IN THE KUALA LUMPUR REGIONAL CENTRE FOR ARBITRATION KUALA LUMPUR (MALAYSIA) BETWEEN GREAT WALL NOODLE SHOP LLC. CLAIMANT ADI BUDIAMMAN, M.D.

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1 THE 7 th LAWASIA INTERNATIONAL MOOT COMPETITION 2012 IN THE KUALA LUMPUR REGIONAL CENTRE FOR ARBITRATION KUALA LUMPUR (MALAYSIA) PLACE OF HEARING: BALI, INDONESIA BETWEEN GREAT WALL NOODLE SHOP LLC. CLAIMANT V. ADI BUDIAMMAN, M.D. RESPONDENT MEMORIAL FOR THE RESPONDENT

2 TABLE OF CONTENTS TABLE OF CONTENTS... ii INDEX OF AUTHORITIES... vii STATEMENT OF JURISDICTION... xi QUESTIONS PRESENTED... xii STATEMENT Of FACTS... xiv SUMMARY OF PLEADINGS... xvii PLEADINGS... 1 I. THE SUBSTANTIVE VALIDITY OF THE TERMS OF THE FRANCHISE AGREEMENT IS GOVERNED BY SINGAPORE LAW, BUT INDONESIAN LAW GOVERNS THE FORMAL VALIDITY AND ALSO THE RIGHTS AND OBLIGATIONS ARISING THEREIN; WHEREAS THE ARBITRATION AND THE ARBITRATION CLAUSE IS GOVERNED BY MALAYSIAN LAW... 1 [A] MALAYSIAN LAW IS THE PROPER LAW GOVERNING THE PROCEDURES OF THE ARBITRAL PROCEEDINGS... 2 [B] SINGAPORE LAW, AS THE PUTATIVE PROPER LAW OF THE FRANCHISE AGREEMENT, GOVERNS ITS SUBSTANTIAL VALIDITY... 3

3 [C] THE PROPER LAW TO GOVERN THE ENFORCEABILITY OF AND THE RIGHTS UNDER THE FRANCHISE AGREEMENT IS INDONESIAN LAW... 4 (a) The choice of law clause providing for Singapore law to apply is not valid... 4 (b) The choice of law clause should be ousted and as a result thereof, Indonesian law becomes the applicable law... 6 [D] THE PROPER LAW TO DETERMINE THE FORMAL VALIDITY OF THE FRANCHISE AGREEMENT AND ITS TERMS IS INDONESIAN LAW... 7 [E] THE PROPER LAW TO DETERMINE THE VALIDITY AND ENFORCEABILITY OF THE ARBITRATION AGREEMENT IS MALAYSIAN LAW... 8 II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE.. 8 [A] THE ARBITRATION AGREEMENT IS INVALID AND THE TRIBUNAL SHALL RULE ON ITS LACK OF JURISDICTION TO HEAR THIS DISPUTE... 9 [B] THE ARBITRATION AGREEMENT IS UNENFORCEABLE AND THE TRIBUNAL SHALL RULE ON ITS LACK OF JURISDICTION TO HEAR THIS DISPUTE... 9 III. THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN LAW, SPECIFICALLY UNDER ARTICLE 31 OF LAW NO. 24 OF 2009 ( ARTICLE 31 ).. 10 [A] THE FRANCHISE AGREEMENT DOES NOT COMPLY WITH THE REQUIREMENT OF ARTICLE ii

