Construction Arbitration Indonesia – Global Arbitration Review Know-How 2025

Navigating the complexities of construction arbitration in Indonesia requires a deep understanding of local laws, institutional rules, and enforcement mechanisms. For investors and contractors alike, construction arbitration in Indonesia serves as a vital tool to mitigate project risks while maintaining essential business relationships through confidential and efficient proceedings.

Legal system

• Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

Indonesia is a civil law jurisdiction. The law on construction in Indonesia is regulated under Law No. 2 of 2017 on Construction Service as amended by Law No. 6 of 2023 on Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (Construction Law) and Government Regulation No. 22 of 2020 on Implementing Regulation of Construction Law as amended by Government Regulation No. 14 of 2021 (GR on Construction).

The main instrument that has legal force and effect is statutory regulation. The main lawmaking body is the House of Representatives. The draft of law must be discussed and agreed with the President. The President will then promulgate the already-agreed draft of law. The new law is published in the State Gazette and accessible on the National Legal Documentation and Information Network platform.

Generally, laws cannot be passed with a retrospective effect. Nevertheless, Appendix II point 156 of Law No.12/2011 on formation of laws and regulation as lastly amended by Law No. 13/2022 on the second amendment of Law No.12/2011, stipulates that if there is a strong reason to apply a law retroactively, the following points need to be taken into account: (i) the regulation cannot be applied retroactively for provisions related to criminal matters, (ii) details regarding the effect of the retroactive provisions on certain existing legal actions, legal relationships, and legal consequences are contained in the transitional provisions, and (iii) the effective date of the regulation shall not be earlier than the date on which the draft of law is made known to the public (eg, when the draft of law is listed in the national legislative programme).

Contract formation

• What are the requirements for a construction contract to be formed? When is a “letter of intent” from an employer to a contractor given contractual effect?

Under article 1320 of the Indonesian Civil Code (ICC), for a contract to have a binding legal force:

1. there must be agreement of the parties who are bound thereby;
2. there must be capacity to conclude an agreement (adult or already married and not under conservatorship);
3. there must be a specific subject matter (eg, construction service); and
4. there must be an admissible cause (not violating laws and regulations, public order and decency).

The Construction Law obliges the contract to be made in writing and must comply with the prevailing laws of Indonesia. A construction contract must at least govern the following provisions:

1. identity of the parties;
2. work description (scope of work, value of work, etc);
3. rights and obligation of the parties;
4. labour;
5. payment system;
6. dispute resolution;
7. termination of contract; and
8. force majeure.

It is also compulsory for building failure provision to be stipulated.

Unless specifically intended for having binding force, a letter of intent is generally not binding since it is only a written statement detailing the preliminary understanding of parties that plan to enter into a contract.

Choice of laws, seat, arbitrator and language

• Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

The Construction Law obliges that construction contracts executed in Indonesia to be governed by Indonesian law. Nevertheless, the parties are free to choose the law of the arbitration agreement, seat of arbitration, arbitral rules, arbitrators and the language of the arbitration since there is no restriction under construction law.

Regarding the language of the contract, the Construction Law stipulates that if the construction contract is executed with a foreign party, it shall be made in the Indonesian language and English, with Indonesian being the prevailing language. This “foreign party” can be a foreign investment company in Indonesia or a foreign business entity. 

Implied terms

• How might terms be implied into construction contracts? What terms might be implied?

Terms may be implied into a construction contract since under article 1339 of the ICC, an agreement shall bind the parties not only to that which is expressly stipulated therein, but also to that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs or the law. In addition, the interpretation of a rule of contract might also affect implied terms in a contract. The terms that might be implied are, for example, when the title of work is considered as having been transferred to the employer, the obligation to abandon the site by the contractor when the contract is terminated, the required mechanism of progress payment, etc.

