In brief: energy contract performance and liability in Indonesia

Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

In principle, energy contracts are governed by general civil and commercial laws.

Specifically for activities of procurement in upstream oil and gas activities, the Indonesian Special Task Force for Upstream Oil and Gas Business Activities published SKK Migas Work Procedure Guidelines Number: PTK-007/SKKIA0000/2023/S9 (Revision 05) on the Second Book: Guidelines for Implementing Procurement of Goods/Services (PTK 007) as amended by Head of SKK Migas Decree Number KEP-0120/SKKIA0000/2024/S9 of 2024. Another commonly used industry-standard form contract is the International Federation of Consulting Engineers Conditions of Contract for Construction.

Furthermore, upstream oil and gas business activities are carried out through a cooperation contract as stipulated under Law Number 22 of 2001 concerning Oil and Gas as amended by GRLL 2/2022 and further regulated in the Minister of Energy and Mineral Resources Regulation Number 35 of 2021 concerning Procedures for the Determination and Bidding of Oil and Gas Working Areas and the Minister of Energy and Mineral Resources Regulation Number 13 of 2024 concerning Gross Split Production Sharing Contract. The cooperation contract can be in the form of a production sharing contract with a cost recovery mechanism, a gross split production sharing contract or another form of cooperation contract.

Furthermore, the required points of agreement in an electricity purchase and sale agreement between PT PLN (Persero) as the buyer and the business entity as the seller are regulated in the Minister of Energy and Mineral Resources Regulation Number 10 of 2017 concerning the Matters in the Electricity Purchase and Sale Agreement as amended by the Minister of Energy and Mineral Resources Regulation Number 49 of 2017 and the Minister of Energy and Mineral Resources Regulation Number 10 of 2018, and partially revoked by the Minister of Energy and Mineral Resources Regulation Number 48 of 2017.

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Contractual interpretation is generally governed by Indonesian Civil Law. In principle, a contract must fulfil the following cumulative requirements:

• the parties must consent to the contract;
• the parties must have capacity to enter a contract;
• the contract must have a certain object; and
• the contract must have a lawful cause.

If a contract is subject to multi-interpretation, the rules of interpretation that apply to a contract pursuant to Indonesian Civil Law are as follows:

• the interpretation that must be chosen is the one that allows the contract to be enforceable rather than an interpretation that does not allow implementation;
• the interpretation that must be chosen is the one most compatible or in accordance with the nature of the agreement;
• the agreement must be interpreted according to what is customary in the country or place where the agreement was made;
• matters customarily agreed upon are deemed to be tacitly included in the agreement;
• the agreement made cannot be interpreted part by part, but must be interpreted as a whole; and
• an agreement must be interpreted to the detriment of the person who has asked for something to be agreed upon, and for the benefit of the person who has bound him or herself to it.

Describe any commonly recognised industry standards for establishing liability.

Civil liability may arise from default and unlawful acts. According to article 1239 of the Indonesian Civil Code (ICC), in the event of default, the defaulting party must provide indemnification in the form of costs, losses, and interest. Further, according to the Indonesian Civil Code (ICC) by R Subekti, in the event of default, defines default as follows:

• failure to fulfil the agreed obligation;
• failure to fulfil the obligation in the agreed manner;
• failure to fulfil the obligation within the agreed time frame; and
• conducting an act prohibited by the agreement.

Moreover, article 1365 of the ICC stipulates that a person who commits an unlawful act and causes loss to another person due to their fault must compensate for the loss. In principle, the ICC adopts fault-based liability for unlawful acts. An unlawful act is committed if the following conditions or elements are met:

• the act is unlawful;
• there must be an error;
• there must be harm caused; and
• there is a causal relationship between the action and the loss.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility recognised in your jurisdiction?

In principle, the ICC recognises the concept of force majeure, and this is reflected in articles 1244 and 1245. Article 1244 provides that if there is any reason for this, the debtor is compensated for costs, damages and interests if they cannot prove that the non-performance or the late performance of such obligation, is caused by an unforeseen event, for which they are not responsible and were not acting in bad faith. In addition, article 1245 provides that the debtor need not compensate for costs, damages or interests, if a force major or a coincidence prevented them from giving or performing an obligation, or if, because of these reasons, they committed a prohibited act.

The provisions of articles 1244 and 1245 above do not provide in detail the events that are categorised as force major. According to case law, events that are categorised as force majeure are as follows: due to the risk of war, loss of objects of the agreement caused by lightning strikes, fires, seizures by the Japanese during the war, government policies, accidents at sea and on land. However, whether a given situation constitutes a force major is determined on a case-by-case basis.

Additionally, the ICC does not recognise the concept of hardship or rebus sic stantibus.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

There is no specific legal framework concerning nuisance and energy development.

However, Law Number 32 of 2009 on Protection and Management of Environment (the Environmental Law) regulates that anyone who causes nuisance (vibration, noise and odour) faces a criminal penalty of a maximum of three years and a fine of a maximum of 3 billion rupiah. The penalties can be imposed if administrative sanctions have been imposed that are not complied with or the violation has been committed more than once. The claim for compensation can also be made by third parties, government, public officials, environmental organisation and/or any disadvantaged community group by filing an unlawful act lawsuits.

Liability and limitations

How may parties limit remedies by agreement?

Indonesian law does not provide any prohibition on any type of limitation of remedies. In principle, parties are generally free to enter into an agreement including limiting the type of remedies and exclusion of liabilities in the agreement in so far it is agreed by the parties, not unlawful, and in good faith.

Furthermore, in the event of default, article 1239 in conjunction with article 1246 of the ICC provides that compensation must be given in the form of:

• cost (expenses that are expressly incurred by the party);
• damage (loss due to damage/loss of goods and/or property belonging to one party caused by the negligence of the other party); and
• interest (ie, the profits that should have been obtained or expected by one party if the other party is not negligent in implementing the agreement).

Is strict liability applicable for damage resulting from any activities in the energy sector?

Strict liability could be applied in environmental claims. The Environmental Law provides that every person whose actions, business, or activities use hazardous and toxic waste produces or manages hazardous and toxic waste, or who poses a serious threat to the environment, is strictly responsible for the losses that occur based on the unlawful act without the need to prove any element of fault.

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