Business organisation overview

Types of vehicle

What forms of business organisation entities are relevant to the typical franchisor?

The typical franchisor would normally take the form of a express liability visitor whose capital is divided into shares.

Regulation of business formation

What laws and agencies govern the germination of business organisation entities?

The formation of express liability companies in Indonesia is governed by the Companies Law (Law No. 40 of 2007) and administered by the Ministry of Law and Homo Rights (MOLHR).

Requirements for forming a business organization

Provide an overview of the requirements for forming and maintaining a business entity.

In general, a limited liability company must be formed by at least ii parties by executing a human action of institution containing its articles of association before a notary public. The notary and then submits the human activity of establishment and articles of association to the MOLHR for its blessing. Upon obtaining the MOLHR's approval, the company attains legal status and the shareholders' liability is adamant according to the percentage of issued shares to which they accept subscribed. The MOLHR then arranges for the publication of the deed of establishment and articles of association in the supplement to the Indonesian State Gazette.

The company must then be registered with the Companies Registry maintained past the local part of the Ministry of Trade (MOT). The MOT then issues a company registration certificate valid for five years (renewable). Another division of the MOT (assuming the company is a 100 per cent locally owned company, ie, it has no foreign shareholders) then issues the visitor an operating business licence that is valid for as long equally the company remains in performance. Depending on its business activities, the company may also be required to apply for a technical business concern licence from the relevant say-so. All companies must convene an annual general meeting of shareholders to discuss and approve, among other things, the annual report and fiscal statements prepared by the board of directors. Boggling general meetings of shareholders may also be held when required.

Restrictions on foreign investors

What restrictions utilise to foreign business entities and foreign investment?

Foreign business entities may found a strange investment company (PMA Company) in Indonesia to appoint in business activities that are open up for foreign investment. A PMA Visitor falls nether the auspices of the Indonesian Investment Coordinating Board (BKPM). Foreign investors should check the investment negative listing to see whether in that location is whatsoever share ownership prohibition or restriction for strange investors in the concern field and discuss with the BKPM or other relevant authority whether they must satisfy whatsoever other requirements when BKPM issues its blessing for the investors' awarding grade (eg, if a manufacturing venture, where the manufacturing plant must exist located, and so forth).

Every Indonesian company must have authorised upper-case letter of at least 50 million rupiah, and at to the lowest degree 25 per cent of the authorised majuscule must be issued and fully paid up by the shareholders. Specifically for a PMA Company, the Indonesian government requires a much higher minimum investment for one concern activity, every bit detailed below:

  • the minimum total investment, which may consist of loans and (paid-up) capital (excluding the value of its land and buildings): more than 10 billion rupiah;
  • issued and paid-upwards capital: at least 2.5 billion rupiah; and
  • capital participation of each shareholder: at least 10 million rupiah, and the pct share ownership is based on the nominal value of the shares.

A PMA Company may not engage in retail business concern, except on a large calibration. Foreign investment in the financial sector is regulated past the Ministry of Finance. There is no foreign exchange control. However, whatever movement of foreign currency worth US$10,000 or more must be reported to the Indonesian Primal Banking concern by the facilitating bank in Indonesia. In addition, the bank must obtain the supporting documents for the transaction underlying the outgoing transfer in foreign currency from its customer or the foreign party if they wish to purchase foreign currency against the Indonesian rupiah, if the total amount exceeds U.s.a.$100,000 (or its equivalent in other currencies) per month per client.

Taxation

Briefly depict the aspects of the revenue enhancement arrangement relevant to franchisors. How are foreign businesses and individuals taxed?

Foreign businesses and individual residents of Indonesia must pay income revenue enhancement. Some of the taxes that demand to be considered include VAT, withholding tax and permanent establishment taxation.

VAT

VAT is levied on supplies of appurtenances and services within the Indonesian customs surface area and those imported into the community area. VAT also applies to services performed abroad simply consumed in Indonesia. Therefore, VAT is payable on the provision of services by the franchisor to the franchisee, regardless of the place of performance. The full general rate of VAT is 10 per cent. VAT on luxury goods is between x per cent and 200 per cent.

Withholding taxation

Tax on the importation of goods and the use of strange services is paid past the importer or user. Under Indonesian tax police, equally a non-resident taxpayer, a foreign franchisor does not have to withhold taxes.

Permanent institution

Strange companies with no permanent establishment in Indonesia are just subject to a final withholding revenue enhancement on sure types of income derived from Indonesian sources. A permanent institution of a foreign corporation is liable for regular Indonesian corporate taxation on profits directly or indirectly owing to its permanent establishment in Republic of indonesia. In add-on, a 20 per cent 'branch profit' tax (reduced by revenue enhancement treaty; 10 per cent in the case of the United States) is imposed. With respect to services and contracts to be performed in Indonesia, a foreign corporation from a tax-treaty country (such as the United States) is considered to have a permanent establishment if its employees are present in Indonesia for business organization purposes for more than 183 days in a 12-month period (in some cases a xc-day or 120-day limit applies, depending on the tax treaty with the relevant country). If the franchisor plans to transport any staff to Republic of indonesia, it should seek tax communication related to this issue. If no staff are to be sent to Indonesia, the franchisor and its affiliates should ensure that their franchise arrangement is not viewed as a permanent establishment.

Labour and employment

Are in that location any relevant labour and employment considerations for typical franchisors?

