Indonesia: Construction

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This country-specific Q&A provides an overview to construction law in Indonesia.

It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Indonesia is a civil law jurisdiction.

  2. What are the key statutory/legislative obligations relevant to construction and engineering projects?

    Indonesia recently introduced a new Law No. 2 of 2017 on Construction Services on 12 January 2017 which has revoked the previous Construction Services Law No 18 of 1999 (the “Construction Law”).

    Some key statutory /legislative obligations under the Construction Law are as follows:

    1. Mandatory provisions: matters that must at least be covered under the Construction Work Contract (the “Construction Contract) are:

      (a) the identity of the parties;

      (b) explanation of the scope of work;

      (c) warranty period;

      (d) equal rights and responsibilities between the service user and the service provider (contractor);

      (e) utilization of construction worker;

      (f) payment method;

      (g) event of default;

      (h) dispute settlement;

      (i) termination of Construction Contract;

      (j) force majeure;

      (k) building failure;

      (l) worker protection;

      (m) protection over the third parties other than the contracting parties and the worker;

      (n) environmental aspects;

      (o) guarantee over the risk arising and legal responsibility towards other parties in the implementation of construction work or effects of building failure;

      (p) choice of construction dispute settlement;

      (q) intellectual property rights for the planning services; and

      (r) transfer of technology if the Construction Contract is performed by the foreign party.

    2. Governing language: the Construction Contract must be made in the Indonesian language. If the Construction Contract involves a foreign party, it must be made in both the Indonesian and English languages and if there is any inconsistency, the Indonesian language version will prevail.
    3. Subcontractor: The main work may only be given to a sub-contractor who is a specialist and must obtain the approval of the Service User. The main work refers to the chain of activities in the undertaking of construction services which has the highest risk level in causing delay in the construction services completion.

      Specialist in the construction consultancy services the business activity refers to: (i) technical and scientific consultancy and (ii) assessment and technical analysis. While for the construction work covers: (i) installation, (ii) special construction, (iii) pre-fabrication construction, (iv) building completion, and/or (v) equipment leasing.

    4. Selection requirement: Only the contractor who has satisfied the required license and documentation (see: question no. 4 below) may participate in the selection of Service Provider, including for the construction project which is funded by the State Revenues and Expenditure Budget (Anggaran Pendapatan Belanja Negara/ “APBN”).

    For the construction project which is funded by the APBN, the main contractor (penyedia jasa utama) must also deliver 5 (five) types of guarantees (e.g. offering guarantee) which may be issued by financial institutions (e.g. the insurance company) in form of bank guarantee and/or other binding agreement according to relevant laws and regulations.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.

    (a) Health and safety:
    According to the Construction Law, the service provider and the service user must comply with the safety, security, health, and sustainability standards during undertaking of construction services, which shall at least cover the following matters:

    1. Material quality standards,
    2. equipment quality standards,
    3. work health and safety standards,
    4. standard of construction services operational procedures,
    5. quality standard of the proceeds of construction services,
    6. operational and maintenance standards,
    7. manpower social security guidelines, and
    8. environmental protection standards.

    In compliance with the safety, security, health, and sustainability standards during operational of construction services, the service provider and the service user must provide approval for the following matters:

    1. the results of assessment, planning, and/or drafting;
    2. the technical plan for construction, maintenance, demolition, and/or reconstruction process;
    3. the implementation of any construction, maintenance, demolition, and/or reconstruction process;
    4. the utilization of material, equipment and/or technology; and/or
    5. the results of construction services.

    (b) Environmental:
    As mentioned in item (2) above, the Construction Law amongst others provide that a construction must amongst others cover the explanation regarding environmental aspects. This sets out the obligations of the parties in complying with the provisions regarding the environment.

    (c) Planning:
    There are a number of regulations that must be considered in the planning stage, including the following:

    1. Zoning Usage:

      Law No. 26 of 2007 on Zoning Usage (“Law 26/2007”):

      The Zoning Usage Permit is a permit required for zoning usage which implementation will depend on the regional policy of the respective governor/major at the project location. The Zoning Usage Permit will affect the allocation of the building function, including (i) the residential function, (ii) the religious function, (iii) the business function, (iv) the social cultural function, and (v) the special function.

