Previously, we discussed about the difference between Breach of Contract and Unlawful Act. In this article we are going to dig deeper on Breach of Contract under Indonesian Law, specifically on the issues of what forms that constitutes a breach of contract, and when is exactly a party can be considered to have breached a contract, what is the remedies for the creditor, and what defenses the debtor may argue when a breach of contract is occurred.

Forms of Breach of Contracts (or “Default”)

The term that is commonly used for Breach of Contract (or ‘in default’) in Indonesia is ‘Wanprestasi’, which is a condition that a party to the contract does not perform its obligation as agreed. According to Prof Subekti S.H, breach of contract may be in the forms of:

1. The Debtor does not fulfill its obligation at all, for example does not deliver the goods as agreed and does not maintain it properly;
2. the Debtor is late in fulfilling its obligation;
3. the Debtor incorrectly or inappropriately fulfills its obligation;
4. Performing something that is prohibited under the contract.

The form of breach of contract shall depend on the nature of the agreement created between the parties. For example, in an agreement that states a party shall pay a certain amount of money at the latest on a certain date. Then, if the payment is made after the agreed date, thus it can constitute a breach of contract, due to the debtor’s late fulfillment of its obligation. Other example, in a contract where the parties agreed that the seller is prohibited to sell his land to third party, then in the event that the debtor sell the land to other party who give higher bid than the buyer[1], this events also constitutes a breach of contract due to the fact that the party have performed what is prohibited under the agreement.

When Exactly a Default Happened?

Although we have mentioned some form of default above, but the question on ‘when’ the default is actually occurred is another matter to be understood. 

Article 1238 of ICC states:

“The Debtor shall be declared in default (breach) by an order, or a similar deed, or by the virtue of the obligation itself, when it implies that the debtor shall be in default with only the passing of the stipulated time period.”

From the provision of the Article 1238 ICC above, it can be concluded that technically speaking the debtor is considered to be in default (breach) if either one of the following event is occurred. First, the debtor is declared have defaulted by an order or a deed, which in practice is known as ‘somasi’. The creditor is usually deliver a somasi to the debtor to warn the debtor to fulfill its obligation. If the debtor does not heed the warning and not fulfill its obligation then the creditor may declare the debtor in default (breach) through a letter. Secondly, according to the nature of the obligation, in which by the passing of the stipulated time period itself shall cause the debtor is in default. For the second, the main issue is the nature of the contract, rather than the issue of the stipulation of a certain time period in the contract.

Supreme Court precedent No. 186 K/Sip/ 1959, dated 1 July 1959, states as follow:

“If it has been stated clearly in the agreement when the relevant party should perform a certain obligation and further after the passing of the stipulated time period the said party sill not yet performs it, according to the law the said party cannot yet be considered to have defaulted in fulfilling its contractual obligation, as long as such default is not yet declared against such party in writing by the counterparty (ingebreke gesteld).”

It is clear from this precedent that although in the agreement the parties have agreed on a time period and the debtor does not fulfill its obligation within such period of time, it does not automatically cause the debtor to be in default until the creditor declares it in writing (with the somasi).

With regards to the default due to the passing of time period, it should be viewed from the nature of the agreement itself. An expert, named J. Satrio, provides an example for this with the agreement between the baker and its consumer, in which it is agreed that the baker will deliver to its consumer a cake in the wedding day of the consumer. If after the wedding day the baker still not yet delivers the cake, then the delivery after the agreed date would make the performance to be of no value or will not have the same value as when it is delivered on time. It can be concluded that such late performance, the intent of the creditor in making such agreement cannot be achieved. On this matter, J. Satrio states that for this case the declaration of default is not required to place the debtor in the default condition. This type of default is also called mora ex re.[2]

The Rights of the Creditor when the Debtor is in Default

Article 1239 of ICC states that:

“In every obligation to do something, or not to do something, shall be settled with the compensation of cost, loss and interest, in the event that the debtor does not fulfill its obligation.”

Further Article 1267 of ICC states:

“The party against whom an obligation is not fulfilled, may choose; to demand the other party to fulfill its obligation, if such fulfillment of obligation is still possible, or demand for termination of the agreement, with the compensation of cost, damage and interest.”

