DIAGNOSTIC STUDY OF ENFORCING CONTRACTS IN INDONESIA

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DIAGNOSTIC STUDY OF ENFORCING CONTRACTS IN INDONESIA

DIAGNOSTIC STUDY OF ENFORCING CONTRACTS IN INDONESIA

A Study on World Bank’s Data and Probable Solutions to Reduce Time and Cost of Contract Enforcement

Composed by: Prof Hikmahanto Juwana, S.H., LL.M., Ph.D

Prof Huala Adolf (mohon diisi gelarnya) Harjo Winoto, S.H.

Handayani, (mohon diisi gelarnya)

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TABLE OF CONTENT

I. Introduction .................................................................................................................................. 6

II. Reviews on World Bank Methodology ......................................................................... 9

A. Enforcing Contracts Methodology Employed by World Bank .................. 9

i. Assumptions about the case..................................................................................... 11

ii. Procedures .......................................................................................................................... 11

iii. Time ........................................................................................................................................ 12

iv. Cost........................................................................................................................................... 12

B. Reviews and Comments ................................................................................................. 13

i. Reviews on assumption about the case ............................................................ 14

ii. Reviews on statistic of duration for contract enforcement ................. 18

iii. Reviews on procedures ............................................................................................... 23

iv. Reviews on cost ................................................................................................................ 23

III. How to reduce the number of procedures .......................................................... 25

A. Identifying the problems .............................................................................................. 25

B. Suggestion of amendment of civil procedure law ......................................... 31

C. Abolish the unnecessary procedures .................................................................... 33

IV. How to reduce the cost of trial and enforcement ........................................... 34

A. Diagnose why attorney fee is so high .................................................................... 34

B. Suggestion to reduce the attorney fee .................................................................. 36

V. How to reduce the time of trial and enforcement .............................................. 41

A. Diagnose why it takes so long in trial and enforcement ........................... 41

B. Suggestion for faster, easier and cheaper .......................................................... 43

IV. Recommendation for reform ...................................................................................... 45

Annex: List of Tables

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EXECUTIVE SUMMARY

Enforcing contract is a crucial element in identifying ease of doing business in a

country. World Bank publishes ease of doing business in several states every

year. Indonesia scores quite an unsatisfactory rank. It ranks 154 out of 183

countries.

This paper is composed to study the reasoning of such unsatisfactory rank and to

further identify what should be done to remedy situations causing such

unsatisfactory rank. Study of this nature is paramount to a state’s economy. In

particular, such study provides important information for policy maker.

According to World Bank’s survey, length of dispute settlement in the first

instance court in Indonesia is 570 days and cost of dispute settlement is in

average 122.7% of compensation claimed. World Bank concludes this rank based

on three key areas: number of procedures in civil procedures law, cost of trial

and enforcement and time of trial and enforcement. The assumptions used by

World Bank are built by following the step-by-step evolution of a commercial

sale dispute before local courts. The data are collected through study of the

codes of civil procedure and other court regulations as well as surveys

completed by local litigation lawyers and by judges. The ranking on the ease of

enforcing contracts is the simple average of the percentile rankings on its

component indicators.

This paper seeks to explore and examine the validity of such claim. The first step

is to dissect how data are collected, assumptions used in the data, and method of

interpreting those data. The second step is to inquire the probable inaccurate

data collection and or method of interpreting those data. The third step is to

provide an alternative view of data interpretation.

Another aspect this paper seeks to explore is probable solutions in theoretical

and empirical framework regarding how improve efficiency in contract

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enforcement in Indonesia, in particular how to reduce time and cost for contract

enforcement.

In a nutshell, the writer opines that World Bank’s methodology is not entirely

accurate. Many assumptions used in composing the data are questionable.

Further discussions and review are necessary to ensure the validity of those data.

The next item on the list is the method of interpretation of those data. It is

questionable how these data are interpreted. For example, World Bank’s survey

concludes that the length of dispute is 570 days. However, this data probably

reflects maximum length provided by the law. Some participants in Focus Group

Discussion who were the respondents in World Bank’s survey explained that the

questionnaire World Bank dispatched requires them to fill in the maximum days

provided by law civil claim cases. In effect, it does not necessarily reflect the

reality.

Further, the writer also spends considerable amount of pages and efforts in

lining out the holistic problem of contract enforcement in Indonesia. It must,

however, be noted that such painting may not capture the whole problem of

contract enforcement. Contract enforcement is a multidisciplinary and

interdisciplinary issue, arraying from law making, policy, sociology, economy et

cetera. Therefore, in painting the general problem of contract enforcement in

Indonesia, this paper is only limited to normative study and certain portions of

empirical study. This paper will not discuss politics, legal policy and other

intricate sociological obstacles in doing so. Pursuant to such assumption, the

writer concludes that the problem lies in several aspects, inter alia attorney’s fee,

judiciary institution inefficiency and some inefficiencies in executing judgments.

The next aspect the writer discusses in this paper is the probable solutions, in

general sense, to deal with the above mentioned obstacles to contract

enforcement. Again, the writer must heed that the solution is not a quick fix or

one shoe fits all size solution. Many improvements beyond mere theoretical and

legal normative approach are required to reduce time and cost of enforcing

contract in Indonesia. Nonetheless, the writer opines that fixing the core

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components of relevant actors is the first and most effective step in reducing

time and cost of contract enforcement. Case management in judiciary is a first

good step. Following steps, such as court’s chamber (putting the right man on the

right place), smart claim court, contempt of court’s rules et cetera are among the

tools that are effective to reduce time and cost of contract enforcement when

employed in altogether. In addition, regulations on other actors, such as

attorneys also remain important as one of the core components of contract

enforcement cost is attorney’s fee.

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Diagnostic Study on Enforcing Contracts in Indonesia

I. Introduction

Many investors, be it domestic or foreign investors, who invest in Indonesia

complain about the law in Indonesia. One particular complain is how the law

governs dispute settlements. The center of their complaints is that legal dispute

settlement in Indonesia consumes enormous amount of time and cost.

Below is a general description of contract enforcement in Indonesia currently.

· Length of dispute settlement

Length of dispute settlement in Indonesia is unpredictable. In World Bank’s

survey, legal dispute settlement in the first instance court takes an average on

570 days.1 It must be noted, however, that 570 days are counted based on the

assumption that the parties in litigation dispute does not appeal the case. In

other words, 570 days in World Bank’s assumption is only for proceeding in the

First Instance (or commonly referred to as District Court).

The components of 570 days are as follows. Table 1. Details of time frame of court proceeding for contractual dispute2

Nature of Procedure Indicator

Procedures (number) 40

Time (days) 570

Filing and service

1 Plaintiff requests payment: Plaintiff or his lawyer asks Defendant orally or in writing to comply with the contract.

* Plaintiff’s filing of summons and complaint: Plaintiff files his summons and complaint with the court, orally or in writing.

* Plaintiff’s payment of court fees: Plaintiff pays court duties, stamp duties, or any other type of court fee.

2 Registration of court case: The court administration registers the lawsuit or court case. This includes assigning a reference number to the lawsuit or 170

1 Doing Business, Measuring Business Regulations, Ease of Doing Business in Indonesia. See http://www.doingbusiness.org/data/exploreeconomies/indonesia/#enforcing-contracts. Last Visit 10 May 2011. 2 Enforcing Contracts in indonesia, http://www.doingbusiness.org/data/exploreeconomies/indonesia/enforcing-contracts/ (Last visit 31 August 2011).

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court case.

*

Assignment of court case to a judge: The court case is assigned to a specific judge through a random procedure, automated system, ruling of an administrative judge, court officer, etc.

3 Court scrutiny of summons and complaint: A judge examines Plaintiff's summons and complaint for formal requirements.

4

Delivery of summons and complaint to person authorized to perform service of process on Defendant: The judge or a court officer delivers the summons to a summoning office, officer, or authorized person (including Plaintiff), for service of process on Defendant.

5 First attempt at physical delivery: A first attempt to physically deliver summons and complaint to Defendant is successful in the majority of cases.

*

Application for pre-judgment attachment: Plaintiff submits an application in writing for the attachment of Defendant's property prior to judgment. (see assumption 5)

*

Decision on pre-judgment attachment: The judge decides whether to grant Plaintiff’s request for pre-judgment attachment of Defendant’s property and notifies Plaintiff and Defendant of the decision. This step may include requesting that Plaintiff submit guarantees or bonds to secure Defendant

6

Pre-judgment attachment.: Defendant's property is attached prior to judgment. Attachment is either physical or achieved by registering, marking, debiting or separating assets. (see assumption 5)

7

Custody of assets attached prior to judgment: Defendant's attached assets are put under enforcement officer's or (private) bailiff's care. (see assumption 5)

8

Hearing on pre-judgment attachment: A hearing takes place to resolve the question of whether Defendant’s assets can be attached prior to judgment. This process may include the submission of separate summons and petitions. (see assumption 5)

Trial and judgment

*

Defendant’s filing of preliminary exemptions: Defendant presents preliminary exemptions to the court. Preliminary exemptions differ from answers on the merits of the claim. Examples of preliminary exemptions are statute of limitations, jurisdictions, etc.

