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icro, Small, and Medium Enterprises (MSMEs/UMKM) play a vital role in Indonesia’s economy. According to the Ministry of Cooperatives and SMEs, over 64 million MSMEs contribute approximately 60% to the national GDP. Ironically, most of them still lack awareness about the importance of written contracts in running their businesses.
Many business owners rely on verbal agreements and mutual trust. However, from a legal and sustainability perspective, a written contract is a crucial protective tool—not only to prevent conflict but also as valid proof of legitimate business transactions.
What Is a Written Contract?
Legally, a written contract is an agreement between two or more parties formalized in a physical or digital document that includes:
- Party identities
- Object of agreement (goods/services or collaboration)
- Rights and obligations of each party
- Terms of payment, duration, and dispute resolution mechanisms
A written contract does not need to be notarized unless required by law (e.g., land sale). As long as it meets the legal validity requirements under Article 1320 of the Indonesian Civil Code, the contract is legally binding.
Legal Basis for Contracts in Indonesia
Why Do MSMEs Need Written Contracts?
1. Ensures Legal Certainty
A written contract provides legal clarity. With a clearly defined document, there is no room for unilateral interpretation that may harm either party.
2. Prevents Disputes and Conflicts
Many business disputes stem from undocumented agreements. A contract becomes the primary reference when differences arise.
3. Protects Assets and Business Capital
Contracts set out the responsibilities and risk-sharing between parties. This is vital for protecting assets—especially in capital investment, joint ventures, or shared projects.
4. Enhances Credibility and Professionalism
Using written contracts shows that an MSME runs its operations professionally and is serious about long-term partnerships.
5. Facilitates Access to Funding
Some banks, financial institutions, and investors require clear, written business agreements before offering credit or capital investment.
Common Types of Contracts for MSMEs
1. Business Cooperation Agreement (MoU or Joint Operations)
For joint ventures, shared projects, or profit-sharing collaborations.
2. Sales and Purchase Agreements
For procurement of raw materials, product sales, or dropshipping among partners.
3. Lease Agreements
For leasing business premises, warehouses, vehicles, or production tools.
4. Employment or Freelance Contracts
Covering employee rights, working hours, salaries, and termination clauses.
5. Supply and Service Agreements
For services like digital marketing, design, packaging, or outsourced production.
6. Distribution or Agency Agreements
For MSMEs using official distributors, agents, or reseller networks.
How to Draft a Simple Contract for Your MSME
1. Use Simple and Clear Language
Avoid overly technical legal terms. Use plain language that is understandable by all parties without losing legal clarity.
2. Include Basic Contract Elements
- Identities of the parties
- Object of agreement
- Rights and obligations
- Payment terms and methods
- Duration and termination clauses
- Dispute resolution methods (mediation, arbitration, or court)
3. Sign Above Official Stamp Duty
Use an official materai (stamp duty) to strengthen the contract’s evidentiary value in court.
4. Keep Original Copies
Ensure that each party retains a signed original copy of the agreement.
5. Consult a Legal Expert When Necessary
If the contract involves large sums or high-risk cooperation, seek legal advice before signing.
Case Study
Mr. Agus runs a handcrafted wood business and worked with a distributor based on verbal agreements. For the first six months, things went smoothly. Then, the distributor refused to pay an outstanding bill of IDR 40 million, citing poor product quality.
Because there was no written agreement outlining product specs, payment terms, or warranties, Mr. Agus had no legal grounds to demand payment. He suffered major financial losses.
Since then, he has used written contracts in all of his business dealings.
Conclusion
Written contracts are not just for large companies. For MSMEs—who often have limited resources and are more vulnerable to legal risks—a contract is the first line of defense to protect your business operations and future.
Better to prepare a contract in the beginning than regret it in the end.
AUFAR & Co Law Office is ready to assist you in:
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Drafting business and supplier agreements
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Tailoring clauses to your business needs
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Providing legal assistance that’s practical and affordable for MSMEs
Free initial consultation available. Contact us today and protect your business legally!
