1

4

Source: International Contractors Association of Korea

Unit: USD

2015

Same

Period

2016

Same

PeriodIncrease/

Decrease

Contract

Amount13.3 Bn 9.1Bn -32%

No. of Contracts 147 161 10%

Countries 73 71 -3%

Newly Entering

Companies12 18 50%

Unit: USD

Asia3.3 Bn

Middle East

3.1 Bn

Central/South

America1.3 Bn

Pacific/ North

America1.1 Bn

Else-where0.3 Bn

Total

9.1Bn

5

Asia

12.7

Bn

Middle

East10.7

Bn

Africa

1.2 Bn

Central

/South

America1.6 Bn

North

America/

Pacific

1.4 Bn

Europe0.5 Bn

Turkey

18 Bn

• Construction and

Operation of Thermal

Power Plants

Malaysia/

Singapore

12 Bn

• Construction and

Operation of High

Speed Railway

Vietnam

2.2 Bn• City Subway

Construction

Indonesia

1.6 Bn

• Extension of Airport

Terminal

• Construction of Light

Rail Transit

• Construction and

Operation of Subway

6

Japan, 72

China, 65Korea, 49

US, 7

Singapore, 7

Netherlands, 6

Malaysia, 6

Others, 35

Foreign Construction Companies Entering Indonesia

Total

247Companies

Source: Construction Business Registry Bureau of Indonesia

7

Scale of Indonesia Construction Market

Source: International Contractors Association of Korea Source: International Contractors Association of Korea

Amount of Indonesian Contracts Awarded to Korean Construction Companies

Unit: USD 100 Million, ( ):Percentage of Construction Market to GDP Unit: USD, ( ): Number of Contracts Awarded

2013

759 million

(34)

2014

999 million

(35)

2015

1.5 billion

(32)

2016

130 million

(20)

2

9

(1) Foreign investment-related laws

10

(2) Key Points of Indonesia’s Investment-related Laws

– Classification of Investment and General Matters of Investment

11

(2) Key Points of Indonesia’s Investment-related Laws – Foreign Investment

12

(2) Key Points of Indonesia’s Investment-related Laws

– Negative List

(1) Construction & Infrastructure

(2) Plant & Electric Power Industry

3

16

17

• Check the relevant licenses at the time of execution of a contract.

• Time, cost and documents to obtain licenses should be confirmed in advance.

In Indonesia, a license (grade) for construction business from the Ministry of Public Works

should be obtained for a foreign construction company to win contracts and operate business within

the country.

The construction license is divided into seven grades (Grade 1 – Grade 7) and should be issued to the

National Construction Services Development Board (LPJK). In practice, Grade 7 (similar to

comprehensive construction license in Korea) is the most advantageous license.

[PROCESS of ACQURING LICENSE]

Qualify as a corporation Join GAPENSI Obtain membership of construction association Obtain

license (grade) from LPJK Register license Acquire approval for construction business from local

government Obtain permanent business license from BKPM

18

FIDIC 2.2 Permits, Licenses or Approvals

The Employer shall provide, at the request of the Contractor, such reasonable assistance as to allow

the Contractor to obtain properly:

any permits, licenses or approvals required by the Laws of the Country:

(i) which the Contractor is required to obtain

(ii) for the delivery of Goods, including clearance through customs, and

(iii) for the export of Contractor’s Equipment when it is removed from the Site.

Construction permit of Indonesia

Approval of Block Plan Submission of Building Permit Application and design drawings to the

competent administrative agency (normally takes 3 months) Approval of commencement of

construction Performance of the works Occupancy Permit

• This clause impose a liability of assistance on the employer.

• By this clause, the contractor may make defense in the case of delay in obtaining license

(i.e. claim that the employer has failed to provide information and assistance to obtain

licenses, claim for extension of period of the works and increase in the cost).

