executive power, but rather over deep disagreements about the nature of the state itself.

The Constitution was amended four times in the period from 1999 to 2002. Prior to this series of amendments, scholars usually separate the Constitution into three distinct periods; namely, 1945-1949 (the liberal democracy period), 1959-1966 (the guided democracy period), and 1966-1998 (the new order period).

The first amendment was made on 19 October 1999, the second was made on 18 August 2000, the third made on 9 November 2001, and the fourth was made on 10 August 2002. The yearly amendment of the Constitution was an intense period of constitutional reform when compared to other States, such as the United States of America. The United States have made just 27 amendments to their Constitution over a 200-year period or an average of just 1 amendment every 8 years.. The basic driving force of constitutional reform in Indonesia over that period was the belief within the community that the Constitution did not allow democratic institutions to function as they were designed to, this is in spite of the common acceptance that the underlying premise of the Constitution is ‘sovereignty of the people’.

The amendments principally were drafted to address the perceived weaknesses in the prevailing provisions of the Constitution at that time. It was believed that the Constitution allowed for the establishment of a fake democratic system in Indonesia. The primary weaknesses include that the political system is too executive oriented, the ambiguity of the provisions, and extensive use of delegation power.

THE LEGISLATIVE

The body that can be categorized as the legislature in Indonesia is the House of Representatives (the “DPR”). The most significant distinction between the DPR of the 2004-2009 period and the DPRs of former periods is the recruitment of its members. At this moment all DPR members are people who have been directly chosen by the voters.

In previous periods, some DPR members were appointed by the President and some of them were appointed by parties. Voters were not able to choose their representatives directly in a general election. Voters were only required to choose a party to represent their aspirations as it were rather than individual candidates. The appointment system described above has created a ‘fake democracy’. Democracy was claimed to be the creation of democratic institutions however it was clear that the behavior and actions of the DPR in performing its tasks were neither democratic nor representative of the people’s aspirations. Simply, one of the primary tasks of the DPR was never able to be adequately executed; namely, ensuring the accountability of the President as it was seen merely to be rubber stamping the autocratic wishes of the Former President Soeharto. However, with the fall of the Soeharto regime in 1998 left the window of democracy slightly ajar and this opportunity has not been missed in the sense that the DPR has become a considerably more powerful State institution in the intervening period.

The current DPR (2004-2009) comprises of members of political parties however these members have been elected directly by their respective constituencies. The DPR consists of 550 members and each member is elected to a 5-year term which expires on the taking of the oath of office by the newly elected members of the following DPR. The DPR has 3 primary functions according to the law; namely, the drafting and enacting of legislation, budgetary affairs, and a supervisory function. However, the Chief Justice of the Constitutional Court, Jimly Asshidiqie, has stated that the primary functions of the DPR also include representation of the people’s aspirations through the performance and execution of the powers and authorities conferred upon it to take and make political decisions.

The performance of these functions are reflected in the powers and authorities granted to the DPR to : a) draft laws that will be discussed and debated within the DPR and with the President with a view to garnering agreement, b) discuss and give consent on Interim Law or Law in Lieu of Law, c) accept and discuss the Bills delivered by the Regional Representatives Council (the “DPD”) that relate to particular subject matters and inviting the DPD to be part of the discussion, d) consider the DPD’s suggestions on the State Budget Bill and Bills related to Taxation, Education, and Religion, e) implement the National Budget with the President by considering the DPD’s suggestions, f) supervise the enforcement of Laws, the National Budget, and the government’s policies, g) discuss and follow up the results of those observations submitted by the DPD on the enforcement of laws on local autonomy, establishment, enlargement, and integration of local regions, the Central and Regional Government relationship, natural resources and other economic resources, the implementation of the National Budget, taxation, education, and religion, h) choose the members of the State Audit Board by considering the recommendations of the DPD, i) discuss and follow up the results of observations on the usage of State funds that have been submitted by the State Audit Board, j) give consent to the President on the election and termination of the members of the Judicial Commission, k) give consent with respect to candidates for Supreme Court Justices as recommended by the Judicial Commission and to be confirmed by the President, l) choose three candidate justices for the Constitutional Court and submit the names to the President to be confirmed, m) provide consideration to the President in assigning Ambassadors, accepting Ambassadors from foreign countries, and providing consideration to the President in the process of granting amnesty and pardons, n) giving consent to the President to declare war, make peace, and agreements with any other State, and in making other international agreements that will have an extensive and substantial effect on the lives of the people or that are related to the burden of State financial policy and/or the making of Laws, o) absorb, compile, collect, and follow up the aspirations of the people, and p) perform any other duties and executing any other authorities that are mandated by the Law. To realize those functions as an institution the DPR has several rights such as a right to: a) interpellation, b) survey, and c) express opinions. Furthermore, each Council member has the right to: a) propose bills, b) raise questions, c) suggest recommendations or express opinions, d) to vote and be voted for, e) self-defense, f) immunity, g) protocol, and h) finance and administration.

Interpellation is a right to ask official questions of the President, particularly with respect to account for performance in the position. Survey is a right to conduct an investigation of a particular case including the right to subpoena any witnesses and sources needed. In the event assistance from the Police or Public Prosecutor is required to conduct the examination or help the DPR complete the investigation then the DPR has a right to request this assistance. The right to express opinions includes statements, resolutions, or warning memorandums on certain government policy or on certain conditions that are addressed to the President or to the public.

In addition to the DPR, Law No. 23 of 2003 established a new state body called the Regional Representatives Council. Generally, the DPD would not be categorized as a part of the legislative body however the description of it appropriately fits into this section because the process of recruitment of its members and some of its functions are quite similar to those of the DPR.

The DPD consists of representatives of provinces that are voted into office at the general election. Each province has 4 DPD members. DPD members must live in the electorate from which they are elected and mandated to represent. Nevertheless, they are required to be resident in Jakarta during session times and most official business is conducted in Jakarta as well. Therefore, the reality is that most members of the DPD spend considerably larger amounts of their time in Jakarta than in their electorates. Each member is elected for a term of 5 years and that term of office ends once the following DPD is sworn in.

The DPD has several functions including to: a) propose recommendations involving the discussion and consideration that is related to particular legislative areas, and b) supervise the enforcement of particular laws. The DPD has the right to propose Bills to the DPR and to be involved in the discussion of Bills related to Local or Regional Autonomy matters, the relationship between Central and Regional Government, the establishment, enlargement, and integration of local regions, management of natural resources and other economic resources, and other issues that relate to the revenue allocation between the Central Government and Regional/Local Government. The DPD also provides input to the DPR on matters related to the Bill on the National Budget and Bills that relate to taxation, education, and religion. The DPD also provides input on the selection and appointment of members to the State Audit Board. The DPD can observe and supervise the enforcement of the Law on Regional Autonomy, as well as the establishment, enlargement, and integration of local regions, the Central and Local Government relationship, natural resources, and other economic resources, the implementation of the National Budget, taxation, education, and religion. The results of these observations and supervision are submitted to the DPR as considerations that are to be followed up. Each member of DPD has the right to: a) propose recommendations and opinions, b) to vote and be voted for, c) self-defense, d) immunity, e) protocol, and f) finance and administration.

Besides the DPD, the People’s Consultative Assembly (the “MPR”) also can be placed into this section on the legislative. The MPR is not a legislative body per se as the MPR consists of the members of the DPR and the members of the DPD. The duties and authorities of the MPR are to: a) amend and implement the provisions of the Constitution, b) swear in the President and Vice President at the MPR’s Plenary Session, c) resolve the DPR’s recommendations based on decisions of the Constitutional Court to impeach the President and/or Vice President after the President and/or Vice President is given the chance to provide an explanation to the MPR for their actions at a MPR Plenary Session, d) swear in the Vice President as President in the event of the death of the President, resignation, impeachment, or when the President can no longer execute their obligations and duties of office, e) within 60 days the MPR must choose the Vice President from the two candidates submitted by the President if the Vice President position is vacant, f) choose the new President and Vice President from two joint candidacies submitted for the position of President and Vice President as proposed by a political party or coalitions of political parties, in the event that both the former President and Vice President resign at the same time, g) enact internal orders, rules, and code of ethics of the MPR. Each member of the MPR has the right to: a) propose recommendations on the amendment of the provisions of the Constitution, b) decide the manner and option in any decision making activities, c) to vote and be voted for, d) selfdefense, e) immunity, f) protocol, and g) financial and administration matters.

The members of the MPR, the DPR, and the DPD enjoy parliamentary privilege and immunity in that they cannot be sued in court based on their statements, questions, and/or opinions that are delivered orally or in writing during the course of any parliamentary meeting so long as it does not contradict any internal orders, rules, or ethical standards of each body. However, this provision is void if the member publishes materials that have already been agreed in a private meeting to be kept secret. All MPR members (the members of the DPR and the DPD) shall not: 1) hold concurrent public office as: a) state official, b) justice of any court, c) civil servant, a member of the military or police forces, an employee of a stateowned enterprise, regional government-owned enterprise, and/or any other institution that has as its source of budgetary funds the National, Regional, or Local Government Budgets, 2) the performance of any duties as a structural official in a private education facility, public accountant, consultant, advocate/lawyer, notary, medical doctor, and other work that has any relationship to any duty, authority, or right of the member of the MPR, the DPR, or the DPD, and 3) or participate in corruption, collusion, and nepotism. Should a member of the MPR, the DPR, or the DPD be alleged to have committed a crime, the summons regarding any testimony and investigation must have the written consent of the President.

THE EXECUTIVE

The executive body in Indonesia is the Office of the President. The President and Vice President hold their respective positions for five years and can be re-elected for one further term. In the event that the President dies, resigns, is impeached, or is unable to perform presidential duties as required by the Constitution, then the President will be replaced by the Vice President. The Vice President will serve out the remainder of the replaced President’s term of office. The Office of Vice President cannot remain vacant for more than 60 days. The MPR shall convene a special session to elect a Vice President from a list of two candidates proposed by the President. 

The President must have the consent of the DPR to make international agreements that have a major and fundamental effect on the lives of the people, particularly international agreements that create any burden on the State financial position or require the State to amend or create law. When the President wants to appoint an ambassador or wants to provide an amnesty or pardon, the President must consider the DPR’s recommendations. When the President wants to grant clemency with respect to a verdict or rehabilitate the name of a convict then the President must consider the recommendations of the Supreme Court.

The President has the right to propose Bills to the DPR. Every Bill, by law, is to be discussed by the President and the DPR with a view to garnering a joint agreement between the parties as to the content of the bill. Should the bill not achieve the requisite joint agreement of the parties then it cannot be submitted again for the DPR’s deliberation during the current sitting of parliament. In the event that the bill does garner joint agreement, has been submitted to parliament, deliberated, and passed, then the bill will become law. A bill that is agreed by parliament will automatically become law after 30 days even if the President fails to enact the law within this period of time. The final act before a bill becomes law is for it to be published in the State Gazette.

The conditions that must be satisfied in order to become either the President or Vice President are not onerous but comprehensive. A candidate for the Office of President or Vice President must be an Indonesian citizen since birth and have never held the citizenship of any other country. The rationale for such a provision is that an individual’s patriotism comes into question should they have been born overseas or have ever held the citizenship of another country, particularly to charges that their loyalties are divided leading to an increased risk of treason and betrayal of the State. Furthermore, the candidates for President and Vice President must be spiritually aware and of sound mind and body in order to be able to successfully execute the duties and authorities of the Office of President and Vice President. The President and Vice President are elected as a package team directly by the voters. The package or pair of candidates for the Office of President and Vice President is to be proposed by a political party or a coalition of political parties and the pair of candidates that secure more than 50% of the votes cast in at least half of the total number of provinces in Indonesia will be declared to have won the election.

The President and/or Vice President may be impeached by the MPR upon the recommendation of the DPR. There are several types of alleged offences that may lead to the impeachment of the President and/or Vice President: a) if he/she has been proven in a court of law to have violated the prevailing laws and regulations with respect to treason, corruption, bribery, other serious criminal acts, and dishonest behavior, b) if he/she has been legally proved to be incapable of fulfilling the duties and functions required as President or Vice President. Suggestion of the impeachment of the President and/or Vice President can only be proposed by the DPR to the MPR only if the DPR had asked the Constitutional Court to examine, put on trial, and judge pursuant to the misconduct alleged by the DPR. The President can not suspend or dismiss the DPR ensuring that the President or Vice President may attempt to circumvent impeachment proceedings by dismissing the parliament.

 The President can offer clemency to prisoners in the form of changing, lowering, or erasing the sentence or the decision. Clemency does not require that the President give any particular consideration or weight to the decision of the original judge in the matter. Clemency is considered to be a Presidential Privilege that is exercised within the parameters of compassion or forgiveness. It is important to note that clemency can change, lower, or erase the criminal punishment attached to the original decision however it neither eliminates any fault of the convict nor does it endeavor to rehabilitate the convicts name or reputation.

Any verdict or decision that has been handed down by a competent court and is deemed final and binding on the convict may be subject to an appeal by the convict directly to the President for clemency. The verdicts that may be subject to an appeal for clemency include: a) death sentences, b) life sentences, c) and prison sentences of greater than two years. An appeal for clemency does not delay the execution of a Court’s verdict except in death sentence cases.

The appeal for clemency must be submitted in writing by the prisoner, the prisoner’s lawyer, or the prisoner’s family to the President. A copy of the appeal is delivered to the court that decided the case in the first instance, and then the first instance court will deliver the appeal to the Supreme Court. The appeal and any copy of the appeal may be given to the Head of the prison, who is then obligated to send the appeal to the President and send a copy to the court that decided the case in the first instance.

No later than 20 days of the copy of the appeal being accepted, the court that decided the case in the first instance must send that copy and the prisoner’s case files to the Supreme Court. Within 3 months of receiving the documents from the court of first instance the Supreme Court must send its recommendation to the President.

The President has the right to accept or reject the appeal for clemency. Nevertheless, the President must give consideration to the recommendations of the Supreme Court however even in the event the Supreme Court recommends clemency the President still retains the prerogative to reject the clemency appeal. The acceptance of the appeal for clemency by the President is usually in the form of: a) reduction or change of the sentence imposed, b) lower the nominal sentence imposed, c) and erase any imposed sentence.

THE JUDICIARY

The judiciary in Indonesia consists of the Supreme Court and all courts under its jurisdiction and the Constitutional Court. The courts under the Supreme Court include the General Courts, the Military Court, the Religious Court, and the State Administrative Court.

The organization of the Supreme Court comprises Chief Justices, Deputy Chief Justices, Associate Justices, Registrars, and a Court Secretary. The number of Supreme Court justices that may be appointed to the court is stipulated in law and cannot exceed 60 judges. The justices of the Supreme Court are appointed by the President from a list of candidates that have been proposed by the Judicial Commission. Supreme Court justices may be appointed from outside of the judicature in the event that such an appointment is required or necessary however before appointment the candidate would still be required to satisfy all normal requirements for appointment. The main requirement for an appointment of a Supreme Court justice from outside the judicature is that the candidate must have a minimum of 25 years experience in the legal profession or as a legal scholar.

 The Supreme Court has the authority to: a) hand down decisions at the cassation level, b) undertake judicial review of legislation, and c) exercise any other authority or power granted to it at Law. At the cassation level the Supreme Court can overturn a decision of a lower court based on the following reasons: a) the lower court does not have the requisite authority or is exceeding that authority, b) the lower court does not apply the law correctly, and c) the lower court is negligent in its application of the prevailing and relevant legislation.

The Constitutional Court is a court of first instance and of appeal ensuring that decisions are final and binding once handed down by the court. The authorities and powers of the court include: a) judicial review of any Law alleged to be in conflict with the Constitution, b) decide any conflict between state institutions that derive thir respective authority and power from provisions contained in the Constitution, c) decide on the dissolution of political parties, and d) decide conflict that arise over the results of general elections. In addition to the above noted authorities and powers the Constitutional Court must decide upon opinions submitted by the DPR with respect to allegations that the President or Vice President are in breach of the prevailing laws and regulations with regard to treason, corruption, bribery, other serious criminal acts, dishonest behavior, or is incapable of fulfilling the requirements for the Office of the President and/or Vice President.

The Constitutional Court comprises 9 members of which one is appointed Chief Justice. Justices to the Constitutional Court are appointed by the Supreme Court, the DPR, and the President, with each appointing 3 justices. The provisions of the Constitution, the relevant laws, and implementing regulations expressly prohibit justices of the Constitutional Court from concurrently holding positions as: a) state officials, b) members of political parties, c) entrepreneurs, d) advocates, or e) civil servants including as active members of the National Armed Forces or National Police Service.

 All organizational, administration, and financial matters relating to the General Court system resides with the Supreme Court. The Constitutional Court also possesses the same authorities and powers as the Supreme Court with respect to the management of organizational, administration, and financial matters relating to the Constitutional Court.

DIVISION OF POWER

The ‘separation of power’ doctrine is not applied in Indonesia in preference to the division of ‘power doctrine’. The meaning of separation of power is clearly different from that of division of power. The separation of power doctrine explicitly distinguishes the constitute parts of State power and stipulates that each constitute part is separate from the other with respect to not only function but personnel as well. It is stated that in strict empirical terms a pure separation of powers cannot be achieved. Consequently, Indonesia has elected to use the division of power doctrine to elaborate the relationship between the constitute parts of State authority. Essentially, the division of power doctrine allows for power to be divided among several constitute parts but the parts are not independent and separate from each other.

Theoretically, the separation of power doctrine can be found in the writings of John Locke in “two treatise on civil government.” Locke said that there are three kinds of power in every State; legislative, executive, and federative. Legislative power means the power to make Statutes. Executive power means the power to execute or implement Statutes. Federative power means the power related to war and peace, making alliances with other States, and all activities related to the people or institutions of foreign States. Montesquieu expands on Locke’s writings and states that the three kinds of power in every State are legislative, executive, and judicative. Montesquieu did not believe that the federative power identified by Locke was a power that can stand on its own. Montesquieu believed that the federative power described by Locke was part of the executive power and he subsequently merged the federative power into those powers attributed to the executive. Instead, Montesquieu proposed an alternative third power, the judicature. He expressly defined that judicative power is the power to solve legal conflict. Furthermore, he stated that each of those three powers is different from the other with respect to not only function but with respect to the individual that exerts control over the power and the functions executed.

Empirically, Montesquieu’s theory is not applicable in the real world. For example, in the making of statutes the legislative must cooperate with the executive. The basic reason is because the executive is the party that will implement the statute and therefore in order to make the implementation effective the executive must be involved in the drafting of statute. Moreover, the executive has more resources than the legislative in terms of human resources, information, practical experience, finance, and facilities.

The division of power doctrine is the antithesis of the Montesquieu theory. The division of power doctrine was defined by Ivor Jennings. Jennings said that the division of power can be seen from both material and formal perspectives. The division of power from the material perspective means that the division of power is rigid by separating the state power into three distinct institutions, legislative, executive, and judicative. From the formal perspective, Jennings said that the division of power is not rigid.

 In Indonesia the division of power is evidenced in the fact that no one single State institution has exclusive power. For example, to appoint an Ambassador the President must consider any recommendations from the legislature, the legislature must also have the President’s agreement on a Bill to ensure that the Bill will become Law, and the composition of justices on the Constitutional Court involves both the recommendations of the President and the legislature.

LEGAL SYSTEM

LEGISLATION AND SUBSIDIARY LEGISLATION

Hans Kelsen’s hierarchy of norm theory (stufentheorie) and Hans Nawiasky’s hierarchy of legal norm theory (die theorie vom stufentordnung der rechtsnormen) can be used to explain the system of legal norms in Indonesia. Both theories suggest that the legal norm is always structured in tiers and is hierarchical in nature, particularly that the lower norm is based on the higher norm until the point where it meets the highest norm which then becomes the basic norm. 

In the current Indonesian law the hierarchy of legal norms is regulated in Ketetapan MPR No. III Tahun 2000 tentang Sumber Hukum dan Tata Urutan Peraturan Perundang-Undangan (MPR Decree of 2000 on The Source of Law and Hierarchy of Laws). The basic hierarchy includes UUD 1945 (the “Constitution”), Ketetapan Majelis Permusyawaratan Rakyat (the “Decree of the People’s Representative Assembly”), Undang-Undang (the “Laws”), Peraturan Pemerintah Pengganti Undang-Undang or PERPU (the “a Law in Lieu of a Law” or an “Interim Law”), Peraturan Pemerintah (the “Government Regulation”), Keputusan Presiden (“Presidential Decree”), and Peraturan Daerah (“Regional Regulation”).

In theory the hierarchy creates at least two problems. First, that the hierarchy is based on the concept of Peraturan PerundangUndangan (formal laws and regulations that bind the public). However, according to the hierarchy of norm theory Peraturan Perundang-undangan may include formal Laws (Formell Gesetz), Executing Regulations (Verordnung), and Autonomous Regulations (Autonome Satzung). The Constitution and the Ketetapan MPR are the basic law of the State (staatsgrundgesetz) and in this theory should be considered as at a higher norm level and technically outside of the hierarchy as neither of them are a Peraturan Perundang-Undangan (prevailing laws and regulations). The second problem is related to the absence of Keputusan Menteri (“Ministerial Decree”) in the hierarchy. This absence has become a contentious issue as it has been interpreted by many Regional and Local Governments that any Ministerial Decree that is issued and purportedly binds Regional and Local Government is not effective. Therefore, Regional and Local Government Regulations hold a higher position in the hierarchy of Indonesian laws than that of Ministerial Decrees because Ministerial Decrees are some form of quasi legislation not contemplated in the hierarchy of Indonesian laws The persistence of this omission results in a high degree of disharmony in legislation between the Central and Regional/Local Governments in several important matters, such as taxation, business licensing procedures, and investment, among others. 

The laws and regulations noted in the hierarchy are made by a varied number of State institutions. The Constitution can only be amended by the MPR. MPR Decrees are made by the MPR. Laws are made by joint agreement between the DPR and the President. Interim Laws are made by the President. Government Regulations are made by the President. Regional Regulations are made by joint agreement between the Head of the Regional or Local Government and the Regional House of Representatives (the “DPRD”).

 To understand the legislative system in Indonesia emphasis must be made on the review of peraturan perundang-undangan or laws that bind the public. Undang-Undang is the highest law in the hierarchy of peraturan perundang-undangan. It can determine applicable penal, civil, or administrative sanctions. It is also a form of law that can immediately apply to and bind the public. Every Undang-Undang is enacted through three phases, a) preparation of a bill, essentially the researching and drafting of the bill, b) elaboration and approval of the bill, essentially the discussions held between the DPR and the President to reach a consensus, and c) the enactment. After a bill is passed by both the DPR and agreed by the President, the President must sign it. To ensure the President’s power to veto a bill is not absolute the MPR amended the Constitution to stipulate that after 30 days should the President fail to sign the bill, the bill would self-enact and automatically become Law.

There are a number of ambiguities in society about several of the key concepts related to the process leading to enactment of Undang-Undang. First, is the ambiguity related to the concept of Undang-Undang in a formal sense and Undang-Undang in a material sense. Those two terms are based on the distinction between wet in formele zin dan wet in materiele zin that exists in the Netherlands. Traditionally, the common misconception that many people held was that the terms refer to two separate kinds of Undang-Undang. However, this misconception is rare nowadays, as people see Undang-Undang in the formal sense that is any law that is named a Undang-Undang, while Undang-Undang in the material sense are any kind of laws that bind the public. In other words, there is only one kind of Undang-Undang.

  Second, is the ambiguity with respect to the concept of Undang-Undang Pokok and Undang-Undang Payung. Many people believed that Undang-Undang Pokok could be used as the mandatory source of law for another Undang-Undang. However, that conception is not popular currently, because many people have accepted the point of view that all Undang-Undang, regardless of name, are at the same level of the hierarchy. Therefore, an Undang-Undang can not act as the mandatory source of law for another Undang-Undang.

PERPU is a form of law that exists at the same level of hierarchy as Undang-Undang. A PERPU is issued by the President and is immediately in force. The basic requirement that must be satisfied before a PERPU is issued is that the legal matter that is to be regulated is an emergency, the need is immediate, and cannot be legislated or regulated in any other way. A PERPU once enacted is only applicable for a definite period of time; namely, a PERPU must be ratified by the DPR in their first sitting after the enactment of the PERPU. Should the DPR ratify the PERPU then it will be reenacted as an Undang-Undang. In contrast, where the DPR rejects the PERPU then it is void at law and the regulatory framework returns to the status quo that existed prior to the enactment of the PERPU.

Peraturan Pemerintah functions as a law that is used to implement an Undang-Undang. It can only be made if it relates to a particular Undang-Undang. Nevertheless, a Peraturan Pemerintah can be made even if it does not mention explicitly the Undang-Undang to which it relates. A Government Regulation may only contain sanctioning provisions if the Law to which it relates also contains those same sanctions.

Generally, Keputusan Presiden is issued in one of two forms; namely, a declaration or a public rule. That second form of Keputusan Presiden is considered as a peraturan perundang-undangan. In assisting the President, Ministers can also enact regulations called Keputusan Menteri, and only those Keputusan Menteri that function as public rules can be considered to be peraturan perundang-undangan. There are three Ministerial levels; Ministers of a Department (Menteri Departemen), State Ministers (Menteri Negara), and Coordinating Minister (Menteri Koordinator). State Ministers and Coordinating Minister cannot issue Keputusan Menteri that bind the public, they can only enact internal rules and regulations.

Peraturan Daerah is enacted by the Head of the Regional/Local Government (the “Governor”, the “Regent”, or the “Mayor”) upon approval of the DPRD. This law regulates matters related to regional autonomy or as the implementation provisions for higher laws. Peraturan Daerah can determine penal sanctions up to six months in prison or fines to a maximum of IDR 5 million. In order to facilitate implementation of the Peraturan Daerah the Head of the Regional/Local Government can pass a Keputusan Kepala Daerah (Head of the Regional/Local Government Decision). Peraturan Daerah and Keputusan Kepala Daerah that regulate and bind the public must be published in the Lembaran Daerah (Regional/Local Gazette).

The amendment of a particular peraturan perundang-undangan means one of two things has occurred; namely, a provision has been added or erased or the law has been revoked in its entirety. The first type of amendment does not result in the revocation of the whole law and only applies to the stated provisions. In contrast the second type of amendment renders the whole law void usually meaning that the law needs to be replaced with a new set of provisions. Amendments can only be enacted by the DPR however it is possible that amendments to the law may be implemented through the use of PERPU by the President. Nevertheless, it is important to note that ultimately the DPR must approve or reject the PERPU at the next sitting of parliament. Any amendments made must stipulate the law being amended, the specific provisions, and the number of times the law has been amended.

Laws (or Undang-undang) are usually issued with a corresponding Elucidation. The Purpose of the Elucidation is to provide additional clarification and explanation with respect to interpretation of provisions to eliminate ambiguity and subsequent misapplication or interpretation of the relevant law. Unfortunately, there is a misconception prevalent in the community that Elucidations do not have any binding power and consequently are an optional feature of the legislative process. However, the Elucidations specifically address interpretative matters and endeavor to eliminate ambiguity and consequently are a key aspect of judicial review and interpretation of laws.

CIVIL LEGAL SYSTEM

Background

The basis for all private law applicable in the European group, and former colonies of the European Group, has been the Dutch Civil Code (Burgelijk Wetboek – Kitab Undang-Undang Hukum Perdata) of 1848. Subsequent amendments to the Dutch Code were also incorporated into the Codes for Indonesia as well based on the principle of concordance. 

It was not uncommon that changes to the Dutch Codes were never fully realized nor implemented in the Indonesian Codes. It can be argued that even aside from the varied special regulations incorporated into the Indonesian codes that deviated from the Dutch codes that the two codes were never exactly the same.

 According to Article 163 of the Indische Staatsregeling (the “IS”), the population was divided into groups and special laws were enacted to govern and regulate the actions of each group. Article 163 of the IS was an amendment to Article 109 of the Regerings Reglement of 1920, and later incorporated into the IS requiring all persons living in Indonesia to be classified into one of three groups; namely:

(1) European

(2) Natives

(3) Foreign Orientals which was further distinguished into Chinese and non-Chinese.

Following independence, the principle of concordance was abandoned, and was a direct consequence of the recently acquired independence of the State. Independence gave rise to a desire to ensure that Indonesia was not merely free of the Dutch Colonialists but also free from Dutch influence in all of the recently independent nation’s institutions. It can be fairly stated that since independence legislative development in Indonesia has generally not followed the Dutch model. Nevertheless, there remain many remnants of Dutch law within Indonesian laws and a movement to modernize and Indonesianize law has developed since independence despite the deviations between Indonesian and Dutch codes becoming more pronounced than ever before.

Transitional Provision Articles I and II of the Constitution states explicitly that all existing institutions and regulations valid at the date of Independence shall continue to be valid pending the enactment of new legislation complying with the Constitution to the contrary.

One of the major criticisms of the continued existence of Dutch laws within the Indonesian codes is that despite claims that the laws were drafted to maintain peace and order, it is clear that the primary purpose was to protect the interests of the Dutch colonialists. Therefore, any maintenance of elements of Dutch law in the Indonesian codes is clearly contrary to the tenets of the Indonesian Revolution.

Nevertheless, it was quickly realized that the revocation in its entirety of all Dutch influenced Indonesian law would lead to chaos as the new legislation had not been drafted. Therefore, in order to avoid the legal vacuum that uniform revocation would cause, all laws and institutions valid at date of Independence would continue until such time as they were revoked and replaced.

The difficulty in determining which laws remain valid and which laws have been revoked is a complicated and somewhat unsatisfactory process. Government Regulation No. 2 of 1945 states that all Dutch law whether amended or replaced is to be deemed invalid when it does not comply with the Constitution. The complication and difficulty arises because the mechanism to determine constitutionally valid of laws was through judicial review by a competent court. Therefore, until such time as a provision was challenged through the courts then it was to be inferred that the Dutch laws remained valid enforceable.

The Indonesian Civil Code

The Indonesian Civil Code contains four books that regulate all private law matters:

1. Book One – titled Individual, regulates all aspects concerning the enjoyment and loss of civil rights, assets and the distinctions between them, residence or domicile, matrimony, the rights and obligations of spouses, legal community property and management thereof, prenuptial agreements, community property or prenuptial agreements in the event of second or further marriages, the division of assets, the dissolution of marriage, separation from bed and board, paternity and the descent of children, the relationship by blood and marriage, parental authority, amendment and revocation of support payments, minority and guardianship, emancipation, and conservatorship.
2. Book Two – titled Goods, regulates all aspects concerning assets and the distinctions between them, possession and the rights resulting there from, ownership, the rights and obligations among owners of neighboring plots of land, the rights and obligations of spouses, servitude, the right to build, the right of tenure by long lease, land rent, use of proceeds, use and occupation, succession by demise, last wills, executors of last wills and managers, the right of deliberation and the privilege of estate description, the acceptance and rejection of inheritances, estate division, ungoverned inheritances, priority of debts, pledges, mortgages.
3. Book Three – titled Contracts, regulates all aspects concerning contracts in general, disputes arising from contracts or agreements, disputes arising by force of law, recision of contract, sale and purchase, exchange, granting and acquiring leases, agreements regarding the performance of services, partnerships, legal entities, gifts, deposits, lending for use, loans for consumption, fixed or perpetual interest, aleatory agreements, the issuance of mandates, guarantees, and settlement.
4. Book Four – titled Evidence and Procedure, regulates all aspects concerning general evidence, evidence by witnesses, inferences, confessions, legal oaths, and Procedure.

The Indonesian Civil law has been in a constant state of development since independence. In 1963, the Supreme Court issued Circular Letter No. 3 which specifies a certain number of Articles of the Civil Code that are no longer valid. Specifically, eight Articles are noted:

• Articles 108 and 110 regarding the competence of a married woman to undertake legal action and appear in Court without the assistance of her husband.
• Article 284(2) concerning the acknowledgment (erkenning, pengakuan) by a European father of a child born out of wedlock to a Native Woman.
• Article 1683 which requires that all gifts be effected by a notarial deed.
• Article 1579 which stipulates that a lessor cannot terminate a lease on the ground that he intends to use the leased property himself, unless the lease agreement explicitly permits him to do so.
• Article 1238 which provides that a written demand to perform must precede any civil suit for breach of contract.
• Article 1460 which assigns the risk of loss to the purchaser from the moment a contract of sale is concluded even though delivery has not been made.
• Article 1603X(1) and (2) which regulated what was regarded to be European Labor and what was non-European labor. This Article distinguishes and discriminates between European and Native laborers.

Law of Marriage

After the promulgation of the new Indonesian Marriage law (Undang-Undang No.1 tahun 1974 tentang Perkawinan) the Marriage Law was deemed to be a uniform law and as such applicable to all Indonesian nationals without any differentiation between ethnic groups. The law also replaced the Marriage law in Book One of the Indonesian Civil Code. 

The Indonesian Marriage Law requires a one step procedure for all persons seeking to divorce that the divorce petition be administered through the General Court system. However, Moslems are required to process their divorce petitions through the Religious Court (Pengadilan Agama) system.

The definition of mixed marriage has changed as a result of the enactment of the new Marriage Law. Mixed marriage no longer means the marriage of persons from different Indonesian ethnic groups but rather refers to marriages between Indonesians and non-Indonesians.

Land Law

The Basic Agrarian Law (1960) ended the dualism that had existed in Indonesian Agrarian law between the Adat Law and European Law. The Basic Agrarian Law has revoked all regulations relating to land and the whole of Book Two of the Civil Code as it relates to matters of soil and water. All regulations relating to the provision and administration of mortgages were revoked with the enactment of the Mortgage Law (“Undang-Undang No. 4 tahun 1996 tentang Hak Tanggungan”). The Law has been very successful in terms of unifying the national law on land rights and mortgage law. 

CRIMINAL LEGAL SYSTEM

The Indonesian Criminal Code in force since independence is in essence the Netherlands Indies Criminal Code and which came into force in 1918. It incorporates certain amendments promulgated by the revolutionary government in 1946 and since 1958 it has been applied uniformly throughout the Republic of Indonesia.

The criminal law is one of three systems of law in operation in the nation since the nineteenth century, the other two being a system of European-derived commercial codes and a civil law based on customary law (adat), which included Islamic law (“syaria”). The criminal law is the only one of these three systems that was essentially codified and applied uniformly throughout the national territory. Prior to January 1918 the Indonesian Criminal Legal System was divided into a dual system containing two distinct penal codes; one for native Indonesians (from January 1873) and one for Europeans (from January 1867).

The Indonesian Criminal Code or Kitab Undang-undang Hukum Pidana (the “KUHP”) and also known as Wetboek van Strafrecht remained valid after Independence in accordance with the Transitional provision Articles of the Constitution which state that, all regulations in force at the time of Independence are declared to remain valid unless or until they are such time as they are replaced in a manner prescribed by the Constitution; namely, Statute (Article I Transitional Provisions). Evidently this transitional provision was to ensure that there was no legal vacuum in the intervening period between initial independence from the Dutch and full independence of Indonesian institutions and the legal system.

The KUHP qualifies two types of criminal behavior; offences and crimes. Offences can be described as misdemeanor crimes where the applicable criminal penalty is a fine. An example of this type of criminal behavior is a driver who does not have a driving license when he or she drives a car or ride a bicycle at night without a lamp. In contrast crimes are defined as felonies or serious criminal behavior such as murder, abuse, theft, and robbery, among many others. Crimes can be further distinguished into:

Crimes or Felonies committed against the government and government institutions – these would include such crimes and felonies as insubordination; subversion; condemnation of the President or desecration of State symbols (national flag); tax delinquency, or a crime committed against a government official while they are on duty.

Crimes or Felonies committed against humanity – these would include crimes against the right to life such as murder; abuse; crimes against the right of freedom; kidnapping; crimes against human dignity; crimes against property.

This discussion of the Indonesian criminal legal system will explore the principles and theories of the system. The first principle is the legality or validity principle as stated in Article 1(1) of the Criminal Code or KUHP. This principle allows at least three possible consequences to occur, namely: an act cannot be punished if at the time of the alleged commission of the act it was not a crime - nulla peona sine lege nula poena sine crimene nullum crimen sine poena legali; the criminal law and statutes cannot be enforced retroactively – an exception exists where the alleged crime is committed in a transitional period between laws where the most favorable statute or law to the benefit of the accused shall be applied therefore if the previous law is more favorable then it will be applied in spite of any non-retroactivity principle; and, analogy and interpretation are not permissible in criminal law.

In order to determine the validity of the KUHP and its subsequent application with respect to an alleged offence or crime, there are four principles applied; namely, the Territorial Principle, the Active Nationality Principle, the Passive Nationality Principle, and Universality Principle. The Territorial Principle specifies that the KUHP may be applied if the locus of the crime is within Indonesian territory irrespective of the accused’s citizenship. The Active Nationality Principle specifies that the KUHP may be applied if the accused has Indonesian Citizenship. The Passive Nationality Principle states that the KUHP may be applied if there is an Indonesian legal interest that has been violated. Finally, the Universality Principle states that the KUHP may be applied if there is a legal interest of all humankind that has been violated.

Causality theory – simply relies on there being a causal condition between the effect of the crime and the action. This theory can be applied to materiel delict (crime) because this kind of crime specifies the effect of the crimes. It also can be applied to qualifying crimes (door het gevolg gequalifiseerde delicten).

The Conditio Sine Qua Non theory can be separated from Von Bury, a jurist whose theories are applied to criminal law in Indonesia, that each and every single action or cause cannot be dismissed in order to determine the subsequent effect. 

The Criminal Law Code is contained in three chapters. Chapter I defines the terms and procedures to be followed in criminal cases and specifies any mitigating circumstances that may affect the severity of a sentence. Chapters II and III, respectively, define the categories of felonies and misdemeanors and prescribe the penalties for each type of offense. The distinction between felonies and misdemeanors generally conforms to the same distinction that is maintained in Western countries. As noted above, several other statutes dealing with criminal offenses are also in force, the most significant of which are laws concerning economic offenses, subversive activities, and corruption.

As of 2004, the available penalties for serious offenses included death, life imprisonment, local detention, and fines. The total confiscation of property is not permitted. Penalties for minor crimes and misdemeanors include the deprivation of specified rights, forfeiture of personal property, and publication of the sentence of the court. Punishments listed in the code are the maximum allowable; therefore judges maintain some discretionary authority to impose lesser punishments. A public campaign for the abolition of the death penalty was launched in 1980 following the execution of two individuals convicted of murder. However, the death penalty remains in force and it seems that this public campaign has made little headway in the elimination of this type of punishment. Nevertheless, despite the death penalty being available to judges, Indonesia has a significantly small proportion of people of death row. The majority of people sentenced to death were convicted pf drug related offences. After a long hiatus in executions Indonesia has recently resumed the execution process.