      Buildings may have more than one function and should be built according to the national spatial and regional plan (“RTRW”), province’s RTRW, regency/city RTRW, detailed spatial plan (“RDTR”)/zoning determination of regency/city, and/or building and environmental layout plan (“RTBL”). If an area does not have the RTRW, RDTR, and/or RTBL, the regional government may issue a temporary building permit (Izin Mendirikan Bangunan/IMB.

    2. Land Procurement:

      In 2012, Law No. 2 of 2012 on Land Procurement for Public Interest (“Law No. 2”) was implemented by Presidential Regulation No. 71 of 2012 on Land Acquisition for Development on Public Interests as lastly amended by Presidential Regulation No. 148 of 2015, were issued and are the first comprehensive law and regulation which contain the requirement to make the required land available for public purpose development project, focusing on the need to accelerate the land acquisition process to enable development.

    (d) Employment:
    The Construction Law classifies the manpower in the construction sector based on the relevant knowledge related to the construction services (including among others architecture, mechanical, the environmental aspect, and the implementation management). The construction manpower comprises of qualification in the positions of:

    1. operator,
    2. technician or analyst, and
    3. expert.

    All employees working in the construction services sector must possess the following documents:

    1. Work Competency Certificate which shall be registered by the Minister of Public Works and People’s Housing (the “PWPH”),,
    2. Registration Certificate of Professional Experience which is issued by the Minister of PWPH as the acknowledgment of professional experience, and
    3. Foreign workers must amongst others comply with the following requirement:

      (a) obtain the plan to utilize foreign workers (RPTKA) and a permit to employ foreign workers (IMTA) and only limited for certain positions;

      (b) foreign construction workers with a position of expert in the area of construction services who will be employed must obtain a registration certificate from the Minister of PWPH, which is issued based on the certificate of competence of the foreign construction worker under the law of such foreign construction worker; and

      (c) to conduct transfer of knowledge and technology to the assistant staff (for foreign construction works in the position of expert).

    (e) Anti-corruption and bribery:
    A corporation can be held liable for corruption and bribery offences where the corrupt act is committed by or on behalf of the corporation as stated under Article 20 (1) of Law No. 31 of 1999 on the Eradication of Corruption Criminal Act as amended by Law No. 20 of 2001 (the “Anti-Corruption Law”). The Anti-Corruption Law further elaborates that a corrupt act is deemed to have been committed by a corporation if committed by individual(s) based on their employment or other relationship within the corporate environment.

    Article 20 of the Anti-Corruption Law also allows managers to be held liable for acts of bribery committed by a company (including members of its Board of Commissioners and Board of Directors) in the context of a working or other relationship, undertaken within the environment of the corporation, alone or jointly, while representing the company. In such circumstances, the company’s directors and other authorised representatives can be prosecuted.

  4. What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    There are many permits required to conduct business activities in Indonesia. If under the Construction Law, the relevant permits/licences and penalties are set out below:

    No.

    Permits/Licenses/Other Documents

    Penalties for Non-compliance

    1

    Individual Business Registration Certificate (Tanda Daftar Usaha Perseorangan) for sole proprietorship business.

    Administrative sanction in the form of:

    a)  written warning,

    b)  administrative fine, and/or

    c)  temporary suspension over the construction services activity.

    2

    Business License (Izin Usaha) for local and foreign construction services business entity.

    Administrative sanction in the form of:

    a)  written warning,

    b)  administrative fine, and/or

    c)  temporary suspension over the construction services activity.

    3

    Certificate of Business Entity (Sertifikat Badan Usaha) for construction services business entity.

    Administrative sanction in the form of:

    a)  written warning,

    b)  administrative fine, and/or

    c)  temporary suspension over the construction services activity.

    4

    Competency (Experience) Registration Certificate (Tanda Daftar Pengalaman) for medium and big scale construction services business entity.

    -

    5

    License of Representative Office of Foreign Construction Services Business Entity (Izin Perwakilan Badan Usaha Jasa Konstruksi Asing).

    -

    6

    Certificate of Work Competency (Sertifikat Kompetensi Kerja) for every construction employee of construction services business entity.

