Franchising in Indonesia: overview
A Q&A guide to franchising in Indonesia.
The Q&A provides an overview of the main practical issues concerning franchising, including current market activity; regulation of franchising; contractual issues relating to franchising agreements (including pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination, and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.
This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.
There have been no major legal developments in the franchising market in the last year. However, the recent developments over the past 12 months reveal that many franchisees (in particular, retail stores), have tried to circumvent the franchise registration requirements in a number of different ways, such as to state that the arrangement is a licence or a distribution/sales arrangement.
Provisions related to direct franchising, multi-unit franchises, master franchise agreements or development agreements are not clearly defined. The most commonly-used method of local franchising is direct franchising in the form of single-unit franchises or multi-unit franchises.
Local laws and commercial issues do not generally influence the franchise method. However, they do often determine whether a franchise arrangement is entered into in the first place.
Master franchising, area development and direct franchising in the form of single-unit franchises or multi-unit franchises are by far the most commonly used methods for the international expansion of a franchise system into Indonesia.
See, Local franchising.
The issues that limit or promote the use of franchising as a technique for the international expansion of a domestic brand outside Indonesia include:
How well established the domestic brand is in Indonesia.
The domestic brand's financial condition.
Whether a thorough research on the development of the franchise business in the target country has been carried out.
The economic and cultural situation in the target country.
The political relationship between the target country and Indonesia.
The legal and technical requirements that must be complied with.
Franchisors cannot appoint franchisees with which they have a direct or indirect control relationship (such as shareholders and subsidiaries/affiliates). Therefore, an overseas franchisor must appoint a separate entity, which does not have any direct or indirect control relationship with the overseas franchisor, to be its independent local franchisee.
Regulation of franchising
Franchising is regulated under the following regulations:
Government Regulation No. 42 of 2007 of 23 July 2007 on Franchising.
Decree of the Director General of Domestic Trade No. 138/PDN/KEP/10/2008 of 31 October 2008 on the Technical Guidelines for the Implementation of Franchising.
Regulation of the Business Competition Supervisory Commission No. 6 of 2009 of 7 December 2009 on the Guidelines on Exclusions from the Implementation of Law No. 5 of 1999 on the Prohibition of Monopolies and Unfair Business Practices in Relation to Agreements Related to Franchising.
Regulation of the Minister of Trade No. 53/M-DAG/PER/8/2012 on the Implementation of Franchising as amended by Regulation of the Minister of Trade No. 57/M-DAG/PER/9/2014 of 17 September 2014.
Regulation of the Minister of Trade No. 68/M-DAG/PER/10/2012 of 29 October 2012 on Modern Store Franchising.
Regulation of the Minister of Trade No. 07/M-DAG/PER/2/2013 of 11 February 2013 on the Development of Partnerships in Franchising for Food and Beverage Services Business Activities.
Regulation of the Minister of Trade No. 60/M-DAG/PER/9/2013 of 30 September 2013 on the Obligation to Use the Franchise Logo.
Decree of the Director General of Domestic Trade No. 16/PDN/KEP/3/2014 of 7 March 2014 on the Implementation and Supervision of Franchising Technical Guidelines.
The Indonesian Civil Code also applies regarding the parties' general contractual obligations or when these obligations are not specifically covered by the franchise agreement.
There are no laws that require foreign franchise agreements to be adapted to be enforceable locally. However, as franchise agreements must be governed by Indonesian law, it is likely that foreign franchise agreements will be adapted to be consistent with Indonesian laws.
Regulation of the Minister of Trade No. 33/M-DAG/PER/8/2008 regarding Property Agents dated 21 August 2008 as amended by Regulation No. 107/M-DAG/PER/12/2015 of 8 December 2015 states that property agents must be national companies, while foreign property agents can operate in Indonesia through franchise arrangements. However, there are no specific regulations that offer incentives or unique, favourable terms to local companies that undertake franchise arrangements.
