Judges at the Central Jakarta Commercial Court ruled that the case against Total EP Indonesie by two contractors - Sanggar Kaltim Jaya and Istana Karang Laut - should be heard in a district court as a civil case.
Sanggar Kaltim and Istana Karang claimed that the French company had failed to pay the two contractors $7.17 million for work they did at its Tunu gas field in East Kalimantan province on Borneo island.
The claim was based on an audit of the project by the state Financial and Development Supervising Agency.
Total EP in turn filed arbitration proceedings against Sanggar Kaltim on 25 February to seek compensation of $12 million for defamation.
Total spokesperson Ananda Idris said the company was considering whether to pursue proceedings after the court ruling.
Last year, the same commercial court declared an insurance unit of British financial services giant Prudential bankrupt, citing its failure to settle a contract with a consultant.
The Supreme Court later overturned the ruling, but the original verdict had further damaged the reputation of Indonesia's erratic courts, which are seen as a major deterrent to badly needed foreign investment.
In 2002, the Supreme Court also overturned a similar bankruptcy ruling against the fully solvent local subsidiary of Canadian insurance giant Manulife Financial Corp.