The Franchise Law Review: Indonesia

Introduction

Franchise arrangement was first introduced to Indonesia in the 1950s by introducing automotive dealers through licensing structure.2 In the 1970s, the practice of licensing in the Indonesian automotive industry has transformed with the introduction of the 'licensing add-on', in which the Indonesian dealers acted not only as dealers but also as the licence holder to manufacture the automobiles.3

From 1970 to 1980, Indonesia saw significant growth of local franchises. Well-known local brands such as Es Teler 77, Homes 21, and Trims Mustika Citra started to offer franchise arrangements and aggressively entered the Indonesian franchise market.4 The introduction of the global restaurant chain McDonald's in 1991 then became the benchmark of the success of the Indonesian franchise market.5

To keep up with the rapid growth of the franchise market, in 1997, the government of Indonesia introduced Government Regulation No. 16 of 1997, the first regulation that regulates franchising. Government Regulation No. 16 of 1997 has now been replaced by Government Regulation No. 42 of 2007, which is still valid at the time of writing.

Based on the data provided by the Ministry of Trade as the regulatory body for franchise business, currently, there are 228 brands registered as a franchise, consisting of 135 foreign franchises and 93 local franchises. Most of the registered franchises (54 per cent) are food and beverages businesses.6 This number, however, may not reflect the real situation since there are many businesses (especially local brands) that are using a franchise arrangement but, for various reasons, do not register the business as a franchise to the Ministry of Trade.

As for industry associations, there are three main franchise associations in Indonesia, namely (1) the Indonesian Franchise Association (AFI); (2) the Indonesian Franchise and License Association (WALI); and (3) the Indonesian Franchise Entrepreneurs Association (APWINDO). These franchise associations significantly promote Indonesian franchises, including assisting local businesses to become franchises.

Market entry

i Restrictions

In general, there are no restrictions for foreign franchisors to enter the Indonesian market. In fact, from the 1970s, franchising has served as an alternative route for foreign companies to operate a business in Indonesia in sectors that are closed to foreign investment. However, although Indonesia is generally open to foreign franchises, several formalities must be satisfied before the foreign franchisors may offer their franchise; among others is that the business has been operational for a minimum of five years. The intellectual property relating to franchises must also have already been registered or filed to registration in Indonesia.

There are no restrictions for foreign franchisors to grant a master franchise to a local entity so long that the franchisors comply with all requirements stated in the franchise regulations. Some of the essential requirements have already been set out in Section IV.

Before the issuance of the current franchise regulation, franchisors are not allowed to own equity in the local franchisee, and this restriction is no longer exists in the current regulation. The absence of this restriction in the current regulation suggests that franchisors can now own equity in the local franchisee. Still, foreign franchisors must be aware that according to Indonesian investment law, foreign investment is allowed in a large-scale business only with an investment value at a minimum of 10 billion rupiahs (roughly equivalent to US$700,000), and shall not include the value land and buildings. In addition, franchisors also need to know whether there are restrictions or limitations relating to a maximum number of foreign shareholdings in the relevant line of business. Although currently, Indonesia makes businesses more accessible for foreign investment, there are still businesses restricted or limited to foreign investment.

Foreign companies also cannot directly own land or property in Indonesia. The usual route for foreign companies to own land or property in Indonesia is to establish an Indonesian foreign investment company, which then will be the registered owner of the property in Indonesia.

ii Foreign exchange and tax

The Indonesian Currency Law and Bank of Indonesia regulation require the use of the local currency for transactions in Indonesia, with several exemptions such as transactions relating to international financing and international trade. However, there are still uncertainties as to whether franchise transactions are exempted from the requirement of using local currency, and in practice, this matter will be assessed on a case-by-case basis by the Ministry of Trade.

Intellectual property

i Brand search

It is normal in Indonesia to engage an intellectual property firm (IP firm) to assist the franchisors in conducting mark search in Indonesia. While the information regarding registration of mark is available online on the Directorate General of Intellectual Property (DGIP) website, there might be information that has not yet been uploaded, and the IP firm usually has access to this information. Searches are usually performed not just on the mark that is being used in the franchising activities but also on similar marks that may potentially lead to infringement.

