Security of contracts

Anger at revelations of wealth accumulated by those close to former president Soeharto during his time in office, and the nationwide clamor to root out corruption which this has prompted, has led many government agencies and state companies to announce a review of all contracts concluded with companies linked to the extended Soeharto clan. However, this fury, if misdirected, could serve to undermine the perceived legal sanctity of contracts in Indonesia and further taint Indonesia in the eyes of potential investors.

Since Soeharto fell on May 21 and his 32 authoritarian rule finally came to an end, hardly a day has gone by without yet more official and unofficial disclosures of business ventures linked to what has come to be known as Soeharto Inc. The size of this brand name corporation is beyond the bounds of imagination.

But there has been a legitimate concern that unilateral and indiscriminate cancellation of business contracts simply because the contracted parties are linked in some way to Soeharto's family and cronies could deal a further blow to investor confidence, something which our battered economy could do without if it is to shake of the economic crisis.

A market economy such as ours depends, among other things, on the security of legal contracts arising from consensual agreements. Without any such legal protection our economy would be governed by the law of the jungle.

But domestic and foreign investors fully agree that legal business contracts are not the same as those which have been set up on a corrupt footing and which are tainted with allegations of collusion and crony capitalism. These unhealthy business practices are shunned in most countries and are criminal offenses liable to heavy penalties. Laws in most market economies prohibit these unsound practices to improve economic efficiency and create a level playing field and healthy climate in which business and entrepreneurship can thrive.

As a basic principle, legally binding business contracts should be honored. However, it must be remembered that Soeharto, during his 32 year authoritarian rule, could make almost anything 'legal', if it suited his purposes. Therefore the condition of legality alone should not spare all contracts from the clean-up campaign. As official disclosures over the past three weeks have shown, many government agencies and state companies were forced into business contracts with Soeharto's family and cronies under duress.

Bona fide businesspeople should be fully aware that a contract must be negotiated and concluded in good faith, without any political or bureaucratic interference. After all, the principle of freedom of contract underpins commercial law in most countries. The freedom of parties to determine for themselves whether or not to enter a particular deal and to agree on the terms of that transaction is the legal lynchpin of the market economy. The law only serves to enforce those legal duties which a party can be understood to have voluntarily undertaken.

Businesspeople, including foreign investors, should therefore not have to worry about their contracts or ventures, despite the fervent anti-corruption campaign which is currently being waged. They should be allowed to rest assured that their contracts will remain under the protection of the law, provided they were entered into in good faith and not obtained through bribery or the wielding of political influence through local partners.

Moreover, foreign investors, notably those from developed countries renowned for their high business ethics, should have known that winning contracts through passing bribes (and a whole list of other unsavory and unprincipled practices) violates the Anti-Corruption Convention which was signed by the 29 member countries of the Organization for Economic Cooperation and Development (OECD) last December.