Setting Out Dispute Resolution in a Franchise Agreement

When you start franchising your business, disagreements can no longer be settled simply through instructions from the owner. A franchisee is a party to an agreement, not a subordinate. Before taking on your first franchisee, establish a dispute resolution process that is clear, affordable and workable. Within a franchise network, this helps protect both parties’ rights while maintaining customer service when relations are strained.

1. Distinguish operational complaints from contractual disputes

Not every problem at an outlet needs to go straight to a solicitor. A delayed response from the support team, for example, may begin as an operational complaint. However, it can become a contractual dispute if the franchisee believes the delay breaches the obligation to provide support and has caused a loss.

Create two connected channels:

• Complaints channel: managed by the person responsible for operations to find solutions to day-to-day problems.
• Disputes channel: initiated by a written notice explaining the obligation in question, the relevant events and the remedy sought.

Specify who is authorised to receive notices on behalf of each party. An outlet address alone is often insufficient, as a letter may be received by an employee who does not understand its significance. Include correspondence addresses, official email addresses and a procedure for updating contact details.

Prepare a simple form with fields for the sequence of events, supporting documents, impact and proposed solution. A form helps keep discussions grounded in facts, but it should not become a barrier to complaints whose substance is already clear.

2. Give the clause the right legal foundation

The main reference is Indonesian Government Regulation No. 35 of 2024 on Franchising, which repealed Government Regulation No. 42 of 2007. Do not copy an old template without reviewing it. Regulation 35/2024 stipulates that a franchise relationship must be based on an agreement in which the parties have equal legal standing and which is governed by Indonesian law. Dispute resolution is among the minimum matters the agreement must address.

This requirement does not mean that writing “to be resolved through mutual consultation” is enough. The clause should explain how consultation begins, who represents each party and what happens next if no agreement is reached.

Regulation 35/2024 also requires the offering prospectus to be provided at least 14 calendar days before the franchise agreement is signed. As good practice, provide a draft agreement at the start of the review period so prospective franchisees can understand the implications of the dispute resolution clause and seek independent advice. Do not confuse this recommendation to provide the draft with the mandatory timing requirement for the prospectus.

If you are considering arbitration or alternative dispute resolution, take account of Indonesian Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution. Ask a legal adviser to assess whether the chosen route suits the types of dispute likely to arise, the parties’ resources and capabilities, and the agreement as a whole.

3. Set out stages with deadlines and clear authority

A good process provides opportunities to repair the relationship without leaving problems unresolved indefinitely. Set out the following stages with agreed deadlines, rather than treating those deadlines as periods prescribed by law.

First, notice and response. Specify when a notice is deemed to have been received, how long the recipient has to respond and which documents must be exchanged. Distinguish an acknowledgement of receipt from a substantive response.

Second, negotiations between authorised representatives. Bring together people who can approve a solution. Repeated meetings with staff who lack the authority to offer compensation or change an implementation timetable will only prolong the problem.

Third, mediation if agreed. Explain how a neutral mediator will be selected, how costs will be shared, where meetings will take place or whether they will be held online, and how the outcome will be recorded. Any settlement should specify concrete actions, who is responsible for them and implementation dates.

Fourth, a clearly defined final forum. Choose either court proceedings or arbitration and draft the provisions consistently. Avoid clauses that offer several forums at once without explaining their relationship and respective authority. If choosing arbitration, identify the institution or procedures to be used, the place of arbitration, the language and the relevant cost arrangements.

Also consider the need for urgent measures through legally permitted channels. The negotiation stages should not be designed in a way that prevents parties from protecting their rights where there is a risk of harm that would be difficult to remedy.

4. Prepare evidence and operating rules for the duration of a dispute

A clause will be of little help if business records are in disarray. Before offering a franchise, establish procedures for storing agreements, invoices, payment records, incident reports and support communications. Use consistent file naming and access controls.

Also specify which obligations must continue to be fulfilled during a dispute, in accordance with the agreement and the law. Examples include maintaining customer safety, securing data and meeting obligations that are not in dispute. Do not automatically treat a complaint as grounds for suspending all services or payments.

Test the draft through a simulation: a franchisee challenges an invoice, head office rejects the challenge and negotiations then fail. Do staff know who receives the notice, what evidence to collect and which forum to use? Improve any step that still depends on an improvised decision by the owner.

Practical step: before recruiting your first franchisee, prepare a dispute resolution flowchart, a list of authorised contacts and a clause reviewed by a legal adviser. The aim is not to prepare for a fight, but to ensure disagreements can be handled fairly and in an orderly manner.