    -

    7

    Employer of foreign construction services business entity must possess:

    a)  Plan to Utilize Foreign Worker (Rencana Penggunaan Tenaga Kerja Asing),

    b)  Permit to Employ Foreign Worker (Izin Mempekerjakan Tenaga Kerja Asing), and

    c)  Certificate of Registration (Surat Tanda Registrasi).

    Administrative sanction in the form of:

    a)  written warning,

    b)  administrative fine,

    c)  temporary suspension over the construction services activity, and/or

    d)  recorded in the black list.

    8

    Professional Expertise Registration Certificate (Tanda Daftar Pengalaman Profesional) for every construction professional.

    -

  5. Is tort law or a law of extra contractual obligations recognised in your jurisdiction?

    Yes, the provision of tort or extra contractual obligations is recognised under the Indonesian legal system, but in a very generic terms being known as perbuatan melawan hukum or unlawful act, as contained in Article 1365 of the Indonesian Civil Code (“ICC”) which states as follows:

    “Every unlawful action, which brings losses to another party, shall oblige the person who due to his / her fault results in the loss, to pay compensation for such losses.”

    In Indonesia, the basis of a civil lawsuit is either: (1) based on a claim for a breach of contract;or (2) based on an unlawful act. All lawsuits based on an unlawful act or tort are based on this Article 1365 of ICC. If, for example, there was no prior contractual relationship between the parties and if one of the parties believe that they have incurred damages through actions of the other party, then this shall be a basis for filing a civil lawsuit based on an unlawful act.

    Indonesian legal scholars general view that a claim for unlawful action must fulfil the following elements:

    1. The action must be unlawful:

      This means that if such person conducts an activity which violates the other person’s right or if such a person conducts an activity against its own responsibility. It implies that such action should violate other person’s right or violate its own responsibility based on the provisions of laws and regulations.

    2. The action must result in a loss:

      Loss in this regard may comprise of material and immaterial losses.

    3. The action must be due to a fault:

      Fault may arise due to express intention to commit the fault or due to negligence. A party is also responsible for the actions of the parties who are under its supervision.

    4. There is causal relationship between the loss and the action:

      This means that there must be a direct relationship between the action and the loss arising [from such action].

  6. Who are the typical parties to a construction and engineering project?

    Typically, a common procurement arrangement would involve the service user or the project company. The service user or the project company is typically tasked with hiring the service provider (the construction contractor or sub-contractor) to implement the project. The service user or the project company is often a special purpose vehicle (SPV) established in Indonesia for the sole purpose of developing the project. The service provider (the construction contractor or sub-contractor) may be managed by a sponsor who is an equity investor that oversees the bidding and project development.

    The financial institutions also play an important role in financing the project and providing the relevant documents (e.g. bank guarantee or insurance policy) in order to allocate the risks of the project.

    The government:

    1. If the service user is a government institution, then the government must undertake the proper procurement process according to Presidential Regulation No. 16 of 2018 on the Procurement of Government Goods/Services (“PR No. 16/2018”), and
    2. In other instances, the government may be the party being authorized to issue the necessary permits and licences.
  7. What are the most popular methods of procurement?

    What is regulated pursuant to Article 42 of Construction Law is the selection of the service provider which uses the source of financing from APBN which is conducted through the following method:

    1. tender or selection which may be conducted through (i) pre-qualification, post-qualification, or fast tender;
    2. electronic procurement as mentioned in the catalog;
    3. direct appointment which may be conducted under the following conditions:

      (a) emergency action for public security and safety;

      (b) complex work which can only be conducted by a very limited number of service providers or may only be conducted by the rights holder;

      (c) confidential work related to state safety and security;

      (d) small scale work; and/or

      (e) certain conditions.

    4. direct procurement which is conducted for the package with a certain value.
      The Construction Law does not regulate the provisions on the method of procurement for the private sector. The only requirement is that the selection process may only be participated by a service provider who has fulfilled the requirements under the Construction Law.

    It is often the case that a service user in the private sector selects the service provider by using a binding tender (where the service user and the winning bidder must conclude the contract) or non-binding tender (request for proposals).