4 [B] NON-COMPLIANCE WITH ARTICLE 31 WILL INVALIDATE THE FRANCHISE AGREEMENT UNDER INDONESIAN LAW [C] THE TRIBUNAL MUST DECLINE JURISDICTION TO HEAR THIS DISPUTE AS THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN LAW (a) The Franchise Agreement is formally invalid (b) The Tribunal has an overriding duty to render an enforceable award IV. ONLY THE TERM WHICH RESTRICTS THE TRIBUNAL'S POWER TO COMPEL SPECIFIC PERFORMANCE AGAINST THE CLAIMANT IS UNENFORCEABLE, NOT ARTICLE XII OF THE FRANCHISE AGREEMENT IN TOTO [A] THE TERM RESTRICTING THE TRIBUNAL'S POWER TO COMPEL SPECIFIC PERFORMANCE AGAINST THE CLAIMANT IS UNCONSCIONABLE AND SHOULD BE SET ASIDE [B] THE VALIDITY AND/OR ENFORCEABILITY OF ARTICLE XII SHALL NOT BE AFFECTED BY THE UNCONSCIONABLE TERM AS THE DOCTRINE OF SEVERABILITY WILL SEVER THE PARTICULAR UNCONSCIONABLE TERM FROM ARTICLE XII V. THE CLAIMANT CAN TERMINATE FOR ANY VIOLATION OF THE FRANCHISE AGREEMENT [A] THE TERMINATION CLAUSE ALLOWS THE CLAIMANT TO TERMINATE FOR ANY BREACH OF THE CONTRACT (a) Singapore Law iii

5 (b) Indonesian Law VI. WARRANTY OF GOOD FAITH AND FAIR DEALING APPLIES TO THE FRANCHISE AGREEMENT, AND THE BREACHES DO NOT JUSTIFY TERMINATION [A] THE CLAIMANT HAS A DUTY TO TERMINATE THE CONTRACT IN GOOD FAITH (a) The inherent warranty of good faith and fair dealing is implied into the contract under Singapore Law (b) The inherent warranty of good faith and fair dealing applies under Indonesian Law 20 [B] THE BREACHES DO NOT JUSTIFY TERMINATION UNDER BOTH SINGAPORE AND INDONESIAN LAW (a) The termination was not made in Reasonable Business Judgment because it was made in bad faith (b) The alleged breaches committed by the Respondent (i) Serving of a single Indonesian dish referred to as The Special of the Day does not justify termination (ii) The Claimant is estopped from using the breach of giving customers the option to substitute lamb for pork as a breach that justifies termination iv

6 (iii) The wearing of the new (white) hijab by the female Muslim employees is not a breach under the FA and cannot justify termination (iv) The above violations do not reflect a continuing disregard of the Respondent s obligations under the FA. The termination was made in bad faith VII. THE NOTICE OF TERMINATION SENT TO THE RESPONDENT WAS IMPROPER AND UNTIMELY [A] THE NOTICE OF TERMINATION WAS IMPROPER UNDER BOTH SINGAPORE LAW AND INDONESIAN LAW (a) The Respondent remedied the breaches to his best capabilities, no longer making it a substantial violation that would entitle the Claimant to terminate the contract (i) Singapore Law (ii) Indonesian Law [B] THE NOTICE OF TERMINATION WAS NOT TIMELY UNDER BOTH SINGAPORE AND INDONESIAN LAW (a) If the tribunal finds that the Claimant has a right to terminate the contract, the Claimant is estopped from terminating the contract because of late delivery of Notice of Termination VIII. THE PROHIBITION OF HIJAB WEARING BY FEMALE MUSLIM EMPLOYEES VIOLATES THE INDONESIAN CONSTITUTION AND LAWS, AS WELL AN INTERNATIONAL TREATY TO WHICH INDONESIA IS A MEMBER. 29 v

7 [A] THE EMPLOYEES' RIGHT TO FREELY MANIFEST THEIR RELIGION (a) The element of Indonesianness (b) The ECHR jurisprudence [B] THE EMPLOYEES' RIGHT FOR EQUAL OPPORTUNITY TO SECURE A JOB WITHOUT DISCRIMINATION ON THE GROUNDS OF RELIGION [C] THE VIOLATION OF THE ABOVEMENTIONED PROVISIONS IN THIS DISPUTE CONCLUSION vi

