Policy Review on the Sanctity of Contract

By: Mr. Simon Sembiring and Mrs. Edna Caroline

Once parties sign a contract, they are bound by the obligations stated in the contract. In business, it is called the sanctity of contract. It is the contract that assures each party that the cooperation will continue as agreed, regardless if the circumstances change.

What is the limit? Is there anything more sacred than the sanctity itself?

This article will try to examine the contract between PT Freeport Indonesia Company and the Government of the Republic of Indonesia as a case study. It refers to the official data provided by US Securities and Exchange Commission. The contract was signed on December 30th, 1991, as the fifth edition of the Work of Contract between the two parties. This Contract will end in 2021, and it should be carefully evaluated by the Government of the Republic of Indonesia whether or not the contract to be extended after that. The first edition of the Work of Contract was signed in 1967. It should have ended in 2013, but in 1991, surprisingly both parties renewed and extended the agreement.

In the Preamble, the contract was signed by Minister of Mines and Energy, on behalf of the Government of the Republic of Indonesia and PT Freeport Indonesia Company. PT Freeport Indonesia Company (PT FIC) is a judicial body incorporated within Indonesia by Notarial Deed and Decree from the Minister of Justice. PT FIC is an indirect Subsidiary of Freeport-McMoRan Inc., a Delaware corporation, and a Subsidiary of Freeport-McMoRan Copper & Gold Inc., a Delaware corporation.

As PT FIC is listed as a legitimate Indonesian company, it will comply with all Indonesian Laws and regulations. It is stated in Article 3 that PT FIC shall be incorporated under the laws of the Republic of Indonesia. Moreover, in article 23, it is stated that PT FIC at all time to comply with the laws and regulations of Indonesia from time to time in effect.  This is a strong message that the Law No. 4 the year 2009 on Mineral and Coal is in line with the contract.

To enhance investment in the mining sector, the Work of Contract gave several privileges and benefits to taxes and several financial obligations to PT FIC. It is regulated in Article 13 that there are 13 different taxes and financial obligations which bind both parties. Article 13 states the obligation of taxes and royalty fees applicable to PT FIC and specifically states that PT FIC shall not be subject to any other taxes, duties, levies, contributions, charges or fees now or hereafter levied or imposed or approved by the Government other than those expressly provided for in this Article and elsewhere in this Agreement.

In this context, the Contract is sacred indeed. However, the limit is the contract itself which is governed and subject to higher regulations, such as Law and Indonesian Constitution. It is written in the Contract itself that all parties oblige to submit to the prevailing laws and regulations. The other most important aspect is that this contract was made based on goodwill, that both parties wish to fulfill its interest. Accordingly, any new circumstances must be solved by goodwill as well. This was also shown when PT FIC agreed to accept the increase of gold and copper royalty to the Government.

* We thank Mr. Simon Sembiring and Mrs. Edna Caroline for their contributions to this article. This opinion piece is the authors own and do not necessarily represent PYC.