    It is not possible to specify what is the most popular method as this will depend on the specific requirement, specification and priorities of the project owner.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    In general, the principles of freedom of contract as contained in Article 1338 of the ICC will apply in relation to construction contracts in Indonesia, but subject to the minimum requirement as mentioned in Question no. 2.

    For private sector construction contracts, there is no standard form. However, the standard form adopted Fédération Internationale Des Ingénieurs-Conseils (“FIDIC”) is commonly used as a reference. In Indonesia, it is common to amend the standard FIDIC form to suit the requirements of the contracting parties.

    For projects funded by APBN, the Ministry of PWPH has regulated a form of standard contract (which will be used as reference) in undertaking construction and consultancy works.

  9. Are there any restrictions or legislative regimes affecting procurement?

    In general, what is specifically regulated is the procurement of goods and services for government related projects being funded by the APBN. Construction contracts which are not funded by the APBN shall be based on the principles of freedom of contract. Notwithstanding this, the provisions of Law number 5 of 1999 on the Prohibition to Conduct Monopolistic and Unfair Business Practices shall apply.

    For projects which are funded from the APBN, the Construction Law and PR No. 16/2018 provide the following restrictions in relation to the procurement:

    1. The construction services legal entity and the representative office of a foreign construction services company may only procure the construction services for the (i) high risk, (ii) high technology, and/or (iii) high cost market segment.
    2. The Service User is prohibited to employ a contractor who has an affiliation with the project for public interest without tender or selection, or electronic procurement.
    3. Direct procurement shall be conducted for goods/construction work/other services which have the value in maximum amount of Rp200,000,000;
    4. Direct appointment shall be conducted for goods/construction work/other services under the specific conditions as follows:

      (a) The undertaking of sudden preparation activities to follow up on international commitments which is attended by President/Vice President;

      (b) confidential goods/services for state interest including intelligence , witness protection, the security of President and Vice President, former President and Vice President including their families and state visitor at head of state/government level, or other confidential goods/services in accordance with laws and regulations provision;

      (c) building construction work as one integrated construction system and or responsibility integration of building failure risk entirely which cannot be planned/calculated earlier;

      (d) goods/construction work/other services which can only be provided by 1 (one) capable business entity;

      (e) procurement and distribution of superior seeds including the seed of rice, corn, and soybean, and fertilizer which covers Urea, NPK, and ZA to the farmer in terms of securing the seed and fertilizer supply in precise and fast manner for the implementation of food security improvement;

      (f) pre-facility, facility, and public utility work in public environment for low welfare society which is conducted by the respective developer;

      (g) goods/construction work/other services in specific and may only be conducted by the patent rights holder, or party which had obtained the license from the patent rights holder, or tender winner party to obtain a license from government, or

      (h) goods/construction work/other services which after the re-tender had been conducted suffer a failure.

    5. Fast tender shall be conducted in terms of:

      (a) the work specification and volume has been determined precisely; and

      (b) the business entity is qualified in the system information of work provider.

  10. Do parties typically engage consultants? What forms are used?

    According to the Construction Law, the employer (service user) and the contractor (i.e. the consultancy construction services provider) may use the Construction Contract, which may cover either the entire or partial services activity including the assessment, planning, drafting, monitoring, and construction organization management over a building (Note: for procurement phase, please see Question No. 9 above).

    It depends on the nature and the complexity of the construction project, but it is common for parties to engage consultants.

    For privately funded projects, there are no specific prescribed forms to use and the parties may agree based on the principles of freedom of contract but subject to the minimum requirements as mentioned in Question no. 2.

    For projects funded by APBN, the Ministry of PWPH has regulated a form of standard contract (which will be used as reference) in undertaking construction and consultancy works.

  11. Is subcontracting permitted?

    Yes, subcontracting is permitted under the Construction Law (Note: please see Question No. 2 above).

    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), contains a clause regulating the cooperation between the service provider and the subcontractor.

    The Construction Law distinguishes between the types of construction services, those that are deemed general and those deemed specialist. According to Art. 53 of Indonesian Construction Services Law, only work deemed to fall into the specialist category can be subcontracted. According to the Construction Law, the specialist work consists of “The Construction Services Consultant” and “Construction Work Services” business type.