8 INDEX OF AUTHORITIES Treatises and Conventions Internationa Covenant on Civil and Political Rights Judicial Decisions from Municipal Courts ABDA Airfreight Sdn. Bhd. v Sistem Penerbangan Malaysia Bhd [2001] 8 CLJ 1 HC... 7 Abu Dhabi National Tanker v Product Star Shipping [1993] Lloyd s Rep Albeko Schuhmaschinen AG v Kamborian Shoe Machine Co. (1961) 111 L.J Amiri Flight Authority v BAE Systems Plc. [2003] EWCA Civ Bennett v Bennett (1952) 1 All E.R Black v Wilcox [1976] 70 DLR (3d) Dallah Real Estate and Tourism Holding Co. v Ministry of Religious Affairs of the Government of Pakistan [2011] 1 A.C E.D. & F (Man) Sugar Ltd. v Yani Haryanto, Indonesian Supreme Court No.1205 K/PDT/ ECRC Land Pte Ltd v Ho Wing On Christopher [2003] SGHC Egon Oldendorff v Liberia Corp. [1995] 2 Llyod's Rep Hengsten Vereniging v Onderlinge Paarden en Vee Assurantie (Artist De Laboureur Arrest), 9 th February 1923, NJ 1923, Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd. [1989] Q.B Intraco v Multi-Pak Singapore Pte Ltd [1994] SGCA vii

9 James Capel (Far East) Ltd v YK Fung Securities Sdn Bhd (Tan Koon Swan, Third Party) [1996] 2 MLJ Liverpool City Council v Irwin [1977] A.C Murugesan v Krishnasamy [1958] MLJ New Zealand Insurance Co. Ltd. v Ong Choon Lin [1992] 1 MLJ Ng Giap Hon v Westcomb Securities [2009] SGCA , 28 Ocean Chemical Transport Inc. v Exnor Craggs Ltd. [2000] 1 All E.R. (Comm) Paragon Finance v Nash [2001] EWCA Civ Paris v Machnick [1972] 32 DLR PT Nubika Jaya v Standard Charted Bank, Indonesian District Court of Central Jakarta No.286/Pdt.G/2009/PN.JKT.PST RDC Concrete v Sato Kogyo [2007] 4 SLR(R) Regazzoni v KC Sethia (1944) Ltd. [1958] AC Regina (SB) v Governors of Denbigh High School [2006] UKHL Request for Judicial Review of the Blasphemy Law, Indonesian Constitutional Court No. 140/PUU-VII/ Saad Marwi v Chan Hwan Hua & Anor [2001] 3 CLJ Spiro v Lintern [1973] 3 All E.R Stocznia Gdanska SA v Latvian Shipping Co (No.2) [2002] EWCA Civ Sulamerica Cia Nacional de Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ The Government of India v Cairn Energy India Pty Ltd & Anor [2011] 6 MLJ Tilden Rent-A-Car Co. v Clendenning (1978) 83 DLR (3d) Van Grutten v Digby (1862) 31 Beavan viii

10 Vita Food Products v Unus Shipping Company [1939] A.C Statutes and Municipal Legislations Goverment Regulation No.42/ Indonesian Civil Code... 12, 19, 29 Indonesian Constitution Law No.24/ , 12 Law No.30/ Law No.39/ Malaysian Civil Law Act Ministerial Regulation No.31/ s.22(3) MAA passim Treatises, Digests and Books Chitty on Contracts, 26 th Edition... 5, 6 Prof. Waddams, 2 nd Edition of The Law of Contracts Proudret and Besson, Comparative Law of International Arbitration, 2 nd Edition... 3 Russell on Arbitration Articles and Commentaries Crouch M., Human Rights and Legitimate Limitations on Religious Freedom: Between Judicial Interpretation and Legislatives Debates in Indonesia, AsianSIL Working Paper 2012/ Explanatory Notes of Law No.13/ ix

