Sharia characterization of a sales-based royalty in an Indonesian beverage franchise agreement: A contractual analysis under DSN-MUI fatwas and AAOIFI standards

Abstract

The present study analyses recurring royalty in the context of its Sharia contractual equivalence using two datasets: relevant DSN-MUI fatwas and AAOIFI Sharia Standards for comparative assessment. This study employs qualitative document and content analysis informed by one anonymizing Franchise Cooperation Agreement from a local tea beverage brand XYZ in Indonesia. A comprehensive analysis of the agreement was conducted, with each clause being examined to determine the allocation of rights and assets, services, payment obligations, countervalues and business risks. These were then categorized and analyzed in the context of substantive bai‘, ijārah, shirkah, ju‘ālah contract law. The findings indicate that the franchise fee, which is paid once only, includes the trademark license, equipment, and primary training (a hybrid transaction). In contrast, the 5% from net sales is more indicative of revenue-based royalty as opposed to actual profit sharing. The subject under discussion fails to meet the criteria for a partnership, as defined by Shirkah. In this context, the contributions of the parties are not treated as capital for the partnership. Furthermore, payment to the franchisee is charged against sales and not realized profit. It is evident that business losses or burdens of loss are predominantly experienced in franchise industries. It also cannot be described as ju‘ālah, since there is no separate franchisor function or quantifiable outcome that would give rise to entitlement to the payment. Equally important, the written agreement does not specify the right, benefit or continuing service that is the countervalue of the monthly royalty. This gharar is in the subject matter of the exchange, which engenders a risk of duplicate compensation. This is because trademark use and initial training are included in the base fee, while new-employee training is charged separately. This conclusion relates to the contractual specification and does not imply that in practice no services were being rendered continuously. The proposed framework is a clause-to-cash-flow model that connects each franchise payment and its associated legal object, countervalue, trigger and risk bearer. The report also advises distinct treatment of franchise payments, and clear specification of the continuing benefits, liabilities and payments associated with each charge.