Contracts 1

Contracts Contracts
Business Ethics & Business Law Class Business Ethics & Business Law Class
SBM I TB SBM I TB J akarta J akarta
19 February 2010 19 February 2010
A CONTRACT A CONTRACT
An Agreement which the law will enforce in An Agreement which the law will enforce in
some way some way (Calamari & (Calamari & Perillo Perillo, 1987) , 1987)
Every Agreement is established either by Every Agreement is established either by
consent or by law consent or by law (article 1233 Indonesian Civil Code) (article 1233 Indonesian Civil Code)
They tend to give something, to do or not to do They tend to give something, to do or not to do
a specific thing a specific thing (article 1234 Indonesia Civil Code) (article 1234 Indonesia Civil Code)
An Agreement in which one party promises to do An Agreement in which one party promises to do
something or provide something for another, in something or provide something for another, in
return for consideration return for consideration- -something of value, something of value,
which may or may not be tangible which may or may not be tangible- -for example, for example,
money money (Donald H. Weiss, 2004) (Donald H. Weiss, 2004)
A Contract A Contract
under The Civil Code under The Civil Code
The formation of a contract : implies a The formation of a contract : implies a
meeting of the minds (consensual meeting of the minds (consensual
principles) principles)
Elements of a Contracts : Consent, Elements of a Contracts : Consent,
Capacity, Subject Certain, Lawful Capacity, Subject Certain, Lawful
Purpose Purpose (Article 1320 Indonesia Civil Code) (Article 1320 Indonesia Civil Code)
Article 1320 KUH Article 1320 KUH- -Perdata Perdata
For the validity of an agreement needs For the validity of an agreement needs
four qualifications: four qualifications:
1. consent of those who bind themselves 1. consent of those who bind themselves
2. the capability to make an agreement 2. the capability to make an agreement
3. a particular object 3. a particular object
4. a lawful cause 4. a lawful cause
Consent Consent
The parties must consent to the basic matters in The parties must consent to the basic matters in
the agreement the agreement
A contract may be valid even though the A contract may be valid even though the
consent was obtained by duress, mistakes or consent was obtained by duress, mistakes or
fraud, but it is void fraud, but it is void- -able able
Duress Duress any mental intimidation any mental intimidation
Mistakes Mistakes on identity of the subject matters or on identity of the subject matters or
the person the person
Fraud Fraud an overt act performed by one of the parties prior to the format an overt act performed by one of the parties prior to the formation of ion of
the agreement with the intention to deceive the other party and the agreement with the intention to deceive the other party and induce himinto induce himinto
concluding a contract which he would not otherwise have conclude concluding a contract which he would not otherwise have concluded d
Capacity Capacity
As a general rule, all persons are legally As a general rule, all persons are legally
capable of entering a contract, except : capable of entering a contract, except :
1) minors / persons under 21yr of age 1) minors / persons under 21yr of age
2) persons placed under guardianship 2) persons placed under guardianship
Associations and businesses which qualify Associations and businesses which qualify
as as legal bodies legal bodies of of legal entity legal entity (badan (badan
hukum) hukum) have the same capacity to have the same capacity to
contract as individual contract as individual
Contracts 2
Certain Subject Certain Subject
The subject must be determinable, The subject must be determinable,
otherwise the contract is void otherwise the contract is void
The subject could be meant as The subject could be meant as
the goods the goods (to be delivered) or (to be delivered) or
the performance the performance (the delivery of the (the delivery of the
goods) goods)
Lawful Purpose Lawful Purpose
A valid contract must have a lawful A valid contract must have a lawful
purpose purpose causa causa
In line with good morals or public policy In line with good morals or public policy
When a contract is created? When a contract is created?
Mutual assent Mutual assent: For a contract to be : For a contract to be
formed, the parties must reach an formed, the parties must reach an
agreement to which they agreement to which they mutually mutually
assent. assent.
This mutual assent is almost invariably This mutual assent is almost invariably
reached through what are called reached through what are called the the
offer offer and and the acceptance the acceptance
Test for Intent Test for Intent
The objective test for a party The objective test for a party s intention, s intention,
in most circumstances, is that party in most circumstances, is that party
intended intended what a reasonable person what a reasonable person
in the position of the other party in the position of the other party
would conclude that his objective would conclude that his objective
manifestations of intent meant. manifestations of intent meant.
Considerations Considerations
As a requirement for a contract: As a requirement for a contract:
It is often said that for there to be a binding contract, It is often said that for there to be a binding contract,
there must be not only there must be not only mutual assent mutual assent (i.e., the offer (i.e., the offer
and acceptance), but also something known as and acceptance), but also something known as
consideration. consideration.
