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Contract Law and Drafting

Nabiyla Risfa Izzati, S.H., LL.M
Course Outline in Contract Law

Basic Concept
Basic Contract Contract
of Contract
Drafting Skill Drafting
Law
 Introductory Thoughts

� Contract formation?
� When contract is enforceable?
� What is contract drafting?
� What is the goal of contract drafting?
Contract Formation
� Contract = consent. Consent = offer + acceptance.
� Promise or offer?
Angga says to Linda, “I will give you $200 tomorrow.”
Angga says to Linda, “I will give you $200 tomorroe, if you give me
your bicycle tomorrow.”
� No acceptance or breach of contract?
The day after Linda agreed to sell her bicycle to Angga, she has
change of heart and says, “I didn’t relly mean it when I said, ‘It’s a
deal’. I was just joking.”
 Why we need proper
CONTRACT DRAFTING

Subjective Objective
Intent
What the parties were
VS Manifestation
What the parties did, such as
thinking when they formed their words or their outward
the contract expression

Contract law isn’t concerned with what was or wasn’t in our head, but
with our objective manifestation. The question for Linda is not
whether she thought she was serious, but whether a reasonable
person standing Angga’s shoes would have thought she was serious,
depending on her objective manifestation.
Leonard v. Pepsico: Collecting for a jet
Leonard v. Pepsico: Collecting for a jet
In the case of Leonard v. Pepsico, Pepsi issued a catalog of items a person could
buy with Pepsi Points. Consumers could buy products to earn a points, and
although people had to submit a minimum of 15 Pepsi Points with their order,
they could purchase additional points for cents each.
To advertise the promotion, Pepsi ran a commercial which a teenager is buying
all sorts of stuff with Pepsi points –a T-shirt for 75 points, a leather jacket for
1450 points, sunglasses for 175 points- and finally he descends from the sky
and lands in front of high school in his own Harrier Jump Jet. As he land, the
commercial displays “HARRIER FIGHTER – 7.000.000 Pepsi Points”.
After watching the ad, Mr. Leonard sent in an order form with 15 Pepsi points
plus $700.00, and demanded the Harrier Jump Jet.
Pepsi refused to sent the Harrier Jump Jet and claimed no contract had been
formed. Leonard sued.
Court decided in favor of Pepsico. Why?

� Pepsi’s objective manifestations in the ad would lead a

reasonable person to conclude that pepsi was joking.

When you draft a contract, don’t make foolish mistakes.

Make sure that both parties will conclude the
same thing when they read the contract.
 Goal of Contract Drafting

� “The goal of a contract is to describe with precision the

substance of the meeting of two minds, in language that will be
interpreted by each subsequent reader in exactly the same
way.”
� “A prerequisite for a precisely written contract is a clear
understanding between the parties, which is often achieved
only after significant effort.”

(Fox, C. (2002) Working with Contracts. What Law School Doesn’t

Teach You, Practising Law Institute.)
Drafting Contract for Clients
� Which side draft a contract?
Usually the party with most leverage will do the drafting.
� If you are a lawyer/paralegal/notary/legal expert:
Your job is to make the client understand and care about many things
that the client may prefer to ignore.
The ‘law guy’ must develop the skill to explain complicated concepts
and issues in a clear and understandable way.
A significant element of this is gauging the client’s knowledge and
interest level and tailoring the explanation accordingly.
Process of Drafting Contract

� You can NOT draft a contract right away.

� Phase 1 : Interviewing and planning 🡪 compiling the information
from your clients and planning what provision need to be
included in the contract.
� Phase 2 : Negotiation 🡪 showing your proposed terms to the
other sides and negotiating the win win contractual obligations.
� Phase 3 : Drafting 🡪 putting the terms into legal contract.
� Phase 4 : Revising and negotiating leading to final agreement.
The hardest part of contract drafting?