* Plaintiff’s answer to preliminary exemptions: Plaintiff responds to the preliminary exemptions raised by Defendant.

9 Judge’s resolution on preliminary exemptions: Judge decides on preliminary exemptions separately from the merits of the case.

10

Defendant’s filing of defense or answer to Plaintiff’s claim: Defendant files a written pleading which includes his defense or answer on the merits of the case. Defendant's written answer may or may not include witness statements, expert statements, the documents Defendant relies on as evidence and the legal authori

11

Deadline for Plaintiff to answer Defendant's defense or answer: Judge sets the deadline by which Plaintiff will be allowed to answer Defendant's defense or answer.

12

Plaintiff’s written response to Defendant's defense or answer: Plaintiff responds to Defendant’s defense or answer with a written pleading. Plaintiff's answer may or may not include a witness statements or expert (witness) statements.

13

Filing of pleadings: Plaintiff and Defendant file written pleadings and submissions with the court and transmit copies of the written pleadings or submissions to one another. The pleadings may or may not include witness statements or expert (witness) statements.

14 Adjournments: Court procedure is delayed because one or both parties request and obtain an adjournment to submit written pleadings.

*

Court appointment of independent expert: Judge appoints, either at the parties' request or at his own initiative, an independent expert to decide whether the quality of the goods Plaintiff delivered to Defendant is adequate. (see assumption 6-b of this case)

*

Delivery of expert report by court-appointed expert: The independent expert appointed by the court delivers his or her expert report to the court. (see assumption 6-b of this case)

15

Pre-trial conference on procedure: The judge meets with the parties to discuss procedural issues (for example which applications and motions parties intend to file, which documents parties intend to rely on, what will be presented as evidence the oral hearing or trial, etc.)

*

Setting of date for mediation hearing: The judge sets a date for a mediation hearing, sometimes also called a 'pre-trial conference,' and notifies the parties of the hearing date.

16

Mediation hearing: The judge during this informal meeting with the parties encourages them to settle the case. The judge acts as mediator. If the case cannot be settled, the judge may draft a pre-trial conference report, after which the case may be allocated to another judg

* List of (expert) witnesses: The parties file a list of (expert) witnesses with the court. (see assumption 6-a)

17 Adjournments: Court proceedings are delayed because one or both parties request and obtain an adjournment to prepare for the oral hearing or trial.

18

Oral hearing (prevalent in civil law): The parties argue the merits of the case at an oral hearing before the judge. Witnesses and a court-appointed independent expert may be heard and questioned at the oral hearing.

19 Order for submission of final arguments: The judge sets the deadline for the submission of final factual and legal arguments. 220

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* Final arguments: The parties present their final factual and legal arguments to the court either by oral presentation or by a written submission.

20 Judgment date: The judge sets a date for delivery of the judgment.

21 Notification of judgment in court: The parties are notified of the judgment at a court hearing.

22 Writing of judgment: The judge produces a written copy of the judgment.

23 Registration of judgment: The court office registers the judgment after receiving a written copy of the judgment.

24 Court notification of availability of the written judgment: The court notifies the parties that the written judgment is available at the courthouse.

25 Plaintiff's receipt of a copy of written judgment: Plaintiff receives a copy of the written judgment.

26

Notification of Defendant of judgment: Plaintiff or court formally notifies the Defendant of the judgment. The appeal period starts to run the day the Defendant is formally notified of the judgment.

27

Appeal period: By law, Defendant has the opportunity to appeal the judgment during a period specified in the law. Defendant decides not to appeal. Judgment becomes final the day the appeal period ends.

28

Reimbursement by Defendant of Plaintiff's court fees: The judgment obliges Defendant to reimburse Plaintiff for the court fees Plaintiff has advanced, because Defendant has lost the case.

Enforcement of judgment

29

Plaintiff's approaching of court enforcement officer or (private) bailiff to enforce the judgment: To enforce the judgment, Plaintiff approaches a court enforcement officer such as a court bailiff or sheriff, or a private bailiff.

* Plaintiff’s request for enforcement order: Plaintiff applies to the court to obtain the enforcement order ('seal' on judgment).

30 Plaintiff’s advancement of enforcement fees: Plaintiff pays the fees related to the enforcement of the judgment.

31 Attachment of enforcement order to judgment: The judge attaches the enforcement order (‘seal’) to the judgment.

* Delivery of enforcement order: The court's enforcement order is delivered to a court enforcement officer or a (private) bailiff.

32

Request to Defendant to comply voluntarily with judgment: Plaintiff, a court enforcement officer or a (private) bailiff requests Defendant to voluntarily comply with the judgment, giving Defendant a last chance to comply voluntarily with the judgment.

33 Plaintiff’s identification of Defendant's assets for attachment: Plaintiff identifies Defendant's assets for attachment.

34 Attachment: Defendant’s movable goods are attached (physically or by registering, marking or separating assets).

35

Report on execution of attachment: A court enforcement officer or private process server delivers a report on the attachment of Defendant's movable goods to the judge.

36

Enforcement disputes before court: The enforcement of the judgment is delayed because Defendant opposes aspects of the enforcement process before the judge.

37 Call for public auction: The judge calls a public auction by, for example, advertising or publication in the newspapers.

38 Sale through public auction: The Defendant’s movable property is sold at public auction.

* Direct sale: Defendant's property is sold but not through a public auction. (assumption 9 is disregarded here)

39 Reimbursement of Plaintiff’s enforcement fees: Defendant reimburses Plaintiff's enforcement fees which Plaintiff had advanced previously.

40 Payment: Court orders that the proceeds of the public auction or the direct sale be delivered to Plaintiff.

180

· Cost for enforcement of contract

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Monetary cost for parties to settle dispute based on the same World Bank’s

survey is 122.7% of the amount of monetary compensation claimed.3 The details

are as follows.

Table 2. Details of claim cost Cost (% of claim) 122.7

Attorney cost (% of claim) 111.3

Court cost (% of claim) 3.1

Enforcement Cost (% of claim) 8.3

*It must be noted that although attorney cost constitutes a major portion of expensiveness of contract enforcement in Indonesia, it is not the only factor. Such problem begs a panacea and it is certainly urgent for Indonesia to repair

such problem. To identify possible solution for such problem, there is a need to

conduct a preliminary problem-identification, i.e. Diagnostic Study on Enforcing

Contracts in Indonesia.

This paper/research is divided into primarily three sections, (i) reviews on the

methodology employed by World Bank (ii) identification of stumbling-blocks of

contract enforcement in Indonesia (iii) approach on how to overcome the

problems of contract enforcement in Indonesia. The first part is important in

drawing a more accurate picture in determining parameters of effective and

efficient contract enforcement in Indonesia. The second part is subsequently

drawn up to describe, in holistic approach, general obstacles in contract

enforcement in Indonesia and the nature of such obstacles. The third part is what

writer considers an individual solution in individual sector. It must be noted that

such solution is not a quick fix nor a “one shoe fits all size” solution.

II. Reviews on World Bank Methodology

A. Enforcing Contracts Methodology Employed by World Bank

3 Doing Business, Measuring Business Regulations, Ease of Doing Business in Indonesia, See http://www.doingbusiness.org/data/exploreeconomies/indonesia/#enforcing-contracts. Last Visit 10 May 2011.

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World Bank elaborates the methodology employed in concluding that enforcing

contracts in Indonesia is costly (average 122.7% of compensation claimed) and

timely (average of 570 days). Below is a brief description of the methodology

employed by World Bank.

Indicators on enforcing contracts measure the efficiency of the judicial system in

resolving commercial dispute. The assumptions used by World Bank are built by

following the step-by-step evolution of a commercial sale dispute before local

courts. The data are collected through study of the codes of civil procedure and

other court regulations as well as surveys completed by local litigation lawyers

and by judges. The ranking on the ease of enforcing contracts is the simple

average of the percentile rankings on its component indicators.

In sum, World Bank methodology can be summarized as follows. Table 3. Summary of World Bank Methodology4

4 Ricardo Simanjuntak, Indonesian Enforcing Contracts for Reform (Presented in Seminar in Enforcing Contract on Ease of Doing Business Project with Korean Team of Experts), presented in Hotel Ritz Carlton, 26 January 2011, page 3.

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i. Assumptions about the case

· The value of the claim equals 200% of the economy’s income per capita.

· The dispute concerns a lawful transaction between 2 businesses (Seller

and Buyer), located in the economy’s largest business city.

· Seller sells goods worth 200% of the economy’s income per capita to

Buyer. After Seller delivers the goods to Buyer, Buyer refuses to pay for

the goods on the grounds that the delivered goods were not of adequate

quality.

· Seller (the plaintiff) sues Buyer (the defendant) to recover the amount

under the sales agreement (that is, 200% of the economy’s income per

capita). Buyer opposes Seller’s claim, saying that the quality of the goods

is not adequate. The claim is disputed on the merits.