The franchisors should be made aware if certain marks violate or have the potential to violate the franchisors' mark, so the franchisor may file for opposition, cancellation or deletion.

ii Brand protection

Under Indonesian laws, the mark protection adheres the first-to-file system. Application for mark registration is filed using a specific format determined by the DGIP. All required supplemental documents as requested by the DGIP shall also be filed and attached to the application form. Upon receiving the application, the DGIP will perform a formality examination within 30 days. Once the formality examination is concluded and the application is declared complete, at the maximum of 15 working days, the DGIP will publish the application in the official gazette for two months. If there is no objection or opposition, the application will proceed to the substantive examination phase for approximately 150 days. In the substantive examination phase, the DGIP will assess whether the mark application will be approved or refused. If the mark application is approved, the mark certificate will be issued by the DGIP. The protection of the registered mark is 10 years as of the date of the submission.

Notwithstanding the above, franchisors need to be aware that the above time frame might be prolonged due to a large number of applications at the DGIP.

iii Enforcement

The enforcement of IP rights in Indonesia applies only to registered IP rights. Since IP rights infringement may be deemed a criminal act, the IP rights owner may opt for a civil or criminal route. A civil action may be initiated by submitting an infringement claim to the commercial court, while criminal route may be initiated by submitting a police report to the relevant police office.

iv Data protection, cybercrime, social media and e-commerce

Law No. 11 of 2008 concerning Electronic Information and Transaction (the EIT Law) provides that any electronic system provider must obtain consent from the data owner to use, collect or process any personal data. The data owner must be notified of the purpose of collecting the personal data, and the data cannot be processed for a purpose other than the purpose that has been notified to the data owner. The data now can be processed and kept offshore; previously the electronic system provider could only process and store the data onshore.

In general, cybercrime falls within the regulatory regime of the EIT Law and its implementation regulation. It covers several violations, among which are the distribution of illegal content, illegal interception, unauthorised computer access and breach of data protection. It is currently rare that cybercrime issues occur in the franchising sector. As to the issue of social media, franchisors and franchisees need to be aware that the use of social media (especially in the official channel) should not contain any unlawful content, such as deception or defamation, as it potentially will expose the parties involved to a significant legal risk.

E-commerce is now regulated under Government Regulation No. 80 of 2019 concerning Trade Activities through Electronic System (E-Commerce Regulation). One of the highlights of this regulation is that the foreign business entity that actively offers or performs e-commerce to consumers in Indonesia and meets specific criteria will be deemed domiciled and doing business activities in Indonesia. Such a foreign business entity is obliged to appoint a representative who resides in Indonesia.

Franchise law

i Legislation

Currently, there are two principal regulations governing franchising: Government Regulation No. 42 of 2007 concerning Franchising and Minister of Trade Regulation No. 71 of 2019 concerning the Implementation of Franchising (the 2019 Franchise Regulation).

According to the franchise regulations, a franchise is defined as a special right owned by an individual or business entity to a business system with business characteristics in the context of marketing goods or services, or both, that have been proven successful and can be utilised or used by other parties based on a franchise agreement.

The franchise regulations also stipulate that a franchise must meet specific criteria. If a business does not meet these criteria, it could not be considered or declared as a franchise. The franchise criteria are as follows:

  1. it must have specific business characteristics;
  2. it has been proven to be profitable;
  3. it has a written standard operating procedure relating to the goods or services, or both;
  4. the business methods are easy to teach and apply;
  5. the franchisor provides ongoing support to the franchisee; and
  6. the intellectual property rights relating to the franchise have already been registered or filed for registration in Indonesia.

Franchising in Indonesia must be based on a franchise agreement, which must be governed by Indonesian law. Before entering into the franchise agreement, a franchisor must first register the franchise offering prospectus to the Ministry of Trade. With regard to the registration, both franchisor and franchisee must obtain the franchise registration certificate (STPW), in which the franchisors are required to register the franchise offering prospectus, and the franchisees are required to register the franchise agreement. Franchisors are also obliged to provide continuous guidance to the franchisee. Franchises are also needed to prioritise the use of domestic goods or services and cooperate with small and medium-sized businesses, as long as they meet the terms and conditions required by the franchise.

ii Pre-contractual disclosure

Before signing a franchise agreement with the franchisee, the franchisor must provide a franchise offering prospectus to the franchisee at least 14 days before entering into the franchise agreement.