Certifiers

• When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

The Construction Law and GR on Construction do not explicitly stipulate the obligation for a certifier, such as an engineer or project manager to act impartially, fairly and honestly. The Construction Law, however, recognises the professionalism principle in the implementation of construction services as a professional activity that upholds the value of professionalism. Article 75 paragraph (1) of the Construction Law stipulates that construction workers who provide construction services (ie, construction consulting services) must be professionally responsible for the results of their work. Its elucidation explains that the responsibilities of the construction workers (ie, consulting service providers) are in accordance with the code of ethics of each profession involved. Thus, construction consulting service providers must comply with the code of ethics. This code of ethics refers to “act honestly, impartially and with full dedication to serve the task giver and the community”. This moral obligation emerges from the engagement.

The parties are bound by the certificate when the certificate has been issued according to the terms of the contract. The certifier is normally considered as acting for and on behalf of the employer. When the violation of the certifier is related to the contractual obligations under the contract, the claim should be directed not against the certifier personally but to the employer. A separate claim against the certifier is possible when the claim focuses on an unlawful act by the certifier that is independent from its obligation under the terms of the contract. 

Competing causes of delay

• If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

The Construction Law and GR on Construction are silent on this matter. This should be mutually agreed by the parties.

Disruption

• How does the law view “disruption” to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

The Construction Law is silent on the specific issue of “disruption” on the contractor. Nevertheless, disruption caused by the employer’s default should generally be treated as a breach of contract, which entitles the contractor to a claim under articles 1238 and 1243 of the ICC.

In filing the claim, the contractor must prove that the losses or damage were caused by the disruption. There is no obligation under Indonesian law that obliges the court or arbitral tribunal to do their best in quantifying losses. Under Indonesian civil procedural law, the court and arbitral tribunal generally act passively and rely on the submitted evidence. In principle, despite the standard of proof is based on the balance of probabilities, the tribunal must base its decision by evidence. It does not mean that the tribunal will quantify that loss. But the tribunal will decide based on the submitted evidence and on the weight of evidence. 

Acceleration

• How does the law view “constructive acceleration” (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

The Construction Law and GR on Construction are silent on this matter. If the acceleration is caused by the employer’s default it can be treated as a breach of contract and the contractor is entitled to the compensation. Under article 1865 of the ICC, the contractor must prove that the acceleration was the result of a breach of contract by the employer, such as failure to provide an extension of time (EOT) and that the contractor suffered a loss due to this acceleration. The answer does not change if the employer acts unreasonably or in bad faith. The employer’s bad faith, by not providing the EOT or causing delays, will further support the contractor’s claim for losses arising from constructive acceleration.

Force majeure and hardship

• What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

Force majeure is regulated under articles 1244 and 1245 of the ICC. A contract generally regulates the same in more detail. The concept of force majeure is that it will prevent the debtor’s obligation to pay cost, damages and interest if there has been an unforeseen circumstance outside the control of a debtor.

Indonesian law does not clearly regulate the requirements for an event to be categorized as force majeure. Nevertheless, based on various jurisprudence and legal doctrine, a force majeure must meet the factors of (i) unforeseeable, (ii) unavoidable by the party that must fulfil the obligation or perform the contract, and (iii) not due to the default of the party. When the same is regulated under the contract, the force majeure event is binding on the parties, including how the risk of force majeure is allocated between the parties.

Based on the elucidation of the Construction Law, force majeure can be categorized as absolute force majeure and relative force majeure. Absolute force majeure has a permanent effect, meaning that it is impossible for the parties to carry out their rights and obligations. Meanwhile, relative force majeure does not have a permanent effect, the parties are still able to carry out their obligations after the force majeure no longer occurs. In the event of difficulty or impracticability in the execution of the contract, this can be considered as a relative force majeure. Under the jurisprudence of Denpasar District Court Decision No. 20/Pdt.Sus-PHI/2021/PN Dps, the judges rule that difficulties (ie, financial loss due to covid-19) in carrying out the performances were considered as a force majeure.

In general, the relief may affect any of the obligations under the contract. When the force majeure is not specifically regulated in a contract, despite its automatic application, a debtor must prove that it did occur. When the force majeure is specifically regulated in a contract, it should comply with the terms of a contract (eg, notification period, expiry, consequences, etc). The Construction Law requires that the force majeure provision be included in the construction contract, therefore it cannot be excluded. 

