Jakarta’s House of Representatives ran into a contract problem recently: they decided they no longer wanted to be part of a contract they had signed with a developer to allow the use of land adjacent to the legislative complex to be used for a shopping mall for the next 25 years. That is a big contract, and getting out of a deal that big can be problematic, but as with any contract, it can be canceled if you know how.
The following methods for getting out of a contract may not work in Indonesia because their legal system is different than that of the United States, but the situation is illustrative of some important considerations for anyone who feels stuck in a bad contractual situation.
Given the facts in the story, there are three ways for Jakarta’s legislative body to get out of their contract:
1. Break It. This is the easiest, but generally also the most costly, way of terminating a contract prior to its natural expiration. If a person decides not to honor the terms of the contract, it is broken. Of course, the breaker of the contract has to be ready to deal with the consequences of the breach. These usually consist of either monetary damages, although in some circumstances a court can order that the contractual duties actually be performed (this is called specific performance). Monetary damages from breach of contract is usually based either on the actual damage the other party suffered, or the damage the other party will suffer in the future due to the breach. Jakarta’s legislative body seems to be ready to pay for breaking the contract, although I would be interested to know how one values the disintegration of a deal for developing land for 25 years.
2. Find a Breach. If one party breaches a contract, the other party can not only claim damages from the breach, but can also declare the contract broken and no longer in force. Generally, the breach needs to be a material breach, which is one that actually affects the deal. It is the non-breaching party that really holds the power in that situation; it can either call the contract broken and cancel the entire deal, or it can set conditions for curing the contract, which will allow the deal to continue if the conditions are met. (The definition of “cure” may vary in different jurisdictions, and might be arguable.) And the non-breaching party can generally also decide whether a breach will require damages, or whether it just wants to cancel the contract and the deal altogether. In Jakarta’s situation, there is speculation that an initial payment of $721,500 to the government. This is potentially a material breach, which the government could use as a basis to cancel the deal entirely.
3. Determine the Contract is Illegal. Under common law in the United States, a contract will not be enforced if it is for something that is illegal. The most common example of this is paying for sex. Since prostitution is illegal, a man cannot take a woman to court claiming that he paid her for sex and she did not deliver. (On a side note, it would be interesting to see if breach of contract has been upheld in places near Las Vegas where prostitution is legalized, and if so, whether the remedy is for damages or specific performance.) Generally, though, any contract that requires one or more parties to do something illegal is unenforceable and will be deemed void. If Indonesia’s legal system involves the same principle, then this might be just what the legislative body needs. The article describes that building a mall on that property would be in violation of a presidential decree (which is likely the same as our executive order) requiring the area to be maintained as a national heritage area. Depending on the wording of the decree and how the decrees are enforced, a contract to build a mall on that property could be considered illegal and therefore void. Void contracts cannot be enforced, and therefore there is no penalty for not fulfilling them.
Of course, the best way to avoid this situation would have been for all the parties involved to have done their research and homework up front, determined the feasibility of the proposal, and then not even signed the contract in the first place. Proper preparation and understanding of contracts up front is crucial to avoiding headaches down the road. But if you find yourself in a bad contractual situation, consider these techniques (and talk to a lawyer before you act).
(Photo by Best Photo)
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Graham Martin is a solo practitioner focusing on Contract law (including drafting, review, and litigation). He operates Martin Legal Services, LLC in the Minneapolis-St. Paul area.
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