From the above provisions it can be concluded that the rights of the creditor in the event of debtor’s default are:

1. the right to demand the fulfillment of obligation;
2. the right to demand compensation;
3. the right to the fulfillment of obligation with compensation;
4. the right to terminate the obligation;
5. the right to terminate the obligation with compensation.

A Declaration of Default for the Purpose of Demanding Creditor’s Right in the Event of Default

Article 1243 of ICC regulates that:

“The compensation for cost, damage and interest for the non-fulfillment of an obligation shall become obligatory, if the debtor, after have been declared default, remains in default in fulfilling the obligation, or in case that the obligation to do a certain act or to give something, can only be performed by the debtor after the lapse of the stipulated time period.”

This provision above gives the understanding that the debtor shall be obligated to compensate for cost, damage, or interest only after the creditor issued a written declaration of default against the debtor. Therefore, the declaration of default does not only have a purpose to place the debtor in default situation, but it also serves for the interest of the creditor to demand the creditor’s rights.

Prof. Dr. Mariam Darus Badrulzaman, S.H., FCARB., confirmed this, stating:[3]

“For what purpose does the “declaration of default” is needed?

 The declaration of default is needed when a person demands for compensation or the termination of obligation by proving the default”

However, if the creditor only demand for the fulfillment of the contractual obligation, then the declaration of default is not required. Prof Dr. Mariam Darus Badrulzaman, S.H., FCArb. in the same book also states this matter, as follow:

“According to the civil law, if the creditor demands for the fulfillment of the contractual obligation, then the declaration of default is not required because the right to have the fulfillment of the contractual obligation is already within the obligation itself.”

Further, if the creditor only demands for the fulfillment of the contractual obligation, without any demand for termination of the agreement, or demand for compensation, then the creditor cannot pursue it through court process. The Supreme Court decided on this in its decision No. 1079 K/Sip/1973, dated 8 March 1979, that states:

“Because the defendant has bring himself in the condition that unable to deliver its property to the plaintiff according to the terms of the agreement, therefore based on the article 1263 of ICC the defendant is obligated to compensate the plaintiff. However, because in this case the plaintiff only demands the defendant to fulfill its contractual obligation, but not asking the judges to terminate the agreement or to punish the defendant to pay compensation for him, therefore the plaintiff’s claim is not accepted.”

Compensations that may be Demanded by the Creditor in the Event of Default

As regulated in Article 1239 of ICC, compensations that may be demanded by the creditor are costs, damages, and interests.  Prof. Subekti explains each of the compensations as follows:[4]

• Costs (kosten) are any cost incurred;
• Damages (schaden) are loss or damages to creditor’s property;
• Interests (interessen) are any profit that would have been obtained should the Debtor not defaulted (winstdervening).

Prof. Mariam Darus Badrulzaman explains regarding the damages (schade) as real damage (feitelijkenadeel) which can be expected or estimated by the time the obligation is made, which is incurred as the result of the default. The amount of the damages shall be determined by comparing the condition of the wealth/property after the default and the condition should the default does not happen.[5]

With regard to the interests, basically what it means as interest is any profit that is expected from the relevant obligation. According Prof. Dr. Mariam Darus Badrulzaman there are four types of interest:[6]

1. Conventional interest, which is an interest that is agreed by the parties in the agreement (Article 1249 of ICC);
2. Moratorium Interest (default interest that is stipulated under the statute), where in an obligation to pay compensation, costs, damages, and interest resulted from the late performance of the obligation shall only consist of the interest that is stipulated by the law. The amount of this interest is 6% (six percent) per year;
3. Compensatory interest, which is any interest that the debtor is obligated to compensate to the creditor for any interest that should be paid to other party due to the debtor’s failure to perform, or performing less of, the obligation. This type of interest shall be decided by the judge;
4. Compound Interest (anatocism), which is an interest that is calculated from the interest of the principal loan that remain unpaid by the debtor.

Defense for a Debtor when Being Sued for a Breach of Contract (Default)

In the occurrence of event of default, there are some defenses for the debtor. First, the occurrence of Force Majeure (overmacht). According to the Article 1244 and Article 1245 of ICC, if the debtor is prevented to perform its obligation due to a certain unpredicted event, which event cannot be avoided, then the debtor shall be freed from any demand to compensate for costs, damages, and interest to the creditor. In practice, the parties usually stipulate in the agreement the events that constitute as force majeure (overmacht).