In general, the Manpower Police does not utilise to foreign franchisors domiciled overseas, unless they employ Indonesian nationals or expatriates to work in Indonesia. To minimise the take chances of a franchisee'due south employee being deemed an employee of the franchisor, the franchisor must brand sure that the relationship with the franchisee is that of an independent contractor and expressly provide for this in the franchise agreement. If the franchisee requires assistance from the franchisor's employees on a more permanent ground, the employees should be employed past the franchisee.

Intellectual property

How are trademarks and know-how protected?

Foreign and domestic franchisors may protect their trademarks and know-how under the prevailing intellectual belongings laws. Trademarks are registered with the Indonesian Trademark Part of the Directorate General of Intellectual Holding Rights (the Advisers), and know-how may exist protected nether the patent or relevant IP laws (industrial designs, copyrights, merchandise secrets). There is no obligation to register a copyright, merely it is recommended. A Ministerial Regulation has been issued that requires that whatsoever licence agreement over registered IP rights to be registered with the Advisers.

Merchandise secrets are too protected under the Indonesian Trade Secrets Law (Police No. xxx of 2000) and the Anti-Monopoly and Unfair Concern Competition Law (Law No. 5 of 1999 - the Anti-Monopoly Law). Nether the Trade Secrets Law, an agreement containing the granting of rights to use trade secrets must be registered with the Advisers. The understanding will then be published in the Official Trade Secrets Gazette. One consequence of not registering an agreement is that it will not bind third parties. Unfortunately, no further details on this bounden effect are provided in the police. Nevertheless, it is expected that registration will provide the trade undercover holder the correct to enforce its IP rights against infringers, as well equally to preserve its rights confronting third parties. Without registration, it is likewise arguable that as long as the agreement is entered into in good faith and satisfies the requirements under the Indonesian Ceremonious Code (ICC) (manufactures 1338 and 1320), and it has been signed past the authorised representatives of the contracting parties, the understanding should reasonably demark a tertiary party. According to the Trade Secrets Law, the procedures for registration will be provided in a government regulation, but no such regulation has been issued yet. Therefore, the Advisers cannot formally procedure the registration of such an agreement, and, in practise, not many parties register their agreements. This besides may also exist because of the confidentiality bug (ie, to what extent the Directorate will maintain the confidentiality of the agreements submitted to it).

Real manor

What are the relevant aspects of the real estate market and real manor law?

The franchisee will have to purchase or lease the real manor for its premises from the property owner. Under the ICC, a lessee has the right to enjoy leased property until the expiry of the lease term. If the belongings is transferred to a third party, the new possessor cannot terminate the lease without the consent of the lessee. Intendance should be taken that the property is located in an area designated (zoned) for commercial purposes (as opposed to residential purposes). In full general, non-resident foreign franchisors cannot purchase real estate. Resident foreigners may purchase property under a specific championship - a right to use championship - and nether certain conditions (ie, their presence must exist 'of benefit to national development' and their 'ownership' is limited to one property.

Franchising in the market

How widespread is franchising in your jurisdiction? In which sectors is franchising common?

Franchising has expanded chop-chop, in particular in food and drinkable sectors followed by retail (more to mode retail, department stores), lifestyle (such equally fitness centres, pilates or yoga studios) and the pedagogy industry.

Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

A franchise is described every bit a special correct that is owned by an individual or an entity over the unique characteristics of a business organisation system that has been successful in the promotion of goods or services, and can be used by another party pursuant to a franchise agreement.

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

Government Regulation No. 42 of 2007 on Franchising (Regulation No. 42) and its implementing regulations:

  • Decree of the Director General of Domestic Trade No. 138/PDN/KEP/10/2008 on the Technical Guidelines for the Implementation of Franchising (Decree No. 138);
  • Business Competition Supervisory Committee Regulation No. half-dozen of 2009 on Guidelines on the Exemption from the Implementation of Police force No. 5/1999 (the Anti-Monopoly Law) for Franchise Related Agreements (Commission Guidelines);
  • Regulation of the Government minister of Trade No. 53/Thou-DAG/PER/8/2012 on the Implementation of Franchising (Regulation No. 53) as amended by Regulation of the Government minister of Trade No. 57/Thou-DAG/PER/9/2014; and
  • Decree of the Manager General of Domestic Trade No. 16/PDN/KEP/three/2014 on the Technical Guidelines for the Implementation of Franchising (Decree No. 16).

Also, specific related regulations have been issued past the Minister of Trade:

  • Modern Store Franchising (Regulation No. 68/Thou-DAG/PER/10/2012 - Regulation 68);
  • the Evolution of Partnerships in Franchising for Food and Beverages Services Business Activities (Regulation Number 07/M-DAG/PER/ii/2013 - Regulation 07 as further amended past Regulation No. 58/K-DAG/PER/9/2014); and
  • the Obligation to Utilize the Franchise Logo (Regulation No. threescore/K-DAG/PER/nine/2013).

Chief franchise requirements

Draw the relevant requirements of these laws and agencies.

A franchise must meet the following criteria:

  • have a specific business characteristic;
  • be a proven successful business, which refers to the franchisor having business experience of approximately five years;
  • have a written standard operating procedure to enable the franchisee to deport its business according to the franchisor's business system;
  • be easy to learn and apply;
  • provide continuous support to the franchisee; and
  • have a registered intellectual holding right.

Before entering into a franchise understanding, a franchisor must provide a prospectus disclosing its business data or information to a franchisee at least ii weeks before the execution of the franchise agreement.