• When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

A contractor may seek relief if unforeseen circumstances make the contract unduly expensive or hard to perform, which will be considered as force majeure. S Soemadipradja, in his book titled Penjelasan Hukum tentang Keadaan Memaksa (Legal Explanation of Force Majeure), says that reasons of economic constraints might be used as a basis for avoiding contractual obligations, such as clausula rebus sic stantibus. This term is, according to S Soemadipradja, connected with the principle of good faith under the ICC. In addition, that opinion is supported by jurisprudence of Denpasar District Court Decision No. 20/Pdt.Sus-PHI/2021/PN Dps, which holds that force majeure related to changes in circumstances, hardship or rebus sic stantibus serves as the reason for the defendant to be declared as not having committed any default. The rule of force majeure is compulsory in nature, and therefore, it cannot be excluded by agreement.

Impossibility

• When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

In such a case, this is generally considered as contractor’s potential breach of contract. The contractor is expected to have known from the beginning that the specification was impossible to fulfil. Therefore, the law does not provide any relief for this matter.

Clauses that seek to pass risks to the contractor for matters it cannot foresee or control

• How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer’s requirements in design and build forms?

As outlined above, the rule of force majeure is compulsory in nature. That rule cannot be superseded by agreement. Thus, such provision will not be effective.

Duty to warn

• When must the contractor warn the employer of an error in a design provided by the employer?

Construction law is silent on this matter. Although it does not specifically regulate the obligation of the contractor to warn the employer of an error in a design, article 1511 of the ICC regulates that if a claim regarding defects causes a purchase to be cancelled, the buyer must notify it within a short period and by observing the customs of the agreement being made. In line with this provision, when the contractor finds that error, it should immediately notify the employer of the matter.

Good faith

• Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

Article 1338 paragraph (3) of the ICC requires that an agreement must be performed in good faith. The concept of good faith, according to J Satrio, means that an agreement must be conducted in a manner that considers fairness, propriety and appropriateness.

The employer’s intervention, the discretion to terminate or suspend the contract, and the ability to claim pre-agreed sums, must all be exercised reasonably and fairly, and cannot be arbitrary, even if it has been agreed at the employer’s discretion.

Time bars

• How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 (“otherwise in connection with the contract”)? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

It generally works according to the terms of contract. But the bar claim in a contract may still be challenged with the general expiry period of 30 years under the ICC.  

Article 1243 of the ICC allows for claims when there is a failure to fulfil a contractual obligation, allowing the affected party to claim costs, damages and interest. Further, article 1267 also gives the affected party the option to either force the other party to fulfil the agreement or demand the termination of the agreement, with compensation for costs, damages and interest. Claims are limited to direct losses caused by the breach of contract (in this case, by the employer). The contractor cannot make a claim for losses suffered indirectly from the employer.

When the employer was not in default, but its non-performance was due to a force majeure event, the employer will forfeit its obligation during the occurrence of that force majeure.

There is no difference in the approach to claims for extensions of time and liquidated damages relief, or to claims for monetary sums. In both cases, the contractor must prove that the direct loss suffered was caused by the employer’s breach of contract. 

Suspension

• What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

The Construction Law and GR on Construction are silent on this matter. Nevertheless, a similar concept of mutual suspension of performance in the context of sales and purchase is regulated under article 1478 of the ICC, which provides that the seller is not obliged to deliver the goods in question, if the buyer has not paid the price. Since it is not regulated under the law, it must be specifically agreed under the contract.

Omissions and termination for convenience

• May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

The employer may exercise an express power to omit work or terminate the contract at will or for convenience, if this has been agreed upon in the contract. Nevertheless, it is necessary to pay attention to the principle of balance. If the elimination or termination for convenience violates the principle of balance (as already adopted by the court and tribunal), then there is a risk that it might be challenged by the contractor. Article 1611 of the ICC stipulates that an employer may terminate the agreement even though the work has been partially performed by the contractor to the extent that it fully compensates the contractor for all expenses spent on the work and for its loss of profit.

Termination

• What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

The parties are free to stipulate the terms of termination of the contract. Specifically based on article 1267 of the ICC, if a party fails to fulfil its obligations, the other party may demand the termination of the agreement with compensation for costs, losses and interest.

