Indonesia’s Legal System Is Based on Civil Law

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal) and the Supreme Court (the court of last resort). Indonesia also has a Constitutional court with the same legal standing as the Supreme Court. Its role is to review the constitutionality of legislation and, with the Supreme Court, to conduct judicial review. Indonesia’s commercial code, grounded in colonial Dutch law,has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking and commercial markets.

Foreign investors possess strong legal protection via domestic or international mechanisms in Indonesia. The country is a member of the World Bank’s International Centre for Investment Disputes and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’). Membership of the New York Convention provides international investors in Indonesia with extra certainty as to protection of their assets, as courts of signatory members of this convention are required to recognise and enforce arbitration awards made in other member states (with the grounds on which courts can refuse to do so limited to certain requirements).

This development serves to render the Indonesian investment climate as more stable, as domestic courts in countries which are not members are only required to enforce foreign arbitration awards if there is local legislation requiring such. Therefore, international investors do have recourse to international arbitration or alternative dispute resolution mechanisms, in the event of contract problems or disagreements with the Indonesian government.

Legal Risks

Indonesia faces issues in protecting intellectual property (IP). Despite having a number of laws and measures in place to protect IP rights, the state’s enforcement capacity remains insufficient. As a result, businesses entering the market need to be aware of the very real risk of having IP stolen with little recourse beyond expensive and time-consuming international courts. Businesses should also be aware of the likelihood of a proliferation of counterfeit and pirate wares being sold throughout the country, and are advised to ensure that all business dealings are legitimate and up to standard to avoid reputational damage.

Another risk involved with using the courts to resolve contract disputes is the prevalence of corruption, which results in an uneven playing field and often disadvantages foreign investors in disputes with local entities, which have better connections and knowledge of the system. Despite serious attempts by the government to reduce corruption, it remains one of the most significant barriers to business activity in Indonesia.

As political and business elites continue to make use of corrupt practices in order to entrench their positions, many companies face problems in the form of extortion for permits/licences and preferential treatment as ordered to certain businesses. In addition, gifts are often required for the installation of utilities such as telephone lines and water mains, while imported goods are subject to delays and illicit payments at Indonesia’s ports. Inadequate anti-corruption legislation means that these practices remain common. Businesses should also be aware of the perceived widespread nature of corruption in Indonesia and are advised to encourage transparency in dealings with state institutions or officials. However, the legal environment of Indonesia is steadily progressing with increased laws safeguarding anti-counterfeiting, alongside a well established e-government readiness.

Political Environment

The political environment of Indonesia has been enhanced since the recent improvement of several bureaucratic procedures. For example, Indonesia made starting a business easier by combining different social security registrations and by reducing notarisation fees in both Jakarta and Surabaya. The country also made registering property easier by reducing the time to solve land disputes at the First Instance Court and enhanced the transparency of the land registry. Such efforts will continue to aid foreign businesses’ ability to enter the Indonesian market. Over the past years, the country has endeavoured to improve businesses’ access by improving bureaucratic standards and requirements. If this trend continues, foreign investors and businesses will benefit greatly, making the country increasingly competitive in the region.

Additionally, President Joko Widodo was elected in 2014 on a business-friendly platform and promised to deliver reforms to improve the regulatory environment, with eradicating corruption and tackling graft being a key target.

Political Risks

Despite Joko’s election, the business environment of Indonesia has not improved drastically. High risks from time and cost perspectives are still involved in the process of registering a new business and obtaining a construction permit, while costs for registering property and wrapping up an insolvent estate are some of the highest regionally.

The current president’s efforts to combat corruption faces serious difficulties as the legality of judgements made by the government body responsible for corruption has been called into question, threatening to undo all of its previous convictions.

Furthermore, the prevalence of graft creates difficulties for businesses using local courts to settle commercial disputes, and hinders the adequate protection of intellectual property rights. Hence, these factors contribute to a significant bureaucratic red tape to doing business in Indonesia.