The findings are particularly relevant as the franchise industry continues to expand across Indonesia. Franchising has become a popular strategy for business growth because it allows entrepreneurs to operate under established brands and proven business models. However, the study emphasizes that the success of a franchise depends not only on brand recognition but also on the quality and consistency of the business system provided by the franchisor.
According to the researchers, a franchise agreement is far more than a license to use a trademark. It establishes a legal relationship in which both parties have enforceable rights and obligations. Beyond granting trademark rights, franchisors are expected to provide a comprehensive business system that includes standard operating procedures (SOPs), employee training, operational support, business supervision, and the transfer of know-how necessary for running the business successfully.
In practice, these obligations are not always fulfilled. The study identifies several common problems, including inadequate operational guidelines, insufficient training, poor ongoing support, and business systems that differ significantly from what was promised during the franchise offering. Such failures can lead to financial losses, declining business performance, or even the collapse of franchise operations.
To examine these issues, Astawa and Prakoso employed a normative legal research approach. They analyzed the provisions of the Indonesian Civil Code (KUHPerdata), Government Regulation No. 42 of 2007 on Franchising, legal doctrines on contract law, and relevant court decisions involving franchise disputes. This approach enabled the researchers to assess how Indonesian law addresses breaches of contractual obligations within franchise relationships.
The study concludes that Articles 1239 and 1243 of the Indonesian Civil Code provide the principal legal basis for holding franchisors accountable when they fail to perform their contractual duties.
Article 1239 stipulates that a party who does not fulfill contractual obligations may be considered in breach of contract. Article 1243 further provides that the injured party may claim compensation for expenses, damages, and lost profits resulting from that breach.
Importantly, the researchers argue that a franchisor's obligations are continuous in nature. Their responsibilities do not end after granting the right to use a trademark or assisting with the opening of a franchise outlet. Instead, franchisors are expected to provide continuous operational assistance, training, supervision, and business development support throughout the duration of the franchise agreement.
Consequently, a failure to provide these essential services may constitute a legal breach if it causes measurable harm to the franchisee.
The research highlights several forms of franchisor misconduct frequently encountered in franchise practices, including:
- Failure to provide adequate standard operating procedures (SOPs).
- Failure to conduct continuous training programs.
- Insufficient operational guidance and supervision.
- Delivery of a business system that differs from the original franchise offer.
- Lack of ongoing business support as stipulated in the contract.
According to the authors, these actions not only violate contractual obligations but also conflict with the legal principle of good faith, one of the fundamental principles governing contract law in Indonesia.
Another significant finding concerns the unequal bargaining power between franchisors and franchisees. Most franchise agreements are drafted as standard-form contracts, leaving franchisees with little or no opportunity to negotiate their terms.
Many agreements also contain limitation of liability clauses that predominantly protect franchisors while making it more difficult for franchisees to seek compensation when the promised business system fails to perform as expected.
Astawa and Prakoso argue that these conditions expose a significant normative gap in Indonesia's franchise regulations. Although Government Regulation No. 42 of 2007 requires franchisors to provide ongoing support, it does not establish clear legal standards for determining when a failure to provide an adequate business system constitutes a breach of contract.
As a result, dispute resolution often depends heavily on judicial interpretation and the specific wording of franchise agreements, creating uncertainty for both parties.
When disputes arise, the study explains that franchisees have several legal options.
The first is litigation, allowing franchisees to file breach-of-contract lawsuits seeking financial compensation or even termination of the franchise agreement when the contract's primary purpose can no longer be achieved.
The second option is alternative dispute resolution (ADR), including arbitration and mediation. The researchers note that these mechanisms are generally faster, more flexible, and better suited to preserving long-term business relationships than court proceedings, which often involve lengthy processes and higher costs.
Nevertheless, the effectiveness of either approach depends largely on the quality of the franchise agreement and the franchisee's ability to demonstrate that the franchisor's failure directly caused the business losses.
Based on these findings, the researchers recommend that the Indonesian government strengthen franchise regulations by establishing minimum legal standards for the business systems that franchisors are required to provide. They also advocate for clearer legal parameters defining business system failure, explicit rules regarding franchisor liability, and stronger legal protections to ensure a more balanced contractual relationship between franchisors and franchisees.
According to Astawa and Prakoso, these reforms would improve legal certainty, reduce the likelihood of franchise disputes, and increase confidence in Indonesia's franchise industry.
"Articles 1239 and 1243 of the Indonesian Civil Code, together with the principle of pacta sunt servanda, provide the primary legal foundation for franchisor liability in cases of contractual breach. Stronger franchise regulations are therefore necessary to ensure legal certainty and more effective protection for franchisees," the authors conclude.
Author Profile
I Ketut Astawa is a legal scholar at the Faculty of Law, Universitas Singaperbangsa Karawang (UNSIKA), Indonesia, specializing in civil law, commercial law, contract law, and business dispute resolution.
Andrianto Dwi Prakoso is a lecturer at the Faculty of Law, Universitas Singaperbangsa Karawang (UNSIKA), Indonesia, with expertise in commercial law, contract law, franchise regulation, and legal protection in business transactions.
Research Source
Title: The Franchisor's Legal Liability for Breach of Contract in the Provision of a Franchise Business System
Authors: I Ketut Astawa & Andrianto Dwi Prakoso
Journal: Indonesian Journal of Advanced Research (IJAR), Vol. 5, No. 6 (2026), pp. 941–956
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