· A court in the economy’s largest business city with jurisdiction over

commercial cases worth 200% of income per capita decides the dispute.

· Seller attaches Buyer’s movable assets (for example, office equipment and

vehicles) before obtaining a judgment because Seller fears that Buyer may

become insolvent.

· An expert opinion is given on the quality of the delivered goods. If it is

standard practice in the economy for each party to call its own expert

witness, the parties each call one expert witness. If it is standard practice

for the judge to appoint an independent expert, the judge does so. In this

case the judge does not allow opposing expert testimony.

· The judgment is 100% in favor of Seller: the judge decides that the goods

are of adequate quality and that Buyer must pay the agreed price.

· Buyer does not appeal the judgment. The judgment becomes final.

· Seller takes all required steps for prompt enforcement of the judgment.

The money is successfully collected through a public sale of Buyer’s

movable assets (for example, office equipment and vehicles).

ii. Procedures

The list of procedural steps compiled for each economy traces the chronology of

a commercial dispute before the relevant court. A procedure is defined as any

interaction, required by law or commonly used in practice, between the parties

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or between them and the judge or court officer. This includes steps to file and

serve the case, steps for trial and judgment and steps necessary to enforce the

judgment.

The survey allows respondents to record procedures that exist in civil law but

not common law jurisdictions and vice versa. For example, in civil law countries

the judge can appoint an independent expert, while in common law countries

each party submits a list of expert witnesses to the court. To indicate overall

efficiency, 1 procedure is subtracted from the total number for economies that

have specialized commercial courts, and 1 procedure for economies that allow

electronic filing of court cases. Some procedural steps that take place

simultaneously with or are included in other procedural steps are not counted in

the total number of procedures.

iii. Time

Time is recorded in calendar days, counted from the moment the plaintiff

decides to file the lawsuit in court until payment. This includes both the days

when actions take place and the waiting periods between. The average duration

of different stages of dispute resolution is recorded: the completion of service of

process (time to file and serve the case), the issuance of judgment (time for the

trial and obtaining the judgment) and the moment of payment (time for

enforcement of judgment).

iv. Cost

Cost is recorded as a percentage of the claim, assumed to be equivalent to 200%

of income per capita. No bribes are recorded. Three types of costs are recorded:

court costs, enforcement costs and average attorney fees.

Court costs include all court costs and expert fees that Seller (plaintiff) must

advance to the court, regardless of the final cost to Seller. Expert fees, if required

by law or commonly used in practice, are included in court costs. Enforcement

costs are all costs that Seller (plaintiff) must advance to enforce the judgment

through a public sale of Buyer’s movable assets, regardless of the final cost to

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Seller. Average attorney fees are the fees that Seller (plaintiff) must advance to a

local attorney to represent Seller in the standardized case.

B. Reviews and Comments

In principle, the writer opines that the data provided by World Bank is highly

questionable on several aspects.

1. Lack elaboration in how the data is collected and interpreted. For example:

the assumption that value of the claim equals to 200% of the economy. In

effect, the monetary worth of the claim is around IDR 40-50 million. It is

highly unlikely that such amount of claim is litigated in Indonesia court or at

least the amount of cases with that number is miniscule.

2. In Focus Group Discussion (“FGD”), some participants who were the World

Bank’s respondents explained that they were asked the maximum days for

litigation in Indonesia. Through their explanations, there was a strong

indication that 570 days length as World Bank indicated is not accurate.

3. Some workshop participants explained their concerns -- a concern which the

writer shares-- that the questionnaires are not disseminated to proper

persons. In other words, some participants suggest that in the future, the

questionnaires are disseminated to parties who are competent to answer the

questionnaires.

4. Some FGD participants are concerned with the accountability of World

Bank’s data and conclusion, particular with regard to attorney’s cost. These

participants opine that if the claim is IDR 40-50 millions, it is certain that

attorney’s fee is astronomical in percentage figure. World Bank estimates

that attorney’s fee in Indonesia is 111.3 % of the whole claim. Assumes that

attorney’s fee is in average IDR 45 million (or equal to 111.3% as World

Bank’s data suggests). If the total claim is IDR 40-50 million, the percentage

of 111.3% looks astronomical. However, this number is only valid in the

assumption that the total claim is IDR 40-50 million. Suppose the claim is IDR

1 billion and the attorney’s fee is IDR 45 million, the attorney’s fee in

percentage will only be 4.5%. In short, the assumption on value of the claim

affects the data on attorney’s fee. Since the assumption on value of the claim

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is highly questionable, consequently, the figure on attorney’s fee (i.e. 111.3%)

is also highly questionable.

On the preface of the methodology explanation, there is no specific explanation

as to what “other court regulations” refer to. This is important as there are

numerous laws and regulations particularly with regard to judicial institution.

For example, the law on Justice’s Authority, the law on Supreme Court and

relevant laws and regulations related to enforcement of a contract.

i. Reviews on assumption about the case

1. Why should the parameter for value of the claim equal to 200% of the

economy’s income per capita? Does this mean that claim above 200% of

the economy’s income per capita is excluded?

2. “The dispute concerns a lawful transaction in the economy’s largest

business city”. Why should the parameter be limited to the economy’s

largest business city only? The assumption is that it is Jakarta (the capital

city). Why does the analysis exlude other business city such as Surabaya,

Medan or Ujung Pandang? Indonesia is a geographically wide area.

Businesses are conducted in places across the country. The data of

dispute settlement in one place may vary greatly from another city, hence,

data limited to only one city may provide incomplete and inaccurate

picture of dispute settlement.

3. “Seller attaches Buyer’s movable assets (for example, office equipment and

vehicles) before obtaining a judgment because Seller fears that Buyer may

become insolvent” This sentence assumes that Seller who does not attach

Buyer’s movable assets is not part of the World Bank analysis. In

Indonesia, it is not mandatory for Seller to attach Buyer’s movable assets

in form of provisional request.5 Even when Seller does not attach Buyer’s

movable assets, the court can still order an auction of assets in the end of

5 Provisional request in contractual dispute usually refers to a party’s request that the court seizes other party’s assets in case the first party wins the case. Such request is usually made under the notion that the other party may assign or sell those assets and consequently the judgment (in case the first party wins) cannot be enforced as there is no more asset to be executed.

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the day if the Seller wins the case. In effect, there may be a huge number

of cases (contract enforcement) where the Seller does not attach Buyer’s

movable assets before obtaining a judgment.

4. “The judgment is 100% in favor of Seller: the judge decides that the goods

are of adequate quality and that Buyer must pay the agreed price”. Why

should the case be specifically limited only to cases where judgment is

100% favor of Seller? What about cases in which judgment partially

grants damages to Seller? Should such case not fall within the ambit of

contract enforcement as the seller has some rights to remedy as well? In

addition, most Buyers dispute the agreed price. Why should the analysis

exclude cases where Buyers dispute the agreed price? Does that not

exlude a major portion of commercial dispute in courts?

5. “Buyer does not appeal the judgment. The judgment becomes final”. This

parameter assumes that Buyer settles in the First Instance Court Level (or

referred to as Pengadilan Negeri), whereas in most instances Buyer

appeals the decision of the First Instance Court to High Court and

subsequently cassation in the Supreme Court. Does this parameter not

exclude a major portion of commercial dispute in courts? In addition, this

parameter does not cover arbitration award which is requested for its

enforcement through Indonesia’s court. It must be noted that among the

most rampant channel of contract enforcement in Indonesia is settled

through arbitration, hence, this parameter excludes a major portion of

commercial litigation in Indonesia.

6. “Seller takes all required steps for prompt enforcement of the judgment. The

money is successfully collected through a public sale of Buyer’s movable

assets (for example, office equipment and vehicles)”. Execution of a decision

on commercial dispute is not only limited to forceful execution. In some

instances, Buyer voluntarily pays the damages the Court awards. Is there

a specific reason why such instance should be excluded from the analysis?

These assumptions are the basis of establishing claims that enforcing contracts

in Indonesia consumes 570 days (for District Court) and costs 122.7 % of the

claims made.

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The writer must note however that such depiction may not accurately reflect the

reality for the following reasons.

1. The assumption of 200% of the economy’s income per capita may not

reflect the reality. According to World Bank database, Indonesia’s Gross

National Income is US$ 2,050 in 2010. 6 During the Focus Group

Discussion attended by Commercial Court judge and legal practitioners, it

is concluded that it is almost impossible that any party would file a claim

for US$ 4,100. The cost for all proceedings alone are usually more

expensive than US$ 4,100. The writer may need some explanation on the

assumptions for the purpose of enhancing analysis in this paper.

2. The statistic is made on the assumption that Seller attaches Buyer’s

movable assets. In other words, the statistic does not include litigation

cases where Seller does not attach Buyer’s assets. This may not reflect the

reality as a major portion of the contractual disputes in Indonesia may

include cases where Seller does not attach Buyer’s movable assets

through provisional request (or commonly known as gugatan provisi).