Certain restrictions apply to franchises in full general, too as specific restrictions on modern store and food and beverages businesses. See question 15.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

In theory, franchisors and franchisees must utilise domestically produced goods and services for at least 80 per cent of their raw materials, business equipment and sales. Farther, a statement confirming this must be attached to the prospectus and franchise agreement registration class. Compliance with the rule is disclosed in the annual study submitted past every franchisor and franchisee. If the parties believe that this threshold is not possible, they tin can apply to the MOT for an exemption and it will be evaluated by the assessment team.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

Ideally, the franchisor should be registered earlier it offers franchises. Nonetheless, owing to the cumbersome registration process, which is not efficient from a business bespeak of view considering of various commercial issues, some franchisors and franchisees go ahead and sign the franchise agreement first and deal with registration of the prospectus later on, followed by registration of the signed franchise agreement. In practice, this approach seems to exist acceptable provided that the parties then comply with the registration requirements and obtain a franchise registration certificate nether each of their names.

A franchisee that has been granted the correct to sub-franchise must take at least one company-owned operation before it can offering franchises to tertiary parties.

Franchisee and supplier choice

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees' suppliers?

Under Regulation 53 a franchisor may non appoint a franchisee with which it has a direct or indirect control relationship. According to Decree No. 16, this command relationship may be a blood relationship, an employment relationship or a shareholding relationship. This means that a franchisor cannot appoint one of its subsidiaries or affiliates as its franchisee in Indonesia. Regulation 53 also requires franchisors to cooperate with local modest and medium-sized businesses as franchisees or suppliers, if they tin can satisfy the franchisor's requirements.

In the consequence of unilateral termination by the franchisor, a clean break alphabetic character or, alternatively, a final and binding court ruling, is now required before the franchisor can appoint a new franchisee for the aforementioned territory.

The franchise regulations do not set a minimum or maximum number of outlets to be adult inside a specified catamenia. This is normally decided by agreement amidst the parties. Nevertheless, Regulations 68 and 07 impose limitations on the number of outlets managed or endemic by a franchisor and a franchisee. Regulation 68 allows franchisors and franchisees engaged in a mod store business to operate upwards to 150 company-owned outlets. Thereafter, they must appoint independent sub-franchisees. Meanwhile, Regulation 07 limits the number of self-managed or company-owned outlets for franchisors and franchisees in the food and beverage businesses (restaurants, bars and cafés) to upward to 250 outlets. Any additional outlets must either exist franchised or operated by style of cooperation with capital participation.

Pre-contractual disclosure

What is the compliance process for making pre-contractual disclosure in your country? How oftentimes must the disclosures exist updated?

The disclosure document must be registered with the MOT for franchises originating from both within Indonesia and exterior Indonesia, following which, the franchisor or sub-franchisor will receive a franchise registration certificate (the STPW). The franchisor must provide the disclosure document at to the lowest degree two weeks earlier the execution of the franchise agreement to prospective franchisees. Although the regulations do not obliged franchisors to update their disclosure document, information technology is recommended to continuously ship updates to the disclosure certificate to each prospective franchisee and the MOT.

Regulation No. 53 requires a prospectus to be registered with the MOT from overseas to exist notarised outset by a notary public in the jurisdiction of the franchisor, and if possible, to then be candy by the Indonesian consulate or embassy in the domicile country of the franchisor. The franchisor must also obtain a reference letter from the relevant trade attaché or Indonesian consulate or embassy in the home country of the franchisor. This statement is a i-page letter confirming the details of the franchisor, such as its name and address, legal grade or status, date of establishment, the trademark under franchise and the name and address of the prospective Indonesian franchisee. A certified Indonesian translation of a strange-language disclosure certificate and its attachments must also be prepared.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed apropos the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The franchise regulations are silent on this matter. Still, before it enters the Indonesian market and appoints Indonesian parties to exist its sub-franchisees, a chief franchisee must exist registered with the MOT. The master franchisee volition then be deemed a sub-franchisor and therefore the provisions that use to a franchisor will also apply to this master franchisee. For instance, it must have its own disclosure document and obtain an STPW under its ain name. Run across questions sixteen and nineteen. In addition, in a sub-franchising organization, the master franchisee is required to own and manage at least i of the businesses that it is permitted to sub-franchise itself.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

Ideally, franchisees should focus on things such as arrangement size and growth of the franchise business, force of the make, length of time in business, experience of the franchisor's officers and directors, start-up and ongoing support, training programmes, amount of investment to exist provided, turn a profit likely to be received and royalty to be paid. Clauses in the franchise understanding must also be considered, in particular in relation to expenses and fees, rights and obligations of the parties, mandatory purchase and termination procedures and penalties that may be incurred. On the franchisor'due south side, the reputation of the franchisee's officers and directors, fiscal state of affairs of the franchisee, franchisee's reputation in conducting the current business, etc, must be considered.

What must be disclosed

What information must the disclosure document contain?

At least the following information must be provided in the disclosure document:

  • the identity of the franchisor, including the information provided on the identity cards or passports of the shareholders, commissioners and directors (if the franchisor is a concern entity);
  • the legal business status of the franchisor, including data about the franchisor's business licence;
  • the business history of the franchisor, including information regarding the institution of the franchisor, its business activities and the development of the franchisor's business;
  • the organisational construction of the franchisor, including the management hierarchy, from the commissioners, shareholders and directors to the organisational structure of the operating division;
  • the audited balance sheet for the past two years;
  • the number of franchise businesses, including the number of outlets owned past the franchisor;
  • the listing of franchisees; and
  • the rights and obligations of:
    • the franchisor, such as the correct to receive royalties and the obligation to provide continuous assistance to the franchisee; and
    • the franchisee, such as the right to use the franchisor'southward intellectual property rights or business organization characteristics and the obligation to maintain their confidentiality.

