Franchise lawi Legislation
The Indonesian regulatory framework on franchising comprises the following regulations:
- Government Regulation No. 42 of 2007 concerning Franchising;
- Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 on the Implementation of Franchises as amended by Minister of Trade Regulation No. 57/M-DAG/PER/9/2014 concerning Amendment to Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 on the Implementation of Franchises;
- Minister of Trade Regulation No. 68/M-DAG/PER/10/2012 concerning Franchising for Modern Store;
- Minister of Trade Regulation No. 60/M-DAG/PER/9/2013 concerning Obligations on the Use of a Franchise Logo;
- Minister of Trade Regulation No. 58/M-DAG/PER/9/2014 concerning Partnership Development in Franchising for Food and Beverage Services; and
- Decision of the Director General of Domestic Trade No. 16/PDN/KEP/3/2014 concerning Technical Guidelines for Franchise Implementation and Monitoring.
In addition to these regulations, there are also regulations concerning applicable registration procedures for franchise businesses under Ministry of Trade (MoT) Regulation No. 85 of 2016 concerning Integrated Trade Services (MoT 85/2016) and Ministry of Trade Regulation No. 86 of 2016 concerning Online Licensing Services Provisions and Digital Signature (MoT 86/2016).
The Indonesian franchising regulations set out the main criteria for a business concept to be considered a franchise arrangement. Those criteria are as follows:
- The franchise has certain business characteristics that could differentiate it from other similar businesses.
- The franchise has been proven to be profitable.
- The franchisor has a written standard operating procedure relating to the goods or services involved in the franchise business.
- The method for carrying on the business is easy to teach and apply.
- The franchisor is in a position to provide continuous assistance to the franchisee.
- The business involves certain IP rights that have been registered or filed for registration in Indonesia.
The following requirements are also specifically provided under the current Indonesian franchise regulations:
- The franchise arrangement must take the form of a written agreement between the franchisor and the franchisee.
- The franchise agreement is governed by the laws of Indonesia.
- The franchise agreement must be in or translated into the Indonesian language by a sworn translator for registration purposes with the Ministry of Trade.
- A franchisor cannot appoint a franchisee that has a control relationship with the franchisor, either directly or indirectly.
- The franchisor is obliged to provide development assistance to the franchisee in the form of training and assistance in management, marketing and research and development.
- Prior to signing the franchise agreement, a franchisor must provide a contractual disclosure document called a 'franchise offering prospectus' to the proposed franchisee at least two weeks before the signing of the agreement.
- Once executed, the franchise agreement must be registered by the franchisee with the Ministry of Trade.
- Both franchisor and franchisee are obliged to use raw materials, industrial or business equipment and to sell traded goods of which at least 80 per cent must be local products or services. An exemption may be granted by the Minister of Trade in relation to the 80 per cent requirement upon a separate written formal application and by virtue of a recommendation rendered by an assessment team established by the Minister of Trade.
- Both franchisor and franchisee may only carry out franchise activities as covered under their business permits or licences. They may sell supporting goods related to their main business, but this is limited to a maximum of 10 per cent of the total amount of all goods sold.
The franchisor is also obliged by law to provide development assistance to the franchisee in the form of training and assistance in management, marketing, research and development.
Further, the Indonesian franchising regulations provide that the parties should prioritise the use of domestic goods or services to the extent that such goods or services meet the quality standards stipulated in writing by the franchisor. Cooperation with local small or medium-sized businesses or local distributors, provided that the latter satisfy the franchisor's requirements, should also be prioritised.ii Recent changes
In 2016, the MoT introduced and implemented a new online system for franchise registration. The system was launched pursuant to MoT 85/2016 and MoT 86/2016. Through this system, known as the integrated licensing information system (SIPT), franchisors or franchisees must submit all applications related to their franchise registration certificate (STPW) online, and are no longer required to submit the original documents to the MoT. However, manual applications can still be submitted where the online system is not working, or if technical difficulties are encountered.
