Settlement Agreements: Key Consideration and Best Practices from Indonesian Law perspective
Authors
Overview
Settlement agreements (perjanjian perdamaian) play a significant role in dispute resolution by offering a practical alternative to litigation, enabling parties to achieve mutually acceptable outcomes, reduce time and legal costs, preserve relationships, and provide legal certainty, while also alleviating the courts’ workload. Under Indonesian law, particularly the Indonesian Civil Code, settlement agreements are expressly recognized and, when properly structured and executed in accordance with applicable substantive and procedural requirements, have binding legal force equivalent to a final and binding court judgment, effectively terminating existing or potential disputes.
This ARMA Litigation Series Update outlines the key legal principles governing settlement agreements in Indonesia and highlights essential considerations and best practices in drafting and implementing such agreements. The discussion is intended to provide practical guidance for parties and practitioners seeking to ensure that settlement agreements are legally enforceable, comprehensive, and aligned with Indonesian legal standards.
1. Legal Basis
- Indonesian Civil Law
Indonesian civil law expressly regulates and recognises settlement agreements. Article 1851 of the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata or “ICC”) defines a settlement as an agreement whereby the parties, through mutual concessions, resolve an existing dispute or prevent a future dispute, underscoring its consensual nature as an alternative to formal adjudication. Further, Article 1858 of the ICC accords a settlement agreement binding force equivalent to a final and legally binding court judgment (putusan yang berkekuatan hukum tetap), a principle reinforced by Article 1338 of the ICC on pacta sunt servanda, which provides that lawfully made agreements bind the parties as law. Collectively, these provisions confirm that a validly executed settlement agreement gives rise to final, binding, and enforceable obligations under Indonesian law.
Pursuant to Article 130 of the Herzien Inlandsch Reglement (“HIR”), judges are required to first encourage settlement when parties appear before the court, and any amicable settlement reached must be formalized in a deed of settlement (akta perdamaian) binding the parties to its terms, a requirement further reinforced by Supreme Court Regulation No. 1 of 2016 on Court-Annexed Mediation, which mandates that settlements achieved through judicial mediation be reduced into a written agreement and confirmed by the panel of judges as an acta van dading. As clarified in the elucidation of Article 130 HIR, such deed of settlement has the same legal force and enforceability as a final and binding court judgment, is enforceable in the same manner, and is not subject to appeal or cassation, thereby ensuring that court-confirmed settlement agreements provide a high degree of legal certainty, finality, and enforceability equivalent to judicial resolution, while simultaneously preserving the consensual nature of dispute resolution.
In summary, Indonesian law places settlement agreements on equal footing with final court judgments, both in substance and enforceability. Whether concluded privately under the Indonesian Civil Code or confirmed by the court in the form of an akta perdamaian or acta van dading, a valid settlement agreement creates final, binding, and enforceable obligations, is not subject to appeal or cassation, and may be executed in the same manner as a judicial decision. Given these legal consequences, settlement agreements must be carefully and robustly drafted to accurately reflect the parties’ true intentions, the scope of disputes being resolved, and the rights and obligations of each party, so as to ensure legal certainty, prevent future disputes, and fully realize the intended benefits of settlement under Indonesian law.
- Indonesian Criminal Code
Under a criminal law perspective, settlement agreements generally do not extinguish criminal liability unless expressly permitted by law. Criminal offences are prosecuted in the public interest, and private settlements cannot override mandatory criminal enforcement; at most, a settlement may be considered as a mitigating factor, but not as a defence. Accordingly, any settlement agreement must clearly distinguish between the resolution of civil claims and potential criminal exposure.
Limited exceptions are recognised through the mechanism of restorative justice, as regulated under Article 79 of Law No. 20 of 2025 on the Indonesian Criminal Procedure Code (Kitab Undang-Undang Hukum Acara Pidana or “ICPC”). Unlike civil settlements, restorative justice in criminal matters is subject to strict statutory requirements under Article 80 paragraph (1), namely: (i) the offence is punishable only by a fine of up to Category III or by imprisonment of no more than five (5) years; (ii) the offence is a first-time offence; and/or (iii) the offence does not constitute recidivism, except for offences punishable by fines or those committed by negligence.
The objective of restorative justice is solely to restore the parties to their original condition, which may be achieved through compensation for losses, payment of medical or psychological expenses, repair of damage, return of property, or forgiveness by the victim and/or the victim’s family. Restorative justice may be pursued from the investigation stage up to court proceedings and may be initiated by the offender, suspect, defendant, victim, or their families, or upon the proposal of law enforcement officials. Nevertheless, this mechanism is expressly excluded for certain serious crimes, including but not limited to offences against state security, terrorism, corruption, and crimes resulting in loss of life, as stipulated under Article 82 of the ICPC.
