LAWASIA MOOT COMPETITION

2012

IN THE INTERNATIONAL COURT OF ARBITRATION

BALI, INDONESIA

GREAT WALL NOODLE SHOP LLC.

Claimant

v

ADI BUDJIAMAN, M.D.

Respondent

MEMORIAL FOR THE RESPONDENT

i

TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................ i

STATEMENT OF JURISDICTION ......................................................................................... vii

QUESTIONS PRESENTED ................................................................................................... viii

STATEMENT OF FACTS ..........................................................................................................x

SUMMARY OF PLEADINGS ................................................................................................ xii

PLEADINGS AND AUTHORITIES ..........................................................................................1

I. INDONESIAN LAW IS THE PROPER LAW TO BE APPLIED IN THIS DISPUTE. ....1

A. A. The Choice-of-Law Clause in the Franchise Agreement should be disregarded by

reason of public policy. ........................................................................................................1

A.1.Principle of Party Autonomy and Choice-of-Law clause ............................................1

A.2. International public policy as a limitation to the party autonomy principle,

particularly the choice-of-law clause .................................................................................2

A.3. The choice-of-law clause contained in the agreement at bar is to be disregarded .......2

B. B. Source of the Applicability of Indonesian Law .........................................................3

B.1. The KUALA LUMPUR REGIONAL CENTER FOR ARBITRATION (KLRCA)

Fast Track Rules 2010 ......................................................................................................3

B.2. Determination of the conflict of laws rules – the Cumulative Approach.....................4

B.3. The Singaporean Conflict of Laws rules point to the application of Indonesian law ...5

B.4. The Indonesian Conflict of Laws rules point to the application of Indonesian law. ....6

B.5. The Malaysian Conflict of Laws rules point to the application of Indonesian law. .....6

II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE .............7

A. The Arbitration Agreement is invalid since Dr. Budiamman’s consent to the Arbitration

Agreement is not unequivocally expressed. ..........................................................................7

B. The Arbitration Agreement is unconscionable. ................................................................8

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C. The franchise agreement is invalid under Indonesian law – specifically Article 31 of

Law 24 of 2009 ....................................................................................................................9

C.1. The mandate of Article 31 of Law 24 of 2009 ...........................................................9

C.2. The agreement is in violation of Art. 31thus, invalid under the Indonesian Civil Code.

....................................................................................................................................... 10

D. Article XII of the Franchise Agreement is invalid and unenforceable. ......................... 10

D.1. The dispute resolution is invalid under Indonesian law because it can be construed as

a provision which Dr. Budiamman would not have anticipated in a Franchise Agreement.

....................................................................................................................................... 10

D.2. The dispute resolution clause under the Franchise Agreement is not in accord with

the basic precepts of good faith and fair dealing. ............................................................. 11

D.3. Assuming arguendo that Singaporean Law will apply: ............................................ 12

E. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not comprise

sufficient cause for termination, hence the requirement of notice is rendered moot. ............ 13

E.1. Assuming that there are grounds for termination, the notice of termination given is

invalid under the Indonesian Contract Law. .................................................................... 13

i. Notice of Termination issued violates Art. 1266 of the Indonesian Civil Code ......... 13

ii. The notice was untimely issued. .............................................................................. 14

III. THE FRANCHISOR MAY NOT TERMINATE THE FRANCHISE FOR A

SUBSTANTIAL VIOLATION OF THE AGREEMENT. ...................................................... 16

A. The right to terminate based on substantial violation granted by the Franchise

Agreement is a catch-all stipulation contrary to the remedies provided under specific

provisions. ......................................................................................................................... 16

IV. THE “INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING” IN

INTERPRETING AND APPLYING FRANCHISE AGREEMENTS APPLIES TO THIS

FRANCHISE AGREEMENT. ............................................................................................... 21

A. The serving of a single Indonesian dish referred to as “The Special of the Day” do not

justify the termination of the franchise. .............................................................................. 22

B. The giving of customers the option of substituting lamb for pork for menu items does

not justify the termination of the franchise. ........................................................................ 23

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C. The wearing of the “new (white) Hijab” by the female Muslim employees does not

justify the termination of the franchise. .............................................................................. 23

D. The above violations of the Franchise Agreement do not reflect a continuing disregard

of the franchisee’s obligations under the Franchise Agreement to justify its termination. .... 24

V. AN EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A HIJAB

BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION VIOLATES THE

CONSTITUTION AND/OR LAWS OF INDONESIA OR ANY INTERNATIONAL

TREATIES TO WHICH IT IS A MEMBER PROVIDED SUCH PROHIBITION

CONSTITUTES DISCRIMINATION AGAINST AN EMPLOYEE. .................................... 25

A. The legal authorities and the general obligation of the state against discrimination ...... 25

A.1. The Indonesian Constitution.................................................................................... 26

A.2. The Indonesian Labor Law...................................................................................... 26

A.3. The International Treaties and/or Conventions ratified by Indonesia ....................... 27

B. Employment regulation; when discriminatory ............................................................. 28

CONCLUSION AND PRAYER ............................................................................................... 30

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INDEX OF AUTHORITIES

Laws, Treaties, Conventions

Convention Concerning Discrimination

in Respect of Employment and Occupation of 1958 35

Employment Equality Regulations 2003 36

Indonesia Conflict of Laws 14

Indonesia Law 24 of 2009 17

Malaysia Conflict of Laws 14

Singapore Law of Contracts 21

Singapore Conflict of Laws 13

The Decree of the Minister of Industry and Trade

Concerning the Provisions on and the Procedure

for the Implementation of Franchised Business Registration 18

The ICESCR 34

The Indonesian Civil Code 18, 19, 22, 29

The Indonesian Constitution 34

The Indonesian Labor Law 34

The KLRCA Fast Track Rules of 2010 12,

The UNCITRAL Arbitration Rules of 2010 15,

The UNIDROIT Principles 20, 21, 29, 30

United Nations Conference on Trade and Development 10

Articles & Books

An Investor’s Perspective, Tengku Nathan Machmud 16

Black’s Law Dictionary 25

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Committee on International Commercial Arbitration of the ILA, above n 62, 3 [11] 10