Consideration: Consideration:
determine whether the contract is supported by determine whether the contract is supported by
consideration or not. consideration or not.
Consideration Consideration
Purpose of consideration doctrine: Purpose of consideration doctrine: Not Not
all promises are legally enforceable. all promises are legally enforceable.
Promises to make gifts, for example, are Promises to make gifts, for example, are
not usually enforceable. not usually enforceable.
The function of the consideration The function of the consideration
doctrine is to distinguish between those doctrine is to distinguish between those
promises that are enforceable and those promises that are enforceable and those
that are not. that are not.
Contracts 3
Consideration Consideration
Evidentiary function: Evidentiary function:
The existence of consideration helps to provide The existence of consideration helps to provide
objective evidence objective evidence that the parties intended that the parties intended
to make a binding agreement. to make a binding agreement.
Cautionary function: Cautionary function:
The requirement that promises be supported by The requirement that promises be supported by
consideration serves a consideration serves a cautionary function cautionary function as as
well. well.
Mutuality of Consideration Mutuality of Consideration
Requirement that each side furnish Requirement that each side furnish
consideration: consideration:
For a contract to be binding, there must be a For a contract to be binding, there must be a
mutuality of consideration mutuality of consideration . .
That is, That is, each party must furnish each party must furnish
consideration to the other consideration to the other, or the entire , or the entire
agreement fails to be enforceable. agreement fails to be enforceable.
Consideration Consideration
In Unilateral Contract In Unilateral Contract
Consideration in unilateral Consideration in unilateral
contract: contract: Recall that a contract in Recall that a contract in
which acceptance occurs through the which acceptance occurs through the
performance of an act (rather than performance of an act (rather than
through the giving of a promise) is often through the giving of a promise) is often
calls a calls a unilateral unilateral contract. contract.
In such contract, the In such contract, the offeree offeree s act is the s act is the
consideration for the offeror consideration for the offeror s promise s promise. .
Consideration Consideration
In Bilateral Contract In Bilateral Contract
Consideration in bilateral contracts Consideration in bilateral contracts
In the case of In the case of bilateral bilateral contracts, a contracts, a
contract is when the parties exchange contract is when the parties exchange
promises. promises.
A promise in a bilateral agreement is A promise in a bilateral agreement is
consideration only if the performance consideration only if the performance
which is promised would be a sufficient which is promised would be a sufficient
consideration. consideration.
Illusory Promises Illusory Promises
Illusory Promises Illusory Promises
One kind of One kind of promise promise that is not that is not
sufficient consideration to support a sufficient consideration to support a
counter counter- -promise is called ad promise is called ad illusory illusory
promise. promise.
An illusory promise is a statement which An illusory promise is a statement which
appears to be promising something, but appears to be promising something, but
which in fact does not which in fact does not commit commit the the
promis promise e- -maker to any maker to any- -thing at all. thing at all.
Article 1338 KHU Article 1338 KHU- -Perdata Perdata
All agreements that are made legally All agreements that are made legally shall shall
apply as the law apply as the law between the parties between the parties
thereto thereto
An agreement is not revocable except with An agreement is not revocable except with
the consent of both parties, or for the the consent of both parties, or for the
reasons that by the law are sufficient reasons that by the law are sufficient
therefore therefore
An agreement must be performed in good An agreement must be performed in good
faith faith
Contracts 4
Pacta Pacta Sun Sun Servanda Servanda
Grotius traced the religious origin of the Grotius traced the religious origin of the
consensual principle, consensual principle, ie ie. . one one s word be kept s word be kept
( (pacta pacta sun sun servanda servanda) and ) and we shall keep our we shall keep our
promise promise ( (promissorum promissorumimplendorum implendorumobligatti obligatti) )
Surat Surat Al Al- -Maidah Maidah, the first paragraph: , the first paragraph: Yaa Yaa
ayyuhalladziina ayyuhalladziina aamanuu aamanuu aufuu aufuu bil bil uqud uqud (Hi (Hi
Muslim, keep your words) Muslim, keep your words)
Al Al Isra Isra paragraph 34: paragraph 34: wa wa aufu aufu bil bil ahdi ahdi inal inal ahda ahda
kana kana mas mas uulun uulun (fulfill your promises, be true (fulfill your promises, be true
that promises will be asked (be accountable). that promises will be asked (be accountable).
