Commercial Agency Contracts in Indonesia

All agreements under the Indonesian Law including commercial agreements/contracts shall be based on the freedom of contract principle promulgated in the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata / Indonesian Civil Code or “ICC”).

Based on Article 1338 of ICC, all agreements that are validly made shall prevail for the parties to such agreement. The word “validly” in Article 1338 of ICC means that the agreement shall qualify with the minimum requirements of a valid and binding agreement based on Article 1320 of ICC.

The minimum requirements of a valid agreement are as follows:

• the Agreement is made by the parties;
• the parties have the legal capacity to enter into the Agreement;
• the parties agreed on a certain amount and/or object;
• the object of the Agreement does not contravene the prevailing laws and regulations as well as common social norms (i.e., it does not contravene UUD 1945 Constitution or any other laws and regulations).

Furthermore, the Agreement must be made in Bahasa Indonesia language according to Law No. 24 of 2009 on Flag, Language, and State Symbol, including National Anthems ("Law 24/2009”) or at least, made in bilingual format (e.g., English and Indonesian language).

Lastly, the Agreement must meet the minimum provisions as stipulated in Ministry of Trade Regulation No. 24 of 2021 on Engagement for Goods Distribution by a Distributor or an Agent (“MoTR 24/2021”) Article 6 paragraph (3), such as:

• name and address of the parties;
• intent and purpose;
• status of agency or distributorship;
• type of traded goods;
• marketing regions;
• rights and obligations of each party;
• authorization;
• time of validity;
• procedure of termination of the agreement;
• procedure of dispute resolution;
• governing law; and
• grace period for resolution.
  

Under Minister of Trade Regulation No. 22/M-DAG/PER/3/2016 of 2016 on General Provisions of Goods Distribution, as amended by Minister of Trade Regulation No 66 of 2019 (“MoTR 22/2016”), the type of activities of an agency falls under the term Distribution, (i.e., direct or indirect transfer of goods to the consumer). While a direct distributorship involves the principal as the seller, an indirect distribution involves distributors, agents, and/or their affiliated networks or entities.

MoTR 22/2016 differentiates intermediaries in distribution activities. Based on Article 3 paragraphs (2) and (3), the intermediaries in distribution activities comprise of:

• distributors and their affiliated networks: the marketing of goods can be carried out by the distributors and their affiliated networks such as sub-distributors, wholesalers, and retailers; and
• agencies and their affiliated networks: the marketing of goods can be carried out by the agent and its affiliated networks such as sub-agents, wholesalers, and retailers;
• (together, the “Indirect Distributors”).

In this regard, the difference between a distributor and an agent is the representative person marketing the goods. A distributor acts on behalf of its own, based on the appointment by the producers or suppliers or importers according to an agreement, while an agent acts on behalf of its appointers, according to the agency’s commercial contract.

Under Article 6 of MoTR 24/2021, the appointment through the agency contract shall be formulated as a valid agency appointment. The formulation of a valid agency appointment must be evidenced as follows:

• if the product is originated outside Indonesia, the Agreement should be legalized by a public notary and apostilled at the principal’s country of origin;
• if the product is originated inside Indonesia, the Agreement should be legalized by a public notary.

Furthermore, MoTR 24/2021 stipulates that an agent shall be appointed by the following entities:

• principal Producer;
• principal Supplier based on the agreement with the Principal Producer;
• foreign investment company (Perusahaan Penanaman Modal asing or “PMA”) that engages in trading activities as a Distributor; or
• foreign Trade Representative Office.
  

Based on Article 19, Minister of Trade Regulation No. 66 of 2019 on Amendment of MoTR 22/2016 (“MoTR 66/2019”), prohibitions for intermediaries include the following activities:

• distributors, sub-distributors, wholesalers, agents, and sub-agents are prohibited from selling goods in small quantities to the consumers;
• agents and sub-agents are prohibited from transferring the rights of the appointing producers, foreign suppliers, or importers over the goods;
• indirect distributors are prohibited from distributing the goods through a direct selling system that has the exclusive distribution rights;
• an importer, which acts as a distributor, is prohibited from distributing the goods directly to the retailers.
  

Under MoTR 24/2021, the exclusivity right is given to an agent if the agent is appointed as a sole agent.

Under Article 1 of MoTR 24/2021, a sole agent is defined as the only entity granted the exclusive right by the appointer/ principal to sell its products in Indonesia or a certain region. The exclusivity rights shall be stipulated under a certain agreement between the appointed sole agent and the principal. Please note that such agreement must fulfil the general requirements of an agency contract as mentioned in our elaboration on Points 1 and 4.

It is mandatory by way of the minimum required provisions in an agency agreement under Article 6 Paragraph (3) MoTR 24/2021 to include clauses on the procedure of the dispute resolution.

As Article 1338 of ICC enforces the freedom of contract to the parties of the agency agreement, the choice of dispute resolution forum shall be determined in the agency agreement by the parties.

The appointer of an agent or a principal may propose the choice of forum based on its jurisdiction. However, please be informed that unless the parties choose an Indonesian court or arbitration, it is practically difficult to enforce a judgment from a foreign court in Indonesia. For enforcement in Indonesia, the parties need to hold another proceeding in the Indonesian court.

In common practice, dispute resolution under Indonesian courts can be determined based on the domicile of the agent. The dispute resolution process begins from the first instance court (Pengadilan Negeri or “PN”), followed by proceedings in the High Court (Pengadilan Tinggi or “PT”), and lastly, the Supreme Court of Indonesia (Mahkamah Agung or “MA”).

The parties elect the option of arbitration dispute resolution. This could be an arbitration forum in Indonesia or another jurisdiction. In Indonesia, arbitration proceedings are held by the National Arbitration Center (Badan Arbitrase Nasional Indonesia or “BANI”).

If the parties choose a foreign arbitration forum, Article 67 paragraph (1) of Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (“Law 30/1999”) stipulates that a foreign arbitral award can be enforced in Indonesia after such award is registered in the Central Jakarta District Court (PN Jakarta Pusat).

A contract can be terminated when the period of the contract expires, or a party of the contract intends to terminate the contract before the validity ends.

In line with Article 1338 of ICC, the parties of the contract are free to determine the validity of the appointment of an agent. In this matter, an agency contract can be valid for a limited timeframe.

Furthermore, Article 8 Paragraph (1) MoTR 24/2021 states that a valid agency agreement can be terminated before its expiration in the event of:

• the company (i.e., agent or appointer) is dissolved;
• the company has halted its business activity;
• the company goes bankrupt; and/or
• the termination is agreed by the parties to the agency contract.