Indonesia has over 275 million inhabitants which makes it the fourth largest population in the world. It is no wonder that it is an attractive market for foreign brands, and that more and more retailers wish to sell their products there.

Retailers have a number of legal structures they can use in order to sell their products in a foreign market. One such way is by appointing a local distributor. Below we present a few of the legal issues you need to consider when appointing a distributor in Indonesia.

Separate distributor and retailer

You may be tempted to appoint a single company as your partner for a multi-channel strategy. This partner would be both your distributor (the entity that buys the products from you and import them into Indonesia) and the product retailer (the entity that sells the products directly to end consumers). This would likely make your life simpler, as you would then deal with only one company.

This, however, is not possible in Indonesia. Under Indonesian law, distributors are not allowed to sell the products to end consumers (with some exceptions). At the same time, retailers (store operators) are not allowed to import goods directly from foreign manufacturers/brands.

At least two entities need to be involved to sell foreign products in Indonesia, namely:

• A distributor - to whom you sell your products and who distributes them in Indonesia on a wholesale basis; and
• One or more retailer partners - who purchase the products from the distributor and sell them to end users via shops or online.

Therefore, you will need to both a distribution agreement with the distributor and a method for ensuring that the product is sold to end-consumers only via approved retail partners that meet your standards. In the distribution agreement. you may wish to secure your right to pre-approve the retailers selected by the distributor or have the distributor responsible for ensuring that the retailer adheres to certain standards. Alternatively, you may consider having an additional contract directly with such retailers to have more control over certain aspects of store standards or operations.

Minimum five-year term and mandatory one-time extension of the distribution agreement

Under Indonesian law, the distributor needs to be appointed for at least five years and the appointment needs to be extended at least once for a further five years. Such extensions may however be subject to certain conditions as agreed between the parties. These conditions need to be carefully drafted to avoid being forced into an extension of a contract with a partner that is not performing satisfactorily.

Registration certificate for a distributor

In Indonesia, a distributor needs to obtain a special Registration Certificate (Surat Tanda Pendaftaran or STP) before they actually start to operate as a distributor. This Registration Certificate is linked to a particular distribution relationship and therefore the distributor can apply for it only once the distribution agreement is entered into and legalized (see below). Usually, it takes up to 14 business days to obtain the Registration Certificate, but there may be delays with translations, legalizations and paperwork. You need to take this into account in your deal timeline.

Indonesian language requirement

In Indonesia, the law requires that the agreements need to have an Indonesian language version (even if they are governed by foreign law). An Indonesian Court issued a decision in which it ruled that an agreement, that was not accompanied by an Indonesian language version, was null and void.

Luckily, if one of the parties to the agreement is a foreign party, the agreement can be signed in a bilingual form - and the parties can choose that the foreign language version shall prevail in the event of discrepancies between the two language versions. In any case, if you negotiate your distribution agreement in English, for example, you will need to allow some time to have an Indonesian language version prepared.

Other formal requirements as concerns execution of distribution agreements

Distribution agreements which concern overseas-produced goods must be legalized by a public notary and be accompanied by a certificate or legalization from the trade attaché of the Republic of Indonesia or an official of the representative office of the Republic of Indonesia in the principal’s country. This may also cause delay.

A couple of issues around termination of the distribution agreement

We mentioned above that a distributor needs to hold a Registration Certificate (STP) to legally perform distribution activities. If the distribution agreement is terminated while the distributor’s STP is still valid, then the newly appointed distributor can only be given a STP after the former distributor has signed a “clean-break” letter to demonstrate that the former agreement is at an end. However, if the parties do not reach agreement on a clean break within three months after termination, the STP of the former distributor becomes invalid. The principal may then appoint new distributor.

Another issue worth mentioning is that if the principal terminates the distribution agreement and does not appoint a new distributor, the principal is required to continue to supply spare parts to the old distributor for at least two years in order to maintain the continuity of after-sale services to the users of said goods.