Continuing disclosure

Is in that location any obligation for standing disclosure?

Every bit explained in question sixteen, the disclosure document does not have to be updated, but it is recommended to practice so.

Disclosure requirements - enforcement

How do the relevant authorities agencies enforce the disclosure requirements?

There are no regulations regarding enforcement of the disclosure requirements, except for the registration of the disclosure document. The administrative sanction that volition be imposed on the franchisor or franchisee, or both, for not complying with the disclosure document and franchise agreement registration requirements is initially a written warning. The written warning will exist served up to three times and each warning will be served 2 weeks after the appointment of the previous alarm letter.

A fine of up to 100 1000000 rupiah will be charged if the franchisor or franchisee, or both, fail to comply with the registration requirement within two weeks of the third alarm letter's expiry date.

In practise, a alert alphabetic character is sent to the franchise operation stating that the government consider it to exist a franchise and that information technology should register every bit such; no meaningful sanctions are imposed for non-registration. It is very common for the authorities to write letters to those who may be seen or thought to be in breach of the regulations, simply not, for example, to revoke their licences directly. In other areas, the government have oftentimes refused to provide approval or a licence until a certain action is taken or requirement satisfied.

Disclosure violations - relief for franchisees

What deportment can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can abolish or rescind the franchise contract, is the franchisee also entitled to reimbursement or amercement?

Franchise regulations provide no remedy for the franchisee. Whatever remedy it wishes to take should be provided in the franchise agreement. Article 1338 of the ICC allows parties to a commercial contract to contract freely every bit long as the contract is fabricated in practiced faith and satisfies the requirements under article 1320 of the ICC. Therefore, the parties can mode their ain remedies in the contract, subject to limitations in the law. Basically, article 1320 of the ICC states that sure elements of a contract must exist satisfied to establish a contractual arrangement in Indonesia, namely a mutual understanding betwixt the parties, the legal capacity of the parties to enter into the contract, specific subject matter and a lawful purpose.

In the absence of contractual provisions to the contrary, full general remedies bachelor to a contracting political party in the outcome of a alienation of contract can ascend from claims under articles 1236, 1243 and 1267 of the ICC.

Article 1236 requires the obligor to reimburse costs, losses and involvement to the creditor if information technology has put itself in a situation in which it is unable to evangelize the goods or if it is unable to properly maintain the goods.

Article 1243 explains that compensation for costs, losses and interest due to non-performance of an agreement is but due if the obligor, afterwards being alleged in default, continues to fail to perform, or if information technology has to deliver or make the goods and their delivery or performance is performed after the agreed to fourth dimension limit.

Article 1267 states that the party against whom an agreement is breached can choose whether to force the defaulting political party to comply with its obligations (if this is still possible) or to request the termination of the agreement, accompanied by compensation for costs, losses and interest.

To avoid difficulties in calculating or proving damages, the franchise agreement may state a certain stock-still amount of coin (ie, liquidated damages) to be paid to the not-defaulting party (article 1249 of the ICC). This means that the corporeality of bounty is agreed to before any actual losses are incurred. The consequence of such an agreement is that the agreed to amount must exist paid in the consequence of not-performance, regardless of the actual losses and in fact, no prove is required to evidence the losses. Nether article 1249, the creditor can claim either performance of the obligation or compensation, but not both.

However, nether article 1309 of the ICC, judges may reduce the amount of the agreed to compensation if the contract has been performed in part. Jurisprudence shows that judges accept reduced the amount of the agreed to bounty (even without any operation at all) on the grounds of decency and proficient faith.

The police force limits what can be claimed in compensation. Compensation for default or non-performance is limited to losses that can be predicted and are direct caused past the default or non-performance (articles 1247 and 1248). Another limitation is with regard to a moratorium interest. Moratorium involvement is involvement that must be paid (every bit a sanction) because the obligor is in default. Article 1250 of the ICC states that in agreements that solely chronicle to the payment of money, the compensation for costs, losses and interest caused merely by a delay in payment may only consist of payment of the interest determined by law, without prejudice to any specific regulation. Furthermore, under article 1250, bounty for costs, losses and involvement only needs to be paid from the 24-hour interval the merits is filed in the court until the day on which it is paid, unless determined otherwise by police.

The remedies specified in a contract are not the just or exclusive remedies to which a party is entitled in the event of a breach. Under article 1365 of the ICC on tort, a party can merits losses suffered outside whatsoever contractual relationship.

In exercise, few cases brought under article 1365 accept been successful. In most cases, the courtroom either rejects or only accepts the claim in part (ie, information technology agrees that tort has been committed but the amount of compensation claimed cannot be fully justified). Besides, claims under article 1365 cannot exist combined with a remedy nether the contract.

Statutory liability for negligence is recognised in Indonesia nether both the Criminal Code and the ICC. The Criminal Lawmaking separates crimes resulting from an intended activity and those resulting from negligence. Nether article 1366 of the ICC, a person may be held liable, not but for losses acquired by his or her action, but also for any losses caused by his or her negligence or carelessness.