LANGUANGE.
“The Plain English Movement” 🡪 Plain English is language that is
not artificially complicated, but is clear and effective for its
intended audience. The premise behind the plain English
movement is that legal documents ought to be plainer (and more
comprehensible) to the average person. 
Characteristic of Plain English:

1. Short sentences

2. Definite, concrete, everyday language

3. The active voice

4. Tabular presentation of complex or multifactor information

5. Separate paragraphs and sections, with headings, for separate concepts

6. The absence of highly legal jargon or highly technical business

terminology and use of Latin or other foreign languages

7. The absence of double or multiple negative

Did you know what these means?
1. ADR

2. Boilerplate

3. Choice of Law

4. Choice of Forum

5. Condition Precedent

6. Condition Subsequent

7. Covenant

8. Default
 QUIZ 1
CONTRACT
TERMINOLOGIES
BINGO!
Good Faith?
Subjective Intent or Objective Manifestation?
Key Policies in Contract Law

� Freedom of contract… and its limitation

� Efficiency (economic aspect of contract law)
� Fairness (protection of underdog, social justice)
� Predictability (expectation of both parties)
 � On October 2018, Lion Air JT-610
crashed in Java Island and killed all its
Lion Air passengers. The family of the victims
is entitled for insurance compensation
Insurance Case in the amount of 1,25 billion rupiah.
� In order to received the
compensation money, the family
needs to signed a contract from Lion
Air. One of the provision in the
contract said that the families of the
victims have the right to receive
compensation if they are willing not
to sue for compensation to Boeing as
the ill-fated aircraft manufacturer.

What is your opinion on that?

Contractual Precision

A precise contract has four elements:

1. It is accurate, meaning it correctly expresses the deal

2. It is complete, meaning that all possibilities have been addressed.

3. It is exact, meaning that it lacks both vagueness and ambiguity

4. It is able to withstand hostile, critical review. After the contract is

executed, the next thorough review of its provisions is likely to be
someone trying to breach the contract or sue over the transaction.
Drafting Contract in Bahasa?

� Law No 24 Year 2009, requires Indonesian language to be used in a

memorandum, agreement, or contract which involves Indonesian
government institution, Indonesian private entities or Indonesian citizens
(Art 31).

� This means that any contract with any governing law, as long as it involves an
Indonesian party, must be drafted in the Indonesian language, in addition to
the foreign language.

� In June 2013, the West Jakarta District Court issued a decision which
declared that a contract not drafted in the Indonesian language was null and
void.
Structure/Anatomy of Contract

In general, contract consist of:

1. Introduction
2. Content
3. Closing
+ appendix (if necessary)

(Law No. 30 Year 2004, Article 38)

Introduction (1)
� Title 🡪 identify the type of contract using a generic term.
Normally in all capital letters, centered.
RENTAL CONTRACT

COOPERATION AGREEMENT
BETWEEN
UNIVERSITAS GADJAH MADA AND CONSTITUTIONAL COURT

� Introductory paragraph 🡪 contain short title and date.

This Memorandum of Understanding is made on the 24th of July, 2018, by and between:

This Assignment of Project Construction Contract (hereinafter referred to as the

“Agreement”) is made and entered into as of 20 February 2019 by and between:
Introduction

� Komparisi / Parties 🡪 include the identity that explains the

status and authorities of the parties
PT SEJAHTERA, a company duly organized and validly existing under the laws of the Republic
of Indonesia, domiciled in _________, with its office at ______ hereinafter referred to as the
“Buyer”.

PT BAHAGIA, a limited liability company formed under the laws of the Republic of Indonesia
and having a place of business at ___________, hereinafter referred to as the “Seller”.

Difficult to explain status? Party I – Party II

Introduction
� Premise / Recitals / “Whereas clause” 🡪 These set the context for the
agreement and are useful for later interpretation of the agreement. They also
provide a place to list related transactional documents. Preambles are traditionally
preceded by the word “WHEREAS”.
Recitals should include facts that will help a later reader grasp the nature, purpose
and basis for the agreement. Examples:
1. the relationship and goals of the parties;
2. the nature of the transaction; and
3. other transactional documents and things associated with the transaction.
WITNESSESTH
WHEREAS, the Seller is the registered and legal owner of …......................
WHEREAS, the Seller has agreed to sell and transfer …........ to the Purchaser, and the Purchaser has agreed to
purchase and accept the transfer of …...... from the Seller pursuant to the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and premises, the Parties hereto agree to enter into this
Agreement to document their agreements as stipulated in the above recital pursuant to the following terms and
conditions.
Introduction

� Recitals can also be called as “Background”

BACKGROUND

A. The Parties have been in discussions in relation to the proposal described in Item 4 of
the Schedule (the “Proposal”).