Furthermore, with the intention of reducing waiting times and further increasing the efficiency of licence issuance procedures, the government has established an integrated licensing system, the Online Single Submission (OSS) system, which falls under the authority of the Coordinating Ministry for Economic Affairs. Upon the enactment of Government Regulation No. 24 of 2018 on Electronically Integrated Business Licensing Services (GR 24/2018), which entered into effect on 21 June 2018, any business or commercial activities registration and licensing application, including STPWs, is integrated under the OSS system. Any government institutions issuing licences must therefore enact regulations to harmonise and comply with the OSS system. However, because of the absence of implementing regulations, the MoT has yet to implement the OSS system for franchise registrations. Thus while ideally all licensing applications, including franchising-related applications, should be submitted via the OSS system, the MoT is still accepting franchise registration applications via its SIPT pending issuance of the necessary OSS implementing regulations.iii Pre-contractual disclosure
The Indonesian franchising regulations stipulate that the franchisor has an obligation to prepare and convey to the appointed franchisee the franchise offering prospectus, which will subsequently have to be registered with the MoT.
Since the implementation of the SIPT, the following requirements or stages must be completed before entering a franchise agreement:
- The franchisor must register the franchise offering prospectus with the MoT and obtain an STPW.
- Once the franchisor has obtained the STPW, it will be required to provide the franchise offering prospectus to the proposed franchisee at least two weeks before signing the franchise agreement.
- A draft franchise agreement containing the standard clauses as provided under the Indonesian franchise regulations must be prepared.
As stated above, the franchisor is required to prepare and convey to the franchisee the franchise offering prospectus, which will subsequently have to be registered with the MoT. However, there is a change of procedure for franchise registration under the new online system, the SIPT. Now the franchisor or franchisee must first sign up with the SIPT to obtain a username and a password. After obtaining these, the applicant should be able to log in to the system and start filling out the online registration form and uploading all the required documents.
The required documents are set out in the online system after the applicant logs in, and include, among others:
- the franchise offering prospectus, containing at least the information on the identity of the franchisor, the franchisor's business licence as registered in the franchisor's country of origin, a brief history of the franchisor's business (outlining information on the establishment of the business, the business activities and business development), the franchisor's organisational structure, the franchisor's financial reports for the past two years audited by a public accountant, information concerning the number of outlets owned by the franchisor, a list of the franchisor's appointed franchisees (names and addresses), and the rights and obligations of the franchisor and the franchisee;
- the master franchise agreement, owned by franchisor and containing the mandatory agreement clauses as stipulated by law (see Section IV.v);
- business registration;
- IP registration;
- ID card of the owner or the responsible person in the company;
- employment composition; and
- material composition of franchise goods.
Once all requirements have been met, the MoT will issue either an STPW, for a correct and complete submission, or a rejection containing information on the aspects of the submission that require correction. The STPW is automatically generated on the system website, where the digital signature of the authorised representative is shown.
As previously mentioned, under the Indonesian franchising regulations, the obligation to register to obtain an STPW rests on both the franchisor and the franchisee. The STPW will be valid for five years and is renewable upon written application.
Both parties should also submit an annual report to the Ministry of Trade to report on, inter alia, the development of the franchise business.v Mandatory clauses
The Indonesian franchising regulations provide that a franchise agreement must contain at least the following clauses:
- the name and address of each party;
- the type of IP involved in the franchise;
- the type of the franchise business (e.g., restaurant, services, clothing and accessories);
- the parties' rights and obligations;
- assistance, facilities, operational guidance, training and marketing that will be provided by the franchisor to the franchisee;
- the area of business;
- the period of agreement;
- the method of compensation (to the franchisor);
- the ownership, change of ownership and the rights of any successor or heir;
- dispute resolution method;
- procedures relating to expiry, extension and termination of the agreement; and
- warranties from the franchisor that it will perform its obligations in accordance with the agreement until it expires.
The franchise agreement may also contain a clause stipulating the granting of rights for the franchisee to appoint a sub-franchisee in Indonesia, in which case the main franchisee must own and operate at least one franchise branch.
Foreign franchisors should bear in mind that it is compulsory to use Indonesian law as the governing law of the franchise agreement and it is important to adhere to the legal formalities in respect of the agreement.vi Guarantees and protection
As to these particular elements, the Indonesian franchise regulations do not yet deal specifically with guarantees and protection. Note should be taken that the general principle of agreement under the Indonesian Civil Code provides a freedom to contract in construing or entering into an agreement. Under this principle, as long as the requirements of a valid contract are satisfied, the parties are free to determine the terms of their contract, including any additional clauses on guarantees and protection as agreed by the parties. This freedom is limited by statute, good morals and customs.