11 General Comment No.22 ICCPR, CCPR/C/21/Rev.1/Add.4, 30 th July General Comment No.3 ICCPR: Implementation at the national level, 29 th July Mayer, Mandatory Rules of Law in International Arbitration, 2 Arb. Int'l Shine P., Establishing jurisdiction in commercial disputes: arbitral autonomy and the principle of kompetenz-kompetenz... 3 Others KLRCA Fast Track Rules... 3 Oxford English Dictionary, 2 nd Edition x

12 STATEMENT OF JURISDICTION Dr. Adi Budiamman ( the Respondent ), challenges the jurisdiction of this Arbitral Tribunal in hearing this dispute submitted by Great Wall Noodle Shop LLC. ( the Claimant ), before the Kuala Lumpur Regional Centre for Arbitration ( KLRCA ), concerning the rights and obligations arising from the Franchise Agreement between the Respondent and the Claimant, which both parties signed on 20 th June This is for lack of a valid and enforceable arbitration agreement to submit the dispute to KLRCA and pursuant to the Arbitral Tribunal s overriding duty to render enforceable award, should not hear any dispute relating to the Franchise Agreement which violates laws and public policy of Indonesia xi

13 QUESTIONS PRESENTED I. What is the proper law to apply in resolving the present dispute? II. Whether there is a valid and enforceable arbitration agreement? III. Whether the Franchise Agreement is valid under Indonesian Law, specifically Article 31 of Law No. 24 of 2009? IV. Is Article XII of the Franchise Agreement invalid and/or unenforceable as it authorizes the granting of specific performance should the Respondent be found to have violated a provision of the Franchise Agreement while prohibiting the granting of specific performance should the Claimant be found to have violated a provision of the Franchise Agreement? V. Was a proper and timely Notice of Termination given to the Respondent? VI. May the Claimant terminate the franchise for any violation of the Franchise Agreement or must it be a substantial violation of the Agreement? VII. Does the inherent warranty of good faith and fair dealing in interpreting and applying franchise agreements apply to this Franchise Agreement and, if so: i. Did the serving of a single Indonesian dish referred to as The Special of the Day justify the termination of the franchise? ii. Did giving customers the option of substituting lamb for pork for menu items justify the termination of the franchise? iii. Did the wearing of the new (white) hijab by the female Muslim employees justify the termination of the franchise? xii

14 iv. 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? VIII. 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? xiii

15 STATEMENT OF FACTS The parties to the contract 1. Great Wall Noodle Shop LLC. ( the Claimant ) was founded by Jianping Ji ( Mr. Ji ) and Xuefeng Wang ( Mr. Wang ) on 20 th May They co-owned the Great Wall Noodle Shop franchise, and have franchised a total of 35 other Great Wall Noodle Shops in China, Singapore, and Malaysia Dr Adi Budiamman ( the Respondent ), is a prominent surgeon in Jakarta, who received his graduate medical training in the United States and is well versed in English. 2 In his youth, the Respondent had worked in a Chinese restaurant in Singapore, and in the moments preceding the meeting between the Claimant and Respondent in Changi Airport, the Respondent was considering reducing his surgical practice due to a mild form of glaucoma, and needed something to occupy his spare time. 3 Facts surrounding the signing of the Franchise Agreement 3. In early 2011, the Claimant intended to expand the Franchise to Indonesia. The Claimant had contacted Mr. Bao Shan with an offer to expand the Claimant s franchise to Indonesia. However, Mr. Bao Shan declined the offer to open the Claimant s restaurants in Indonesia. 1 First Clarifications D-1 2 Statement of Agreed Facts ( Agreed Facts ), p.6, footnote 9. 3 First Clarifications A-3 xiv