19

• In general, the contractor shall bear the burden of license and tax risk at the time of bidding or

execution of a contract. According to the FIDIC, the Contractor shall pay all taxes, duties and

fees required to be paid by him under the Contract.

• It is necessary to negotiate to restrict the scope of licenses and tax burdens.

• Licenses to be obtained by the contractor should be specific to limit the license risk.

• To avoid license risk, “Change in law” should be included in the Claim clause. By doing this,

the risk may be transferred to the employer if a license-related change occurs after execution

of a contract.

• As to tax burden, the portion to be paid by the contractor and how to deal with individual

contingent taxes should be clarified through discussions with the employer.

20

(1) Governing Law

• Even in case where FIDIC standard conditions are used, a review by a local legal expert

on the local mandatory provisions of the country where the works are conducted is needed

since such provisions may be applied

• So, it is desirable to be assisted by Korean lawyer and Indonesia lawyer together from the initial

stage of investment.

21

(2) Performance Security and Delay Damages

• When can the employer claim the performance security?

In general, violation of the contract and failure to remedy a default within 42 days

• Damage for delay can be applied.

In claiming for delay damages due to a delay in completion of construction, the employer

may want to offset the damages against the completed amount to be paid.

If such offset is to be made, the employer should make claim notice to the contractor

under Article 2.5 of FIDIC (Employer’s Claim).

22

(3) Language

• If no language is specified on contract, the official language of the place of the project will be

used therefor, which may result in additional time or cost. Therefore, the English language

should be expressly included as the language of the contract.

(4) Employment of and Execution of Subcontracts with Subcontractors

• It is notable that some contracts may oblige the contractor bear all liabilities for

subcontractors designated by the employer or grant excessive authority to the employer in

relation to appointment and replacement of subcontractors.

• So, it is advisable to negotiate in order to restrict the contractor’s liability such as “only if

solely attributable to the contractor”

23

(5) Claims – Contractor’s Claim

• Article 20.1 of FIDIC expressly states that the contractor’s claim ceases to exist in case of

failure to comply with the 28 days of notification period. However, this issue is fiercely

challenged by each dispute.

• It should be noted that, in some cases, the employer is indemnified on the ground of the

contractor’s non-compliance with the claim notification period under the contract.

• In short, the contractor under FIDIC contract should make a timely claim notification and

actively deal with claims, if any, by utilizing engineers or appropriate legal experts on the DAB

stage, in order to respond to a dispute.

24

(6) Payment Schedule

• Time and condition of payment of the completed amount, changes in the circumstance

since the execution of the contract and the method of compensation for increase in cost for

predictable reasons should clearly be addressed in the contract.

• Large-scale construction projects usually make payment in installments. In such cases, the

time of payment should be specified as clearly as possible because, if the time of payment of

construction price is not specified, it would be difficult for the contractor to take out a loan from a

financial institution.

• For example, the payment condition such as “the first payment can be paid in 2017 budget year”

is too vague for the contractor to borrow the loan from the bank

• Further, it should be expressly stated that the construction price should be paid if the contractor

carries out the works in accordance with the terms and conditions of the contract.

25

(7) Project Schedule – Meaning of the Time for Completion

• Before participating the construction project, the following things should be considered.

Whether the project schedule or the time for completion is practically achievable

Whether the contract accurately reflects the reasons that may cause delay and holds

harmless the contractor.

Time for Commencement and Completion

The Time for Completion of the whole of the Facilities shall be: [24] months, from the Effective

Date as described in the Contract.

26

(7) Project Schedule –Impact of Delay in Time for Completion

Liquidation damage / Termination

• If the Contractor fails to attain Completion, the Contractor shall pay to the Employer

liquidated damages.

• Once the “Maximum” is reached, the Employer may consider termination of the

Contract.

Applicable rate for liquidated damages: [*]% of the Contract Price per week delay

Maximum deduction for liquidated damages: [5]% of the Contract Price.

