Buying a Franchise: Secure Your Right to Remedy Breaches

Before buying a franchise in Indonesia, do not just read the operating standards. Check what happens if your outlet is deemed to have breached them. Record-keeping errors, poor hygiene and late reports can have different consequences. In a healthy franchise network, standards should be upheld through clear assessments and defined opportunities to put problems right. Prospective franchisees should therefore examine the procedures for notification, evidence, remedial action and penalties before signing the agreement.

1. Distinguish between legal requirements and contractual protections

Government Regulation No. 35 of 2024 on Franchising provides Indonesia’s regulatory framework for franchises, replacing Government Regulation No. 42 of 2007. It stipulates that franchise agreements must be made between parties of equal legal standing and governed by Indonesian law.

Franchisors must also provide prospective franchisees with an offering prospectus at least 14 calendar days before the agreement is signed. Use the period before signing to request the draft agreement and the operating standards that will be binding on your outlet.

However, do not assume these provisions automatically grant a specific period to remedy every breach. You must check the contract specifically for the opportunity to remedy breaches, including any exceptions and the consequences if remedial action has not been accepted.

Agreements are also generally subject to the Indonesian Civil Code. Article 1320 sets out the requirements for a valid agreement, including the parties’ consent and legal capacity. A legally valid contract does not necessarily mean that every clause favours the buyer. Ask a legal adviser to review broad or unclear penalty clauses before you accept them.

2. Make sure breaches are clearly defined

Wording such as “the franchisee must protect the brand’s reputation” is important, but too general to serve as the sole basis for penalties. Ask which actions constitute a breach, how compliance is checked and what evidence is used.

Use the following checklist when reading the draft agreement:

• Applicable standards: are the obligations set out in the agreement, its appendices or an operating manual that you can review?
• Assessment methods: are assessments based on checklists, photographs, transaction records or specific tests?
• Decision-makers: who has the authority to confirm findings and approve remedial action?
• Categories of breach: are administrative errors distinguished from safety issues or fraud?
• Repeat breaches: how are repeat incidents counted, and when is a breach treated as closed?

For example, a late stock report should not automatically be treated in the same way as selling products that endanger customers. This is a principle of proportionality to propose during negotiations, not a guarantee that every brand must use the same categories.

Also ask how changes to standards are communicated. Franchisees need to know which version of the manual applies, so they are not assessed against requirements they have never received.

3. Negotiate the notification and remediation process

A right to remedy a breach can be difficult to exercise if the notice is unclear or the deadline starts running before it is received. Propose a written procedure covering the following stages.

First, notification of findings. The notice should identify the obligation breached, the evidence, the action required and the potential penalties. Specify an email address or other official communication channel, so notices are not delivered solely through informal conversations with field staff.

Second, an opportunity to respond. You need to be able to correct factual errors, for example where a late report was actually caused by a fault in the central system. Specify who receives your response and how it will be recorded.

Third, a deadline appropriate to the problem. Correcting documents is different from repairing premises or equipment that require a technician. Negotiate how the time allowed is determined, when it starts and the procedure for requesting an extension where there are demonstrable obstacles.

Fourth, verification of completion. Specify what evidence of remedial action will be accepted and when the franchisor must review it. Request written confirmation that the finding has been closed, so a resolved issue does not continue to count as an outstanding breach.

Safety risks or suspected serious fraud may require immediate interim action. Even so, the contract should explain the grounds, scope, review process and conditions for lifting such measures. Do not confuse a temporary suspension for safety reasons with permanent termination of the franchise relationship.

4. Assess how penalties could affect your outlet’s cash flow

Penalties are not always fines. Suspending supplies, disabling access to systems or restricting an outlet’s activities can hamper sales while rent and wages still have to be paid.

Run a simple scenario using your outlet’s own expenses. If operations are restricted, how long could the available cash cover fixed costs? Would minimum royalties or other payments still be due? Who pays for re-inspection? Do not assume that all costs automatically stop when the outlet is not operating.

Next, ask whether several penalties can be imposed for a single incident. Also check whether challenging a finding puts penalties on hold. The answers should be in the written terms, not just in explanations from sales staff.

Before signing, take one example of a minor breach and one of a serious breach to the franchisor. Ask them to explain the process from the initial finding through to closure, then check their explanation against the contract.

The bottom line: make sure you know what constitutes a breach, how to challenge an incorrect finding, what opportunity you have to put matters right and when penalties end. A promise to “discuss it later” is no substitute for a written procedure.