Indonesian Constitutional Court Rules Omnibus Law as Conditionally Unconstitutional
Indonesia’s first Omnibus Law – Law Number 11 of 2020 on Job Creation (“Job Creation Law”) – has been declared conditionally unconstitutional by the Constitutional Court through its Ruling Number 91/PUU-XVIII/2020 issued on 25 November 2021 (the “Court Ruling”).
BACKGROUND
This Court Ruling was made in relation to a judicial review on the Job Creation Law submitted on 15 October 2020. The applicants comprising an individual citizen, a student, a lecturer, and several associations challenged the constitutionality of the Job Creation Law based on how the law was enacted, namely:
that the method of law making through an “omnibus law” used for the Job Creation Law is inconsistent with the recognised forms of legislation mandated by the Indonesian Constitution1 and Law No. 12 of 2011 on Legislation Procedures (“Legislation Procedures Law”)2; and
the lack of transparency3 throughout the preparation, review and issuance of the Job Creation Law, namely, that amongst others, the law-makers did not fully facilitate the involvement of the public and various stakeholders during public consultation sessions. Moreover, the applicants emphasized on a significant discrepancy between the draft of the Job Creation Law which had been ratified by the President and Parliament and the final version announced in the State Gazette.
THE COURT RULING
Following such petition, the Judges of the Constitutional Court decided and ruled the following:
the law-making process of the Job Creation Law was contrary to the Indonesian Constitution and therefore the Job Creation Law is not legally binding if no remedial action is made within two years from the date of the Court Ruling (i.e. 25 November 2021);
the Job Creation Law continues to be valid until it is remedied within the grace period mentioned in point (1) above;
if the necessary remedial actions are not completed within the said grace period:
the Job Creation Law would become permanently unconstitutional and therefore void;
the laws or articles or content of the laws that had been revoked or amended by the Job Creation law would be reinstated by operation of law; and
apply a moratorium on:
all Government actions/policies relating to the Job Creation Law that are strategic and have broad-impact; and
issuance of new implementing regulations related to the Job Creation Law.
The Constitutional Court did not examine the constitutionality of the substance or articles within the Job Creation Law, as a result, all articles contained in the Job Creation Law remain legally binding unless the Job Creation Law becomes permanently unconstitutional.
IMPLICATION OF THE COURT RULING
Status of Job Creation Law
Based on the above Court Ruling, the Constitutional Court concluded that the law-making process (i.e. the procedural aspects) of the Job Creation Law was conditionally unconstitutional. Such condition refers to an obligation to conduct “remedial actions” within a two year grace period, however, the Constitutional Court does not provide guidance on what remedial actions need to be carried out. It is unclear whether the law-makers are expected to redo the entire process of law-making for the Job Creation Law or can remedial actions be limited to addressing the specific “faults” highlighted by the Constitutional Court (e.g. lack of public involvement and draft discrepancies).
If the law-makers choose to redo the entire process of law making for the Job Creation Law, which is the more conservative approach, in our view the Government and Parliament would have to issue a new Law – by complying with the legitimate law-making process – that replaces the Job Creation Law. Pursuant to Legislation Procedures Law, a law-making process consists of several stages, such as: (i) planning; (ii) drafting; (iii) deliberation and legalisation; (iv) enactment; and (v) gazetting. As the Court Ruling provides a time limit, all these stages would have to be completed by the Government and Parliament within the two-year grace period. This in our view is doable as the existing Job Creation Law was firstly proposed by the Government on 17 December 2019, ratified by the Government together with Parliament on 5 October 2020, and finally enacted on 2 November 2020.4
Status of Implementing Regulations to the Job Creation Law
The validity of implementing regulations to a Law would in no way be directly impacted by judicial review decisions issued by the Constitutional Court relating to the underlying Law. To declare an implementing regulation (e.g. government regulation, president regulation, ministerial regulation, etc.) as legally invalid, such determination must be made by the Supreme Court through a judicial review application made against such implementing regulation.5
Prior to the issuance of the Court Ruling, the Government had issued 51 Government Regulations as well as other Ministerial and Departmental regulations and decrees that served to implement the provisions introduced under the Job Creation Law. These implementing regulations should continue to be valid during the two-year grace period and beyond regardless of the validity of the Job Creation Law so long as the prevailing laws at the time do not contradict the provisions of these implementing regulations6 and that no new implementing regulations are issued to replace these current implementing regulations.