Definitions - Copyright © 1981-2005 by

Gerald N. Hill and Kathleen T. Hill 23

Nigel Blackbaby and Constatine Partasides

with Alan Redfern and Martin Hunter, Redfern and Hunter on

International Arbitration (Oxford University Press, 5th ed, 2009), 85 9

Practical Law, Multi-jurisdictional Guide 2011-12,

Labor and Employee Benefits; Nafis Adwani and Freya Weston,

Ali Budiardjo, Nugroho, Reksodiputro 35

Silberman, Linda & Ferrari, Franco,

Getting to the Law applicable to the Merits in International Arbitration

and the Consequences of Getting it Wrong; September 2010 13

The Indonesian Production Sharing Contract:

The Indonesian Law of Contracts by

Prof. Dr. C.F.G. Sunaryati Hartono, SH 30

The Islamic Veil and Freedom of Religion,

the Rights to Education and Work:

a Survey of Recent International and National Cases 37

West's Encyclopedia of American Law, edition 2.

Copyright 2008 The Gale Group, Inc. 23

Cases

2961-8667 Québec Inc. v. Fafard, Court of Appeal of Quebec,

Canada, 31 March 2004, [2004] 16

Andrés v. Díez Carrillo S.L.,

Audiencia Provincial de Palma de Mallorca

(sección 5ª), Spain, 5 October 2006 16

Bonython v Commonwealth of Australia [1951] AC 201

(Privy Council on appeal from Australia), at page 219 14

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STATEMENT OF JURISDICTION

At the request of the claimant, Great Wall Noodle Shop LLC, a written claim was

submitted before the Kuala Lumpur Regional Arbitration Center (KLRCA) for Arbitration. The

respondent, Adi Budiamman, M.D. does not question the authority of the KLRCA. Hence, this

Tribunal is called upon to resolve the dispute.

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QUESTIONS PRESENTED

A. What is the proper law to apply in resolving this dispute: Singapore Law, Indonesian

Law, or some other law?

B. In order to minimize additional delay in resolving this dispute, the parties are directed

to address each of the following questions in the alternative: i.e., under both

Indonesian and Singaporean law if they are different.

1. Is the Arbitration agreement valid and enforceable?

2. Is the Franchise Agreement invalid under Indonesian Law – specifically Article

31 of Law 24 of 2009?

3. Is Article XII of the Franchise Agreement (Dispute Resolution) invalid and/or

unenforceable as it authorizes the granting of specific performance should the

Franchisee be found to have violated a provision of the Franchise Agreement

while prohibiting the granting of specific performance should the Franchisor(s) be

found to have violated a provision of the Franchise Agreement?

4. Was a proper and timely Notice of Termination given to the Franchisee [Dr.

Budiamman]?

5. May the Franchisor terminate the franchise for any violation of the Franchise

Agreement or must it be a substantial violation of the Agreement?

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6. Does the “inherent warranty of good faith and fair dealing” in interpreting and

applying franchise agreements apply to this Franchise Agreement and, if so:

a. Did the serving of a single Indonesian dish referred to as “The Special of

the Day” justify the termination of the franchise?

b. Did giving customers the option of substituting lamb for pork for menu

items justify the termination of the franchise?

c. Did the wearing of the “new (white) hijab” by the female Muslim

employees justify the termination of the franchise?

d. Do the above violations of the Franchise Agreement reflect a continuing

disregard of the franchisee’s obligations under the Franchise Agreement to

justify its termination?

7. Does an employment regulation prohibiting the wearing of a hijab by female

Muslim employees or restriction (or the color type of the hijab) violate the

constitution and/or laws of Indonesia or any international treaties to which it is a

member?

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STATEMENT OF FACTS

The Claimants Mr. Xuefeng Wang and Mr. Jianping are owners of the Great Wall Noodle

Shop, LLC. The Respondent Dr. Adi Budiamman is the franchisee of the GWNS in Jakarta and

Medan, authorized under the Franchise Agreement.

The encounter and the offer of the Franchise

As part of the GWNS plan to expand to Indonesia, Mr. Wang travelled to Singapore. On

June 20, 2011, Mr. Wang met Dr. Adi Budiamman, a prominent Jakarta surgeon while waiting

for his flight home in the Singapore Airlines Lounge in Changi Airport. Their conversation led to

the offer of franchise agreement originally intended Mr. Bao Shan, a franchise owner of

Singapore restaurants. Mr. Wang retrieved the Franchise Agreement and explained the fee

arrangements in detail, Article V: A,B, D & E. However, he was not able to go through the entire

Franchise Agreement and suggested that Dr. Budiamman take it home. A photocopy of both the

original English and a Bahasa Indonesia copy were delivered to Dr. Budiamman the next day.

On September 2011, the two new franchises opened in Jakarta and Medan. The Jakarta

location is more successful than the Medan location.

The discovery of uniformity violations which led to the dispute

On October 2011, Mr. Ji made an unannounced visit to both Indonesian restaurants. This

is authorized under Article III G and/or Article VIII of the Franchise Agreement. Several

violations were found such as: the sale of food products not on the “official menu”; substitutions

for the ingredients of others; wearing of unauthorized clothing, a head scarf or Hijab.

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On November 4, 2011, Mr. Ji sent an email to Dr. Budjiaman informing the latter to take

immediate steps to conform to the operations required in the Franchise Agreement. Mr. Ji claims

that the objection to the serving of dessert items presents a “uniformity” issue. It is clear in the

franchise agreement that “no food items not of the Great Wall Noodle Shop Standard Menu can

be sold at any franchise without their permission”.

Two weeks, thereafter, a report of the inspector hired by Mr. Ji was submitted to the latter

stating that Indonesian foods were still being served, a single Indonesian dish called“Special of

The Day” written in Bahasa Indonesia. And, many of the girls were still wearing scarves. Thus,

Mr. Wang and Mr. Ji sent a letter to Dr. Budiaman terminating the franchise and directing him to

close both restaurants and signage within 15 days.

Dr. Budiaman refused to close his two restaurants.