16 4. At the Singapore Changi Airport, Mr. Wang met the Respondent, and explained the purpose of his visit to him. As the Respondent s flight was being called for boarding, he offered to open the Claimant s restaurants in Indonesia. 5. Mr. Wang explained the fee arrangements as found Paragraphs B, D, and F of Article V of the Franchise Agreement 4 meant for Mr. Bao Shan. As the Respondent had a flight to catch, he suggested the Respondent to take the Franchise Agreement home with him and read it in full before signing it. However, the Respondent dismissed the terms as "legal mumbo jumbo" and proceeded to sign the agreement. An Indonesian and English copy of the Franchise Agreement was delivered to the Respondent the following day. Discovery of violations of the Franchise Agreement 6. Two months into the operation of the Jakarta and Medan franchises, Mr Ji made an unannounced visit to the restaurants pursuant to Article III.G and/or Article VIII of the Franchise Agreement and discovered that: (i) the sale of food products not on the official menu being served 5, (ii) substitutions for the ingredients of others 6, and (iii) some of the female Muslim employees wore red head scarves 7. There had been no request for permission by the Respondent for these adaptations. 8 4 First Clarifications C Agreed Facts, p.3, footnote 4. 6 Ibid, p.3, footnote 5. 7 Agreed Facts, p.3, footnote 6. 8 First Clarifications C-7 xv

17 7. On 4 th November 2011, Mr. Ji contacted the Respondent in an and urged him to cease these alleged violations, citing that it created a problem of lack of uniformity with the Franchise System, which, if not rectified, would warrant termination of the franchise. 8. In another inspection conducted two weeks later, it was reported that the alleged violations was still not addressed; (i) the sale of non-menu items persisted in the form of a "Special of the Day" 9, (ii) the continuation of the wearing of unauthorised uniform by all female Muslim employees, in the form of a white headscarf 10. Termination and Dispute Resolution 9. Following the report, Mr Ji and Mr Wang sent a Notice of Termination to the Respondent, and indicated their intention of reopening the Jakarta restaurant under a new management in 30 days. However, the Respondent refused to close his two restaurants. 10. Following the Respondent's refusal, the Claimant submitted a Notice of Arbitration pursuant to Article 3 of the Kuala Lumpur Regional Centre for Arbitration Fast Track Rules ( the Rules ). The parties agreed to resolve their disputes in accordance to the Kuala Lumpur Regional Centre for Arbitration Fast Track Rules ( the Rules ). 9 Agreed Facts, p.5 10 Ibid. xvi

18 SUMMARY OF PLEADINGS I. Different laws apply in resolving the different agendas of the hearing. The putative proper law for the Franchise Agreement is Singapore law. The putative proper law for the Arbitration Agreement and the procedural matters of the arbitration is Malaysian law. The proper law to be applied in resolving the underlying dispute is Indonesian law, which will also govern the formal validity of the Franchise Agreement. II. The Tribunal has no authority to resolve the dispute between the parties for two alternative reasons; the Arbitration Agreement found within the Franchise Agreement is invalid or alternatively, it is unenforceable as it is contrary to the public policy of the forum. Assuming, arguendo, the Tribunal assumes jurisdiction nonetheless, then it has jurisdiction to hear on Agenda B7 as well because it is decided in a commercial context, thus arbitrable. III. The Franchise Agreement is invalid under Indonesian law, specifically Article 31 of Law No. 24 of 2009 ( Article 31 ). This is significant because the formal validity of the Franchise Agreement is governed by Article 31. Even if its formal validity is governed by lex loci contractus, the Tribunal has an overriding duty to render an enforceable award. Pursuant to these alternative reasons, the Tribunal must decline jurisdiction to arbitrate the present dispute. IV. The Tribunal should set aside the restriction of its powers to compel specific performance against the Claimant as it is a product of an unconscionable bargain under Malaysian law. xvii

