“In accordance with the principle of freedom of contract, any contracting parties can determine the choice of law and the choice of forum in commercial contracts. While it is not mandatory to do so, determining such choices can be beneficial to the contracting parties under certain considerations.”
In Indonesia, the laws and regulations acknowledge a principle of “freedom of contract”, which states that the contracting parties are allowed to determine specific clauses within the contract, insofar as the contract does not violate any elements of validity stipulated by law.
Prior to discussing the choices of clauses within a contract, it must first be established that in order for a contract to be determined valid and binding, provisions under Article 1320 of the Indonesian Civil Code (“ICC”) state that the elements of validity of a contract are:
- There must be consent from the parties;
- The parties must retain the legal capacity to conclude an agreement;
- There must be a specific legal subject; and
- There must be an admissible cause.
Furthermore, it must also be regarded that a contract that is deemed valid shall be considered as prevailing laws between the contracting parties. This is in accordance with Article 1338 paragraph (1) of the ICC, which states that all legally executed agreements shall bind the individuals who have concluded them by law.
In relation to the principle of freedom of contract, a conclusion can be derived that any contracting parties can enter into an agreement in which they are free to determine any clauses which then shall apply to them as if the agreement is a prevailing law.
Determination of the Choice of Law and Choice of Forum in Commercial Contracts
Referring back to the principle of freedom of contract, insofar as all elements under Article 1320 of the ICC are met, all clauses mentioned in an agreement are applicable to the contracting parties as if they were prevailing law. In the event a contract is to be used in Indonesia, the provision under Article 1320 of the ICC shall always apply.
However, while Article 1320 of the ICC applies to all contracts which are to be used in Indonesia, the law governing some contracts is allowed to be determined based on the agreement of the parties.
While some contracts must be governed by Indonesian law (e.g., employment contracts), commercial contracts are relatively more flexible when it comes to the determination of clauses. Therefore, the contracting parties can choose any other law outside of Indonesian law to govern the rights and obligations of each party in commercial contracts.
Similarly, the contracting parties are allowed to determine a choice of settlement forum in the event of a dispute. For example, the parties can choose a forum of arbitration in order to settle any dispute arising out of the commercial contract.
The urgency of Determination of Choice of Law and Choice of Forum in Commercial Contracts
In line with the principle of freedom of contract, Indonesian law does not stipulate any mandatory clauses which need to be stated in a contract.
Therefore, the parties may choose whether to agree on specific clauses such as the choice of law and the choice of forum. This means that the parties are also allowed not to determine the choice of law and the choice of forum in the commercial contract. However, it must be noted that there is an urgency to the determination of the choice of law and the choice forum.
With regard to the choice of law, a determination thereof is of the utmost importance. This is because, without a determination of the choice of law, the governing law of the commercial contract cannot be deemed as certain. For example, if the contracting parties are 2 (two) individuals of different nationalities, there can be an ambiguity as to whose national law applies to the contract. Similarly, if the contract were to be signed in different countries, the ambiguity can arise all the same.
With regard to the choice of forum, a determination thereof is a little less urgent compared to the determination of the choice of law. This is because, in most national laws, any dispute arising out of a commercial contract can be settled by the default forum of a legal court. However, there can be multiple considerations to choose a specific form of a legal court, namely:
- The parties may intend to settle the dispute as quickly as possible and thus would rather have the dispute resolved by a quicker means of settlement.
Should this be the case, the parties may opt for an amicable settlement prior to any settlement in the legal court. Furthermore, if an amicable settlement cannot be reached, the parties may opt for alternative dispute resolution forums, such as arbitration, which does not entail as long of a proceeding as a proceeding in a legal court.
- The parties may intend to settle the dispute specifically in a certain region of the country.
While the parties may agree to the default forum of a legal court, most national laws also determine the specific region of the country wherein the legal court is located. For example, according to Indonesian law, the default location of the legal court must be in the domicile of the respondent in the dispute. Therefore, should the parties intend to waive the default location of the dispute settlement, the parties may agree to have the dispute settled in the specific region preferable by the parties.
- The parties may intend to settle the dispute at the least possible cost.
In most cases, a dispute settlement by the forum of a legal court can be cost-ineffective. This is because the proceeding of a legal court may entail legal documents and actions which are not as easily executed compared to an execution by a legal counsel.
Therefore, in most cases, dispute settlement by a forum of legal court requires the parties to engage services from a legal counsel. On the other hand, if the commercial contract states that the dispute settlement forum shall be by amicable settlement, the parties can attempt a resolution on their own. Therefore, cost efficiency constitutes one of the main considerations to determine a choice of forum.
Author: Yohana Veronica Tanjung
Gaffar & Co., an Indonesian Boutique Law Firm specializing and focusing on commercial law areas e.g. Capital Market & Financial Services.
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