Security of contracts

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.