 Widespread complaints regarding the penal code and a perception that it is not reflective of Indonesian society or modern criminality as it is an archaic relic of Dutch Colonialism has been gaining ground over a number of years. However, the committee that was established in the early 1980s to overhaul the criminal code to Indonesianize and modernize it has been largely unsuccessful in its endeavors to do so. Nevertheless, a recent draft of the new criminal code is expected to reach the floor of the parliament for debate sometime during the 2004-2009 parliamentary sessions.

Under Indonesian law, certain categories of crime may be dealt with under purposively drafted statutes outside the penal code]. . Offenses such as bribery, the assessment of illegal "levies," and the diversion of public funds for private use by business figures or officials formed a special class of crime usually handled under a 1955 statute on Economic Crimes (the statute no longer put into effect) and a 1971 statute on Corruption which has been revised as Law.No. 31 of 1999 on Corruption which also has been revised by Law No. 20 of 2001 on Revised of Law. No 31 of 1999 on Corruption. Political offenses and acts that Indonesian authorities regarded as threats to national security were usually prosecuted under Presidential Decree No. 11 of 1963 on the Elimination of Subversive Activities (the “Subversives Law”). This Decree was promulgated as a Law in 1969 and to all intensive purposes remains in force to this day. The law grants far-reaching powers to the relevant government authorities in dealing with almost any act that does not conform to government policy. The law allows for a maximum sentence of death to be imposed on individuals convicted under its provisions.

The National Commission of Human Rights (Komnas HAM)

During the New Order period one of many problems that confronted human rights activists was the protection of human rights is a system that granted little or no legal protection to human rights. Until very recently the sources of legal authority in Indonesian law for the protection and maintenance of human rights remained uncertain and were not formulated in a cohesive manner. This was the result partly from a historical legacy of the Dutch and partly as a result of the omissions of the New Order State. The history of the modem Indonesian State exhibits considerable resistance to absorption of the notion of the rule of law or negara hukum, both as a founding constitutional principle and as a basis upon which to build a working legal infrastructure. Many basic civil and political rights rest upon rule of law concepts, particularly in relation to notions of equality before the law and the right to a fair trial. Nevertheless the current climate of political reform in Indonesia offers considerable opportunities for reform and the establishment of a legal system based on the rule of law. Understanding why the Indonesian legal system currently still falls short of the rule of law ideal requires a review of the historical development of the legal system as it currently exists. Following the resignation of Soeharto in 1998, the Habibie government appeared to adopt a more conducive stance towards human rights law reform and protection. Upon assuming office the Habibie administration immediately announced that it would undertake a program of human rights reform, electoral reform including bringing forward the MPR/DPR and Presidential elections, as well as reform of the State apparatus. To be sure, the Habibie administration remained dominated by allies of the recently resigned Soeharto, but nonetheless prevailing public opinion, expressed in social unrest, required at least modest reform. The Habibie administration set about signing and or ratifying a number of International Conventions (see below), and revoking some of the more excessive legislation of the Soeharto era (examples include law with respect to the Press, public demonstrations, and subversive activities). While such moves were uneven, and often incorporated attempts to preserve restrictive laws by moving them to other legislative instruments, the overall pattern of reforms favored a more open and democratic political environment. 

In addition to the ongoing efforts to establish a permanent human rights court within the existing court structures, a number of important ad hoc courts have been established to try matters pertaining to particular human rights abuses. While generally viewed as a step forward in the efforts to hold those responsible for human rights abuses accountable these ad hoc courts have also come under some severe criticism.

Komnas HAM as the national independent investigator of human rights abuses has been strengthened after the resignation of Soeharto. In September 1999 the Habibie government introduced, and the DPR approved, legislation which increased the number of members sitting on the commission and provided a more legislatively secure framework under which it works; namely, the repeal of the original Presidential Decree establishing the commission and replacing it with a Regulation. In doing so Komnas HAM in effect was granted a greater level of autonomy and independence from executive interference than it had enjoyed before. With respect to the day-to-day workings of Komnas HAM, the Habibie legislation also granted the commission subpoena powers for the first time, thus increasing its effectiveness as an investigative body. During the Abdurrahman Wahid administration Komnas HAM was also empowered to seek immediate clarification from the Attorney General’s Office with respect to the progress of human rights prosecutions. This important additional power introduces a degree of accountability in the prosecution of human rights cases by the Attorney General’s Office, which it is hoped will lead to an improvement in the performance of the Attorney General’s Office and prosecutors with respect to human rights cases in the future.

The National Commission of Women (Komnas Perempuan)

In an attempt to uphold human rights in the Indonesian Criminal Legal System and in particularly Criminal justice, the new Indonesian Criminal Procedure Code affords suspects and defendants many rights to ensure some basic protections of their humanr rights. Unfortunately, it would appear that the new code opportunely forgot to protect the rights of victims and witnesses of and to crime that is critical in gaining the convictions desired. In response to rapid increases of domestic violence and sexual crimes committed against women and children a group of leading Indonesian feminists set out to found an organization to advocate for these rights and protections. Consequently, the National Commission of Women was established. The primary purpose of the national commission is to advocate for change to the legal system to ensure that the rights of women are protected and that these protections are guaranteed. One of the most notable changes that has occurred as a result of this advocacy is a greater understanding of domestic violence and an appreciation that longterm violence can lead to murder. The Indonesian Criminal Code now recognizes self-defense as a legitimate defense for women who have been subject to long-term violence at the hands of their husbands. This is most often referred to as ‘battered women’s syndrome’ the ability to prove this defense is a matter of fact however if so proven then the defendant is entitled to plead not guilty and where the facts bear out a judgment for acquittal (Putusan Bebas).

CUSTOMARY LAW/ADAT LAW

Introduction

Indonesia is a country with a very rich and diverse cultural history. The diversity of and between cultures is enhanced because of the physical nature of the Republic – an archipelago. The Indonesian archipelago consists of thousands of islands and hundreds of different ethnic groups, each with their own laws and customs. Consequently, there is no single Adat or customary law that is common to the whole of Indonesia. On the contrary, as was so ably pointed out by Snouck Hurgronje that Adat law (“adatrecht” in Dutch), the law of the archipelago was dominated by the customary or adapt practices of the indigenous (“native”) populations. The term adatrecht was later popularized by Van Vollenhoven and then translated to English as Adat law. The major question facing legal scholars and experts has always been how to define Adat law. Adat law is not easy to define because of the breadth and variety of legal principles between groups nevertheless the definition promulgated by Ter Harr is the one that has received most discussion. Ter Harr defines Adat law as decisions made by the law enforcer within the relevant society. Decisions in Adat law include not only decisions made by judges, village leaders, and religious leaders but also decisions made by the village assembly. Adat law itself can be in either statutory or non-statutory forms. However, the reality in Indonesia is that Adat law is predominantly non-statutory.

Types of Adat Society

All Adat law is unique. Adat law developed according to the needs of each community (adat society). There are 3 types of adat society that are territorial in structure:

1. Village society
   Included in village society are groups of natives who live by the same principles, ways of life, and have the same beliefs. The community is fixed, remaining at the same location, and is governed by a village chief.
2. District society
   The adat district society comprises of a number of village societies of the same adat that live within the same district but with each community retaining its independence. As noted earlier each village society will retain its own organizations and structures but remain united under the district society in that singular village communities cannot be separated from the whole. 
3. Village union society
   The village union is formed on the basis of cooperation between the district societies that are located within the same adat territory. The aim of the cooperation between district societies is to work together and create a good and prosperous adat society where all activities are undertaken and completed in the best interest of the adat society as a whole. 

Before the unification of laws it is important to note that adat law was the only source of law for and among Indonesian natives. The introduction of Islam to the archipelago through trade and other activities with middle-eastern merchants and emissaries, particularly to the islands of Sumatra, Java, Borneo, and the Celebes allowed for adat law to be influenced by Islam. The Acehnese, located at the northern most tip of the island of Sumatra, based their adat law specifically on theprinciples and tenets of Islam. Islam has exerted a similar influence over the adat law of West Sumatra as well. 

Adat Law in the Indonesian Legal System

There is not one single Article in the Indonesian constitution that clearly regulates Adat Law or its application. However, Article I of the Transitional Provisions of the Constitution, stipulates that all regulations in existence are to remain in force for so long as there are no new laws or regulations established pursuant to the provisions of the Constitution. 

Adat Law varies between the different parts of Indonesia. Adat is simply traditional or community law and reflects the norms of the relevant community. The major areas where Adat law differs from other laws in the Indonesian legal system are:

1. Marriage law
2. Inheritance law 
3. Land law
4. Law of Delict

Marriage Law

Marriage in Adat communities is the means by which organized relationships within the group form to define the autonomous community and personal concerns. Marriage in Adat communities can also be a matter that reflects social staus – either in a positive or negative manner. Marriage is an integral part of the renewal process of village and regional communities as it often results in the addition of new members to the community or the social nucleus. Marriage also carries with it the heavy burden and privilege of responsibility for the spiritual and material welfare of the community. 

Marriage ceremonies reflect the often primitive and animistic ideas and customs of the community even in this modern world. The cultures of all Adat communities reflect the integral role of religion in the community’s social interactions with each other and particularly during the ritual of marriage.

  Marriage law in Adat communities differs between the regions, some are more influenced by religion and others remain more true to Adat culture that may have existed prior to any religious influence. The marriage law includes not only the rules and regulations governing marriage but also the rules and regulations as they relate to the dissolution of marriage, divorce. In marriage and divorce law, particularly the requisites of marriage, the rights and obligations of the husband and wife, the grounds for divorce, have always been, and are now still heavily influenced by Adat Law. Consequently, the intricate details on the above noted matters may vary from village to village and region to region. Nevertheless, it is interesting that a primary principle that is uniform to most adat law is the sharp distinction maintained between ‘original’ property (goods owned by either party before entering the marriage) and ‘common’ property (gained or acquired by their joint efforts of the husband and wife during the marriage).

In a marriage that has not resulted in children being born of the marriage then on dissolution the original property must return to the respective families while common property must be divided between the husband and wife. This usually would occur as part of a court sanctioned divorce petition and dissolution with the court resolving the most equitable division of property. In contrast the adat system provides a greater amount of this responsibility for determining the division of property to the parents of the husband and wife, as they were responsible for ‘arranging’ the marriage. The parental responsibility for the division of property is substantially different from Western cultural perspectives on marriage where the marriage contract is executed only between the parties to the marriage and not their respective families.

Inheritance Law

The Adat law with respect to inheritance is a series of legal regulations that govern the eternal process of passing material and non-material property from generation to generation.

The rules of inheritance in adat systems are not only subject to influences from social changes in the community and the expansion of family ties and the family tree which usually includes a concomitant decrease of the influence of clan and tribal ties, but also to the influence of rules of inheritance contained in foreign legal systems. The rules of inheritance of foreign legal systems that enter into adat systems of law are a result of certain external connections within the adat community to the elements outside the adat community, most often through religion.

The most common system that is used in Adat Law with respect to inheritance is the bilateral system. This system gives the children equal rights to inherit from both parents. In case of adoptive children, they have the same rights as legitimate children with respect to the common property of both parents. Nevertheless, adopted children do not have rights to original property as this may only be inherited by legitimate children born of the marriage. Furthermore, children of deceased parents can inherit from their grandparents’ estates the same share that was to be inherited by those parents.

Land Rights

Prior to the Basic Agrarian Law there were two legal systems that had been used to determine and distinguish rights to land, namely:

1. rights based on Adat Law
2. rights based on the Civil Code

For indigenous Indonesians these rights were based upon Adat Law and for foreigners these rights were based upon the Civil Code. The Basic Agrarian Law revoked all regulations concerning land including all of Volume II of the Civil Code concerning ‘soil and water’. However, the parts of Volume II of the Civil Code that related to the provision and administration of valid ‘hypothec’ or mortgage securities were not revoked. Rights to land under adat law were not entirely extinguished with the enactment of the Basic Agrarian Law as ‘ulayat’ rights or the rights of certain communities over certain parcels of land were maintained.

There are several characteristics of rights to land that are recognized according to Adat law. Adat law recognizes a distinction between the rights to land and the rights to everything on or above the land. Simply stated this means that a right to land does not necessarily include any right to the development of that land or any structures that may be on it. A further example of this unique characteristic relates to debts where the security is land. When a person incurs a debt to any other party and gives their land as a collateral guarantee (pledge of land) as security against any future failure to pay those debts, the creditor may become the owner of that land through the exercise of their right over the security. However, with the aim of protecting the weakest party in a pledge of land states that where a pledge has been in existence for more than 7 years shall be deemed to have expired thereby allowing the person pledging the land to reclaim that land free of any debt.

The Law of Delict

Adat law also recognizes delict – a disturbance to the equilibrium of an individual or the community that is deemed unacceptable by the community. Any such action that disturbs this equilibrium requires some form of reaction to restore the equilibrium. In most cases where the delict relates to money or property which can be quantified in financial terms then equilibrium is restored through a series of fines.

However, the motives or objective of disturbance and the subsequent restoration of the equilibrium include the consideration of highly personal elements such as being made feel ashamed for the conduct, rage, the need for revenge for the victim,, and the negligence and (or) intent of the perpetrator. The process is not exclusively personal as it requires the blending of the best interests of the individual and the wider adat community to ensure the full restoration of the equilibrium.

When delict occurs and both the victim and the offender are from the same adat community then the overall ‘well-being’ of the community requires that a remedy be found to restore equilibrium irrespective of whether the victim may have claimed any injury or damage. The village chief is obligated to take any necessary action to remedy the injury or damage to ensure that there is no further weakening of the community and to prevent more serious repercussions from the original act. In this instance the fine that may be payable as a consequence of the delict may be received by the victim, or by the victim and the community, or just by the community dependent on the offence committed.

In the event that the injury or damage is caused by an outsider or someone within the district community but not of that village, then the relevant district and village chiefs acknowledge the breach and seek to remedy the situation as quickly as possible. Any injury or damage by an outsider will be perceived as an attack not only on the individual but also an attack on the community at large. To ensure that the original delict does not escalate into a viscous circle of reprisals then it is the responsibility of the district and village chiefs to remedy the situation. The most common remedy even during inter-village disputes is to return to a point of acceptable equilibrium and is usually similar to those processes undertaken within the communities themselves to resolve internal delict acts. In the event there is a specifically mandated board or authority to deal with these matters then representatives of each of the communities will appear as individuals on behalf of their respective communities.

Indonesia has numerous Adat laws and each with different characteristics and each with their own particular influence within the Indonesian legal system. Some of these distinct adat characteristics are listed below:

1. the Adat communities of North Sumatra usually follow a patriarchal form of family relationships meaning that inheritance is from father to son(s)
2. the Adat communities of West Sumatra usually follow a matriarchal form of family relationships meaning that inheritance is from mother to daughter(s)
3. the Adat communities of Java usually follow a bilateral system that allows inheritance from both parents.

The unique nature of the adat law system does not prohibit the relevant communities from following or practicing these laws so long as they are not in conflict with the national system of Indonesian law.

CONSTITUTIONAL LAW

One definition of Constitutional Law widely used in Indonesia is that constitutional law is a set of rules that regulate and govern the organization, relationship, and interaction of the institutions of the State both vertically and horizontally. However, an alternative definition often noted in Indonesia is that of Oppenheim and Van Volenhoven that is constitutional law as the law of States in hiatus mode.

As an organization Indonesia is a Republic based on the sovereignty of its people. The primary goals of the State are:

1. to protect all Indonesian people;
2. to advance the general welfare of the people;
3. to raise educational standards, and
4. to contribute in maintaining world order based on the principles of independence, eternal peace, and social justice. 

In order to satisfy these goals the Republic of Indonesia has adopted a basic set of principles known as Pancasila. Pancasila simply means the five principles. These principles are:

1. a belief in one God;
2. a just and civilized humanity;
3. the unity of Indonesia;
4. socialism that is lead by wisdom with conference/representation,
5. social justice for all Indonesians. 

All of these basic principles are written in the Preamble of the Constitution.

The Preamble of the Constitution of Indonesia is a part of the Constitution and may be considered with regard to statutory interpretation. Nevertheless, the majority of the substance of the Constitution is contained in the Batang Tubuh or the Content. The Content contains a series of provisions which can be said to set out the basic legal norms of the Indonesian community. The first Constitution consisted of just 37 Articles, 2 Additional Provisions, and 2 Transitional Provisions. The Constitution clearly states that it is only the Parliament that may amend the Constitution and sets out very specific rules governing how these amendments are to be enacted.

Constitutional amendment in Indonesia has moved through several distinct and identifiable phases. Initially, the Constitution that was drafted for the purposes of Indonesian independence was introduced and applicable to all the parts of the Netherlands East Indies that came under the auspices of the Indonesian Government on independence. During the period of 27 December 1949 – 17 August 1950 There was a period of change and flux in Indonesia resulting in the Declaration of the Unitary Republic of Indonesia from the previous union and the 1950 Constitution was applied. The 1950 Constitution was an early draft of the new Constitution under development by the Konstituante. The application of the 1950 Constitution was temporary as the Konstituante was never able to complete the drafting of a new Constitution and in fact was dismissed by former President Sukarno on 5 July 1959 for this failure. The dismissal of the Konstituante included the reapplication of the 1945 Constitution.

During the Presidency of President Soeharto any amendment to the Content of the Constitution was expressly forbidden. The Constitution to all intensive purposes had assumed the status of being a ‘sacred’ text not in need of any amendment. Furthermore, any person that demanded or even suggested that the Constitution should be amended fell victim to the Soeharto government policy of declaring all opposition or activism for change the enemy of the State that must be eliminated to maintain stability, security, and prosperity. The sacred nature of the Constitutional text ceased on the resignation of Soeharto from the Presidency on 20 May 1998 with the amendments coming at regular intervals. The first amendments were completed in October 1998, the second series of amendments were completed in October 1999, the third series of amendments were completed in October 2000, and the fourth series of amendments were completed in October 2001.

According to the Constitution of Indonesia the State body must at a minimum include the following:

1. Majelis Permusyawaratan Rakyat (People’s Representative Assembly);
2. Dewan Perwakilan Rakyat (House of Representatives);
3. President;
4. Ministers;
5. Mahkamah Agung (Supreme Court);
6. Mahkamah Konstitusi (Constitutional Court);
7. Komisi Yudisial (Judicial Commission);
8. Central Bank;
9. Dewan Perwakilan Rakyat Daerah (House of Regional Representatives); and
10. Pemerintah Daerah (Regional Government). 

If these State bodies are viewed from the perspective of a division of power, then the MPR is a constitutive body, the DPR and the DPD the legislative body, the President, Ministers, Central Bank, and Regional Government is the executive body, and the Supreme Court, the Constitutional Court, and the Judicial Commission are the judiciary.

The remainder of State bodies and institutions are to be regulated and governed by other types of subsidiary law to the Constitution.

 This subsidiary law cannot be classified as a source of constitutional law. However, it is critical to acknowledge that a significant portion of law is related to the establishment and implementation of mechanisms set out in the Constitution. Some of the more significant of these include Law No. 24 of 2003 on the Constitutional Court, Law No. 5 of 2004 on Judicial Power, Law No. 5 of 2004 on the Amendment of Law No. 14 of 1985 on the Supreme Court, Law No. 4 of 1999 on the Organization and Position of the MPR, DPR, and DPRD, Law No. 23 of 2003 on the General Election of the President and Vice President, Law No. 12 of 2003 on the General Election of Members to the DPR, the DPD, and the DPRD, Law No. 31 of 2002 on Political Parties, Law No. 22 of 1999 on Regional Government,Law No. 39 of 1999 on Human Rights, and Law No. 62 of 1958 on Citizenship.

Human Rights in Indonesia are seen to be a set of rights that attach to the nature and existence of human beings as creatures of the one and only God. These human rights must be respected, honored, and protected by the State and its laws, government, and citizen. Several sources of law that play an important role in the protection of human rights in Indonesia are the Second Amendment of the Constitution, particularly Articles 28 A-J, Law No. 39 of 1999 on Human Rights, and Law No. 26 of 2000 on the Human Rights Court.

Indonesian citizenship laws have undergone several phases of development. Prior to the enactment of Law No. 62 of 1958 on Citizenship the principle used to determine nationality in Indonesia was ius soli or nationality determined by the place of the individual’s birth. This meant that a) all descendants of the Dutc who were either born in Indonesia or who had been resident for at least the 6 months prior to 27 December 1949 were given the chance to choose to become citizens of the new Republic of Indonesia, b) indigenous Indonesians qualifying or holding Dutch citizenship residing in Indonesia were given the opportunity to assume Indonesian citizenship, and c) Arabs and Chinese resident in Indonesia and who were classified as Dutch citizens in Indonesia were also afforded the opportunity to assume Indonesian citizenship.

This principle of citizenship changed with the enactment of Law No. 62 of 1958 with the introduction of ius sanguinis or nationality based on blood relations. However, based on the Sonario-Chou agreement any Chinese descendants of Indonesian citizens have the right to choose and or remain Indonesian citizens. Foreign people may become citizens of Indonesia in either one of two ways; namely, and official request or the State grants citizenship on the grounds of some kind of State interest in doing so or a significant contribution made by the foreign individual to Indonesia.

ISLAMIC LAW

Islamic law is often stated to be universal in nature. This is because in part the law constitutes a basic tenet of the religion. Theoretically, Islamic law by its very nature should be applied to Muslims wherever they may reside and irrespective of any nationality they may hold. This is in contrast with National law or the applicable law of individual States regulating and governing the behavior of its citizens. 

Islamic law entered Indonesia with traders and emissaries from neighbouring Islamic sultanates and spread peacefully throughout the archipelago. The Dutch colonial government continued to allow this peaceful spread of Islamic law in Indonesia. Notably the Dutch colonial government even arranged and published a resume (compendium) about Islamic marriage law and the Islamic inheritance law that was to be used by the Indonesian court system to resolve disputes among Moslems. Even during the period of British colonial rule this situation did not change as Thomas Raffles stated that the Koran formed the general law of Java.

 Islamic law is a law that finds its primary sources to be the Al-Qur’an and the hadist of the Prophet Muhammad SAW and is referred to as syari’at. This law was then developed, enhanced, and refined through ijtihad or evaluation and examination by expert scholars of Islamic law. These expert scholars were tasked with interpreting the law based on the teachings of the Al-Qur’an and the hadist.. Aside from the syari’at, there is the science of establishing the basic legal norms to be applied to all Muslims from the specific provisions contained in the Al-Qur’an and general rules of Islam as set out in the hadist. This process gives rise to Fikih or the understanding of the law in the Al-Qur’an and the hadist that is to be applied to all Muslims. This system has seen the creation of five basic norms in the Islamic legal system – al-ahkam al-khamsah. The norms are fard (obligation), sunnah (suggestion), ja’iz/mubah/ibadah (allowed), makruh (denunciation), and haram (prohibition).

 The first and the main source of Islamic law is the Al-Qur’an. The Al-Qur’an is the holy text that contains the written statements of Allah’s vision as given to the Prophet Muhammad SAW. According to experts, the Al-Qur’an generally consists of matters related to faith, rules governing interaction between people and people with Allah, general behavior, stories of human history, stories of the future, core principles of science including the basic laws of the universe.

The second source of Islamic law is the Sunnah or the Hadists. The Hadists is an authentic interpretation and explanation of the Al-Qur’an. These interpretations and explanations are based on the statements, actions, and unspoken behavior of the Prophet Muhammad SAW in spreading Islam. The Hadists explains almost all aspects of life that are regulated in the Al-Qur’an. 

The third source of Islamic law is Ijtihad. Ijtihad is the human investigation and pursuit of interpretation of the fundamental legal norms contained in the Al-Qur’an and the general legal norms of the Hadists. This pursuit leads to the formulation of the applicable law. The person who completes the ijtihad is called a mujtahid. The methods of ijtihad are:

1. Ijma’
   It is the agreed opinion of the experts about a particular problem that has occurred in any one place at any one time.
2. Qiyas
   It is a legal analogy with respect to a matter that is not clearly regulated in the Al-Qur’an by comparing the similarities to other similar matters that are regulated.
3. Istidal
   A conclusion drawn from two or more different legal systems that regulate the same matter or problem.
4. Al-masalih al mursalah
   It is finding an acceptable legal norm based on the public interest, public policy, or public order for a matter which has not been regulated in the Al-Qur’an or the Hadists.
5. Istihsan
   Law that is made parallel to existing rules of justice and public interests, policy, and order. 
6. Istishab
   Similar to precedent in that it is law that has developed on previous occurrences of the matter that remains in force until such time as there is concurrence in opinion that changes the law.
7. ‘Urf
   ‘Urf is a traditional custom that does not conflict with the principles of Islamic law and it can be applied to all members of a certain community. 

Despite there being no sanctions for non-compliance individuals comply with the tenets of the law as part of their faith. The binding power of Islamic law is equivalent to the level of each individual Moslem’s faith and subsequent acceptance of the law. Islamic law has a very broad scope and includes not only human interaction with each other and their community (muammalah) but also the relationship between people and Allah (ibadah). Islamic law is not limited to worldly matters as it also expresses a view of the hereafter. 

Islamic law does not differentiate between civil law and public law because it views each as being part of the other. The parts of Islamic law are:

1. Munakhat (private law)
   This includes marriage and divorce law and the consequences of each.
2. Wirasah (inheritance law)
   This includes the method by which property is inherited.
3. Mu’amalah (trade law)
   This includes all matters related to the regulation of property and rights over property with respect to trading, leasing, and other agreements, among others. 
4. Jinayat/’Ukubat (criminal law)
   This includes all criminal regulations where there is a relevant threat of punishment either as determined by the Al-Qur’an (jarimah hudud) or by the relevant authority (jarimah ta’zir).
5. Al-ahkam as-sulthaniyah (constitutional law)
   This includes the regulation of all matters related to governance such as the Office of the President, Central and Regional government relationships, soldiers, and taxation, among others.
6. Siyar (international law) This includes the regulation of all matters related to war and peace as well as relations between States.
7. Mukhasamat (legal proceeding)

This includes the regulation of all matters related to the judiciary and legal procedure (hukum acara).

In summary the main characteristics of Islamic law are:

1. Part of the religion of Islam;
2. Strong correlation between faith and behavior;
3. Two main sources of law the syari’at (Al-Qur’an) and the fikih (Hadists),
4. Two primary relationships : ibadah (with Allah) and muamalah (with other people);
5. Structure: (a) Al-Qur’an, (b) Hadist, and (c) Ijtihad, and (d) Practices,
6. Obligations rather than rights;
7. Universal – applied to all Moslems all over the world;
8. Respect of human values; and
9. Enforcement. 

JUDICIAL SYSTEM

SUPREME COURT

The existence of the Indonesian Supreme Court cannot be separated from the Court’s history because its function, its authority, and its position have changed from time to time throughout that history.

The Daendels Governorship saw many changes to the Indonesia system of justice as established by the Dutch throughout their colonization occur. In 1798, Raad van Justitie became the Hooge Raad. The period of English Colonialism saw the Raad van Justitie in Semarang, Batavia and Surabaya converted into Courts of Justice. The Court of Justice of Batavia also became the Supreme Court of Justice an as such had the competency to hear on appeal matters decided by the Courts of Justice in Semarang and Surabaya.

With the return of the Dutch came the promulgation of the St. 1819 No. 20 on Criminal and Civil Procedure which permitted a dual system of Indonesian justice to develop, particularly with respect to the hierarchy of Courts. Essentially, this dualism could be found in the separate courts for the adjudication of matters relating exclusively to indigenous Indonesians and a court for Europeans.

For Europeans, the function and position of the Supreme Court was as follows: the control and operation of the court; acting as ‘hov van casatie’; and, as an appeal court for Raad van Justitie. 

The Governor General Decree dated 3 December 1847 No. 2 and which came into force on 1 May 1848 (RO) which stated that the hierarchy of the court in Madura and Java was as follows: Districtgerrecht, Regenschaptgerrecht, Landraad, Rechtbank van Omgang, and Hoogerectschof. The hierarchy based on the RO was to be divided into two separate jurisdictions; one for the indigenous Indonesians and the other for Europeans. The Hooggerechtsof was a Supreme Court which sat in Jakarta. It had absolute authority over all jurisdictions in Indonesia to ensure the control and operation of the courts; control over the conduct of the judges; settle disputes between the courts established on authority of the King and any Adat Courts that had the necessary competency to hear adat matters.

The Japanese colonial period saw the Supreme Court maintained as the Saikoo Hooin based on Osamu Seirei, Law No.2 of 1944 and but many of its functions were to be handed over to the chief of the Kooto Hooin.

After Independence, Government Decree No.9/S.D.of 1946 stated that the Supreme Court was to sit in Jakarta. The Constitution of the Federal Republic of Indonesia stated that the Supreme Court was the highest federal and was also to sit in the capital city of the Federal State.

The Role of the Supreme Court up to now

Any discussion of the Supreme Court would be remiss if it was not to explore the administration of justice by the Supreme Court until now. The highest court in Indonesia is the Supreme Court or the Mahkamah Agung. The Law concerning the administration of justice in the sphere of the General Courts and the Supreme Court No. 13 of 1965 (State Gazette 1965 No. 70; Undang-undang tetang Pengadilan dalam Lingkungan peradilan umum dan Mahkamah Agung) explicitly revoked the law of 1950. A short summary of the respective courts will provide a clear picture of the administration of justice in Indonesia. 

The court of first instance is created by the Minister of Justice on the recommendation of the Supreme Court. The jurisdiction of a first instance court is normally the Autonomous Region Second Level (Daerah Tingkat II). The District Court is in principle a council of judges as at least three judges are required to sit on the bench for each hearing held by the court. The requirement for three judge panels is based on Section 29 of Law. No. 13 of 1965 and Section 8 of Law No 19 of 1964 of which the first mentioned law is an implementing regulation. However, Law No. 19 of 1964 has since been repealed and replaced with Law No. 14 of 1970. Article 15 of this law specifies that it is a requirement to have a council of judges presides over both civil and criminal cases.

In the capital city of Jakarta where there are five courts of First Instance; namely, the Central Jakarta Court, the North Jakarta Court, the East Jakarta Court, the West Jakarta Court, and the South Jakarta Court. This means that decisions of the court have improved significantly as all decisions are handed down by three member panels in civil and criminal matters. However, the quality of judicial decisions in outer provinces decline proportionally to the lack of skilled and qualified human resources to staff courts. It is not uncommon for less than three judges to hear matters in the outer provinces particularly where there are not three judges available to hear the matter.

The jurisdiction of the Court of Appeal is based on the Level 1 Region (Daerah Tingkat I). The Courts of Appeal usually hand down judgment as a council of judges consisting of three judges, especially in criminal cases. Nevertheless, current practice in the court of appeal of in Jakarta sees only one judge participate in civil cases. The courts of appeal may review all decisions of courts of the first instance in private law cases. The term private law is to be understood in its broad sense and in that regard should be defined to include commercial law cases. All disputes concerning competency between the courts of first instance are settled by the respective court of appeal. The courts of appeal lead and have control over the court of first instance within its jurisdiction. As a controlling body they have the power to order that files and documents of the courts of first instance be sent to them for examination and evaluation of the capacity and the diligence of the judges sitting in the first instance.

The Supreme Court is the highest level of court in the administration of justice in Indonesia. In a technical judicial sense all courts in Indonesia fall under the leadership of the Supreme Court, but administratively and financially the courts fell under the organization of the Department of Justice. By virtue of its position as Indonesia’s highest court, the Supreme Court has supervision and control over all lower courts. It is the task of the Supreme Court to see that the law in Indonesia is upheld by the courts. Therefore, the Supreme Court is empowered to provide warnings to lower court judges and to provide advice to lower courts in the performance of their respective functions. Most often this advice is in the form of Supreme Court Circulars (Surat Edaran Mahkamah Agung or SEMA). The Circulars tend to have significant influence on the performance of the duties of the judges in the lower courts as well assist the lower court judges in their daily practice and decision making functions. The Circular gives an official interpretation by the Supreme Court of how the former Dutch codification, especially the Civil and the Commercial Code, is to be understood, which part of the Codes should be regarded as valid and those parts which should not.

The Supreme Court is the apex of the court system in Indonesia and as such one of its primary functions is the supervision of lower courts within its jurisdiction. Therefore, the Court reserves the right to request case files and all associated documents are forwarded to it for further examination. However, this is a power that is rarely used as the workload of the Court is already considerable and the backlog of cases is mounting at an exponential rate. Additionally, the Supreme Court also determines competency of the relevant courts within its jurisdiction, particularly with regard to the jurisdiction of those courts themselves. The current division of jurisdiction is as follows: General Courts – private and commercial law matters; Religious Courts – primarily family and inheritance matters for followers of the Moslem faith; Military Courts – primarily to resolve criminal matters of serving military personnel; and, Administrative Courts – normally to resolve civil matters. There are currently a number of special courts that fall under the jurisdiction of the Supreme Court including the Human Rights Court, the Commercial Court, the Tax Court, and the recently established Corruption Court.

The Supreme Court’s primary function is to resolve matters on cassation from lower courts. Cassation at the Supreme Court is normally only available if all other means of achieving justice have been exhausted. Therefore, it is possible for the Court to reject an application for cassation if in the Court’s opinion all appellate avenues have not been exhausted. The strict provisions relating to cassation have not resulted in any significant reduction of the Court’s caseload.

The normal grounds for cassation are that the decision of the lower court does not comply with the formal requirements as set forth in the laws and regulations governing the relevant are of law. An application for cassation may also be submitted if the lower court exceeds its jurisdiction or authority in rendering its decision. The final grounds for cassation are the improper application of the law and due process in deciding the case at the first instance or appellate level.

The Role of the Supreme Court – a strengthening of its role

The Supreme Court is the highest judicial tribunal and the final court of appeal in Indonesia. The Supreme Court is the apex of the court system in Indonesia and exists as an independent entity alongside the legislative and the executive branches. The Supreme Court is independent of the other branches of government however this has not always been the case. It was not until 1968 that the restructuring of the Supreme Court was completed and compliance with the provisions set out in the Constitution were achieved, particularly to be independent of all government intervention and interference in the exercise and pursuit of justice. Justices to the Supreme Court are appointed by the President on the recommendation of the DPR and once appointed the justices are in theory independent of the other branches of government. It is important to note that although the Supreme Court is technically remains the highest court of appeal in Indonesia there is now a separate Constitutional Court with the power and authority to hear matters directly related to the interpretation of the Constitution and any conflict between the Constitution and laws created by the DPR. The Constitutional Court is separate from the Supreme Court. In March 2004, the Supreme Court assumed all organizational, administrative, and financial responsibility for the lower courts within its jurisdiction from the Department of Justice and Human Rights.

The transfer of organizational, administrative, and financial responsibility from the Department of Justice and Human Rights is contained in Law No. 35 of 1999. This transfer should result in considerable continued reform of the judiciary and greater independence from the other branches of government. The completion of this series of reform will see the Supreme Court assume central responsibility for the administration of justice throughout Indonesia.

The Supreme Court has 51 judges and the structure of the Court comprises a Chief Justice, Deputy Chief Justice, 6 Junior Chief Justices, and the remainder associate justices. The Court is divided into 8 Chambers and the judges are divided among those chambers. The respective chambers are led by a senior judge and will include a maximum of 3 judicial panels. The management of case and workload at the Supreme Court has traditionally been below standard and most commentators agree that greater transparency and accountability is required to ensure that the Supreme Court fulfills its primary objectives in the administration of justice. To this end the Supreme Court has already implemented a number of electronic management systems in an attempt to overcome case management and administration matters. The initiation of the Akses-121 or Sistem Informasi Mahkamah Agung Republik Indonesia (SIMARI - the Information System of the Supreme Court) is an attempt to allow the public to track cases from submission through to decision. Nevertheless, the system is in its infancy and considerably more development is required if the information systems are to fulfill there designated purpose. A major issue already identified is that the system is only available at the Supreme Court therefore if a member of the public wants to track a case they must be physically present in the Court. The second issue identified is a lack of resources committed to the project as the status of most cases is not regularly updated so access to the system does not guarantee the provision of accurate case information.

To ensure that structure reform takes place within the Supreme Court and the lower courts within its jurisdiction the Court has commissioned a number of “blueprints”. The International Monetary Fund (IMF), in collaboration with the Netherlands, financed four blueprints: (i) an academic draft and bill on the judicial commission, (ii) a policy paper on judicial personnel management reform, (iii) a policy paper on the court financial management reform, and (iv) a policy paper on a permanent judicial education system reform. A fifth blueprint was supported by the Partnership for Governance Reform and pertains to general Supreme Court reform initiatives. The blueprints are the first of their kind to be conducted through a collaborative working relationship between the Supreme Court and local civil society, with a special focus on judicial reform. A steering committee will be established by the Supreme Court to implement the blueprints. The donor community, led by IMF, is also collaborating with the Supreme Court to implement the reforms recommended in the blueprints. The Supreme Court is intending to adopt a number of the recommendations of the blueprint on the reform and the policy paper on permanent judicial education system reform as soon as practical.

CONSTITUTIONAL COURT

The mandate for the Constitutional Court came as an amendment to the Constitution. The Constitution was amended 4 times in successive years after the fall of former President Soeharto, the Constitutional Court amendments were part of the third series of amendment that were enacted on 9 November 2001. The basis of the Court is contained in Article 24(2) and 24C of the Constitution. Separate and independent Constitutional Courts emerged as part of law reform discourse in civil law countries throughout the 20^th century. Indonesia is the 78^th country to establish a Constitutional Court and is the first country to establish such a court in the 21^st century.

Prior to the establishment of the Constitutional Court, judicial review of legislation was one of the many functions of the Supreme Court. The Supreme Court still retains some of these functions but on a much more restrictive mandate. After the relevant constitutional amendments the MPR decreed that the Supreme Court would maintain the authority of the Constitutional Court until such time as the Constitutional Court was ready to assume its constitutional functions pursuant to Article III of the Transitional Provisions of the Constitution. Despite the constitutional establishment of the Court the reality was that there was still no law in place stipulating the precise role, functions, duties, and formulations of the Court. The government and the DPR entered into immediate discussions and debate to draft the Constitutional Court Law. This law was drafted and enacted as Law No. 24 of 2003 on the Constitutional Court. The enactment of the Law was published in the State Gazette No. 98, Supplemental State Gazette No. 4316. Two days later, on 15 August 2003, the President, through Presidential Decree No. 147/M of 2003 appointed 9 (nine) Constitutional Court Justices. The newly appointed justices swore their oath of office on 16 August 2003 at the State Palace.

With the constitutional amendment enacted, the relevant Constitutional Court Law enacted, and the appointment of the justices to the Court made, the Court was ready to receive its first cases. The Supreme Court which had assumed a caretaker role over constitutional matters until such time as the Constitutional Court was ready to assume these responsibilities itself transferred the initial cases to the Court on 15 October 2003.