A franchise offering prospectus must at least contain the following:

  1. the identity of the franchisor;
  2. the franchisor's business licence, as registered in the country of origin;
  3. brief history of the franchisor's business activities;
  4. the organisational structure of the franchisor;
  5. audited financial statements for the past two years;
  6. a list of franchisees;
  7. a brief description of the rights and obligations of the franchisor and franchisee as stated in the franchise agreement; and
  8. information regarding intellectual property rights related to the franchised business.

The franchise offering prospectus must be officially translated into Indonesian language, and be formally registered through the online single submission system (OSS) before the franchisor signs a franchise agreement with the franchisee.

Although there is no explicit clause in the franchise regulations regulating the veracity of information included in the franchise offering prospectus, the Indonesian civil code stipulates that an agreement has no legal force and can be annulled if it is entered into due to fraud, which in Indonesian law can be broadly interpreted to include misrepresentation. If an annulment claim arises (which usually follows by a damage claim), the critical element that needs to be proven by the franchisors is the franchise offering prospectus already: (1) covers essential information that the franchisee requires to enter into a franchise agreement; and (2) contains a sufficient disclaimer.

iii Registration

Under the Indonesian franchise regulations, both franchisor and franchisee must register to obtain the STPW. The franchisor must register its prospectus, while the franchisee must register the franchise agreement. Registration must be performed via OSS (online single submission system), and once all requirements have been met, the STPW will be issued by the Ministry of Trade.

It is prohibited to operate a franchise in the absence of an STPW.

iv Mandatory clauses

Indonesian franchise regulations stipulate that a franchise agreement must at least contain the following in its clauses:

  1. the names and addresses of the parties;
  2. the types of intellectual property rights;
  3. franchised business activities;
  4. rights and obligations of the franchisor and franchisee;
  5. assistance, facilities, operational guidance, training and marketing provided by the franchisor to the franchisee;
  6. the franchise territory;
  7. the period of the franchise agreement;
  8. the procedure for payment of fees;
  9. requirements on ownership and change of ownership of the franchise business;
  10. dispute resolution;
  11. procedures for extending and terminating the franchise agreement;
  12. a guarantee from the franchisor to carry out its obligations until the franchise agreement ends; and
  13. the number of franchise outlets managed by the franchisee.

v Guarantees and protection

Indonesian franchise regulations do not regulate the guarantees and protections issued by individuals or corporation to the franchisor. However, the provision of guarantee (including in the franchise transactions) commonly occurs in Indonesia, and it is generally regulated under the Indonesian civil code.

In practice, personal or corporate guarantees in franchise transactions are made in a notarial deed and contain a clause that the guarantor will be fully liable if the franchisee fails to carry out its obligations in the franchise agreement. As for the issue of enforceability, although a valid guarantee is enforceable, the enforcement process may be lengthy since it must be enforced through court procedures.

Tax

i Franchisor tax liabilities

Under Indonesian taxation law, in general, tax liabilities arise from any source of income derived in Indonesia. Specifically for a franchisor, the taxation liabilities may arise from income derived from payment of franchise fee, royalties and profits. In addition, sales of product also subject to value added tax (VAT).

ii Franchisee tax liabilities

Similar to tax liabilities that apply to the franchisor, the franchisee is also liable to pay tax that derives from taxable income. As above, the sales of product also subject to VAT.

iii Tax-efficient structures

There are no definite tax-efficient structures in Indonesia, as this will depend on, and will be assessed on, a case-by-case basis based on the relevant line of business. Nonetheless, we note that the issuance of the Omnibus Law, Law No. 11 of 2021 concerning Job Creation (the Job Creation Law) and Government Regulation In Lieu of Law No. 1 of 2020 has relaxed certain tax obligations and may be useful for franchisors in creating tax-efficient structures.