B. The Parties enter into this Memorandum of Understanding to record their current aims
and as an expression of their intent to proceed on the basis outlined in this
Memorandum of Understanding and pursue negotiations among themselves to
endeavour to give effect to those aims.
Content

� Definition 🡪 the purpose is to isolate a term or concept that usually

repeated in the agreement, and ensure that it will be given the same
meaning each time.
Should be set out alphabetically in a separate section located near the beginning of
the agreement.
Defined words should be distinguished from normal words. Example: using Initial
Caps and treating it as a proper noun. It is important that defined terms are initial
capped every time they are used.

a. “PT PMA Company” shall mean the Indonesian limited liability company incorporated by notarial
deed after approval by the relevant Governmental Authorities.

b.“Commitment” shall mean the commitment of the Lenders to provide the Borrower with the Facility
under and subject to the terms and conditions of this Agreement.
A quick exercise…

� Create a stand-alone defined terms for the following sentences.

Re-work the sentence so that it would work as definition in
context:

1. The property being sold is the Taman Melati Apartment.

2. Object being discussed in this agreement as employee is anyone

who work in PT. Swarnajiwa.

3. Parties only acknowledge Ministry of Finance as authorized

ministry in relation to this contract.
Content
� Operative Clause / Transaction Clause 🡪 clauses which govern the
transaction conducted by parties. Contain the essence of agreement,
which is different in each types of contract.

Operative clause = essential element

Sell and purchase agreement?
Rental contract?
Employment contract?
Leasing contract?
Content

� Except Clause 🡪 usually includes event of default

(wanprestasi/overmacht/force majeure) and remedies.
The provisions should be clear and can be implemented easily.
Except clause usually placed to accommodate another
complementary article (miscellaneous clause, governing law,
and dispute settlement).
What might be in the content?
� Considerations
� Covenant
� Representation and Warranties
� Indemnification
� Breach and Cure
� Termination
� Remedies
� Assignment
� Choice of Law
� Amendment and Waiver
Closing

� Closing section of contract should contain signature block, which

begin by stating that by signing the document, the parties are
agreeing to its terms.
For a natural person, a line with the person’s name underneath is
used.
For a corporate or limited liability signatory, identify both the entity
and capacity of the person actually signing for such entity.
IN WITNESS whereof the Parties have caused this Agreement to be duly executed in duplicate on the date first
written above.

For and on behalf of For and on behalf of

Apple.inc The Republic of Wakanda
Tim Apple Okoye
CEO Military General
Contract Elements in Detail (1)
1. Representations and Warranties
Representation is a statement of fact upon which another party is expected to rely.
Warranty is one party assurance as to a particular fact, coupled with implicit
indemnification obligation if that fact is false. Both purpose are to give snapshot of
facts which important for one party to enter into agreement.
Representations are drafted in the present or past tense, not the future tense, to
prevent them from being interpreted as covenants.

Seller represents and warrants that Seller has the right and authority to transfer the Shares to
Purchaser under the Republic of Indonesia law and regulation.
-----
With respect to the purchase of the Shares as set forth in this Agreement, the Purchaser, hereby
unconditionally and irrevocably represents and warrants to the Seller as follows:
1. that the Purchaser is a company duly established and validly existing under the laws of the Republic
of Indonesia.
2. the Purchaser has the full legal right and corporate power and authority required to enter into,
execute and deliver this Agreement and to fully perform its obligation hereunder.
Contract Elements in Detail (2)
2. Covenants 🡪 ongoing promises by one party to take or not to take certain
action.
There are two types of covenant:
(i) Affirmative covenants 🡪 promises to take specific actions
(ii) Negative (restrictive) covenants 🡪 promises not to take specific actions
Covenants generally drafted in the form of “shall clause”.

Employer shall pay the employee Rp5.000.000,00 per month. The payment shall be made via transfer
to the employee account on the first working day each month.
-----
The Borrower shall not sell any of its assets, except for the sale of obsolete equipment in the ordinary
course of business.
Contract Elements in Detail (3)
3. Condition Precedent 🡪 requirements that must be satisfied before a party
is obligated to perform or before the contract is enforceable.
Seller is not required to transfer the assets unless Buyer pays the purchase price.
-----
If the house passes inspection, the Buyer shall provide a deposit.

