The New Franchise Regime in Indonesia
This brief is aimed to provide readers a general highlight on Indonesian franchise law,
especially upon the issuance of new laws.
I.
Franchise Law in Indonesia prior to 2013
Prior to 1997, Indonesia had no specific provision regulating franchise business. At that
moment, the legal basis underpinned franchising business was only the principle of the
freedom of contract, which can be found in Article 1338 Indonesian Civil Code. The said
principle allows any individuals and/or legal entities to create legally binding contract
upon them, as long as it is executed in good faith and not contradictory to the existing
law. Moreover, another regulation that could be related with franchising is Articles 4450 of Law Number 18 Year 1992 concerning Trademark.
On 18 June 1997 the Government of Indonesia issued Government Regulation Number
16 Year 1997 and Decree of the Minister of Industry and Trade Number
256/MPP/Kep/1997 (“1997 Regulations”). The “1997 Regulations” were issued on the
purpose of (i) increasing the participation of Indonesian workers in the labor market;
(ii) increasing the opportunity of Indonesian businessmen to develop their business
through the transfer of technology. The “1997 Regulations”, moreover, also laid down
the basic ground of franchising business in Indonesia by providing the system of prior
disclosure by a franchisor to franchisee, mandatory registration of franchise agreement
to relevant authority, the issuance of Certificate of Franchised Business Registration to
local franchisee, and the insertion of ‘Clean Break statement’1 requirement into the
franchise Agreement.
Ten years afterwards, the “1997 regulations” were replaced by Governing Regulation
Number 42 Year 2007 and Regulation of the Minister of Trade Number 31/MDAG/PER/2008 (“2007-2008 Regulations”). The “2007-2008 Regulations” continued to
preserve the franchise regime set up by the “1997 Regulations” with slight
modifications. For instance, the “2007-2008” obliges the foreign franchisor to first
register an offering prospectus at the Department of Trade prior the execution of the
franchise agreement. This obligation was believed to become more onerous on foreign
franchisors. In that era, the “1997 regulations” created number on discussions and
controversies, among others, the spirit of “2007-2008” Regulations” was to create fair
partnership between SMEs (micro, small, and medium enterprise) and big sized
business enterprise, however, its content did not reflect such spirit. If we take closer
look at Article 9 of Governing Regulation Number 42 Year 2007, one can see that the
said governing regulation intends to further develop the SMEs by obligating both
franchisor and franchisee to prioritize domestic production and/or services, and
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Clean Break statement is a statement to safeguard any outstanding obligations between the franchisor and
franchisee in the event that a franchise agreement is terminated. This statement prevents franchisor to appoint
new franchisee until the settlement with the disgruntled franchisee has been reached.
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cooperate with SMEs in running their business. The local services or productions and
SMEs, yet, need to fulfill terms and conditions set up by both franchisor and franchisee.
Such requirement created an impression that the franchisees and franchisors, which
mostly big sized business enterprises, have a higher bargaining position than the SMEs
and domestic products or services, so that, is prejudicial to the objective of the said
government regulation to create fair partnership.
II.
The New Law Regimes
With the intention to clarify previous questions and controversies in “2007-2008
Regulation”, the Government of Indonesia, subsequently, issues new regulations,
namely Regulation of the Ministry of Trade Number 53/M-DAG/PER/8/2012 regarding
the Operations of Franchisees (“Regulation 53”), Regulation of the Ministry of Trade
Number 68/M-DAG/PER/10/2012 concerning Modern Stores (“Regulation 68”), and
Regulation of the Ministry of Trade Number 07/M-DAG/PER/2/2013 on Foods and
Beverages franchise (“Regulation 07”). “Regulations 53” are replacing the prior
regulation (“Regulation 31”) that implemented Government Regulation Number 42 Year
2007 (which remain effective), while “Regulation 68” and “Regulation 07” are adding
more specific implementing rules for the Government Regulation Number 42 Year 2007.
In general, the main objectives of the said regulations are to increase the use of
domestic products in franchising business and stimulate the growth of local business.
The objectives are relatively similar to the previous regulation; however, within the new
regulations some loopholes and uncertainties are trying to be answered. Under the new
laws there are some notable changes compared with the previous law, which are as
follow:
1. The local sourcing requirement
Unlike the previous laws which only oblige, both franchisor and franchisee, to
prioritize the use of domestic product and services without clear limitation, the new
laws stipulate that franchisor and franchisee are obliged to use domestically
produced goods and services for the minimum of 80 % of their raw materials,
business equipment and sales. The local sourcing requirement is said to have a
greater impact on product distribution franchise than a service franchise. Many say
that it will become almost impossible for a distribution franchises which rely on the
imported goods to comply with this requirement. Currently, some issues arising on
this matter (mainly on how the 80 % local sourcing requirement should be
calculated, what constitutes raw material?) are being discussed with the relevant
authorities, some initiatives and breakthrough are sought to circle this barrier.
2. Clean Break Statement
Upon the termination of a franchise agreement, clean break statement bars
franchisor to appoint new franchisees. The prior laws stipulate that franchisor must
wait until the settlement or six months following the termination to appoint new
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franchisee, whereas, the new laws obliged the franchisor to wait until the settlement
of dispute or a final and binding court decision has been issued.
3. The new regime provides more specific regulation on modern stores, and
food & beverages.
Under the new law regime, modern store, and food & beverages Franchise business
are, specifically regulated. Instances for modern store, among others, are
supermarket, mini market, department store. The new laws attempt to limit the
number of business outlet owned by franchisor and franchisee to maximum 250
outlets (for food and beverages) and 150 outlets for modern stores. Some
arrangements, nonetheless, are allowed for the current franchised business to
adapt, e.g. capital participation adjustment.
It is also important to notice that the laws provide 5 years adjustment period upon the
above changes.
III.
Conclusion
Franchising business is a relatively new concept in Indonesia. The specific law
regulating franchise business was firstly introduced in 1997 and continues to evolve
until the present time. Some notable changes have been added by Government of
Indonesia into the present franchise law regime. Most of the changes are aimed to
support the development of locally produced goods and services and provide wider
opportunities for domestic businessman. The changes, however, may dominantly affect
the franchised businesses which are dependable on imported products in running their
business. Some new and specified arrangements, therefore, are needed for the current
and potential franchised business.
For further details on this issue, please contact: maria.ardianingtyas@jpplawyer.com
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