Disclosure violations - apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

There is no regulation on the sharing of liability. This should exist agreed to betwixt the franchisor and the sub-franchisor. Private officers, directors and employees of the franchisor or the sub-franchisor should non exist exposed to liability unless there is negligence or fault on their function. All the same, in legal proceedings, they are usually named as co-defendants.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the full general principles of police force that affect the offer and sale of franchises? What other regulations or government agencies or manufacture codes of comport may impact the offering and sale of franchises?

The bones principle of Indonesian contract law is the freedom of contract principle nether article 1338 of the ICC, which states that all agreements validly entered into serve as law for the parties to them. Agreements cannot be cancelled except by mutual understanding betwixt the parties, or for reasons determined by law. All agreements must be implemented in good faith. As well, all contracts must contain the 4 elements of contract required nether article 1320 of the ICC discussed higher up.

Full general rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should brand to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might use to such transactions?

There are no other general rules on presale disclosure other than the franchise-specific rules on what disclosures franchisors should make to potential franchisees. Generally, a disclosure document contains data on the history of the franchisor (which unremarkably includes its predecessors); a few also disclose ongoing or completed litigation, the obligation to pay certain fees, etc (equally applicative). Ideally, the trademark to be used nether the franchise agreement should be registered with, or at least its registration should have been applied for to, the Directorate. See question 19 for the minimum information that must exist included in the disclosure document.

Fraudulent sale

What deportment may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

Encounter question 22.

Legal restrictions on franchise contracts and the relationship between the parties

Franchise human relationship laws

Are at that place specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?

The parties will have to comply with the franchise regulations and other laws or regulations related to the business, as well as the terms and weather condition that have been agreed to under the franchise agreement. The signed agreement will bind the parties concerned and must be implemented in good religion.

Operational compliance

What mechanisms are normally incorporated in agreements to ensure operational compliance and standards?

Below are the mutual mechanisms required nether a franchise agreement:

  • inspection rights;
  • periodic audit reporting to exist made to franchisor;
  • copy of all insurance policies procured and maintained past franchisee to be provided; and
  • in some cases, specific certifications (such equally halal certification) to exist obtained

Amendment of operational terms

May the franchisor unilaterally modify operational terms and standards during the franchise relationship?

There are no legal restrictions on the right of the franchisor to introduce changes, both to the operational terms and standards. Nonetheless, if the changes will have a material touch on the local business organisation, the franchisee should be informed of the changes before they are implemented. Too, ideally, the franchisor'south privilege to unilaterally change the operational terms and standards are included in the franchise understanding. In absenteeism of such a provision, we believe that information technology volition need franchisee's consent or, at least, a notice to be delivered to the franchisee of the changes.

Other laws affecting franchise relations

Do other laws impact the franchise relationship?

Franchises are exempt from the Anti-Monopoly Constabulary (article 50B of the Anti-Monopoly Law). Co-ordinate to the Commission Guidelines under this police, the law does not utilize to licence or franchise relationships. However, the commission has issued farther guidelines under which the exclusion of franchise related agreements does non ever utilize, equally they could comprise provisions that would lead to monopolistic practices or unfair business competition.

Other laws or regulations may touch on the franchise relationship. For example, regulations on import activities, food and drink-related regulations such equally food registration and halal certification, consumer protection laws, zoning rules, advert restrictions, etc.

Policy affecting franchise relations

Do other regime or trade association policies affect the franchise relationship?

The MOT's policies and the Committee Guidelines should exist taken into business relationship when preparing a franchise arrangement.

Termination by franchisor

In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor'due south ability to end a franchise relationship?

In general, the parties should state in the franchise agreement the circumstances that may give rise to termination of the franchise relationship. Under article 1266 of the ICC, a political party may non unilaterally finish an agreement without a ruling of the court with jurisdiction. If an agreement waives this article and contains a clause assuasive unilateral termination, by reason of either breach or default or whatever other reason, i of the parties to the agreement may unilaterally stop it. Consequently, it is appropriate to include a waiver of article 1266. The franchise agreement may also be terminated by agreement between the parties.

Termination past franchisee

In what circumstances may a franchisee terminate a franchise human relationship?

See question 32.

Renewal

How are renewals of franchise agreements ordinarily effected? Practise formal or noun requirements apply?

The terms and weather for the renewal will be every bit provided and agreed to in the franchise agreement. Obviously, before a franchise understanding can exist renewed, certain weather condition must be satisfied. For example, the franchisee must not exist in alienation of the franchise agreement and financial obligations must have been settled, etc. A franchise renewal fee is ordinarily paid. At that place is no formal or substantive requirement applicative for a renewal.

Refusal to renew

May a franchisor turn down to renew the franchise understanding with a franchisee? If yeah, in what circumstances may a franchisor refuse to renew?

Yes, the franchisor may refuse to renew the franchise understanding with the franchisee. Every bit with termination, the parties should agree to the franchise renewal rights and their terms and weather condition, and they should exist stated in the franchise agreement. It is prudent to state in the understanding that the agreement will expire on a sure date, and either political party may convey a written request for its renewal to the other party at least three or six months before the decease of the agreement. Automated renewal is non recommended as information technology makes information technology as well easy to miss the death engagement of the current term, which may mean that the agreement will continue under the same terms and conditions. The franchisor should state that it may, at its sole discretion, refuse to renew the franchise. In the event of its renewal, the parties will sign a renewal understanding with the terms and conditions agreed to between them. Withal, it is recommended that the discontinuation of the franchise relationship (either by termination or non-renewal, or otherwise) be made amicably in order to secure a clean-suspension agreement or letter from the franchisee. This will allow the franchisor to engage a new franchisee, if required, adequately easily.