3. The statistic is made on the assumption that Buyer does appeal the

judgment and the judgment becomes final. This assumption may reflect

reality. During the Focus Group Discussion, judges and legal practitioners

explained that problems with lengthy proceeding for contract

enforcement occur in cassation level, not district court level. In district

court level the first trial is held after 30-40 days counted from the date

the plaintiff files a lawsuit. In the first trial, if the parties are present,

Indonesia Supreme Court Regulation Number 1 year 2008 regarding

Mediation stipulates that judge shall offer the parties to enter into

reconciliation procedure, i.e. mediation. Mediation process shall take no

more than 40 days since the parties have appointed mediators. By the

consent of the parties, mediation can be prolonged for maximal 14 days.

The guide book on administration technicality and trial procedure

technicality on general civil law and special civil law, the time period of

case settlement is 6 months counted from the date after the parties fail to

6 http://devdata.worldbank.org/AAG/idn_aag.pdf (Last visit 31 August 2011)

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reach amicable settlement through mediation. If the judge fails to settle

the case within 6 months since the mediation fails, the judge must report

the delay along with the reason for the delay to the high court chief

(“Ketua Pengadilan Tinggi”). The total time needed to complete the civil

case in district court if the mediation fails is:

Filing lawsuit in the first trial : 40 days

Mediation : 54 days

Trial to Judgment : 180 days

These 274 days is a maximum time, most judges in the civil cases in

district court comply with this time limit.

In other words, most district courts comply with duration to adjudicate

(judge) a case. In fact, cases are usually bottle-necked in cassation level.

For example: sometimes, it takes up to several months before parties are

summoned for a preliminary hearing in Supreme Court for cassation level.

(please refer to Part 5 of this paper for explanation of why cases are

stacked in Supreme Court level).

As a comparison, the table below demonstrates that, in reality, some cases are

decided in significantly smaller amount of days.7

Number

Case Registry Type of Cases

Date of Register

Date Judgment

Total time

(days)

1 434/PDT/G/2010/ PN.BDG

Breach of contract

November, 16th 2010

February, 9th 2011

95

2 437/PDT/G/2010/ PN.BDG

Ownership November, 19th 2010

March 14th 2011

115

3 441/PDT/G/2010/ PN.BDG

Unlawful act/ Tort

November, 23rd 2010

June, 7th 2011

187

4 442/PDT/G/2010/ PN.BDG

Unlawful act/ Tort

November, 23rd 2010

July, 21st 2011

240

7 10 case samples in the table are adjudicated in District Court of Bandung for the time period 2010.

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5 445/PDT/G/2010/ PN.BDG

Breach of contract

November, 25th 2010

March, 2nd 2011

97

6 446/PDT/G/2010/ PN.BDG

Unlawful act/ Tort

November, 26th 2010

May, 31st 2011

186

7 447/PDT/G/2010/ PN.BDG

Breach of contract

November, 26th 2010

February, 23rd 2011

89

8 451/PDT/G/2010/ PN.BDG

Purchase November, 30th 2010

May, 19th 2011

152

9 456/PDT/G/2010/ PN.BDG

Unlawful act/ Tort

Desember, 2nd 2010

June, 1st 2011

181

10 458/PDT/G/2010/ PN.BDG

Unlawful act/ Tort

December, 3rd 2010

May, 31st 2011

180

ii. Reviews on statistic of duration for contract enforcement

The statistic concludes the following.

1. Filing and service consumes 170 days

2. Trial and judgment consumes 220 days

3. Enforcement of judgment consumes 180 days.

General remark: The writer suggests that, if possible, each sub-item is also provided with details of days. For instance, in details of activities in ‘trial and judgment’ category point 5 (filing and pleading): how many days? Details of activities in ‘filing and service’ category (170 days).

1. Plaintiff requests payment. Plaintiff or his lawyer asks Defendant orally or

in writing to comply with the contract.

2. Registration of court case: The court administration registers the lawsuit

or court case. This includes assigning a reference number to the lawsuit

or court case.

3. Court scrutiny of summons and complaint: A judge examines Plaintiff’s

summons and complaint for formal requirements.

4. Delivery of summons and complaint to a person authorized to perform

service of process on Defendant: The judge or a court officer delivers the

summons to a summoning office, officer, or authorized person (including

Plaintiff), for service of process on Defendat.

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5. First attempt at physical delivery: A first attempt to physically deliver

summons and complaint to Defendant is successful in the majority of

cases

6. Pre-judgment attachment: Defendant’s prooperty is attached prior to

judgment. Attachment is either physical or achieved by registering,

marking, debiting or separating assets.

7. Custody of assets attached prior to judgment: Defendant’s attached assets

are put under enforcement officer’s or (private) bailiff’s care.

8. Hearing on pre-judgment attachment: A hearing takes place to resolve the

question of whether Defendant’s assets can be attached prior to judgment.

This process may include the submission of separate summons and

petitions.

iii.1. Reviews on ‘filing and service’ category

a. It is not always the case that custody/confiscation of assets

(provisional request) is requested. In effect, the 170 days may not

be accurate as in a portion of contractual disputes, Seller does not

request for custody of assets.

b. There are cases where the court decides on issue of custody of

assets in the end of the day (altogether with the decision on

merits). In practice, some cases are treated that way. When such is

the case, the assumption of 170 days may not be accurate.

Details of activities in ‘trial and judgment’ category (220 days).

1. Judge’s resolution on preliminary exemptions: Judge decides on

preliminary exemptions separately from the merits of the case.

2. Defendant’s filing of defense or answer to Plaintiff’s claim: Defendant files

a written pleading which includes his defense or answer on the merits of

the case. Defendant's written answer may or may not include witness

statements, expert statements, the documents Defendant relies on as

evidence and the legal authority.

3. Deadline for Plaintiff to answer Defendant’s defense or answer: Judge sets

the deadline by which Plaintiff will be allowed to answer Defendant’s

defense or answer.

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4. Plaintiff’s written response to Defendant’s defense or answer: Plaintiff

responds to Defendant’s defense or answer with a written pleading.

Plaintiff’s answer may or may not include a witness statements or expert

(witness) statements.

5. Filing of pleadings: Plaintiff and Defendant file written pleadings and

submissions with the court and transmit copies of the written pleadings

or submissions to one another. The pleadings may or may not include

witness statements or expert (witness) statements.

6. Adjournments: Court procedure is delayed because one or both parties

request and obtain and adjournment to submit written pleadings.

7. Pre-trial conference on procedure: The judge meets with the parties to

discuss procedural issues (for example which applications and motions

parties inted to file, which documents parties intend to rely on, what will

be presented as evidence in the oral hearing or trial, etc)

8. Mediation hearing: The judge during this informal meeting with the

parties encourages them to settle the case. The judge acts as mediator. If

the case cannot be settled, the judge may draft a pre-trial conference

report, after which the case may be allocated to another judgment.

9. Adjournments: Court proceedings are delayed because on or both parties

request and obtain an adjournment to prepare for the oral hearing or trial.

10. Oral hearing (prevalent in civil law): The parties argue the merits of the

case at an oral hearing before the judge. Witnesses and a court-appointed

independent expert may be heard and questioned at the oral hearing.

11. Order for submission of final arguments. The judge sets the deadline for

the submission of final factual and legal arguments.

12. Judgment date: The judge sets a date for delivery of the judgment.

13. Notification of judgment in court: The parties are notified of the judgment

at a court hearing

14. Writing of judgment: The judge produces a written copy of the judgment.

15. Registration of judgment: The court office registers the judgment after

receiving a written copy of the judgment.

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16. Court notification of availability of the written judgment: The court

notifies the parties that the written judgment is available at the

courthouse.

17. Plaintiff’s receipt of a copy of written judgment: Plaintiff receives a copy

of the written judgment.

18. Notification of Defendant of judgment: Plaintiff or court formally notifies

the Defendant of the judgment. The appeal period starts to run the day

the Defendant is formally notified of the judgment.

19. Appeal period: By law, Defendant has the opportunity to appeal the

judgment during a period specified in the law. Defendant decides not to

appeal. Judgment becomes final the day the appeal period ends.

20. Reimbursement by Defendant of Plaintiff’s court fees: The judgment

obliges Defendant to reimburse Plaintiff for the court fees Plaintiff has

advanced, because Defendant has lost the case.

iii.2. Reviews on ‘trial and judgment’ category’ a. Specifying details (days) of each sub-item may help revealing the

true bottle-neck of lengthy proceeding. For instance, point 15 to 18

(registration of judgment to Notification of defendant of judgment)

takes the least amount of days. The bottleneck (on case per case

basis) most probably lies on point 2 to 6 and 8 to 14.

b. Depending on the case, some contractual disputes may be

elongated in, for instance, filing of pleading. Hence, to solve

problems related to lengthy proceeding is to solve procedure on

‘filing of pleading. Identifying the core problem may be the most

effective way of seeking for the solution.

