A valid agreement is binding to the parties who made it. This is the principle of “pacta sunt servanda“. Nevertheless, there are exceptions to this principle: judges may also consider the aspects of justice, appropriateness and balance. This article discusses an interesting case relating to the principle of balance.
Facts
The plaintiff demanded that one of the articles in an agreement be declared to have no legally binding force.
First-instance court
The first-instance court admitted the plaintiff’s claim. The court held as follows:
Considering, although the agreement between the plaintiff and the defendant does not violate Article 1320 of the Indonesian Civil Code, the fact remains, according to the panel of judges, the contents of Cooperation Agreement made and agreed by the Plaintiff and the Defendant in the implementation of that agreement, clearly violate the principle of balance due to the imposition of unreasonable and unabalanced obligations between the Plaintiff and the Defendant, all costs related to the investment for the development and management . . . were entirely charged to the Plaintiff, plus additional contributions and fines . . . On the other hand, the Defendant was earlier benefited since the Plaintiff must be burdened with the construction of an official house as compensation for the use of land owned by the Defendant, moreover, at the end of the term of agreement . . . it will become the property of the Defendant.
Considering, that according to the agreement law the parties are free to make an agreement in accordance with Article 1320 of the Indonesian Civil Code and that agreement is binding as law as long as they do not violate the law and the principles of appropriateness and justice.
Considering, that even though the agreement made by the parties was in accordance with the principle of freedom of contract, if it violates the law, the principles of appropriateness and justice, one of the parties may request that the agreement be terminated.
The panel of judges stated that one of the articles in the agreement violated the principle of balance. Therefore, the panel declared that the provision had no legally binding power.
Supreme Court
The Supreme Court upheld the first-instance court’s considerations and decisions, providing the following reasoning:1
That in the a quo case there has been an unavoidable situation where if the contract is continued, the purpose of the agreement is not achieved, therefore based on the principles of balance, appropriateness, and the benefits of both parties, the agreement must be altered according to the decision by the [first-instance court].
Comment
The plaintiff’s claim in this case was bold. It was met by equally bold decisions (and legal considerations) by the first-instance court and the Supreme Court. These decisions are welcome because, regardless of the interests of the parties in the case, they enrich Indonesian case law on the principles of balance, justice and appropriateness in a legally binding agreement as limitations to the principle of freedom of contract.
Further, and crucial for legal practitioners in Indonesia, these decisions suggest that the application of principles limiting the principle of freedom of contract is not only applicable for the termination of an entire agreement but also on the non-applicability of a definite clause, article or provision in an agreement.
For further information on this topic please contact Eddy Leks at Leks & Co by email (eddy.leks@lekslawyer.com). The Leks & Co website can be accessed at www.lekslawyer.com.
Dr. Eddy M. Leks