But basically, ICC does not stipulate or make a list of events that can constitute or be considered as force majeure (overmacht). Yet, ICC still provides the elements of a force majeure, which are:[7]

1.  An occurrence of an event that prevent the debtor to perform its obligation, such prevention that justifies the debtor to not perform its obligation or to not perform the obligations as it is supposed to be (or agreed);
2. No fault on the debtor for the occurrence of the event that prevent the performance of the obligation; and
3. Cannot be predicted beforehand by the debtor.

Meaning, if an event fulfills all the three abovementioned elements then such event is considered as a force majeure. Further the debtor cannot be demanded by the creditor to pay compensation for any loss due to the non-performance of the obligation by the debtor.

Secondly, is the doctrine of Exceptio Non Adimpleti Contractus. Non adimpleti contractus is a demurrer which states that the creditor itself has not performed its obligation and therefore it is not proper to demand the debtor to perform its obligation. This demurrer can only be argued if applied in a bilateral agreement.[8]

An example for a bilateral agreement is a sale and purchase agreement. A sale and purchase agreement is regulated under the article 1478 of ICC which states “The seller shall not be obligated to deliver the goods, if the buyer has not paid the purchase price, and the seller hasn’t granted a delay of payment.”  From this provision it is understood that as long as the buyer hasn’t pay the purchase price he cannot demand the seller to deliver the goods. If the buyer, demand the seller to deliver the goods (but he has not paid the prize), then the seller may argue with the Exceptio Non Adimpleti Contractus for the defense.

Thus we convey some issue regarding breach of contract (default) according to Indonesian Law.

Hope it’s useful.

[1] While the property owner is free to sell his property to anyone who they desire, but it is possible also in the sale and purchase of property (for example land or shares) in Indonesia that the seller and buyer enter into an agreement which stipulates that the seller shall not sell nor transfer the property to third party. In practice it usually can be found in a conditional sale and purchase agreement in which the buyer would require a due diligence before deciding to buy the property or not. The conditional nature of the agreement makes the performance of the sale and purchase shall be depended on the result of the due diligence. Thus, to avoid the seller would sell or transfer the property to third party, both parties may agree that from the execution of the conditional sale and purchase agreement until the due diligence process is finished the seller shall not sell or otherwise transfer the property to third party.   

[2] Article by J. Satrio, “Some legal aspects regarding ‘somasi’ (part I)” (Beberapa Segi Hukum tentang Somasi (bagian I)”. The writing published on hukumonline.com website https://www.hukumonline.com/berita/baca/lt4cbfb836aa5d0/beberapa-segi-hukum-tentang-somasi-bagian-i-brioleh-j-satrio-?page=all

[3] Prof. Dr. Mariam Darus Badrulzaman, S.H., FCArb.  “the Law of Obligation in the Indonesian Civil Code Book – Three, Precedents, Doctrines, and Explanations”  “Hukum Perikatan dalam KUHPerdata Buku Ketiga, Yurispurdensi, Doktrin, serta Penjelasan”, First Edition, Published by PT. Citra Adita Bakti, Bandung, year 2015, page 23.

[4] Prof, Subekti, S.H., “Principles of Civil Law “ “Pokok Pokok Hukum Perdata”, 31^st edition, published by Intermasa, Jakarta, year 2003, page 148-149.

[5] Prof. Dr. Mariam Darus Badrulzaman, S.H., FCArb, op. cit. page 30-31.

[6] Ibid, page 43-44.

[7] J. Satrio, “Law of Obligation, Obligation in General”  “Hukum Perikatan, Perikatan Pada Umumnya”, 3^rd edition,  year 1999, published by Alumni, Bandung, page 253.

[8] Article by J. Satrio, “Some legal aspects regarding ‘somasi’ (part IV)” “Beberapa Segi Hukum tentang Somasi (Bagian IV)”. The writing published on hukumonline.com website https://www.hukumonline.com/berita/baca/lt4cdb67c58d247/beberapa-segi-hukum-tentang-somasi-bagian-iv-brioleh-j-satrio-?page=all

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