Details of activities in ‘enforcement of judgment’ category (180 days).

1. Plaintiff’s approaching of court enforcement officer or (private) bailiff to

enforce the judgment: To enforce the judgment, Plaintiff approaches a

court enforcement office such as a court bailiff or sheriff, or a private

bailiff.

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2. Plaintiff’s advancement of enforcement fees: Plaintiff pays the fees related

to the enforcement of the judgment

3. Attachment of enforcement order to judgment: The judge attaches the

enforcement order (‘seal’) to the judgmenmt.

4. Request to Defendant to comply voluntarily with judgment: Plaintiff, a

court enforcement officer or a (private) bailiff requests Defendant to

voluntarily comply with the judgment, giving Defendant a last chance to

comply voluntarily with the judgment.

5. Plaintiff’s identification of Defendant’s assets for attachment: Plaintiff

identifies Defendant’s assets for attachment.

6. Attachment: Defendant’s movable goods are attached (physically or by

registering, marking or separating assets).

7. Report on execution of attachment: A court enforcement officer or private

process server delivers a report on the attachment of Defendant's

movable goods to the judge.

8. Enforcement disputes before court: The enforcement of the judgment is

delayed because Defendant opposes aspects of the enforcement process

before the judge.

9. Call for public auction: The judge calls a public auction by, for example,

advertising or publication in the newspapers.

10. Sale through public auction: The Defendant’s movable property is sold at

public auction.

11. Reimbursement of Plaintiff’s enforcement fees: Defendant reimburses

Plaintiff's enforcement fees which Plaintiff had advanced previously.

12. Payment: Court orders that the proceeds of the public auction or the

direct sale be delivered to Plaintiff

iii. 3. Reviews on ‘enforcement of judgment’ category

c. It must be noted that not all executions are conducted through

auction. In the event the object of execution is immovable assets,

Indonesian Law Number 4 Year 1996 regarding Security Right

Article 20 (2) allows execution of immovable assets in the event of

default (or through court decision) to be conducted through direct

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sale (private sale). In reality, this method is taken by some parties

to contractual disputes. By excluding ‘private sale’ method of

assets execution, the statistic may not be accurate.

d. Similar to the above reviews, identifying the bottleneck of the

problem in ‘enforcement of judgment’ category may provide a

more accurate perspective. For instance, point 6 and 7 perhaps

consumes more time than other procedures as in practice some

parties would hamper the execution. In practice, the difficulty of

executing assets is the main obstacle to the whole process.

Providing details of days and reasons why it takes such a long time

for each sub-item will enhance the analysis of the statistic.

iii. Reviews on procedures

“To indicate overall efficiency, 1 procedure is subtracted from the total number for economies that have specialized commercial courts, and 1 procedure for economies that allow electronic filing of court cases”. Is there a specific reason why such method is employed? Indonesia has not

implemented electronic filing of court cases. Does the parameter “allow the

electronic filing of court cases” not constitute a substantial exclusion of

commercial litigation in Indonesia?

iv. Reviews on cost

“Cost is recorded as a percentage of the claim, assumed to be equivalent to 200% of income per capita (why 200% not more or less?). No bribes are recorded. Three types of costs are recorded: court costs, enforcement costs and average attorney fees.”

Is there a specific reason why the claim is assumed to be equivalent to 200% of

income per capita? Why does the parameter exclude less than 200% of income

per capita claim?

In addition, one of the primary reasons why enforcing contract in Indonesia is

costly is lawyer incorporates ‘bribery cost’ into their fees component. It is

because in practice, many lawyers deal with foreign corporations bound by “anti-

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corrupt practice act”, hence, lawyers commonly incorporate ‘bribery cost’ into

their fees. The above parameter excludes a major portion of real problems with

contract enforcement in Indonesia. Such parameter may exlude a substantial

number of contract enforcement cases in Indonesia.

Suggestion for cost explanation The writer suggests that such cost assumption is further perfected by means of

citing law or regulation. For instance, the cost assumption can be perfected by

citing Stipulation of Chief District Court Central Jakarta No.

W10/U1/9036/PDT.02.I.2010.01 dated 11 October 2010. The Stipulation

enumerates the following details.

i. Front payment for registering civil claim: IDR 657,000

ii. Non-tax State’s income: IDR 30,000

iii. Redaction: IDR 5,000

iv. Stamp (2 pieces): IDR 12,000

v. Cost for summoning Claimant 2 x IDR 75,000: IDR 150,000

vi. Cost for summoning Respondent 4 x IDR 75,000: IDR 300,000

vii. Announcement of Decision: IDR 150,000

Execution Cost

1. Cost for warning parties: IDR 317,000

2. Cost for auction: IDR 6,336,000

3. Cost for discharging executable assets: IDR 7,000,000

Review on statistic

Cost (% of claim) 122.7

Attorney cost (% of claim) 111.3

Court cost (% of claim) 3.1

Enforcement Cost (% of claim) 8.3

The above statistic may provide a more accurate view when explanations are

available. Several points that should be considered in providing such

explanations are as follows.

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1. Court cost: Is this the formal cost (cost that is regulated by law) or cost in

practice (reality)? What are the components of this cost? Break

down/details of this cost may help providing a more accurate statistic.

2. Enforcement cost: Is this the formal cost (cost that is regulated by law) or

cost in practice (reality)? What are the components of this cost? Break

down/details of this cost may help providing a more accurate statistic.

III. How to reduce the number of procedures

The writer should note that problems of inefficiency and exorbitant cost of

contract enforcement mostly derive from inefficiency in practice level, not on

normative level. Most jurists that are involved in the drafting of the new civil

procedure law share similar sentiments. Nonetheless, it is erroneous to quickly

dismiss the notion that amendment of civil procedure law (in normative level)

can reduce cost and time in enforcing contracts in Indonesia.

A. Identifying the problems

In general, the problems of contract enforcement in Indonesia lie in:

i. the complex structure and numerous procedural steps of contractual

dispute settlement.

ii. absence or vagueness of regulation with regard to time frame

iii. parties’ attempt to stall the procedure (particularly the

respondent/defendant) and postponement of evidence hearing

iv. judges’ discretion to assign time frame for different types of cases

(usually judges consider the number of parties, domicile of parties and

complexity of cases)

v. Lack of expertise of most judges which affect judges’ability to decide on a

case promptly.

To further identify problems related to contract enforcement, one should start

from contract enforcement ‘roadmap’. Below is the broad description of such

‘roadmap’.

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When contractual dispute arises, there are several possibilities in terms of types

of contractual breaches. Please refer to the chart below.

Table 4. Types of contractual breach and its damages8

Explanation of Table 4:

In each category – not able to perform, late to perform, perform contrary to what

is agreed – there are separate consequences under the civil code (contract law),

hence different time frame for court proceeding. For instance, when the court

considers more elements of damages (compensation of cost, loss, interest), the

court needs to consider more evidences. Hence, the court takes more time to

deliberate on cases where more types of damages are granted.

There are several alternatives of contractual dispute settlement, i.e. court

process and out of court process.

Table 5. Alternatives of contractual dispute settlement9

8 Ricardo Simanjuntak, Indonesian Enforcing Contracts for Reform (Presented in Seminar in Enforcing Contract on Ease of Doing Business Project with Korean Team of Experts), presented in Hotel Ritz Carlton, 26 January 2011, page 1. 9 Ricardo Simanjuntak, Indonesian Enforcing Contracts for Reform (Presented in Seminar in Enforcing Contract on Ease of Doing Business Project with Korean Team of Experts), presented in Hotel Ritz Carlton, 26 January 2011, page 2.

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Explanation of Table 5: Each alternative has its own procedures, consequences and purposes, hence,

each alternative has different time frame. Simply put, if a party opts to choose for

one alternative, it may take longer than another alternative.

Table 6. Alternatives of Legal actions/ steps in enforcing contract in Indonesia10

10 Ibid..

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Explanation of Table 6:

For the purpose of this paper, writer will not explain in details the whole process.

The table is intended to provide a broad view of alternatives of legal actions in

enforcing a contract when one’s right under a contract has been breached. It

must be noted that each alternative has different legal procedures, legal

substances (merits) and political problems. Hence, the time frame for each

alternative may differ substantially. For instance, bankruptcy is limited to 60

days by law while other proceedings such as civil lawsuit does not have a

comprehensive rules on time frame.

Table 7. General time frame of civil lawsuit proceeding11

11 Ibid, page 5.

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Explanation of Table 7: The duration stipulated in Table 7 is not regulated by law. The number is

extracted from rough estimation in practice. In reality, this number varies widely

and is highly uncertain. Most judges decide this time frame based on case per

case basis and for different reasons, for instance: number of parties (the more

parties, the longer the time frame for summoning parties), where parties are

located (if parties are located abroad, time for summoning is longer), complexity

of the case (the more complex the case is, the longer the time needed for

evidence, witness and conclusion hearing).

After Seller wins the case, the next step is to execute the court’s decision. If the

execution is conducted through auction, the Seller must go through the whole

process.