    Type of Services

     

    General

    (Not Permitted to Subcontracting)

    Specialist

    (Permitted to Subcontracting, subject to the approval of project owner)

    Construction Work

    Services

     

    Classification

     

    ·  Tower Building

    ·  Civil Building

    ·  Installations

    ·  Special Construction

    ·  Pre-fabrication Construction

    ·  Building Completion

    ·  Equipment Lease

     

    Scope of Work

     

     

    ·  Construction

    ·  Maintenance

    ·  Demolition

    ·  Re-building

     

    Particular Part of the Construction Building or Other Physical Form

    Construction Services Consultant

    Classification

    ·  Architecture

    ·  Engineering

    ·  Integrated Engineering

    ·  Landscape Architecture and Site Planning

     

    ·  Scientific and Technical Consultation

    ·  Technical Review and Analysis

    Scope of Work

    ·  Review

    ·  Planning

    ·  Design

    ·  Supervision

    ·  Construction Operational Management

    ·  Survey

    ·  Technical Examination

    ·  Analysis

  12. How are projects typically financed?

    It is common for major construction projects to be funded using international project finance methods using a combination of debt and equity. Bridging and mezzanine finance are also commonly used. While for local projects it is common to use corporate debt from local banks.

    Other options may include financing from the capital markets and the bonds market, but this is less developed.

    For government related projects, the common forms of financing includes the following: (i) APBN-based financing, (ii) state owned enterprise (Badan Usaha Milik Negara/BUMN) based financing, either based on the corporation initiative or the appointment from the government, (iii) private based financing, and (iv) public private partnership based financing.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    For projects funded by APBN, Article 30 of PR No. 16/2018 provides examlples of security for project owners in a relation to the procurement of goods/services which may be inform of bank guarantee or surety bond. The types of security consists of:

    1. offering bond (jaminan penawaran),
    2. objection appeal bond (jaminan sanggah banding),
    3. performance bond (jaminan pelaksanaan),
    4. advance payment bond (jaminan uang muka), and
    5. maintenance bond (jaminan pemeliharaan).

    The effective period of each security/bond above depends on the character of the bond/security itself. For example, (i) the performance bond (jaminan pelaksanaan) is effective up to the transfer of the construction work and (ii) the maintenance bond (jaminan pemeliharaan) is effective up to the maintenance period and shall be returned within 14 (fourteen) working days after the maintenance period is accomplished.

    The above forms of security is also commonly used for privately funded projects based on the specific business requirements of such private sector.

    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), contains a clause regulating the forms of performance bonds.

  14. Is there any specific legislation relating to payment in the industry?

    For the privately funded constructed contract, there is no any specific legislation relating to payment in the construction industry. This is based on the principle of freedom of contract.
    For construction contracts funded by APBN, there are regulations on the procedures of payment for goods and services.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    For construction contracts especially in the private sector, Indonesian laws and regulations are silent with regard to this specific matter. Therefore, the general provisions of freedom of contract under Indonesian contract law will prevail and consequently pay-when-paid clauses are permitted if the parties contractually agree to this.

    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), contains a clause regulating the payment for the performance of the work. There is a model-clause that states that the request for payment from the Service Provider to the Service User must be supported by evidence of payment to its sub-contractors according to the progress of the work.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    In relation to this question, there is no standard form of contract governing constructions contract in Indonesia for privately funded construction contracts. As mentioned in our response to Question number (8) above the general principles of freedom of contract will apply in relation to construction contracts in Indonesia.

    Notwithstanding of the above, the general principles of retention is contained in the ICC (although it is scattered in many articles in the ICC). The general principle is that certain creditors will have the retention rights to retain the object of the debtor until the invoice relating to such object has been paid.

    Therefore, if the parties intend to incorporate certain retention rights, then it is recommended to expressly include this in the construction contract.

    For construction contracts funded by APBN, the standard form contract issued by Ministry of PWPH contains provisions relating to retention rights. For example if the service provider does not conduct certain obligations then the project owner may use the retention funds to finance the completion of such obligations or to liquidate the bond.

  17. Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?