The Case

Mr. Wang and Mr. Ji submitted a Notice of Arbitration in conformity with Article 3 of

the Kuala Lumpur Regional Arbitration Center (KLRCA) Fast Track Rules seeking a restraining

order against Dr. Budiamman pursuant to Article XII B of the Franchise Agreement, trademark

infringement and damage to the reputation of the Great Wall Noodle Shop.

A counterclaim was filed, thus a case management Meeting was held thru phone. The

hearing will be held on November 18, 2012 in Bali, Indonesia.

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SUMMARY OF PLEADINGS

I. The Indonesian Law is the proper law to be applied in this dispute because the Choice-

of-Law clause in the Franchise Agreement should be disregarded by reason of public

policy. Under the principle of party autonomy and choice-of-law clause, there is a

recognition that stipulations entered into by parties are to be accorded the highest

respect. The Indonesian law should apply based on the International Rules on

Conflicts of Laws. In the absence of the choice-of-law clause, Article 6(1) of the Kuala

Lumpur Regional Center for Arbitration (KLRCA) Fast Track Rules 2010 allow it to

apply the law it deems applicable as guided by the cumulative approach in the

determination of the conflict of laws rules.

II. The arbitration agreement is invalid and unenforceable. The Arbitration Agreement is

invalid because Dr. Budiamman’s consent to the arbitration agreement is not

unequivocally expressed. The Arbitration Agreement is also unconscionable, hence

unenforceable. Dr. Budiamman only read and signed the English copy of the Franchise

Agreement, and not the Indonesian copy which is a violation of Article 31 of law 24 of

2009.

III. Article XII of the Franchise Agreement is invalid and unenforceable. The dispute

resolution clause under the Franchise Agreement is not in accord with the basic

precepts of good faith and fair dealing. It is invalid under Indonesian law because it

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can be construed as a provision which Dr. Budiamman would not have anticipated in a

Franchise Agreement.

IV. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not comprise

sufficient cause for termination, hence the requirement of notice is rendered moot.

Assuming that there are grounds for termination, the notice of termination given is

invalid under the Indonesian Contract Law because notice of termination issued

violates Art. 1266 of the Indonesian Civil Code and was untimely issued.

V. The franchisor may not terminate the franchise for a substantial violation of the

agreement since to do so will is in contravention of the specific remedies available to

the franchisor in more specific provisions. The right to terminate based on substantial

violation granted by the Franchise Agreement is a catch-all stipulation detrimental to

the interests of the franchisee and contrary to the remedies provided under specific

provisions of the Agreement.

VI. The “Inherent Warranty of Good Faith and Fair Dealing” in interpreting and applying

franchise agreements applies to this franchise agreement. The “uniformity violations”

do not justify the termination of the franchise. It does not reflect a continuing disregard

of the franchisee’s obligations under the Franchise Agreement to justify its

termination.

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VII. An employment regulation prohibiting the wearing of a Hijab by female Muslim

employees or restriction does not violate the Constitution and/or Laws of Indonesia or

any International Treaties to which it is a member provided such prohibition does not

constitute discrimination against an employee.

1

PLEADINGS AND AUTHORITIES

I. INDONESIAN LAW IS THE PROPER LAW TO BE APPLIED IN THIS

DISPUTE.

A. A. The Choice-of-Law Clause in the Franchise Agreement should be disregarded

by reason of public policy.

A.1.Principle of Party Autonomy and Choice-of-Law clause

The terms and provisions made by the parties in their agreements are binding

among them. In international commercial contracts, they are free to stipulate the

terms and conditions as well as choosing the law that will govern their agreement, the

rights under it and the obligations of each. Such agreements are respected by

Arbitrators as this is considered as the well-known principle of “party autonomy”

recognized in International Commercial Arbitration and considered primarily as the

‘foundation stone of international arbitration’.1

One manifestation of the principle of party autonomy is the choice-of-law

clause. It is a provision in an agreement or contract whereby parties are free to

stipulate the law “that will govern any disputes that may arise between the parties.

The parties specify or stipulate that any dispute or lawsuit which arises out of the

contract between them shall be determined according to the law of a particular

jurisdiction. This choice usually becomes binding when the dispute is arbitrated.”2

1 Nigel Blackbaby and Constatine Partasides with Alan Redfern and Martin Hunter, Redfern and Hunter on

International Arbitration (Oxford University Press, 5th ed, 2009), 85. 2 http://definitions.uslegal.com/c/choice-of-law-clause/

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The arbitrators are thus bound to apply the merits of the dispute the rules of law

chosen by the parties. This is the general rule of international arbitration law.3

A.2. International public policy as a limitation to the party autonomy principle,

particularly the choice-of-law clause

There is a limitation on the applicability of the party autonomy, particularly

on the Choice-of-Law Clause in any agreement concluded by parties. The arbitrators

may disregard the application of the rules of law chosen by the parties by reason of

international public policy.

International public policy is defined as a country’s conception of

international public policy or, the ‘the part of a public policy of a State which, if

violated, would prevent a party from invoking a foreign law or foreign judgment or

foreign award’.4

A.3. The choice-of-law clause contained in the agreement at bar is to be disregarded

Franchise Agreement between Great Wall Noodle Shop, LLC (GWNS) and

Dr. Adi Budiamman contained a clause5 which states:

3 United Nations Conference of Trade and Development, International Commercial Arbitration, 5.5 Law Governing

the Merits of the Dispute 4 Committee on International Commercial Arbitration of the ILA, above n 62, 3 [11] 5 Compromis, XII-B 3rd par., page 30

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“Applicable Law: This agreement and the parties’ rights under it and the

relationship between the parties shall be governed by, and will be interpreted in

accordance with the laws of Singapore. You specifically waive any rights and

protections that might be provided through the laws of any other country including

the place where the franchise is operated” xxx

The choice of law of the parties is clear in the Agreement—that the laws of

Singapore will govern their relationship, their rights and their obligations. However,

the international public policy of Indonesia mandates that the laws, customs and rules

of Indonesia will be taken into consideration in every contract. An implied waiver of

these policies as when mistakenly agreed into in a contract, will hurt and encroach Dr.

Budiamman’s and his employees rights enshrined under the Indonesian Constitution

and particular laws governing franchise regulations, which is a direct contravention of

the state’s notion of fundamental morality and justice.