Condition Subsequent?
4. Remedy Provision
There are two elements to a remedy provision:
- A description of the event that gives rise to the right to a remedy
(triggering event)
- The remedies themselves
In the event Seller fails to perform, Buyer may at its option and its exclusive remedy:
(i) terminate this Agreement, or
(ii) seek specific performance.
Contract Elements in Detail (4)
5. Termination 🡪 in the event of termination, neither party is required to
continue performance under the contract.
In the event Operator defaults in the performance of any covenant or agreement made
hereunder, as to payments of amounts due hereunder or otherwise, and such defaults are
not remedied to the Supplier’s satisfaction within ten (10) days after notice of such defaults,
the Supplier may thereupon terminate this agreement and all rights hereunder of the
Operator but such termination shall not affect the obligations of the Operator to take action
or abstain from taking action after termination hereof, in accordance with this agreement.

6. Choice of Law 🡪 meaning that contract must be interpreted and

enforce under the law of specific jurisdiction. This provision should
never be omitted from any contract, no matter how short or informal.
This Agreement and the rights and obligations of the parties hereunder shall be governed by,
and construed and interpreted in accordance with, the laws of the Republic of Indonesia.
Contract Elements in Detail (5)
5. Consent to Jurisdiction 🡪 designed to ensure that a dispute regarding
the contract will be heard in a particular court, or, in the contrary,
waive the right the right to assert the proceeding to specified
jurisdiction to avoid inconvenience.
In the event of dispute, each party shall submit to any court of competent jurisdiction
for purposes of the enforcement of any award, order judgment.
Any award, order or judgment pursuant to arbitration is final and may be entered an
enforced in any court of competent jurisdiction.

6. Amendments 🡪 Any amendments to the contract should be made in

writing and signed by all parties.
The parties may amend this Agreement only by a written agreement, signed by the
parties, that identified itself as an amendment to this Agreement.
Remember contractual precision?

“Seller shall deliver a bill of sale, in form and substance

reasonably satisfactory to Purchaser.”
INSTEAD, YOU MAY USE:

“Seller shall deliver a bill of sale, in form and substance customary

for transaction of this type.”

OR IF YOU WANT TO BE EXACT:

“Purchaser and Seller shall enter into services agreement
substantially in the form attached as Appendix 2.”
Homework!

� Find a contract online (sell and

purchase/rental/employment/cooperation) min 5 pages, max
10 pages.
� Address the element that you can find in those contract, and
make anatomy out of it.
� Bring to class on the next meeting.
Overview of Contract Standard Provision
� Title
� Preamble/Recitals
� Definitions
� Considerations
� Covenant
� Representation and Warranties
� Indemnification
� Breach and Cure
� Termination
� Remedies
Additional important contract provisions:
Contract Interpretation

� Ambiguity 🡪 when a word or phrase has two or more conflicting

meanings. Ambiguity in contract may lead one party to claim
that the language means one thing, while the other party says
that it means something else.
� Example: a buyer orders “oranges and grapefruit from
Magelang”
� Seller sends grapefruit from Magelang, but oranges from
elsewhere.
� Buyer claims that the seller is in breach.
Contract Interpretation

� Common Law 🡪 textual/literal approach 🡪 the meaning and

effect of a contract should be determined solely from the
words of the text itself and not from any external evidence.
� Civil Law 🡪 purposive approach 🡪 the meaning and effect of a
contract should be determined taking account of object and
purpose of the contract, and the intentions of the parties.
Principles of Contract Interpretation
1. Document must be read as a whole
2. “The literal and golden rules” 🡪 words should be given their ordinary
meaning.
3. Ut res magis valeat quam pereat 🡪 an interpretation that makes the
contract valid, is preferred to one that makes it invalid.
4. Contra Proferentem 🡪 if an ambiguity in a contract cannot be
resolved in any other way, then it must be interpreted againts the
interest of the party which suggested it.
5. Noscitur a socilis 🡪 if the meaning of a phrase in a contract is unclear
by itself, its meaning should be gathered from the words and phrases
associated with it.
6. On Contradictory terms : typewritten terms prevail over printed
terms, handwritten terms prevail over typewritten or printed terms,
and words prevail over numbers.