Amending contracts of work : Rectifying past misconstruals

Amending contracts of work : Rectifying past misconstruals Hikmahanto Juwana  ;   Professor of international law at University of Indonesia, Depok, West Java

JAKARTA POST,  19 Maret 2014

                                  

                                                                                         

                                                      

The Indonesian government will soon revise contracts of work (COWs) and PKP2B (coal mining business permits) with several of its contractors, including Freeport and Newmont. Twenty-five mining companies have signed memorandums of understanding (MoU) on the revision of several principal issues in their respective contracts. The law governing COWs has long been perceived as lex specialis in accordance with the legal maxim of lex specialis derogat legi generali, which literally means a law governing specific subject matter overrides a law that only governs general matters. The basis for this construal is because a government is party to a COW. A government is not distinguished as between a private and a public entity. Thus, if provisions under a COW contradict provisions in laws and regulations, the provisions of the COW will prevail. To take an example, tax and duty regulations apply as at the time the COW was signed. The taxes and duties remain the same until the expiry of the COW regardless of any changes in the prevailing tax and duty laws and regulations. This is referred to as nail down. The nail-down concept lay undisturbed under the Soeharto administration. But today in a more democratic society, where the people’s voice should be heard, the application of COWs as lex specialis is being challenged for at least three fundamental reasons. First, it should be understood that depending on which branch of the law is concerned, the government can act in different capacities. Under international law, a government is bound by norms in a treaty if it agrees to do so. This is different in public law. A government can issue laws and regulations without obtaining agreement from each individual in society. Once a law is promulgated, individual or legal entities have to be bound and abide by them. Under private law, the government has the capacity to enter into a contract in the same way as an individual or a legal entity. This kind of contract is referred to as a government contract. Most government contracts are in the area of government procurement of goods or services. But the capacities of the government often overlap with each other. This is the case with COWs. When entering a COW the government is acting as a private entity. However in issuing tax and duty regulations, the government is acting as a public entity. The question is if under the COW there is agreement on taxes and duties does that mean the prevailing regulations on tax and duties can be waived? Of course the answer would be an outright “no”. Government actions as a public entity cannot be and should not be castrated by government actions as a private entity. This applies not only in Indonesia, but in all countries in the world, including the United States. For this reason a COW may not restrict government capacity to issue regulations on tax and duties. On the contrary, a government as a private entity has to obey and observe regulations issued by the same government as a public entity. What if provisions under a contract contradict prevailing laws and regulations? This brings us to the second fundamental reason why a COW may not run counter to prevailing laws and regulations. Under Article 1337 of the Indonesian Civil Code (ICC), a contract has prohibited cause if such a contract contradicts laws, morals and public order. A contract with prohibited cause under Article 1335 of the ICC will have the consequence of being unenforceable or null. Hence, provisions of taxes and duties under a COW that contradict prevailing tax and duty regulations under Article 1337 of the ICC qualify to be categorized as prohibited contract. Further, under Article 1335 such contracts will become null. The last fundamental reason for COWs not to be treated as lex specialis is because the maxim of lex specialis derogat legi generali only applies if the form of law is the same. Thus, a certain provision contained in, say two presidential regulations, where one is more specific than the other, the presidential regulation which contains specific reasons will prevail. However the maxim of lex specialis derogat legi generali will not apply if the form of law is different. A specific provision in a presidential regulation will not prevail if it contradicts with a general provision in an act (law). This is because in the legislation hierarchy an act is superior to a presidential regulation. This also applies to a contract in relation to legislation. As mentioned earlier under Article 1337 of the ICC, a contract may not contradict legislation. This is a legal concept subscribed to all over the world. Thus, a COW may not be considered as lex specialis if the provision contradicts legislation. Having said that, a question may arise as to why it is that under the Soeharto administration the law relating to COW was recognized as lex specialis? There are three reasons. First, when the COWs were signed, the government was in a weak position. The government had the mining areas, but not the funding, technology or experts. Second, the government was willing to surrender its “public” power to enable it to attract mining contractors. Third, in the early 1990s as some scholars questioned the applicability of COWs as lex specialis on tax and duty, the government was quick to promulgate an amended Tax Law, which stipulated that the relevant taxes and duties of the law would apply to COWs. In 2009, the 1967 Mining Law was amended. Two features affected COWs. First, the contract regime has been replaced by a license regime. Second, through the law the mistake of treating COWs as lex specialis in all respects, not only in taxes and duties, was rectified. Under Article 169 (b) of the 2009 Mining Law it is provided that all COWs have to be adjusted to be in compliance with the law. The law sets the timeframe of one year even though there is no sanction if the deadline is passed. The government of President Susilo Bambang Yudhoyono has not been strict in ensuring the COWs comply with the law. Under his administration, room for renegotiation is provided, despite the fact that this mechanism is not recognized under the law. On the other hand, with the promulgation of the 2009 Mining Act and its implementation regulations contractors have grounds for complaint if the government does not honor the sanctity of the COW. Such complaints, however, are groundless. The sanctity of a contract arises when there is a breach. To date the government has honored and never breached its obligations under COWs. The current amendment to COWs and other legal consequences are the result of changes in the Mining Law and its implementing regulations. One principle of contract law recognized in any jurisdiction is that contracts have to be amended and adjusted if laws and regulations change. If the provisions of contract are not brought into line with the law, the provisions of such contracts will become null and void. As such, if mining contractors want to continue their operations in Indonesia they do not have any choice but to conclude amendments to their COWs and follow new laws and regulations issued by the government. ●