Therefore, the Choice-of-Law clause, designating Singaporean Laws to apply

in the dispute, in the agreement should be disregarded.

B. B. Source of the Applicability of Indonesian Law

B.1. The KUALA LUMPUR REGIONAL CENTER FOR ARBITRATION (KLRCA)

Fast Track Rules 2010

The KLRCA is the arbitration tribunal designated by the parties in the

Franchise Agreement as the tribunal to govern their dispute. It was agreed that the

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parties are to submit to arbitration any dispute, controversy or claim arising out of

or relating to the Agreement.6 Thus applying the principle of party autonomy, the

KLRCA and its rules shall govern the conduct of arbitration proceedings between

GWNS and Dr. Budiamman.

It is provided in the KLRCA Fast Track Rules 2010, 2nd

edition, that:

“The Arbitral Tribunal shall apply the law designated by the parties as

applicable to the substance of this dispute. Failing such designation by the

parties, the Arbitral Tribunal shall apply the law determined by the

conflict of laws rules, which it considers applicable.”7

In the present dispute, since it has been established that the choice-of-law

clause or the designation of the law of the parties has failed for reasons of

international public policy, the KLRCA has to apply the law basing on the

conflict of laws rules which it considers applicable.

B.2. Determination of the conflict of laws rules – the Cumulative Approach

The cumulative approach is a guideline generally used by arbitrators in

determining what law will apply to the merits of the dispute in case the

designation of law of the parties fails or is not applicable. The approach looks

into the various sets of conflict of laws rules linked to the dispute.8

6 Compromis, XII-A 1st par., page 29 7 Article 6(1) KLRCA Fast Track Rules 2010, 2nd Edition 8 Silberman, Linda & Ferrari, Franco, Getting to the Law applicable to the Merits in International Arbitration and the

Consequences of Getting it Wrong; September 2010

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The various sets of conflict of laws that may be looked into by the

arbitrator in the present case are the Conflict of Laws rules of Singapore (the law

chosen by the parties in the Agreement), Indonesia (the law of the contracting

party Dr. Budiamman) and Malaysia (the law of the seat of arbitration).

B.3. The Singaporean Conflict of Laws rules point to the application of Indonesian

law

The rule under the ‘Choice of Law for Contracts’ in Singaporean Conflict

of Laws provides that “If the court cannot find any choice by the parties, then the

proper law is the law of the country or system of law with the closest and most

real connection with the transaction and the parties.”9

The Franchise Agreement is with a view to establishing the franchise in

Indonesia. The business operation and the restaurants are located in Jakarta and

Medan, Indonesia. The franchisee (Dr. Budiamman) is a citizen and resident of

Indonesia and the same country to which Mr. Jianping Ji (one of the franchisors)

had visited for an inspection. All the incidents and alleged acts of violation

happened in Indonesia.

9 Conflict of Laws of Singapore, Chapter 6, Sec. 3.8

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B.4. The Indonesian Conflict of Laws rules point to the application of Indonesian law.

The principles underlying the Conflict of Laws of Indonesia are

considered fundamental and guide in determining what law to apply. One

well-accepted principle is “that legal acts are subject to the law of the place

where they are performed.”10

In the present dispute, the acts, transactions and

business operations including the alleged violations of Dr. Budiamman are

performed in Jakarta and Medan, Indonesia where the two restaurants are

located respectively. Therefore, any rights, obligations, issues and disputes

that may arise from such acts and transactions are subject to the laws of

Indonesia.

B.5. The Malaysian Conflict of Laws rules point to the application of Indonesian law.

Under the Malaysian Conflict of Laws, the law to be applied to resolve

the merits of the case will depend on either the express or implied intention of

the parties. Failing such intention, resort will be had to choosing the

applicable law which has the “closest and most real connection” to the

transaction.11

It has already been established that Indonesia is the country which has the

closest and most connected to the dispute and its circumstances.

10 Indonesian Law, Chapter on Conflict of Law, page 347, S. Pompe 11 Bonython v Commonwealth of Australia [1951] AC 201 (Privy Council on appeal from Australia), at page 219

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Thus, from the foregoing, it is submitted that the law of Indonesia which

has the closest connection with the transactions, circumstances and the parties, is

the law that will apply in this dispute.

II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE

A. The Arbitration Agreement is invalid since Dr. Budiamman’s consent to the

Arbitration Agreement is not unequivocally expressed.

KLRCA Fast Track Rules 2010 is the governing law under the Franchise

Agreement that will guide the Arbitral Tribunal in the arbitration proceeding. It

includes, among others, the determination of the validity of arbitration agreements.

The Fast Track Rules 2010 is adopted from the UNCITRAL Model Law on

International Commercial Arbitration. In lieu, the UNCITRAL Model Law on

International Commercial Arbitration has provided for a universal guideline regarding

the formalities and requirements of a valid arbitration agreement.

Article 7 of the UNCITRAL Model Law on International Commercial

Arbitration provides that the arbitration agreement must be in writing.12

It is

important to determine whether the parties’ intention to submit a dispute to an

arbitration tribunal is expressed unequivocally.13

Courts in various jurisdictions have

12 Art. 7(2), UNCITRAL Model Law on International Commercial Arbitration 13 2961-8667 Québec Inc. v. Fafard, Court of Appeal of Quebec, Canada, 31 March 2004, [2004]

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occasionally held that the parties’ undertaking to resort to arbitration must be

unambiguously expressed.14

Dr. Budiamman, in a sworn written statement after the commencement of

the Arbitration,15

declared that he did not read the entire Franchise Agreement and

was not aware of certain provisions. In the same matter, Mr. Wang in his sworn

statement stated he could not recall whether there was any discussion of Article

XII.

It is clear therefore that the intention of Dr. Budiamman to obligate

himself to submit the any dispute arising from the Agreement to arbitration and

thus it is submitted that his consent was not expressed in an unequivocal manner.

B. The Arbitration Agreement is unconscionable.

The Doctrine of Unconscionability is well-settled and known in Indonesia.16

It is

characterized by contracts which are often one-sided, abusive or that the freedom of

contract is undermined by a stronger party. The effect of unconscionability is to annul or

make void contracts based on it. It is a matter of public policy in order to prevent

oppression and avoid abuses.