There may be other laws, which affect the offer and sale of franchises, such as import regulations, food registration and halal certification regulations, modern store regulations, regulations on advertising, consumer protection law and so on.
Before entering into a franchise agreement with an Indonesian franchisee, the franchisor should be registered with the Ministry of Trade and have obtained a franchise registration certificate (Surat Tanda Pendaftaran Waralaba) under its name. There is no requirement for the franchisor to pilot one or more outlets before franchising or to take preliminary payments from franchisees.
There is no mandatory membership of any Indonesian industry organisation or professional body for franchisors or franchisees to operate or undertake business in Indonesia.
The franchisor (or IP owner, if different) does not need to be so registered. The IP itself, such as trade marks or patents should be registered with the Directorate General to be legally protected, including an IP licence agreement. The sanctions for failure to comply with the disclosure document/franchise agreement registration requirements are the following:
Up to three written warnings will be served on a franchisor and/or franchisee who does not comply with the registration requirements.
A fine of up to IDR100 million will be imposed if the franchisor and/or franchisee fails to respond to the warnings.
An unregistered IP will not be legally protected by the Indonesian IP laws and an unregistered IP licence agreement will not bind third-parties.
At least 80% of the raw materials, business equipment and merchandise in a business must be domestically produced. In practice, this is calculated based on the total number of these items used in the business.
Franchisors must also co-operate with small-scale and medium-scale enterprises as franchisees or suppliers if they are able to satisfy the franchisor's requirements. The general consumer protection law may also benefit franchisees.
Indonesia does not have a national franchise association. However, there are several franchising and licensing associations or societies established by business players. These associations or societies do not impose any requirements that must be met before a business can sell a franchise.
The following criteria must be satisfied to create a franchise:
The business must have specific business characteristics that cannot easily be copied by other parties, for example the management system, distribution system and so on.
The franchisor must have approximately five years' experience and be aware of the appropriate business ''do's and don'ts'' for how to overcome business problems, to prove that it is a profitable business.
Written standard operating procedures and a description of the proposed goods and/or services must be available.
The business must be easy to learn and applied so that it can be operated by inexperienced franchisees.
The franchisor must be able to provide continuous support to its franchisees.
The relevant IP to be used in the business should have been registered with or applied for from the Directorate General.
The disclosure document must be registered and the franchisor must have obtained the franchise registration certificate (Surat Tanda Pendaftaran Waralaba) before signing a franchise agreement. In practice, the actual registration can take up to three months or more to complete.
Pre-contract disclosure requirements
The following minimum information must be provided in the disclosure document:
Proof of identity of the franchisor.
The legal documents of the franchise business.
The business history of the franchisor.
The organisational structure of the franchisor.
Audited balance sheets for the last two years, except for micro and small businesses.
The number of franchise businesses.
A list of the franchisees.
The rights and obligations of the franchisor and the franchisee.
Large or sophisticated franchisees or investors are treated the same, whether they are based in Indonesia or outside Indonesia. A disclosure document produced by a foreign franchisor must be legalised by a notary public in its home country. In addition, the franchisor must have a reference letter issued by the relevant trade attaché or Indonesian consulate/embassy in its home country. See Question 7, on the consequences of failing to comply with the disclosure requirements.
For local sub-franchising, an overseas franchisor or IP owner is not required to participate in the local disclosure process. However, he can provide assistance in the preparation of the local disclosure document.
An Indonesian sworn translation of a foreign language franchise agreement should be prepared. Notarisation or legalisation is not required. The franchise agreement must be governed by the laws of Indonesia. In addition, the following elements of a contract are required to establish a contractual arrangement in Indonesia (Article 1320, Indonesian Civil Code):
Mutual agreement between the parties.
Legal capacity of the parties to enter into a contract.
Definitive subject matter.
A franchise agreement is categorised as a contractual written agreement between a franchisor and a franchisee. It will of course have both IP and service elements, but it is not formally classified as either or as a hybrid agreement.