As an example, even though Law No. 7 of 2004 on Water Resources (“Water Resources Law”) was annulled by the Constitutional Court7 through its ruling on 18 February 2015, the implementing regulations issued by the Government prior to the Court ruling that serve to implement the Water Resources Law (e.g. Government Regulation No. 15 of 2005 on Development of Drinking Water Supply Systems, Government Regulation No. 20 of 2006 on Irrigation as well as five other implementing regulations issued by the Government) continue to be valid and binding until today.
Status of Business Licences in light of the Court Ruling
Regarding to certainty of investment after the issuance of the Court Ruling, it is comforting to see that the President of the Republic of Indonesia issued a statement on 29 November 2021 that he was optimistic and expressed the Government’s commitment to comply with the Court Ruling and carry out the necessary remedial actions. This demonstrates the Government’s intention to safeguard the trust that it has established with both domestic and foreign investors concerning the future of Indonesia’s investment.
Specifically in relation to licences, the President in his November statement also confirmed that existing licences issued before the Court Ruling as well as application for new licences submitted after the Court Ruling (both under the risk-based licencing regime introduced by the Job Creation Law) would continue to be honoured and administered by the Government.8 However, considering that after the issuance of the Court Ruling, the Government is not able to issue further implementing regulations related to businesses and/or operational licencing in the various sectors due to the express terms of the Court Ruling, we anticipate that in practice, lack of certainty is unavoidable. The lack of implementing regulations required to bring certainty to investments in the different sectors in Indonesia may be the biggest challenge during the next two years. Such uncertainties will most probably need to be addressed by investors working closely with Government agencies to understand how they are able to operate their businesses within the existing regulatory framework, without running afoul of the regulations considering uncertainties that arise.
If, within the two year grace period, the Government and Parliament are able to complete the remedial actions required by the Court Ruling, this would be well and good and would result in less uncertainties surrounding licences held by investors that were issued under the risk-based licensing regime introduced under the Job Creation Law. If however the Government and Parliament are not able to commence or complete remedial actions within the timeline required under the Court Ruling and the Job Creation Law becomes void, this would create some uncertainties on the status of licences issued under the risk-based licensing regime, however, because the risk-based licencing regime regulated under Government Regulation Number 5 of 2021 on Implementation of Risk-Based Licensing would not expressly contradict laws that would be reinstated as a result of the unconstitutionality of the Job Creation Law, we anticipate that the Government at the time will issue policies confirming that they will continue to honour and administer licences under the risk-based licensing regime.
Article 22A of Indonesian Constitution.
Article 64 paragraph (2) of Legislation Procedures Law: provisions regarding the techniques of drafting legislation as referred to in paragraph (1) is listed in Appendix II which is an inseparable part of this Law.
Article 5 of the Legislation Procedures Law.
The timeline for the law making of the job creation bill can be accessed here.
Article 31 of Law Number 5 of 2004 on the Amendment to Law Number 14 of 1985 on the Supreme Court.
Implementing the principle of lex superior derogat legi inferiori.
Law No. 7 of 2004 was annulled by the Constitutional Court under its Ruling Number. 85/PUU-XI/2013.
The official press release can be accessed here
For any particular question regarding the matters highlighted in this update or the status of your business licence, please do not hesitate to contact us.
 | AVINASH PANJABI Partner PSHP Law t + 62 5229705 - 06 m +65 9179 3819 e avinash.panjabi@pshp.law |
 | MERY ENJELICA Mid-Associate PSHP Law t + 62 5229705 - 06 e mery.enjelica@pshp.law |
 | GITA SENIA Associate PSHP Law t + 62 5229705 - 06 e gita.senia@pshp.law |
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.
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