The arbitration clause contained in the Agreement is one-sided because it leaves

Dr. Budiamman no other option to negotiate and agree on fair terms the manner and

substance of the arbitration clause.

14 D. Andrés v. Díez Carrillo S.L., Audiencia Provincial de Palma de Mallorca (sección 5ª), Spain, 5 October 2006 15 Compromiss, Requests for Clarifications, Sworn Statement by Dr. Budiamman 16 The Indonesian Production Sharing Contract: An Investor’s Perspective, Tengku Nathan Machmud

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Thus as a matter of accepted principle of contract law, when the arbitration

agreement is invalid it therefore follows that it is unenforceable.

C. The franchise agreement is invalid under Indonesian law – specifically Article 31

of Law 24 of 2009

C.1. The mandate of Article 31 of Law 24 of 2009

Article 31 of Law 24 of 2009 is clear. It provides:

“(1) Indonesian must be used in memoranda of understanding and/or

agreements that involve state organs, government institutions of the

Republic of Indonesia, private Indonesian institutions or individuals who

are citizens of the Republic of Indonesia.

(2) Memoranda of understanding and/or agreements as specified in

paragraph (1) that involve foreign parties shall also be written in the

national language of the foreign parties and/or English.”

The Franchise Agreement signed by Dr. Budiamman was only the English

copy. Although the Indonesian copy was delivered to Dr. Budiamman, the same

was not signed by him. Further, there was no response or acknowledgment from

him regarding the receipt of the Indonesian copy of the Agreement.

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C.2. The agreement is in violation of Art. 31thus, invalid under the Indonesian Civil

Code.

Art. 1339 of the Indonesian Civil Code provides, to wit:

“Agreements shall bind the parties not only to that which is expressly stipulated,

but also to that which, pursuant to the nature of the agreements, shall be imposed

by propriety, customs, or the law.”

In accordance with this provision, the Agreement is therefore invalidated.

Art. 31 of Law 24 of 2009, in addition to Art. 2 of the Decree of the Minister of

Industry and Trade,17

imposes an obligation on the parties in the present dispute to

use Indonesian language and the language of the Franchisors and/or English.

Failing to comply with the mandate of Art. 31 will not bind the parties to the

agreement, thus, invalid

D. Article XII of the Franchise Agreement is invalid and unenforceable.

D.1. The dispute resolution is invalid under Indonesian law because it can be

construed as a provision which Dr. Budiamman would not have anticipated in a

Franchise Agreement.

The pertinent provisions of the Indonesian Civil Code are the following:

Art. 1339. Agreements shall bind the parties not only to that which is expressly

stipulated, but also that which, pursuant to the nature of the agreements, shall be

imposed by propriety, customs, or the law.

17 Art. 2, The Decree of the Minister of Industry and Trade Concerning the Provisions on and the Procedure for the

Implementation of Franchised Business Registration

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Art. 1347. Customary stipulations shall be deemed to be implied in the agreement,

notwithstanding that these have not been expressed.

Art. 1349. In the event of ambiguity, the agreement shall be interpreted against

the party who stipulate something, and in favour of the party who has bound

himself thereto.

In the customary practice of entering into agreements and contracts, it can be

reasonably expected that each party can demand the performance by the other of his or

her end of the agreement. In this case, there is a unilateral and biased stipulation in favour

of Wang and Xi to the detriment of Dr. Budiamman’s right to adjust the performance of

his obligations to conform with the Indonesian customs and sales practices.

D.2. The dispute resolution clause under the Franchise Agreement is not in accord

with the basic precepts of good faith and fair dealing.

Art. 1.7 of the UNIDROIT Principles on International Commercial

Contracts which is supported by the Indonesian Civil Code, and furthered under

Art. 2.1.20 renders ineffective surprise terms unless expressly accepted by the

other party. The same provision defines surprise terms as such terms which is of

such a character that the other party could not have reasonably expected it, based

on the content, language and presentation. The UNIDROIT principles also

provide in Article 3.2.7 that a party may avoid the contract or an individual term

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of it if, at the time of the conclusion of the contract, the contract or term

unjustifiably gave the other party an excessive advantage. Regard is to be had,

among other factors, to (a) the fact that the other party has taken unfair advantage

of the first party’s dependence, economic distress or urgent needs, or of its

improvidence, ignorance or lack of bargaining skill, and (b) the nature and

purpose of the contract.

Further, it is improper for Wang to fail to acknowledge Budiamman’s

right to demand specific performance as well since this is implied from the nature

of the Franchise Agreement concluded between the parties. Art. 5.1.2 provides

that implied obligations stem from the (a) nature and purpose of the contract;

practices established between the parties and usages; good faith and fair dealing;

and reasonableness.

D.3. Assuming arguendo that Singaporean Law will apply:

The unilateral right of the Franchisors to specific performance excluding

such right on the Franchisee violates the Singaporean Law of Contracts which

provides for a right to specific performance on an aggrieved party sometimes

damages will not be an adequate remedy for a breach18

. Thus the provision on XII

of the Franchise Agreement is invalid and unenforceable under the Singaporean

Law.

18 Chapter 8.13.17 Singaporean Law of Contracts

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Finally, unlike its predecessor Article 28 of the CISG, the UNIDROIT

principles mandate the court to order specific performance unless one of the

exceptions laid down in the Article applies. Hence, such principle cannot be

limited by stipulations in the Franchise Agreement.19

E. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not

comprise sufficient cause for termination, hence the requirement of notice is

rendered moot.

Based on the submissions raised under the next issue, the claimant does

not have a solid ground to terminate the Franchise Agreement. Hence, the issue of

proper and timely notice of termination given to the Franchisee is rendered moot.

E.1. Assuming that there are grounds for termination, the notice of termination given

is invalid under the Indonesian Contract Law.

i. Notice of Termination issued violates Art. 1266 of the Indonesian Civil Code

Art. 1266 of the Indonesian Civil Code states that:

“The termination requirement always deemed that is stipulated in the

reciprocal agreement, if one party does not fulfill its obligation. In such

case, the agreement isn’t null and void, but termination must be requested

to the Court. The said request shall be conducted, although the termination

19 Page 240 UNIDROIT Principles with annotations

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requirement on non-performance obligations is stipulated in the

agreement.