Parties' rights and obligations
Under the Indonesian Civil Code, an agreement validly entered into will be binding between contracting parties and the agreement:
Cannot be withdrawn except by a mutual agreement between the parties, or for reasons determined by law.
Must be implemented in good faith and reasonably by the parties.
Obligations of the franchisee
In addition to the contractual obligations, the franchisee and franchisor must:
Use domestically produced goods and/or services for at least 80% of its raw materials, business equipment and merchandise.
Submit an annual report on the progress of the franchise to the authority which issued the franchise registration certificate (Surat Tanda Pendaftaran Waralaba) by 31 March of each year.
The above obligations cannot be overridden by express provisions in the franchise agreement.
Obligations of the franchisor
See above, Obligations of the franchisee. In addition, the franchisor must provide a training programme to the franchisee on operational management assistance, marketing, research and sustainable development.
The above obligations cannot be overridden by express provisions in the franchise agreement.
The law is silent as to whether an overseas franchisor or its officers and directors can be liable for the failures of the local sub-franchisor. If, required, it should be agreed between the franchisor and the sub-franchisor. However, in legal proceedings, they will often be named as co-defendants.
The following provisions must be included and cannot be overridden by express provisions in a franchise agreement:
The name and address of the franchisor and the franchisee.
The types of IP rights.
The business activity offered (such as, retail, education and so on).
The rights and obligations of the franchisor and the franchisee.
The assistance, facilities, operational counseling, training and marketing that the franchisor will provide to the franchisee.
The business area.
The term of the agreement.
The procedure for paying fees or royalties.
How disputes will be settled.
The procedure for any extension, termination or discontinuation of the franchise agreement.
A warranty from the franchisor that it will continue to comply with its obligations to the franchisee under the franchise agreement until its expiry date;
The number of outlets to be managed by each franchisee.
Exclusion and entire agreement clauses are generally enforceable in Indonesia.
These clauses should be clearly defined in the franchise agreement between an overseas franchisor and a local franchisee who also acts as a local sub-franchisor. However, if a dispute concerning a default committed by the local sub-franchisor goes to court, the overseas franchisor can be named as a co-defendant. However, whether or not the co-defendant is eventually held liable will be examined and decided by the court.
Fees and payments
There is no restriction on the parties' freedom to set the fees and payments in Indonesia. However, for restrictions in relation to the resale price, see Question 36, Exemptions.
On whether interest can be charged on overdue payments, the Indonesian Civil Code states that in agreements that solely relate to the payment of money, compensation for costs, losses and interest caused merely by a delay of payment can only consist of the payment of interest as determined by the Staatsblad No. 22 of 1848 (a Dutch regulation issued before Indonesian independence). This Act determines an interest rate of 6% per annum (that is, a moratorium or default interest), which is the interest that must be paid (as a fine) because the obligor is in default. In practice, the 6% interest rate must only be used if no other rate is indicated and a higher or lower interest rate can be agreed by the parties. However, an extortionate or outrageously high interest rate is not likely to be enforceable. It is common to see interest rates (for rupiah debt) of 2% or even 3% per month.
Term of agreement and renewal
Before a franchise agreement can be renewed, certain conditions must be satisfied. For example, the franchisee must not be in breach of the franchisee agreement. A franchise renewal fee is commonly paid.
There is no right of renewal protection and no legal restriction on the fees or charges payable on any contract renewal. As the right of renewal is contractual and optional, there is no remedy available if a franchisor does not renew, assuming the required requirements have not been met.
Compensation does not need to be paid to the franchisee because the agreement has expired or been terminated. It is certainly recommendable for franchisors to insert a ''no compensation on termination'' provision in the agreement. It is also common to reserve any right to claim for compensation or damages on termination due to a breach of the agreement that leads to a termination. This would give the injured party the right to pursue a civil claim for breach of contract or for tort.
The circumstances for terminating an agreement are contractual rather than regulated by law. For example, if the franchisor has failed to remedy a default within a certain time limit or if a representation or warranty provided by the franchisor is materially false or misleading.