The Constitutional Court is a court of first and final instance in that justices have the authority to hold trials at both the first instance and appellate stages. The final decisions issued by the Court are deemed to be final and binding and include the following:

1. decisions on the constitutional validity of laws – it is important to note that this power has traditionally been interpreted to mean any law enacted by the DPR that is alleged to be in conflict with the provisions of the Constitution. However, recent jurisprudence emanating from the Court suggests that the Court will broadly construe this power to ensure that legal certainty is maintained including to issue determinations on laws that conflict with other laws.
2. deciding disputes between State institutions.
3. the dissolution of Political Parties.
4. resolving disputes related to the results of the General Election.

The Constitutional Court, on the petition of the DPR, reserves the power and authority to determine allegations of treason, corruption, bribery, and other serious criminal offences against the President and Vice-President. The Court also may be required to determine whether the President and Vice-President are fit for office based on a strict interpretation of the relevant provisions contained in the Constitution with respect to the Office of President and Vice-President.

The 9 justices appointed to the Constitutional Court had to fulfill very specific criteria prior to confirmation of their respective appointments, namely:

1. be an Indonesian citizen;
2. hold a law degree;
3. be at least 40 (forty) years old at the time of appointment;
4. have never been imprisoned based on a final and binding court decision for committing a crime punishable by at least 5 (five) years of imprisonment;
5. never declared bankrupt by the court; and
6. have at least 10 years experience in the field of law.

Prior to appointment candidates are required to submit written confirmation of their willingness to be considered for appointment. The appointment of the 9 justices is divided equally between the Supreme Court, the DPR, and the President with each appointing 3 justices to the Court. Nevertheless, actual appointment to the Court is based on a Presidential Decree that is to be issued within 7 days of nominations being received by the President. Once appointed to the bench of the Constitutional Court, Justices are prohibited from holding the concurrent positions of:

1. state official
2. a member of any political party;
3. a businessperson;
4. an advocate; or
5. a civil servant

The Constitutional Court is headed by a Chief Justice and supported by a Deputy Chief Justice both of whom are elected from the appointed justices by the justices for a period of 3 years. The remaining justices are appointed as associate justices. The Constitutional Court includes a Secretariat as well as a Registrar to provide essential administrative support in the daily functions of the Court.

COURT SYSTEM

The Indonesian judicial system is regulated in the Constitution and an assortment of other implementing regulations. The Supreme Court is the highest judicial institution in Indonesia and constitutes the apex of the judicial power, as expressly stated in Article 24(2) of the Constitution. This constitutional power is further defined in Law No. 19 of 1964. Law No. 19 of 1964 was later repealed by the enactment of Law No. 14 of 1970 on Basic Judicial Power and Law No. 14 of 1970 was in turn repealed and replaced with Law No. 35 of 1999. Law No. 35 of 1999 has been amended and these amendments are contained in Law No. 4 of 2004. Law No. 35 of 1999 provides, among others, that the organization, administration and finances of the Courts of General Jurisdiction are to be handled by the Supreme Court within 5 years of the enactment of the Law. Nevertheless, the Religious Court was excluded from this provision and there is no defined time frame for the transfer of organizational, administrative, and financial control of the Religious Court to the Supreme Court.

The Supreme Court stands at the apex of an independent but complex series of courts of various jurisdictions. There are four branches or spheres of the judicature, namely: 

1. General Courts;
2. Religious Courts;
3. Military Courts; and
4. Administrative Courts.

These courts have been granted various degrees of special extended jurisdiction with the Children’s Court, Human Rights Court, and the Commercial Court falling under the jurisdiction of the General Courts and the recently created Tax Court falling under the jurisdiction of the Administrative Courts.

The last three branches of the judicature are courts that possess limited jurisdictions. Each of the courts stated above are courts of first instance as well as appellate courts. Historically, these courts have had their organizational, administrative, and financial affairs administered by the respective Ministers of the relevant Departments; namely, the Minister of Justice and Human Rights for General Courts; the Minister for Religious Affairs for Religious Courts; and, the Minister for Security and Defense Affairs for Military Courts. The technical legal and judicial aspects of court administration were the responsibility of the Supreme Court. However, recent reforms to the judiciary have seen these organizational, administrative, and financial functions come under the auspices of the Supreme Court.

Commercial Court

The Amendment of the Bankruptcy Law, Law No. 4 of 1998, created a special court tasked specifically with resolving commercial cases including bankruptcy, the Commercial Court. It is emphasized more on the new Bankruptcy Law No. 37 of 2004 that replaces the previous Bankruptcy Law. The Commercial Court is within the jurisdiction of the District Court and is a first instance court. The Commercial Court was established through Presidential Decree No. 97 of 1999 and the first court was established in Jakarta at the Central Jakarta District Court. The Decree allows for the future establishment of additional commercial courts in Bandung, Semarang, Surabaya, and Medan. It is important to note that any appeal against a decision of the Commercial Court is submitted directly to the Supreme Court.

Under Law No. 37 of 2004, bankruptcies appear to vary according to the individual circumstances and what actions the respective debtor and individual creditors decide to undertake. Specifically, the bankruptcy may result in liquidation of the debtor's estate or it may proceed under a suspension of payments. The new law is full of technical deadlines, all of which are aimed at insuring the debtor's case is adjudicated quickly. Furthermore, it provides a more neutral framework because safeguards exist for debtors and creditors alike.

The Commercial Court was set up with at least two goals in mind. The first was to have a court with career-judges knowledgeable on insolvency or other economic law matters. In the context of the Bankruptcy Law, the judges were selected from a list of career-judges from all over Indonesia. They then had to undergo training in bankruptcy law. The second purpose was to provide for the possibility of introducing new concepts to the court system without tampering with the generally accepted mechanisms and procedures governing the majority of cases. These new concepts include the introduction of non-career judges, of dissenting opinions, and a scaled remuneration system.

As noted earlier, with this new court system, the number of cases has increased, especially bankruptcy cases. The business community is particular enthusiastic and holds high hopes and expectations that the new court will help them to balance the leveraging process in the debtor-creditor relationship. Furthermore, The Commercial Court has jurisdiction not only over bankruptcy cases but also all other commercial dispute matters. 

In the Indonesian legal system, there are two kinds of jurisdiction; namely, absolute jurisdiction and relative jurisdiction. Under the principle of absolute jurisdiction the Commercial Court will purposely handle certain commercial cases. The latest development in the definition of absolute jurisdiction would see the commercial court handle bankruptcy cases, trademark cases, patent cases, and certain proceedings related to industrial design and Integrated Circuit system cases. The current case load is indicative of this definition of absolute jurisdiction with the majority of cases being either bankruptcy or intellectual property matters. One of main differences between the bankruptcy and intellectual property regimes are the time limitations placed on proceedings. The most obvious consequence of this is the difficulty in integrating the two subject matters efficiently into the administrative framework of the court. The theory underpinning the court is that it will develop into a court of special jurisdiction dealing with particular subject matter. In contrast the concept of relative jurisdiction would see the establishment of a number of regional courts in the following centers: Central Jakarta, Surabaya, Semarang, Medan, and Makasar.

In a pre-emptive move to ensure that the new Commercial Court was not overwhelmed with bankruptcy petitions as a result of the new regulatory framework 45 career-judges were selected and trained to handle the expected increase in bankruptcy petitions. Ultimately, the Supreme Court appointed 16 (sixteen) judges and 7 (seven) of them were appointed as supervisory judges in 1998. Currently, there are 12 (twelve) judges in Commercial Court. The Commercial Court includes a number of ad-hoc judges. An ad-hoc judge most fulfill a stringent list of criteria prior to appointment to the Court including being recognized as an expert in the commercial law field and have at least 10 years experience in commercial law. Ad-hoc judges on the Commercial Court are no longer active because their limited period of time is ended. Surprisingly, the demand for the services of ad-hoc judges has been small and in fact just one case has been heard by an ad-hoc judge since the establishment of the Court. The judge, Elijana, heard a bankruptcy matter between the BPPN (the Indonesian Bank Restructuring Agency) as petitioner and Mahajaya Gemilang Co. as the defendant.

Indonesian law requires that a panel of judges sit on all matters and this is no different in the Commercial Court with all matters being adjudicated by a panel of three judges. In Bankruptcy matters once a declaration of bankruptcy is made, then a sole supervisory judge is appointed to oversee the liquidation and distribution of the estate pursuant to the decision. These supervisory judges observe and supervise the activities of the appointed curators or administrators of the estate.

The Commercial Court continues to be the most advanced and prominent experiment in judicial reform in Indonesia. The Court’s regulatory framework means it is the most accountable and transparent of all Indonesian courts. In contrast to other Indonesian courts the decisions handed down by the Court are published and accessible to the public. Decisions of the Commercial Court also incorporate dissenting opinions into the full judgment of the panel ensuring that the individual legal reasoning of dissenting judges is available for analysis ensuring active legal debate on points of law and greater public scrutiny of the judicial process.

Tax Court

Indonesia has had a Tax Review Tribunal (Institusi Pertimbangan Pajak) since 1915 (Staatsblaad No. 707/1915) based in Batavia (Jakarta). The Regulation establishing this tribunal was amended by Staatsblaad No. 29/1927 on Ordonantie Regeling van het Beroep in Belasting zaken which in turn was amended by Law No. 5 of 1959. The Tax Review Tribunal changed its name to the Tax Review Council (Majelis Pertimbangan Pajak). The primary function of the Tribunal and the Council was to review and assess applications seeking a review of Central and Regional government taxes. The Council performed this function until 1997 when these functions were taken over by the Tax Dispute Settlement Board (Badan Penyelesaian Sengketa Pajak or BPSP) that was established under the provisions of Law No. 17 of 1997.

Despite having tax dispute settlement mechanisms in place the government believed that to ensure that the efficient, effective, and comprehensive way to resolve tax dispute matters was to have a purposely created court. Therefore, Law No. 14 of 2000 on the Tax Court was enacted. The Tax Court is a special court with limited jurisdiction, as it is only able to hear and decide tax matters. Physically, the Court is a special Chamber of the Administrative Court system and as such is ultimately under the control of the Supreme Court (stated in the elucidation of article 15 Law No. 9 of 2004 on Amendment of Law No. 5 of 1985 on Administrative Court). Law No. 14 of 2000 states that for cases that have already been filed at the BPSP but as yet remain to be heard and decided, then these cases will be transferred to the Tax Court.

Prior to the submission of an application to the Tax Court the taxpayer may file their petition to the relevant authority or the Directorate General of Taxation. In the event the petitioner is unsatisfied with the outcome of their petition then they may lodge an appeal against the decision at the Tax Court. Normally, decisions in these matters; namely, the first instance and any appeal should be handed down within 6 and 12 months respectively, with 3 months addition for certain cases.

Nevertheless, the appeal requires that a number of conditions be satisfied; namely, that the appeal is lodged within 3 months of the decision being handed down and that the delinquent taxpayer has paid 50% of the assessed tax that is the subject of the appeal. A taxpayer may also file a petition to the Tax Court if they have an objection to the tax collection process and any assessment including any reassessment by the Taxation Office notified in any tax assessment letter. The court requires only the Respondent to the petition and not the Appellant. Therefore, the appellant’s presence in the hearing is only required where subpoenaed by the Court. It is important to note that the Law requires that the Court provide appropriate reasons and show cause for the subpoena of the appellant before the appellant is obligated to appear. Any proceedings irrespective of whether at first instance or appeal do not abolish the taxpayer’s obligations to pay the assessed tax. In practice this means that the taxpayer must pay the assessed tax and in the event the assessment is contested and the taxpayer is successful in their claim then the relevant amount of tax that has been paid will be considered excess payment and reimbursed by the Taxation Office to the taxpayer. The complex nature of taxation generally and the taxation law in particular requires that judges of the Tax Court not only hold a law degree but also hold special qualifications in tax as well as relevant experience related to taxation law.

The decision of Tax Court must state the assessable tax amount and the requirement that the outstanding tax assessment be paid in full. The rationale for the inclusion of an express statement of this nature is to ensure that both the Taxation Office and the taxpayer have the requisite legal certainty to enforce the judgment. Any assessment, additional assessment or decision with respect to the contested tax debt should be paid within 1 month even where there is an objection noted. An application in certain circumstances may serve to delay payment and must be lodged at least 15 days prior to the payment due date. The Taxation Office then has a further 10 days to process the application and respond to the objection. In the event that the Taxation does not process the application and respond within the granted time limit then the application is deemed to have been accepted by the Taxation Office. However, if the objection is regarding a reassessment or an appeal then these time limitations do not apply.

The decisions of the Tax Court are meant to be final and binding. However, despite the final and binding nature of the decisions there is still an avenue of appeal; namely, judicial review at the Supreme Court. A decision of the Tax Court can be appealed to the Supreme Court seeking judicial review within 3 months of the decision in the matter being handed down provided one of the following conditions are met:

• if the decision is considered to be based on an act of perjury or deception on the part of one of the parties or based on evidence that is subsequently found to be invalid by a criminal court judge .
• if there is new very important written evidence that could alter a decision if it had been discovered in an appeal or the original case.
• if a decision clearly does not conform with prevailing tax regulations.

Upon a partially or fully successful appeal or suit, the tax already paid based on the tax assessment (SKPKB) or additional tax assessment (SKPKBT) will be returned to the taxpayer plus compensation of 2% interest per month up to a maximum of 24 months even if one of the disputing parties files for judicial review at the Supreme Court.

Labor Court

Law No. 12 of 1964 required that a labor dispute be processed by a “Pegawai Perantara” or compulsory mediator in the first instance. If the dispute was not able to be settled amicably between the relevant parties at this stage them the matter would be transferred to the P4D (Panitia Penyelesaian Perselisihan Peburuhan Daerah) or Regional Committee for Labor Dispute Settlement. In the event that the decision issued by the P4D was rejected by one of the parties then that party could appeal to the P4P (Panitia Penyelesaian Perselisihan Perburuhan Pusat) or Central Committee for Labor Dispute Settlement. Essentially, the P4D and the P4P are arbiters tasked with resolving a labor dispute. It is important to note that the P4 D and P4P are both compulsory arbitrations and any decision was considered to be final and binding. Nevertheless, to secure enforcement of the decision a court order would be required.

The law had been considered ineffective because of the following reasons:

1. the Law did not provide for the imposition of any criminal penalties for breach;
2. when the law was enacted there were at least 15 rules, decrees, and others regulations issued by the Department of Labor and its subordinates. Some of these regulations, decrees, and rules were inconsistent with the law. For example: during the process of PHK (Labor Termination) the company could enforce suspension and during the scorching time, the company could cut the paycheck;
3. The law viewed PHK not as a dispute but rather as a process in the termination of employment that required no further action than filing the PHK at the P4D and P4P.

In December 2003 a new labor law was passed by the DPR and was enacted as Law No. 4 of 2004 on Settlement for Industrial Relation Dispute. The law is comprehensive and includes 9 Chapters, 126 Articles, and 204 sub-sections. A fundamental development and change between the previous regulatory regime and the new regulatory regime encompassed in the new law is the establishment of the Industrial Relations Dispute Settlement Court. This court will ultimately be the peak judicial body in the resolution of all labor disputes, including the earlier noted PHK issue which under the new regulatory framework would be considered to be a contract between the employee and the employer and as such could be resolved in a court of law where the parties were unable to reach a mutually acceptable agreement through mediation or arbitration.

Children’s Court

Children are neither immune from crime nor are they immune from the ability to commit crimes. Child delinquency is not a new phenomena and this is also true for Indonesia. However, the state of the law for children in Indonesia leaves it prone to the abuse of children’s rights through the legal process, particularly the criminal legal process. Historically, Indonesia’s response to the crimes of children has often left the children permanently stigmatized as a consequence of their crimes often leading to children being disowned by their families, being expelled form school or quitting on their own accord when the stigma becomes too much to bear. The negative impacts to the future development of not only the children involved but the community in general will remain for the long-term.

The National Statistic Agency reported that in 1997 there were at least 4,000 reported suspects are under 16 throughout all of Indonesia. In Lampung alone, during 2000, some 35 cases were reported a week meaning that courts in Lampung had to deal with some 420 cases a year involving children without any specialized children’s facilities or judges with specialized training in the hearing and handling of children’s legal matters.

In 1997 Indonesia enacted Law No. 3 of 1997 on the Children’s Court. This Law was initially drafted to ensure that Indonesia complied with its international obligations under the Convention on Children’s Rights. The relevant provisions in this convention expressly state that children have a right to be protected from exploitation, violation, and unfair treatment in the criminal justice system.

A person who is already eight years old but has not reached eighteen years old and has never been married is considered to be a child (anak) as defined in Article 1(1) of Law No.3 of 1997. Juvenile delinquent (anak nakal) is generally defined as children who commit crimes or children who commit an action which is forbidden by the law.

Basically, the procedures in the Children’s Court are the same as the procedures in a conventional criminal court. However, because the accused in the matter at hand is a child some special provisions apply that must be followed to ensure that the rights of the child are protected at all times.

First, if the children who commit the alleged crime are in the age range as stated in the Law – that is 8 to 18 years old – but prior to the alleged crime reaching the criminal trial phase the child has reached an age above 18 but not yet 21 then the matter will still be heard in the Children’s Court. Secondly, where a child alleged to have committed a crime has not yet reached the age of 8 years, the child will still be investigated for the crime committed by the State investigator. The State investigator will then determine whether the child should remain with their parents or recognized guardian and be raised by them or recommend that the child become a ward of the State under the auspices of the Department of Social Affairs.

Generally, the procedures to hear matters in the Children’s Court are the same as those in the courts of criminal jurisdiction. However, the Children’s Courts have several special features to ensure that the interests of the child remain paramount throughout the proceedings.

Children who commit crimes in the company of adults will have their matter heard in the Children’s Court and the adult will be brought before the court with the relevant criminal jurisdiction. Children who commit crimes in the company of military personnel will have their matter heard in the Children’s Court and the adult military personnel will be brought before the court with the relevant military criminal jurisdiction. All Children’s Court matters are to be heard in a closed court thereby ensuring the confidentiality of the identity of the child. A closed court means that only the child’s parents, guardian, or appointed social workers may be present (Article 8). This is in stark contrast to the. Law No. 14 of 1970 where it is stated that in order to uphold the human rights of every citizen, then those citizens have a right to a fair public trial. Any failure to adhere to this stipulation may lead to any verdict being declared void at law. Nevertheless, the closed court principle is not absolute and a judge may open the court to public access in the event that the subject matter of the trial warrants it. In any event the judge maintains the discretion to permit attendance during the trial to other individuals however this discretion still only allows the judge to permit attendance of individuals that have some relationship to the subject matter of the trial or may contribute to bringing the matter to a conclusion.

Despite the generally closed nature of the Children’s Court, any verdict that is rendered in a Children’s Court matter must still be read in an open court. Any failure to do so may result in the verdict being declared void at law. Nevertheless, although the verdict is read in an open court this does not breach the paramount interests of the trial so long as all reasonable efforts are taken to protect the identity of the child.

There are several significant differences between the Children’s Court and the courts of general criminal jurisdiction and some of these are noted below:

1. Generally, the maximum penalty that may be applied against a child is half that of the maximum applicable sentence for an adult. For example where the maximum sentence for larceny may be 7 years in courts of general criminal jurisdiction, then the maximum sentence applicable to a child will be 3.5 years.
2. Most of the judgment is penalty to go to prison not actions that the Law specifically mentioned such as the children will not go to prison but the court will say that the children go back to their parents to be educated.

Indonesia has enacted the necessary provisions of the Convention on the Rights of a Child into its domestic legislation and as such courts are required to consider and apply these principles in all matters that involve the process of children through the criminal justice system. Some of these principles include the following:

• Every child has the right not to be the object of oppression, torture, or inhuman legal punishment. Sentence of death or life imprisonment shall not be handed down child offenders.
• Every child has the right not to have his freedom unlawfully taken from him. Children may be arrested, detained, or jailed only in accordance with prevailing legislation and only as a measure of last resort.
• Every child whose freedom is taken from him has the right to human treatment, as benefits the personal development needs of his age, and shall not be separated from his parents unless this is in his own interest.
• Every child whose freedom is taken from him has the right to access effective legal or other aid at every stage of ongoing legal proceedings.
• Every child whose freedom is taken from him has the right to defend himself and to access to a private hearing before an objective and impartial Child Tribunal.

Human Rights Court

The existence of the Human Rights Court is based on Law No.39 of 1999 on Human Rights (Law 39/1999), particularly in Article 104 which states:

1. To try severe human rights violations the Human Rights Court is incorporated within the area of the general judicature. 
2. Court as mentioned in paragraph (1) is to be incorporated by law within a maximum period of 4 (four) years.
3. Before the incorporation of the Human Rights Courts as mentioned in paragraph (2), alleged human rights violation cases as mentioned in paragraph (1) shall be heard by the authorized court.

To satisfy the provisions of the Human Rights Law noted above Law No. 26 of 2000 was enacted on 23 November 2000 establishing the Human Rights Court.

Law 39/1999 was preceded by a Peoples Consultative Assembly Decree (TAP MPR RI) No.XVII/MPR/1998 on Human Rights), which mandated that all state superior institutions and the entire state apparatus had to respect, uphold and disseminate the values of human rights and promote an understanding of these rights within civil society.

To increase awareness of human rights issues and to ensure that they are protected from violation the human rights debate was initially framed within the State ideology of Pancasila, the Constitution, and the Universal Declaration of Human Rights. This led to the establishment of the National Commission for Human Rights or Komnas HAM. Komnas HAM was granted broad general powers to elucidate, examine, observe, research, and mediate human rights issues, as set forth in the law.

The existence of Komnas HAM within the framework of observation and reporting human rights violations and subsequent cases has increased the sensitivity of the legal system to the integral role that human rights plays in a democratic society. Since 2003, Komnas HAM has formed 8 human rights investigator teams, which are:

• Investigator Ad-Hoc Team and Human Rights Violation Study on Soeharto’s Actions (Head of Komnas HAM Decision No. 07/KOMNAS HAM/2003, Jakarta 14 January 2003)
• Ad-Hoc Team on Peace Monitoring in Aceh (Head of Komnas HAM Decision No. 10.a/KOMNAS HAM/III/2003, Jakarta 6 March 2003)
• Investigator Ad-Hoc Team on Bulukumba
• Investigator Ad-Hoc Team on Reporter’s Violence in 1996- 2002 (Head of Komnas HAM Decision No. 04/KOMNAS HAM/I/2003, Jakarta 15 January 2003)
• Research Ad-Hoc Team on Ahmadiyah’s case (Head of Komnas HAM Decision No. 26/KOMNAS HAM/VIII/2003, Jakarta 4 August 2003).
• Research Ad-Hoc Team on Missing Person Cases (Head of Komnas HAM Decision No. 18/KOMNAS HAM/VI/2003, Jakarta 20 June 2003 and Head of Komnas HAM Decision No. 29/KOMNAS HAM/IX/2003, Jakarta 23 September 2003).
• Research Ad-Hoc Team on Missing Person Cases (Head of Komnas HAM Decision No. 18/KOMNAS HAM/VI/2003, Jakarta 20 June 2003 and Head of Komnas HAM Decision No. 29/KOMNAS HAM/IX/2003, Jakarta 23 September 2003).
• Research Ad-Hoc Team on Human Rights Violation in Papua (Head of Komnas HAM Decision No. 22/KOMNAS HAM/VII/2003, Jakarta 24 July 2003).

The Human Rights Court is located within the General Court system therefore where procedures are not specifically defined within Law 26 of 2000 then Law No. 2 of 1986 on General Courts will prevail pursuant to Article 2 of Law No. 26 of 2000. Furthermore, Article 49 of Law No. 26 states:

Regulation regarding the authorization of a superior that entitled to punish an officer who delivers the case as stated in Article 74 and Article 123 Law No. 31 of 1997 on the Military Court shall no longer prevail in the investigation of severe human rights violations according to this law.

The abovementioned Article is indicative of the shift from military justice to the pursuit of justice through the General Court system and particularly the Human Rights Court. Furthermore, as stipulated in Article 1(4) of Law No. 26 of 2000:

Every person whether an individual, group of people, civilians, military or police shall be responsible as an individual.

It is important to note that the current regulatory framework expressly states that human rights violations are within the jurisdiction of the General Courts and specifically the Human Rights Court. Therefore, it is not possible for human rights matters to be held in any other forum including Connection Courts, a hybrid Civilian/Military Tribunal where the alleged breaches were conducted by a mixed group of civilian and military personnel. Consequently, even though Connection Courts remain recognized Chapter XI of the Indonesian Criminal Code these courts can no longer hear cases that allege severe human rights violations.

The establishment of the Human Rights Court is expected to ensure that the human rights of individuals and groups are respected as a fundamental tenet of the law providing legal certainty, justice, and a sense of security for all those pursing justice for alleged breaches of their respective human rights. The development of the Human Rights Court is a part of the drive towards national unity as encapsulated in TAP MPR-RI No.V/MPR/2000 on National Unity and Stabilty.

Indonesia needs to participate in the maintenance of world peace and ensure the respect and implementation of universal human rights values, as set forth in the Universal Declaration of Human Rights. Furthermore, the establishment of the Human Rights Court can be viewed as a part of this commitment to increasing Indonesia’s participation in global affairs.

The ad hoc Human Rights Court currently has been established based on Presidential Decree No. 53 of 2001 on the Establishment of an Ad-Hoc Human Rights Court at the District Court of Central Jakarta. This Presidential Decree was issued based on DPR Decree No.44/DPR-RI/III/2000-2001 dated 21 March 2001 to try specific alleged human rights violations in East Timor and Tanjung Priok. The DPR Decree was preceded by a letter from the President No.KD.02/1733/DPR-RI/2001 dated 30 March 2001, requesting the establishment of these tribunals.

The Human Rights Court has already completed all trials related to the alleged human rights violations committed in East Timor and Tanjung Priok cases. Both of which have priority based on Presidential Decree (Keppress) No. 53 of 2001 as stipulated in Article 2 and amended by Keppres No.96 of 2001.

However, in Article 48 of Law No. 26 of 2000, the settlement of the past severe human rights violation can be settled through extra-judicial mechanism, that is as follows: (a) where the alleged violation occurred prior to the implementation of the law it may be settled by a commission on truth and reconciliation (b) Commission on truth and reconciliation established by law. In general, the Elucidation of the law in this respect is express in stating that: “commission on truth and reconciliation is an extrajudicial institution stipulated by the law that carries on its duties to uphold justice and reveal the misuse of power and past human rights violations, pursuant to the prevailing laws and regulations and perform reconciliation on a national scale and in the national perspective”.

Military Court

The Indonesian judicial system is based on Law No.14 of 1970 an that law states that there is to be 4 types of courts. The courts are General Courts, Religious Courts, State Administrative Courts, and Military Courts. The Courts are regulated under specific legislation and as such have specialized jurisdictions. This section will analyze the Military Court.

The Military in Indonesia has been an important and integral part of Indonesian affairs for a long period of time. However, it is clear in any country that the military and the rules governing the military are substantially different from those governing the affairs of civilians. Therefore, the military is subject to a specialized set of laws and procedures that are to be processed through military courts. The Military Court was established and is regulated by Law No. 31 of 1997.

Law No. 31 of 1997 distinguishes the various Military Courts commencing with the Military Court (Pengadilan Militer), a court of first instance, Military High Court (Pengadilan Militer Tinggi) an appellate court, Military Supreme Court (Pengadilan Militer Utama) an appellate court for administrative disputes, and the Military War Court (Pengadilan Militer Pertempuran).

The Military Court is a court of limited jurisdiction as it may only try individuals that are members of the armed forces. The military prosecutor (oditur) is different in every case and it dependant on the rank of the defendant. In MPR Decree VII/MPR/2000 it is stated that (for Indonesian soldiers) any violation of military law is subject to military justice while any violation of the general criminal code is subject to the General Courts. However, in the event that a member of the military commits a crime in the company of a civilian, then the matter may be processed through the general court system or in a specialized Connection Court (Pengadilan Koneksitas).

Religious Court

The Religious Court (Pengadilan Agama) is based on Islamic law and is to resolve marriage and family law problems for Moslems. The Pengadilan Agama is a court of first instance and the Religious High Court (Pengadilan Tinggi Agama) is an appellate court. Conceptually, the Religious Courts can trace their history to tahkim which was an early dispute resolution mechanism for resolving disputes between Moslems by acknowledged religious experts.

On 29 December 1989, Law No. 7 of 1989 on the Religious Court (Pengadilan Agama) was passed by the House of Representatives (DPR). This law is indicative of the important role that the Religious Court plays in Indonesian law and the community generally. The Religious Courts can be found at the municipal level and Religious High Courts are located in the capital city of each province. The Religious Courts are within the jurisdiction of the Supreme Court.

The Religious Court has jurisdiction over disputes between Indonesian Moslems in the areas of marriage, inheritance, will, grants based on Islamic law, and wakaf (property donated for religious purposes) and shadaqah (voluntary donation). The Religious Court Law states that in inheritance matters, the parties involved are given the freedom to choose the applicable law for their dispute before they submit the dispute to the court. Furthermore, the parties are encouraged to resolve the matter amicably and to the mutual satisfaction of the parties concerned prior to commencing the litigation process. 

Essentially, the legal proceedings of the Religious Courts are the same as tose of General Courts except for the matters specifically regulated in the Law. These specifically regulated matters generally deal with the issues noted above.

State Administrative Court

In 1986 Indonesia enacted Law No. 5 of 1986 on the State Administrative Court. This Law constitutes an implementing regulation drafted and enacted specifically to ensure compliance with the provisions of Law No. 14 of 1970.

Law No. 5 of 1986 was amended by Law No. 9 of 2004. The State Administrative Courts is different from the General Court and these differences are reflected in the characteristics of the State Administrative Court:

1. Compensation for the imbalance of power between the applicant (penggugat) and the respondent (tergugat) where the tergugat is a State official. It is assumed that the applicant’s position is weak compared to that ot the respondent.
2. The object of the dispute is a decision by a relevant State official.
3. Any claim submitted to the court does not suspend the enforcement of the State official’s decision.
4. The court’s decision is enforced on the principle “erga omnes”; namely, that the decision is enforceable against not only the parties to the claim but also against related third parties.

According to Law No. 5 of 1986 there are 2 ways of settling State Administrative Disputes. The settlements are:

1. Administrative Measures (Upaya Administrasi)
   Administrative Measures is a way of dispute settlement by an individual or legal person (badan hukum perdata) in a dispute with the State within its own administrative authority (lingkungan administrasi sendiri).
   There are 2 kinds of Administrative Measures:
   1. Administrative Appeal (Banding Administrasi)
      An appellate matter resolved by a higher-ranking official.
   2. Objection (Keberatan)
      The settlement of the State Administrative action is conducted by the State apparatus. 
2. Accusation (Gugatan)
   Accusation is any claim against a State administrative official/institution. This effort is use when there is no regulation with respect to the settlement of State administrative disputes through the Administrative Measures (Upaya Administrasi).

CIVIL PROCEDURE

The Court System

The Indonesian judicial system comprises several types of courts under the supervision of the Supreme Court (Mahkamah Agung). Following the civil law tradition of The Netherlands, Indonesian courts do not apply the principle of precedent which is so familiar among common law jurisdictions.

All civil cases will be brought in the first instance before the District/Lower Court (Pengadilan Negeri), the daily court of first instance. Its jurisdiction is as a rule that of the Autonomous Region such as City or District (kota or kabupaten). According to Law No. 14 of 1970, at least three judges are required for each panel for the hearing or session to be declared valid.

The High Court (Pengadilan Tinggi) forms the court of second instance or appellate court. They render judgment on appeal of the judgment of the lower court. A Court of Appeal is normally located in the capital city of each province. The Court of Appeal similar to the District Court usually sits as a panel of three judges and have the authority to hear appeals from all lower courts. The Court of Appeal leads and has control over the court of first instance within their respective jurisdictions. As the controlling body they have the power to order that files and documents of the courts of first instance be sent to them for examination and evaluation with a view to making a determination of the capacity and the diligence of the judges sitting in first instance.

The highest court in Indonesia is the Supreme Court. In a technical sense all courts in Indonesia fall under the leadership of the Supreme Court. However, the previous regulatory framework meant that although general courts were being led by the Supreme Court the administrative and financial matters of the courts were under the auspices of the Department of Justice and Human Rights. This changed significantly with the enactment of Law No. 35 of 1999 which stated that all General Courts were now under the authority and supervision of the Supreme Court.

In 1998, the Indonesian parliament established the Commercial Court (Pengadilan Niaga) through the enactment of legislation. Initially, the Commercial Court was tasked to handle bankruptcy and insolvency applications. Its jurisdiction can be extended however to include other commercial matters such as Intellectual Property Rights. Appeals from the Commercial Court proceed direct to the Supreme Court.

In 2001 the Constitution was amended to mandate the creation and establishment of a Constitutional Court (Mahkamah Konstitusi). Among other matters, the Constitutional Court has the jurisdiction to hear cases involving the constitutionality of particular legislation, results of a general election, as well as actions to dismiss a President office. The Constitutional Court has been established.

The Procedure

Indonesian Civil Procedure is based on two regulations which were inherited from the Dutch Colonial system, Herziene Inlandsch Reglement (HIR) and Rechtsreglement voor de Buitengewesten (RBg.) According to the Emergency Law No. 1 of 1951 on the provisional measures to obtain uniformity in the administration, competency and procedure of the civil courts ensured that those two regulations remained in force until such time a new law was enacted to repeal them.

Court Processes in District Courts

Most disputes appear before the courts of general jurisdiction, with the court of first instance being the District/Lower Court (Pengadilan Negeri). A typical civil case begins when the plaintiff registers their claim with the registrar office of a District/Lower court. Subsequently, the head of the District Court will decide whether to appoint a single judge or a panel of judges to hear the case. Most cases are heard by a panel of three judges. The appointed judge or judges will sit for hearings, examinations, and, finally, will issue a decision. The court will schedule dates of hearings and will summon parties to appear before the court. The court will serve a summons directly on the relevant person or, if the address is unknown, place an advertisement in a newspaper including the content of the summons.

There are normally eight hearings or sessions once registration has taken place until the judge or panel of judges renders its verdict. At the first court hearing, if the plaintiff and defendant attend the session, the panel of judges will ask both parties whether or not they have attempted to negotiate an amicable settlement prior to appearing before the court. If the parties have not done so, the panel of judges has the obligation to mediate between the two contesting parties or order that they endeavor to resolve this matter through external mediation. At this point, the hearing will be temporarily adjourned while the parties attempt to reach an amicable settlement.

If the mediation effort is successful, the parties will draw up a Settlement Agreement (Akta Perdamaian), which will have the same effect as a court judgment in the sense that it is enforceable. If the mediation fails and an amicable settlement cannot be reached, then the parties may proceed to litigation ant the first court hearing will be scheduled.

In the event a defendant or their attorney does not appear, the panel of judges will schedule another hearing and ask for the defendant to be properly summoned. The panel of judges may also, however, issue a default judgment in the absence of the defendant. In the event a plaintiff or their attorney fails to appear on the scheduled day, the judge or panel of judges will declare the lawsuit null and void.

The first court hearing starts with the plaintiff stating their case and submitting their arguments in support of the case and any demands made regarding how it is hoped the court will decided the matter at hand. The plaintiff does so by reading the written lawsuit. The reading of lawsuits is common in the litigation process in Indonesia as the process is more of a 'paper' process than an oral one. After hearing the plaintiff's lawsuit, the panel of judges will give an opportunity for the defendant to rebut at the second court hearing. It is rare for the defendant to rebut on the same day. The judge or panel of judges will usually adjourn the rebuttal hearing so as to give the defendant time to prepare a written rebuttal.

At the second court hearing, the court will hear the defendant read his written rebuttal (konpensi). At this point, the defendant also has the option to file a counter suit (rekonpensi) against the plaintiff. This is when the process becomes complicated, since the defendant becomes a plaintiff at the same time. The judge or panel of judges in this kind of process will have to issue two verdicts at the same time.

The third court hearing will hear the plaintiff's rebuttal against the argument made by the defendant at the last court hearing.

At the fourth court hearing, the panel of judges will hear the defendant's arguments with respect to the plaintiff's rebuttal. 

The fifth and sixth court hearings are dedicated to examining evidence and presenting and hearing any witnesses, including expert witnesses. The plaintiff is given the first opportunity to present evidence, while the subsequent hearing is given to the defendant to present any witnesses or testimony that it may wish to do so in support of its case.

The seventh court hearing is for the court to hear both parties give their conclusions in the case. The eighth and last court hearing is when the panel of judges reads its verdict.

The court's verdict, however, does not immediately take effect and become enforceable. The verdict takes effect only after fourteen days have passed with no appeal submitted. If a party submits an appeal, which is often the case, the verdict does not take effect and is unenforceable.

Appeal to the High Court

Appeals from the District/Lower Court are heard before the High Court (Pengadilan Tinggi). The High Court is a District Court of Appeal. Appeals from the High Court and, in some instances from the District/Lower Court, may be made to the Supreme Court located in Jakarta.

The High Court will review the case through materials submitted by the parties at the District Court. In this regard, the High Court procedure is more of a game for lawyers. The parties to the dispute will not be physically involved. The High Court's verdict will take effect and become enforceable in fourteen days if no cassation to the Supreme Court is submitted. There are no restrictions, except for time limits, with respect to challenging a verdict of the High Court to the Supreme Court. In addition, there is no mechanism to examine the admissibility of cassation based on sound legal grounds. 

Appeal to the Supreme Court

The Supreme Court can hear a cassation appeal (kasasi) which is a final appeal from lower courts. It can also conduct a case review (Peninjauan kembali) if, for example, new evidence is found which justifies a re-hearing.

The Supreme Court renders decisions concerning disputes of competency amongst the types of court in the first and last instances. The Supreme Court can overrule a verdict of a lower court on any of three grounds: the court in question lacked jurisdiction or acted beyond its jurisdiction; the court applied the law incorrectly or violated prevailing law; and, the lower court neglected to satisfy certain requirements imposed by law.

The review of a case at the Supreme Court will be based on the same materials presented at the District Court; the Supreme Court will not admit new evidence. The process at the Supreme Court is the same as at the High Court in that the parties to the dispute are not physically involved.

A case will also not necessarily end once the Supreme Court renders its verdict. The next challenge is to enforce the verdict, and the case can always be re-opened by one of the parties to the dispute if they can furnish new evidence that has a bearing on the decision.

The Supreme Court gives judgment in cassation. Commercial disputes in Indonesia also end with the Supreme Court and also as a cassation. The parties in private law cases may request cassation by the Supreme Court. Cassation is possible only if no other ordinary means of obtaining justice is available. If there is a possibility of bringing the case for appeal to the court of second instance (High Court) then the cassation will not succeed. In other words, it is impossible to request cassation on the decisions of the District Courts of first instance. The case must first be brought before the respective courts of second instance, except in some instances. For example, in a dispute about trademark registration and bankruptcy the decision of the first instance court may be directly brought before the Supreme Court. This is due to the fact that the decisions for these cases in first instance court are deemed to be final, without opportunity for appeal.