Table 8. Auction process12

12 Ibid, page 7.

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Table 9. Appeal process in the high court13

13 Ibid.

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Table 10. Cassation Process in the Supreme Court14

B. Suggestion of amendment of civil procedure law Indonesian Civil Procedure Law was inherited from the Dutch government

during colonialization era. The law is hitherto more than 100 years old. Hence, a

new civil procedure law is needed.

There are several reasons why civil procedure law should be amended.

a. Indonesian Civil Procedure Law is not codified as the Dutch government

imposed numerous civil codes, for example civil codes that are applicable

within the Java Island and outside the Java Island. In short, there are two

related yet separate problems, i.e. numerousness of source of law of civil

codes and non-codification of those laws. To demonstrate the

numerousness nature of civil codes sources, below are enumerated

b. Sources of Indonesian Civil Procedure Law.

i. Herzien Inslandsch Reglement (HIR) entered into force since 1941

14 Ibid, page 8.

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ii. Reglement tot Regeling Van Het Rechtswezen in De Gewesten

Buitten Java en Madura (RBg) entered into force since 1927

iii. Reglement of de Burgerlijke Rechtsvordering (RV) entered into

force 1918

iv. Adat Customs.15

v. Doctrines

vi. Islam Law

c. In addition, the prevailing civil procedure law is often based on customs.

Consequently, many parts/provisions of the civil procedure law are no

longer relevant and very often contradictory to the existing circumstances.

d. When parties domicile outside the legal domicile of the court, so often the

court takes 1-2 months for summoning those parties. The new civil

procedure law must address this issue by setting a shorter and rigid time

frame for summoning parties. One of the ways to do so is by allowing

electronic summon (for example, through email or through fax).

e. Parties who attempt to stall the proceedings shall be waived of their

rights to submit documents. In document exchange or evidence hearing,

parties commonly stall the proceedings. The new civil law should address

this problem by stipulating more rigid regulations on time frame of

submission of documents and consequences of not submitting documents

on time. Of course, the new civil code can also provide exception to such

rigid rule, such as the court may extend time for document submissions in

the event that such document is in the process of retrieval due to natural

disaster such as flood.

f. Two temporary issues both in practice and academia are “contradiction”

and “incoherence” among many legal regimes, such as bankruptcy law

and company law, with Indonesian Civil Procedure Law.16 In effect, many

legal regimes have superseded the Indonesian Civil Procedure Law.

Nonetheless, it remains a great challenge to identify which legal regimes

15 Adat is a specific term that is rooted on Indonesian’s cultural and religious beliefs. In English, the comparable term is folk law. For example, Indonesia recognizes hak ulayat (In English, the comparable term is indigenous right to land) that is based on adat. 16 Non-contradiction is a state where there is no law overriding each other. Coherence is a state where existing legal regimes are not only not overriding each other, but also coherent, supportive and complementary to each other.

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that have superseded the Indonesian Civil Procedure Law. Issue that is

frequently debated is how to identify the prevailing laws. This point will

be elaborated more comprehensively below in “abolish the unnecessary

procedures”.

The new civil procedure law, therefore, must reflect and accommodate the

existing circumstances. It must also serve as an umbrella law to harmonize civil

procedures existing in other legal regimes that are currently scattered.

C. Abolish the unnecessary procedures

The writer would like to note that analysis in this part is based on normative

approach, i.e. what the law says as opposed to how the law is practiced.

First and foremost, the time frame of procedures must be governed and

condensed. The root of inefficiency in contract enforcement in Indonesia is

timeframe. Coupled with exorbitant attorney’s costs, elongated proceeding very

often causes expensive bills. One problem with Indonesian Civil Procedure Law

is the absence of timeframe provision. In other words, many stages of contract

dispute proceeding are not regulated in terms of time frame. For instance, how

long should exchange of documents take place, how long should the evidentiary

hearing takes place, how long should a judge and a panel of judges deliberate and

deliver decisions after the last examination and et cetera. Consequently, there

are several stages of contract enforcement which can be regulated and

condensed. There are several instances which should be regulated.

i. Time frame for a respondent to provide a response, for claimant to

make a reply to respondent’s response, respondent’s counter reply,

etc.

ii. Time frame for witness and expert examination.

iii. Time frame for evidence examination.

iv. Time frame for judges’ deliberation

v. Time frame for judges’ decision delivery.

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This list is by no means exhaustive in terms of stages that should be regulated

and condensed. Nonetheless, it describes the elongated nature of stages

contractual disputes in a court of law.

This type of solution had been proposed and had been materialized in several

legal regimes, such as bankruptcy law. Although bankruptcy law contains a clear

provision on time frame (the law stipulates expressly that the time frame for

bankruptcy proceeding is 60 days). Nonetheless, such procedure failed to

address the core of the problems. Judges in the district court often exceeded the

60-day time frame. Even if the judges comply with 60-day time frame, if parties

file a cassation claim, the dispute will precipitate in mountain of files in the

Supreme Court. Consequently, aside from addressing the time frame in

normative level, some efforts must be made on (i) discipline of judges in

deliberating and delivering decision and (ii) case management in the Supreme

Court. The Supreme Court has been known to be overloaded with cases.

Second, some procedural matters should be abridged; particularly matters that

are redundant and purely red-tape. This is in line with the spirit of the

establishment of court of equity as opposed of court of law. Similar phenomenon

takes place in Indonesia. To some outsiders, some court procedures are so rigid

to the extent of absurdity. Of course, the solution is not of mere legal-formalistic

approach. The new civil procedure law must strike a balance between giving

judges sufficient discretion and regulating judges’ authority. On the one hand,

judges the law cannot address every ‘nook and cranny’. Judges must retain

certain degrees of discretion to deal with amorphous situations or situations that

require case per case basis assessment. Discretion is important as judges can

proceed more efficiently without a rigid constraint of the procedures. On the

other hand, judges must also deliberate their decisions under the constraint of

law to ensure law supremacy and legal certainty.

IV. How to reduce the cost of trial and enforcement

A. Diagnose why attorney fee is so high

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Another contributing factor to exorbitant cost of contract enforcement is

attorney’s fee. In Indonesia, attorney’s fee is exorbitant due to devious practices.

Devious practice leads attorney to spend more money on officials in the judiciary

or officials that are related to contract enforcement. Since such cost cannot be

allocated to attorney’s bill, such cost must be listed as attorney’s fee.

In addition, there is no incentive for existing and experienced attorneys to push

legal/judiciary reform. On the contrary, those attorneys enjoy incentives from

the corrupt system. Many attorneys regard connections and lobbying skills as

their competitive advantages which justify their exorbitant fees.

Further, litigators very often impose success fee. In Indonesia, costs related to

judicial proceeding are in fact small. Litigators’ success fee and out-of-court cost

are two primary components of exorbitant cost of contract enforcement.

Commonly, success fee is based on the percentage of the contract or total claim’s

value.

Normatively, Article 21 (2) Indonesian Law Number 18 Year 2003 regarding

Advocate regulates in a broad term that attorney’s fee must be imposed

reasonably based on agreement of the attorney and his/her’s client. The law

further stipulates that the term “reasonable” shall mean that attorney’s fee must

be imposed by considering risk, capability, time and interest of client

(elucidation of Article 21 (2) Indonesian Law Number 18 Year 2003).

Nonetheless, this Law does not stipulate a more detailed regulation on attorney;s

fee nor does the Advocate code of ethics. Components of attorney’s fee, inter alia

are:

i. Attorney’s individual fee

ii. Transportation fee

iii. Accommodation fee

iv. Case fee

v. Court fee

vi. Success fee (5-20% of the damage claimed)

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In practice, there are 2 methods that are used to determine attorney’s fee, i.e.:

1. Lump sum basis: single payment of total amount or an amount of money

that is given in a single payment rather than being divided into smaller

periodic payments.

2. Hourly basis: counted based on the hours the attorney spends. In Jakarta, the attorney’s office is commonly divided into two major categories,

i.e:

1. Lawfirm with more than 10 associates usually imposes hourly basis tariff.

The rage of hourly basis fee is IDR 500,000 to 10,000,000 an hour. The

lowest range of fee is for junior associate and the highest range of fee is

for senior partner.

2. Sole practitioner attorney usually imposes attorney’s fee based on lump

sum for litigation case and hourly basis for corporate works.

Attorney generally conceals the amount of payment they receive. Information on

attorney’s fee is difficult to obtain for that reason.

B. Suggestion to reduce the attorney fee

As the writer highlighted above, the root of exorbitant cost in enforcing contracts

is corrupt practices, such as bribery. To win court cases, most attorneys resort to

bribery. Since those attorneys cannot include such cost as a separate cost, they

must include such costs into attorney’s fee. Hence, in order to reduce attorney’s

fee, corrupt practice (including bribery) in the judiciary must be eradicated.