19 The restriction, however, does not affect the validity of the arbitration agreement due to the doctrine of severability. V. The Franchise Agreement may be terminated for a any violation because its termination is subjected to the unfettered discretion of the Claimant arising from the Termination Clause within it Under either Singaporean or Indonesian law, the freedom to contract such a term is recognised. VI. The application of inherent warranty of good faith and fair dealing is possible under either Indonesian law or Singaporean law. Also, based on the term of the Franchise Agreement, the Claimant s decision to terminate the Franchise Agreement is protected by its Reasonable Business Judgement. However, the decision to terminate the Franchise Agreement was not in correct exercise of Reasonable Business Judgement as the breaches do not justify such termination. Hence, the termination was consequently not in good faith. VII. The Notice of Termination was improper and untimely under either Singaporean or Indonesian law. Under Singaporean law, the termination was unjustified and the Claimant was estopped from terminating the Franchise Agreement nonetheless. Under Indonesian law, the termination is not in good faith and it did not comply with the requirements of termination as stipulated by statute. VIII. The employment regulation interferes with the employee's right to manifest their religious belief under Article 28E, Paragraph 1 of the Indonesian Constitution and Article 18, Paragraph 1 of the International Convention on Civil and Political Rights The xviii

20 regulation also discriminates the employees based on their religion under Article 5 of Law No. 13 of 2003 of Indonesia. xix

21 PLEADINGS I. THE SUBSTANTIVE VALIDITY OF THE TERMS OF THE FRANCHISE AGREEMENT IS GOVERNED BY SINGAPORE LAW, BUT INDONESIAN LAW GOVERNS THE FORMAL VALIDITY AND ALSO THE RIGHTS AND OBLIGATIONS ARISING THEREIN; WHEREAS THE ARBITRATION AND THE ARBITRATION CLAUSE IS GOVERNED BY MALAYSIAN LAW 1. As regards the question of applicable law, the Respondents maintain that Singapore law, Indonesian law and Malaysian law are applicable to different facets of the dispute herein. 2. This dispute involves transnational and multinational elements. These elements are: 2.1 The Claimant is a Chinese company, whereas the Respondent is an Indonesian citizen; 2.2 The place of the restaurant operation is in Indonesia; 2.3 The seat of arbitration is in Malaysia; and 2.4 The FA was signed by both parties in Singapore. 3. As such, this dispute attracts a multiplicity of applicable laws. Hence, the Tribunal must first and foremost determine these various sets of laws for each aspect of the dispute. 4. In this respect, the Respondent submits that:- 4.1 Malaysian law is the proper law governing the procedures of the arbitral proceedings 1

22 4.2 Singapore law is the putative proper law governing the issues of substantive validity vis-à-vis the underlying contract. 4.3 Despite the choice of Singapore law in the Franchise Agreement ( FA ), this Tribunal must apply Indonesian law to resolve the dispute in the underlying contract. 5. The justification for the Respondent s contention at paragraphs 4.1 to 4.3 above is further elaborated below. [A] MALAYSIAN LAW IS THE PROPER LAW GOVERNING THE PROCEDURES OF THE ARBITRAL PROCEEDINGS 6. The law of the seat of arbitration or lex arbitri must govern the procedural matters of the arbitral proceedings 11. Such procedural matters include: 6.1 The scope of the Tribunal's power; 6.2 The conflict of laws rules to be applied by the Tribunal; and 6.3 The procedures to be followed by the Tribunal in conducting the arbitral proceedings. 7. Since the Rules provide that the seat 12 of the Tribunal is in Malaysia, Malaysian law shall be the lex arbitri 13. Hence, the Malaysian conflict of laws rules must be used to determine the following sets of laws governing the respective aspects of this dispute. 11 The Government of India v Cairn Energy India Pty Ltd & Anor [2011] 6 MLJ 441; Sulamerica Cia Nacional de Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ Seat of arbitration has been defined as the juridical connections which bind the parties to the arbitration and arbitrators on one hand, to a state court forum and the national arbitration law, on the other hand. See Proudret and 2