If the termination requirement is not stipulated in the agreement, then the

Judge reviews the conditions, based on the request of the defendant; freely

provide a certain period to fulfill obligations, but that certain period cannot

be longer than a month.”

It is clear from the express wording of this provision that in order for a

party to exercise his right to terminate the agreement, court approval must first be

sought even if such right is already stipulated in the agreement.

Mr. Ji and Mr. Wang sent an email notifying Dr. Budiamman of their

intention to terminate the Franchise the day after Mr. Ji received a report from his

hired ‘inspector’. This notice of termination is in contravention of Article 1266

because Court approval is necessary in order for the Franchisors to terminate the

agreement. Thus, the issuance of such notice was improper as is violates this

provision.

ii. The notice was untimely issued.

For a notice to be timely, it must be “within the time required by

statute, court rules or contract.”20

Also, “term timely must, in a number of

20 Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill

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situations, be determined on the basis of the facts and circumstances of

each individual case.”21

The notice of termination sent by Mr. Ji and Mr. Wang indicated

that Dr. Budiamman should close down and remove the signage within 15

days. It is contradictory to the provision set out in the Franchise

Agreement, to wit:

“XIV. Post-Termination Obligations

…You must promptly at your expense remove or obliterate all Restaurant

signage, displays or other materials (electronic or tangible) in your

possession at the Authorized Location or elsewhere that bear any of the

Trademarks and so alter the appearance of the Restaurant as to

differentiate the Restaurant unmistakably from duly licensed restaurants

identified by the Trademarks. If, however, you refuse to comply with the

above provisions within 30 days, we have the right to enter the Restaurant

and remove all signage, displays or other materials that bear any of the

Trademarks, and you must reimburse us for our costs incurred.

Notwithstanding the foregoing, in the event of expiration of this

Agreement, you will remain liable for your obligations pursuant to this

Agreement or any other agreement between you and us or our affiliates

that expressly or by their nature survive the expiration or termination of

this Agreement.”

21West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc.

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Article XIV of the Agreement imposes a 30-day period within which Dr.

Budiamman may remove all signage and displays. The notice of termination

given to him allotting a 15-day period to which he should perform his post-

termination obligation is a clear violation of the provision contained in Article

XIV. Therefore the issuance of the notice becomes untimely as it does not follow

the period prescribed in the Agreement.

III. THE FRANCHISOR MAY NOT TERMINATE THE FRANCHISE FOR A

SUBSTANTIAL VIOLATION OF THE AGREEMENT.

A. The right to terminate based on substantial violation granted by the

Franchise Agreement is a catch-all stipulation contrary to the remedies

provided under specific provisions.

The term “substantial” refers to something of real worth and importance;

something worthwhile as distinguished from something without value or merely

nominal…”22

A violation in the agreement therefore can be said to be substantial if it

affects the essence and relevant provisions thereof. In legal terms, it is synonymous to

material violation.

The right to terminate on the ground of substantial violation is conferred by the

Franchise Agreement itself to wit:

22 Black’s Law Dictionary

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“XIII-B. Termination by us. We have the right to terminate this Agreement for any

substantial violation of the terms and conditions of this Agreement we deem substantial.”

However, it is submitted that the condition for the finding of substantial violation

is arbitrary and unjust because its determination is left to the whim and judgment of the

franchisors without any standards of reasonableness or fairness provided in the

Agreement. It may be an instrument of abuse on the part of the franchisors and may most

likely be exercised to the prejudice of the franchisee.

In addition, specific provisions of the Franchise Agreement provide for more

specific courses of action in case of noncompliance with the terms of the Franchise

Agreement, to wit:

I. Article III (Products and Operations Standards and Requirements)

G. Evaluations. We or our authorized representative have the right to enter your

restaurant at all reasonable times during the business day for the purpose of

making periodic evaluations, ascertaining if the provisions of this Agreement are

being observed by you; or inspecting and evaluating your supplies, ingredients

and products, as well as the storage, preparation and formulation and the

conditions of sanitation and cleanliness in the storage, production, handling and

serving.

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If we determine that any condition in the Restaurant presents a threat to

customers or public health or safety, we may take whatever measures we deem

necessary, including requiring you to immediately close the Restaurant until the

situation is remedied to our satisfaction.

This provision relates to the compliance with the production and sale of the Menu

Items listed and/or approved in writing by the Franchisor exclusively.23

It also limits the

use of the proprietary and non-proprietary ingredients, recipes, formulas, cooking

techniques and processes and supplies, and the preparation and service Menu Items and

products in such portions, sizes, appearance, taste and packaging as the Franchisor has

specified in its most current product preparation materials or otherwise in writing in the

preparation of the items to be served in the Restaurant.24

The claimant alleges that respondent violated these provisions of the Agreement

when Indonesian food and desserts were served in the Jakarta and Medan locations of

GWNS.25

Claimant alleges that the service of such products will destroy the uniformity

of the GWNS franchise and cause damage to the identity and value of the GWNS

trademarks.26

In the same email, claimant threatened termination of the Franchise based

on these grounds.27

This cannot be alleged by the claimant without violating the

Franchise Agreement he bases his claims upon. At the most, claimant can require

23 Art. 3 paragraph A 24 Art. 3 paragraph B 25 paragraph 8 of the compromiss, email dated 4 November 2011 26 paragraph 8 of the compromiss, email dated 4 November 2011 27 paragraph 8 of the compromiss, email dated 4 November 2011

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respondent to temporarily close the Restaurant to enable the latter to comply with the

requirements under the Agreement to the satisfaction of the claimant.

However, it should be noted that Mr. Wang already recognized the need to make

the necessary adjustments to accommodate local tastes when he specifically revised the

Indonesian menu to include the use of spices.28

It will be a belated for him to now argue a

strict compliance with Chinese food items to maintain uniformity in all franchises.