Partial termination is possible in the construction contract. Partial termination may be feasible if it does not disrupt the overall project. On the other hand, if partial termination significantly impacts the overall project, it may not be a practical solution.

The financial consequence is that the party terminating the contract can seek compensation for the loss incurred, provided that such termination was claimed due to another party’s default.

• If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

Generally, other rights to terminate will not be considered as available. Termination outside of the contract provisions is only possible if the contract does not fulfil the subjective requirements under article 1320 of the ICC (ie, consent of the parties and capacity to contract).

• What limits apply to exercising termination rights?

Indonesian law and construction law are silent on this matter. Nevertheless, according to Munir Fuady, in his book Hukum Kontrak Buku Kesatu (Contract Law Book One), if a contract is terminated due to breach of contract, it must be a serious default, which can be specified in the terms of the contract that defines which non-performance of obligations are considered to be a default. In addition, termination of the contract must also be done in good faith. This means that a party cannot terminate the contract for arbitrary reasons.

Completion

• Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

Construction law is silent on this matter. Normally, this matter is regulated under the contract. Nevertheless, if the contract does not stipulate this matter, the concept under the provision of article 612 of the ICC, which governs that ownership of movable goods is deemed to be transferred when the goods are handed over, may be applied and considered that the work has been completed after being possessed by the employer. 

• Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

Unless specifically regulated, an approval of the work by the employer should not bar a subsequent complaint, as there are other provisions that entitle an employer to claim from the contractor (eg, warranty of the work and building failure).

Construction law is silent on this matter. But article 1608 of the ICC stipulates that the assessment of the construction work is deemed to have occurred when that part of the work has been paid. In addition, the provision of article 612 of the ICC may be applicable, which means that once the work is handed over to the employer or taken over by the employer, it can be considered accepted by the employer.

Liquidated damages and similar pre-agreed sums (‘liquidated damages’)

• To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

Under Indonesian law, there is no concept of liquidated damages for delay, but rather a term of “delay damages” might be used. Delay damages is used as a guarantee that the contractor will fulfil its obligations under the contract as stipulated in article 1304 of the ICC. Essentially, delay damages are not exhaustive or limited in nature. Therefore, the injured party retains the right to claim additional compensation, provided it can be proven.

If delays result from the contactor’s fraud, wilful misconduct, recklessness or gross negligence, this constitutes a breach of contract and a violation of the good faith principle. But in terms of losses claimed, it does not make any difference. This behaviour cannot be excluded by agreement since the principle of good faith in the performance of agreement is mandatory under Indonesian contract law.

• If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no “sweep up” provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

As the delay occurs due to the actions of the employer, the contractor’s delay is not considered as a default of the contractor under the legal doctrine of non adimpleti contractus. Therefore, the employer should not be entitled to delay damages.

• When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

That might happen when it is proven that the actual losses are lower than the predetermined amounts under the delay damages.

• When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

A court or arbitral tribunal may award more than the agreed delay damages if it is proven that the actual losses are more than the agreed delay damages.

Assessing damages and limitations and exclusions of liability

• How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

Monetary compensation is awarded for actual losses or losses that should have been foreseen from the commencement of an agreement. These losses must be a direct consequence of a default.

The employer may claim loss of profits as part of its monetary compensation. If the lost profits are exceptionally high, and there is no liability limit in the contract, they can still be claimed if it is actual or can be foreseen from the beginning, and a direct consequence of such default. Nevertheless, there was a case where the panel of judges corrected the arbitral award on the amount of compensation to be paid by the respondent by considering its impact on the respondent’s ability. 

• If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

The law is silent on this specific subject. Hence, if it is contractually obligated, the contractor must rectify it, regardless of the disproportionate cost. Based on the principle of freedom of contract, the parties can agree on a stricter provision if the contract does not violate law, public order or morality.

• If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

The contractor is no longer liable to the defects after the DNP. Therefore, the employer cannot make a claim to contractor after DNP, except in relation to building failure that is applicable for a maximum of 10 years from the final handover of the work.

• What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

Indirect or consequential loss cannot be claimed under Indonesian Law. Therefore, such exclusion follows the Indonesian Law (ie, article 1247 of ICC).

• Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

The parties to an agreement freely agree to exclude or limit the liabilities of the parties. Nevertheless, the enforceability of such limitation is subject to the good faith principle. Since the limit of liability is derived from an agreement, it is not applicable to tort and delict claims.

If the contract is silent on behaviour such as fraud, wilful misconduct or gross negligence, as long as the limit of liability is agreed, the limit of liability provision is binding on the parties. If it is expressly agreed upon for those behaviours, then the limit of liability is binding on the parties.

The required causation is the same as a breach of contract and damages, namely, the non-defaulting party must prove that there has been a breach of contract (eg, fraud, negligence, etc) and there have been losses incurred as a result of it. 

Liens

• What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

The contractor’s right to lien is not commonly agreed upon in a construction contract in Indonesia. Nevertheless, the contractors can generally exercise the right to retain any property it holds until it has received full payment for the works. The contractor’s right to retain is stipulated under article 1616 of the ICC that labourers (contractors), who hold the goods of another person (employer) to perform work on it, shall be entitled to retain such goods until their total costs are fully paid, unless the employer has provided sufficient security for such costs and wages. If the employer has no interest in the site, the contractor should then file a claim for breach of contract against the employer. In practice, retention a right is recognised and implemented when the need arises.

Subcontractors

• How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

The Construction Law and GR on Construction are silent on this matter and there is no restriction under Indonesian law. ‘Pay-when-paid’ provisions are enforceable as long as it is agreed by the parties. Despite the non-inclusion of a ‘pay-when-paid’ provision in a contract, based on good faith principle and the provisions under article 1614 of the ICC (see answer 34), late payment by the contractor to its subcontractor due to non or late payment by its employer may be justified.

• May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

Yes, under article 1614 of ICC they are entitled to directly claim from the employer the sums that the employer owes to the contractor. The merits and proof of the subcontractor’s claim are not expressly regulated in the ICC and therefore should follow the law of evidence and the terms of the subcontract agreement.

Under the Construction Law, the governing law for the construction contract must be Indonesian law. Therefore, no foreign law as a governing law of contract is permitted.

• May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

An employer may hold its contractor to their arbitration agreement, as long as the dispute regarding the subcontractor’s non-performance is considered a breach by the contractor under the construction contract between the employer and the contractor. When the subcontractor is to be included in the arbitration proceeding, the disputing parties (ie, the employer and the contractor), the subcontractor and the arbitral tribunal must agree to include the subcontractor in the proceeding.

If there is no arbitration agreement between the employer and contractor or between the contractor and the subcontractor, the contractor may require litigation against all parties. Nevertheless, if there is an arbitration agreement between the employer and contractor or between the contractor and the subcontractor, then the court does not have jurisdiction to examine the case.

The seat is important when the arbitration dispute involves a foreign party or foreign arbitration rules, or the award will not be made in Indonesian territory. When the seat is not in Indonesia, the lex arbitri of Indonesia is not applicable. 

Third parties

• May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

Generally, under a privity of contract principle, the third party does not obtain rights under construction contract between the employer and contract except for the amount that the employer owes to the contractor for this third party’s work. Future or ultimate owners have no right to file a claim against the contractor since the employer and future or ultimate owners are considered as different legal subjects from the employer and therefore not a party to a contract.

Limitation or exclusion of liability is permissible if it is agreed by the parties except for liability mandatory by law.

• How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

The contractor’s affiliates, directors or employees are not a party to the construction contract. Under the privity of contract principle, a person who is not a party to a contract cannot be held liable. Limitation or exclusion of liability is permissible if it is agreed by the parties, except for liability mandatory by law.

Limitation and prescription periods

• What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

Under the Construction Law, decennial liability applies in terms of building failure. Building failure is a condition of a building collapsing and/or building malfunctioning after the final handover. Article 85A (2) of GR on Construction stipulates that building collapse is a condition in which most or all the building components are damaged and cannot be operated. Building malfunctioning is a condition where the building is not as planned and/or the building fails to comply with security, safety, health and sustainability aspects. The contractor is liable for building failures within the prescribed time frame in accordance with the age plan of a construction, or, if the age plan of a construction is more than 10 years, the contractor shall be liable for building failures within a maximum period of 10 years. Based on article 1979 of the ICC, a summons, claim and any act of legal action may suspend the time limit for claim (expiration). This is a substantive law. The parties cannot agree otherwise.