Nominaat Nominaat Contract Contract (regulated under ICC) (regulated under ICC)
Sale and Purchase Sale and Purchase (J ual (J ual- -Beli) Beli)
Exchange Exchange (Tukar (Tukar- -Menukar) Menukar)
Lease Agreement Lease Agreement (Sewa (Sewa- -Menyewa) Menyewa)
Employment Agreement Employment Agreement (Perjanjian Kerja) (Perjanjian Kerja)
Partnership Partnership (Persekutuan Perdata) (Persekutuan Perdata)
Donations Donations (Hibah) (Hibah)
Deposits of Goods Deposits of Goods (Penitipan Barang) (Penitipan Barang)
Borrowing Borrowing (Pinjam Pakai) (Pinjam Pakai)
Consumer Loans Consumer Loans (Pinjam Pakai Habis) (Pinjam Pakai Habis)
The Granting of Power of Attorney The Granting of Power of Attorney (Kuasa) (Kuasa)
The Guaranty of Debt The Guaranty of Debt (Penanggungan Hutang) (Penanggungan Hutang)
Amicable Settlement Amicable Settlement (Perdamaian) (Perdamaian)
Innominaat Innominaat Contract Contract
(not regulated under ICC) (not regulated under ICC)
Among others Among others: :
Production Sharing Agreement Production Sharing Agreement
J oint Venture Agreement J oint Venture Agreement
Build Operate Transfer (BOT) Agreement Build Operate Transfer (BOT) Agreement
Build Operate Own (BOO) Agreement Build Operate Own (BOO) Agreement
J oint Operation Agreement J oint Operation Agreement
Construction Agreement Construction Agreement
Management Contract Management Contract
Technical Assistance Contract Technical Assistance Contract
Performance Agreement Performance Agreement
Innominaat Innominaat Contract Contract
(not regulated under ICC) (not regulated under ICC)
Continued Continued: :
J oint Operation J oint Operation (Kerjasama Operasi) (Kerjasama Operasi)
Distribution Agreement Distribution Agreement
Leasing Agreement ( Leasing Agreement (Perjanjian Perjanjian Leasing) Leasing)
Lease Purchase/Hire Purchase ( Lease Purchase/Hire Purchase (Sewa Beli Sewa Beli) )
Installment Purchase Agreement Installment Purchase Agreement
Franchise Agreement Franchise Agreement
Licensing Agreement Licensing Agreement
Innominaat Innominaat Contract Contract
Innominaat Innominaat Contract is a new form of Contract is a new form of
contract, and it is not known when the contract, and it is not known when the
Civil Code is made and published Civil Code is made and published
Innominaat Innominaat Contract is created based on Contract is created based on
the needs of the society in making the needs of the society in making
contracts contracts
The 5 component involved: the legal norm The 5 component involved: the legal norm
(written and unwritten), legal subjects, (written and unwritten), legal subjects,
the object of contract, the object of contract,
consent/agreement, the effect of consent/agreement, the effect of
agreement agreement
Innominaat Innominaat Contract Contract
Some Some Innominaat Innominaat Contracts are regulated Contracts are regulated
by the Law, i.e: by the Law, i.e:
Production Sharing Contract in UU Production Sharing Contract in UU
No.22/2001 concerning Oil and Gas No.22/2001 concerning Oil and Gas
J oint Venture Contract in UU No.1/1967 J oint Venture Contract in UU No.1/1967
concerning Foreign Investment concerning Foreign Investment
Construction Contract in UU No. 18/1999 Construction Contract in UU No. 18/1999
concerning Construction Service concerning Construction Service
Contracts 5
Innominaat Innominaat Contract Contract (the scope) (the scope)
Lex Specialis Derogat Lex Generali Lex Specialis Derogat Lex Generali
Article 1319 ICC : All agreements, either it Article 1319 ICC : All agreements, either it
has a special name, or which not known has a special name, or which not known
under a specific name, are subject to under a specific name, are subject to
provisions which are stipulated in the ICC provisions which are stipulated in the ICC
(under Book I II Chapter I and II) (under Book I II Chapter I and II)
Freedom of Contract Freedom of Contract (under Article 1338 I CC) : (under Article 1338 I CC) : All All
agreements that are made legally shall agreements that are made legally shall
apply as the law between the parties apply as the law between the parties
thereto thereto
Innominaat Innominaat Contract Contract (the scope) (the scope)
The Lex Specialis of UU No. 22/2001 concerning The Lex Specialis of UU No. 22/2001 concerning
Oil and Gas, requires several principles: Social Oil and Gas, requires several principles: Social
Economic Principle (Azas Ekonomi Kerakyatan), Economic Principle (Azas Ekonomi Kerakyatan),
Integrity Principle (Azas Keterpaduan), Integrity Principle (Azas Keterpaduan),
Advantage Principle (Azas Manfaat), Fairness Advantage Principle (Azas Manfaat), Fairness
Principle (Azas Keadilan), Balance Principle (Azas Principle (Azas Keadilan), Balance Principle (Azas