Further, Article 3 paragraph I (Operating Procedures) states in part that the

“franchisee must use its best efforts to promote and increase the sale and service of Menu

Items and to effect the widest and best possible distribution throughout the Designated

Area.” The same provision gives the Franchisor an option to “revise the manuals and

standards, procedures, techniques and management systems periodically to meet

changing conditions of retail operation in the best interest of restaurants operating under

the Proprietary mark.” This statement, unlike other statements in the Agreement, does not

expressly prohibit or exclude the Franchisee from introducing the necessary changes to

boost the sales of the Restaurant.

28 Clarifications, G-4

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However, use of lamb as alternative to pork29

was not raised by claimant in the

email as ground for breach of contract by Dr. Budiamman.

Art. III paragraph H (Period of Operation). “...You acknowledge and agree that if

your restaurant is closed for a period of 2 consecutive days or 5 days or more days in any

12-month period without our prior written consent, such closure constitutes your

voluntary abandonment of the franchise and business and we have the right, in addition to

the other remedies provided for herein, to terminate this Agreement.”

This is not an issue in this case, hence cannot be alleged as a ground for

termination of the Agreement by the claimant. Further, this provision is contrary to the

provision above-cited as well as Article 8 second paragraph [Inspection (of all records,

books of account, tax returns and other documents and materials in possession or under

your control relating to this Agreement, including without limitation, all records required

to be maintained pursuant to applicable law)]of the Agreement which states in part that

“In the event that we give you notice of any deficiency detected during such inspection,

you must correct them within 5 days after receipt of such notice.”

Under Art. 1342 of the Indonesian Civil Code, if the wording of the contract is

clear, one shall not deviate from it by way of interpretation. Hence, the grounds for

termination of contract being explicit under the provisions relevant in this case, Wang

29 footnote 5, compromiss

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cannot now unduly expand by implication the said grounds to the prejudice of

Budiamman.

In any case, the Article 1.9 (2) of the UNIDROIT Principles of International

Commercial Contracts of 2010 provides that “the parties are bound a usage that is widely

known to and regularly observed in international trade by parties in the particular trade

concerned except where the application of the usage would be unreasonable. In this case,

the serving of Indonesian food and desserts in the Jakarta and Medan franchises can be

arguably considered as widely observed.

IV. THE “INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING”

IN INTERPRETING AND APPLYING FRANCHISE AGREEMENTS

APPLIES TO THIS FRANCHISE AGREEMENT.

Under Article 1338 of the Indonesian Civil Code, “All legally executed

agreements shall bind the individuals who have concluded them by law. They cannot

be revoked otherwise than by mutual agreement, or pursuant to reasons which are

legally declared to be sufficient. They shall be executed in good faith.” It requires

parties to a contract to perform their respective obligations in good faith and with the

exercise of reasonable discretion or judgment.

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This principle is an affirmation of the covenant of good faith and fair dealing30

under the UNIDROIT Principles of International Commercial Contracts. Article 1.7

of the same provides that in “1) international commerce, each party must act

according to the principle of good faith and fair dealing; and 2) that the parties may

not ignore this responsibility.”31

Thus, in this Franchise Agreement, the inherent

warranty of good faith and fair dealing is required of the parties in that:

A. The serving of a single Indonesian dish referred to as “The Special of the Day”

do not justify the termination of the franchise.

The serving of a single Indonesian dish is a mere deviation of what has been

authorized by the Franchise Agreement. It does not constitute a material or substantial

violation as to warrant the franchisors in terminating the contract. The Franchise

Agreement (and all franchise agreements) is founded on the relationship of both the

franchisors and the franchisee, so reasonable discretion must be employed to carry

out the essence of such relationship. The serving of a single Indonesian dish is a

minute violation. Mr. Ji and Mr. Wang could have exercised a reasonable discretion

in allowing Dr. Budiamman to rectify his violation by giving succeeding warnings, in

case. The outright termination of the Franchise on the basis of the serving of a single

Indonesian dish destroys the essence of the franchise relationship between the parties

because reasonable discretion could have been exercised.

30 Art. 1.7 UNIDROIT Principles of International Commercial Contracts 31 The Indonesian Law of Contracts by Prof. Dr. C.F.G. Sunaryati Hartono, SH

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B. The giving of customers the option of substituting lamb for pork for menu items

does not justify the termination of the franchise.

The culture of Indonesia is diverse including its population. The majority

consists of Muslim population. The giving of customers the option of substituting

lamb for pork does not justify the termination. It is expected of Mr. Ji and Mr. Wang

to take into consideration the nature of the business in relation to its geographical

location. As the franchise is operated in Indonesia, it is expected that there are

customers who, living by their customs and traditions, would always ask for lamb

instead of pork. If this is indeed a violation that would warrant the termination of the

franchise, reasonable means should be achieved in arriving at the decision of

termination. The room is always open for subsequent reprimands or warning if

negotiations could not be achieved. The warning was only given once by Mr. Ji. He

could have exercised reasonable discretion in allowing Dr. Budiamman to correct his

ways through a series of suggestions or even warning. Such outright termination is

unjustifiable considering that the franchise restaurants run by Dr. Budiamman are

successful.

C. The wearing of the “new (white) Hijab” by the female Muslim employees does

not justify the termination of the franchise.

The termination of the franchise based on the ground that female Muslim

employees are wearing the “new (white) hijab” is violative of the Indonesian Constitution

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and other regulations and treaties that ensure protection to individuals of their freedom to

practice religion. The reason by the Franchisors that wearing of the hijab by the

employees will lose the “common appearance”32

is not sufficient to justify the

termination of the Franchise. When the rights of the employees are at issue, especially

rights fundamental under the Indonesian Constitution, the restriction on wearing of hijab

and the mere reason of ensuring uniformity in the appearance of the employees should

never prevail. Thus, the termination on the ground that some female employees are

wearing hijab is not justified.

D. The above violations of the Franchise Agreement do not reflect a continuing

disregard of the franchisee’s obligations under the Franchise Agreement to

justify its termination.

The above violations are not intended by Dr. Budiamman to disregard or to

willfully disrespect his obligations under the Franchise Agreement. As submitted

earlier, these violations are made on reasonable and just causes taking into

consideration the nature of the business in relation to the location and area where it is

operated. Mr. Ji and Mr. Wang could have exercised their obligation in fairly dealing

with the acts of Dr. Budiamman because these acts do not manifest a malicious or

willful intent to deviate from the obligations and rules set forth in the Agreement. The

violations therefore do not reflect a continuing disregard of the franchisee’s

obligations in order to justify its termination because the violations are founded upon

reasonable causes.