Apart from the freedom of contract principle, the Indonesian Civil Code also states that the terms of the agreement cannot violate ''a sense of justice''. The authors are aware of cases before Indonesian courts where liquidated damages clauses were found to be enforceable. However, there have been situations where Indonesian courts have lowered the level of liquidated damages under a contract because the original sums violated this ''sense of justice''.
The enforceability of post-term restrictive covenants cannot always be guaranteed. The underlying principle in these provisions is fairness and trying to ensure that any post-term restrictive provision is reasonable and does not restrict the local party's right to engage in a similar business. However, as there are no established rules, guidelines or case precedents as to the reasonableness of these clauses, foreign franchisors should assume that they will not be enforceable.
A payment to the franchisee can increase the chances of enforceability but it is not a legal requirement. Non-solicitation covenants will generally be more enforceable than non-competition restrictions. Non-disparagement restrictions should be enforceable.
Confidentiality covenants are generally enforceable. The franchise agreement should entitle the franchisor to certain damages or to pursue certain sanctions in the event of a violation of the confidentiality covenant. There is no limitation on the duration or geographical scope of a confidentiality covenant.
Choice of law and jurisdiction
A franchisor can ensure that the franchisee complies with the business standards, systems and requirements by providing regular and continuous supervision and assistance to the franchisee. The franchisee can also be required to establish and implement a business plan in accordance with the franchisor's standards and submit a written business development report..
There are no statutory remedies for a franchisee against a franchisor for deceptive or fraudulent selling practices. The parties can agree their own remedies under contract, subject to any statutory limitations.
In the absence of remedies under contract, the franchisee can:
Pursue general remedies in the event of breach of contract (Articles 1236, 1243 and 1267, Indonesian Civil Code (ICC)).
Pursue criminal actions (such as fraud and embezzlement) (Indonesian Criminal Code (ICC)).
Pursue losses suffered outside any contractual relationship, for example for tory under Article 1365 of the ICC.
Statutory liability for negligence is recognised in both the Indonesian Criminal Code and the ICC. The Indonesian Criminal Code separates crimes resulting from an intended action from those resulting from negligence. However, under Article 1366 of the ICC, a party can be liable for both losses caused by their actions and for losses caused by their negligence or carelessness.
Indemnity provisions are usually included in the franchise agreement. Either party can limit or, to a certain extent, exclude its liability by carving out the indemnity claim that can be brought against the other party. Parties to a franchise agreement are advised to use carefully worded indemnities, warranties and termination provisions to allocate and limit or exclude risks and claims. The enforceability of these limitations and exclusions may be subject to judicial review, principles of public policy and laws and regulations. In the absence of a contractual provision, the indemnity claims can be made under the Indonesian Civil Code (see Question 28).
To emphasise the franchisee's independence from the franchisor, it is common to make provision for an independent contractor clause. There may also be other obligations and undertakings on the part of the franchisee in this regard.
It is usually agreed in the franchise agreement that the franchisee can use the agreed IPR during the term of the agreement, to develop the know-how or upgrade the manual.
There are no limitations on the franchisor's ability to limit the use of IPRs and confidential information only for the purposes of the franchised business or to carve out express reservations from the rights granted. All relevant limitations should be stated clearly in the franchise agreement.
IP licence agreements must be registered with the Directorate General (Regulation of the Minister of Law and Human Rights No. 8 of 2016 on the Procedures and Requirements for the Registration of IP Licensing Agreements).
The registration application can be submitted by either of the following parties:
A proxy of the author.
Holder of the copyright.
An owner of the related rights.
An authorised IP consultant.
The examiners will only review for the completeness of the supporting documents. If they are deemed complete, the licensing agreement will be registered and announced on the official website of the Directorate General.
It is not strictly necessary to use a licence that is separate from the franchise agreement. However, a simple licence agreement should be sufficient.
See Question 7 for the consequences of failing to register a licence, or the franchise agreement if a separate licence is not required.