No bonus will be given for earlier Completion of the Facilities or part thereof.

27

(8) Extension of Time for Completion : negotiable point for the contractor

The Time(s) for completion shall be extended :

(a) any Change in the Facilities

(b) any occurrence of Force Majeure, unforeseen conditions

(c) any suspension order given by the Employer

(d) any changes in laws [in some case, employer does not allow this exception]

(e) any default or breach of the contract by the Employer, or the Project Manager, or any

other contractors employed by the Employer or

(f) any delay on the part of a sub-contractor

• Unforeseen condition: “Unforeseeable” means not reasonably foreseeable by an

experienced contractor by the date for submission of the Tender. It is not easy to succeed by

arguing “unforeseen physical condition”.

• An experienced contractor should make his own assessment. So, do not just rely on

employer’s information. If possible, ask employer to warrant the physical information of the

site, history, contamination and environment.

28

(9) Force Majeure

FIDIC 19.1 Definition of Force Majeure

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed

below:

(i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

(ii) rebellion, terrorism, sabotage by persons other than the Contractor’s Personnel, revolution,

insurrection, military or usurped power, or civil war,

(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel,

(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as

may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and

(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

• It is notable that the scope of indemnity for the contractor is determined by the reasons for

events of force majeure.

• It is advisable to broaden the definition of “Force Majeure” for the interest of the Contractor:

import restriction, port congestion, lack of usual means of public transportation and

communication, industrial dispute, shipwreck, shortage or restriction of power supply, shortage

of labor, materials or utilities

29

(9) Force Majeure

• It should be noted that notice of force majeure is also subject to the notification period of 28 days

since Article 20.1 of FIDIC concerning claims is applicable to extension of time for completion or

payment of additional cost under Article 19.3.

FIDIC 19.5 Force Majeure Affecting Subcontractor

If any Subcontractor is entitled under any contract or agreement relating to the Works to relief from

force majeure on terms additional to or broader than those specified in this Clause, such additional or

broader force majeure events or circumstances shall not excuse the Contractor’s non-performance

or entitle him to relief under this Clause.

• In case where the contractor uses a sub-contractor, it is desirable to make the force majeure

clause of such sub-contract match the clause of contractor’s contract, if possible.

30

(10) How to set up the relations with Joint Contractors/Sub-contractors:

• Type 1: The Contractor should cooperation with others (contractor’s liability is broad) → It is

risky for the contractor

• Type 2: The Contractor should cooperates with others to the extent not requiring

additional construction period and costs (contractor’s liability is limited) → It is desirable for

the contractor

31

(11) Defect Liability

• The employer is entitled to terminate the contract if a substantial defect exists. It is

different from Korean civil law (In Korea, it is difficult to terminate the contract on the ground of

defect of the construction structure).

• It should be reviewed to what extent the termination right will be accepted with respect to

defects (a negotiation is needed to adopt provisions to protect the contractor, e.g. limitation

of application to material defects, etc.).

FIDIC 11.4 Failure to Remedy Defects

If the defect or damage deprives the Employer of substantially the whole benefit of the Works or any

major part of the Works, terminate the Contract as a whole, or in respect of such major part which

cannot be put to the intended use.

4

33

Action Details GroundsAlternative and Relevant Insurance

Coverage

Non-Approval

of Completion

Where the contractor completed the

construction without any defect and

applied for the approval of completion,

but the employer does not give an

approval (even after quite a long time has

passed).

The employer does

not give an approval

without any justifiable

reason.

Consider such act as deprivation of rights

and infringement on property rights

(Expropriatory Act)

• Securing with PRI

Where the construction has been

completed, but the approval has not been

given.

Approval will be given

upon the remedy of

defect in performance.

Procuring funds for remedy of defect

• Project PI Insurance

Where the construction has been

completed, but the approval has not been

given because there is defect in

performance.

There is a serious

defect to the extent that

the completion of

construction cannot be

expected.