Cassation will be successful if the decisions do not comply with the formal requirements as set forth in the regulation, pertaining to nullification. It is also possible when the lower courts in rendering their decision exceed their jurisdiction. Finally, cassation is possible if the regulations and rules of law have been improperly used or if there is a violation of those rules.

CRIMINAL PROCEDURE

Indonesian Criminal Procedure is regulated in Law No. 8 of 1981 on Criminal Procedure. The Law is so called KUHAP or Kitab Undang-undang Hukum Acara Pidana an Indonesian Code of Criminal Procedure. KUHAP replaced the old criminal procedure contained in HIR 1941 or Het herzine Inlandsch Reglement, a Dutch regulation concerning the Procedural Law in Hindia Belanda (Indonesia). When the Law was enacted in 1981, it was considered a masterpiece because the Law made some changes and even included some innovations considered to be significant improvements on the old HIR. First, the law ended the dualism in criminal procedure by eliminating the Landraad and Raad van Justitie Procedures. The Law on enactment was to be nationally implement and applicable throughout Indonesia. Second, the Law utilizes the accusatorial system where the HIR applied the inquisitorial system. The accusatorial system is considered as more humane than the inquisitorial system because the inquisitorial system considers the confession of the defendant as evidence. The inquisitorial system has no limitation concerning the authority of the investigator and the investigation process itself. Historically, it was the fact that in order to get the defendant’s confession, the investigator tortured the defendant if this was the only way to ensure that a confession was made. Third, the Law reflects the national aspirations and the national ideology therefore, at least, on a technical and theoretical level the KUHAP honors and upholds the human rights of Indonesians in its substance.

In the Indonesian Criminal Justice System, there are 4 (four) basic components to the system; namely, the Police (Kepolisian), the Attorney General (Kejaksaan), the Court (Pengadilan), and Correctional Facilities/Prisons. All are considered to be law enforcement institutions. The system may be defined “…generally as a complex of elements or components directly or indirectly related in a causal network, such that each component is related to at least some others in a more or less stable way within any particular period of time…” The Law expects there will be a unity and uniformity in action and policy amongst the four components of the Indonesian Criminal Justice System. The system is referred to as “SISTEM PERADILAN SATU ATAP” (Criminal Justice under One Roof System) or it is also known as an “Integrated Criminal Justice System”. The mechanism of the criminal justice process begins with arrest, search, detention/remand, prosecution, and trial. At the end of the process, there is an enforcement of the judgment at a correctional facility/prison (Lembaga Pemasyarakatan).

There are several stages to the criminal justice process. First, an inquiry conducted by the police. The police in order to conduct an inquiry have the rights and authorities as follows: to receive a report or complaint regarding a crime; to search for information and evidence; to stop a person that is the subject of the complaint or report; and, do any other action based on laws. The Law states that this authority resides in the National Police Force or Kepolisian Republik Indonesia and the law does not consider that there is a need to involve lawyers/counselors. This means that there are no legal services or legal aid available to the accused as a requirement of the law. Related to a discussion of the inquiry and the investigation process, it can be said that the beginning of the criminal justice process is when the following three conditions are met: there is a report of a crime, a complaint of a crime, or there is a “crime caught in action”. Based on one or more of these three conditions, the police will start the investigation. A report of a crime can be defined as any information brought by a person based on his/her rights or obligations given by the law to the authorized officers concerning a crime that has been committed or is being committed or it is suspected that a crime will be committed. A complaint of a crime can be defined as a formal report along with an application from an interested person (especially a victim of the reported crime) asking the authorized officers to take some legal action on the person who committed the crime.

The prosecutorial function rests with the Attorney General, who holds the position of supreme public prosecutor. The Attorney General occupies a cabinet-level post separate from that of the Minister of Justice (or in the most recent Government the Minister of Law and Human Rights), both of whom report directly to the President. In 1992 the Attorney General's Office included 27 provincial-level prosecutors' offices and 296 district prosecutors' offices.

The public prosecutor's principal functions were to examine charges of felonious conduct or misdemeanors brought by individuals or other parties, and then either dismiss a charge or refer it for trial to the relevant Court having jurisdiction over the matter. The prosecutor's office was also responsible for presenting the case against the accused in court and for executing the sentence of the court.

The matter of control over the conduct of the preliminary investigation has been a point of contention between the prosecuting authorities and the police going back to the late 1940s and early 1950s. Practice under the old code of criminal procedure evidently rested on working agreements between the two services, 

under which the police, in principle, conducted primary investigations but deferred to the prosecutor whenever the latter asked to undertake the investigation. Under the new code of criminal procedure, a clear division was made between the investigatory function, which was given solely to the police, and the prosecution function, which remained with the prosecutor's office. The only exception was in the case of "special crimes," a category which was not further defined but which was believed to be reserved for unusually sensitive cases such as espionage and subversion, in which the prosecutor could also take a role in the investigation. Continuing tension between the prosecutor and the police was evident during debate over a new prosecution service law in 1991. The law as passed gave the Attorney General the power to conduct limited investigations in cases that were determined to be incomplete. The 1991 law also established the positions of Deputy Attorney General and a sixth Associate Attorney General responsible for civil cases and administrative affairs.

The second stage is the arrest process. This process can be done when there is enough prior evidence or “bukti permulaaan yang cukup” and also it is considered to be a paramount part of the inquiry and investigation process. An arrest may be made of any person reasonably suspected of having committed a crime or is reasonably suspected of being about to commit a crime. Generally, the arrest only takes one day. The arresting process should be preceded by an arrest warrant however there is an exception where the person(s) are “caught in the act” of committing the crime.

The third stage of the criminal justice process is detention or remand. At this stage the law states in Article 20 that detention or remand can be effected at any stage of the criminal justice process, Article 21 states that further detention is possible at the demand of the public prosecutor. Article 23 regulates how the type of detention or remand that the accused is subject to may be changed. Articles 24 to 29 regulate the term/ length of the detention period.

KUHAP as well as the Reglement (HIR) stipulates the legal basis for arrest, detention, or remand. There are two basic legal foundations regarding arrest and detention; namely, judicial and opportunity.

The judicial reason arises when there is a reasonable suspicion that the person has committed a crime based on sufficient evidence and the minimum applicable penalty for the alleged crime is 5 or more years. However, there is an exception to the 5-year minimum for certain crimes as stipulated by the law. The opportunity reason applies when there is a sufficient reason to believe that the accused will flee or attempt to destroy evidence or commit further crimes. The opportunity reason applies alternatively, meaning it can be applied even when only one of the conditions arise.

Before exploring the fourth stage of the process, it is important to discuss the pre-trial review process. The pre-trial review is a process or an institution that is not recognized by the Reglement (HIR). This institution was introduced by the Law. The pre-trial review process is the competence of the first instance court (Pengadilan Negeri) to examine and decide whether the actions of law enforcement to this point have been legitimate, particularly with regards to the arrest and detention. The Court may cease the investigation or the prosecution process. The pre-trial review may also determine whether there is any compensation due to the investigated person for a breach of their rights or whether the relevant authorities are obligated to rehabilitate the good name of the investigated person. The pre-trial review is conducted by only one judge. This institution is characterized as “accidental” meaning it only occurs when the suspect or his family or his attorney submit an application to the Chief Justice of the first instance court. This is an expedited process as the judge will render a decision within 10 days of the review being commenced. Essentially, the pre-trial review process is a filter to ensure that the actions of the relevant law enforcement agencies comply with the provisions of the relevant laws. Nevertheless, it is important to note that it does not cover the inquiry process meaning that any unlawful acts of the police in the inquiry process are not subject to pre-trial review.

The fourth stage is the trial. This process commences with a summons to appear based on the prevailing laws and regulations. Once the prosecutor submits the case for trial a panel of judges will be appointed to hear the matter. There are three basic types of trial: regular, expedited, and summary (summir).

Law No. 14 of 1970 stipulates a number of principles concerning competency of the court and how a fair trial is to be conducted:

1. Equality before the law – everyone has the same position in front of law, no discrimination should be allowed.
2. Due process of law – as all legal enforcement before the trial such as arrest, detention, search, and seizure have to be conducted based on written orders or warrants from an authorized officer, and has to be done in accordance with the law.
3. Presumption of innocence – no one can be considered guilty before a judgment which is final and binding is rendered.
4. Everyone who is suspected, arrested, remanded, prosecuted, or tried without legal reason and or in error should be given compensation and rehabilitation. The officers who either deliberately or because of mistake cause this violation have to be charged or given an administration sanction.
5. The court or justice should conduct matters expediently, simply and cheaply. The trial should be free, fair and impartial.
6. Everyone charged with a crime has a right to legal representation or legal aid.
7. The suspect has the right to be informed of what charges are contained in the indictment and the legal basis for the indictment.
8. The court hearing must be conducted in the presence of the defendant.
9. The court is open to the public, except were the law provides otherwise.

In order to uphold the human rights of citizens and to implement the principles contained in Law No. 14 of 1970, the KUHAP honors and guarantees some rights for the suspect (accused) and or the defendant. The most significant of these principles is the principle of a presumption of innocence. It means that every person who is accused of committing a crime that has lead to their arrest, remand, prosecution or trial has the right to be presumed innocent until proven guilty, which in this case would be with the rendering of a final and binding judgment by the relevant court. As an innocent person, the accused has rights: the right to be examined immediately, the right to know the crime alleged to have been committed, the right to know the content of formal charges, and the right to have legal representation, among others.

Furthermore, all statements by the accused are required to be given freely without intimidation or coercion. Any refusal by the accused to sign the statement must be record in the police report of the investigative process. Once an indictment has been issued the accused then has a right to a speedy trial by a competent court, the right to be physically present at any court hearing, the right to have the indictment and any other charges in a language in which they can understand, the right to legal aid if the accused is unable to afford legal representation, and a right to receive family visitors, among others. Last, but not least, in order to uphold the principle of the presumption of innocence, the accused does not have the burden to prove their innocence rather the burden of proof is on the prosecutor to prove guilt.

Legal aid can be provided at any stage of the process in order to prepare his/her pleadings. As of the arrest and detention of the accused the right to contact a legal representative becomes available to the accused. The KUHAP recognizes client/lawyer legal privilege and as such any communication between the accused and their appointed legal representative is protected and privileged. The KUHAP recognizes this principle in terms of “within sight but not within hearing”. An exception applies to crimes of subversion, as any contact between the accused and the lawyer may be heard by the relevant officials involved in any investigation or prosecution of the alleged crime.

Free legal aid is provided to the accused where the penalty for the crime is 5 years or more imprisonment. The KUHAP establishes the right to legal assistance of one’s choosing, excluding where the legal assistance is free legal aid. Legal advisors are also given the right to have access to their client at any time.

In criminal court, most of the procedures in reaching a decision which is final and binding are the same as those in a civil court. Specifically, the Criminal Procedure Code or KUHAP also regulates “Judgment in Criminal Court”. At first, a criminal case will be brought to the courts of first instance. It will be heard by a panel of judges. To reach a decision, the judges should have at least two pieces of evidence and sworn testimony that satisfy the panel of judges that the alleged crime has been proved. When the judges reach a decision, it should be declared in open court to ensure that the decision is valid and enforceable. Within 7 days, the defendant or his lawyer may file an appeal. The public prosecutor who conducted the case also has the right to file an appeal. No appeal can be filed a judgment of acquittal (putusan bebas) or a judgment of dismissal of all charges (putusan lepas dari segala tuntutan hukum).

All judgments in criminal cases other than those judgments of the Supreme Court can be overturned on appeal or cassation. The right to file an appeal rests with the defendant and the public prosecutor who brought the case. Finally, no cassation can be filed for a judgment of acquittal (Putusan Bebas).

All Decisions of the court should be titled with the following: “For Justice based on God” (Demi Keadilan yang berdasarkan Ketuhanan Yang Maha Esa).

CONSTITUTIONAL PROCEDURE

The History

A Constitutional Court was an oft mooted idea in the Indonesia judiciary and it was not until the Constitution was amended in 2001 that the court began to take on more than just a conceptual form. Articles 24(2) and 24C of the Constitution were amended and inserted, respectively. The Constitutional Court is indicative of the legal reform process in Indonesia and a commitment to the establishment of a legal society and a community that is based on the basic principles associated with the rule of law.

Even though the recognition of a Constitutional Court in the Constitution the reality was that there was not a functioning court in place to perform the tasks that were envisaged for it. The Law expressly allowed for the Supreme Court to continue performing the functions of the proposed Constitutional Court until such time as the court was a physical reality and able to accept transfer of cases from the Supreme Court into its own jurisdiction. The government and the DPR entered into immediate discussions and debate to draft the Constitutional Court Law. This law was drafted and enacted as Law No. 24 of 2003 on the Constitutional Court. The enactment of the Law was published in the State Gazette No. 98, Supplemental State Gazette No. 4316. Two days later, on 15 August 2003, the President, through Presidential Decree No. 147/M of 2003 appointed 9 (nine) Constitutional Court Justices. The newly appointed justices swore their oath of office on 16 August 2003 at the State Palace.

With the constitutional amendment enacted, the relevant Constitutional Court Law enacted, and the appointment of the justices to the Court made, the Court was ready to receive its first cases. The Supreme Court which had assumed a caretaker role over constitutional matters until such time as the Constitutional Court was ready to assume these responsibilities itself transferred the initial cases to the Court on 15 October 2003.

The Constitutional Court is a court of first instance and of appeal ensuring that decisions are final and binding once handed down by the court. The authorities and powers of the court include: a) judicial review of any Law alleged to be in conflict with the Constitution, b) decide any conflict between state institutions that derive thir respective authority and power from provisions contained in the Constitution, c) decide on the dissolution of political parties, and d) decide conflict that arise over the results of general elections. In addition to the above noted authorities and powers the Constitutional Court must decide upon opinions submitted by the DPR with respect to allegations that the President or Vice President are in breach of the prevailing laws and regulations with regard to treason, corruption, bribery, other serious criminal acts, dishonest behavior, or is incapable of fulfilling the requirements for the Office of the President and/or Vice President.

The Constitutional Court comprises 9 members of which one is appointed Chief Justice. Justices to the Constitutional Court are appointed by the Supreme Court, the DPR, and the President, with each appointing 3 justices. The provisions of the Constitution, the relevant laws, and implementing regulations expressly prohibit justices of the Constitutional Court from concurrently holding positions as: a) state officials, b) members of political parties, c) entrepreneurs, d) advocates, or e) civil servants including as active members of the National Armed Forces or National Police Service.

The Procedure

According to the law, the first stage in the Constitutional Court process is to file a complaint, written in Bahasa Indonesia and signed by the disputing party and must be in the form of 12 original copies of the complaint. The structure of the complaint must cover the identity of the parties and whether they have legal standing to bring the matter to the Court as well as the posita and petitum of the complaint. The complaint must also be complete with all supporting evidence. For electoral disputes, the complaint has to be submitted within 72 hours (3 x 24 hours) since the result of the National Election is declared by the National Election Commission.

After the court receives the complaint then the session/hearing schedule will be set up with the first hearing to be scheduled within 14 days of the registration of the case. The parties to the dispute then will be notified of the hearing date there will also be a public announcement of the hearing. In the pre-examination phase, the bailiff will examine whether the complaint already fulfills the requirements as well as make a determination on the clarity of the complaint. If the complaint still lacks sufficient clarity or is incomplete in any way the bailiff will return the complaint to the relevant party and demand that the party rectify the noted issues within 14 days and resubmit the case to the court.

For complaints that concern the judicial review of legislation with respect to alleged conflicts with the Constitution then this complaint should also be forwarded in copy to the President and the parliament (MPR). Dispute between governmental institutions requires that a copy of the complaint be forwarded to the opposing party. Any complaint regarding an opinion of the parliament requires that a copy of this complaint be forwarded to the President. In cases where a complaint has been submitted with respect to the announced election results then a copy of this complaint must be forwarded to the National Election Commission.

All hearings at the Court are open to the public and require the attendance of all parties to the complaint with respect to the presentation of their respective evidence and any other testimony required by the court. However, where one of the parties is a government institution then that evidence or testimony may be in written form and submitted within 7 days of the hearing. The Court has the power to call expert witnesses to submit testimony where the Court believes that it will contribute to the understanding of the matter being heard or assist in resolving the matter to the satisfaction of the Court. All witnesses are entitled to be accompanied by their legal representatives or any other person of their choosing.

The decision of the Court shall be rendered within 60 working days afterof registration of the case for the dissolution of a political party. In cases concerning the dispute of election results the relevant time limits are 14 days where the disputed results concern the President and Vice-President and 30 days where the dispute concerns the parliamentary election results. In cases concerning opinions of Parliament the time limit is 90 working days of registration. Court decisions are to be in written form and each judge’s opinion is to be included in the judgment, including any dissenting opinions.

The decision of the Court is deemed to be final and binding once it has been read in open court. A copy of the decision that has been read out in open court will be furnished to the parties within 7 days of the decision being read. 

ENFORCEMENT & JUDGMENT

Judgment

Indonesia has four judicial branches as outlined in the Basic Principles of Judicial Power as amended by Law No. 4 of 2004; namely, General; Military; Religious; and, Administrative Courts.

General courts include the District Courts of first instance, High Courts (Appellate Courts), and the Supreme Court. General courts are courts that hear civilian (non-military) and criminal cases among and between civilians.

In General Courts, all cases will be brought to the daily courts of first instance or District Court (Pengadilan Negeri). Indonesian law requires that all matters are held before a panel of judges. The panel must include at least three judges to constitute a valid hearing, judgment in most civil cases is rendered by three judges. The law further requires that all judgments are read in open court and any failure to do so may result in the decision being rendered void at law. The method of reaching a decision requires that the judges meet in closed chambers to consider the facts presented and the prevailing laws and regulations. All deliberations in closed chambers remain confidential and secret. The amendments contained in Law No.4 of 2004 require that every judge has an obligation to deliver a written opinion to be included in the judgment. The law expressly states that dissenting opinions are also to be included in the written judgment. General Courts normally require the parties to enter into mediation where appropriate. In the event that this mediation process results in a mutually acceptable agreement between the parties, then this agreement will be confirmed by the court in a Deed of Settlement (akta perdamaian) which will be deemed to be final and binding on all the relevant parties. 

Once the judgment of the General Court in the first instance is rendered an appeal against the content of that judgment may be filed to the High Court. This appeal must be filed within 7 days of the decision being read in open court, and may be filed by any party to the first instance decision. No appeal can be filed against a judgment that has been rendered by the court with the consent of the parties. Any decision handed down that is based on a prior agreement of the parties among themselves or with the court is considered to be final and binding.

The High Courts acting as a Courts of Appeal usually sits as a panel of 3 judges however acceptable practice for civil matters is that only one judge will sit in judgment of the appeal. The courts of appeal may review all decisions of the courts of first instance.

In the event one or both parties are unsatisfied with the decision of the appeal court, then the aggrieved party may file an application for appeal to the Supreme Court within 14 days of the of the appeal court handing down its decision. This appeal is known as cassation.

The grounds for cassation, in private law cases, are: first, when the decision does not comply with the formal requirements as set forth in the regulations, pertaining to nullification, secondly when the lower courts in rendering their decision exceed their jurisdiction. Finally, cassation is possible if the laws and regulations have been incorrectly applied or there is some form of identifiable and provable impropriety. No appeal can be filed to a Deed of Settlement (akta perdamaian).

In the criminal jurisdiction the procedures in reaching a decision which is final and binding are the same as other jurisdictions of the General Court. The specific procedures applicable in the criminal jurisdiction of the General Courts are stipulated in the Indonesian Criminal Procedure Code or KUHAP (Kitab Undang-undang Hukum Pidana). Criminal matters are first tried in a General Court of first instance and to reach a decision the judges must be presented with at least two pieces of evidence and faith to satisfy them of guilt or innocence. Once a decision has been reached by the judges that decision is to be read in open court in order to be valid. Within 7 days the aggrieved party may file an appeal to the relevant court of appeal in the jurisdiction. No appeal can be filed against a judgment of acquittal (putusan bebas) or judgment of dismissal of all charges (putusan lepas dari segala tuntutan hukum).

All decisions that have been decided at the District Court level and appealed to the High Court in the criminal jurisdiction may be appealed to the Supreme Court as a cassation matter.

All judgments are required to be prefaced with the following statement – For The good sake and fairness based on God (“Demi Keadilan yang berdasarkan Ketuhanan Yang Maha Esa”). This is critical to ensuring that the decision is afforded the full support of the law as recent jurisprudence suggests that judgments rendered without this statement will be held to be void at law.

Extraordinary Legal Remedies in Indonesian Law

All judgments which have been deemed final and binding at the last appellate level may seek a final extraordinary legal remedy, Peninjauan Kembali. Peninjauan Kembali is a form of judicial review or cassation that is used for the good sake of law (Kasasi Demi Kepentingan Hukum).

Enforcement

In civil matters the Bailiffs of the relevant court execute any enforcement order issued by the Head of the relevant Panel of Judges. The party or parties can request for “Sita Jaminan” or a Confiscation Order or Consevatoir Beslag and “Sita Eksekusi”or Writ of Execution. 

In criminal matters, the judgment that is considered to be final and binding is enforced by the prosecutor (jaksa). Any discussion of the enforcement of criminal court judgments requires a more thorough analysis and examination the penal system of Indonesia.

A. The Enforcement of Securities

When a corporate borrower is in financial difficulties and a secured debt has become due, it would be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods. In this method lenders and borrowers almost always attempt to negotiate an amicable agreement for repayment of debt or refinancing of debt before a lender, secured or not, invokes a recognized legal enforcement method in Indonesia. Both are aware of the uncertainty of enforcement methods. If it is not possible after a suitable period of time for the secured lender to reach an agreement, then enforcement methods may be used by the lender, including foreclosure of security by a secured lender.

There are several mechanisms available to security holders to enforce their securities under the Indonesian legal system including the power to take possession of property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, and the power to wind up the corporate borrower. A secured creditor must exercise its foreclosure rights against its security through the courts, if the debtor resists foreclosure. The foreclosure procedures vary depending upon the type of security involved. There are no self-help remedies in Indonesia. Accordingly, if the debtor resists repossession by way of security foreclosure, court intervention is required. 

B. The Enforcement of Foreign Judgments

In order to enforce a foreign judgment the general principle referred to in Indonesian law is the territorial principle. Consequently, as a general rule, foreign judgments are not enforceable in Indonesia. Judgments of foreign courts cannot be executed by Indonesia courts as a judgment delivered in one country does not have the requisite force of law in some other jurisdiction. However, although foreign judgments are not generally enforceable in Indonesia it is possible for a foreign judgment to be enforced if Indonesia has a bilateral or multilateral treaty with the relevant country issuing the arbitral award. Nevertheless, there are some recent developments that Indonesia in association with Thailand and the Philippines are examining ways of implementing a universal or cross-border principal of award recognition that would in effect allow for the recognition of foreign judgments.

C. The Enforcement of International Arbitration Judgements

Indonesian courts have historically been very reluctant to enforce international arbitration judgments without first confirming that judgment or award through the Indonesian judicial system. An example of this reluctance was highlighted in the Karaha Bodas case where Karaha filed their international arbitration claim in Switzerland. The Swiss arbitration resulted in an award of USD 261 million of the USD560 million claimed. On receipt of the judgment Karaha sort to execute that award in Indonesia.

Indonesia has already ratified Convention on the Recognition and Enforcement of Foreign Arbitral Award (New York Convention 1958) through the provisions of Presidential Decree No. 34 of 1981. However, Article 5 of this convention stipulates that the enforcement of an international arbitration judgment can be refused if it breaches public policy or would be detrimental to public order. In the Karaha Bodas case, the suspension of the project was considered to be in breach of public policy and as such the Court of First Instance in Indonesia, the District Court, refused to issue the necessary writs of execution to enforce the judgment.

The Indonesian and foreign mass media seized on this refusal to issue the Writ of Execution as evidence that Indonesia was not only reluctant but would not enforce foreign arbitral awards.

D. The Enforcement of Judgments of the Administrative Court

A judgment that is issued and considered final and binding by the Administrative Courts (Peradilan Tata Usaha Negara) have the following consequences:

1. A judgment means that the dispute is settled
2. The judgment is final and binding for everyone not only the parties to the action but all relevant parties as the judgment is said to have the characteristics of “erga omnes”.
3. The judgment is an authentic or official document and is considered to be perfect or credible evidence.
4. The judgment has executorial power and can be enforced by any law enforcement agency.

In enforcing the judgment, the name of a government officer who doesn’t enforce the judgment will be announced in the printed media this is more affect the officer morally and mentally for Indonesian officer “nama baik” or integrity is everything.

E. The Enforcement of Judgments of the Taxation Court (Pengadilan Pajak)

The judgment of the Taxation Court is deemed to be final and binding (Berkuatan Hukum Tetap). The only legal remedy that can be requested is Peninjauan Kembali or the judicial review of the case at the Supreme Court. Judicial review at the Supreme Court is restrictive as the Court is only allowed to consider questions of law and the application of the prevailing laws and regulations to the facts in dispute. The Court will not retry the facts of the case.

Legal Remedy in Constitutional Law

In Constitutional Law, the President has a prerogative right to provide an official pardon [grasi] to the convicted. The effect of a pardon is than it may reduce or even expunge the conviction, sentence, or penalty.

In Article 1 of Law No. 22 of 2002, “Grasi” [Official Pardon] is a pardon such as changing, reducing, or dismissing the execution of the sentence on the convicted and is issued by the President. Generally, the law has interpreted convicted persons as only those persons who have been convicted in a court of law and where the conviction is deemed to be final and binding at law.

THE LEGAL PROFESSION AND EDUCATION

JUDGES

The status of Judges in Indonesia.

During the colonial era, Judge (Hakim) in the Hoogrechtsthof and Raad van Justitie were officials (pegawai) completely separate of the government. Meanwhile, the colonial government established special courts for the indigenous/native population known as Landraad. All Heads of the Landraad on the islands of Java and Madura and almost all Landraad Heads on the other islands had the effective status of government official (pegawai pemerintah) under as such under the direct authority and control of the Department of Justice. In fact most of the magistraatsgerecht, regentschapsgerecht and districtgerecht were ordinary government officials that were appointed to serve as judges at those courts.

During the Sukarno government the function of the judiciary in general and the role of judges in particular were placed in the outer circle of State power. State power during this period was clearly dominated by the executive. The independence of the courts was not acknowledged and to a greater degree legislated against. This is explicit in Law No. 19 of 1964 on the Basic Provisions of Judicial Power which states that all institutional instruments of judicial power are subordinate to the President as the Great Leader of the Revolution. Furthermore, this law purported to grant the President the necessary power to intervene in judicial matters when cases were being decided. This power was presumably to ensure the protection of the public interest but neither the Law nor the Elucidations to the Law placed any real constraints on this power which would have protected the power from being abused for personal gain or other reasons.

During the Soeharto regime (or as it is most often referred the ‘New Order’), the matter of judges official status was regulated indirectly through Law No. 14 of 1970 which simply stated that Judges are to be appointed by the President (Art. 31). Obviously, this implies that an appointed Judge is in fact a government official and subsequently subject to all the prevailing laws and regulations that govern the actions and behavior of State or government officials. This situation was further exacerbated by the enactment of Law No. 8 of 1974 on the Basic Provisions of Judicial Power which stated that Supreme Court Judges are State officials and that Judges appointed to lower courts are civil servants. Judges of the Supreme Court, including the Chief Justice, are not simply appointed by the President but are in fact appointed by the President on the recommendation of the Parliament (Law No. 14 of 1985 Art. 8 on the Supreme Court).

After the fall of the Soeharto New Order regime in 1998, the Peoples Consultative Assembly (MPR) passed MPR Resolution (Ketetapan MPR/ TAP MPR) No. X / MPR / 1998 on Basic Provisions of Development Reform in the Framework of Ensuring and Normalizing National Life. This resolution allowed for a real separation of the functions of the judiciary and the executive. In 1999, Habibie (the then President) issued Presidential Decree No. 21 of 1999 on the Formation of a Joint Working Team for the Implementation of TAP MPR No X / MPR/ 1998 in Relation to the Explicit Separation of the Functions of the Judiciary and Executive (Joint Working Team) under the Coordination of the Minister for State for State Administrative Reform. Two of the teams recommendations dealt with the need to establish the one roof system in the interests of the management of court administration and the need to change the status of judges from civil servants to State officials.

These recommendations were then implemented in Law No 35 of 1999 on Amendments to Law No. 14 of 1970 on the Basic Provisions of Judicial Power and Law No. 43 of 1999 on Amendments to Law No. 8 of 1974 on the Basic Provisions on the Ordinance of the Civil Service. Law No. 35 of 1999 allowed the Supreme Court to take over the organization, administration, and financial matters relating to the judiciary, which had previously been the authority of the Department of Justice and Human Rights. This arrangement was known as the ‘one roof system’. Law No 43 of 1999 changed the status of judges from civil servant (pegawai negeri sipil) to state official (pejabat negara). This status change was further strengthened under the provisions of Law No. 8 of 2004 on the Amendment of Law No 2 of 1986 on General Courts (Undang-Undang Peradilan Umum), which stated that the judge of the general court is a state official whose duty is to implement the provisions of the Law on Judicial Power.

The Appointment of Judges

Under Law No. 8 of 2004 the judges of General Courts are appointed and dismissed by the President on the recommendation of the Chief Justice of the Supreme Court. In order to be recommended by the Chief Justice for appointment a prospective judge must first be recognized by the government as a Judge Candidate (Calon Hakim). All Judge Candidates are required to have qualifications in law and experience in the practice of law. Furthermore, the Judge Candidate should have successfully participated in and completed a series of examinations and training over approximately two years prior to their acceptance as a Judge Candidate. Once a Judge Candidate has been accepted they will then complete at least a 1 year internship at a number of different District Courts. On the successful completion of the internship the Chief Justice of the Supreme Court at their discretion will recommend to the President that the Judge Candidate be appointed as a judge.

PROSECUTOR

The task of prosecuting a criminal case through the General Court (pengadilan umum) system is the responsibility of public attorneys, public prosecutors, and prosecutors (Jaksa). All prosecutors and prosecuting activities are to be administered by the Kejaksaan Republik Indonesia (Public Prosecution Services of the Republic of Indonesia or PPS). This PPS is a governmental organization established by Law to implement and execute State authority with respect to the prosecutorial activities and other duties as described in the Law. The hierarchy of the PPS is described below in descending order:

1. Kejaksaan Agung (The Office of the Attorney General). The Attorney General is the highest ranking authority within the PPS. The head office is located in Jakarta and there are representative offices throughout Indonesia and its jurisdiction is inclusive of all the sovereign territory of Indonesia.
2. Kejaksaan Tinggi (State Attorney) is the authority which possesses the jurisdiction at the provincial level to prosecute cases. The offices of the Kejaksaan Tinggi are located in the capital city of the province.
3. Kejaksaan Negeri (District Attorney) is the authority which possesses the jurisdiction at the regional level to prosecute cases. The offices of the Kejaksaan Negeri are located in almost all regional centers.

Duties and Authorities of Prosecutors

The roles, duties, and authorities of prosecutors within the Indonesian judicial system has developed and changed throughout Indonesian legal history. In the period after Indonesia’s independence, the two central activities of law enforcement, investigating crime and prosecuting criminals, was integrated into one organizational system. The 1951 Emergency Law (Law No. 1/Drt of 1951) provided that public prosecutors would supervise and coordinate the investigative instruments of the police. This included conducting their own further investigations and providing direction, coordination, and supervision of the police. In 1955 (Law No. 7/Drt of 1955) the Prosecutors were made the central investigators for economic crimes, including investigation of public corruption. This central role was expanded to include customs and smuggling (Law No. 73 of 1967) and corruption (Law No. 3 of 1971). This integrated system had the advantage of insuring that evidence sufficient to ensure convictions would be produced in court. It had the disadvantage of centralizing all the powers in one place with few institutional checks and balances.

In 1981 as part of an overhaul of Indonesian criminal procedure, a committee made up of the leaders of the police, prosecutors, and judiciary recommended separating the functions of the police and the prosecutors in order to create a much-needed level of checks and balances. These recommendations were codified in Law No. 8 of 1981 on Criminal Procedure which generally restricted the previously expansive role of prosecutors to the prosecution of crime only. Prosecutors could not investigate crimes except when investigating public corruption, smuggling, and subversion. This is known as, and is referred to, the residual power of prosecutors to investigate crime. 

While on face value there are a significant number of benefits to be derived from the 1981 law, the reality is that it has resulted in an increasing lack of cooperation between the police and prosecutors and the development of an unhealthy institutional rivalry. This usually leads to competing claims of incompetence between the police and prosecutors about the quality and value of evidence collected and submitted by the police in dossiers that are to be used by the prosecutors to secure a conviction against the alleged criminal.

In 1991 the Attorney General Law (Law No. 5 of 1991) provides prosecutors with additional authority to complete the dossier where it is deemed insufficient to secure a conviction, particularly with respect to the carrying out of any further examination that may be required to complete the dossier to the satisfaction of prosecutors prior to the dossiers submission to the relevant court. Although these provisions did provide additional power to the prosecutors it still did not permit them to interview the accused.

The mandate of the prosecutors has undergone a number of important and significant changes in the recent past, particularly during the New Order where prosecutors represented the interests of the State in securing convictions in criminal cases. Clearly, this meant that the prosecutorial service was not independent and not free from the influence of government. Since the fall of the New Order government the prosecutorial service has focused on development of a sustainable rule of law and developing into its role as the guardian of the public interest. These new roles and developments are plainly seen in the PPS’s willingness to engage in public debate with regard to the performance or non-performance of its duties and functions, particularly with respect to outstanding corruption cases.

In July 2004, Law No. 16 /2004 on the Public Prosecution Service was enacted (Undang-Undang Kejaksaan Republik Indonesia). Article 30 of this Law describes in a more comprehensive and broader manner the duties and powers of prosecutors; namely, to prosecute criminal case, to implement final and binding judicial decisions, to investigate special crimes enacted by laws (corruption and smuggling), to complete dossiers, and to conduct further investigation in certain circumstances.

Furthermore, prosecutors are also granted powers to represent State or government officials (the executive) in civil cases and State administrative cases. The law demands that prosecutors participate and play an integral role in the maintenance of public order including to enhance public awareness of the law; to assist in the development of sustainable law enforcement policy; the control of publicly published and disseminated materials; the control of identified threats such as religious sects (aliran kepercayaan); to prevent the abuse of religion and eliminate blasphemy; to conduct legal research; to assist in legal development and law reform; and, to maintain criminal statistics.

LAWYERS and ADVOCATES

The Indonesian legal profession can trace its roots back to the Dutch colonial era and the two types of lawyer that practiced in the jurisdiction; namely, pokrol bambu (zaakwarnemer or native/indigenous lawyer) and advocaat en procureurs or advocate. Both types of lawyer consulted and assisted people with legal problems and also were primary players in the litigation process.

However, there were also differences. The two major differences dealt with professional requirements and the venue in which they were allowed to represent or assist their clients. In order for an advocate to practice it was compulsory for them to hold a Master of Law degree. Furthermore, an advocaat en procureurs provided legal services for Europeans throughout the colonial court system including the District Court (Residetie-Gerecht), the Appellate Court (Raad van Justitie), and the Supreme Court (Hogerechtschof). In contrast, the Dutch colonial government did not require the pokrol bambu to have any legal education or even a legal background as neither was considered to be of critical importance to the intended functions of the pokrol bambu. The function of the pokrol bambu was to provide legal services for and to the indigenous population throughout the native/indigenous court system; namely, the Landraad, Districsgerecht, and Regenstschapsgerecht.

The Dutch colonial government recognized the functions and duties of both advocates and pokrol bambu by enacting Staatsblaad 1847 on Judicial Organizations and Justice Policy (Reglement op de Techterlijke Organisatie en het Beleid der Justice) and Staatsblad 1927-496 on Assistance and Representation to Parties in Civil Cases at the Native/Indigenous District Court (Landraad).

Staatsblad 1847-23 was the first attempt by the Dutch colonial government to establish a legal regulatory framework setting out the rules of legal practice in Indonesia (or at that time the Dutch East Indies). The regulatory framework included provisions for advocates to be supervised by judges sitting on the appellate courts and Staatsblad 1927-496 set out provisions designed to protect indigenous clients from any malpractice and manipulation that may arise as a result of retaining the services of untrained pokrol bamboo representing clients that possessed even less knowledge of the law and the legal system. The structure of the legal system was prone to abuse and corrupt practices within both the judiciary and the government, a concern that remains even to the present day.

Laws and Regulations for Advocates

In the post independence period specific laws were enacted to address matters relating to the practice of law in Indonesia, such as Law No. 12 of 1970 on the Basic Principles of Judicial Power (Law 14/1970). One issue that received particular attention was legal aid for clients and the obligation on advocates to provide legal assistance to those that require it. This is highlighted in Law 14/1970 which states that legal aid must be made available to individuals that may require it at any point in the legal process. Furthermore, the Criminal Procedure Code (Law No. 8/1981) enumerates the rights and obligations of advocates including an obligation to provide legal assistance to individuals through both the investigative and trial phases of cases.

The issue of regulating the behavior and acts of advocates in Indonesia through the enactment of specific legislation has always been a source of contention, conflict, and controversy. Many advocates hold a belief that the enactment of laws infringes on their professional independence and amounts to State interference in the performance of their functions. The concept of professional autonomy, although not unique to Indonesia, is premised on the belief that self-regulation of advocates is the best method to ensure a competent profession. In contrast, the government believes that regulation by the State is the most effective method of maintaining professional and political stability. The concept of politically stability and the advocate profession became intimately intertwined during the Suharto era as a means of controlling the profession and removing the threat that knowledgeable advocates would oppose the government’s policies on human rights and democratic grounds.

However, the need for formal acknowledgement of the advocate’s role in the judicial system was a primary motivating force for advocates to become involved in the drafting and enactment of Law No. 18 of 2003 on Advocates (Advocates Law). The preamble to the Advocates Law endeavors to justify the enactment of the law:

“…that in order to ensure that judicial powers are free from all outside interference and intervention, an independent, autonomous and accountable Advocates’ Profession is required to ensure justice, honesty and legal certainty for all seekers of justice, as well as to uphold the law, truth, justice, and human rights;

that the independence, autonomy and accountability of the Advocates’ Profession in upholding the law needs to be guaranteed and protected as part of the effort to uphold the supremacy of law”

Rights and Obligations of Advocates

The Advocates Law describes the rights of advocates as follows:

1. An advocate shall be free and independent to voice opinions or make statements to pursue a case in which s/he is involved before any court, meanwhile adhering to the professional code of ethics and the provisions of the prevailing laws and regulations;
2. An advocate shall be free to perform his/her professional duties to pursue a case in which s/he is involved, while also adhering to the professional code of ethics and the provisions of the prevailing laws and regulations;
3. An advocate may not be sued or prosecuted in either a civil or criminal court on account of something s/he has done in good faith as part of the performance of his/her professional duties in the interest of a client before the court;
4. In the performance of his/her professional duties, an advocate shall be entitled to obtain information, data, and documents, whether from government agencies/institutions or other parties, where such information, data and documents are necessary for the pursuit of a client’s interest, subject to the provisions of the prevailing laws and regulations;
5. An advocate shall be entitled to have the confidentiality of his relationship with a client respected, including a prohibition on the seizure or inspection of case files and documents, and on the electronic monitoring of communication devices used by an advocate.