    As mentioned above, there is no standard form for construction contracts in Indonesia for privately funded construction contracts. We note that it is common for construction contracts to include delay liquidated damages.

    Delay liquidated damages in principle is recognized in Indonesia and there have been instances where contractual provisions on delay liquidated damages are upheld by the courts.

    However, please note that case law is not mandatorily binding in Indonesia legal system and therefore each claim for delay liquidated damages will be considered on a case-by-case basis.

    For construction contracts funded by APBN, we note that the standard form of Ministry of PWPH contain provisions on delay liquidated damages.

  18. Are the parties able to exclude or limit liability?

    Yes, generally the parties are able to exclude or limit the liability according to the freedom of contract principle as set forth under Article 1338 of ICC. However, if it relates to strict liability as stipulated under prevailing law, then we consider that the parties are not able to exclude or limit such liability. As mentioned above, there is no standard template for privately funded construction contract.

    We note, however, that for projects funded by APBN, the Ministry of PWPH standard form contract (which will be used as reference in undertaking construction and consultancy works) contain provisions regarding liability for construction failure.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    There are no restrictions on termination and parties may contractually agree (based on the principles of freedom of contract) to terminate a contract, including for convenience or due to force majeure event. This is based on the principles of freedom of contract as explained above, especially in relation to privately funded construction contracts.

    What is regulated under the prevailing regulations is that a termination clause must at least contain: (i) the form of termination which covers the termination as [mutually] agreed between the parties or unilateral termination; and (ii) the rights and obligations of the service user and the service provider as the consequences from termination of the construction works contract.

    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), which contains a clause for termination due to convenience.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    Under the Construction Law, a Construction Contract must cover the rights of third parties other than the worker and the contracting parties. Therefore, the rights to third parties are commonly granted based on the mutual consent of contracting parties to set forth relevant provisions in the Construction Contract.

    One of the rights which is commonly granted is step in rights which enables one party (the beneficiary) to “step in” the role of another party and to assume all rights and obligations of such party if (for example) there has been serious breach of contract.

  21. Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Again this is permitted based on the principles of freedom of contract and if contractually agreed by the parties, such notices as conditions precedent is recognised in Indonesia.

    We have seen that this notices of claims both for additional time and money being used in construction clause in Indonesia.

  22. What insurances are the parties required to hold? And how long for?

    The Construction Law does not specifically contain an obligation for insurances that the parties are required to hold. One of the implementing regulations, being Government Regulation No. 29 of 2002 regarding the Undertaking of Construction Services only provide that the implementation of compensation in the event of a building failure may be conducted (amongst others) by insurance.

    Therefore, based on the wording above, insurance is optional and not mandatory.
    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), contains a clause for the service provider to provide the necessary insurance for:

    a. All goods and equipment that has a high risk for accident, implementation of work, all risks associated with the implementation of the contracted work by the employees relating to accidents, damages, loss, including all other unpredicted risk; and

    b. Third parties as the result of accidents in the work place.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    The two common forms of dispute resolution for construction and engineering disputes in Indonesia are: (i) litigation; and (ii) arbitration (both domestic and international arbitration).

    We have seen the trend to select arbitration as the dispute resolution mechanism amongst others due to the confidential nature of arbitration and the ability of the parties to choose experts in the area of construction as the arbitrators due to the often complexity in construction disputes.

    For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), provide an option for the contracting parties to choose either litigation or arbitration.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    The recent developments have shown Indonesian courts to be more supportive in enforcing both international and domestic arbitration awards.

    1. Enforcement of International Arbitration Awards:

      International arbitration awards are not immediately enforceable in Indonesia and pursuant to Article 65 of Law No 30 of 1999 regarding Arbitration and Alternative Dispute Resolution (the “Arbitration Law”), the Central Jakarta District Court has the authority to deal with the acknowledgment of international arbitration awards.