Transfer restrictions

May a franchisor restrict a franchisee's power to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?

Yes, this restriction should exist stated in the franchise understanding. The franchisor unremarkably has these rights. The franchise agreement ordinarily only allows the franchisee to transfer its franchise or undertake a transfer of ownership in the franchisee entity with the prior written approval of the franchisor. The aim of this brake is to ensure the connected functioning of the franchise despite the transfer of the franchise or transfer of buying in the franchisee entity.

Fees

Are in that location laws or regulations affecting the nature, corporeality or payment of fees?

At that place are no specific laws or regulations affecting the nature, amount or payment of fees. See question 39.

Usury

Are there restrictions on the corporeality of interest that tin can be charged on overdue payments?

The parties may specify in the agreement the amount of interest to be charged on overdue payments. The underlying principle is the skillful religion of the parties. The aggrieved party can seek a reduction in the involvement payable if it believes the amount is not reasonable. The involvement rate provided for in a contractual agreement may exceed the legal interest rate (6 per cent nether the Statute Volume of the Dutch East Indies, 1848-22, which applies when no interest rate is agreed to, under a courtroom ruling every bit long as the parties agree. Information technology should also be noted that:

  • the Statute Volume of the Dutch East Indies, which was published in 1938 (before Indonesia'due south independence), regulates matters related to usury; and
  • there is alien instance law in Republic of indonesia regarding high interest rates provided for in contractual agreements. Some Indonesian court decisions have held that loftier interest rates must be reduced considering, among other things, they are opposite to justice and humanity. Other courtroom decisions have held that high interest rates agreed to past the parties under a contractual understanding must be honoured by the parties.

It should be remembered that Republic of indonesia operates a ceremonious law system. Different in the common police force arrangement, courts practice not have to follow precedent. Each case is decided according to the presiding court's interpretation of the law and conclusion of the facts. It is, therefore, difficult to predict how the courts will decide on specific matters.

Foreign exchange controls

Are there laws or regulations restricting a franchisee's ability to make payments to a foreign franchisor in the franchisor'due south domestic currency?

No, at that place is no law or regulation restricting a franchisee's ability to make payments to a foreign franchisor in the franchisor's domestic currency. However, note the requirements related to the purchase of strange currency against the rupiah discussed in question 4.

Law No. vii of 2011 regarding currency requires the rupiah to be used for any payments, financial transactions or the settlement of obligations in the territory of the Indonesia, except for:

  • certain transactions for the implementation of the state budget;
  • grants from or to Republic of indonesia;
  • international merchandise transactions, which include exports and imports of goods out of or into the Indonesian community expanse, and the cantankerous-border provision of services through cross-border supply and overseas consumption (such as an Indonesian citizen who is studying abroad);
  • deposits in foreign currencies with Indonesian banks; or
  • international financing.

Given the higher up, whatever transaction between two Indonesian entities in Republic of indonesia is bailiwick to the Currency Law, and therefore whatsoever payment must exist made in rupiah. Meanwhile, any transaction between Indonesian entities and overseas entities such as a franchise agreement or technical services agreement can be categorised as an international trade transaction since the services are provided from overseas and may be classified as cantankerous-border supply and therefore the fee chargeable may exist in US dollars or any other foreign currency.

The sanction for a violation of this requirement is imprisonment for upwards to ane year and a fine of up to 200 million rupiah. In addition, whatsoever recipient who refuses to take payment in rupiah for the settlement of financial transactions in Republic of indonesia is liable to up to one yr in prison and a fine of up to 200 million rupiah, unless:

  • it is in doubt most the genuineness of the money received;
  • it has been agreed to in writing with the other parties to the understanding that payment will exist made in foreign currency; or
  • the payment is for one of the transactions specified in the previous paragraph.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Yes, they are generally enforceable. The franchise agreement should land that the franchisor volition exist entitled to certain amercement or to pursue sure sanctions in the event of a violation of the confidentiality covenants.

Good-faith obligation

Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise understanding? If so, how does information technology affect franchise relationships?

Yes, the ICC requires all agreements to be entered into in good religion. Article 1338 of the ICC states that all agreements validly entered into shall serve as law for the parties to them. Agreements cannot be cancelled except by mutual agreement between the parties, or for reasons determined by law. All agreements must exist implemented in practiced organized religion.

Franchisees every bit consumers

Does whatsoever law care for franchisees every bit consumers for the purposes of consumer protection or other legislation?

The Consumer Protection Law (Law No. 8 of 1999) defines consumers every bit users of goods and services for their own, their family members', or other persons' or other living creatures' purposes, not for trading. The law explains that consumers are terminate-users of the products and services. As franchisees are business agents, non end-users, they are not treated equally consumers for the purposes of consumer protection.

Language of the agreement

Must disclosure documents and franchise agreements be in the language of your country?

The disclosure document and the franchise agreement may be in a foreign language, just its Indonesian translation must be provided. Ideally, both the foreign and the Indonesian versions must be signed by the franchisor and franchisee.