Furthermore, the Advocates Law states a number of obligations upon advocates, namely:

1. An advocate in the performance of their professional duties shall be prohibited from differentiating between clients based on gender, religion, political affiliation, ethnicity, race, or social and cultural background;
2. An advocate shall be required to maintain confidentiality of all matters that come to his/her knowledge or which s/he is informed by a client based on their professional relationship, unless otherwise stated by the law.
3. An advocate shall be prohibited from holding any other position that could give rise to a conflict of interest with the duties and dignity of his profession.
4. An advocate shall be prohibited from holding any other position that requires such services that could prejudice the Advocates’ Profession, or reduce the advocate’s independence and freedom in their ability to perform their duties and responsibilities.
5. Should an advocate accept appointment as a state official, the advocate shall not be permitted to practice as an advocate during the term of appointment.

Appointment and Disbarring of Advocates

According to the Advocates Law only those that have successfully graduated from an institute of higher learning specializing in law may be appointed as advocates once they have completed a professional education program approved by the Bar Association. Advocates may be dismissed for breaches of the Advocates Law or the Bar Association’s Code of Ethics both of which enumerate a number of reasons that would lead to an advocate being disbarred.

NOTARY

Notaries in civil law countries have at least three principal functions, namely; drafting important legal instruments, authenticating and certifying documents that will serve a particular evidentiary function, and they act as an office of public record. Therefore, to maintain the evidentiary value of the documents produced a Notary is required to retain an original copy of every document that they produce, authenticate, or certify and upon request or pursuant to any prevailing laws and regulations furnish authenticated copies to the requesting party. An authenticated copy is deemed to have the same evidentiary value as the original document at law.

Until very recently the legal framework regulating notaries remained an antiquated set of Dutch colonial regulations; namely, Staatsblad 1860 No. 3 (“Reglement op Het Notaris Ambt in Indonesie”) and published in the State Gazette (Lembaran Negara), No. 101:2 of 1945. This was complemented by the Ordinance of 16 September 1931 on Notary Honorariums, Law No. 33 of 1954 on Deputy and Substitute Notaries (Wakil Notaris and Wakil Notaris Sementara) published in State Gazette (Lembaran Negara) No. 101 of 1954, and Government Regulation No. 11 of 1949 on Notarial Oaths (Sumpah / Janji Jabatan Notaris). However, the recent enactment of Law No. XX on Notaries was a result of the perceived need to modernize the law on notaries and to ensure that the prevailing provisions of the law reflected the prevailing social conditions within modern Indonesia.

Essentially, notaries do not have any competition for their services as the current status of the law states that notaries are the only public entities that may perform these functions of producing, authenticating, or certifying documents to provide them the necessary force of law to make them binding upon the parties to them.

Furthermore, the prevailing laws and regulations in a number of areas strengthens the monopoly that notaries have in providing these specialized services to the community including laws and regulations in Family Law, Company Law, Corporate Documents Law, Archive Law, Agrarian Law, and Capital Market Law, among others. However, the role of a notary was much more expansive than just producing, authenticating or certifying documents, as notaries played a significant role in inheritance and real property transactions, an impartial witness to commercial activities such as at the draw of a lottery or some other prize giving competition. Notaries have historically played an important role in financial agreements, underwriting agreements, the authentication of Articles of Incorporation and Association, constitutional documents for Political Parties, legalizing documents and witness’ for the converting of documents (Archival Law and Document Corporation Law), and many other activities.

Finally, the duties and functions of Indonesian notaries are more than just the clerical and administrative functions associated with the creation of legal documents but notaries provide an important contribution across a broad spectrum of social activities as noted above ensuring that notaries are an integral party of the Indonesian legal profession.

LEGAL EDUCATION

Law and legal education has occurred as a matter of necessity throughout the history of humanity and not always in a structured or regular format. In this regard Indonesia is no different from any other country with respect to the development of legal education and as such has and continues to encounter many of the issues encountered by others. Nevertheless, Indonesia can trace its modern legal educational institutions and form to the Dutch and the colonization of Indonesia by the Netherlands through to a period after the conclusion of World War II and the eventual full independence in 1949. However, it is important to note that even to this day much of the Indonesian legal system still maintains remnants of Dutch colonial laws and regulations. Despite the more than 300 years of colonization by the Dutch it was not until 1909 that the Dutch colonial government considered establishing a secondary school for law or “rechtsschool” to train the native population in legal administrative practice to work as clerks in the burgeoning district court system. Initially the rechtsschool was not an institute of higher education. As the demands from the indigenous population increased along with the need to distinguish the quality of education provided the Dutch upgraded the rechtsschool into a rechtshogeschool or an institute of higher education for law studies in 1924. The school was established in the colony’s capital, Batavia. In the post-World War II period where Indonesia gained its independence from the Dutch the rechtshogeschool became the faculty of Law at the University of Indonesia.

In the period after World War II the demand for legal education has increased exponentially and there are now more than two hundred accredited law faculties stretching the length and breadth of Indonesia. The potential profits that education can generate for private educators and companies providing private education services has meant that there has been significant growth in the provision of private education including legal education. This has meant that two parallel legal education systems have developed; namely, State or public education based faculties of law and privately-owned institutes of higher education with a faculty of law.

Of the more than two hundred accredited law faculties throughout the country, a mere twenty seven of these are stateowned or approximately 10%. The majority of these state-owned law faculties offer undergraduate programs that allow students to graduate with a Bachelor of Laws or LLB (“Sarjana Hukum” or “SH”). Only a small number of these state-owned institutions have sufficient resources available to them to run post-graduate law programs at the Masters level and even fewer still at the Doctorate level. Legal education in Indonesia is undergraduate in nature and students are not required to have a first degree before enrolling in a legal education program. This is similar to the systems offered in Europe and Australia. It is important to note that one of the primary differences in the Indonesian legal education system from that of Europe, Australia, and the USA is that the system does not currently cater for a professional skills component with in the program. An Indonesian law degree in this regard is considered to be general in nature preparing students for further academic study or employment in any other number of professions outside of law rather than necessarily equipping them for the professional practice of law.

The Indonesia legal system is based on Minister of Education Decision No. 17 of 1993 (the “Decision”) which stipulates the basic framework of legal education at university level law schools that is to be universally taught throughout the country. The purpose of the Decision is not only an attempt to standardize the study of law but also an attempt to reduce the disparity between the burgeoning numbers of law faculties offering a legal education. The basic premise of the law curriculum is to produce graduates with legal skills (“kemahiran hukum”) that are ready for immediate employment in the law profession. The concept of ‘ready for employment’ does not distinguish between public and private practice and the Decision can reasonably be construed as preparing law graduates with generic legal skills that are applicable to both the public and private practice of law. An initial and persistent criticism of the standardized law curriculum was and is that it is in fact too academic and too generic in nature to adequately prepare graduates for anything but further academic study. It is important to distinguish the national law curriculum from other regulations that govern the provision of continuing legal education and professional skills such as advocacy training. The overall responsibility for setting the law curriculum resides with the Consortium for Legal Science (the “CLS”) within the Ministry of Education.

The current CLS curriculum is divided into two main areas; namely, compulsory subjects (the national curriculum) and elective subjects (the local curriculum). The national curriculum is inflexible and contains a list of law subjects that must be taught by each accredited faculty of law. These national curriculum subjects in essence do not differ substantially from law faculties located in any other part of the world and include such subjects as ‘Introduction to Law’, ‘The Indonesian Legal System’, ‘Civil Law and Procedure’, ‘Criminal Law and Procedure’, ‘Administrative Law’, and ‘Public International Law’, among others. The local curriculum, in contrast, is determined by each individual faculty and as such reflects the strengths and weaknesses of the staff on each individual faculty. Although this system is not resistant to change, any changes that have occurred have been labored and slow. However, it is interesting to note that increasing emphasis is being placed on the provision of professional legal skills at the under-graduate level although a comprehensive curriculum of professional skills is still not readily available to be taught nor would most law faculties have the necessary resources, financial or human, to support such an initiative.

One of the major criticisms of the current national law curriculum is that it does not provide graduates with the necessary analytical skills that are required to adequately apply the generic legal skills that their law school educations have provided them. However, there is perhaps a more fundamental criticism that must first be leveled to understand the plight of legal education in Indonesia; namely, the ad hoc application of the national legal curriculum and the disparity in resources, human and others, between law faculties throughout the country. Although the universal application of the national law curriculum may alleviate some of the disparity issues between law faculties in Jakarta and the regions, the reality remains that many of the leaders in legal education are concentrated in Jakarta, which leaves only the most committed of legal educators in the regions outside of Jakarta.

Finally, legal education is the most critical component of the development of a sound legal profession in Indonesia, as without it the enforcement of the law by highly-qualified and skilled legal practitioners is not a reality but an unsustainable fantasy. The necessary building blocks for a comprehensive legal education sector are already in place but this infrastructure and the ongoing commitment to the development of legal education needs to be clarified and regulated to ensure that all objectives are successfully met. 

ALTERNATIVE DISPUTE RESOLUTION

ARBITRATION

The History

Arbitration has existed in Indonesia since the time of the Dutch colonial government. The Dutch brought arbitration to Indonesia along with other elements of their national legal system in an attempt to govern its new colony. The implementation of this ‘foreign’ legal system ultimately resulted in a dual legal system; namely, laws and regulations for Europeans and laws and regulations for non-Europeans. The primary premise for this development of the dual system was to ensure that, at least the Europeans and the Asians were segregated into different legal groups and subject to different laws.

One of the laws was the Het Indonesische Reglement (HIR). The HIR only applied to indigenous Indonesians living in Java and Madura. Complimenting the HIR was the Burgelijke Reglement op de Rechtsvordering (RV) which applied exclusively to Europeans. Consequently, many of these segregating legal features were incorporated into the arbitration procedures as well as a number of laws and regulations. For instance, the RV covers regulations regarding arbitration from section 615 to section 651 and section 377 of the HIR also contains an arbitration clause similar to section 705 of the Rechtsreglemen Buitengewesten (RBG), which applied only to Indonesians resident outside of Java and Madura.

This dualistic system was abolished at the same time as the European Court in Indonesia was terminated. The abolition is usually marked as when the laws were replaced by the HIR as the sole source of regulation. Therefore, the HIR assumed a more dominant role in the settlement of disputes through arbitration, but this transition was not without its problems. The HIR was promulgated with the intent of resolving simple disputes and matters and it was quickly evident that the simplicity envisaged in the HIR was not in accord with the increasing complex disputes arising in commercial matters. To overcome the deficiencies of the HIR in this respect the RV continued to be used to resolve more complex issues of business and commerce. The use of the RV persists in that many of the provisions of the RV are still in force to this present day.

After independence was gained on 17 August 1945, the arbitration system continued to be used, and arbitration principles were reinforced, albeit indirectly, with the enactment of Law No. 14 of 1970 on Judicial Powers. The Judicial Powers law did not expressly regulate arbitration as a process of alternative dispute resolution (ADR) but the Elucidation of Section 3(1) did stipulate that non-court dispute mechanisms were acceptable and permissible. The Elucidation has traditionally been interpreted as an endorsement of arbitration as a means to achieve a mutually acceptable resolution to a dispute without the need to resort to litigation.

In the post independence period another law that served to strengthen the use of arbitration was Law No. 1 of 1950 on the Supreme Court, particularly Sections 15 and 108 which acknowledged that the Supreme Court was an appellate institution for the purposes of arbitration. This law encouraged people to utilize arbitration as a means to resolve commercial disputes. 

The most recent attempt to codify all the disparate arbitration laws and regulations into one law was Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (the “Arbitration Law”). This is the primary source of law for the arbitration system in Indonesia.

In addition to the Arbitration Law disputes in Indonesia use a variety of traditional and customary dispute resolution mechanisms. Although these adat dispute resolution mechanisms are available it is important to note that they do not maintain uniform application and are relevant only to the local communities that subscribe to the relevant customary and traditional practices. Just about every adat community in Indonesia recognizes some form of traditional dispute resolution mechanism. Examples of these mechanisms can be found in cultures of the Tuha Puet people of Aceh and the Kerapatan Adat Negeri people of Minangkabau. These traditional dispute resolution mechanisms have been in force for a considerably longer period than the modern forms of arbitration that most people are familiar with. The primary method for achieving resolution resides in the musyawarah mufakat system. Essentially, the system relies on discussions between the affected parties with a review to reaching a mutually acceptable consensus on suitable punishment or compensation. It is believed that this system leads to win-win solutions for all the relevant parties as there is no resolution to the dispute until both parties agree on the terms and conditions of any settlement.

The win-win scenario is a primary motivating force in the development of court based arbitration systems. Traditionally, court based arbitration provides a win-lose result where the parties cannot reach some form of mutually acceptable resolution before resorting to litigation. In a win-lose scenario it is likely that the losing party will feel aggrieved at their loss and appeal to the next level of the judicial hierarchy. Although this is the right of the party it often results in considerable expense and is time consuming where extended delays can have serious negative repercussions on the success of a business. To avoid excessive costs and time delays most business are prepared to entertain ADR mechanisms as a means to substantially reduce costs and time in achieving mutually acceptable dispute resolution outcomes.

This need is recognized in the Arbitration Law and any settlement reached through an ADR mechanism is given the full force of the law and as such is legally binding and enforceable against the relevant parties to the agreement.

Arbitration and Alternative Dispute Resolution

The Arbitration Law is a compilation of all the existing and disparate arbitration laws and regulations in force at the time of its enactment. The intent in codifying all of these disparate regulatory frameworks into one definitive arbitration law was to provide legal certainty. This legal certainty was not only for the benefit of foreign investors but also for local investors who also regularly fell foul of the prevailing laws and regulations. The legal protection of largescale investments has always been a significant impediment to continued investment as the risks quite often outweighed the benefits as even where the law may have been sufficiently clear to determine the matter the resulting enforcement mechanisms were not as certain.

Arbitration according to the Arbitration Law is defined as a mechanism of dispute resolution commenced prior to pursuit of a court based litigation process. The most notable feature of arbitration is the agreement between the parties to pursue arbitration as the foundation fro resolving their outstanding dispute. Any agreement to pursue arbitration should be in the written form and signed by all parties to the agreement. The Arbitration Law stipulates that it is only commercial disputes that are to be resolved through this mechanism however any other substantive issues that are to be resolved through arbitration are to be agreed by the parties. In the event the parties elect to pursue arbitration they waive their right to litigate this matter through the General Court system until such time the parties agree that they cannot resolve the dispute through arbitration.

The procedures and methods of arbitration are set out in the Arbitration Law as applicable guidelines to be followed by arbitration bodies and any other ad-hoc institution engaged in arbitration matters. The guidelines cover substantive procedural matters such as closed examination, language, time limits, election between national and international arbitration, administrative procedures, witnesses, and evidence, among others. A closed examination is simply a method of protecting the identity of the witness providing testimony as well as the protection of any confidential business information such as trade secrets which may be the source of the dispute. The guidelines are also specific on the appointment of arbiters, particularly that bith parties must agree on the appointment. In the event one party does not agree to the arbiter they may veto the appointment. Nevertheless, it is important that a party cannot utilize a veto to purposefully frustrate the arbitration process.

The time limits are clearly stipulated in the Arbitration Law and arbiters are required to comply with these time limitations to ensure that the parties resolve the dispute in a timely fashion or seek a settlement through some other ADR or court mechanism. The time limit stipulates that an arbiter must examine the case within 180 days to ensure that not only is the process efficient and effective but also to facilitate the pursuit of justice. The Arbitration Law allows the Parties to determine whether any dispute that arises is subject to national or international arbitration institutions to resolve the dispute. However, once an arbitration system and institution is elected and agreed by the parties then they are bound by the prevailing rules and regulations of the agreed institution. The Law also permits arbiters to call witnesses and experts to provide testimony in pursuit of a mutually acceptable settlement agreement.

The responses to arbiter questions will normally be written testimony however where deemed necessary the arbiter may choose to hear this testimony orally. Once the arbiter is satisfied that they have heard and received all the necessary evidence to issue a decision then the arbiter may issue that decision. Any decision issued by the arbiter is final and binding and as such no appeal may be made to any court for judicial review of the decision of the arbiter. The decision must be registered at the District Court and if one of or both parties demand an execution order then the Chief of the District Court will issue the requisite order. Despite the final and binding nature of the arbiter’s decision in the event that one of the parties is able to submit and prove that false testimony or forged documents were entered into evidence then it is possible for the decision to be annulled.

A request for annulment must be submitted to the Chief of the District Court within 30 days of the decision being registered with the District Court Bailiff. An annulment can take one of two forms; namely, a full annulment of the decision or a partial annulment of only the affected provisions and this decision must be handed down by the District Court within 30 days of the request being submitted. Once the arbiter’s decision has entered the General Court system then it is possible to appeal an adverse determination of the District Court with respect to the arbiter’s decision. However, it is the District Court decision that is being appealed and not the decision of the arbiter and appellate courts strictly interpret the law to ensure that only the affected provisions of the original request are the subject of the appeal. Any appeal must be determined by the relevant appellate court within 30 days of the appeal being accepted by the court.

In the event that parties elect to have the dispute resolved through international arbitration, then the parties must accept that it is not possible to immediately enforce a foreign judgment or arbitral award. Once an award has been made the party seeking to enforce that award in Indonesia must first register the foreign judgment at 

the District Court of Jakarta to secure the necessary recognition of the award and then to apply for the relevant execution order. The Arbitration Law stipulates that the District Court of Central Jakarta may only issue a recognition order and the subsequent execution order is to be issued by the Supreme Court only where the country issuing the original foreign judgment is a party to either a bilateral or multilateral agreement providing reciprocal recognition of judgments. Even in the event that the relevant country is a party to an applicable bilateral or multilateral agreement the District Court will only issue the necessary recognition order if the foreign judgment is related to commercial business activities and the enforcement of any such judgment will not disrupt public order or offend public morals. The Supreme Court will only issue an execution order once the recognition order is registered at the court by the Bailiff. It is important to note that there is no mechanism for appeal with respect to the issue of foreign awards within Indonesia.

A foreign award seeking recognition must be submitted to the District Court in its original form with a certified translation in Indonesian, a copy of the original agreement that formed the basis of the dispute including a certified translation in Indonesian, as well as a statement letter from the Indonesian mission in the jurisdiction where the judgment was issued. In the event that the District Court refuses to recognize the foreign judgment then the holder of the foreign judgment may appeal to the Supreme Court. This appeal would be in the form of cassation and the general rules regulating cassation applications apply. The cassation application must be lodged within 90 days of the District Court’s decision on the matter.

Arbitration Institution

Arbitration in Indonesia is possible within one of the four recognized arbitration institutions; namely, Badan Arbitrase National Indonesia (BANI or the Indonesian National Arbitration Board), Badan Arbitrase Muamalat Indonesia (BAMUI or the Indonesian Muamalat Arbitration Board), and Pusat Perselisihan Bisnis Indonesia (P3BI or the Indonesian Business Dispute Resolution Center). BANI was founded in December 1977 and was the first arbitration institution in the country. Badan Arbitrase Muamalat Indonesia (BAMUI) was established in October 1993 with a specific mandate to resolve matters pertaining to commercial activities based on the principles of Islam. Finally, the Pusat Perselisihan Bisnis Indonesia (P3BI) was established in February 1996. A recent development has been the establishment of the Badan Arbitrase Pasar Modal Indonesia (BAPMI or the Indonesian Capital Market Arbitration Board). The establishment of BAPMI has coincided with the demand for a specific arbitration authority to resolve complex and specific securities related disputes. The establishment of BAPMI is recognition of the very technical and complex disputes that arise as a result of activities on the capital market that would exceed the skills and resources of the other recognized arbitration boards.

Each arbitration board or authority has its own procedural rules. An example is BANI, BANI requires that the parties to the dispute agree to have their dispute resolved under the auspices of BANI. BANI further requires the parties to act in good faith and have a commitment to the amicable resolution of the dispute.

In addition to the recognized arbitration boards and authorities noted above there are also a number of non-court based dispute resolution institutions. These institutions are normally integrated parts of government Departments and are restricted to subject matter directly related to the services they provide. Several prominent examples include the Panitia Penyelesaian Perselisihan Perburuhan Pusat (P4P or the Central Committee for the Settlement of Labor Disputes) and the Panitia Penyelesaian Perselisihan Perburuhan Daerah (P4D or the Regional Committee for the Settlement of Labor Disputes) both of which are part of the Department of Labor and Transmigration designed specifically to resolve labor disputes. A further example is the Majelis Pertimbangan Pajak (MPP or the Tax Review Authority) which is tasked with resolving all tax related matters and complaints.

Other examples include the Badan Pertimbangan Kepegawaian (BPK or Public Servant Review Board), the Mahkamah Pelayaran or the Maritime Court, and the Consumer Dispute Resolution Body (Badan Penyelesaian Sengketa Konsumen/ “BPSK”) as mandated in the Consumer Protection Law.

MEDIATION and CONCILIATION

The Arbitration Law regulates not only arbitration but also other alternative methods of dispute settlement including those specifically stated in Chapter 2 of the Law. Interestingly the Arbitration Law itself does not specify the ADR mechanisms that may be utilized by parties in dispute however the Elucidations to the Law do state that mechanisms such as consultation, negotiation, mediation, conciliation or expert judgment may be used in an attempt to resolve a dispute. The mechanism noted above are not that far removed from traditional adat means of dispute resolution noted earlier, particularly the concept of the musyawarah mufakat.

In mediation and conciliation the parties are required to find solution for their disputes on their own. There is not usually a third independent or impartial party appointed to oversee the process. In the event a mediator is used it is important to note that the mediator’s role is simply to facilitate the discussion process and to assist the parties in reaching an agreement or resolution. The role of the mediator is not to adjudicate or resolve the dispute for the parties. This is distinct from the role of an arbiter appointed as part of an arbitration process. In arbitration, the arbiter is appointed by the parties to decide and make decisions about the dispute, and the result is potentially a win-lose solution. Nevertheless, some parties still prefer arbitration to adjudication as the parties still maintain some control of the process. Clearly, any control the parties have during mediation, conciliation, or arbitration is lost in the court based litigation process.

The Arbitration Law sets out the guidelines that are to be used in the ADR process from the commencement of an action to the issue of a mutually agreed settlement. The most essential element of the ADR process is that the parties participate in good faith. The initial step involves the parties coming together in a faceto-face meeting with a view to achieving settlement and a written agreement to the parties expressing the terms and conditions of the agreement concluded. There are no specific guidelines or rules on how the meeting should be conducted nevertheless the parties have only 14 days to reach a settlement. In the event the parties do not reach settlement in 14 days they may request the assistance of an independent and impartial third party to assist them through the process for a further 14 days.

In the event that the parties and the independent and impartial third party after a period of 28 days is unable to reach a mutually acceptable agreement, then the parties can seek to enter formal mediation or arbitration. Once a mediator is appointed the process should commence within 7 days and must be completed within 30 days of being commenced. Any decision is final and binding on the relevant parties once they have signed the documents indicating their respective agreement to the terms and conditions of the settlement. The settlement agreement reached between the parties is to be registered at the District Court within 30 days of agreement and any enforcement order will be issued within 30 days of registration of the settlement agreement. 

BUSINESS LAW

COMPANY LAW

Introduction

Since the implementation of the 25-year economic development-planning program, Indonesian economic growth can be attributed to an increase in participation of small and large business enterprises. Not only has there been an increase in assets and capital accumulation, enlistment of human resources, but also business resources (which from time to time create a business cycle). One of the business entities that dominate, in the Indonesian business sector, is the Limited Liability Company. As a created legal entity, it is necessary for an Indonesian Limited Liability Company to be supported not only by its own organs, but also by clear and concise regulations in order to maximize and utilize its organizational and managerial ability effectively and efficiently. Hence, strong and stable business entities are very important to enhance national development. It is therefore necessary to have a brief overview of business organizations within the framework of Indonesian Company Law. 

Types of Business Organizations

Indonesia’s commercial sector recognizes three principal categories of business organizations: sole proprietorship, partnership (general or limited) and company. Sole proprietorship is generally used in the informal sector, since its nature and activities are of the informal sector. For example, it does not require formal registration to Indonesian authorities.

There are three types of partnership: persekutuan perdata (maatschap or private association), persekutuan firma (venootschap onder firma or firma, “FA”) and persekutuan komanditer (commanditaire vennootschap, “CV”). The Indonesian Civil Code governs the first type of partnership whereas the rest are governed by both the Indonesian Civil Code and the Indonesian Commercial Code. It is not easy to determine absolute equivalents between these partnerships and partnerships under common law tradition; however, the maatschap and firma closely resemble the concept of a general partnership under the common law system whereas the commanditaire venootschap resembles limited partnership under common law.

The last type of business organization is under the Indonesian Company Law takes the form of Perseroan Terbatas (“PT”). It is similar to the incorporated limited liability company under the common law system. Historically, this was referred to as the Dutch corporate model known as the naamloze venootschap (“NV”). However, since the enactment of the new Indonesian Company Law, which repealed the provisions governing the company, many companies started to use the abbreviation “PT”. There was also another form of an Indonesian incorporated company, which was intended to be used by indigenous Indonesians, so-called “the Maskapai Andil Indonesia” (Indonesische Maatschappij of Aandelen or IMA). It was governed by separate regulations, i.e. Ordinances 886. However, the promulgation of the new Indonesian company law in 1995 abolished the dualism of the Indonesian company structure - PT under the Commercial Code and PT under IMA, and brought the Indonesian company structure into one common corporate regime: the (New) Indonesian Company Law.

Until now, there are three types of companies in Indonesia. The most common is “PT Biasa” or local companies. Even though it only has Indonesian shareholders, directors and commissioners, it is still subject to regulation by the UUPT. It is required to have a minimal capital, as stated in the UUPT. Although Government Regulation No.20 of 1994 (“PP20”) states that foreigners may acquire shares in this type of company, in practice, it is closed to foreign investment and foreign citizens are not allowed to hold positions of director or commissioner, unless the field of business is not listed on a negative list, in which a specific written approval from the relevant Minister is given. The second type is a domestic investment company referred to as “PT PMDN” (PMDN Company), which has certain regulatory advantages and tax concessions compared to a PT Biasa. Originally, a PT PMDN company was reserved to Indonesian shareholders, but following the enactment of PP20, the Decree of Chairman of BKPM (Investment Coordinating Board) 15/SK/1994 (“SK15”) and the current practice of BKPM, it became possible for foreign parties to acquire up to 95% of the shares in the company. Such a company with a foreign shareholder may have foreign directors and/or commissioners. To obtain status as a PMDN company, the company has to have BKPM approval for the line of business it is operating as and is required to have a minimum investment equivalent to the exchange rate as stated in BKPM’s letter of approval (specifically in rupiah) set by BKPM. Finally, there is the foreign investment company incorporated in the Foreign Investment Law of 1967 Law No. 1 of 1967 also known as the “PT PMA” (PMA Company). It may have foreigners as its shareholders so long as it has at least two shareholders, but it has an obligation to invest an unspecific percentage to Indonesia within 15 years. It may have foreigners as director and commissioner, enjoy certain advantages and protections against expropriation of the investment. However, it has an obligation to report its activities regularly to BKPM. BKPM will approve the minimum investment plan of this company that is specified in both US dollars and rupiah.

The (New) Company Law Framework 

Ever since Indonesia’s independence, business sectors and mainly business enterprises have played an important role in fostering Indonesia’s economic growth. There are various regulations that govern Indonesian business organizations. Presently, the laws of Indonesian business organizations are primarily governed by the Law on Limited Liability Company, Law No.1 of 1995 (Undang-Undang tentang Perseroan Terbatas or “UUPT”) which is considered modern Indonesian company law (referred also as the New Indonesian Company Law), the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata or Burgelijke Wetboek), and the Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang or Wetboek van Koophandel). The last two codes were first promulgated during the Dutch colonial rule.

The UUPT, consist of 129 articles and was enacted on March 7, 1995 and came into effect a year later. Prior to the enactment of UUPT the limited liability company was governed by only twenty-one articles in the Indonesian Commercial Code. The UUPT symbolizes the first major revision of the Indonesian company law since the commercial code. The promulgation of the law was a response to the rapid economic progress that needed provisions to complement international practices and the modern commercial sector. This paper will focus on the UUPT since it serves as the basis of Indonesian corporate structures. 

Separate Legal Entity

PT, as an Indonesian company, is a legal person who has a legal identity separate from its shareholders. Thus, shareholders are not personally liable for the obligations of the company. The shareholders have limited liability to the extent that their liability for the acts of the company can be limited to their capital contribution. Nevertheless, there are some limited possibilities to pierce this corporate veil, for instances in the event that the relevant shareholders either directly or indirectly with bad faith take advantage of the company solely for their personal interest or the relevant shareholders either directly or indirectly unlawfully use company’s asset causing the company’s assets to be inadequate to settle company’s debts.

Incorporation

There are four steps for incorporating a PT. First, execute the deed of establishment, which also includes the company’s article of association before a notary in the form of a notarial deed. Second, obtain a formal approval over the deed from the Ministry of Law and Regulation. Upon approval, the deed has to be registered in the Company Registry that is maintained by the Ministry of Industry and Trade. Lastly, publish the deed of establishment in the State Gazette. It needs to be pointed out that prior to the registration and publication processes, the liability of a company can be put in the hands of its directors. In other words, in addition to the liability of the company, a personal liability of the director’s may arise if the new company fails to register and publish the approved deed.

Another requirement in establishing a PT is to have at least two persons as the founders or shareholders. The eligible person can be an individual or a legal entity. With an exception for PT BUMN (State-Owned Company) can be established by a single entity, the government. The requirement to have at least two shareholders still continues. If a PT has only one shareholder and it does not offer shares to other shareholders within six months, then the existing shareholder is personally liable for the agreements and losses of the company. The requirement to have at least two shareholders is based on contractual theory, a conception that a PT is a product of contract, thus it requires two or more shareholders at all times.

Share Capital and Voting Rights

The UUPT requires a company to have a minimum authorized capital of 20 million rupiah. Issued capital must be at least 25% of the authorized capital and by the time of approval of the Articles of Association of the new company by the Minister of Law and Regulation, all the issued capital must be fully paid up. However, in the case of a PMA company and a PMDN company, usually BKPM requires a higher minimum capital level of investment.

A company may issue registered and bearer shares and may also issue non-voting shares. Furthermore, it can issue redeemable and convertible shares, cumulative and non-cumulative shares, and preference shares. However, a company must have at least one class of ordinary shares (“saham biasa”) with voting rights. Payment for shares can be made in cash or in other forms (“in kind”), but payment in kind, such as of real property in consideration for the issue of shares, requires an independent expert valuation. Under the UUPT, a company may not issue shares to itself or to its subsidiary. Subsidiary is defined as a company in which the parent company owns more than 50% of its shares or the parent company controls more than 50% of the voting rights in a General Meeting of Shareholder (“GMS”), and/or the parent company influences management control such as the appointment and dismissal of director and commissioner. However, under special circumstances, it can buy back the issued shares and hold them as ‘treasury shares’ that the company can sell at a later date. Such shares cannot be counted to form a quorum nor can the voting rights be attached to the shares being exercised.

Directors, Commissioners & Shareholders Meeting

Indonesian corporate structure is different from the common law system, since it adopts a two-tier management structure instead of a single-tier management. The management structure comprises of Board of Directors (“BOD- Direksi”) and Board of Commisioners (“BOC-Dewan Komisaris”). Senior officers are responsible for the company’s actual management in the operational sense is the Direksi. Even though there is one director, there is usually more than one. The basic functions of the Direksi are to manage and represent the company, and not the shareholders. The second tier is Komisaris (“Commisioner”), which has the role of supervising and advising the Direksi, and representing the interests of the company and not merely the interest of the shareholders. The requirement of a company to have a BOC is a significant alteration from the old provision (the Code). To date, all public companies, companies in the business of mobilizing funds from the public or companies that issue debt instruments must have at least two directors and two commissioners. The UUPT also distinguishes between the collegial nature of the BOD and the noncollegial nature of the BOC. Where a company has more than one commissioner, the BOC constitutes a council pursuant to the Elucidation that no individual commissioner can represent the company if there is more than one commissioner. In contrast, when a company has more than one director, each director has the individual authority to represent the company unless the company’s articles of association states otherwise. Although the primary responsibility of managing the company rests on the directors, in some circumstances, commissioners can exert certain managerial powers -provided by the company’s articles of association or the GMS- for instance managing the company for a specific time period. Both director and commissioner bear personal liability for any fault or negligence committed in discharging his/her task. Although the UUPT does not define “fault” or “negligence”, it does however acknowledge the concepts of fiduciary duties. In case of breaching any fiduciary duties, shareholders who control at least ten percent of the issued shares with valid voting rights may, in the name of the company, bring a cause of action against the director or commissioner for the loss suffered by the company. Since the shareholder initiates the legal action in the name of the company, it can be considered derivative action.

Pursuant to the UUPT, the shareholders of an Indonesian company are acting via GMS. The GMS has various rights, some of which cannot be waived under any circumstances i.e. the right to approve amendments of the company’s Articles of Association and to approve a dissolution or winding up of the company, while the rest may be modified in the company’s Articles of Association. There are two types of GMS: annual and extraordinary meetings. An annual GMS is held within the last six months of the company’s fiscal year. The GMS convenes in order to approve the annual report, including its annual accounts that must comply with Indonesian Financial Accounting Standards and the signatures of the directors and commissioners required for the annual accounts. The extraordinary GMS can be convened at any time that the company deems necessary for the purposes stipulated in the UUPT or Articles of Association. In other word, a company shall undertake an extraordinary GMS for the purposes other than approving the company’s annual account, such as: merges, acquisitions or appointment of a new Direksi. Commissioner, Director or a party that controls at least 10% of the issued shares may request the meeting.

Minority Shareholders protection

The UUPT grants minority shareholder a great deal of protections as all shareholders have pre-emptive rights – a right allowing them to maintain or increase their proportionate shares in the company before the company offers the shares to other parties. Another right comes from the provision that entitles the shareholder to control less than 10% of the issued shares with valid voting rights to request the State Court to commence an investigation panel with respect to the company in the event that the directors or commissioners are suspected of having committed an illegal act that causes loss to the shareholders, third parties or the company itself.

Mergers & Acquisitions

Although the UUPT provides only eight articles governing merges and acquisitions, it is still a remarkable change in Indonesian corporate context because there have been no specific regulations on such business activities since Indonesia’s independence. It is expected that a more detailed provision will be issued subsequently. It is important to note that even though the UUPT introduces three terms: merge, amalgamation and acquisition, it is actually governed only by a statutory merge and shares of acquisition. There are four types of merges: shares, assets, contractual and statutory merge; whereas in acquisition there are asset and shares acquisition.

The term merger (“penggabungan”) refers to a company that becomes part of another existing company. While amalgamation (“peleburan”) refers to a transaction in which two companies dissolve in order to form a new company. The difference between a merge and an amalgamation is in a merge a company dissolves another, whereas in an amalgamation both companies involved dissolve in order to create a new company. Acquisition (“pengambilalihan”) refers to a company or individual taking over a company through a purchase of the latter’s shares. In this process, no company dissolves. A company involved in a merger, amalgamation or acquisition in general has to take two steps. First, the directors of the respective company prepare a proposal. The proposal must then be approved by the extraordinary GMS, which must satisfy the quorum and approval requirements. Shareholders representing no less than 75% of the issued shares with voting rights must attend the meeting, and approval must be given by 75% of those attending shareholders. Second, submit an approved proposal to the Minister of Law and Regulation for the purpose of reporting or approving the proposal. The UUPT also requires merges, amalgamations, and acquisitions to take into account the interests of the minority shareholders and employees of the companies as well as the interests of the public and of competition. The right of the minority shareholders to sell their shares for an equitable price should also be protected. With respect to competition, the Elucidation states that in the even of undertaking merges, amalgamations and acquisitions, a company should prevent the rise of a monopoly which goes against public interest.

Dissolution

The UUPT recognizes three ways a company can dissolve: decision made during a GMS meeting, upon the expiration of the period of existence specified in its articles of association and by order of court. The court order to wind up the company (judicial investigation) can also be made by request from the prosecutor for representing the public’s interest or a single shareholder holding not less than 10% of the voting rights. Once the company is wound-up, it must appoint a liquidator to liquidate the company. The director will act as the liquidator in the event that no liquidator has been appointed.

Proposed Revisions

Revisions are aimed at unclear and ambiguous provisions such as:

• the filling systems (registration) articles of association and amendments to the articles of association at the Ministry of Law and Regulation and the Ministry of Industry and Trade, should be simplified because it is complicated, expensive and time consuming. Even though the filling system has been computerized since 2004, however, it is still ineffective.
• the articles of association should specify only the amount of authorized capital not the amount of paid-up capital or issued capital
• the issuance of a share without nominal value should be permitted
• the meaning of ‘substantial part’ of a company’s assets should be clarified
• the meaning of acquisition should be made clearly in regards to terms such as: changing control, etc.

Conclusion

The promulgation of the UUPT, at that time, reflects the political will of the Indonesian government to reform the corporate legal framework to be in sync with modern commercial activity, thus generating greater legal certainty in the Indonesian corporate sector. Even though some parts of the UUPT are merely codified, due to existing practice or government policy, problems are still encountered. The enactment of the New Company Law marks a major step in the development of the Indonesian Company Law framework. The new provisions in the UUPT that govern merges and acquisitions, duties and liabilities of directors and commissioners, and the rights of minority shareholders raise the corporate governance issues in Indonesia. At last, the UUPT can be considered a unique legislation product because it combines both civil and common law concepts. On the one hand, it preserves civil law concepts, such as the two-tier management structure and the company (judicial) investigation, while on the other hand it also adopts common law traditions, such as provisions that deal with the duties of directors and commissioners. Hopefully, the proposed revisions of this UUPT will create a legal certainty for the future of Indonesian corporate law.