In addition to restorative justice–based settlements in criminal cases, the ICPC also recognizes other consensual resolution mechanisms, namely plea bargaining and the Deferred Prosecution Agreement (“DPA”), both of which are expressly regulated under the ICPC. Plea bargaining, as stipulated in Article 79 of the ICPC, allows a defendant who voluntarily admits guilt and cooperates with law enforcement authorities to obtain sentencing mitigation, provided that the statutory requirements are satisfied. Upon such admission, a plea agreement is entered into and submitted to the court; if approved by the panel of judges, the case proceeds under a summary examination procedure, thereby promoting procedural efficiency while maintaining judicial oversight.
By contrast, the DPA mechanism under Article 328 of the ICPC applies exclusively to corporate criminal liability and is not available to individual defendants. A DPA operates as an agreement between the public prosecutor and the corporate offender to suspend prosecution, focusing on legal compliance, remediation of harm, and efficiency in criminal enforcement. The conditions of a DPA may include payment of compensation or restitution, implementation of corporate compliance or anti-corruption programs, mandatory reporting and cooperation with law enforcement authorities, and other corrective measures deemed necessary by the prosecutor. As such, DPAs represent a compliance-oriented approach to corporate crime, emphasizing remediation and prevention rather than purely punitive outcomes.
- Indonesian Civil Law
-
2. Clarity of Scope and Object of Settlement
Pursuant to Article 1851 of the ICC, a settlement agreement must clearly and precisely define its scope and object. This includes an explicit description of the dispute or legal relationship being resolved, the parties involved, and the rights and obligations subject to settlement. Clear identification of these elements is essential to demonstrate that the settlement reflects a genuine mutual concession intended to terminate or prevent a legal dispute.
The agreement should expressly state whether it covers only existing claims or also extends to potential future claims arising from the same facts or legal relationship, and whether it replaces, amends, or extinguishes any prior agreements, claims, or ongoing legal proceedings. Ambiguity in these matters may undermine the intended finality and binding effect of the settlement and could expose the parties to renewed disputes or challenges to its enforceability.
Additionally, in the criminal context, settlement agreements are typically accompanied by a settlement deed or agreement on case resolution, which must be signed by the Suspect, the Victim, and the relevant authority (i.e., the Investigator, Investigator, or Public Prosecutor), in accordance with the stage of the proceedings.
3. Release and Waiver Provisions
Under Indonesian contract law, best practice requires that release and waiver provisions be drafted with clear and unequivocal language. This includes clearly defining the scope of the release (pembebasan tuntutan), identifying the parties being released (which may include affiliates, directors, officers, and shareholders), and expressly stating the parties’ intention to waive certain rights, subject always to mandatory provisions of law. It should be noted, however, that waivers cannot validly exclude or limit claims arising from fraud, bad faith, or unlawful acts (perbuatan melawan hukum) where considerations of public policy are engaged.
In the criminal law context, the effectiveness of release and waiver provisions may involve a degree of practical risk. In practice, if restorative justice (RJ) has already been pursued and a waiver has been granted, but the offender subsequently defaults or fails to fully perform the settlement obligations, there is a concern that law enforcement authorities may be reluctant to revive or further pursue the case, as it may be perceived as having been previously resolved through settlement.
Nevertheless, in many RJ cases, the termination or withdrawal of the criminal process is only carried out after the agreed compensation or restitution has been fully paid and all settlement obligations have been completely fulfilled. Accordingly, as a matter of best practice, even where waiver provisions are included, it is critical to ensure that the offender has fully complied with the settlement agreement before any formal withdrawal or termination of the criminal proceedings is affected.
-
4. Consideration and Mutual Concessions
Article 1851 of the ICC requires that a settlement agreement be supported by mutual concessions between the parties. These may take the form of monetary payment, restructuring of payment obligations, withdrawal of claims or legal proceedings, and/or the performance of specific agreed obligations, reflecting a reciprocal compromise intended to finally resolve the dispute.
As an additional note, in the criminal context, settlement agreements are typically accompanied by an agreement on compensation or restitution in any agreed form, upon which the parties consent to the termination of the criminal process, whether through the issuance of an SP2Lid, SP3, or a Decree on the Termination of Prosecution, depending on the procedural stage at which restorative justice is applied. Furthermore, such criminal settlements are formalized through a settlement deed or agreement on case resolution, which must be signed by the Suspect, the Victim, and the relevant authority (i.e., the Investigator, Investigator, or Public Prosecutor), in accordance with the stage of the proceedings.
Conclusion
Settlement agreements under Indonesian law constitute a powerful and legally binding mechanism for resolving disputes efficiently and with finality, provided they are carefully structured in accordance with statutory requirements and public policy considerations. By clearly defining the scope of settlement, ensuring valid consideration through mutual concessions, and thoughtfully addressing release and waiver provisions, while respecting mandatory legal limitations, particularly in the criminal law context, parties can achieve legal certainty, mitigate risks, and avoid future disputes. When properly drafted and implemented, settlement agreements not only serve as an effective alternative to prolonged litigation but also promote stability, enforceability, and fairness within Indonesia’s legal framework.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
Related Updates
Latest Updates
