Legal Insight: From Procurement to Performance Mastering Commercial Law in Indonesia's Oil and Gas Industry

In the dynamic and complex world of the energy sector, understanding the legal frameworks and industry standards is paramount, especially in jurisdictions with unique legal landscapes such as Indonesia. This article delves into the intricate details of commercial and civil law as they pertain to the energy industry, with a special focus on the procurement processes in upstream oil and gas activities. It highlights the critical role of SKK Migas Work Procedure Guidelines and the FIDIC Conditions of Contract for Construction, providing a comprehensive overview of the contractual interpretation principles under Indonesian law.

Moreover, it explores the established industry standards for establishing liability, including fault-based liability, force majeure, and strict liability in environmental damages. Through this exploration, professionals involved in the energy sector, legal practitioners, and scholars will gain valuable insights into navigating the complexities of Indonesian energy contracts, liability issues, and the broader legal context governing the energy sector.

Diving Into Legal Nuances: Q&A on Energy Sector Contracts in Indonesia

Rules and industry standards

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

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). Another commonly used industry-standard form contract is the FIDIC Conditions of Contract for Construction.

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.?

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The rules of interpretation that apply to a contract under Indonesian civil law are as follows:

• the interpretation that must be chosen is the one that allows the contract to be enforceable rather than one 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 cannot be interpreted in part, but must be interpreted as a whole; and
• an agreement must be interpreted to the detriment of the drafter, and for the benefit of the person binding themself to it.

Describe any commonly recognised industry standards for establishing liability.

In principle, the Indonesian Civil Code adopts fault-based liability for unlawful acts. An unlawful act is committed if:

• the act is unlawful;
• the party committing the act is at fault;
• harm has been caused; and
• the act caused the harm.

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 Indonesian Civil Code recognises the concept of force majeure, in articles 1244 and 1245. Article 1244 provides that an obligor must provide compensation for costs, damage and interest if they cannot prove that the non-performance or the late performance of their obligation was caused by an unforeseen event for which they were not responsible, and they were not acting in bad faith. Article 1245 provides that the obligor need not compensate for costs, damage or interest, if an act of God or an accident prevented them from giving or performing an obligation, or caused them to commit a prohibited act.

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?

Indonesian law is silent on claims of nuisance to obstruct energy development.

However, Law Number 32 of 2009 on Protection and Management of Environment (the Environmental Law) provides that anyone who causes nuisance (vibration, noise or odour) faces a maximum criminal penalty of a term of three years and a fine of 3 billion rupiahs. The penalties can be imposed if administrative sanctions have not been complied with or in cases of recidivism. Third parties, the government, public officials, environmental organisations and any disadvantaged community group may also claim compensation by filing an unlawful act lawsuit.

Liability and limitations

How may parties limit remedies by agreement?

Indonesian law does not prohibit the limitation of remedies. In principle, contractual parties are generally free to limit the types of remedies provided that the purpose for doing so is not unlawful or immoral. Indonesian law has yet to develop the distinction between liquidated damages and penalty clauses found in some other jurisdictions.

In addition, Indonesian civil law recognises the concept of a demand letter (legal notice). The parties may stipulate in the agreement that a legal notice be given before a lawsuit may be filed.

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

Strict liability only applies for environmental damages resulting from activities in the energy sector involving hazardous and toxic waste. Law Number 32 of 2009 on Protection and Management of Environment provides that every person whose actions, business or activities use hazardous and toxic material, who produces or manages hazardous and toxic waste, or who poses a serious threat to the environment is strictly liable for the losses that occur based on the unlawful act without the need to prove fault.

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