CONTRACT LAW

Introduction

The Indonesian commercial legal system is, basically, derived from the Dutch Civil Law traditions codified in the Indonesian Civil Code (Burgelijke Wetboek or Kitab UndangUndang Hukum Perdata) and the Indonesian Commercial Code (Wetboek van Koophandel or Kitab Undang-Undang Hukum Dagang). The first code, however, serves as the basic legislation governing Indonesian contract law. Contract, is actually a part of what the Indonesian legal system recognizes as the law of obligation (hukum perikatan or verbintenissen), and is governed in Book III of the Indonesian Civil Code (“ICC”). The law of obligation recognizes two sources of an obligation; namely, an obligation resulting from contract and an obligation resulting from statute. Pursuant to Article 1313 of the ICC, a contract or an agreement is defined as an act by which one or more individuals bind to one another. The term of “contract law” is then used to define an obligation that arises as a result of this contract and is referred to as a contractual obligation. Therefore, contract law constitutes one of the principal sources of obligations in Indonesian law.

There are several principles with respect to contract law that are important to understanding the operation of Indonesian contract law. First, the principle of freedom of contract – a principle that recognizes that each and every person has the right to enter into contract so long as it does not breach the prevailing laws and regulations, accepted decency and moral standards, and public policy. Second, the consensual principle – in essence a contract in itself implies a meeting of minds, and from the moment this meeting occurs a contract is formed. Thus, the consensual principle is a principle stating that a contract is considered to come into existence once the parties reach a mutual consensus. These two principles form the basis of Indonesian contract law. Other principles are contained in Book III of the ICC where Indonesian contract law is referred to as “an open system”. Generally, this has been interpreted to mean that the provisions contained in Book III are considered as an optional law, in which the parties are free to make use of or ignore those provisions. As optional law the parties are permitted to determine specific provisions regulating the contract into which they will enter including agreeing to provisions that are expressly contrary to the optional law contained in Book III. In the event that the parties opt for a standard contract and have not made any specific provisions in the contract to the contrary then the provisions of Book III apply – this is referred to as the “default rule”.

Elements of Contract

Not all contracts constitute valid and binding contracts. To establish a valid and binding contract, there are four conditions to be satisfied as follows:

Consent of the Parties

The consent of the parties to enter into a contract constitutes the consensual principle and serves as the basis of contract law. A contract is considered to have consent if approval by the parties is made without duress, mistake or fraud (misrepresentation). Duress involves an illegal mental threat including physical violence (but not an action that is permitted by law to bring as a lawsuit), blackmail and excessive influence over a person in a weakened mental state. Mistakes comprise of two types: concerning the identity of the subject matter of the contract and concerning the identity of the person that concluded the contract. Fraud is defined as a plain act performed by one party prior to the formation of a contract with the intention to deceive the other party and induce him to conclude the contract that he would not have concluded if he was to be aware of the deception. In other words, one party concludes the contract because of the deceitful act.

Nevertheless, a contract may be valid even though consent was obtained by duress, mistake, or fraud. In this case, the contract is considered to be a voidable contract, meaning that the contract can be made void but only at law and on the bringing of a successful cause of action by the injured party. The suit has to be filed within five years of the cessation of the duress or within five years of the discovery of the mistake or fraud.

Capacity of the Parties

The legal capacity of a party to conclude the contract serves as the second important requirement that must be satisfied before a contract can be considered valid. Generally, all persons are legally eligible to enter into contract. Exemption is made to the following persons: a minor (a person under 21 years old, unless married), a person under official custody, and a person prohibited by the relevant law to conclude a contract.

A contract concluded by the above persons is considered to be a voidable contract. It is possible that a contract of this nature can be annulled by the court on the request of the incompetent party that entered into the contract. The obligation of the other party, however, is unaffected by the incompetence unless or until the contract is declared void. The nullification of contract based upon the incompetence of the individual mentioned above, shall cause the assets and the parties to be returned to the state they were in prior to the entry into the contract, on the understanding, that anything granted or paid to the incompetent party, as a result of the contract, may only be reclaimed, to the extent that any such payment that is still in the hands of the incompetent party, or to the extent it appears that the settlement of payment has been beneficial to him, or that he has applied or extended the enjoyment to his use.

Definite/Specific Subject Matter

Third element of a binding contract is the specific subject matter. In general, anything that is tradable and determinable may become an object of a contract. A subject matter of a contract can be comprised of rights, services, or goods whether existing now or in the future. Under the ICC, only existing goods are tradable. Future trading is governed by a separate law. For instance, the sale of 10,000kg of jasmine tea leaves at harvest time in 2005 for USD 2/kg is considered sufficient to constitute a definite subject matter, but the sale of jasmine tea leaves for USD2/kg, does not constitute as a definite subject matter, and thus it is unacceptable.

An Admissible Cause

The last pre-requisite that must be satisfied for a valid contract to be created is an admissible cause. An admissible cause means that the purpose of a contract must have a lawful ‘causa’. A contract is considered to have a lawful causa or admissible cause if the object of the purpose of the contract breaches the existing laws and regulations, accepted decency and good moral standards, and public policy. For instance, a contract regarding the trafficking in humans would be considered to be an illegitimate contract as the purpose is contrary to the prevailing laws and regulations. Similarly, a contract for sexual-service would be contrary to the acceptable decency and moral standards and as such would be declared invalid.

A contract that does not satisfy the third and forth elements is considered to be null and void meaning that the law will hold that there is no valid and existing contract between the parties. A decision of this nature by a court requires that the court also issue an order that returns the parties to their respective original states prior to their entry into the voided contract.

Contract Formation

The Indonesian Civil Code does not recognize theories of contract formation in the same manner as that of common law systems, particularly as it does not define when parties to a contract consented to be bound. Well established doctrines, however, provide that contract is considered to exist and therefore bind the parties when they have reached agreement; namely, when one part’s offer is accepted by the other party. It is generally held that contract is formed the exact moment when this acceptance is received by the offeror. In other words, a contract is created at the moment a legitimate offer has been accepted. The offer and acceptance can be explicit or tacit. A written acceptance is effective upon receipt. It should be noted that a legitimate offer is irrevocable unless a power to revoke has been reserved.

Formalities

As a general rule, there is no formal requirement for a contract to be written or registered before it is considered to be binding on the relevant parties. However, there are some situations where a contract must be concluded formally – the contract must be in writing and executed by notarial deed. For example, every transaction that deals with land, intellectual property rights, or incorporation of a limited liability company, must all be in writing and registered in the relevant Registry Office. If a contract is to be used as evidence in a civil lawsuit, then the contract must have been entered into under seal and the applicable stamp duty paid.

Performance

A valid contract shall bind the parties who have entered into it and cannot be revoked unless by mutual agreement or pursuant to provisions included in the contract, or for valid legal reasons. This serves as what the Indonesian contract law knows as the pacta sunt servanda principle – a principle that states a contract binds only the parties entering into it. The parties, however, are not bound only by what the contract specifically provides, but also by the nature of the contract, by reasonableness, custom, and statute. In addition, a contract shall not be detrimental or benefit a third party. Some exceptions, however, are made to conclude a contract that benefits a third party, for example, in the event of insurance. In insurance, a third party becomes the beneficiary of the contract.

A contract must also be performed in good faith. In order to preserve the application of good faith, a civil case judge, who has the power to supervise the performance of a contract in accordance to the principles of reasonableness and justice, may depart, if necessary, in rendering his decision from the contract provisions.

All rights and duties arising out of a given contract pass to the heirs of a party in the event of his death, unless the contract clearly provides otherwise.

Breach of Contract (Default)

An obligor, a contracting party who has to perform an obligation in a contract, should perform his obligation at the time and in the manner agreed in the contract. Failure to do perform his obligation would constitute a breach of contract or default. Pursuant to the Indonesian contract law, a party is considered to be in breach of contract if any one of these four conditions apply; namely, total failure to perform the obligation, failure to perform the obligation in the time specified, failure to perform the obligation properly (contrary to the terms of the contract), and performs a prohibited action specified in the contract.

Indonesian contract law provides various remedies that could be exercised against the breaching party, such as; specific performance, damages or termination of the contract. Basically, the aggrieved party to a contract has the right to sue the breaching party for specific performance, if it is still possible or reasonable for the breaching party to fulfill its obligations under the contract, especially in relation to the sale of land. Damages usually comprise of all expenditure in relation to the performance of the contract – all expenses and costs actually incurred by the aggrieved party in reliance on the contract, loss – injury to the property of the creditor resulting from the default, and interest – lost profit. Provisions contained in Book III of the ICC do not provide clear measures for calculating monetary damages. It imposes limitations, however, on monetary compensation. The debtor is liable only for the costs, damage, and interest which have been foreseen or which should have been foreseen at the time of the formation of contract. Damages, however, are limited to the injuries which directly result from the breach. In the event that performance is to be in the form of payment of money, the ICC permits the court to render a decision on interest for late or non-payment with interest not to exceed 6% per year calculated from the date the petition was filed.

Termination of contract

Indonesian contract law recognizes ten ways of terminating a contract; namely, by performance, by certified tender, by novation, by compensation (set-off), by merger (confusion), by release, by destruction of the subject matter, by rescission, by occurrence of a canceling condition, and exceeding any statute of limitation.

Performance of a contract is the most common way of terminating a contract, which denotes with the word ‘payment’. Generally, only the party concerned makes the payment, however, it is also possible to have a third party do so. If the third party does this without taking the creditor’s place, then the contract is terminated, whereas if the third party steps into the shoes of the creditor, then it is known as subrogation.

Certified tender plus deposit may discharge the contract in the event the creditor refuses to accept payment. If the debtor wishes to make payment by offering money or movable goods (not immovable goods), but the creditor refuses, then such money or goods are to be deposited in the court at the responsibility of the creditor.

Novation occurs when the old contract is terminated and a new contract is born. It must be done explicitly and requires the consent of both parties.

Compensation occurs automatically if someone is simultaneously a creditor and debtor of another person and the contract concerns a sum of money or a certain and similar quantity of goods. Thus, no special procedure or intervention of a third party is required.

Merger is a termination process whereby the positions of debtor and creditor unite in one person. This may occur when, for example, the debtor marries the creditor or the debtor becomes the heir of the creditor.

Release is a situation in which the creditor releases the debtor from any obligation by conclusion of a new contract. The debtor has to accept the creditor’s offer to free him from the obligation. 

A contract concerning a delivery of goods is terminated under the following three situations: if the goods are destroyed, if the government issues a regulation prohibiting the sale of such goods, and if the goods are lost or become damaged in such a way as to be unrecognizable. In order to terminate the contract, the destruction of the goods must precede delivery and beyond the ability of the obligor to prevent.

Rescission occurs in the event that a contract concluded by an incompetent party is declared null or a contract in concluded because of duress, mistake, fraud or anything that violates the law, morals, and public order of the community, and is subsequently annulled.

Occurrence of a canceling condition occurs in a contract by which a certain event is stated to be a cause of terminating the contract. Therefore, if such event occurs, the contract is then automatically discharged.

Running of the statute of limitations occurs thirty years after each and every contract comes into effect. The aggrieved party has the power to exercise his right to file a legal claim within 30 years of the date that the relevant contract came into force. If within such time he does not institute any such action, then pursuant to the ICC, all rights are discharged.

Types of Contract

Indonesian contract law recognizes two basic types of contract – general contract and special contract. General contract consists of conditional contracts, temporal contracts, alternative contracts, contracts giving rise to joint and several liabilities, divisible and indivisible contracts, and contracts that contain a punishment clause. Special contract, on other hand, comprises of contracts of sale, contracts of hire-purchase, contracts of installment-purchase, contracts of lease, contracts of gift, contracts of agency and representation, contracts of a free-loan, pledges and chattel mortgages, and contracts of warranty.

Conclusion

Although Indonesian contract law is still governed by Book III of the Indonesian Civil Code inherited from the colonial period, people involved in the business sector including lawyers, advocates, judges, and the business community are relatively comfortable with the existing legislation. Therefore, the demand for reform in the Indonesian contract law sphere does not seem as high as in other areas of commercial law reform. Criticism was restricted to the implementation and enforcement of contract relating to the efficiency of the judiciary area. Serious reform to secure proper enforcement of commercial contracts is needed. Establishment of new specialized courts such as the commercial court or tax court is expected to provide greater legal certainty with respect to the enforcement of contract.

LAND LAW

Preface

The basic principles and provisions of the present land tenure structure in Indonesia can be found in the Basic Agrarian Law, Law No. 5 of 1960 (BAL), which came into effect on 24 September 1960. The nomenclature is a little misleading as the BAL does not only regulate agrarian matters it also regulates Indonesia’s vast natural resources including minerals, territorial waters, fish and other marine resources, oil and gas, space, and almost all other natural resources deemed critical to the ongoing 

national development of Indonesia. Nevertheless, the BAL is generally referred to as the Land Law.

According to the BAL, the pre-emptive and ultimate right is the right held by the State (Hak Bangsa). The underlying premise of this concept is that all of Indonesia’s land and natural resources are owned by the people and as such the government of Indonesia as the elected representatives of the people are empowered to administer these vast lands and resources in the best interests of the communities and people that they serve. This right is allencompassing in that it permits the State to regulate all matters concerning both publicly-owned as well as privately-owned land and resources and is often referred to as the Hak Menguasai Negara or the Right of Control over the State.

In Indonesia, Article 6 of the BAL states that all titles to land have a social function. This function is specifically that not only is the holder of land entitled to make use of the land but is in fact expected to utilize it in order to serve the general welfare of the community.

Based on the BAL, several implementing regulations have been enacted to regulate the land tenure structure in Indonesia, including different types of land titles, the rights and obligations of title holders, and measures to obtain title of land. The authority who has jurisdiction with regard to land matters is the National Land Institute (Badan Pertanahan Nasional/BPN).

Besides BAL and its implementing regulations, customary and Adat law still exist. However, these customary and traditional laws are being consumed by the uniform application of the BAL which has developed into the standard for the administration of land in Indonesia.

Despite the BAL developing into the pre-eminent source of land law in Indonesia there is a belief that the BAL enacted in1960 is no longer reflective of the current community and public needs with respect to land law in Indonesia in the 21^st century.

Type of Land Title and Their Particulars

Primary and Secondary Titles of Land

Under the BAL, land titles are divided into two categories; namely, primary and secondary titles. Primary Titles are derived from the state and consist of: the Right of Ownership (Hak Milik), the Right to Till or Exploit (Hak Guna Usaha), the Right to Build (Hak Guna Bangunan), the Right of Use (Hak Pakai) and the Right of Management (Hak Pengelolaan). All titles are required to be registered or certified. Secondary titles are titles granted by other title holders and which are based on mutual agreement and consist of leases (hak sewa), the right of share cropping (hak usaha bagi hasil), the right of land pledge (hak gadai) and the right of lodging (hak menumpang).

The title holder of both titles has the same right to make use of the Land and to utilize it by himself/herself to extract a profit from someone else although this is traditionally based on an agreement by granting one of the secondary titles.

Besides the aforementioned, there are also five important types of land that must be acknowledged by companies who wish to run businesses in Indonesia. It must be noted that each of these titles give rise to different consequences.

1. Right of Ownership (Hak Milik/HM)
   HM is the most complex form of ownership of land in Indonesia. It is subject to planning regulations, in which the holder can use the land for any purposes, including for housing. It also entitles the holder to use the air space (the space above the land) as well as the soil beneath it. However, HM does not allow the holder to exploit the natural resources found on or under the land as this is a right that is regulated under the provisions of Law No. 11 of 1967 on Mining.
   In principle, only individuals of Indonesian nationality and the special legal entities stipulated in Government Regulation No. 38 of 1963 (government banks, cooperatives, and religious and social bodies) can hold this title. Therefore, foreigners and legal entities, such as joint venture companies, cannot hold a HM title.
   There is no time limit on this title and it can be given or bequeathed to another, even on the holder’s deathbed. HM is also one of the titles that makes a person eligible for a mortgage in Indonesia (Hak Tanggungan).
2. Right of Exploitation (Hak Guna Usaha/HGU)
   HGU is the principle title that applies to agricultural areas such as plantations, fisheries, and cattle properties. A HGU is provided by the State in order that a private legal individual or entity may utilize State-owned land. The holder is allowed to erect structures so long as it is utilizing the land subject to the granted HGU in some substantial and significant manner.
   In general, the right is granted for an initial maximum period of 35 years for plantations, but can be extended for another 25 years on the submission of an application seeking the extension. The prevailing laws and regulations stipulate all necessary fees and charges associated with the application for extension process. These payments will be made to the State Treasury and constitute a form of non-tax revenue.
   The HGU right cannot be granted on areas of less than five hectares and is not subject to any other limitations and large tracks of land are normally granted. However, in practice, the government will not issue a right to a plantation if the proposed plantation area is less than 25 hectares.
   A HGU can be transferred and granted to another party and is eligible for Hak Tanggungan.
3. Right of Building (Hak Guna Bangunan/HGB)
   The holder of this title is entitled to erect and possess a structure on the land. A HGB can exist on both State and privatelyowned land. Most land in local areas is subject to a HGB grant from the government with respect to residential, commercial and industrial land. The HGB title is also granted to most major development projects, such as energy and mining projects.
   The right is normally granted for an initial period of up to 30 years and it can be extended for a further 20 years on application.
   Based on Government Regulation No. 40 of 1996, a company, formed in the nature of investment, shall pay official costs (uang pemasukan) to the State Treasury for a period of 80 years which is inclusive of the initial 30-year grant, the 20-year extension and an additional renewal for a further 30 years after the issue of the HGB title by the relevant authority. The title is also eligible for Hak Tanggungan.
4. Right of Use (Hak Pakai/HP)
   A HP is granted against specific plots of State or privatelyowned land in order that the holder of the HP title may exploit the land for productive purposes. In practice, the right is usually only granted to enter a lease or some other equivalent set of terms of agreement, rather than going through the formality of granting the right. The right can be held by Indonesian individuals or legal entities as well as by foreign residents for a maximum of 25 years and it can also be extended for another 20 years.
5. Right of Management (Hak Pengelolaan/HPL)
   A HPL is given to State-owned companies and Regional Governments with respect to planning and development of Stateowned land. It is usually given to those who will use the land for industrial and/or business purposes. The holder has the power to grant a HGB and a HP. Many examples exist of the use of the HPL grant such as the Pulogadung Industrial Estate and some low-cost housing projects including those developed by the State Housing Company.
   The time period of the HPL is in accordance with the time in which the holder intends to use it for industrial and/or business purposes. This right is not eligible for Hak Tanggungan.

Unregistered Titles of Land

Besides the rights defined in the BAL, in rural areas customary land titles, which are not registered, still exist. One of them is the Customary Right of Ownership (Hak Milik Adat), which by law has to be converted to a registered Hak Milik and must be registered since 24 September 1960. In Central Java, particularly in Jepara, the Hak Milik Adat is called Hak Yasan and is referred to as “Letter C”. This right is known in West Java as “Girik”. In addition to Hak Yasan, there is also Village Land (Tanah Bengkok or “Tanah Jabatan”), which is given to and can be used by the Head of the Village (Kepala Desa) during his/her tenure in office.

Theoretically, Tanah Bengkok cannot be sold since it is regarded as “salary” for the Kepala Desa, thus it can only be possessed and used during the term of office. However, in the event that this land is needed for the purpose of development, it can be sold under Village Decree (Keputusan Desa/Rembug Desa) and confirmed thorugh Governorial Decree.

The Land Acquisition Process

Land Acquisition Methods

Three things must be taken into consideration when obtaining land: the status of the land, the status of the individual who will acquire the land, and the willingness of the title holder to surrender the land.

In regards to the status of land, there are two kinds of land in Indonesia, State and private.

1. State Land
   The only way to obtain State land is to apply for the relevant land title through an authorized state official, as stipulated in the regulation of the Department of Home Affairs No. 6 of 1972. To obtain a land title, applicants are required to pay the associated land taxes, which is 5% of the value of land and buildings minus IDR 30 million. In addition to the PPHTB (Pajak Penghasilan atas Pengalihan Hak atas Tanah dan/atau Bangunan - Income Tax over Transfer of Land dan/or Building), they are also required to pay the all other official costs to the State in accordance with State Minister for Agrarian Affairs/Head of the National Land Institute Regulations No. 4 and 6 of 1998. The procedure for granting a land title is stipulated in the Minister for Home Affairs Regulation No. 5 of 1973 and which has been amended by the regulations of State Minister for Agrarian Affairs/Head of National Land Institute No. 2 of 1993 and has recently been further amended by Minister of State for Agrarian Affairs/Head of BPN Regulations No. 2 and 3 of 1999.
2. Private Land
   There are four legal methods to obtain private land, but it depends on the individual who wishes to posses the land as well as the type of title that they desire. The methods are:
   1. Available land which is based on an agreement with the title holder (such as a lease agreement) is usually used on the condition that a party wishes to use a small plot of land over a short period of time, say between 3-10 years, thus it is considered to not be necessary to posses a strong title over the land.
   2. If done by direct transfer, such as sale and purchase or exchange of land, the status of the individual who wishes to posses the land will be evaluated and taken into consideration. This is to avoid the possibility that the transfer will become null or void at law, thus making the particular land subject to this agreement the property of the State. A direct transfer is frequently used for sale and purchase.
   3. Indirect transfers or the relinquishment of land title is used when a company wishes to posses land, but is not eligible to hold the title. An example of this is a company that is trying to obtain both the title of Hak Milik and Hak Milik Adat. In order to possess these titles, the owner of the land must first release his/her title over the land in exchange for an agreed price that is to be paid as part of a sale and purchase transaction. The owner then declares that s/he has released the title over the land. This release should be in written form of a Notarial Deed and or at a minimum witnessed by a notary and confirmed by relevant State appointed body. The declaration states that the owner releases title over the land for the benefit of the company. It is preferred that the declaration be made before the Head of the Regional Land Office, who will then draft a new Deed. Additionally, in order to subvert the possible rejection of the release of title by the relevant State authority the Deed of Release usually includes a clause that expressly states that in the event of rejection that the owner permits the company to transfer the “rights” to any other qualified party. Thereafter, the request for the appropriate title should be submitted to the local Agrarian Affairs Office and the process is then complete on the issue of a certificate. The grant of land title in this procedure does not require the payment of any uang pemasukan to the State Treasury since the company has paid the price of the land to the owner, but there is an administration fee charged by the relevant local authority that must be paid.
   4. Expropriation – this is the last method that can be used for the purposes of obtaining land for the public’s benefit. Expropriation requires that the relevant parties, the owner and the individual who wishes to obtain the land, enter into negotiations in order to reach an agreement. In the event the parties fail to reach a mutually acceptable agreement with regards to terms and conditions to effect transfer then the law would allow for an expropriation of the property to occur. The expropriation principles are explicit that the State is subject to the law and as such must respect the rights of the individual and as a result the BAL stipulates a number of strict provisions that must be satisfied before expropriation can occur; namely, Article 18 of the BAL states that: (a) the land will be used in order to fulfill the public interest, (b) the expropriation must be accompanied by proper compensation, and (c) the expropriation must be executed based on a Presidential Decree. Once expropriation has occurred then the new owner of the land must submit the relevant applications to the relevant bodies to secure appropriate title over the land.

Land Acquisition for Companies in the Framework of Capital Investment

The emergence of fierce competition between developing countries for foreign investment and the plain link between foreign investment and the need to acquire title in land spurred the government to improve and simply the land acquisition process for foreign investors.

According to the new regulation, Minister of State for Agrarian Affairs/Head of BPN Regulation No. 2 of 1999, in order to acquire land in accordance with the Regional Spatial Lay Out Plan, a company must be granted a location permit (izin lokasi), which is only valid as a transfer title permit.

Foreign Ownership Land/Property

Under Government Regulation 41 of 1996 (GR 41/1996), foreign residents in Indonesia, foreign companies with representative offices in Indonesia, representatives of foreign countries (Embassies and Consulates), and representatives of international organizations are among the few categories of people who can hold Hak Pakai. The definition of foreign residents, as defined in GR 41/1996, is “foreigners whose presence in Indonesia gives opportunities to national developers”. Unfortunately, this definition is able to be so broadly construed that any sort of uniform application is almost impossible to effect.

CAPITAL MARKET LAW

Introduction

The essence of the capital market, in general, is the same as that of a conventional market; namely, a place where sellers and buyers meet to transact. The capital market’s primary function is to facilitate meetings between the supplier of funds and the users of funds where the underlying aim is to finalize either a mid to longterm investment. According to Article 1(13) of Law No. 8 of 1995, the Capital Market is the forum for the activities of trading and offering securities to the public, as well as to supervise the activities of public companies that have offered securities to the public, as well as the supervision of the activities of securities related institutions and professions. The activities of the Indonesian capital market will be defined below.

The capital market is not a new development in Indonesia. On the contrary, the activities related to the trading of stocks and bonds have been a familiar line of business in Indonesia since the 19th century. The book, Effectengids, published by Verreniging voor den Effectenhandel in 1939, states that the trading of stocks has occurred since 1880. However, the major difference between the trading activities of the past and the trading activities of today is that the buying and selling of stocks and bonds in the late 19th century occurred without an official trading floor. Nevertheless, even an official trading floor is not something that is new to Indonesia as the Indonesian Capital Market of the early 20th century established the first official trading floor on 14 December 1912 in Batavia (now Jakarta). In the period between 1912 and 1925 there was significant growth in the capital market and the amounts of stocks and bonds being traded, this growth was the driving force behind the establishment of the Surabaya trading floor on 11 January 1925 and the Semarang trading floor on 1 August 1925. Currently, in 2005, there are two trading floors – Jakarta and Surabaya.

The Indonesian Capital Market closed during World War II as a consequence of the complete deactivation of the world’s Capital Market systems and also because of the belief that it was neither feasible not possible to engage in capital market activities during a war. After the war the government enacted Emergency Law No. 13 on 1 September 1951, this was later confirmed as Law No. 15 of 1952 on the Stock Exchange. This led to the reopening of Indonesia’s Stock Exchange on 1 September 1952 after a closure of 12 years. The law mandated the appointment of staff to the Stock and Financial Trade Association and this management comprised of 3 State banks and several broker-dealers and Bank Indonesia as advisor. However, the Stock Exchange survived only 6 years as Indonesia suffered heavily under a sluggish domestic and international economy and declining world-wide stock activities. Another notable cause for the declining stock exchange was the confrontationalist policies the government had adopted towards its former colonial masters, the Netherlands. The end result of this policy was that the majority of the remaining Dutch citizens and their business interests in the community chose to leave taking as much of their capital and investment with them.

This situation continued to deteriorate and was further exacerbated by tension between Indonesia and the Netherlands over West Irian as well as the nationalization of Dutch companies still with business interests in Indonesia. The nationalization of Dutch firms was based on Law No. 86 of 1958 on Nationalization and an instruction from BANAS (Badan Nasionalisasi Perusahaan Belanda) that prohibited the Indonesian Stock Exchange from trading any remaining Dutch company’s stocks and to cease all trade in Dutch firms whose stocks were denominated in Dutch currency.

This led to a number of other related problems including the rapidly increasing rate of inflation that was seriously reducing the public’s trust and belief in the the financial markets of Indonesia. This inflationary pressure resulted in a significant depreciation of the Rupiah and the rapidly deteriorating economy which culminated in the political turmoil and tragedy that was to befall Indonesia in 1965-1966.

After the closure of the Indonesian Capital Market in 1952 there had been an almost constant ebb and flow. Finally, in 1976 through the issue of Presidential Decree No. 52 of 1976, the Indonesian Capital Market Supervisory Agency (Bapepam) was established and was granted the following duties and functions: 

1. Evaluate whether the companies that are to sell their shares through the capital market have complied with the requirements and are sound and fit;
2. Organize an effective and efficient capital market;
3. Extensively supervise the development of Issuers

It was anticipated that these duties and functions granted to Bapepam would allow for the creation of an orderly, fair, and efficient capital market that was able to protect the interests of both the public and investors. These duties and functions are similar to the main tasks granted to the Securities Exchange Commission (SEC) in the United States.

Finally, to clarify and strengthen these duties and functions the government enacted Law No. 8 of 1995 on the Capital Market (Capital Market Law). Bapepam falls under the auspices of the Department of Finance and the Chairperson of Bapepam is appointed by the President and reports to the Minister of Finance.

The Indonesian Capital Market

The Indonesian Capital Market has undergone significant growth since it was reestablished. Today, the Jakarta and Surabaya Stock Exchanges have become the central features of the Indonesian Capital Market with each retaining their own distinct trading floor characteristics. Initially, both floors relied on manual transaction systems however the recent automation of the Jakarta trading floor with the introduction of the Jakarta Automated Trading System (JATS) has resulted in much larger volumes of trade and accountability. The JATS is a transaction system design to be integrated with the clearing and settlement system as well as integrated with the depository system to improve accountability and transparency in transactions from which it is hoped that the public’ trust and belief in the system will drive future trading growth. The clearing and settlement system is managed by Indonesian Clearing and Guarantee Corporation (KPEI) and the depository system is managed by Central Securities Depository Agency (KSEI).

The Indonesian capital market community comprises not only of Bapepam as the supervisory agency, but the Clearing and Guarantee Corporation and the Central Securities Depository Agency, both of which are Self Regulating Regulatory Bodies. However, the Law in fact mandates that under the auspices of Bapepam there are 4 self-regulatory bodies; namely, the Jakarta and Surabaya Stock Exchanges, the Clearing and Guarantee Corporation, and the Central Depository Agency. The four Self Regulatory bodies are privately-owned companies whose shares are owned by the Capital Market community. The Jakarta Stock Exchange and the Surabaya Stock Exchange were established not long after the Indonesian Capital Market was reestablished, whereas the Indonesian Clearing and Guarantee Corporation and Central Depository Agency were established based on the Capital Market Law.

The Indonesian Clearing and Guarantee Corporation (KPEIKliring dan Penjaminan Efek Indonesia) was founded to provide clearing and guarantee services in the settlement of stock exchange transactions in an orderly, fair and efficient manner. The KPEI was established as a limited liability company based on Deed of Establishment No. 8 dated 5 August 1996 in Jakarta by the Jakarta and the Surabaya Stock Exchanges, with each holding 90% and 10% respectively of the founding shares issued of IDR 15 billion. The KPEI received its confirmation as a legal entity from the Minister of Justice of the Republic of Indonesia on 24 September 1996 and on 1 June 1998 it received the relevant license to operate as a Clearing and Guarantee Corporation based on Decision Letter No. Kep.-26/PM/1998 of the Capital Market Supervisory Agency (Bapepam). Although formed and operating as a corporation, the KPEI is in fact a non-profit organization as all of its revenues are allocated to finance its operations, while its net profit, if any, is fully retained towards the continuity of its mission. 

The Central Depository Agency (KSEI-Kustodian Sentral Efek Indonesia) was established pursuant to the provisions of the Capital Market Law and its main duties and functions are to provide orderly, appropriate, efficient central custodian and transaction settlement services. The KSEI was established on 23 December 1997 and obtained the necessary licenses to commence full operations on 12 November 1998.

Aside from the Capital Market Law there are a number of other regulations that govern the operations of the Indonesian Capital Market:

1. Government Regulation No. 45 of 1995 on the Implementation of the Activities of the Capital Market activities (this regulation revoked Presidential Decree No. 53 of 1990 on the Capital Market)
2. Government Regulation No. 46 of 1995 on the Procedure of Investigation in the Capital Market
3. Ministry of Finance Decision No. 645/KMK.010/1995 revoking Ministry of Finance Decision No. 1548/KMK.013/1990 on the Capital Market and since amended by Ministry of Finance Decision No. 284/KMK.010/1995
4. Ministry of Finance Decision No. 646/KMK.010/1995 on Stock Ownership or Mutual Funds for Foreign Investors
5. Ministry of Finance Decision No. 647/KMK.010/1995 on Stock Ownership for Foreign Investors (up to a maximum of 85% of the capital stock)
6. Ministry of Finance Decision NO. 455/KMK.010/2003 dated 17 July 2003 on Capital Requirements for Brokerage Firms
7. All Regulations issued by Bapepam since 17 January 1996

Current Activities in the Indonesian Capital Market

Scripless Trading

In July 2000, the Indonesian Capital Market commenced Scripless Trading to enhance market liquidity and to eliminate the occurrence of lost and forged stocks as well as to simplify the process of transaction settlement.

The introduction of Scripless Trading has meant that all previous transactions that relied on paper to be transacted have been eliminated and replaced with a computer-based electronic system allowing both the transaction and subsequent settlement to occur electronically. The owner of shares will only have a confirmation of the record and the status of the relevant shares. The implementation of scripless trading itself has led to a reduction in white collar crime within the Capital Market, particularly related to the handling of share certificates. The Capital Market Law allows for the implementation of a scripless trading system, although it is important to note that scripless trading is not specifically addressed in the Law. Article 55 of the Capital Market Law simply states that settlement may occur in a number of different ways, such as bookentry, physical delivery or other means stipulated in Government Regulations. However, the Elucidations to this Article do state that electronic settlement or settlements using new technology may be utilized to effect settlement. The remainder of the regulatory framework with respect to scripless trading has been issued by Bapepam, the Central Securities Depository Agency, and the Indonesian Clearing and Guarantee Corporation.

Scripless trading is a feature of the Jakarta Stock Exchange in comparison the Surabaya Stock Exchange currently prefers a Remote Trading system. However, since 2002 the Jakarta Stock Exchange has also allowed Remote Trading as a means to increase market access, market efficiency, and simply the procedures related to trading and the frequency with which trades may be made. 

The Capital Market and Islamic Law (Sharia)

As a country with the biggest Moslem population in the world it is hardly surprising that Indonesia is not only open to financial and banking activities based on Islam nor is it surprising that financial services based on Islam are offered to the public. The first significant move towards the provision of financial services based on the principles of Islam saw the establishment of Bank Muamalat Indonesia in 1990. This was quickly followed by the establishment of a number of other banks offering similar services and visions of Islamic based financial services.

The rapid development of Sharia based financial services has seen Memorandums of Understanding (MOU) signed between Bapepam and the Sharia National Committee-Majelis Ulama Indonesia (Dewan Sharia Nasional-Majelis Ulama Indonesia- DSN MUI) on 14-15 March 2003 regarding the provision of Sharia based capital market services. Later, the Sharia National Committee also signed another MOU with Jakarta Stock Exchange for the provision of Sharia based share trading activities.

To implement the provisions of the MOU, the Jakarta Stock Exchange and PT. Danareksa Investment Management established the Jakarta Islamic Index (JII). The primary purpose of the Jakarta Islamic Index is to act as a benchmark in measuring market activities based on Sharia. Currently, there are approximately 30 corporate stocks listed on the JII.

There is a fundamental difference between the conventional capital market and the capital market based that is based on the principles of Sharia. The concept of short selling on the capital market is neither a principle nor an acceptable means of transacting on the Sharia based capital market. The Sharia based capital market, in general, focuses on long-term investments. Furthermore, stock ownership means that all profit and loss is accepted as a mutual risk of the investment and assumed jointly between all stock holders.

In addition to the stocks that are issued within the Sharia based capital market system there are Sharia bonds. Sharia bonds are based on a number of acceptable Sharia principles; namely, akad (agreement) and mudharabah (profit-sharing). The Nisbah or the percentage of profit sharing will be stated before the agreements are executed. Finally, the Sharia based capital market also offers Sharia based mutual fund investments. Despite having the largest Muslim population in the world many of the financial services based on Sharia principles remain in their infancy in terms of popularity compared to other non-Sharia based financial services. Nevertheless, it is important to recognize that this is a rapidly growing segment of the capital investment community as the community becomes more aware of and comfortable with the quality of the investment options offered.

BANKING LAW

Introduction

In Indonesia, the banking industry constitutes about 93% of the total assets of the entire financial industry of Indonesia and the remaining 7% is spread among players in the non-banking industry such as insurance and multi finance corporations. The large percentage of these funds held by the banking sector is intricately linked and can trace its origins to Minister of Finance Decision No. 1062/KMK.00/1988 on the Establishment of State Banks, Regional Development Banks, National Private Banks, and Cooperative Bank. This Decision led to a huge increase in the number of operating and established Banks. A brief overview of the data indicates that in October 1988 some 124 banks were established including 13 Non-Bank Corporations. This number further increased during the period from 1988 to 1997 where the number of established banks increased from 124 to 240 banks.

In mid-1997, the effects of the Asian monetary crisis and eventual meltdown of a number of regional economies commenced with the rapid depreciation of the Indonesian Rupiah (IDR) and worsened as a result of the political turmoil that plagued 1998 and has continued in varying degrees through to 2005. The depreciation of the IDR quickly consumed the Indonesian banking sector and many of the banks established in during the period from the confirmation of the Ministerial decision were now in danger of collapsing or had already collapsed. As banks collapsed they were being bailed out by Bank Indonesia, initially as a means to protect customer’s savings and deposits but as time went on Bank Indonesia quickly realized that the financial bailing out of insolvent institutions was too costly to continue to pursue on a large scale. The financial crisis was felt hardest by bigger banks who were holding considerably larger amounts of offshore borrowings and larger percentages of non-performing loans and bad debt. Smaller banks were not immune to the financial crisis occurring around them but carrying much less bad debt and non-performing loans as a percentage of the assets meant that they were better able to weather the circling financial storm.

Banking Law in Indonesia

Indonesian Banking Law has a long history and Widjanarto classified these periods of history into nine distinct phases commencing with the end of Dutch colonization through to the period of 1988-1993. The Banking Law in Indonesia can trace its post-colonization roots to Government Regulation in Lieu of Law (Perpu or Interim Law) No. 2 of 1946 which created Bank Nasional Indonesia (BNI). In 1953, Law No. 11 on Bank Indonesia was enacted. Law No. 11 of 1953 was then amended by Law No. 13 of 1968 on the Central Bank. However, in 1999, the Government enacted another new law, Law No. 23 of 1999 on Bank Indonesia since the previous law was considered to no longer represent the current status of the banking sector in Indonesia and rather than continue to amend the original law to ensure that it remain relevant and enforceable it was determined that the best means to modernize the banking law was to draft and enact a new law therefore a new law was drafted and enacted and the old banking law was repealed in its entirety.

Banking activities in Indonesia are governed by Law No. 14 of 1967 on Banking as amended by Law No. 7 of 1992. In 1998, a further series of amendments to the Banking Law were contained in Law No. 10 of 1998.

The general financial crisis afflicting Indonesia was keenly felt in the over-exposed banking sector as the IDR continued its rapid depreciation against the United States Dollar (USD). A large number of banks had immediate liquidity problems and quickly became insolvent and despite this insolvency many continued to go about business as normal waiting and hoping that the government through the Central Bank would bail them out. During this period of rapid decline in the public confidence of the Indonesian banking sector the government elected to provide liquidity funds to banks which it considered to be critical to the recovery of he sector in the future. Many of the smaller banks in liquidity trouble were either to be consolidated into larger merged banks or liquidated. The government restructuring program for the banking sector commenced in 1998 and included the following:

1. the injection of government capital into viable banks through the issuance of recapitalization bonds;
2. the introduction of a blanket guarantee;
3. the establishment of the Indonesian Bank Restructuring Agency (IBRA);
4. corporate restructuring;
5. improvement of corporate governance; and
6. bringing supervisory and regulatory practices closer to international standards.