Impact of general law

i Good faith and guarantees

Indonesian civil code stipulates that any agreement (in this matter, including a franchise agreement) must be performed by the parties in good faith. If a party to the agreement violates the good faith principle and it results in damages to the other party, the other party may file a civil claim in Indonesian courts (or arbitration if the parties opted for arbitration) and request for compensation and fulfilment of the contract.

ii Agency distributor model

In Indonesia, a franchise arrangement is not treated as an agency–distributor relationship since agency and distributor relationships are regulated under different regulatory regimes. However, to avoid the franchise arrangement being wrongly deemed as an agency–distributor relationship, it is common in practice to include a 'non-agency/distributor clause' in the franchise agreement.

iii Employment law

Assuming that the franchise arrangement between the franchisor and franchisee is valid and legally binding, the franchisee can not be deemed as the employee of the franchisor.

iv Consumer protection

Franchisees shall not be treated as consumers since consumers are narrowly defined as end-consumers in the Indonesian consumer protection law.

v Competition law

Agreements relating to franchise arrangements are exempted from the provisions of the Indonesian competition law. However, in 2009, the business competition supervisory commission (KPPU) issued a regulation concerning the implementation guidance of the exemption as it pertains to franchising, which covers several issues, as follows:

  1. Resale price maintenance provisions are not allowed to be included in the franchise agreement. Franchisors are only allowed to make a non-binding resale price recommendation.
  2. Exclusive supply provisions may be included in the franchise agreement if a clause aims to maintain the concept, identity, and reputation of the franchised business. However, the franchisor cannot prohibit the franchisee from appointing other suppliers if the goods or services, or both, provided by the other suppliers have met the franchisor's standard.
  3. Tie-in provisions are allowed if it is intended to maintain the identity and reputation of the franchised business.
  4. Territorial restriction is allowed so long as it is not intended to create a barrier of entry.
  5. Post-term non-compete clauses are only allowed for a reasonable period.

vi Restrictive covenants

Under Indonesian law, non-compete provisions and other restrictive covenants are enforced as contractual obligations when the franchise agreement is in effect. If a party violates these clauses, it will usually be sanctioned based on the provisions in the agreement (e.g., termination). However, if damages arise, the injured party may also file a claim to the chosen dispute forum, and this could be court or arbitration.

vii Termination

Minister of Trade Regulation No. 71 of 2019 concerning the Implementation of Franchise implies that a franchise agreement cannot be terminated unilaterally. This matter then raises a debate as to whether unilateral termination by the franchisor may be enforceable in the event the franchisee commits a serious breach.

In this regard, although there are currently differing interpretations among legal practitioners regarding this matter, in general, under the principle of freedom of contract as regulated in the civil law code, termination of franchise agreement will be enforceable if it follows the procedure stated in the agreement.

Post-termination non-compete clauses are permitted by Indonesian law as long as such a clause aims to protect the identity and reputation of the franchise. Nonetheless, the inclusion of this clause must take into account the provisions in the KPPU's regulations as mentioned in Section V.

Indonesian laws also allow the franchise to be taken over by the franchisor. However, this is not possible for foreign franchisors, considering that foreign companies cannot directly carry out business activities in Indonesia.

viii Anti-corruption and anti-terrorism regulation

Under Indonesian laws, franchising regime generally is not relevant to anti-corruption and anti-terrorism issues, unless in conducting business the franchisor or its franchisee are involved in these unlawful matters (e.g., bribery).

ix Dispute resolution

The Indonesian franchise regulations do not specifically regulate disputes procedures, hence dispute resolution will follow the parties' choices and the usual route is either court or arbitration.

In Indonesia, arbitration forum is the primary dispute resolution forum for foreign franchises, while civil court is still the primary choice for local franchises. Should the parties opt for an international arbitration forum, for enforcement purposes, it needs to be ensured that the parties opt for the arbitration forum that has a seat in a jurisdiction that has ratified the New York Convention (United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards).

Indonesian law also recognises mediation as an alternative forum for dispute resolution, but in general, there is no obligation for the parties to opt for a mediation. Nonetheless, the Supreme Court of the Republic of Indonesia has issued a regulation whereby the parties in dispute must first enter into mediation before the commencement of the court hearings. Therefore, mediation has become mandatory in the Indonesian civil courts.

No regulation in Indonesia requires civil court judges to uphold foreign laws. Therefore, in practice, when a dispute concerning a foreign contract is brought to court, the judge will usually assess the matter from an Indonesian law perspective. Nevertheless, keep in mind that, since franchise agreements are required to be governed by Indonesian law, there should no longer be any differences regarding legal interpretation in Indonesian courts for franchise disputes.

