Toll Processing Agreement Template for Indonesia

A toll processing agreement is a specialized commercial contract that allows you to outsource the processing of your materials to a third-party processor while retaining ownership of both the raw materials and finished products. Under Indonesian law, this arrangement requires careful legal documentation to protect your interests and ensure compliance with local industrial regulations.

When do you need this document?

You need a toll processing agreement when your company owns raw materials but lacks the necessary processing facilities, specialized equipment, or technical expertise to transform them into finished products. This arrangement is common in industries such as chemicals, pharmaceuticals, food processing, textiles, and mining, where specialized processing capabilities or expensive equipment are required. The agreement is also essential when you want to maintain control over your proprietary materials and processes while leveraging another company's manufacturing capabilities. Additionally, you may need this document when expanding into new markets where local processing requirements or cost considerations make outsourcing more viable than establishing your own facilities.

Key legal considerations

Several critical legal elements must be addressed in your toll processing agreement to protect your interests and ensure successful operations. Material ownership and custody provisions are fundamental, as you must clearly establish that you retain ownership throughout the processing cycle while defining the processor's responsibilities for handling and safeguarding your materials. Quality control and specifications require detailed technical requirements, testing procedures, and acceptance criteria to ensure the finished products meet your standards. Intellectual property protection is crucial, particularly when your materials or processes involve proprietary formulations, trade secrets, or confidential information. Risk allocation and insurance provisions must address potential losses, damages, or contamination during processing, including clear liability frameworks and adequate insurance coverage. Pricing structures should account for processing fees, material handling costs, and any additional services, while termination clauses must provide appropriate notice periods and procedures for returning materials and equipment.

Legal requirements in Indonesia

Indonesian law imposes specific requirements on toll processing arrangements that you must incorporate into your agreement. Under Law No. 3 of 2014 on Industry, both you and your processor must comply with industrial licensing requirements and operational standards for processing activities. Government Regulation No. 107 of 2015 mandates specific permits for industrial business operations, which your processor must maintain throughout the agreement term. Environmental compliance under Law No. 32 of 2009 requires adherence to environmental protection standards, waste management protocols, and impact assessment procedures. Labor law compliance under Law No. 13 of 2003 ensures proper working conditions and safety standards at processing facilities. The Indonesian Civil Code governs contract formation, performance, and enforcement, requiring clear terms and conditions that comply with local contract law principles. Additionally, if foreign investment is involved, compliance with Law No. 25 of 2007 on Investment may be necessary, particularly regarding ownership structures and operational requirements.