The roots of the problem in that precipitated the Indonesian economic crisis related to non-performing loans and considerable levels of offshore foreign debt held by both the private and public sectors. To understand how it was possible to carry so much offshore foreign debt and non-performing loans requires only a brief examination of corporate governance principles and practices in Indonesia prior to the crisis with respect to credit and risk analysis it was invariably lacking in most cases and non-existent in the others. In February 1993, Booz Allen & Hamilton forecast that problem loans (both under and non-performing) held by Indonesian banks would constitute somewhere in excess of 20% of all outstanding loans based on its analysis of figures from 1990 through to 1992 which indicated a significant increase in th percentage of poor and non-performing loans – 6% in 1990, 11% in 1991, and 17% in 1992.

In an attempt to deal with the continuing financial and banking crisis the government devised and commenced implementation of a comprehensive restructuring plan in 1999. The establishment of the Indonesian Bank Restructuring Agency (IBRA) at the end of January 1998 was intended to ensure adequate policy direction and supervision of the restructuring process. IBRA was created and established through the enactment of Perpu No. 17 of 1999 on the Indonesian Bank Restructuring Agency. The primary duties and functions of IBRA pursuant to the Perpu are:

(i) verify customer claims under the blanket guarantee scheme;

(ii) dispose of assets from banks that have been taken over;

(iii) restructure and sell loans transferred from banks; and

(iv) divest government ownership in recapitalized banks. 

Aside from the establishment of IBRA to strengthen the supervision of banks, Bank Indonesia (BI) was trying to manage and integrate its supervisory functions with that of IBRA. Statements at the time indicated that BI was fully aware that the banking crisis stemmed from weaknesses in its own performance of the supervision of banks. To overcome these deficiencies BI has been concentrating and refocusing its initiatives on the following aspects:

• harmonizing the organization of bank supervision procedures, particularly regarding structure and responsibility;
• improving bank supervision management including, but not limited to, more efficient and transparent supervision, more competent supervisors, accountability and recognition, as well as reward and enforcement;
• introducing risk-based supervision;
• rectifying prudential regulations with emphasis on risk control.

Other efforts have also been undertaken to improve the stability of the Indonesian banking system, such as the introduction of new banking and central banking laws, particularly the new Banking Law of 1998, which:

• transferred the authorization for bank licensing from the Minister of Finance to BI;
• relaxed the limit on foreign ownership of Indonesiaincorporated banks, raising it to 99%;
• encourages the development of Sharia banking;
• narrowed bank secrecy provisions to cover only the information on deposits (name and amount) instead of total assets and liabilities;
• provides for more comprehensive and stricter criminal sanctions, and determines their minimum levels;
• provides for the establishment of a deposit protection scheme by 2004 at the latest;
• provides for the establishment of a temporary special agency to assist with the banking restructuring program.

The Indonesian government introduced the Act on Foreign Exchange Traffic and the Exchange Rate System in 1999 which provides a legal basis for monitoring the flow foreign currency exchange and improves the ability to enforce prudential provisions. The law requires banks to submit to BI a report containing the movement of financial assets and liabilities between residents and non-residents. Complete, accurate and timely reports that include all pertinent information regarding foreign exchange flows as a means of supporting a prompt monetary policy response. This is primarily to ensure that the stability of the Rupiah is maintained.

Information Technology (IT) is a critical reform and development issue for Indonesian banks and the banking sector generally. Overall, the utilization of IT and technology generally throughout the Indonesian banking sector was best described as poor however a recent drive towards simplifying and facilitating personal and corporate banking has seen a rapid increase in the use of IT. This development has been so rapid that the primary response from BI to ensure that the regulatory framework is in place to deal with the new issues that will arise is to issue Circulars enumerating policy and regulatory standards. It is expected that most of these Circulars will eventually be enacted into law to provide greater legal certainty. One of these IT developments that has had an immediate and significant impact on the Indonesian banking industry is ‘Internet banking’. To address this rapidly developing area of banking services BI issued Circular No.6/ 18 /DPNP, dated 20 April 2004 on the Implementation of Risk Management in Internet Banking Activities. The Circular from Bank Indonesia is in essence a set of guidelines that banks should follow and implement as part of their respective IT policy.

Sharia Banking In Indonesia

Today, the Indonesian banking system also recognizes Sharia banking. Although Sharia banking has been a part of Indonesian banking services for some years the development of a Sharia banking system has only recently come to the fore as a significant alternative to traditional banking methods and practices. The driving force behind Sharia banking and financial services development is clearly demand from the public for appropriate banking and financial services that comply with the strict Sharia banking and financial principles. In response to these demands the current law through amendments to Law No. 7 of 1992 on Banking as amended by Law No. 10 of 1998, and finally Law No. 23 of 1999 on Bank Indonesia is a legislative attempt to regulate Sharia banking and banking practices.

Since the enactment of the legislation defining and regulating Sharia banking there has been considerable rapid and sustained growth of 74% annually. Bank Indonesia’s primary function, as the banking regulatory authority, is to ensure the development of a sound Sharia banking system and set of governing principles.

The banking and financial crises of 1997 and 1998 highlighted that the sound fundamentals of the Sharia banking system allowed it to weather the financial and banking crisis much better than the traditional banking alternatives. The main reason behind this better performance relates to the rates of return that are paid to depositors as they are not based on strict market rates allowing Sharia banks to channel relatively lower fund management costs back to their clients.

According to the Blueprint for Islamic Banking Development in Indonesia issued by Bank Indonesia, Sharia banking development should be conducted in accordance with the actual needs and expectations of the stakeholders of the Sharia banking sector in Indonesia that includes:

• Sharia commercial banks, Sharia banks, and Sharia rural banks
• Bank Indonesia as the banking regulatory and supervisory authority
• National Sharia council (DSN)
• Muamalat Arbitration Board (BAMUI)
• Other Sharia financial institutions: Takaful (Sharia insurance), Baitul mal wat Tamwil, BAZIS, and Sharia securities companies
• Other regulatory bodies: Department of Finance and the Capital Market Supervisory Agency (BAPEPAM)
• Universities/educational institutions concerned with developing training programs on Sharia finance and economics
• Organizations and companies related to Sharia economic and finance such as: the Sharia Economic Society (MES), Association of National Sharia Banks, the Jakarta Stock Exchange, and vendors, among others.
• The general public

Further, the strategic objectives of the Sharia banking development include:

• Maintaining a high level of competitiveness while complying with Sharia principles
• Playing a significant role in sustaining the national economy and public prosperity
• Global competitiveness through compliance to international operational standards

However, the success of Sharia banking development fully depends upon the stakeholders. Therefore, a uniform vision and proper coordination are the keys to success and the factors most likely to support sustainable Sharia banking development in the future.

SECURED TRANSACTIONS LAW

Introduction

In Indonesia Hak Tanggungan (Indonesian Security Right upon Land or mortgage) and Fiduciary Security are now two widely used forms of security, especially since both are already regulated under Indonesian law with the implementation of Law No. 4 of 1996 on Hak Tanggungan and Law No. 42 of 1999 on Fiduciary Security (Undang-Undang Hak Tanggungan/ “UUHT”). While Hak Tanggungan is only over immovable property, land and land related object, the fiduciary security is designed to cover moveable property either tangible or intangible and also immoveable property that can not be encumbered with the Hak Tanggungan.

Hak Tanggungan

1. Definition and Object of Hak Tanggungan

One method of securing obligations is by a mortgage. Unlike other mortgages, which also include a pledge where a creditor can occupy the property encumbered with the relevant mortgage, the Law of Hak Tanggungan only provides the creditor with an in jure right which means that there is no immediate occupancy right attached to the mortgage.

On 9 May 1996 the Indonesian Government enacted Law No. 4 of 1996 on Hak Tanggungan. This new law repealed the previous hypothec provisions contained in the Indonesian Civil Code in so far as it related to land and other assets related to the mortgaged land.

In Indonesia, the Hak Tanggungan on land and land related fixtures is the only security right under which a land title is placed as defined in the Basic Agrarian Law (“BAL”) with or without other fixtures forming a totality with the land for security of a particular loan, which gives priority to a particular creditor over other creditors. The Hak Tanggungan shall give the right to the creditor to sell the land through a public auction without the requirement of a court order permitting it to do so, as the certificate of Hak Tanggungan serves as a court order.

The land title which can be placed by Hak Tanggungan are (1) Hak Milik (right of ownership); (2) Hak Guna Usaha (right to till or right to exploit); (3) Hak Guna Bangunan (right to build); (4) Hak Pakai (right of use) and (5) Hak Milik atas Satuan Rumah Susun (Strata Title). Hak Tanggungan can also be attached to the land including the buildings and fixtures on that land.

2. Procedures for Placing and Registering a Hak Tanggungan

The formal procedures for placing and registering a Hak Tanggungan can be described as follows:

1. The creditor and debtor sign a credit agreement simultaneously. The debtor or the title holder of the land then signs either a power of attorney to encumber the Hak Tanggungan (Surat Kuasa Membebankan Hak Tanggungan or “SKMHT”) or a Deed granting the Hak Tanggungan (Akta Pemberian Hak Tanggungan or “APHT”) before the relevant Land Deed Official (Pejabat Pembuat Akta Tanah or “PPAT”). The APHT must clearly identify the plot or plots of land being used as security and the total amount of the loan being secured. Any buildings, plant or others fixtures attached to the land sought to be covered in the Hak Tanggungan must also be specifically described in the APHT.
2. Within 7 (seven) working days as of the date of the APHT, the PPAT must submit the APHT and Land certificate to the Local Land Officer to register the Hak Tanggungan.
3. On the 7^th calendar day following the receipt of the APHT and land certificate by the Local Land Officer, they must issue the Hak Tanggungan land book and note the date of registration. By law, at this stage, the Hak Tanggungan will be effective and will provide the creditor with the status of a preferred creditor. Thereafter, a copy of the Hak Tanggungan book and copy of the APHT shall cause the issue of the certificate of Hak Tanggungan. At the same time, the Land Office shall record the Hak Tanggungan in the original land book at the Local Land Office and the original land certificate.

Certificate of Hak Tanggungan consists of a copy of the Hak Tanggungan land book and a copy of the Hak Tanggungan Deed.

3. The Right of Priority

A holder of Hak Tanggungan has a priority right over other creditors upon encumbered land and has a priority right to have any outstanding loan and debt payments settled from any funds generated from the liquidation of the property subject to the Hak Tanggungan. Nonetheless, it is possible that there is multiple Hak Tanggungan against the one plot of land with each being held by a different creditor. Therefore, the priority right rank of the Hak Tanggungan is based on the date of registration of the Hak Tanggungan. Simply, the first registered Hak Tanggungan shall have first right of settlement and each following Hak Tangungan holder will receive payment so long as funds from the sale of the subject of the fiduciary security remain.

4. The Transfer of the Hak Tanggungan

In the case that loans are transferred or assigned to other parties, the Hak Tanggungan secured for the loans are transferred also to the other parties and should be registered based on the transfer or assignment agreement. However, a new APHT is not required for this process.

5. The Cancellation of Hak Tanggungan

The cancellation of the Hak Tanggungan occurs at the point in time any of the following occur: (1) cancellation of the debt secured by the Hak Tanggungan; (2) release of the Hak Tanggungan by the Hak Tanggungan Holder; (3) a clearing of the Hak Tanggungan based on a ranking stipulation by the Chief Justice of the District Court (“Roya”), and (4) a cancellation of the right to the land which is subject to the Hak Tanggungan.

6. The Enforcement of Hak Tanggungan

Under the Hak Tanggungan Law, creditors have the right to immediate execution (parate executie) upon the debtor’s property. On the debtor’s default, the creditor may execute the secured property without having to comply with the civil procedural law and procedures of seizure. Therefore, a Hak Tanggungan holder enjoys the right of direct execution, which is a relatively simple and costefficient means of ensuring payment of outstanding debts. Nevertheless, unless the debtor agrees to the auction, the Auction Office, which conducts and supervises the public auction, requires a court order for the auction, which in veritably is a costly and lengthy process.

7. The Position of the Holder of the Hak Tanggungan (mortgage) in cases of Bankruptcy

The position of the Hak Tanggungan’s holder in the order of distribution of the debtor’s assets remains unchanged by a declaration by the debtor of bankruptcy. However, to enforce the Hak Tanggungan (for closure), the Hak Tanggungan holder has to wait 90 (ninety) days as of the declaration of bankruptcy by the court. (Article 56A of the Bankruptcy Law)

If the Hak Tanggungan holder does not enforce its right within the specified time, the curator or receiver at any subsequent auction of bankruptcy assets will carry execute any collateral facility comprising the Hak Tanggungan holder’s right to share in the proceeds of any sale. If the proceeds are insufficient to satisfy the Hak Tanggungan holder’s claim, then the Hak Tanggungan holder becomes a general creditor with respect to the settlement of any remaining and outstanding debts.

Fiduciary Security

1. Definition of Fiduciary, Fiduciary Security, Grantor, and Grantee of the Fiduciary Security

Fiduciary security is a relatively new type of security in Indonesia. Law No. 42 of 1999 on Fiduciary Security was enacted on 30 September 1999.

Fiduciary is a transfer of the right of ownership of a property based on trust with the provision that the property transferred in still held by the owner of the subject property. Fiduciary security is a form of security right over moveable property either tangible or intangible also over immoveable property that cannot be attached to a Hak Tanggungan (mortgage), in which the fiduciary grantor retains the property transferred that is being used as a Security to pay the loan and it provides the fiduciary grantee with a priority right over other creditors.

The fiduciary grantor is an individual or a corporation that owns the property that is to subject to the fiduciary Security. The fiduciary grantee is an individual or a corporation that is owed a debt whose payment of which is guaranteed by a fiduciary security.

2. The Scope of the Law on Fiduciary Security

Matters that are not within the scope of the law of fiduciary guarantee include Hak Tanggungan (mortgages) related to land and buildings so long as the regulations require registration; hypothec on registered ships whose bruto volume is 20m3 or more; hypothec on aircraft; and, pledges.

3. The Encumbrance of a Fiduciary Security

A fiduciary guarantee is an accessoir agreement of an initial agreement that gives rise to one or more obligations on the relevant parties to the agreement. Granting a fiduciary security for securing those obligations must be made with a Notarial Deed in Indonesian and specifically state that it is a Fiduciary Security Deed. The Deed must, at least, note the identities of both the grantor and the grantee of the fiduciary security; all relevant data on the initial agreement that is to be secured with the fiduciary security; a description on the property which is subject to the fiduciary security; the nominal value of the security; and, the nominal value of the property subject to the fiduciary security.

Furthermore, the Deed must also specify whether the debts that are secured by the fiduciary security are existing debts, future debts that have already been agreed in specific amounts, or a debt that can be measured at the nominal value at the time of the execution in accordance with the initial agreement that gave rise to the original obligation.

A fiduciary security can be given against more than one object, a debt that already exists, or that will accrue in the future. The provision of a fiduciary security for some future debt does not have to be contained in a separate security agreement.

4. The Registration of the Fiduciary Security

The property that is the subject of the fiduciary security must be registered at the Fiduciary Registry Office. The fiduciary grantee themselves, or their attorney, or someone on appointed on their behalf can complete the application for registration.

The Registry Office will then note the fiduciary guarantee in the Fiduciary Register Book, then issue and give the certificate of Fiduciary Security to the fiduciary grantee and date the certificate on the day it received the application.

The objective of the registration itself is to give legal certainty to both the fiduciary grantor and grantee as well as to any third party interest in the fiduciary security.

5. The Transfer of the Fiduciary Security

The transfer of loans secured with a fiduciary security results in the transfer of all of rights and duties of the fiduciary guarantee to the new creditor by law. The new creditor must register the transfer at the Fiduciary Registry Office. The fiduciary security remains in force against the property noted in the fiduciary security irrespective of who may have physical possession of the object, except if the transfer was completed and effected in a manner which is not common within the business community. However, in order to secure the fiduciary security interest, the transfer of a fiduciary guarantee where the object is a stock of goods, then those stocks must be exchanged for some other equivalent good or stock of equivalent value.

6. The Cancellation of the Fiduciary Security

A fiduciary security is no longer valid under the following circumstances: the closure of the debt secured by the fiduciary security; the withdrawal of the right of fiduciary security by the fiduciary grantor; and the abolishment of the property that was the object of the fiduciary security.

In the event that the property that was the object of the fiduciary security is destroyed but is fully insured, then any subsequent insurance claim may replace the property of the original fiduciary security.

The fiduciary grantor must inform the Fiduciary Registry Office on the cancellation of any fiduciary guarantee and then the Office will issue a statement that the stated fiduciary security deed is no longer valid.

7. The Right of Priority

A fiduciary grantee has a priority right over other creditors and has the priority to receive payments of debt from the any income gained in the execution of the fiduciary security. Moreover, those rights cannot be eliminated in the case of bankruptcy or liquidation of the fiduciary grantor since the fiduciary security is a right of security to payment of debt. Nevertheless, in the law of bankruptcy, there is also a provision that the property that becomes the object of fiduciary security is be dealt with separately to those of the other bankruptcy or liquidation assets.

8. The Execution of the Fiduciary Security

If the debtor or the fiduciary grantor fails to pay the debt, the property that becomes the object of the fiduciary security can be executed. The execution can be done in 3 ways:

1. Executing title by the fiduciary grantor without the help of the court. However, in practice it is difficult to execute and enforce the security without the assistance of the court.
2. Selling the property that is the object of the fiduciary security through public auction then utilize the resulting income to pay the debt.
3. Selling the property that is the object of the fiduciary security by non-notarial deed. This can be done based on the agreement by both grantor and grantee of the fiduciary security provided that the agreement ensure the maximum price of the asset is reached in order to maximize the benefits derived by both parties. The conditions that must be satisfied are:
   1. The sale must be completed one year after the public notification by the fiduciary grantor and/or grantee to interested parties.
   2. Announced in two newspapers;

In case the result from execution is over the nominal security granted under the fiduciary agreement, then the fiduciary grantee must return the difference to the fiduciary grantor and if the result is not enough to pay the debt. However, where the income from the sale is insufficient to cover the outstanding debt then the liability is not expunged until such time as the remaining debt is finalized to the mutual satisfaction of the parties.

9. Criminal Provisions

Even though fiduciary is deemed to be a private matter, the government has enacted legislation to strengthen fiduciary institutions, as well as to regulate individual and social morality and to prevent parties from acting without the requisite goodwill critical to successful fiduciary transactions irrespective of whether they parties are individuals or corporations. The Fiduciary Security law provides for the imposition of criminal penalties including terms of imprisonment of between 1 and 5 years and fines ranging between IDR 10 and IDR 100 million.

LABOR LAW

A major change towards global production, concentration of capital under transnational corporations, and improved mobility of consumer goods, services, and capital brings about the arrival of a new international division of labor. The structure of the global economy has been transformed, linked to a loss of control over national economies by governments in favor of transnational financial conglomerates and international financial institutions. Given the fact that there is a relatively abundant and less skilled labor force, it is not surprising that most of the developing countries increasingly compete in providing the sites and workforces for industries which manufacture goods for the world market. Deyo stated that in most of the developing countries, a general observation is that occupations are characterized by low skill, low wages, job insecurity, lack of career mobility, extreme political subordination, and government policy which focused on industrial stability (repression) as an advantage to increase foreign direct investment. These occupations also tend to be associated with high levels of job turn-over, low work commitment, tenuous social bonds, the subordination of politics in labor conflict/militancy, and weak bargaining power position. Accumulated with the creation of such a global market, there are conflicting interests of national governments whether to attract foreign direct investments by addressing more pro-business policies, or to maintain protective regulations for labor whose bargaining power appears potentially weakened by the emergence of a surplus labor force on a world scale.

Indonesia has a quite unique labor market scheme which includes both formal-modern and informal-traditional sectors. Practically, the same as many developing countries, such a dualistic scheme is characterized by a small modern sector with a larger traditional sector and the persistent movement of the massive surplus labor force from the traditional to the modern sector. However, the slow increase of the modern sector tends to stick workers at relatively constant wages as compared to wage-inflation. The government is challenged to balance its policies so that the development of the modern sector does not impede employment creation in the sector. The focus of government regulations until now has been on protections that support modern sector issues, and as such contributes a relatively small percentage to the total national employment level.

Accompanying the downfall of President Soeharto’s administration, the new government’s decentralization policy has allowed an atmosphere of democratization to develop that has influenced the regulation of workers’ rights and standards. This leads to heated discussions on industrial relations, labor protection, as well as labor dispute issues.

The Indonesian industrial relations system has developed slowly but surely. Recently, the Government ratified 8 ILO core conventions whilst removing strict guidelines for union representation and collective bargaining. Consequently, there has been an explosion in the numbers of trade unions being declared and they have tended to range across the political spectrum, from conservative pro-employer trade unions, to moderates only concerned with collective bargaining and workplace reforms, to radicals and revolutionaries who want both political and social change (La Botz, 2001). Aside from the new trade union law that endorses the implementation of a multiple union system at the plant level, the government also advocates the interest of employers’ to maintain industrial stability by granting the exclusive or preferential bargaining right merely to the majority union. It is worth noting that this limitation is common practice in most developing countries.

Regarding strikes and lock-outs, the latest regulation explicitly states that those are basic rights to promote and to protect both employer’s and worker’s interests. A strike is legitimate and therefore should be permitted after prior notice to the local labor office and employer has been furnished. Another requirement to be fulfilled is that the strike should be conducted peacefully. The common reason for workers to go on strikes is a stalled, locked, or frustrated bargaining process. The new law also mandates that striking workers are to be paid continuously during any such action, unless one party brings the case to mediation or arbitration. In contrast to some other developing nations labor laws, Indonesia expressly prohibits the replacement of striking labor with any type of contract labor.

Bipartite institutions have played an important role as a consultative and social dialog mechanism concerning welfare and working conditions. It differs from collective bargaining since it focuses more on information sharing, discussion, and exploration of options. Another breakthrough in the industrial setting is the introduction of co-determination institutions. The work council is not only seen as a forum dealing with workplace issues, but is also seen as a body whose members should work in a cooperative manner.

The second issue covers policies with regard to minimum wages, overtime, severance payments, paid leave, paid annual holidays (such as Christmas or Idul Fitri bonuses), as well as social security. As a direct consequence of the on-going decentralization process, the central government has given greater authority to provincial governments to determine minimum wages as a general entry level standard. The minimum wage composition consists of base-salary (75%) and regular-financial assistance (25%). Most decentralized minimum wage policy has a tendency to reflect the actual Price Consumer Index in a certain province or area. It also promotes social dialog between employers and employees, through mutual negotiation on the subject of non-entry level wages. The government has its own interest on minimum wages setting because it is a means to lessen poverty. In that sense, minimum wages also serve as a social safety net. Generally, governments in developing countries perceive minimum wage setting as a device to achieve low inflation and a low level of unemployment. On the other hand, annual increases of the minimum wage are troublesome as one of the consequences is that it supports a demand for higher wages by non-entry level workers. Considering that Indonesia has not fully recovered from the economic crises of 1998 any tacit support for higher wages is likely to face stiff employer resistance.

A basic guideline to calculate overtime rates has also been provided by the government. However, provincial governments may modify these rates based on a tripartite consultation.

Under the new Ministerial Decree on severance pay and the dispute resolution law, lay offs or dismissals are dependent on quite rigid standards and demand greater compliance from employers. The calculation of severance-pay totals will be based on an individual worker’s length of service and the reason for his/her dismissal. Practically, such process also takes into account the economic condition of the company with respect to the final determination of severance pay due. Nevertheless, the government provides particular mechanisms to delay compliance with the above mentioned standards.

The colonial principle of no work/no pay has been revisited a number of times through particularly the current exceptions to this principle such as maternity leave, two-days leave during menstruation, death of an immediate family member, among a number of others. Bonuses, annual holiday pay, and the 12-days of annual leave which may be converted into cash have also come under scrutiny. The need to improve social security and the protections that it affords has resulted in the establishment of a national social security system which will be implemented on a gradual basis. There are three programs, each conducted separately and each with a different target: civil servants, armed forces/police officers, and private sector workers. Yet, all programs are designed to protect workers from loss or reduced income caused by economic and social risks such as old age, industrial accidents, sickness, invalidity, unemployment, and other loss of livelihood for reasons beyond his/her control.

Labor protection is also promoted through occupational health and safety regulations, prohibition against discrimination at work – especially those regarding sex and race, as well as the abolition of forced and child labor practices. The new labor act has steadily improved child labor standards through increased minimum age requirements, compulsory basic education programs, limited line of work and working hours. Furthermore, it also includes quite comprehensive regulations concerning female workers. While not an essential issue, a restriction on night work for women will potentially lead to further debates on gender equality in the workplace. Workers also have a right to rest and leisure, as well as reasonable limitation of working hours as opposed to exploitation practices. A period of rest offers workers the chance to regain his/her lost strength, while leisure is aimed to allow workers to celebrate public holidays.

Indonesia has been recognized as the leading exporter of migrant labor. The major problem is the fact that most Indonesians working overseas enter those labor markets through informal procedures which means that they are afforded lower levels of protection and are often illegal migrants in the country of destination. The government has increasingly engaged in bilateral agreements to protect its migrant workers but much remains to be done. Improved regulatory standards and supervision systems have also been developed and implemented in order to diminish the role of labor brokers at all levels and steps of a migrant workers’ departure or repatriation to Indonesia.

With the enactment of the new Labor Law, industrial disputes are classified into four categories: opposing interests, legitimate rights, dismissals, and disputes among unions. Those disputes could be resolved through a mandatory process conducted by the government dispute councils (which are to be replaced by an Industrial Relations Dispute Settlement Court in early 2006) or voluntary arbitration. Individual dismissals are submitted to the provincial dispute councils while mass dismissals and appeals are referred to the central government dispute council. Final and binding principles of arbitration are implemented to encourage both parties to make a realistic offer in order to gain consensus, essentially a win-win solution. The new law stipulates that decisions to terminate workers must be based upon some legitimate reason. The introduction of industrial dispute courts as an alternative to the existing dispute council has also been initiated. These courts are to be formed in every district across the country. Given the poor standing of both the civil court system and the government dispute council mechanisms, industrial players are quite skeptical that this new alternative can reduce the bulk of currently pending cases.

In conclusion, sustained development of Indonesian labor law has increasingly focused on workers’ basic rights while at the same time accommodating employers’ interests. However, intense government involvement and control through protective labor policies have been preserved ensuring that the labor market is not nearly as liberal and open as it may become. Law is still predominant over bargains and discretionary power of employers. A new approach that provides greater voluntary accomplishment and mutual consent in regulating worker rights and standards should be endorsed without altering their characteristics. 

COMPETITION LAW

The History of Law No. 5 of 1999

The term competition, and in particular monopoly, has become a common word used in Indonesia, particularly in the period know as ‘reformasi’ or reformation that has been a continual presence in policy discussions of the government. The need for a competition law arose as a result of the rapid spread of monopolistic business practices that were permeating all levels of business like an epidemic primarily because there was no law to stop these unfair business practices. At that time, there was only one provision in the Constitution that acknowledged competition, Section 33. Section 33 states that everything and anything that concerns the lives of Indonesian citizens, is under government protection. The Constitution did not really help to alleviate or clarify this boom in monopolistic practices. Not only was the definition of competition vague, but people also took the opportunity to exploit the vagueness of the definition to find alternative interpretations. There appeared to be an explicit link between the vagueness of the definition and the increase in monopolistic behavior in business dealings. In fact, this condition considerably worsened when combined with the everincreasing levels of corruption and abuse of power by government officials. A direct consequence of these monopolistic and unfair business practices was that many small and medium enterprises had to close, while state-owned companies cashed in on the monopolistic practices to generate profits. One of the other most identifiable aspects of this type of monopolistic behavior and unfair business practice was a widening and stark gap that had become visible between the rich and the poor, as well as rapidly rising unemployment levels which further exacerbated the gap between the haves and the have-nots. 

Consequently many Indonesians suffered, particularly the middle and low classes who were required to bear the brunt of these practices. It seemed that the government was unaware of the benefits that competition would provide to its citizens as customers of businesses. Increasing unemployment meant a significant decrease in disposable income that had traditionally supported the growth of Indonesian businesses. Simply, the greater the competition the greater the benefits enjoyed by consumers, particularly with respect to fair prices for goods and services. However, it must be noted that the government cannot take part in the competition, but this does not diminish the government’s responsibility or obligation to protect its citizens from monopolistic and unfair business practices. Should these conditions be allowed to persist then the most likely outcome is a significant decrease in both domestic and foreign investment capital that has traditionally supported the rapid economic growth that Indonesia and Indonesian citizens had enjoyed through the 1970s to 1997. Investors have become afraid to risk their money in a market that does not guarantee a fair and free market or any degree of legal certainty to protect their investments or themselves personally. The guarantee is simply given when an investor is able to acknowledge that the legal and regulatory framework affords them the personal as well as professional legal protections afforded to all citizens. This guarantee includes a tacit understanding that the Government will refrain from interference in the market, particularly from manipulation of market and policy mechanisms for personal gain. To ensure that these guarantees were enforceable the realization that there was a need for significant legislative reform became apparent, particularly with respect to competition, monopolistic practices, and unfair business competition.

The intent to create laws that would regulate competition in Indonesia began to take shape around 1990. It was during this time that legal scholars, members of various political parties, nongovernmental organizations, and certain government institutions began to get together and discuss the possibility of enacting a new law. In fact, a number of different groups, including the Indonesian Democratic Party and the Indonesian Department of Trade (cooperating with the Faculty of Law of the University of Indonesia), produced a bill encompassing competition laws. The original draft of the bill was not seen as a serious attempt to address monopolistic practices or likely to be enacted. Consequently, corrupt government officials continued to perpetuate the monopolistic and unfair business practices of the past and as a result the economy continued to suffer and plummet towards crisis.

Therefore, the new government initiated a new regulation that regulated the framework for competition and unfair business practices. The DPR passed Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition (“Law No. 5/1999” or the “Anti-Monopoly Law”) on 5 March 1999. The primary objectives of this law were to improve the efficiency of the national economy in order to reach the desired levels of national prosperity, to create an environment conducive for business, to stop monopolistic and unfair trade practices, and to create both efficacy and efficiency in business.

At the same time, Law No. 5/1999 was a means to ensure that the conditions that Indonesia had agreed to in the Letter of Intent entered by the Indonesian government and the International Monetary Fund in July 1998 were fulfilled. This law was passed by the DPR on 18 February 1999, and was signed into law by the President on 5 March 1999. The provisions of the law required that 1 year was to pass before the law became effective and therefore the Anti-Monopoly Law came into force on 5 March 2000. The purpose of this delay was to provide a opportunity to socialize the law within the business community as a means of ensuring maximum compliance to the new provisions. Moreover, businesses were given an additional six-month grace period through 5 September 2000, to comply with the law. This grace period was included to ensure that businesses, the public, and others were aware if the significant changes that were to be implemented with respect to doing business in Indonesia.

Law No. 5/1999

The Law includes 11 Chapters and 53 Articles, with the major substantive law sections covering issues of prohibited agreements, prohibited activities, abuse of dominant position, exceptions, the creation of the Commission for the Supervision of Business Competition (the “KPPU”) and applicable sanctions.

Prohibited agreements cover issues of oligopoly, price fixing, price discrimination, predatory pricing (by agreement with competitors), resale price maintenance, market division, group boycotts, cartels, trusts, vertical integration, exclusive dealings concerning re-supply, tying, reciprocal dealing, and agreements with foreign parties that may result in monopolistic practices or unfair business competition.

The prohibited activities set forth in the law cover matters such as monopoly (Article 17), monopsony, market control, predatory pricing (unilaterally), determining production and other costs, conspiracies to rig bids, obtaining competitors' business secrets, and impeding the production and marketing of a competitors' products. The Law also prohibits what is known as the abuse of dominant position which is categorized into interlocking directorates, cross-share holdings, mergers & acquisitions that may result in monopolistic or unfair business practices. This section of the law also stipulates the obligations of businesses to provide notice to the KPPU when a business activity such as a merger is to be executed.

Article 50 provides exemptions for certain activities such as agreements intended to implement applicable laws and regulations, intellectual property, standard setting, joint ventures for research and development, international agreements ratified by the government, export agreements, activities of small-scale enterprises, and activities of cooperatives aimed at serving their members. There is also exceptions for state action, defined as activities carried out by a state-owned enterprise or institution formed or appointed by the government allowing for the creation of a monopoly.

Another important element of the Law is the establishment of the Commission for the Supervision of Business Competition or the KPPU. The KPPU is the body responsible for the enforcement of the Anti-Monopoly Law. This authority and power is derived from Articles 30-37. The Anti-Monopoly Law also sets out the procedures and methods applicable to the KPPU including the power and authority to issue sanctions for any proven breach of the Law. Consequently, any alleged or reported breach of the AntiMonopoly Law is to be heard by the KPPU and the results of the investigative process are to be announced publicly to reinforce public confidence in the accountability and transparency of the KPPU.

The Commission for the Supervision of Business Competition

The KPPU commenced operations in June 2000 after the appointment of Commissioners pursuant to the conditions contained within Articles 30-37 of the Anti-Monopoly Law and Presidential Decree No. 75 of 1999. The KPPU constitutes Indonesia's first truly independent regulatory commission, as it is not a branch of government and the government is strictly prohibited from intruding on the independence of the KPPU. The KPPU has three major functions; namely, law enforcement, policy advice, and public compliance through education of the community. The first aspect, law enforcement, deals with the methods used by the KPPU to investigate, interpret and enforce the Law. Second, the KPPU is required to assist the government in the development of competition policy through submissions on the interpretation of the law so as to ensure that government policy is indicative of a prohibition on monopolistic practices and supportive of fair and healthy business practices. Finally, the KPPU has an obligation to assist businesses and the public in understanding the provisions of the law so that full public and government compliance is achieved.

The KPPU is responsible to the nation, the president, the DPR, the judiciary, and the public. The KPPU must report to the DPR all matters relating to the appointment and dismissal of members as well as all budget related requirements. The KPPU although not directly related to the judiciary it is important to note that decisions of the KPPU may be appealed to the General Court system as a means of appellate review. To ensure accountability and transparency in the decision making processes of the KPPU, the KPPU is required to announce all decisions publicly.

The KPPU comprises of Commissioners and a Secretariat. The Secretariat comprises of four Directorates and includes professional staff. There are 11 Commissioners appointed to the KPPU, each of whom have met the requisite experience and expertise conditions. An important element of the selection procedure for Commissioners is to ensure that a candidate does not have any affiliations with any business entity. Commissioners serve a 5-year term and can be reappointed for another five year term. Commissioners have equal authority and KPPU decisions are majority decisions. The Chairperson and Vice-Chairperson are elected by and from among the Commissioners and serve for a 1- year term.

There are four Directorates in the Secretariat; namely, the Directorate for Investigation and Law Enforcement – responsible for investigating any violations of the Anti-Monopoly Law and litigating cases before the courts; the Directorate for Communication – responsible for disseminating information to businesses, the public, and the press; the Directorate for Research and Training – responsible for training professional staff and providing research in support of cases under investigation and the competition advocacy program; and the Directorate for General Affairs – responsible for administration, finance, and personnel.

The procedure to commence an action at the KPPU requires the submission of a written report stating the alleged breach of the Anti-Monopoly Law. However, the KPPU may initiate an investigation without a report being lodged if it becomes aware of a breach of the Law that has not yet been reported. Anyone who is aware of a violation or is the injured party can make a report by revealing his or her identity. Although it is not expressly stated in the Law there is an element of whistleblower protection incorporated in the provisions that allow the KPPU to suppress the identity of any witnesses that it may call in the course of an investigation. Once a report has been received and accepted by the KPPU, then the KPPU must have commenced a preliminary investigation and made a determination as to whether there are sufficient grounds to proceed with an additional more detailed investigation of the alleged breach within 30 days. In the event that the KPPU considers additional investigation is warranted then the KPPU should commence this detailed investigation of the alleged breach. Any and all information that comes into the possession of the KPPU during the course of its investigation must be handled with appropriate care to ensure that all trade secrets are protected. Where the KPPU deems it necessary it may hear testimony from witnesses, experts, or any person considered to be able to assist in resolving the alleged breach of the Law.

All investigations undertaken by the KPPU must be formal and as such comply with the strict stipulations contained in the Law. The KPPU maintains the power and authority to call any party to provide evidence to determine the validity of any report and witnesses and experts called are required to assist to the fullest extent possible within the boundaries of the prevailing laws and regulations. Any attempt by witnesses or experts to delay or obstruct the process may be subject to sanction therefore compliance is encouraged to ensure that these sanctions are not imposed on the relevant parties.

The permissible evidentiary tools available to the KPPU in the investigation process include: witness testimony, expert testimony, written documents or letters, and explanations from relevant parties. Any additional investigation that follows a preliminary investigation must be completed within 60 days. An extension of 30 days to this initial period is possible and will be based on reasonable necessity grounds. Essentially, these grounds will be the need for additional time to successfully complete the investigation. Once the investigation is completed the KPPU must issue a decision that states whether a breach of the Anti-monopoly Law has occurred or not. On reaching a decision on the matter the KPPU is required to read this decision in an open session, in effect a public announcement, to ensure transparency and accountability of the KPPU.

In the event that there is no objection to the decision of the KPPU, then the decision is held to be legally binding and an order of execution will be issued by the District Court to effect judgment. In the event that one of the parties wishes to appeal the decision of the KPPU, then that party must lodge an appeal to the District Court with 14 days of the decision being issued. If there is no appeal lodged within the permissible time period then the decision is deemed to be accepted by all the relevant parties. In the event that an appeal is submitted to the District Court, then the District Court has 14 days to examine the appeal and it must hand down its decision within 30 days of the initial examination commencing. Once the decision has been handed down by the District Court if the parties are still not satisfied, then an appeal in the form of cassation can be made to the Supreme Court.

The Law provides the KPPU with remedial powers, including civil remedies (Article 47) to declare unlawful agreements null and void; require restructuring of firms guilty of illegal vertical integration; issue cease and desist orders to stop activities causing monopolistic practices or unfair business competition or the abuse of dominant position; cancel mergers or consolidations in violation of the law; order compensation for damages by violators to injured parties; impose civil fines up to IDR 25 billion (approximately USD 2.5 million) for any proven violations of the law. The KPPU can also send matters to the police for further investigation. This additional investigation may result in criminal penalties being imposed on the parties for the violations set out in Article 48. In the event that the police investigation results in charges being laid for alleged breaches of the Law then the responsible parties are liable for fines up to a maximum of IDR 100 billion (approximately USD 10 million) and terms of imprisonment of up to six months.

CONSUMER PROTECTION LAW

In Indonesia, consumer protection is relatively new. Parliament enacted the Consumer Protection Law No. 8 of 1999 (CPL) on 20 April 1999. This law enables consumers, who have sustained any injuries caused by a dangerous product and/or service, to take legal measures against the business operators responsible.