Consents from landlords should not be difficult to obtain, provided that the terms and conditions related to the transfer or sublease are made clear in the lease agreement. A draft lease agreement can primarily be reviewed by the franchisor. Many landlords will not permit novations, which will release the novating party from further obligations.
An offshore franchisor cannot acquire the franchise premises unless it has already established its own business here. Typically, the premises is either leased or owned by the local franchisee. At the end of the franchise relationship, the franchisee must vacate the leased premises or stop the franchise activities, by removing the franchisor's branding from its premises, if the premises are owned by the franchise.
Any payment (including goodwill or other payment) should be agreed between the parties. An option arrangement is possible with, for example, a power of attorney being provided by the franchisee to the franchisor to liaise directly with the landlord.
Leases and lease interests do not need to be registered in a land registry in Indonesia.
Any costs related to the leasing or subleasing of the franchisor's site must be agreed between the parties. The authors' experience in Indonesia is that if the franchisor leases its own site to the franchisee, the franchisor will usually charge a fixed rent for the use of the premises and not a percentage of the franchisee's sales. However, alternative arrangements are possible.
The Regulation of the Business Competition Supervisory Commission No. 6 of 2009 of 7 December 2009 on the Guidelines on Exclusions from the Implementation of Law No. 5 of 1999 on the Prohibition of Monopolies and Unfair Business Practices in Relation to Agreements Related to Franchising indicates areas of concern to be observed when drafting franchise agreements. In general, the following provisions are not prohibited subject to certain restrictions:
Resale price maintenance. Imposing a fixed sales price can lead to price uniformity among franchisees, and customers will have no choice. However, it is allowed to recommend a sales price to its franchisee so long as the recommendation is not binding.
Procurement of goods and/or services from the franchisor or its appointees. A franchisor cannot impose absolute requirements which require the franchisee to procure goods and/or services solely from the franchisor or its appointees.
Purchasing other goods and/or services. A franchisee should not be obligated to purchase goods and/or services which are not related to the franchise from the franchisor.
Area restrictions. The restrictions must not:
limit customer access to the franchised goods and/or services because the customers are domiciled outside the determined franchise areas; or
set up market boundaries/assign shares of the market.
Non-competition provisions. This restriction is acceptable under the Anti-monopoly Law as long as the purpose is to protect the intellectual property rights of the franchisor or to maintain the reputation of the franchise, in particular if the franchisor has transferred its know-how. The non-competition period is normally one year.
See above, Competition law.
A franchisor can contractually prevent a franchisee from:
Having its own website presence.
Promoting its business on the internet (simply advertising the brand and business).
From engaging in e-commerce (selling products or services online).
Depending on the complexity of the case, it can take between six months and one year to obtain a decision from a district court in Indonesia. The losing party can file an appeal in the relevant high court and it can take up to six months before a decision is made. The losing party can file an appeal in the Supreme Court and the final ruling can then take between one and five years.
Domestic and foreign investors are reluctant to pursue matters in the Indonesian courts. However, if interim relief is of paramount concern (for example, to protect IP rights or enforce confidentiality obligations), in matters involving Indonesian statutory rights or for claims that may not otherwise be capable of arbitration, the Indonesian court system may be the best and only viable option.
A unique feature of Law No. 30 of 1999, which governs arbitration in Indonesia (Arbitration Law) is that all awards handed down by a tribunal or an individual arbitrator within the jurisdiction of Indonesia are treated as domestic awards, regardless of the international nature of the dispute or parties. Other unusual features of the Arbitration Law are:
Only claims of a commercial nature or involving rights within the full legal authority of the disputing parties can be capable of arbitration.
The language of the proceedings is Indonesian. The arbitration is usually decided on written documents.
The involvement of district courts in the arbitral process is strictly limited to providing assistance with the appointment, withdrawal or recusal of the arbitrators, as well as the enforcement of the award. Once rendered, the award must be registered with a district court within 30 days, otherwise it will be deemed unenforceable.
A district court's decision to reject a request for the execution of a domestic award is final and binding. The only grounds for rejection are that:
there is no valid agreement to arbitrate;
the dispute is not capable of arbitration; or
the award is against decency or public order.