One of the possible ways to do so is to impose more stringent standards on

attorney ethics, i.e. to generate attorneys with integrity. This may in turn reduce

attorney’s fee as attorneys are bound by such code of ethics not to charge clients

for unreasonable expenses. Although Indonesian Advocate Association (PERADI)

has enacted attorney code of ethics, however, it is not implemented effectively.

One of the problems is the code is ‘sketchy’ and ‘insufficient’. It is insufficient to

draw a clear line between reasonable and unreasonable expenses. Another

problem with the code is with regard to the sanction board that is mostly

governed by political interest. One of the possible solutions is to include non-

attorney in the sanction board. In effect, the sanction board shall consist of

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attorney, the judiciary member and third-party member, such as civil society

representative or business actor representative.

The aim of the solution is to encourage attorney to impose fee limit. The

structure of attorney’s fee in Indonesia is rooted on the agreement he/she made

with clients. It must also be noted that attorney’s fee is not expressly regulated in

Indonesia, but rather made on the basis of market force or individual case. There

are several types of attonery’s fee. Nonetheless, there are several types of

attorney’s fee that can be identified. First, conditional payment in which the

attorney would be paid more than the agreed first rate if he won. Second,

contingency payment in which the attorney would be paid an agreed amount of

percentage of the awarded compensation if he won, but receive nothing if he lost.

Lastly, the hourly basis in which the attorney and the client agree on the

attorney’s hourly rate, and the attorney is consequently paid according to the

amount of hours he spends to work on the case.

A radical solution is to determine that attorney is paid on hourly basis fee

(including litigation works) only, except in some circumstances. These

circusmtances may later be defined as some litigation works of extraordinary

nature and certainly should be limited in terms of number.

There are several models that are available for determining attorney’s fee.

1. Attorney’s fee in United States

To ensure a more reasonable fee structure, Indonesian Law on

Advocate/Attorney shall establish a benchmark for attorney’s fee. One of the

models that is used in the United States is Laffey Matrix. Nonetheless, it must be

noted that this matrix only addresses hourly basis attorney’s fee, not conditional

payment or contigency fee.

Table 11, Laffey Matrix17

17 [source : http://www.laffeymatrix.com/see.html]

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Years Out of Law School *

Year Adjustmt Factor**

Paralegal/ Law Clerk 1-3 4-7 8-10 11-19 20 +

6/01/10- 5/31/11 1.0337 $161 $294 $361 $522 $589 $709

6/01/09- 5/31/10 1.0220 $155 $285 $349 $505 $569 $686

6/01/08- 5/31/09 1.0399 $152 $279 $342 $494 $557 $671

6/01/07-5/31/08 1.0516 $146 $268 $329 $475 $536 $645

6/01/06-5/31/07 1.0256 $139 $255 $313 $452 $509 $614

6/1/05-5/31/06 1.0427 $136 $249 $305 $441 $497 $598

6/1/04-5/31/05 1.0455 $130 $239 $293 $423 $476 $574

6/1/03-6/1/04 1.0507 $124 $228 $280 $405 $456 $549

6/1/02-5/31/03 1.0727 $118 $217 $267 $385 $434 $522

6/1/01-5/31/02 1.0407 $110 $203 $249 $359 $404 $487

6/1/00-5/31/01 1.0529 $106 $195 $239 $345 $388 $468

6/1/99-5/31/00 1.0491 $101 $185 $227 $328 $369 $444

6/1/98-5/31/99 1.0439 $96 $176 $216 $312 $352 $424

6/1/97-5/31/98 1.0419 $92 $169 $207 $299 $337 $406

6/1/96-5/31/97 1.0396 $88 $162 $198 $287 $323 $389

6/1/95-5/31/96 1.032 $85 $155 $191 $276 $311 $375

6/1/94-5/31/95 1.0237 $82 $151 $185 $267 $301 $363

Note on the statistic:

* “Years Out of Law School” is calculated from June 1 of each year, when most law students graduate. “1-3" includes an attorney in his 1st, 2nd and 3rd years of practice, measured from date of graduation (June 1). “4-7" applies to attorneys in their 4th, 5th, 6th and 7th years of practice. An attorney who graduated in May 1996 would be in tier “1-3" from June 1, 1996 until May 31, 1999, would move into tier “4-7" on June 1, 1999, and tier “8-10" on June 1, 2003. ** The Adjustment Factor refers to the nation-wide Legal Services Component of the Consumer Price Index produced by the Bureau of Labor Statistics of the United States Department of Labor.

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Certainly, the writer is not suggesting that the fee in this matrix shall not be

imposed in Indonesia without further consideration on the market force.

Nonetheless, what can be learned from such fee structure is (i) ratio and (ii)

quality to determine fee structure. In other words, the first step is to determine

what quality to be assigned with certain amount of hourly fees (in Laffey Matrix,

the quality is years out of law school). Perhaps, Indonesian Law on Attorney can

improvise the ‘quality’ to include ‘rate of winning’, ‘satisfaction of clients’, and

‘independent body assessment’ on certain attorneys’ quality. The next step is to

assign an amount of hourly fee to an array of quality which has been determined

in the first step (in Laffey Matrix, the highest amount is US$ 709 for 20-year

experience attorney). This method can ensure a more standardized attorney’s

fee, hence, it will reduce cost of contract enforcement. In most cases, attorney’s

fee is high due to “bribery” costs. Introducing structure of attorney’s fee will

impede bribery practice as the attorney’s fee must accord to a standardized fee

structure. At least, such method can provide a clear and consistent fee structure

on cost of contract enforcement.

2. Attorney’s fee in Malaysia

Malaysia establishes Advocate Tariff Commission which is chaired by Chief

Justice of the Supreme Court. This Commission determines attorney’s fee based

on several factors, inter alia client’s position, location and situation of

transaction occurence, amount of damage claimed, capability and attorney’s level

of responsibility, amount of documents prepared by the attorney and the

values/utilities of documents prepared.18

3. Attorney’s fee in Singapore

In Singapore attorney’s fee is regulated under PART VIII of Legal Profession Act.

The Committee for determining attorney’s fee consists of:

i. The Chief Justice

ii. The Attorney-General

iii. The President of the Law Society of Singapore

iv. 2 solicitors nominated by the Council of Society

18 Menakar besar kecilnya fee advokat, http://hukumonline.com/berita/baca/hol19145/menakar-besar-kecilnya-ifeei-advokat. Last visit 31 August 2011.

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The amount of remuneration must be based on the following considerations

(Article 108 (3) Legal Profession Act).

a. the position of the party for whom the solicitor or law corporation or

limited liability law partnership is concerned in the business, that is,

whether as vendor or purchaser, lessor or lessee, mortgagor or

mortgagee, and the like;

b. the place where, and the circumstances in which, the business or any part

thereof is transacted;

c. the amount of the capital money or rent to which the business relates;

d. the skill, labour and responsibility involved therein on the part of the

solicitor or law corporation or limited liability law partnership;

e. the number and importance of the documents prepared or perused,

without regard to length.

The Legal Profession Act stipulates a restrictive rule on charging client with

respect to attorney’s fee. Those rules are, inter alia:

1. remuneration for attorney’s fee must be made in an agreement

2. the components such as searches, plans, travelling, stamps, fees or other

matters must be embodied in the agreement.

3. Court can cancel the agreement when taxation of costs in the agreement is

unreasonable.

The Legal Profession Act further regulates types of agreement for the purpose of

determining attorney’s fee. The Legal Profession Act divides the agreement and

attorney into several categories.

1. Agreements with respec to remuneration for non-contention business

2. Remuneration of solicitor who is mortgagee

3. Agreements as to costs for contentious business

In sum, there are several alternatives to consider in order to reduce attorney’s

fee in Indonesia.

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1. Provide more rigid rules on attorney’s fee in a body of law, including type

of agreements, nature of businesses and legal affairs an attorney is

involved in.

2. Provide parameters and benchmarks for determining attorney’s fee.

3. Establish a council or body similar to that of the Singapore or Malaysia’s

council to determine and supervise imposition of attorney’s fee. The

council should consist of people from different backgrounds, i.e. judge,

client, businessperson, etc.

4. Provide a guideline that is similar to the nature of Laffey’s matrix.

Although this matrix is not binding and attorney’s fee should be

determined on case per case basis, nonetheless, the matrix can provide a

guideline.

V. How to reduce the time of trial and enforcement

A. Diagnose why it takes so long in trial and enforcement The core problem with protracted trial and enforcement is the large amount of

cases the judiciary must handle. The Supreme Court currently has 50 justices in

total. Eleven of which belong to the administrative structure (the Chief and Vice

Chief of Supreme Court and Director of each Sub-Department). These 50 justices

must handle 13,480 cases in 2010 and 12,540 cases in 2009.19 Those cases have

been filtrated from 3,037,036 cases in 2010 and 3,531,613 cases in 2011 in the

first instance court (or also known as district court). The rough number of total

justices is 1,091. The rough number of cases a judge must handle is 22,4 a month

(assuming that it is an individual judge, not a panel of 3 or 5 judges). This is a

herculian task for a judge. In addition, some judges must deal with

administrative works.