Definition of Consumer, Business Operator, Goods and/or Services

The CPL defines a consumer as any natural person who uses goods and/or services available in the market, either for self interest, family interest, others, or other living creatures that can not be used for resale (Article 1(2)). In other words, only endconsumers are protected in Indonesia. Meanwhile, a business operator is defined as any natural or legal person who, either in the form of a legal entity or some other business form, was established and domiciled or does business within the jurisdiction of the Republic of Indonesia, either by his own or together, under a contract in the field of economics (Article 1(3)).

According to the CPL, the definition of goods is anything that is either tangible or intangible, moveable or immoveable, that can be exhausted (dapat dihabiskan) or not, which can be sold, used, and consumed. A service is defined as a service either in the form of a job (pekerjaan) or as a result (prestasi) which is provided to the community to be used by consumers. Consumers’ Rights and Obligations Article 4 of the CPL states the rights of consumers:

1. a Right of comfort, security, and safety in the consumption of goods and/or services;
2. a Right to choose goods and/or services and to get those goods and/or services at the proper price and in the condition that the goods and/or services were promised.
3. a Right of true, precise, and honest information on the condition of the goods and/or services;
4. a Right to be heard, whether an opinion or objection (keluhannya), to the goods and/or services used;
5. a Right to seek legal aide assistance during a consumer protection dispute;
6. a Right to get guidance and education.
7. a Right to be treated or served in a proper and non-discriminate manner.
8. a Right to get compensation, redress and/or a replacement if the goods and/or services received were not as promised in the agreement or were unfit for purpose. 
9. any other rights granted under any other prevailing laws and regulations.

Under Article 5 of the CPL, consumers also have obligations:

1. To read and follow the instructions and procedures to use or make use of the goods and/or services for security and safety.
2. Act in good faith during the purchase transaction of any goods and/or services;
3. To pay the agreed price;
4. To participate in any consumer protection legal dispute in accordance with the prevailing laws and regulations.

Business Operator’s Rights and Obligations

Business operators’ rights are regulated in Article 6 of the CPL:

1. a Right to receive payment pursuant to the terms and conditions of the agreement and to refund and exchange goods and/or services;
2. a Right to legal protection from consumers acting in bad faith;
3. a Right to submit a proper defense in any consumer protection dispute matter;
4. a Right to rehabilitation of the good name and reputation if the damage is legally proved not to be the fault of the business operator or of the goods and/or services sold;
5. any other rights granted in any other prevailing laws and regulations.

A business operator under Article 7 of the CPL has the following rights:

1. To conduct business in good faith;
2. To supply true, correct, clear and honest information on the condition and guarantee the goods and/or services as well as provide instruction on the use, repair, and maintenance of the goods and/or services;
3. To treat or serve consumers in a proper and non-discriminate fashion.
4. To guarantee the quality of the goods and/or services produced or sold in accordance with the standard provisions of any prevailing laws and regulations with respect to the quality of goods and/or services sold;
5. To provide consumers a chance to test and/or try certain goods and/or services and to give any necessary guarantee on the product made or sold in the market;
6. To provide compensation, redress and/or replacement for any injury or damages as a result of consuming, using, and making use of the goods and/or services sold;
7. To provide compensation, redress and/or replacement for any injury or damages if the received or used goods and/or services were not in accordance with the terms and conditions of the agreement.

The CPL in Chapter IV, Articles 8-17 prohibits business operators from certain conduct such as producing and selling goods and/or services that are unfit for purpose based on prevailing quality standards regulations; selling defective or used goods without providing full and frank disclosure on the condition of the goods and/or services; offering, promoting, or advertising goods and/or services under a false pretense; promoting goods and/or services by way of either incorrect statements or misleading information; using standard contracts where location and form are not readily identifiable or can not be seen clearly, or if its statement cannot be understood and if it prohibits other conduct.

Business Operator’s Liability & Product Liability in Indonesia

Indonesia does not currently have specific product liability legislation that addresses the legal liability of manufacturers and sellers to compensate users and consumers for injury or damage suffered after consuming a defective product. Although the CPL does address the matter however traditional legal concepts of privity of contract and fault-based theories of producer liability are still applied. As a consequence of the type of legal system utilized in Indonesia it is fair to say that product liability-related jurisprudence is not yet highly developed. Litigation in Indonesia generally is viewed as being counter to the social and cultural characteristics of the community and the State that prides itself on the resolution of disputes through discussion and the achieving ultimately of a consensus. It is these social norms in Indonesian society that tend to discourage litigation in favor of discussion leading to consensus and this is evidenced in the small number of claims that ever make it to court.

Product Liability in Indonesia is known as a liability on defective goods (“tanggung jawab produk cacat”). This kind of liability is a result of the circumstances of a product, good, or service, which puts the burden of product liability on the producers or manufacturers. This liability, therefore, puts the stress on the defectiveness of the product that caused injury to people, other people, or other goods.

Even though the CPL does not provide a specific definition for a defective good, nevertheless, it can be assumed to mean: “every product which cannot fulfill the objective of its manufacture either intentionally or negligently as a result of the process of production or any other thing that happens in the distribution process, or by not providing the safety requirements for people or their property in using it, as people would expect it to be used.”

In Indonesia, there are three causes of action that consumers can use to file a product liability civil action: negligence, breach of contract, and tort. Nonetheless, business operators in Indonesia can also be brought to the court for their alleged criminal liability for either public health or security reasons. Under Article 62, business operators that violate the provisions in the CPL can be imprisoned for a maximum term of 5 (five) years or a fine of IDR 2 billion.

Negligence

In the CPL there are three provisions that govern product liability; namely, Articles 19, 23 and 28. Article 19 deals with liability of a producer, in which case the producer should provide compensation for damage, pollution and/or the consumer’s financial loss as a result of consuming the goods or services that were produced or sold (Art. 19(1)). Compensation can be in the form of the return of money, replacement of the goods or services, or the provision of treatment to injury or providing compensation in accordance with the prevailing laws and regulations. Compensation must be given within seven days of the date of transaction. Nevertheless, compensation does not eliminate criminal liability, once fault has been established (Article 19(4)).

However, it is also possible that a producer may avoid compensating the consumer if the producer is able to prove that the injuries, damage, or other loss was caused by the consumer themselves and not by the good or service. However, if the producer cannot prove this and he refuses to compensate the consumer pursuant to Article 19, the consumer can take legal action (“sue”) against the producer by going through the Consumers Dispute Settlement Body (Badan Penyelesaian Sengketa Konsumen) under Article 23.

Under Article 19, the consumer has the right to restitution if it can be proven that negligence occurred. If negligence can be proven and the business operator and or producer refuses to compensate the consumer within seven days of the date of transaction, Article 23 allows the consumer to take the business operator or producer either to court or through the Consumers Dispute Settlement Body.

The CPL shifts the burden of proof to the producer, in the sense that the producer must prove that there was no negligence. Therefore, product liability, according to the CPL, is a negligence action that at the same time modifying the burden of proof to the producer.

Breach of contract

Under the provisions of Article 1243 of the Civil Code, consumers who have sustained injury or damage can sue the sellers or manufacturers due to a breach of contract. This provision argues that the seller or manufacturer failed to uphold their end of the contract, thus the plaintiff should be entitled payment for costs, damages, and interest arising from the breach of contract. However, if the sellers or manufacturers can prove that their defect was caused by something unforeseeable for which they cannot be held accountable, then they are not held liable for the damages or injuries, assuming that they are not acting in bad faith. Furthermore, they do not need not pay for damages due to force majeure or by some unintentional occurrence, or if they were prevented from performing the contract. Under the breach of contract theory, consumers can only prevail if they are able to prove damage occurred and that the business operator or producer was aware of the defect at the time the contract was entered.

The Civil Code also states that sellers are obliged to ensure that the goods they sell are free from hidden defects. In other words, if the defects are known to the consumer, then the consumer either would not have purchased the goods or services or would have purchased it at a reduced price. Sellers are not obligated to inform consumers about visible defects in which buyers can conceivably discover for themselves. Therefore, it can be said that a breach of contract includes a breach of warranty by the producer. Since the contract is between the producer and consumers, only consumers can bring about this course of action. The key of this theory is dependent upon the privity of contract.

Tort Liability

Tort Law (“perbuatan melawan hukum”), also known as an “open” clause, is one of the theories available for a product liability action in Indonesia. Article 1365 of the Civil Code provides the legal foundation under Indonesia law for all tort actions by consumers who were injured by a defective product. Under this provision, it is mandatory for the person who inflicts damage upon another to compensate the victim. Furthermore, Article 1366 states that each and every person is responsible for the damage that they cause due to their negligence or carelessness.

Therefore, to be able to bring a tort claim for product liability, consumers have to provide evidence which proves that the producer was negligent (at fault), the action of the producer was an unlawful act, the consumers suffered damage, and there is a causal relationship between the tort in question and the injury or damage the victim suffered.

Product liability in Indonesia is based upon fault, in other words, consumers can only bring a product liability claim if only the producer is at fault. Under the theories of breach of contract and tort liability, the burden of proof is on the plaintiff, while under the negligence theory, laid out by the CPL, the burden of proof is on the producer. Unlike the US, which imposes the concept of “strict liability” with respect to tort claims, Indonesia only prescribes a presumption of negligence or a presumption of liability in which the producer can rebut the presumption if they can proof that they were not at fault. Hence, the principle of product liability in Indonesia is still at least one step behind the principle of strict liability. 

Consumer Dispute Settlement Mechanism

A consumer dispute is basically a dispute between business operators and consumers who demand redress as a result of alleged damage, pollution, or other suffering in the consumption or the usage of goods or services. There are 3 mechanisms in which consumers can settle their dispute with business operators: through the Consumer Dispute Resolution Body, litigation, or an approved ADR mechanism.

Consumer Dispute Resolution Body (Badan Penyelesaian Sengketa Konsumen)

The Consumer Dispute Resolution Body (“Badan Penyelesaian Sengketa Konsumen” or “BPSK”) acts as an out of court consumer dispute mechanism. All consumers who suffer damage can sue the producer, manufacturer, or seller through this body instead of through the general court system. In some aspects, this new body is basically similar to a small claims court because the procedures involved are simple, informal, and inexpensive. If a consumer decides to go through the Consumer Dispute Resolution Body, it is the consumer’s choice if legal aide is wanted. Any consumer who wants their dispute settled by the BPSK has to file a written or oral complaint on settlement of the dispute through the secretariat of the BPSK, who in turn will then establish a committee that will consist of three people that represent the three elements of the BPSK (government, consumer, and business operators). This committee will settle the consumer dispute through conciliation, mediation or arbitration, whichever the parties decide.

All consumer disputes using the aforementioned mechanisms have to reach a settlement at least twenty-one days from the day the complaint was received by the BPSK secretariat. The decision from the BPSK is final and binding, however, each party can appeal the decision which would lead to a trial within fourteen days of the decision being delivered to all the relevant parties. During the trial, the court has to hand down its decision within twenty-one days. If either of the parties are still unsatisfied with the verdict, the decision may be appealed to the Supreme Court within fourteen days of the decision of the trial court. The Supreme Court has to hand down its decision no later than thirty days after the petition is filed. In conclusion, a consumer dispute that commences in the BPSK and is finally resolved in the Supreme Court may take up to 100 days.

Litigation (In Court) Process

Every suffering consumer can submit their complaint to the relevant District Court in an attempt to resolve their dispute with the business operator. Any complaint by a consumer on the conduct of a business operator that is alleged to have breached the CPL can be filed by the relevant consumer or their heirs; a group of consumers with the same or similar complaint with respect to the same product or service in the form of a class action; by a consumer protection group (Consumer Protection NGO) or by the Government or any other related institution in the event that the good or service in question resulted in huge material loses and assessable damages or there were a significant number of consumers who were affected by the breach. The procedures noted in this mechanism refer to the procedural processes of the General Courts.

Out of Court Settlement Mechanisms

An out of court consumer dispute settlement occurs when the relevant parties desire to resolve the matter with respect to the amount of compensation or other reparation regarding the alleged breach of the law to guarantee that the consumer is protected from further harm and compensated for the harm already suffered. The format used is known as Alternative Dispute Resolution (“ADR”). An important provision that must be considered is Article 45(3).

This Article states that any out of court consumer protection dispute amicably settled between the parties does not void any criminal liability that may be incurred as a result of the conduct. Finally, parties that elect to attempt an out of court settlement may only return to the court to confirm their agreement. In the event the parties fail to reach a mutually acceptable agreement may the parties re-enter a court administered litigation action.

TAXATION

The foundation of Tax Law in Indonesia is the Constitution, particularly Article 23A, which states, “Tax and other levies which are characterized as compulsory for the needs of State are to be regulated by law”. Since Indonesia gained independence in 1945, Indonesia has recognized two primary terms in taxation law; namely, tax and fiscal. There has been no agreement, particularly among the experts, on the difference between these two terms however there has been no shortage of possible interpretations. Several experts have stated that tax is a non-compulsory contribution from the individual or organization to the government to defray the expenses incurred in the common interest of all citizens without reference to any special benefits conferred by regulation. Fiscal, on the other hand is defined by Soemitro as any form of government action to receive contributions from their people for particular purposes and to be used exclusively at certain times for the purpose for which the fiscal was levied.

There are 3 basic categories of taxes in Indonesia; namely, National taxes, Regional taxes, and custom (duties and excise) taxes. National Taxes include income tax, value added tax, sales tax on luxury goods, land and building tax, and the fiscal departure tax. Regional Taxes include development tax, motor vehicle tax, and other relatively minor taxes. Customs Taxes include import duties, export tax, and taxes on certain commodities such as tobacco, alcohol, sugar, and gasoline.

The Indonesian Government is currently undertaking a significant amount of tax reform, particularly through amendments to current legislation and the enactment of new legislation. The primary aim of these reforms is to provide taxpayers with increased fairness and greater levels of legal certainty with respect to their rights and obligations under the tax law. Furthermore, it is expected that these reforms will provide more clarity and simplicity in both procedural and technical matters. Interestingly, the reform package also introduces the possibility of self-assessment with respect to tax. The Government has recently confirmed the Tax Policy Blue Print which sets out the Government’s tax policy and strategy for the decade from 2001 through to 2010. The proposed tax reform program has already commenced with some of these amendments coming into force as of 1 January 2001. The Directorate General of Taxation was responsible for drafting several amendments to three earlier tax laws, namely: Law 16 of 2000 on General Taxation Arrangements and Procedures; Law 17 of 2000 on Income Tax; and, Law 18 of 2000 on Value-Added Tax on Goods and Services and Luxury Sales Tax. The amendments include revisions to tax brackets and a number of measures designed to improve taxpayer compliance. The current prevailing tax legislation restricts the Directorate to making a request to the National Police Force to arrest delinquent taxpayers or individuals alleged to have breached any other tax law or regulation.

Income Tax

The basic principles of Indonesia's Income Tax law apply to businesses and individuals alike. Taxable income is defined as any increase in economic prosperity received or accrued by a taxpayer, whether originating from within or from outside the Republic of Indonesia that may be used for consumption or to increase the recipient’s wealth in whatever name or form. It includes any remuneration in connection with work or services, business profits (with no distinction between operating and capital income), dividends, interest, rent, royalties and other income related to the use of property.

The current tax bracket system stipulates 3 brackets with a maximum tax rate of 30% applied to individuals or businesses with taxable income above IDR 50 million. Generally, taxation is selfassessed which has traditionally allowed for significant levels of tax avoidance to occur. To counter this, there is an extensive system of domestic withholding taxes to ensure regular and early collection of income tax. The withholding tax system includes severe penalties for non-compliance. In addition to the 3 brackets noted above there are special tax brackets for specific types of businesses such as petroleum companies, mining companies, geothermal power companies, foreign drilling companies, and non-resident international shipping and airline companies.

Taxable income is determined by subtracting allowable deductions from revenue. Certain expenses, such as employee benefits in kind and donations, are generally not tax deductible. In addition, interest incurred to finance the acquisition of shares is not deductible unless dividends from the shares purchased are taxable. As a general rule, taxpayers may deduct from gross income all expenses related to earning, securing, and collecting taxable income. Items that are not deductible include those incurred for the personal benefit of shareholders; benefits in kind (housing and vehicles) provided to employees, except for the provision of food and beverages for all employees, and for certain benefits in kind provided to employees in certain remote areas (including gifts, donations and support); “excessive” payments for goods or services where a special relationship is deemed to exist between the buyer and seller; and, expenses incurred in the course of producing income that is exempt from tax or subject to final tax. Formation of a reserve or allowance is generally not tax deductible, with the exception of bad debt allowances for banks or finance leasing companies, reserves in insurance companies, and reserves for reclamation costs in the mining industry.

Taxable Income for individuals includes virtually any "increase in economic benefit" received by a taxpayer including wages, profits, prizes, gifts, and capital gains. Tax residents are taxed on world-wide income (whether or not remitted to Indonesia), although the tax authorities still lack the resources to effectively monitor and enforce full compliance where offshore income is involved.

In Corporate Tax most Indonesian companies adopt the calendar year as their financial and tax year, however under special circumstances substituted accounting periods are available. A corporation, for tax purposes, is classified as “resident” or “nonresident”. Residency is determined on the basis of place of incorporation. A corporation is therefore considered “resident” if incorporated in Indonesia and non-resident if otherwise. Resident corporations are taxed on their worldwide income. Tax credits are allowed for income that was taxed outside the country. Nonresidents are taxed only on income derived from Indonesian sources, subject to any relief available under double taxation agreements. However, a non-resident entity with a permanent establishment (“PE”) in Indonesia, such as a branch office, is taxed on (1) the PE’s income from its business or activities, and from the assets it owns and controls; (2) the income of the head office arising from business activities, or sales of goods or services in Indonesia of the same type as those sold by the permanent establishment in Indonesia; and (3) all other income, either received or accrued by the head office such as dividends, interest, royalties, rent and other income connected with the use of property, fees for services, etc, provided that the property or activities producing the income is effectively connected with the PE in Indonesia. Income attributable to a PE of a company that is resident of a treaty country should refer to the relevant treaty. 

In Indonesia a PE is generally defined as an operation in which a non-resident establishes a fixed place of business in Indonesia. This would include a management location, a branch office, and an office building, among others. A PE can also be established as a result of the non-resident entity’s employees providing services in Indonesia for more than 60 days in any 12- months period. For companies from those countries with which Indonesia has concluded a Double Tax Agreement (“DTA”), the relevant definition can be somewhat modified.

Expenses such as those for research and development carried out in Indonesia and eligible employee training qualify as regular allowable deductions. Indonesia has no special income tax deductions/relief for research and development and eligible employee training. The deductibility of research and development performed offshore remains unclear.

There is taxation of other particular forms of income, such as:

Dividends – withholding tax applies to dividends paid by Indonesian corporations. An important exception is domestic intercorporate dividends, provided that the dividend is from the retained earnings, the shareholding of the recipient is at least 25%, and the recipient maintains other active businesses. If the recipient is a resident individual or non-corporate entity, the rate is 15% and represents an advance against the taxpayer's annual income tax.

Interests – interest paid by resident borrowers to resident banks or financial institutions is exempt from tax. Interest paid to offshore lenders is subject to 20% withholding tax (subject to applicable tax treaty).

Royalties – if the royalty recipient is a resident taxpayer, tax is withheld at the rate of 15%. If the recipient is a non- resident, tax is withheld at the rate of 20% (subject to applicable tax treaty).

Capital Gains – capital gains are generally taxable as ordinary income and capital losses are tax deductible. Special rules apply for publicly traded shares.

Value Added Tax (VAT)

VAT is imposed upon the delivery of most categories of goods and services within Indonesia. The basic VAT rate is 10%. Imports are generally subject to VAT at a rate of 10%, but exports are effectively exempted from VAT by application of a 0% rate. Undeveloped land transfers do not attract VAT but land prepared for residential or industrial estate development is subject to a VAT of 8%. VAT liability arises at the time of delivery of the goods or services, or upon receipt of payment, whichever is earlier. As a practical matter, the date of the tax invoice (faktur pajak) is used to determine when tax liability arises. The taxable individual corporation must issue the tax invoice no later than the end of the month following the month of delivery or payment. Monthly returns of all taxable purchases and sales must be filed by the 20th of each month. If output VAT is greater than input VAT, the net difference is payable to the tax office. In practice, payment of tax may be delayed up to a maximum of 75 days following the day of delivery. If input VAT is greater than output VAT, the excess may be carried over to the following month to offset against that next month's output VAT. In principle, the excess of input VAT over output VAT may be refund once a year, although actual collection may be difficult and/or time consuming.

Various means of reducing the burden of VAT have been introduced. Deliveries of goods into bond zones are VAT exempt, as are goods and services to foreign aid projects, sales of cattle and poultry feed, and the import of certain specified goods and services. Services in certain sectors have been specifically exempted from VATsuch as services related to medical and health care, social welfare activities, banking and insurance, radio and television broadcasting, telephone and telegram services, educational and religious activities, public transportation, postage, labor supply, and hotel accommodation. Additionally, deferrals of VAT are available to PMA and PMDN companies on the import of Master list equipment, machinery and raw materials used in the production process. Presidential Decree No. 37 of 1998 provides for a VAT exemption on the transfer of capital goods in the form of machinery and factory equipment. Under Minister of Finance Decree No. 615/KMK.O1/1997, production companies may import raw materials free of VAT, Sales Tax on Luxury Goods and import duties, provided that the raw materials are processed and reexported. Additionally, under the so-called PET facility (Perusahaan Eksportir Tertentu) established by the Minister of Industry and Trade and the Minister of Finance, specially designated exporting companies are granted a facility to purchase certain types of locally sourced basic and auxiliary materials on a VAT free basis.

Sales Tax on Luxury Goods

Sales Tax on Luxury Goods is imposed at a rate of 10% to 50% on a wide range of both imported and local luxury goods. Luxury houses, apartments, condominiums and townhouses are subject to a 10% Sales Tax on Luxury Goods.

Land and Building Tax

Land and Building tax is payable annually on land, buildings and permanent structure. The rate is 0.5% of the assessable value, which is set at 20% of the market value of the property except for residences with a market value in excess of IDR 1 billion in which case the assessment is 40% of the market value. The market value, in principle is revised annually. However, the first IDR 8 million per taxpayer is tax-deductible. 

Special calculation formula applies to plantations, mining, and forestry business. Non-taxable objects are land and buildings used for religious worship, social affairs, health, national education and culture, graveyards and archaeological relics, protected forests, nature reserves, tourist forests, national parks, pasture under village control and other state lands, diplomatic offices and consulates (on a reciprocal basis), and specified international organizations.

Fiscal Departure Tax

Every Indonesian resident departing Indonesia by air is required to pay a IDR 1 million "Fiscal Departure Tax", with limited exceptions.

Development Tax

Development Tax is 

municipal tax intended to aid the development of cities. Where applicable, it is levied at the rate of 10% on restaurant bills. There is also a tourism development tax of an extra 2% on the service charge imposed by some hotels and restaurants.

Tax Returns

Taxpayers must prepare both monthly and annual returns. Monthly returns must be filed by the 20th day of each month for corporate tax, employee income tax, and VAT. Annual returns must be submitted within three months of the end of the financial year.

Accounts and records must be kept in Indonesia, denominated in Rupiah, and composed in Indonesian or a foreign language approved by the Minister of Finance. PMA (foreign investment) companies, permanent establishments of foreign companies, production sharing contractors, contract of work companies, and other entities with foreign affiliations are allowed to 

keep records in English and accounts in US dollars, subject to approval from the Director General of Tax. PMA companies, permanent establishments, and other entities with foreign affiliations must obtain this approval at least 3 months before the beginning of the relevant accounting year or within 3 months of a new taxpayer being established. Production sharing contractors and contract of work companies must notify the Tax Office in writing at least one week before US dollar/English bookkeeping is adopted. A taxpayer who uses English (only) in its bookkeeping has to submit written notification to the Tax Office within 3 months after the beginning of the book year when English bookkeeping commences.

Where a tax assessment has been issued, an interest penalty is chargeable on tax not paid by the due date, calculated from that date until it is paid. The rate of interest is 2% per month for a maximum of 24 months. Administrative surcharges levied on under reported tax:

1. 50% of the income tax not paid or underpaid in a tax year if a tax return is not filed or not filed within the specified period as stated in the reminder letter issued by the Tax Office.
2. 100% of the income tax not withheld or under withheld, not collected or under collected, or not deposited or under deposited.
3. 100% of any VAT or sales tax on luxury goods not deposited or under deposited, in certain circumstances.

If a taxpayer corrects its own tax return (2-year limit after the tax is due or after the end of tax period or tax year) with the result that the tax owed increases, a penalty in the form of 2% interest per month is applied to the total tax underpayment, calculated from the end of the filing date for the period until the date of payment arising from the corrected tax return. Even though a tax return has been corrected or the 2-year limit has passed, a taxpayer may declare an error in the tax return as long as the Tax Office has not issued a tax assessment and the revision results in a higher taxable profit or a lower tax loss. Any tax underpaid and the administrative surcharge of 50% of the tax underpaid should be paid before the tax return is submitted.

The Indonesian tax system is based on the principle of selfassessment. However, the Tax Office has the right to issue an assessment within a 10-year period ("statute of limitation"), if, after an audit, it considers that the taxpayer has not self-assessed the correct amount or if no tax return has been lodged. However, an assessment can be issued after expiry of the 10-year limitation period if the taxpayer has committed a criminal act. The Tax Office conducts the following types of audits:

1. full audits, which should be completed within 2 months, but may be extended to 8 months;
2. simple field audits, which should be completed within 1 to 2 months;
3. simple office audits, which should be completed within 4 to 6 weeks;
4. If any transfer pricing issues are identified, the tax audit may be extended up to 2 years, although this does not apply if the taxpayer requests a refund.

An additional tax assessment letter may be issued within the 10-year limitation period if new data and/or data previously undisclosed is discovered shows that the tax liability has been understated. An administrative surcharge of 100% is levied on such additional assessments. An additional assessment can be issued after expiry of the 10-year limitation period if the taxpayer has committed a criminal act, in which case an administrative (interest) penalty of 48% is applied to the additional assessment in addition to the above surcharge. A taxpayer may object to an assessment or an additional assessment within 3 months of its date of issue. The Tax Office has one year in which to issue a decision. The Tax Office may reduce the assessment, confirm it, or even increase it. Failure to issue a decision means the taxpayer's objection is deemed to be accepted.

A taxpayer may submit an application to reduce or cancel administrative penalties on tax assessments (request for reconsideration) to the Tax Office. The application has to be processed within 12 months; otherwise the application is deemed to be accepted.

BANKRUPTCY LAW

Indonesia has had a formal Bankruptcy Law since 1905, when Staatsblad 1905 No. 217 jis. 1906 No. 348 or Failissement Verordening (hereinafter “FV”) was put into effect. The Bankruptcy Law was then amended with Government Regulation in lieu of Law (Peraturan Pemerintah Pengganti Undang-undang or abbreviated as “PERPU”) No. 1 of 1998 (hereinafter referred to as “PERPU 1 of 1998”). A PERPU can only be enacted by the President and may be enacted without the parliament’s consideration however the subject matter of the PERPU must require emergency regulation and cannot be regulated in any other way. Nevertheless, to ensure that the President does not abuse the power of PERPU, a PERPU is required to be brought to the parliament at the first available parliamentary sitting to be confirmed or rejected as law. As stated in TAP MPR No. III of 2000, a PERPU is one rank below a Law. The PERPU power is regularly the source of debate, particularly with regard to whether an economic crisis can qualifies as a state of emergency that requires PERPU regulation. At the time the underlying reason was the urgency placed on the amendments to be rapidly enacted to ensure an IMF loan disbursement. The debate still lingers whether the urgency stated equates to a state of emergency necessary for the use of the PERPU power. Nevertheless, the use of PERPU to regulate urgent matters does avoid the often long and tedious debates of the parliament in the immediate term. However, as noted earlier before a PERPU can be enacted as a full law it must be passed by the parliament in the parliament’s next sitting so the avoidance of debate and public scrutiny is not avoided in the longterm.

PERPU 1 of 1998 came into effect on 20 August 1998 and the Parliament confirmed the PERPU into Law 120 days later without making any amendments to Law 4 of 1998. Therefore, Law 4 of 1998 refers to the Amendment of the Bankruptcy Law and PERPU 1 of 1998 which were incorporated into Law 4 of 1998. The amended Bankruptcy Law became Law 4 of 1998. The Bankruptcy Law Amendment did not replace the old law but merely add provisions and amend the provisions of the FV. Furthermore, on 2004, the new Bankruptcy Law came into effect, named as Law 37 of 2004 on Bankruptcy and Suspension of Debt Payments. This new law replaces the previous Bankruptcy Law. As it is said in article 307, FV and Law 4 of 1998 are withdrawn and not legally binding anymore. Therefore, the Bankruptcy Law refers to Law 37 of 2004.

The FV has always been an unpopular legal instrument within the business community for a number of reasons, particularly the difficulty of successfully sustaining a bankruptcy claim. This is evidenced by the fact that during the 1980s and 1990s only a small number of bankruptcy petitions were ever successful and involved nominal debt values and usually against sole traders, this has often been referred to as consumer bankruptcy. Legal entities that had significant asset or debt rarely utilized the bankruptcy law or associated procedures. Indonesian bankruptcy history shows that Arafat Lyold (Sailing Company) was the only company holding huge debt and significant assets that were subject to a business bankruptcy proceeding. It is worth noting that at that time, voluntary petition was much more common than involuntary petitions were. 

Bankruptcy has often been viewed as saviour or destroyer of businesses and business interests however at the beginning of 20th century bankruptcy enjoyed somewhat of a revival as businesses were looking at bankruptcy in a more favorable light. Professor Sudargo Gautama notes in his book that there were many bankruptcy petitions in civil court at that time. However, as the 20^th century was ending, the 1990s saw a substantial decline in the number of bankruptcy petitions filed in civil court. The primary reason for this decline was that legal consultants advised their clients to consider the bankruptcy procedure as a dead option and whose consequences were not worth any consideration.

Since the last revision of Staatsblaad 1906: 348 there has in practice been no significant change to the substance of the bankruptcy law. This could be viewed as a careless oversight or a conscious minimizing of the value of bankruptcy law however it is clear that the bankruptcy law should at least reflect the current and real conditions of the business community. In the postindependence period Indonesia experienced a major transformation in business practices and unfortunately it become obvious that the Bankruptcy Law was never able to keep pace. The most obvious of these deficiencies was the inability of the Bankruptcy Law to provide protection to creditors from a bad faith debtor. Furthermore, the requirements that must be satisfied prior to filing a bankruptcy petition were extremely onerous and complicated. The FV required the creditors to prove that the debtor was in a discontinued-debtpaying position before a bankruptcy petition could be filed. Clearly this is difficult as the majority of debtors were still paying their debts despite the payments being made never being in the full amount. These difficulties were only increased by the ineffective work of the Trust Estate Agency (“Balai Harta Peninggalan”) and the courts, which often took excessively long periods of time to resolve matters and usually treated the matters as trivial inconveniences delaying other more important matters.

The FV is the bankruptcy law inherited from the Dutch that was applied during the colonial period. This meant that bankruptcy cases were generally dealt with in the general court system and were treated the same as any other civil case. The Trust Estate Agency, a Government run institution, in essence provides the same services and function as the Trustee in the Chapter 7 US Bankruptcy Code with respect to the administration of an estate.

The previous bankruptcy law, Law 4 of 1998 (also stressed out in Law 37 of 2004 article 300), had established a special court to handle commercial cases including bankruptcy. This court was simply named, the Commercial Court. The implementation of the Amended Bankruptcy Law requires further ‘implementing regulations’ to facilitate and ensure compliance with the amended provisions. Presidential Decree 97 of 1999 created additional Commercial Courts in Bandung, Semarang, Surabaya, and Medan. The Commercial Court falls under the jurisdiction of the District Court, a first instance level court of the Indonesian judiciary, and is considered to be a specialized chamber of the relevant District Court, similar to Human Rights Courts and Children’s Courts. Article 11 of the Bankruptcy Law stated that the new Commercial Court or ‘Bankruptcy Court’ is intended to be a method of last resort. Essentially, this requires that all other methods and means of satisfying payment have been exhausted and the debtor remains delinquent in their obligation to make payment on the relevant debt despite being in a position to do so or where a debtor has consistently negotiated in bad faith with respect to settling any outstanding debt obligation. Therefore, it is reasonable to state that the underlying premise of the Bankruptcy Law is to force delinquent debtors, and who have the means to pay their debts, to negotiate with their creditors a repayment schedule, or in the case of those debtors unable to pay off their debts, to expedite the liquidation of the debtor’s assets. The Bankruptcy Law includes both the material and procedural elements of law to ensure compliance with and enforcement of the provisions of the law.

Basically, like other bankruptcy system the parties in Indonesian Bankruptcy Law are the debtors and the creditors with the receiver to assist them in reaching settlement. The Bankruptcy Law introduces two mechanisms to deal with the insolvent debtor. The first mechanism is the petition to declare the debtor bankrupt with the aim of liquidating the assets under Chapter II. Either the debtor or its creditor(s) can initiate this type of proceeding. The debtor under the Bankruptcy Law can be individual as well as a juridical person (a company, a bank, or any other legal entity that has legal personality). However, in Article 2 (2), (3), (4), and (5) states there are four other categories that may file a bankruptcy petition: (1) the Office of the Attorney General in the public interest (2) the Indonesian Central Bank if the debtors are banks, (3) the Capital Market Supervisory Board if the debtor is a listed company (4) the Minister of Finance if the debtor is Insurance Company . Article 4 further requires spousal consent to file a petition where a debtor is married. Under Article 2 (1) a petition for the declaration of bankruptcy has to satisfy two requirements; namely, the debtor has at least two or more creditors and the debtor has failed to pay at least one of the due and payable debts.

The second mechanism introduced under Chapter III of the Bankruptcy Law is the Suspension of Debt Payments (“Penundaan Kewajiban Pembayaran Utang” or “PKPU”). This mechanism does not aim to liquidate assets but rather encourage the debtor and creditor to restructure the debt and payment schedule. Under this mechanism Article 222 allows the debtor to request a suspension of debt payments provided there is an intention of achieving a compromise with creditors and unsecured creditors to restructure the debt. These proceedings may be initiated by the debtor and requires the agreement of a certain number of unsecured creditors. Article 224 (1) states the restructuring agreement can only take effect once it has been agreed by the court. Furthermore, Article 236 states that once a restructuring agreement takes effect it will immediately revoke any suspension in debt payments that has been granted previously.

The Indonesian Bankruptcy Law is pro-creditor and provides for a wide variety of creditor remedies,for instance: (1) establishes an asset distribution framework that maximizes the amount of assets apportioned to creditors; (2) allows for a suspension of debt payments procedure; (3) grants broad powers to the court-appointed receiver to generate as much profit as possible on behalf of the insolvent company; and (4) Indonesia's Company Law provides for directors to be held personally liable for debts if the directors' mismanagement of the company resulted in the bankruptcy. Significantly, the Indonesian Bankruptcy Law does not result in a discharge of the debtor's debts, but rather preserves the debtor's liability to creditors even after the adjudication.

Under the Indonesian Bankruptcy Law in Article 3 (1), any natural person or entity as prescribed by the laws of Indonesia is eligible for bankruptcy if domiciled within the country. Moreover in Article 3, the petition for bankruptcy is filed in the District Court that has jurisdiction over the debtor's place of domicile.

Article 36 states that a petition for declaration of bankruptcy requires the court to immediately adjudge the debtor's status and deem the debtor bankrupt if past due debts exist. The effect of a debtor being adjudicated bankrupt is that a lien is placed over the debtor's property. In the event of a judgment of bankruptcy Article 11 notes that the debtor has the opportunity to appeal within 8 days, depending on whether the debtor had prior notice of the proceeding. However, such an appeal does not stay the bankruptcy.

After declaring a debtor bankrupt, the judge has 14 days to establish a deadline for all creditors to submit their claims to the court and to determine the time and place for a meeting of the judge, receiver, debtor, and any creditors who desire to attend as noted in Article 113. This meeting is called a verification meeting, and its purpose is to review all of the claims filed by creditors and determine which are secured, preferred, or general, and whether or not any filed claims are being disputed. At the meeting, the receiver may demand proof to substantiate a creditor's claim and negotiate with creditors while the creditors may dispute the validity of a claim or its amount.

Article 56 (1) states that once a debtor is determined to be bankrupt creditors with a secured interest may foreclose on the secured property if this action is initiated ninety days after the declaration. Alternatively, a secured creditor may redeem his financial interest through the liquidation of the debtor's estate, as initiated by the court-appointed bankruptcy receiver. Creditors may also benefit by compelling the judge upon conclusion of the verification meeting to appoint a Creditors' Committee. The Creditors' Committee acts to advise the receiver. However, the receiver is compelled to provide the Creditors' Committee with all information sought and consult with the Committee before taking certain actions.

Conversely, a debtor may attempt to protect himself by offering an alternative plan at least eight days prior to the verification meeting that has the agreement of the general creditors to pay all or part of the debts. Any such plan must be approved by a majority of the general creditors present at the verification meeting, as well as the District Court. Upon approval of the plan, the bankruptcy is canceled and the debtor's unsecured claims are satisfied to the extent of the agreement's terms.

Once a debtor is adjudicated bankrupt, the receiver commences liquidation of the debtor's estate. Secured interests are given priority, in that all secured interests must be fully satisfied before proceeds from the liquidation may be made available to the other creditors. Provided enough money was procured through the liquidation sale, remaining creditors are entitled to payment in proportion to their filed claims. Nevertheless, creditors still seek collection of unpaid debts through mechanisms outside the legal system, utilizing negotiation and "dubious debt collection practices that would not be acceptable elsewhere."

If a debtor elects the suspension of payments option, the commercial court must hold a hearing to determine whether the suspension of payments should be extended to a total of 270 days. If the 270-day period of suspension of payments is granted and the debtor and creditors fail to agree on a rescheduling plan, the commercial court must adjudicate the debtor as bankrupt. Conversely, if an agreement is reached on the terms of the rescheduling of debt payments, and the Commercial Court accepts the terms of the agreement, then a decision will be issued making it binding on all parties. Furthermore, a creditor or the state prosecutor can request the court to confiscate a bankrupt debtor's assets. Additionally, creditors can ask the court to nullify grants made by a debtor within the last twelve months if the debtor knew or should have known it would be detrimental to a creditor.

The new regulations also provide for debtor protection. Primarily, the new regulations allow for a 9-month suspension of debt payments, enabling debtors to work with a receiver to formulate a plan on how to pay creditors. A debtor who is unable to pay loan repayments may receive a deferral from the court if the debtor presents a proposal for settlement with the creditor. 

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Referensi

• https://www.aseanlawassociation.org/