In improver, Law No. 24 of 2009 on the National Flag, Linguistic communication, Emblem and Anthem (the Language Police) requires the Indonesian language to be used in, among other things, agreements entered into by Indonesian parties. If the understanding involves foreign parties (such as a foreign franchisor and an Indonesian franchisee), the agreement can be executed in a dual language format (eg, Indonesian and the foreign language side-by-side), which will be treated the same every bit the original. The Language Constabulary does not provide any sanctions for a violation of the obligation to employ the Indonesian linguistic communication or any further explanations of what is meant by all versions being the same as the original (in the case of a dual-language understanding).

The Linguistic communication Law was issued in 2009, and in theory, an implementing regulation should have been issued within ii years. However, so far, it has not been issued. Awaiting this enabling regulation, information technology is still unclear what the legal result of having an agreement executed merely in English will be or the choice of a foreign language in the consequence of whatsoever conflict between the Indonesian and the English language versions, for example. Therefore, it is advisable to include a clause conspicuously confirming the parties' understanding on this matter in the agreement. It tin can also be argued that an agreement that has been entered into binds the contracting parties as a law which should be implemented in good faith. In addition, the Indonesian translation of a foreign linguistic communication franchise understanding is expected to be prepared by a sworn translator.

A precedent is provided by a court ruling on a ceremonious case handed downward in June 2013 based on the Linguistic communication Law, nether which a contract governed by Indonesian law only executed only in the English language linguistic communication was declared nil and void. An appeal confronting this ruling was rejected by the Jakarta High Court and Supreme Courtroom. Although Indonesia does not take a organisation of precedent as exists in certain common police force jurisdictions and other Indonesian courts reviewing similar cases are not required to follow this ruling, the contracting parties should be aware of this possibility.

Restrictions on franchisees

Describe the types of restrictions placed on the franchisees in franchise contracts.

Other than the restrictions nether the applicable regulations below, the types of restriction nether a franchise understanding will exist every bit agreed betwixt the parties.

Governing law

An Indonesian franchise agreement must exist governed by Indonesian law.

Business areas

Except in provincial capitals, a franchise concern may non be conducted unless the municipality or area has been 'opened' specifically for franchise activities by the Ministry building. Once more, this is to protect smaller enterprises. The precise location of franchise activities (whether in a traditional market or in a modern shopping mall) is too regulated, as is the ability to appoint franchisees for the same products or services in adjacent sites in a item location. A convenience store may exist field of study to the zoning restrictions depending on the size of the store, for example, a mini-market must be located at least 0.5km away from the local market place and on the side of the road.

Training programmes

A franchisor must provide its franchisees grooming in the grade of operational management assistance, marketing, research and sustainable development. The post-obit are the types of grooming that the franchisor should provide to its franchisees:

  • teaching and training in the franchise management organization, to help the franchisees to operate the franchise in practiced club and to brand a profit;
  • routine operational direction assist, so any operational errors tin exist remedied immediately;
  • market development assistance through promotions using advertisements, leaflets, catalogues, brochures or participating in exhibitions; and
  • market research and the evolution of products to be promoted, and then that the products see market place needs and are accustomed past the market.

The authorised agency volition revoke the franchisor'due south certificate if the franchisor fails to provide the above after receiving iii consecutive warning letters, although information technology appears that this has never been tested in do.

Meet besides questions 15 and 45.

Competition law

Describe the aspects of competition police force in your country that are relevant to the typical franchisor. How are they enforced?

The Commission Guidelines signal areas of business to be taken into business relationship when drafting franchise agreements. These areas include resale price maintenance, the procurement of appurtenances or services from the franchisor or its appointees, the purchase of other goods or services from the franchisor, area restrictions and undertaking competitive business organisation after the expiry of a franchise arrangement. In general, these are not prohibited, but the parties must make certain that the franchise arrangement does non create or issue in monopolistic practices or unfair business competition. The Commission Guidelines cover the following.

Resale price maintenance

A franchisor may not fix the sales prices to be charged to customers past its franchisee. From the anti-monopoly perspective, fixing sales prices tin can lead to price uniformity amidst franchisees, and customers then have no choice. A franchise understanding containing a stock-still sales price therefore violates the Anti-Monopoly Police force. However, to maintain the economic value of the franchise business concern, the franchisor is immune to recommend sales prices to its franchisee so long as the recommendation is not binding.

Procurement of appurtenances or services from the franchisor or its appointees

A franchisor cannot require the franchisee to only procure goods or services from the franchisor or its appointees. An exemption from the Anti-Monopoly Law may apply if the purpose of the restrictions is to protect the franchisor's reputation and to maintain the franchise. However, the franchisor cannot foreclose the franchisee from purchasing similar goods or services from other sources if they run into the quality standards set by the franchisor.

Purchasing other appurtenances and services

A franchise understanding that obliges the franchisee to purchase goods and services that are non related to the franchise from the franchisor is not exempt from the Anti-Monopoly Law.

Area restrictions

The purpose of an area restriction under a franchise agreement is normally to establish a franchise networking system and to determine the permitted activities of the franchisor and franchisee in the detail surface area. However, this restriction violates the Anti-Monopoly Law if the intention is to limit customers' access to the franchised appurtenances or services if the customers are domiciled outside the determined franchise area, or to plant marketplace boundaries or assign a share of the market.

