The Good Faith and Its Relevant in the Banking Loan Agreement

The Good Faith Principle and Its Relevant in the Banking Loan Agreement

The principle of good faith applies throughout the entire contract agreement process.  It also includes the principles of consensus, binding power, freedom of contract, and pacta sunt servanda.  The regulation of good faith is found not only in the national legal arrangements but also in international legal instruments, especially those relating to treaties or agreements.  Provisions relating to international agreements between countries are regulated in the Vienna Convention on the Law of Treaties 1969 (VCLT 1969), that emphasizes the importance of the existence of good faith together with free consent and pacta sunt servanda in international treaties as universally recognized.  Other applications of the principle of good faith can be found in the provisions of the General Rule of Interpretation in Article 31 paragraph (1), Invalidity of Treaties in Article 46 paragraph (2), and Article 69 paragraph (2), the principle of good faith is very important in its role.  The principle of good faith derives from the civil law of contract legal system that originates from the Roman Empire time and the common law systems traditionally do not recognize this principle.  It turns out there are common law countries such as the United States (except Louisiana) who have accepted the principle of good faith in its contract legal system.  In the United States, the existence of the principle of good faith in the Uniform Commercial Code (UCC) legal instrument, which was adopted by all states.  Article 1 Section (2) Section 1201 paragraph (2) letter (t) of the UCC defines good faith as, "Good faith, except as otherwise stated in article 5, it means true honesty and the observance of reasonable commercial standards of a fair dealing."  Based on these provisions, it is basically implying on the good faith principle, except as stated otherwise in the Article 5.  It also means true adherence to fair commercial standards of a fair agreement.  The principle of good faith is reaffirmed in Article 1 Section (3) of Section 1304 UCC, namely, every contract or duty within this act, imposes an obligation of good faith in its performance and enforcement. The provision actually shows that each contract or obligation in this regulation enforces the obligation of good faith in its implementation and enforcement.  On the other hand, Britain, as other common law system countries, do not acknowledge the implementation of the universal obligations regarding to good faith and its application to the parties involved in the contracts in the British Law.  This is partly due to fears that it can create too much uncertainty, deciding what is really needed or fair is unclear and subjective.  This is contrary to the freedom of the contract, which is why interfering with a contract when the parties have the freedom to negotiate their clauses.  As a consequence, there is no definition of the principle of good faith that were applied in the English law.

In other countries, there is existence of good faith principle in the civil law systems such as in the Nederland, Belgium, Germany and Indonesia.  In Indonesian Law, the agreement is stipulated in Book III Article 1313 of the Indonesia Civil Code (ICC), an agreement is where one or more people commit to themselves to one or more people.  Good faith principles in ICC can be found in the Article 1338 paragraph (3) which governs any agreements that bind the parties shall be implemented in good faith.  However, it can be applied only in a situation where the agreement has beed fulfilled as stipulated in Article 1320 of the ICC.  This condition is different from treaty laws in the developed countries such as the Netherlands, France, and Germany where good faith principles applied at the stage of signing, executing and negotiating contracts (duty of good faith in negotiation).  Therefore, the compensation can be persued by parties who feel disadvantaged starting from the drafting of the contract. 