Other key laws

• What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

In principle, mandatory rules and the provisions that are regulated in statutory regulations cannot be excluded or modified by agreement. The rules that can be excluded or modified by the parties are the provisions in Book III of the Indonesian Civil Code on Agreement, if these provisions are not mandatory rules. An example of a mandatory rule that cannot be excluded or modified is the governing law provision under the Construction Law.

If the provisions in the FIDIC Silver Book 1999 (or any other contract) violate the (mandatory) laws, public order and ethics, they are not enforceable and may be considered as null and void.

• What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Mandatory laws and regulations will continue to apply in Indonesia. If the provisions in the FIDIC Silver Book 1999 (or any other contract) violate the (mandatory) laws, public order and ethics, they are not enforceable and may be considered null and void.

Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions

• For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

Yes, it is possible. Article 32 of Law No. 30 of 1999 on Arbitration and Alternative Disputes Resolution (Arbitration Law) stipulates that upon the request from one of the parties, the arbitrator or arbitral tribunal may render a provisional award or interlocutory award. Therefore, the contractor can obtain an interim award if the contractor expressly requests the interim award in its claim or in its request for arbitration pending the final award. The same goes for the court under article 185 of Herziene Indonesich Reglement (HIR).

Courts and arbitral tribunals

• Does your jurisdiction have courts or judges specialising in construction and arbitration?

No, there is no specific chambers or court division for that matter.

• What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

In principle, disputes arising in construction contracts are tried in Indonesian public courts, which have three stages, namely, first stage at the district court, appeal stage at the high court, cassation at the Supreme Court. There is an opportunity to file a judicial review at the Supreme Court after the cassation decision has been obtained. All their decisions are published.

Binding precedent is not recognised in Indonesia, but permanent jurisprudence is normally followed by judges or arbitrators. The rest of the jurisprudence is persuasive in nature.

• In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

Under Indonesian civil procedure law, judges in court in examining cases are only limited to what is presented by the parties at trial, whilst arbitrators are more active in examining cases. Arbitrators may ask the parties to provide witnesses to support the facts in the proceeding as stipulated under article 49 of the Arbitration Law.

No, judges and arbitrators are not expected to give preliminary indications on their view of the merits of dispute.

• If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

Where it has been agreed that the dispute will be resolved by arbitration, the contractor will not be able to bring a parallel proceeding, since the court has no jurisdiction to examine the dispute between the contractor and the employer where there is an arbitration agreement.

If there are preconditions and these have not been met, there might be a challenge to the jurisdiction of the tribunal that might terminate the arbitration proceeding.

• If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

No, it is not.

Expert witnesses

• In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

Both parties and the tribunal can appoint experts to be heard at trial. The arbitration law is silent on to whom the expert owes their duty. But it should be for the tribunal despite being appointed by the party.

State entities

• Summarize any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

In the event the state entity or public authority is the employer, the scheme used is the procurement of goods and/or services as set forth under Presidential Regulation No. 16 of 2018 on Government Procurement of Goods/Services as lastly amended by Presidential Regulation No. 12 of 2021 on Amendment to Presidential Regulation Number 16 of 2018 on Government Procurement of Goods/Services (PR No. 16/2018). Procurement of goods and/or services is a construction project financed by state finances and therefore, it uses standardised documents. In the procurement of government goods and/or services, there are standard documents for tenders that are regulated by the government goods/services procurement policy institution.

Article 62 GR on Construction and article 38 PR No.16/2018 require that the contractor be selected using several methods, namely:

1. e-purchasing;
2. direct procurement if the maximum value of the work is 200 million rupiah;
3. direct appointment for certain circumstances, for example, for works that are confidential in nature concerning state interests, the security of the president and vice president, and development for public utility, facility and infrastructure in residential neighbourhoods for low-income citizens as performed by the relevant developers;
4. express tender if the work specification and volume can already be determined in detail; and
5. tender.