Keseimbangan), Even Distribution Principle Keseimbangan), Even Distribution Principle
(Azas Pemerataan), Wealthy Principle (Azas (Azas Pemerataan), Wealthy Principle (Azas
Kemakmuran), Equality Principle (Azas Kemakmuran), Equality Principle (Azas
Kebersamaan), Security Principle (Azas Kebersamaan), Security Principle (Azas
Keamanan), Safety Principle (Azas Keamanan), Safety Principle (Azas
Keselamatan), and Legal Certainty Principle Keselamatan), and Legal Certainty Principle
(Azas Kepastian Hukum) (Azas Kepastian Hukum)
Innominaat Innominaat Contract Contract (the scope) (the scope)
The The Lex Specialis of UU No. 18/1999 Lex Specialis of UU No. 18/1999
concerning Construction Service, requires concerning Construction Service, requires
several principles: Honesty and Fair several principles: Honesty and Fair
Principle, as well as Advantage Principle Principle, as well as Advantage Principle
(Azas Manfaat) (Azas Manfaat)
The Contract Structure The Contract Structure
The title of contract The title of contract
The parties identity The parties identity
The considerations The considerations
The substance of agreement The substance of agreement
Terms & conditions (condition precedent, Terms & conditions (condition precedent,
the rights & obligations of the parties, the rights & obligations of the parties,
representation & warranties, covenants, event of representation & warranties, covenants, event of
defaults, amendment, waiver, etc) defaults, amendment, waiver, etc)
General terms (confidential agreement, force General terms (confidential agreement, force
majeur majeur, correspondence, choice of law, legal , correspondence, choice of law, legal
jurisdiction, etc) jurisdiction, etc)
Closing statements, place, date of the signing Closing statements, place, date of the signing
The signatures of the parties (with stamp duty) The signatures of the parties (with stamp duty)
Two types of Terms Two types of Terms
Express Terms Express Terms
The terms that are explicitly stated The terms that are explicitly stated
between parties. It gives a logical between parties. It gives a logical
certainty to the agreement. Could be in certainty to the agreement. Could be in
written or verbal agreement written or verbal agreement
Implied Terms Implied Terms
The terms that are read into the contract The terms that are read into the contract
even though the parties have not even though the parties have not
expressly stated so. expressly stated so.
Breach of Contract Breach of Contract
The breach of contract shall be related to The breach of contract shall be related to
the fulfillment and performance of a the fulfillment and performance of a
contract contract
Every contract consists promises either to Every contract consists promises either to
give something, to do something, or not give something, to do something, or not
to do something (Art.1234 ICC). to do something (Art.1234 ICC).
Contracts 6
Breach of Contract Breach of Contract
A A breach of contract breach of contract is occurred when a is occurred when a
party fail to fulfill the promise, after party fail to fulfill the promise, after
previously was getting a warning previously was getting a warning ( (somasi somasi
or or ingebrekestelling ingebrekestelling) which states that this ) which states that this
party was breaching the contract. party was breaching the contract.
Breach of Contract Breach of Contract
Breach of Contract can be categorized in 4 Breach of Contract can be categorized in 4
types of actions: types of actions:
(1) not doing performance as promised, (1) not doing performance as promised,
(2) convey the performance but not as (2) convey the performance but not as
expected in the promise, expected in the promise,
(3) doing the performance but it is late, (3) doing the performance but it is late,
(4) doing something which is prohibited by (4) doing something which is prohibited by
the contract. the contract.
Breach of Contract Breach of Contract
Somasi Somasi or or aanmaning aanmaning is a warning to fulfill the is a warning to fulfill the
obligation under the agreement obligation under the agreement
The element of a The element of a Somasi Somasi: :
- - Statement of the occurrence for Statement of the occurrence for a breach of a breach of
contract contract
- - Clear statement about the claim Clear statement about the claim
- - Statement of warning that a legal process will Statement of warning that a legal process will
be followed if the claim were ignored be followed if the claim were ignored
- - Statement to provide a certain time as Statement to provide a certain time as
appropriate to fulfill the claim. appropriate to fulfill the claim.