      Article 66 of the Arbitration Law provides for a number of pre-requisite requirements for international arbitration awards to be enforced in Indonesia being:
      (a) the international arbitration award must be made by an arbitrator or panel of arbitrators in a country which is bound by agreement with Indonesia, either bilateral or multilateral, on the acknowledgment and enforcement of International Arbitration Awards;

      (b) the International Arbitration Award in paragraph (a) is limited to awards which pursuant to Indonesian law is in the scope of commercial law;

      (c) the international arbitration award as referred to in paragraph (a) can only be enforced in Indonesia if it is not contrary to public policy;

      (d) the international arbitration award can only be enforced in Indonesia after obtaining an execution order (eksekuatur) from the Head of the Central Jakarta District Court; and

      (e) the international arbitration award in paragraph (a) involving the State of the Republic of Indonesia as a party in the dispute, can only be enforced after obtaining an execution order from the Supreme Court of the Republic of Indonesia which is further assigned to the Central Jakarta District Court.

      The most common objections raised by recalcitrant Indonesian parties in trying to prevent the enforcement of international arbitration awards is by using the grounds that the international arbitration awards is against Indonesian public policy. There have been cases in the past where the District Court of Central Jakarta have refused to enforce an international arbitration award under this basis.

      Whereas for the enforcement of international arbitration awards, referring to Article 66 (d) an International Arbitration Award may be enforced in Indonesia only after obtaining an order of Eksekuatur from the Chairman of the District Court of Central Jakarta. In practice, the order is issued at the latest 30 (thirty) days after an application for execution of the award is submitted to the Clerk of the District Court of Central Jakarta

    2. Enforcement of National Arbitration Awards:

      The enforcement of national arbitration awards is regulated under Article 59 of the Arbitration Law which states that at the latest 30 (thirty) days from the date of the arbitration award is rendered, the original or an authentic copy of the award shall be submitted for registration to the Clerk of the District Court by the arbitrator(s) or a legal representative of the arbitrator(s). The costs related to the preparation of the registration deed must be paid by the parties. In practice, once this is satisfied then the arbitration award can be enforced.

      Furthermore, based on Article 63 of Arbitration Law the Chairman’s instruction of the district court must be written on the issued original and authentic copies of the arbitration award, and with this instruction, the award be enforced as if it were a final and binding judgment in a civil case according to Article 60 of Arbitration Law.

    Please note that in practice there may be considerable delay if the enforcement of the arbitration award is challenged by the other party.

    Enforcement of international arbitration awards would also need to consider the location of the assets or the address of the losing party, because the implementation of the execution order from the District Court of Central Jakarta must be delegated to the authorized chairman of the relevant District Court.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Yes, there is limitation period for commencing civil lawsuit/disputes in Indonesian legal system. In general, it is regulated under Article 1967 of ICC which states that “all legal claims, either inherently related to asset or individual, shall expire due to the statute of limitation after thirty years, and the individual who invokes the expiration shall not be required to submit any title, and an individual cannot object to this expiration if such is based upon bad faith”.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Multi-party disputes is common in construction contracts, especially for major construction contracts where multiple parties are involved in the construction process, for example consultants, designers, contractors, sub-contractors, etc.

    If, for example, the construction contract provides Indonesian courts as the dispute resolution mechanism, in a lawsuit being filed by a project owner, for example in the failure of the contractors to deliver the project according to what has been agreed, it is common to drag multiple parties as defendants in the lawsuit.

    This is particularly to ensure completeness of the parties in lawsuit. This is to avoid the lawsuit being rejected by the court under the basis of a demurrer of insufficient (lack of parties) to the lawsuit, filed by the defendants.

    The apportionment of liability between the defendants would need to be proved by the plaintiff based on the contract and the factual circumstances during the construction of the project. The burden of proof will be with the plaintiff under the principle contained in the Indonesian Civil Procedure Code which essentially provides that “any party who states he has the right or if he states a certain action to emphasize such right or to rebut the rights of another party would require such person to prove the existence of such right or event“. Therefore, the judge would render its decision based on the evidences submitted by the plaintiffs which has been proven during the court proceedings.

    As mentioned above, based on the principle of freedom of contract, the parties may include such net contribution or limitation of liability clauses. We have seen these clauses have been used in construction contracts in Indonesia.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    1. Biggest Challenges:

      (a) Land acquisition:

      Although this issue has been improved with the enactment of various regulations to ease the land acquisition process, there are still practical challenges. Investors should be aware of the potentially lengthy and costly process of land acquisition. Landowners may either refuse/reluctant to sell their land or demand very high prices beyond the market price rate. It is possible for the land owners to file the lawsuit related to the disagreement of the proposed land prices. An example of this is the dispute between the landowners in the land acquisition of the Mass Rapid Transit (MRT) Jakarta project.