Noncompete provisions

Post-obit the termination or decease of a franchise agreement, a franchisor may prohibit the franchisee from engaging in the same business as the franchisor. This restriction is acceptable nether the Anti-Monopoly Law as long as the purpose is to protect the intellectual holding rights of the franchisor or to maintain the reputation of the franchise, in particular, if the franchisor has transferred its know-how. Several factors volition exist considered by the committee in deciding whether a noncompete period is acceptable, such as the technology that has been transferred and the total investment made. Nether the Commission Guidelines, if the technology has entered the public domain and the investment so far has not been pregnant, the noncompete period would normally be i yr.

Courts and dispute resolution

Describe the court organization. What types of dispute resolution procedures are available relevant to franchising?

The 1945 Constitution and relevant laws governing Indonesia'south judicial system (for example, Law No. 48 of 2009 on the Jurisdiction of the Courts of Justice) divide judicial authority between the Supreme Court and the Ramble Court. The Supreme Court has jurisdiction over appeals confronting rulings of the full general courts, religious courts, military courts and the Country Authoritative Courtroom. Unlike other courts, the Constitutional Courtroom is not supervised by the Supreme Court.

Republic of indonesia likewise recognises several specialised courts: commercial courts, which rule on bankruptcy petitions and trademark infringements; children'due south courts; human rights courts; industrial relations courts; fisheries courts, which operate under the general courts; and revenue enhancement courts, which operate under the state administrative courts.

Commonly, a lawsuit is initiated by a plaintiff submitting a complaint to the chairman of the commune court with jurisdiction over the defendant'southward domicile. The plaintiff is and then required to register the lawsuit with the Deputy Registrar of the commune court. The losing party at district court level can entreatment to the High Court. Information technology may accept a year or more for the High Courtroom to issue its ruling. The losing party under a Loftier Court decision may appeal confronting it to the Supreme Courtroom. It can take iii years or more than for a final conclusion to be issued. Unless stated otherwise in the relevant law, a panel of judges consisting of at to the lowest degree three judges, one of whom acts every bit the presiding judge, will examine the lawsuit. The judgment must exist delivered in open public court.

Likewise as through the courts, the parties may also settle their dispute past arbitration or an culling dispute resolution method if they agree to do so. The law defines an alternative dispute resolution method equally through an establishment for the settlement of disputes or divergent views through an out-of-courtroom procedure agreed to by the parties (ie, consultation, negotiation, mediation, conciliation or evaluation by experts). Foreign arbitral awards are enforceable in Republic of indonesia. The enforcement of an arbitral award, whether domestic or strange, requires an execution order to exist issued by the relevant court.

Mediation - advantages for franchisors

Describe the master advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.

Theoretically, the principal advantages of arbitration for strange franchisors are the following:

  • the confidentiality of the dispute between the parties is guaranteed;
  • procedural and administrative delays can exist avoided;
  • the parties can appoint an arbitrator who in their view has proper knowledge, experience and groundwork in the thing in dispute;
  • the parties can determine the choice of police for settlement of any dispute, besides as the arbitration procedure and venue (except in certain commercial transactions, such every bit franchise arrangements to which Indonesian law applies); and
  • the decision resulting from arbitration tin can be implemented through a supposedly uncomplicated procedure.

Withal, at that place are certain disadvantages to arbitration over normal litigation, for example:

  • while Indonesian arbitration constabulary attempts to reduce the potential for delays in the enforcement of arbitral awards, at that place is a distinct danger that the tight procedural fourth dimension limit for courts to hear appeals or for the disputing parties to gear up and make filings may result in hasty decisions and rushed drafting; and
  • some uncertainty is caused by some of the provisions of the Arbitration Law (eg, the parties must try to resolve the dispute within 14 days before proceeding to an culling dispute resolution method, but when the 14-day period commences or whether information technology tin be extended is non stated).

Another example is where a party wants urgent injunctive relief in the effect of default past the defaulting political party. Some contracts provide for one or both parties to seek urgent relief from the courts. This has the obvious disadvantage that in one case a matter is earlier the courtroom, it is very difficult to halt the action and the party bringing the action will have to face up counterclaims, etc. Finally, in do, it is often difficult to prevent another party taking a dispute to the courts even though the parties have chosen arbitration as the exclusive dispute resolution mechanism.

National handling

In what respects, if at all, are strange franchisors treated differently from domestic franchisors?

Indonesian franchise regulations utilize as to foreign and domestic franchisors. Authoritative requirements may differ, just, in general, strange and Indonesian franchisors are not treated differently.

Update and trends

New legislation and regulation

Are there whatsoever proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to note?

New legislation and regulation49 Are at that place any proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to annotation?

In relation to the introduction of a new Online Unmarried Submission (OSS) system past the Indonesian government, a foreign franchisor is now required to be registered with the OSS organization to obtain a business registration number (Nib). Following receipt of its NIB, the franchisor may submit the disclosure certificate through the online registration system of the Ministry of Trade.

Finally, and in relation to a prominent update and tendency that indirectly relates to application legislation and regulation, information technology is apparent that a number of franchise parties are trying to construction their arrangements in a way that does not trigger the disclosure, registration and other requirements of Indonesia's franchise regime. This is undertaken by fashion of some other contractual (eg licensing or retails sales) agreements that are drafted to specifically try to avoid being classified as a franchise. The legality and effectiveness of carrying out these arrangements is all the same somewhat uncertain, but at that place is no doubt that many concern activities that could hands and might unremarkably be seen as franchises are beingness classified by the relevant parties in a different style. Any franchise party that tries to avoid the franchise regulatory regime should first obtain detailed legal advice in this regard.