As an overview, the following is the procedure for civil litigation in Indonesian courts:

  1. The Plaintiff files a claim at the defendant's domicile or at a certain district court appointed by the parties.
  2. Within approximately 14 days of the date of the registration of the claim, the district court will summon the parties to attend the opening hearing.
  3. In the opening hearing, the judges will give order to the parties to attend the mediation process, which will be held for 30 days.
  4. The parties' principal must appear in person in the mediation meetings.
  5. If the parties reach settlement, the mediator will subsequently prepare a settlement agreement and report this settlement to the presiding judge.
  6. If the parties fail to settle, the hearing will continue with the submission of pleadings and evidence.
  7. The judges will render a decision at a maximum of five months from the date of the registration of the claim.
  8. If a party is dissatisfied with the district court's decision, the party may file an appeal to the high court within the 14 days following the date of the district court's decision.
  9. The high court will then examine the case documents and render its decision within three months.
  10. If a party is dissatisfied with the high court's decision, the party may file an appeal to the Supreme Court within 14 days of the notification of the high court's decision.
  11. The Supreme Court will then examine the case documents and render a final decision within 250 days.

If an interim injunction is required, the franchisor may file a request for the court to issue a provisional order to prevent the franchisee from carrying out specific actions (e.g., to prohibit the franchisee from using the mark). Such a request should be submitted supplementary to a claim; therefore, it cannot be submitted independently. Furthermore, the request may only be filed due to urgent reasons relevant to the claim. There are still uncertainties relating to the enforcement of interim injunction obtained in the foreign arbitration forum; since as to date, only the final foreign arbitration award may be enforced by the Indonesian court.

Under the civil code, in a situation involving a breach of contract, the injured party may claim damages, interest and future earnings that arise directly from the breach of contract.

Indonesia has ratified the New York Convention (the United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards). Therefore, the award from the arbitration forum seated in the member country of the convention may be enforced in Indonesia. Nonetheless, to be enforced in Indonesia, the foreign arbitral award must not contradict public order and shall consist of arbitrable matters according to Indonesian law.

In contrary to the foreign arbitral award, foreign court decisions can not be directly enforced in Indonesia. The only avenue available to 'enforce' foreign court decisions is to have the matter to be relitigated in Indonesia.

Current developments

The government has put significant effort into simplifying the franchise regulations in order to attract more businesses to enter the Indonesian market. Although it is now already two years since being issued, the 2019 Franchise Regulation has become solid proof of the simplification effort from the government, at least from the regulatory perspective. Prior to the issuance of the 2019 Franchise Regulation, the franchise regulatory regimes are scattered in various ministerial regulations, and it is not uncommon that, sometimes, it creates confusion among business actors. In this sense, the 2019 Franchise Regulation has been deemed as a solution to confusion caused by previous franchise regulations.

In addition to the above-mentioned matter, with the issuance of Indonesian omnibus law, Law No. 11 of 2021 concerning Job Creation (the Job Creation Law), the government has made a significant effort to increase foreign and domestic investment and create jobs by way of improving the ease of doing business in Indonesia. The Job Creation Law has amended approximately 43,000 Regulations and 39 existing Laws, and it focuses on 11 elements, among which are the simplification of licensing procedures, reform in manpower regulation, and ease of doing business.7

We also note that during the covid-19 pandemic, many businesses, including franchise businesses, had a significant setback. The state statistical centre bureau has recorded that food and beverages businesses have suffered an income fall of 94.7 per cent, while the trading sector has suffered an income fall of 84,6 per cent.8 Therefore, the ease of doing business and the government's simplification effort, as mentioned above, could become a substantial stimulant to Indonesian businesses, including franchises.

One other thing to note is that there has been an ongoing discussion to amend government Regulation No. 42 of 2007, as it has been more than 10 years since this Regulation was issued. However, to date, it remains unclear when the new Regulation will be issued.

Footnotes

1 Emir Pohan is a partner at Emir Pohan & Partners Law Offices.

3 ibid.

4 Amir Karamoy, Waralaba Jalan Bebas Hambatan Menjadi Sukses, PT. Gramedia Pustaka Utama, 2011, p. 21.

5 ibid.

6 Data is valid as at 24 September 2021.

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