Settlement offers

• If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

Even though it is not common, a party can make an offer that is without prejudice save as to costs. Under article 1815 of the ICC, the parties are free to enter into a settlement agreement to resolve a pending case or prevent a case from arising. A settlement agreement can be made at any stage of the proceedings before the final award is rendered.

Privilege

• Does the law of your jurisdiction recognise “without prejudice” privilege (such that “without privilege” communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

Yes, the “without prejudice” privilege is recognized. Even though there are no laws and regulations in Indonesia that clearly regulate the without prejudice privilege, article 7 point a of the Indonesian Advocate’s Code of Ethics provides that letters that have been marked with the words “Sans Prejudice” cannot be used as evidence in court.

Yes, if it is agreed to keep the negotiation settlement confidential, any violation of that confidentiality may cause a definite amount of compensation.

• Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterized as substantive or procedural law?

Advocate–client privileges are recognized and stipulated under article 19 of Advocate Law (Law No. 18 of 2003), that an advocate is obliged to keep confidential everything known or obtained from its client due to its professional relationship and is entitled to the confidentiality of its relationship with the client. But this provision does not necessarily mean applicable to an in-house counsel.

The relevant law in question falls under substantive law.

Guarantees

• What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

Article 1820 of the ICC stipulates that a guarantee is an agreement, by which a third party for the benefit of the creditor (employer), binds itself to fulfil the agreement of the debtor (contractor), if the debtor (contractor) itself does not fulfil it. The requirements for guarantee are stipulated under articles 1820 to 1830 of the ICC, are: (i) there is a valid main agreement, (ii) the guarantor cannot bind him or herself to amount exceeding the debt of the debtor or for onerous conditions than the main agreement; and (iii) a guarantee shall not be implied, but must be made with an express statement and it is not permissible to extend the guarantee beyond the terms under which it was entered into. Since a guarantee must be made expressly, an oral guarantee is not effective.

• Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

Yes, it will be limited to the underlying construction contract as per article 1822 of the ICC. The guarantee’s wording should not affect the position.

• Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

The guarantor will be released from its obligations in the guarantee in the following circumstances when: (i) the principal debtor (guaranteed debtor) has completed its obligations in the underlying contract with the principal creditor (employer); (ii) the validity period of the guarantee has expired; or (iii) if the underlying contract is abolished as stipulated in article 1381 of the ICC, for example, such as by the destruction of the goods that were owed or cancellation of the agreement. The guarantee’s wording will not affect the position.

On-demand bonds

• If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

A challenge on the jurisdiction cannot be raised since it has been agreed that the bond was subject to Indonesian law.

Regarding the substantive law, a challenge can only be raised if the call is made when there has been no default from the guaranteed party (ie, the contractor) against the employer. The essence of a call on bond is that there must have been a default by the main debtor that then entitles the creditor (guaranteed party) to call on it. This is clearly regulated under article 1820 of the ICC.

• If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

When there is a clear restriction in a contract for amounts that the employer is entitled to, the court or tribunal should adhere to it. Hence, the court or tribunal might restrain a call by the employer violating such agreed terms of contract.

Further considerations

• Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

The Construction Law regulates the requirements for foreign construction services in the form of both business entities or individuals in conducting activities in Indonesia.

Foreign construction services business entity or foreign construction services individual business that will conduct construction services business in the territory of Indonesia must establish: (i) representative office; and/or (ii) Indonesian legal entity through capital cooperation with domestic construction services business entities.

There are several requirements if a foreign construction services company chooses to establish a representative office, among others: (i) the representative office must be in the form of a business entity with qualifications equivalent to large qualifications; (ii) the company must have a valid business license; and (iii) the company must establish a joint operation with local construction business entity with a large qualification and has a valid business license.

If a foreign construction services business entity or foreign construction services individual business chooses to establish an Indonesia legal entity through a joint venture, the Indonesian legal entity formed must be a large qualification construction service business entity, have a valid business license and have a business entity certificate.

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This article was published on Global Arbitration Review in June 2025. For further in-depth analysis, please visit the GAR Know-how Construction Arbitration.