23 [B] SINGAPORE LAW, AS THE PUTATIVE PROPER LAW OF THE FRANCHISE AGREEMENT, GOVERNS ITS SUBSTANTIAL VALIDITY 8. The substantive validity of the FA and its terms must be distinguished from their formal validity because the latter is governed under different sets of law and may be subjected to different requirements. 9. The substantive validity of the FA and its terms, including the substantive validity of the choice of law clause 14 itself, must be governed by the putative proper law. 10. This putative proper law concept is to resolve the potential circular argument akin to the purpose of the doctrine of Kompetenz-Kompetenz 15. When the validity of a contract and the terms therein (including the choice of law clause) are in doubt, the Tribunal must employ a system of law to resolve the same. The concept of putative proper law then comes in to avoid a legal vacuum, by putatively applying the choice of law stipulated in the contract. 11. The concept has also been used in issues pertaining incorporation of terms 16, offer & acceptance 17 as well as other issues concerning the substantial validity of the an agreement and its terms. Besson, Comparative Law of International Arbitration, 2 nd Edition, p.101; Russell on Arbitration 2003, para 2-209; s.22(3) MAA 2005 provides that a hearing can be held at a place different from the seat of arbitration. 13 Art.6, Para.2 of the Fast Track Rules 14 FA, p.30, para.3 15 s.18(1) MAA 2005; Shine P., Establishing jurisdiction in commercial disputes: arbitral autonomy and the principle of kompetenz-kompetenz, Journal of Business Law. 2008, 3, ; Dallah Real Estate and Tourism Holding Co. v Ministry of Religious Affairs of the Government of Pakistan [2011] 1 A.C Egon Oldendorff v Liberia Corp. [1995] 2 Llyod's Rep 64 3

24 12. With regard to the FA, the putative proper law is Singapore law found within the abovementioned choice of law clause assuming that it is valid. [C] THE PROPER LAW TO GOVERN THE ENFORCEABILITY OF AND THE RIGHTS UNDER THE FRANCHISE AGREEMENT IS INDONESIAN LAW 13. As submitted above at paragraph [9], the issue of substantive validity of a choice of law clause shall be governed by the putative applicable law, which is Singapore law. 14. As a matter of general principle, the Tribunal must defer to party autonomy and give effect to the choice of law by the parties to govern an agreement if it is valid and is mutually consented to by those parties 18 and also if it is not contrary to public policy of the forum In this dispute, the Respondent argues that the choice of Singapore law should not be applied because: 15.1 There was no real consent by the Respondent to the choice of Singapore law to govern the enforceability and the rights under the FA, rendering it invalid; and 15.2 Even if there was real consent (which is denied), the choice of Singapore law is contrary to the public policy of Malaysia, thus rendering it unenforceable. (a) The choice of law clause providing for Singapore law to apply is not valid 16. The Respondent submits that the choice of law clause has not been incorporated into the FA. 17 Albeko Schuhmaschinen AG v Kamborian Shoe Machine Co. (1961) 111 L.J s.30(2) MAA Vita Food Products v Unus Shipping Company [1939] A.C

25 17. It is trite law that when a contractual term in one party's standard form of agreement is onerous or unusual, then the party seeking to enforce it must show that it had been fairly and reasonably brought to the other's attention 20. Failing that, the particular term will not be deemed to be part of that agreement and thus invalid. This principle is applicable also to explicitly signed agreements In this dispute, the choice of law clause has not been validly incorporated into the FA as it is an onerous term for the following reasons: 18.1 The choice of Singapore law has no connection whatsoever with the FA except for the mere coincidence that it was signed in Singapore; 18.2 It puts the Respondent in a disadvantaged position as his rights will be better protected under Indonesian law as opposed to Singapore law It contains a waiver that requires the Respondent to waive all his rights and protection under Indonesian law Such an abrogation of right given by a statute is onerous Having established the onerous nature of the choice of law clause, it is incumbent on Mr. Xuefang Wang ( Mr. Wang ), as the authorised agent of the Claimant, to fairly and reasonably bring the particular clause to the attention of the Respondent 23 at the time of contracting. This duty was not fulfilled in this dispute. It is therefore unfair to hold the 20 Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd. [1989] Q.B. 433; Chitty on Contracts, 26 th Edition, para Amiri Flight Authority v BAE Systems Plc. [2003] EWCA Civ 1447; Ocean Chemical Transport Inc. v Exnor Craggs Ltd. [2000] 1 All E.R. (Comm) 519; Tilden Rent-A-Car Co. v Clendenning (1978) 83 DLR (3d) Chitty on Contracts, 26 th Edition, para Supra note.10 5