      (b) Financing Gap:

      One the biggest problems relating to the infrastructure development is to find the necessary funds required to meet the government’s target for infrastructure development.
      In the National-Medium Term Development Plan (“RPJMN”) 2015-2019 the requirements for infrastructure financing reaches Rp4,796 trillion (or approximately USD 348 billion at the present exchange rate). The available financing from the APBN is only capable of covering Rp.1,978 trillion (USD142.5 billion) or 41.3% of the needs. While State and Regional-Government owned companies can only provide approximately Rp1,066 trillion (USD76.8 billion) or 22.2% of the needs. This leaves a financing gap in the infrastructure sector of Rp1,715 trillion (USD123.6 billion) or 36.5% of the needs to be supported by the private sector.

    2. Biggest Opportunities

      Various Infrastructure Projects

      The country’s present RPJMN 2015 – 2019 highlights infrastructure development for connectivity and accessibility, enhancing the maritime sector, integration of remote and frontier regions, shifting transport from road to rail and shipping, and tackling urban mobility. RPJMN 2015 – 2019 focuses on improved competitiveness through greater connectivity and productivity, and addressing inequality by prioritizing development in eastern Indonesia.
      In accordance with RPJMN 2015 – 2019, the following governmental road strategies have been developed:

      (i) creating an obstacle - free road transport parallel to the national arterial roads, with reference to the capacity and standards of freeways;

      (ii) renewing and improving the national road network through an integrated road – capacity - building program, improved geometrics (alignments and widening) and repair; and

      (iii) optimizing efficiency and improvement of administration/implementation in the road sector in regard to cost efficiency and quality of work.

      In addition, several public finance institutions have been set up, such as the Indonesia Infrastructure Guarantee Fund (IIGF), PT. Sarana Multi Infrastruktur (SMI) and PT. Indonesia Infrastructure Finance (IIF). In 2015, the government announced that SMI would become the government’s infrastructure bank and it has started to transform into this role, offering debt and equity to infrastructure projects.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    In order to boost population distribution, reduce gap between regions, and reduce population concentration in Java Island, the government of Indonesia has been focusing on the development of public infrastructure network which will accommodate the inter-island, inter-province, inter-regency, inter-village, inter-region and other basic need's mobility. To achieve this goal, Indonesia government targeted the needs of prioritized investment in infrastructure sector valued IDR 5,452 trillion.

    Although the government has concentrated most the APBN on the development of infrastructure, the involvement of private sector (both local and foreign) is expected to close the remaining gap on infrastructure projects.

    Therefore, the Indonesian government has been trying to enhance the investment attractiveness by creating a more conducive environment for private sector participation through several polices such as:

    a. Public Private Partnership (“PPP”) Directives through Presidential Regulation No.38/2015 which expands eligible sectors and offering more incentives to the private partner.

    b. Indonesian Investment Coordinating Board (BKPM), now provides a centralised licensing point for certain sectors, which increase the efficiency of the investment approval process.

    c. Enacting of the new Land Acquisition Law No 2 of 2012 to provide more certainty land acquisition process which has been one of the main obstacle in Indonesian development of infrastructure.

    d. Establishment of PPP unit in the Ministry of Finance (“MoF”) who will be responsible for conducting project development for PPP projects.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    he Minister of PWPH has stated for the newest application of the result of the newest research and technology as one of the main innovations for accelerating the development of infrastructure. Some of the quoted technologies are as follows:

    1. Maximizing usage of local materials in western Papua for example limestone in constructing the Trans Papua and West Papua road.
    2. In the water resources sector, the development of precast concrete technology for irrigation canals with good standardization and quality and a cheaper price so that the irrigation canal works can be quickly completed.
    3. To accelerate the one-million housing program the Ministry of PWPH has utilize precast concrete which is superior in speed and the continuity of the concrete production process. This has been used in Pidie Jaya in early 2017 including the construction of roads and bridges.