Compensation for Damages – Securing with

Project PI

(Remaining facilities are to be disposed by sale

as the contractor has the ownership of them)

Force Majeure

Where construction has been halted due

to a force majeure event during

construction. There is no problem for

completion if the

relevant event/accident

is restored.

Procuring funds for restore losses

• Construction All Risks Insurance(EAR

and/or ALOP)Accident During

Construction

Where construction has been halted due

to an accident during construction.

Discontinuation

of Construction

Where it is impossible to continue

construction work.

Lack of capabilities,

failure to manage the

construction site

Liability for expenses of restoration or damages

• Securing with Project PI

The contractor

unilaterally halted

construction. Disposal of assets

Bankruptcy, insolvency

34

• An insurance to cover political risks. PRI covers such risks as war, rebellion, expropriation,

confiscation as well as restriction of remittance (by the declaration of moratorium, etc.).

• It covers damage inflicted on the employer or a third party where the construction object fails to

perform as expected due to the poor construction supervision by the insured of the

construction design or the defects in construction.

• Generally, the employer requires the contractor to provide guarantee to perform contracts

regarding construction.

• If the credit rating of the local insurer is lower than required, they choose to provide the back

guarantee through a re-insurer with a higher credit rating.

35

• Third Party Liability Insurance

• It provides guarantee for Advance Loss of Profit Insurance (ALOP) or Delay in Start-up

Insurance (DSU).

• It covers risks for cases where any damage is inflicted on the cargo during the ordinary course

of maritime/land/air transportation.

5

37

• The Korean Party generally wants to designate the Korean law and the Korean court as the

governing law and the jurisdiction for litigation.

• However, even if a ruling is rendered by a Korean court, there is no provision on the execution

of a ruling by a foreign court under the Civil Procedures Act of Indonesia

• Therefore, it is difficult to directly execute the ruling of a Korean court in Indonesia.

38

• A State Party to the United Nations Convention on the Recognition and Enforcement of Foreign

Arbitral Awards ( “New York Convention”) may execute an arbitral award in the territory of the

other State Party if the arbitral award has been rendered in the other State Party.

• Korea acceded the New York Convention on Feb. 8, 1973, and Indonesia in 1981.

• If certain requirements have been met, e.g. where the two parties to contract have agreed on

arbitration, where a duly authorized representative has signed on the agreement if a party is a

company, where the fair opportunity to participate in the arbitration proceeding has been

provided to the parties via public announcements or delivery of notices, etc., the execution of

an arbitral award is possible.

39

Claims

(Employer

/ Contractor)

Obtaining

Dispute

Board’s

Decision

Amicable

SettlementArbitration

40

FIDIC 20.1 Contractor’s Claims

If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or

any additional payment, under any Clause of these Conditions or otherwise in connection with the

Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance

giving rise to the claim.

(1) Contractor’s Claims

41

FIDIC 20.4 Obtaining Dispute Board’s Decision

If a dispute (of any kind whatsoever) arises between the Parties, either Party may refer the dispute in

writing to the DB for its decision, If either Party is dissatisfied with the DB’s decision, then either

Party may give a Notice of Dissatisfaction to the other Party indicating its dissatisfaction and intention to

commence arbitration.

(2) Dispute Board’s Decision

42

FIDIC 20. 5 Amicable Settlement

Where a Notice of Dissatisfaction has been given, both Parties shall attempt to settle the dispute

amicably before the commencement of arbitration.

(3) Amicable settlement

(4)Arbitration

FIDIC 20.6 Arbitration

Any dispute between the Parties arising out of or in connection with the Contract not settled

amicably in accordance with Sub-Clause 20.5 above and in respect of which the DB’s decision (if

any) has not become final and binding shall be finally settled by arbitration.

Youngwoo ParkPartner

T : +82 2 6003 7557

E : ywpark@hwawoo.com