To reduce the time of trial and enforcement, case management must be installed.

Case management, especially one which can help filtrate cases from lower court

19 Annual Report of the Supreme Court of Indonesia 2010. Available at http://kepaniteraan.mahkamahagung.go.id/laporan-tahunan/120-laporan-tahunan-2010.html (last visit 28 July 2011)

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level to the Supreme Court level, is very crucial. Another dimension of case

management is assigning the right judge to the right case. It means that judges

must specialize in certain legal regimes and these judges should be assigned to

cases they are most efficient at. This will allow more efficient and expeditious

process.

In addition, a system of administrative sanction shall be installed. One of the

problems with judges’ behaviour is that there is no control mechanism. Although

judges are required to deliver a decision on a fix time frame as required by

certain laws (such as bankruptcy law), judges who fail to comply with such time

frame are not sanctioned.

Even after such long trial and after the judgment is pronounced by the judges,

the execution of the judgment may still be obstructed. The losing party may

directly obey the court’s decision and fulfill its obligation as adjudicated in the

judgment or it may refuse to fulfill their obligation. Situation where the losing

party refuses to comply with the court’s decision happens in practice. This is

partly due to absence or lack of consistency in precedents. Further, non-

compliance to the court’s decision occurs because the losing party enjoys

supports from the government or the court authority itself. In some occasions,

even the bailiff does not have the authority to execute the judgment or take

enforcement measures against the losing party to fulfill its obligations.

In other countries, such as England, Japan, United States of America, Canada,

Australia, which have regulations on contempt of court, refusal or rejection to

obey the court’s order may be considered contempt of court, consequently,

judges may impose sanctions, such as fine or imprisonment for someone who is

found guilty of contempt of court.

In Indonesia, establishing the regulation regarding contempt of court is urgent

since executing the court’s order or judgment is quite strenuous. Enacting the

law regarding contempt of court which imposes sanctions upon the party

refusing or neglecting the court’s order may ease the execution of court’s order.

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Further there should be a systematic/holistic training or education for judges to

comprehend cases promptly. The ability to comprehend cases promptly will

allow judges to adjudicate more cases without reducing the quality of

deliberations and decisions. This will, consequently, reduce the time of trial and

enforcement in the long run. Judges must also be trained to understand that their

function is as a civil servant, not a governing power. Judges in Indonesia tend to

treat parties to a case as a sub-ordinate. This mental attidude of judges hampers

the ability of parties to push judges for an expedient trial even when the law

requires so.

Certainly, attorney is not innocent on this matter. Attorney has every incentive to

prolong the trial as he/she is paid more if the trial is longer.

B. Suggestion for faster, easier and cheaper Having lined out the problems of lengthy time to enforce a contract, there are

several possible solutions to this problem.

1. Number of judges and mentality of judges

First, number of judges in the court must be increased. Second, judges must be

relinquished from administrative works. Third, judges who fail to comply with

time frame requirement in adjudicating a case must be imposed with

administrative sanction. Fourth, judges recruitment must be revolutionized in

the sense that the best judges are recruited and subsequently trained. Fifth, mind

set of judges as a servant must be instilled and mind set of judges as superior

must be eradicated. Sixth, procedures to ensure that attorney does not protract a

trial must be enacted.

2. Providing decent remuneration

To increase judge’s quality and dedication, decent remuneration is paramount. A

classic reason for judges not to perform its task expediently is lack of

remuneration. This is certainly not-easy-to-measure issue. Nonetheless, it is

necessary to improve judge’s remuneration.

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3. Installing chamber system: the right man on the right place

In terms of Supreme Court structure, the writer opines that it is necessary to

install a chamber system. A chamber system is a system where judges are

allocated to different cases based on their expertise. For instance, criminal,

administrative and contractual case. This system ensures that proper allocation

of judges. As the old adage goes “the right man on the right place.” Certainly, this

system must also be coupled with educational training of judges. This training is

important to ensure judges keep pace with legal development. With chamber

system, training can also be devised more effectively as the needs of respective

chamber are already identified. Further, within training program itself, a

certification program can be installed. Judges who opt for criminal chamber must

undergo series of tests or certification programs. This will ensure that judges

who are allocated for certain chambers are qualified.

4. Installing small claim court

Commonly, the nature of contract with huge monetary value and contract with

small monetary value is different. The difference usually results in different level

of complexity of the case in the event of contractual dispute. More complex case

usually requires more time to solve and less complex case requires less time to

solve.

Installing a small claim court system will allow more effective proceedings

where the court allows a ‘fast track’ road for small claim. As a comparison, in

other APEC countries, a claim not exceeding AU$ 5,000 shall qualify for small

claim court.

Installing small claim court of course is not such an easy matter because this is

subject to political will of executive and legislative. Installing small claim court

must be grounded on the regulation otherwise it may not be effective. In addition,

small the success of small claim court requires a solid cooperation between

executive and legislative.

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It is a common phenomenon in Indonesia that small claims are not settled

through court. The inability of court’s capacity to serve small claims has

ramifications. For example, it is a growing phenomenon that most banks hire

‘freeman’ to ensure that debtors pay their debts. Recently, there were some cases

involving violent debt collection which resulted in death the debtors. Installing

small claim courts may also be the panacea to such problems.

· Enacting the law regarding contempt of court

Enacting the regulation regarding contempt of court is urgent since executing the

court’s order or judgment is quite strenuous. Enacting the law regarding

contempt of court which imposes sanctions upon the party refusing or neglecting

the court’s order may ease the execution of court’s order. Stricter rules on

contempt of court are also useful in ensuring that the magistrate (juru sita)

enforce decisions of judges accordingly.

IV. Recommendation for reform Continuous effort of reform is needed, especially in the vicinity of the Supreme

Court, involving every actor, arraying from clerk to Supreme Court justice.

1. Number of procedures

Several steps which should be considered to reduce number of procedures.

1. Amend the civil procedure law, include more rigid regulations on time

frame to deliberate and adjudicate a contractual dispute and time frame

for each activity of claimant and defendant (for instance, how many days

for providing evidence, submission of pleading, etc)

2. Install electronic system in summoning parties, informing parties to

attend court hearing, etc.

2. Cost of trial and enforcement

Several steps which should be considered to reduce cost of trial and

enforcement.

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Attorney’s fee

1. Provide more rigid rules on attorney’s fee in a body of law, including type

of agreements, nature of businesses and legal affairs an attorney is

involved in.

2. Provide parameters and benchmarks for determining attorney’s fee.

3. Establish a council or body similar to that of the Singapore or Malaysia’s

council to determine and supervise imposition of attorney’s fee. The

council should consist of people from different backgrounds, i.e. judge,

client, businessperson, etc.

4. Provide a guideline that is similar to the nature of Laffey’s matrix.

Although this matrix is not binding and attorney’s fee should be

determined on case per case basis, nonetheless, the matrix can provide a

guideline.

5. Reform on attorney code of ethics is needed. This is pertaining to

attorney’s fee structure and behavioral problem with some attorneys to

protract trial proceedings.

Court

1. Increase number of judges and repair judges mentality. Lack of judges is a

very crucial problem in Indonesia judiciary. The wave of cases in Supreme

Court or cassation level is huge. Each judge must adjudicate at least 22

cases a month. This is a herculian task. Number of judges must be

increased. In addition, judges must understand their roles as a servant of

the people.

2. Provide decent remuneration for judges. Decent remuneration is the key

to improving judges’ performance.

3. Install chamber system: the right man on the right place. Chamber system

allows judges with proper qualification to adjudicate cases of his

expertise. In addition, in chamber system installation, specialized training

must also be installed to enable judges to continuously improve and

sharpen themselves on specialized legal regimes.

4. Install small claim court. Small claim court allows judges to allocate

resources on cases more proportionally. Usually big-claim cases are more

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complex than small-claim cases. This system also improves access to

justice for the less fortunate segment of the society.

5. Enact the law regarding contempt of court. Winning a claim in a court and

executing it are two very different issues in Indonesia. One may win a

claim through a legal avenue but one may not necessarily be able to

execute it. Contempt of court law will enable judges to further involve in

the execution process where registrar of the court of the losing party will

be subjected to sanction when judge’s decision are complied with.

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ANNEX: LIST OF TABLES

Table 1 ---- Details of time frame of court proceeding for contractual dispute

Table 2 ---- Details of claim cost

Table 3 ---- Summary of World Bank Methodology

Table 4 ---- Types of contractual breach and its damages

Table 5 ---- Alternatives of contractual dispute settlement

Table 6 ---- Alternatives of Legal actions/ steps in enforcing contract in

Indonesia

Table 7 ---- General time frame of civil lawsuit proceeding

Table 8 ---- Auction process

Table 9 ---- Appeal process in the high court

Table 10 ---- Cassation Process in the Supreme Court

Table 11 ---- Laffey Matrix

DIAGNOSTIC STUDY OF ENFORCING CONTRACTS IN INDONESIA

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