Closed Agreements: What Indonesia's Competition Law Prohibits

A closed agreement is one of the prohibited forms of agreement under Article 15 of Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition, because it risks creating a vertical restraint that can block competitors' market access and give rise to unfair competition. Article 15 identifies three forms of closed agreement:

1. Exclusive dealing distribution

Article 15(1) prohibits a business from entering an exclusive distribution agreement with another business. The provision states: a business is prohibited from making an agreement with another business that requires the party receiving goods and/or services to supply, or not supply, those goods and/or services only to certain parties and/or in certain locations. Exclusive distribution agreements are prohibited because they can drive other businesses out of the market by cutting off their access to raw materials or distributors — and because exclusivity arrangements raise barriers to market entry.

2. Tying agreement

Article 15(2) provides that a business is prohibited from entering an agreement with another party that requires the party receiving certain goods and/or services to also purchase other goods and/or services from the supplying business. A tying agreement is prohibited because it strips a business of the freedom to choose which products it wants to buy, forcing it to purchase products it may not actually need.

3. Special discount

Article 15(3) prohibits an agreement on price or a specific discount for goods and/or services that requires the receiving business to either purchase other goods and/or services from the supplier, or refrain from purchasing the same or similar goods and/or services from a competitor of the supplier. The effect is similar to a tying agreement, in that it removes a business's freedom to choose the products it wants to buy.

A valid, binding agreement must satisfy the requirements of Article 1320 of the Civil Code:

• Consent of the parties who bind themselves;
• Capacity to enter into an obligation;
• A certain subject matter;
• A lawful cause.

An agreement prohibited under Law No. 5 of 1999 — one that would or could result in monopolistic practices or unfair competition — can be considered as failing the fourth requirement under Article 1320 and Article 1337 of the Civil Code, on the basis that it involves an unlawful cause prohibited by statute and contrary to public morality and order.

The legal consequence of failing the fourth (objective) requirement under Article 1320 is that the agreement is void from the outset. A business that breaches Article 15 also faces further sanctions, including:

• Administrative action under Article 118 of the Job Creation Law, amending Article 47(2)(a) of Law No. 5 of 1999.
• Criminal sanctions in the form of a fine ranging from Rp5 billion to Rp25 billion, or imprisonment in lieu of the fine for up to five months.

The approach applied to assess a closed agreement or conduct that breaches Article 15 is per se illegal. A closed agreement prohibited under Article 15 — whether an exclusive dealing distribution, tying agreement, or special discount arrangement — is treated as an unlawful act without needing further proof or an assessment of its actual effect on the market and competition. Entering such an agreement is, in itself, a deliberate unlawful act that businesses should avoid altogether.