The grounds for requesting the annulment of a domestic award are limited to matters involving fraud or intentional concealment.
Domestic arbitral awards in Indonesia are not subject to appeal before the courts. The unusual features of the Arbitration Law increase the risk that a domestic award may not be enforced, based on formalistic or arbitrary grounds, or that an award made in excess of the tribunal's jurisdiction may not be subject to annulment by the losing party. The Arbitration Law offers no judicial assistance with the enforcement of interim measures imposed by arbitrators.
However, the costs of an administered domestic arbitration in Indonesia are quite competitive, particularly for smaller claims. Indonesia has its own arbitration body, the Indonesian National Arbitration Board (Badan Arbitrasi Nasional Indonesia (BANI)) which is often used for domestic arbitration. Disputes relating to franchise agreements will most likely be resolved in either the local courts or BANI. Mediation and other alternative dispute resolution methods are rare.
Offshore arbitration is acceptable in Indonesia under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). The most popular international forum is the Singapore International Arbitration Centre, followed by the International Chamber of Commerce and the United Nations Commission on International Trade Law.
The Arbitration Law specifically states that the courts must refuse to be involved in a dispute if the parties have chosen arbitration for the settlement of disputes. Therefore, the choice of foreign arbitration in the agreement should not be challenged by an Indonesian court.
The Central Jakarta District Court can enforce a foreign arbitration award if it is awarded by an arbitrator or a board of arbitrators in a country with which Indonesia is bound by a bilateral or multilateral agreement on the confirmation and implementation of foreign arbitration awards (such as the New York Convention). Enforcement is limited to awards related to commercial matters.
However, in practice, the actual enforcement of an international arbitration award can be a difficult process and some foreign arbitral awards have failed due to uncertainties in the Indonesian judicial system. The failure rate has been reduced in recent years.
Indonesia does not recognise foreign court decisions. To obtain an enforceable judgment in Indonesia, a new suit must be initiated, which effectively amounts to a retrial.
The procedure for the enforcement of a foreign arbitration award commences when an application for enforcement is filed in the Central Jakarta District Court. The application must be accompanied by the original or an authentic copy of the foreign arbitration award and the agreement to submit the matter to foreign arbitration, including their official Indonesian translations. After the Chairman of the Central Jakarta District Court issues the execution order, further enforcement is delegated to the Chairman of the relevant District Court who is authorised to enforce it.
Exchange control and withholding
Indonesia has limited foreign exchange controls. However, any transfer of foreign currency equivalent in value to US$10,000 or more must be reported to Bank Indonesia, the Indonesian central bank, by the facilitating bank in Indonesia. In addition, the bank must obtain a number of documents and information from its customer or the foreign party, if it wishes to purchase foreign currency against Indonesian rupiah and the total amount will exceed US$100,000 (or its equivalent in other currencies) per month per customer, including purchases of foreign currencies for derivative transactions and for payments to overseas franchisors.
Indonesian income tax is collected mainly through a system of withholding taxes. If a particular item of income is subject to withholding tax, the payer is generally held responsible for withholding or collecting the tax. Indonesian franchisees must withhold tax from payments to foreign franchisors at a basic rate of 20%. If the recipient is resident in a country that has a tax treaty with Indonesia, the withholding tax rate may be reduced or exempted.
Norma Mutalib, Senior Associate
Makarim & Taira S
Professional qualifications. LLM, University of Melbourne, 2002; Bachelor of Laws, University of Trisakti, 2000
Areas of practice. Corporate and commercial; franchising and licensing; IP; hotels and resorts and manpower.
Richard Cornwallis, Senior Foreign Legal Consultant
Makarim & Taira S
Professional qualifications. LLB, 1981; Dipl.L.P, University of Edinburgh
Areas of practice. Corporate and commercial; foreign investment; mergers and acquisitions; hotels and leisure; franchising; employment; anti-corruption and corporate governance.