Buying a Franchise: Clarify the Dispute Resolution Process

Dispute resolution clauses are often overlooked because prospective franchise buyers are more focused on opening their outlet. Yet contractual rights can be difficult to enforce if the resolution process is unclear or too expensive. In franchising, clear rules for handling disagreements help both parties preserve their relationship while providing a way forward when ordinary discussions fail.

1. Distinguish between governing law and the dispute resolution forum

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. The regulation governs franchise operations based on agreements and requires the franchise offering prospectus to be provided at least 14 calendar days before the agreement is signed. Use this review period to ask about dispute resolution arrangements, not just investment details.

Alongside the specific franchise regulations, the general provisions on contracts in the Indonesian Civil Code remain relevant. If the contract provides for arbitration, also consider Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution.

Two separate questions need answering:

• Which law applies? This determines the legal rules used to assess the parties’ relationship and obligations.
• Where will disputes be decided? This determines the forum, such as a court or arbitration agreed in writing.

The phrase “governed by Indonesian law” does not identify the dispute resolution forum. Conversely, naming an arbitration institution does not explain all the procedures that will apply. Ask a legal adviser to assess both, particularly if the franchisor is based outside Indonesia.

2. Set out negotiation stages with clear deadlines

A clause stating that disputes will be “resolved amicably through discussion” sounds positive, but it is not sufficiently practical on its own. Without a procedure and deadlines, one party may keep insisting that negotiations are ongoing while the outlet’s problem remains unresolved.

Propose a process that specifies:

1. Notice of dispute: the address for notices, permitted delivery methods and the minimum information required.
2. Responsible representatives: individuals from each party who have authority to negotiate a settlement.
3. Deadlines: when negotiations must begin and when they will be deemed to have failed to produce an agreement.
4. The next stage: whether the matter proceeds to mediation, arbitration or court, as provided in the contract.

These deadlines need to be agreed; there is no standard timeframe that applies to every franchise. Tailor them to operational needs and the potential urgency of the issue.

Also check when a notice is deemed to have been received. A message to a sales representative may not satisfy the contract’s formal notice requirements. Keep evidence of delivery, receipt and responses so you can demonstrate that you have completed the required stages.

If mediation is used, specify how the mediator will be selected and how the costs will be shared. A mediator helps the parties reach an agreement; this differs from the role of a judge or arbitrator, who decides the dispute.

3. Assess the forum’s affordability, not just its name

Arbitration is not automatically the best option for every prospective franchisee. Nor are court proceedings always the most practical choice. Consider the size of the investment, the outlet’s location, the complexity of the contract and your ability to fund the process.

Under Law No. 30 of 1999, a written arbitration agreement generally excludes the jurisdiction of Indonesia’s district courts to hear disputes covered by that agreement. Arbitral awards are final and binding, with enforcement mechanisms and limited avenues for challenge set out in law. Do not, therefore, treat agreeing to arbitration as a mere formality.

Before agreeing to a forum, ask:

• Are the institution and its procedural rules accurately identified?
• In which city will proceedings take place, and is remote participation possible?
• Which language will be used?
• How will arbitrators be appointed if arbitration is chosen?
• Who pays the initial costs, and how will costs ultimately be allocated?

Obtain current fee information directly from the relevant institution or through a legal adviser. Also factor in travel, translation, legal representation and the time the owner will spend away from the outlet. Avoid assuming that you will necessarily be able to recover all costs from the other party if you win.

Be wary of wording that refers to both courts and arbitration without explaining their respective jurisdictions. Such ambiguity can lead to a further dispute over where the case should be brought.

4. Test the clause against an outlet-level problem

Before signing, work through a simple example: you dispute a charge, while the franchisor insists it must be paid. Trace who receives your objection, what evidence is needed, how long negotiations will last and which forum comes next.

Then check whether the contract explains your obligations while the dispute is ongoing. Must undisputed payments continue? How should an objection to a particular part of an invoice be recorded? Are there interim arrangements to keep the outlet operating? These points need to be negotiated clearly; do not assume that raising a dispute automatically suspends all obligations.

Seek legal advice if the clause gives only one party the right to choose the forum or allows procedures to be changed unilaterally. Also ensure that any negotiated settlement is recorded in writing by authorised representatives, rather than left as a verbal promise.

Practical takeaway: before buying a franchise, make sure you can explain the dispute resolution process on one page: how to raise an objection, the negotiation deadlines, the final forum and the estimated costs. If the process is unclear or unaffordable, negotiate improvements before signing.