Breach of Contract Breach of Contract
Legal consequences of breaching a contract Legal consequences of breaching a contract
legal accusation with several options of claims: legal accusation with several options of claims:
To pay the compensation of costs, damages and To pay the compensation of costs, damages and
interests interests (1243 ICC) (1243 ICC)
To terminate the contract To terminate the contract (1266 ICC) (1266 ICC)
To pay the risk of not delivering the object To pay the risk of not delivering the object
which under the debtor responsibility which under the debtor responsibility (1237 ICC) (1237 ICC)
To fulfill the contract or otherwise to terminate To fulfill the contract or otherwise to terminate
the agreement, with a compensation to pay the the agreement, with a compensation to pay the
costs, damages and interests costs, damages and interests (1267 ICC) (1267 ICC)
To pay the judicial costs. To pay the judicial costs.
Force Force Majeure Majeure
Force Force majeure is majeure is act of God act of God , or , or overmacht overmacht , ,
or or keadaan memaksa atau keadaan darurat keadaan memaksa atau keadaan darurat , ,
so that nothing can help. so that nothing can help.
No parties intentions, such as flood, fire, No parties intentions, such as flood, fire,
earthquake, tsunami, strike, or prohibition by earthquake, tsunami, strike, or prohibition by
regulation. regulation.
Article 1245 ICC: There shall be no Article 1245 ICC: There shall be no
compensation of costs, damages and interests, if compensation of costs, damages and interests, if
the debtor because of a force majeure or the debtor because of a force majeure or
because on deliberately unable to give or to do because on deliberately unable to give or to do a a
specific thing, he was obliged to, or because of specific thing, he was obliged to, or because of
the same reason has did something forbidden the same reason has did something forbidden
Compensations Compensations
Article 1243 ICC: Compensation of costs, damages and Article 1243 ICC: Compensation of costs, damages and
interests, arising from the unfulfilling of the agreement, interests, arising from the unfulfilling of the agreement,
will be due, if the debtor, after being declared as having will be due, if the debtor, after being declared as having
failed to fulfill his obligation, continue to neglect it, or if failed to fulfill his obligation, continue to neglect it, or if
the debtor is obliged to give or to do something, which the debtor is obliged to give or to do something, which
can only be given or done within period that he has can only be given or done within period that he has
passed passed
Article 1246 ICC: The compensation of costs, damages Article 1246 ICC: The compensation of costs, damages
and interests that the creditor is entitled to demand for, and interests that the creditor is entitled to demand for,
in general consists of the loss be suffers and the lack of in general consists of the loss be suffers and the lack of
profit that he suppose to enjoy, without prejudice to the profit that he suppose to enjoy, without prejudice to the
expectations and the alterations thereafter expectations and the alterations thereafter
Contracts 7
Compensations Compensations
About compensation of costs, damages About compensation of costs, damages
and interests and interests ( (penggantian biaya, penggantian biaya,
kerugian dan bunga kerugian dan bunga) ) are stipulated under are stipulated under
Article 1243 to 1252 ICC Article 1243 to 1252 ICC
The application of compensation: (1) The application of compensation: (1)
compensation only, (2) the performance compensation only, (2) the performance
of contract without compensation, (3) the of contract without compensation, (3) the
performance of contract with performance of contract with
compensation, (4) the cancellation of compensation, (4) the cancellation of
contract without compensation, (5) the contract without compensation, (5) the
cancellation of contract with compensation cancellation of contract with compensation
Prohibited Contracts Prohibited Contracts
Monopoly Monopoly
Oligopoli Oligopoli
Horizontal Price Fixing Horizontal Price Fixing ( (Penetapan Penetapan Harga Harga) )
Group Boycott Group Boycott ( (Pemboikotan Pemboikotan) )
Cartel Cartel
Trust Trust
Oligopsoni Oligopsoni
Vertical Trade Restraints Vertical Trade Restraints ( (Integrasi Integrasi Vertikal Vertikal) )
Tying Arrangement Tying Arrangement ( (Perjanjian Perjanjian Tertutup Tertutup) )
Arrangement with Foreign Business Arrangement with Foreign Business
Termination Termination
Performance Performance
Certified tender plus Certified tender plus
deposit deposit
Novation Novation
Compensation (set Compensation (set- -off) off)
Confusion (merge) Confusion (merge)
Remission of Debt Remission of Debt
Destruction of the Destruction of the
subject matter subject matter
Dissolution Dissolution
Occurrence of a Occurrence of a
resolutory resolutory condition condition
(conditional (conditional
obligations) obligations)
Prescription Prescription