One of the principles that is essential in making and implementing an agreement is the principle of good faith as stipulated in Article 1338 paragraph (3) of the ICC.  Even though the existence of the principle of good faith was not stated explicitly in the Banking Law, the provisions of Banking Law especially relating to the function of banks as intermediary to the public in the form of credit, cannot be released from the review of the Agreement Law.  In fact, the credit extended by banks is based on an agreement that ultimately leads to agreement between the bank and customer.  That means the legal relationship is based on the contract law.  The understanding of good faith principles in loan agreements between bank as a creditor and consumer as a debtor is to honour the loan agreement being made based on trusts and commitments, in accordance with the terms and conditions, to carry through the Agreement successfully.  It is about moral and ethical.  It is implicitly applied in the good faith principle and it is reflected in the provisions of Articles 2 and 8 of the Banking Law governing the principles of Indonesian Banking based on the economic democracy.  It is stated that banks in carrying out their business activities shall always comply with the laws and regulations based on preventive, good faith, trust, and prudential principles.  The binding of banking financial institutions as a service provider in relation to the credit distribution and customers as debtors occurs when the Credit Agreement Deed is signed in front of a Notary.  To prevent future problem with the loans, in approving credit applications, banks based on principles of 4P’s (Personality, Purpose, Prospect, and Payment) and 5C’s formula (Character, Capacity, Capital, Collateral, and Condition of Economy).  However, there were high risks of non-performing loan (NPL) in Bali and certain areas in Indonesia, influenced by internal and external factors, due to several reasons.  For example, by internal factors such as, bad faith or unwillingness of  debtors in repaying their debt; lack of understanding of the contract agreement; some just signing the contract without reading the terms and conditions of the loan agreement beforehand.  There are also external factors such as, high credit interest rates that it is contrary to the function of banks as agent of trust, agents of development, and agents of service (Article 1 number 2 of Law Number 10 Year 1998 concerning Amendments to Law Number 7 Year 1992 concerning Banking); natural disasters such as the eruption of Mount Agung in Bali and landslide or sinkhole in Palu Sulawesi; and recently the pandemic of Covid-19 as a non-natural disaster.  Furthermore, it is also questioned, the government readiness to resolve the problems of capital adequacy in the economic sector? 

There is an increase in problems relating to the adequacy of bank capital.  This is because in obtaining a return, banking financial institutions will always be faced with credit risks.  To minimise the non-performance loan (NPL) caused by internal and external factors, the Financial Services Authority (OJK) issued a relaxation policy based on the Decision of the Board of Commissioners No. 20/KDK.03/2017 (Based on Financial Services Authority Regulation No. 45/POJK.03/2017 concerning Special Treatment of Credit or Bank Financing for certain areas in Indonesia affected by natural disasters) which has been effective for three years starting from December 29^th, 2017.  Furthermore, the government (Financial Services Authority/OJK) also issued a national economic stimulus regulation No 11/POJK.03/2020 as a Countercyclical Policy.  The aim of this regulation is to provide credit relaxation for Covid-19 affected customers, especially for Micro-Small-Medium Enterprises (MSME’s / UMKM / Usaha Mikro Kecil Menengah) such as, tourism, transportation, hospitality, trade, processing and mining.  The installment of the relief does not apply automatically as the customer or debtor needs to apply independently.  Moreover, due to the relaxation policy, both banks and customers should draw a new loan agreement whether to restructure or to reschedule the repayment.  In the new agreement the good faith principle should also be applied. 

The core values of the good faith principles actually have a close relationship with the values of local wisdom, as well as the values of the philosophy of Tri Hita Karana in the Balinese Society.  The values of goodness and harmony in life which makes the community happy.  Such values also found similarly with the values contained in the principle of good faith.  The teachings of kindness from the philosophy of Tri Hita Karana are explicitly affirmed in Article 1 number 11 of the Provincial Regulation of Bali Province No. 3 of 2001 concerning Desa Pakraman (Bali Regulation No.3 / 2001) which in essence determines Awig-Awig, which is set of rules made by the village elders of Pakraman (local communities in Bali in the area of the traditional village/banjar) with the core values guided by the Principle of Tri Hita Karana.  Whereas, the principle of good faith stated in the ICC has not been explicitly affirmed in the provisions of the banking law in Indonesia.  The existence of the principle of good faith only explicitly stated in Article 1338 Paragraph (3) of the ICC.  Meanwhile, the provisions of the Banking Law and the existence of the principle of good faith is only implied in the principle of economic democracy by using the precautionary principle that is applied prudently and in good faith, as well as the principle of trust and confidence in the ability, good faith and character of customers or the public in returning credit.  In the Financial Services Authority Law (OJK), the existence of good faith is not formulated explicitly, but reflected in the formulation of norms of good governance principles such as the fairness, responsibility, accountability and transparency.  Meanwhile, in a comparative perspective, the Civil Law System strictly regulates the existence of the principle of good faith in treaty of law.  In the common law system, traditionally does not recognize such good faith principles, it has accepted the principle of good faith in its contract legal system.  In the future, it is expected due to the relevancy of good faith principle, it should be explicitly stated in the structure and norms of the Banking Law and other related legal banking provision