32 Letter sent to Dr. Budiamman on Nov. 4, 2011, Compromis page 4

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Assuming arguendo that Singaporean Law applies, no implied warranty of

good faith and fair dealing is enforced or supported by its laws or jurisprudence. In

the present dispute, the effect of such would be to remove the obligation on the part

of the Franchisors to act in accordance with the implied obligation of fair dealing with

Dr. Budiamman. It would be thus, prejudicial to the Franchisee as he would have

little protection of his and his employees rights by the mere fact that the implied

warranty of good faith and fair dealing is not applicable in this Franchise Agreement.

V. AN EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A

HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION

VIOLATES THE CONSTITUTION AND/OR LAWS OF INDONESIA OR

ANY INTERNATIONAL TREATIES TO WHICH IT IS A MEMBER

PROVIDED SUCH PROHIBITION CONSTITUTES DISCRIMINATION

AGAINST AN EMPLOYEE.

A. The legal authorities and the general obligation of the state against

discrimination

As stated by the INTERNATIONAL CONVENANT ON ECONOMIC,

SOCIAL AND CULTURAL RIGHTS (ICESCR), states are bound by the obligation

to respect the right of women to have access to decent work and thus to take measures

to combat discrimination and to promote equal access and opportunities.

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In the context of Article 6 of the ICESCR, the ‘‘core obligation’’ of States

‘‘encompasses the obligation to ensure nondiscrimination and equal protection of

employment’’ in the private and public sectors of disadvantaged and marginalized

individuals and groups.

A.1. The Indonesian Constitution.

According to the Indonesian Constitution33

“Every person shall have the

right to work and to receive fair and proper remuneration and treatment in

employment.”

It is with this regard that any person seeking employment is entitled to a

fair and proper treatment regardless religion, among others that may affect his/her

employment. The purpose of such constitutional provision is to forestall the

possibility of oppression and discrimination on account of these factors.

A.2. The Indonesian Labor Law.

Article 5 and 6 of the Labor Law provides to wit:

“Art. 5 - All persons that are qualified to perform a job have the same

opportunity to get the job without discrimination.”

33 Article 28-D(2)), Indonesian Constitution

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“Art. 6 - All workers have the right to receive equal treatment without

discrimination from their employer”

The interpretation of Article 5 provides, among other things, that all

persons who are qualified to perform a job cannot be discriminated against on the

grounds of sex, race, ethnicity, religion, political orientation. In the same manner,

employers must provide workers with equal rights and responsibilities with no

discrimination based on the factors mentioned.34

A.3. The International Treaties and/or Conventions ratified by Indonesia

Convention Concerning Discrimination in Respect of Employment and

Occupation of 1958, No. 111

Article 1 of the Convention defines discrimination as: a) any distinction,

exclusion or preference made on the basis of race, colour, sex, religion, political opinion,

national extraction or social origin, which has the effect of nullifying or impairing

equality of opportunity or treatment in employment or occupation; b) such other

distinction, exclusion or preference which has the effect of nullifying or impairing

equality or opportunity or treatment in employment or occupation as may be determined

by the Member concerned after consultation with representative employers’ and workers’

organizations, where such exists, and with other appropriate bodies; Any distinction,

34 Practical Law, Multi-jurisdictional Guide 2011-12, Labor and Employee Benefits; Nafis Adwani and Freya

Weston, Ali Budiardjo, Nugroho, Reksodiputro

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exclusion or preference in respect of a particular job based on the inherent requirements

thereof shall not be deemed to be discrimination.

B. Employment regulation; when discriminatory

Under Article 1 of the Convention, an employment regulation that prohibits the

use of hijab by female Muslim employees or restriction of such is not discriminatory per

se. It is only such when it falls under the enumeration mentioned in the Convention, or

when it is a: 1) Direct discrimination; 2) Indirect discrimination; 3) Discrimination by

way of “victimization” or “harassment” in the workplace by reason of “any religion,

religious belief or similar philosophical belief.”35

Direct discrimination occurs where the complainant is treated less favorably than

other persons on grounds of religion or belief. Indirect discrimination occurs where the

employer imposes a provision, criterion or practice which applies or would apply equally

to persons not of the same religion or belief but puts persons of one particular religion or

belief at a particular disadvantage compared with persons of another religion or belief,

and the employer cannot show (such a provision, criterion or practice) to be a

proportionate means of achieving a legitimate aim.

A claim for victimization will arise where a person receives less favorable

treatment simply by virtue of the fact that they have previously raised a complaint (or by

35 Employment Equality Regulations 2003

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reason that the employer knows that a person intends to raise a complaint) of religious

discrimination.36

Harassment is defined as unwanted conduct on grounds of religion or belief which

has the purpose or effect of either violating another person’s dignity or creating an

intimidating, hostile, degrading, humiliating or offensive environment same religion or

belief but puts persons of one particular religion or belief at a particular disadvantage

compared with persons of another religion or belief, and the employer cannot show (such

a provision, criterion or practice) to be a proportionate means of achieving a legitimate

aim.

Thus, it is submitted that an employment regulation prohibiting or imposing

restrictions on the use of Hijabs on female employees, on the ground that is amounts to

discrimination on account of religion, sex, race and other factors that may deny such

employee of fair and reasonable treatment, is violative of the Indonesian Constitution, its

domestic laws and the treaties to which it is a signatory of.

36 The Islamic Veil and Freedom of Religion, the Rights to Education and Work: a Survey of Recent International

and National Cases

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CONCLUSION AND PRAYER

WHEREFORE, the respondent respectfully prays for the following reliefs from this

Arbitration Tribunal: that the Arbitration Agreement be declared invalid and unenforceable; that

the Franchise Agreement be declared unenforceable for failing to comply with the formal and

substantial requisites; that Article XII of the Franchise Agreement be declared invalid and

unenforceable; that damages be awarded in favor of the respondent for the breach of the terms of

the Franchise Agreement by the claimant in instituting a premature and baseless action.