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Legal Overview on Franchise Regulations in Indonesia

By IBLS Editor

The term "franchise" was introduced by Isaac Singer in 1851.  In general, franchise refers to an approval by the owner of particular products or services (the "Franchisor") granting rights to another party to use or to market such products or services under a certain terms and conditions.

The Franchisor utilizes the franchise system as an alternate scheme to expand a business rapidly. The Franchisor does not have to provide huge amount of capital to operate in the new market areas. The capital will be derived from the party granted the right to use or to market the products or services (the "Franchisee"). Furthermore, the Franchisor can be less concerned about the management of the branches, as the management will be taken care by the Franchisee.

The Franchisor in return shall receive a percentage of the gross revenues of the Franchisee and shall not incur any risk caused by or in connection with the Franchisee's lost. Furthermore, the Franchisor could generate another income, i.e., from the payments of the training programs the Franchisor provides to the Franchisee.

Likewise, the Franchisee would prefer the franchise system as it could minimize the cost in starting its business. As the products or services commonly have been proven and recognized in an established market, the risk of failure can be minimized. For the operational matters, the Franchisee could obtain the marketing and operational assistances including the start-up assistance, ongoing operational support, and availability of training and experts from the Franchisor.

In Indonesia, franchise is regulated under the Government Regulation No. 42 of 2007 ("GR 42") and the Minister of Trade Decree No. 31/M-DAG/PER/8/2008 ("Decree 31"). The GR 42 defines franchise as a special right of an individual or a business establishment (i.e. Franchisor) on a business system having special characteristics in marketing certain products and/or services which has been successfully proven and could be utilized and/or used by other party (i.e. Franchisee) based on a franchise agreement. Thus, the Franchisor and the Franchisee could be an entity or an individual.

Once the Franchisor has entered into a franchise agreement ("Agreement") with one Franchisee, the Franchisor may not franchise the same products and/or services under the same trademark to other Franchisees in nearby areas if it could cause unfeasibility of the franchise business. This limitation is also applicable for the Franchisee towards its Sub-Franchisee.

GR 42 stipulates that franchise business has to meet the criteria of having special characteristic of a business, having had profit proven, having a written standard of service and products marketed, easy to be taught and applied, providing intergrated support, and having registered intellectual property rights.

Franchise Agreement

By the GR 42, an Agreement must be made in writing, governed by Indonesian laws, and preferably in Indonesian language. In practice, where an Agreement is made in foreign language (English for example), the Indonesian version must be attached.

A foreign Franchisor has to meet the legality requirement of its country of origin and the documents related thereto have to be legalized by the foreign relevant authority and attested by the Indonesian consulate in the Franchisor's country.

Before the parties enter into an Agreement, the Franchisor has to provide the Franchisee with a prospectus regarding the offered franchise business. The franchise prospectus shall at the minimum contain the following information,

a. Franchisor identity
b. Franchisor business legality
c. History of business activity
d. Organisation structure of Franchisor
e. Balance sheet for the last 2 (two) years
f. Total outlets of Franchisor
g. List of the existing Franchisees
h. Rights and obligations of Franchisor and Franchisee

Franchisor shall register the prospectus before entering into an Agreement with Franchisee. The prospectus to be registered shall have been legalized by a public notary and attested by the Indonesian consulate in the Franchisor's country.

An Agreement should at the minimum stipulates the followings,

1. Identity and domicile of each of the parties;
2. Type of the intellectual property rights;
3. The concerned business activity:
4. Rights and obligations of each of the parties;
5. Assistance, facility, guidance in operational, training, and marketing provided by the Franchisor to Franchisee;
6. Marketing area. In this regard, the Franchisor may stipulate whether the marketing area only covers a certain part of or throughout Indonesia;
7. The term of the Agreement;
8. Procedures of payments;
9. Ownership, change of ownership;
10. Provision on settlement of disputes;
11. Method for extension, expiration and termination of  Agreement;

The Agreement may stipulate a provision that allows the Franchisee to sub-franchise to other party provided that such Franchisee operates at least 1 (one) franchise outlet and the sub-franchise agreement shall be with the Franchisor's knowledge. In sub-franchising its rights under the Agreement, the Master Franchisee must show to the Sub-Franchisee that the Master Franchisee has the authority to do so.

Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba)

In undertaking the franchise business, both the Franchisor and the Franchisee must have a Franchise Registration Certificate ("STPW") which could be obtained from the Ministry of Trade ("MOT"). To obtain the STPW, the Franchisor shall register the prospectus with the MOT, while the Franchisee shall register the Agreement.

Application form for obtaining a STPW shall be signed by the Franchisor and the Franchisee respectively and submitted to the MOT along with the prospectus and the Agreement and some other required documents. MOT will issue the STPW or reject the application within 3 (three) working days as of receipt of the complete application. In case the application is rejected, the applicant may re-apply the STPW.

MOT will assign the authority to issue the STPW to the Director General of Domestic Trade if the Franchise Agreement involves a Franchisor and Franchisee or Master Franchisee of an off-shore franchise business. For a Franchisor and a Franchisee of a local franchise business, and a Sub-Franchisee of an off-shore franchise business, the STPW is to be issued by the Head of Local MOT office. The holders of STPW are obliged to submit periodical reports to the authority issuing the STPW every 1 (one) year.

Clean Break of Franchise Agreement

In case the Franchisor terminates the Agreement before the term expires, the Franchisee may then enter into another franchise agreement provided that all issues arising out from the terminated Agreement have been settled within 6 (six) months after the termination date among the parties (Clean Break).

Conclusion

These principles are used as the legal basis of the franchised businesses that have rapidly grown in Indonesia for the last years. Bearing in mind that an Agreement shall be governed by Indonesian law, therefore, it is highly recommended that in documenting a franchise agreement, foreign party obtain an advice of a reliable consultant.

Worth to note, in the grant of an exclusive right to use and/or to market products or services in a particular area, the parties should also consider the regulations pertaining to the unfair business competition. An exclusive right to use and/or to market the products or services might fall into activities prohibited by the Law No. 5 of 1999 designed to eliminate the monopolistic practices and unfair business competition in Indonesia.

The above commentary is only intended to be an article and should not be relied upon as legal advice or as a substitute for legal advice in any cases.

Full post as published by IBLS Internet Law Blog on October 13, 2008 (boomark / email).