26 Respondent to the onerous choice of law clause in question. Hence, it is not deemed to have been incorporated into the FA and thus invalid. (b) The choice of law clause should be ousted and as a result thereof, Indonesian law becomes the applicable law 20. Alternatively, the choice of law clause must be ousted as it is contrary to the public policy of Malaysia, the seat of arbitration The public policy consideration of Malaysia includes the exercising of the principle of international comity towards a foreign friendly state, and it includes non-enforcement of a contract which violates the law of a foreign friendly state. This necessarily extends to the choice of law clause which forms part of the contract. 22. This principle has been illustrated in the Malaysian High Court case of ABDA Airfreight Sdn. Bhd. v Sistem Penerbangan Malaysia Bhd. 25 where the learned judge, Abdul Malik Ishak J, affirmed the following: Just as public policy avoids contracts which offend against our own law, so it will avoid at least some contracts which violate the laws of a foreign state, and it will do so because public policy demands that deference to international comity In this dispute, the choice of law clause requires the Respondent to waive all his rights and protections afforded to him by Indonesian law and also requires the FA to be governed under Singapore law. 24 Supra note.9 25 [2001] 8 CLJ 1 HC 26 Ibid., per Viscount Simonds in Regazzoni v KC Sethia (1944) Ltd. [1958] AC 301 6

27 24. This is contrary to the requirements of two Indonesian franchise legislations; that both parties must have equal status under Indonesian law 27 and that the FA must observe Indonesian law Hence, the Tribunal, like the Malaysian courts, should exercise the principle of international comity towards a foreign friendly state that is Indonesia and set the choice of law clause aside Upon ousting the choice of law clause on either alternative grounds, the lex loci solutionis approach shall then be used in the absence of an express or implied choice of law by parties By using that approach, the place of the characteristic performance of the FA will determine the proper law of the FA to resolve this dispute. Since the operation of the franchise restaurant is in Indonesia, then Indonesian law shall be the said proper law. [D] THE PROPER LAW TO DETERMINE THE FORMAL VALIDITY OF THE FRANCHISE AGREEMENT AND ITS TERMS IS INDONESIAN LAW 28. The formal validity of the FA and its terms must be governed by either the law of the place of contracting (i.e. lex loci contractus) or the proper law of the FA In this dispute, the lex loci contractus has very little connection with the FA because it was only a mere coincidence that Mr. Wang met and contracted with the Respondent in 27 Art.5, Para.1 of Ministerial Regulation No.31/ Art.4, Para.1 of Goverment Regulation No.42/ s.37(1)(b)(ii) MAA James Capel (Far East) Ltd v YK Fung Securities Sdn Bhd (Tan Koon Swan, Third Party) [1996] 2 MLJ Van Grutten v Digby (1862) 31 Beavan 561 7

28 Changi Airport, Singapore 32. Thus, the formal validity of the FA and its terms must be governed by the proper law of the FA that is Indonesian law 33. [E] THE PROPER LAW TO DETERMINE THE VALIDITY AND ENFORCEABILITY OF THE ARBITRATION AGREEMENT IS MALAYSIAN LAW 30. The doctrine of separability of an arbitration clause dictates that the Arbitration Agreement ( AA ) is separate and independent of the main FA 34. In the absence of an express choice of law to govern the AA, then the parties' implied choice of law must be given effect by virtue of the seat of arbitration found within the AA The law of the seat of arbitration (i.e. lex arbitri) must govern both the formal and the substantive validity of the AA 36. Since the Kuala Lumpur Regional Centre for Arbitration is to be the seat of arbitration, then Malaysian law shall be the lex arbitri 37. Accordingly the Malaysian Arbitration Act ( MAA ) 2005, Malaysian Arbitration (Amendment) Act 2011 and common law 38 are referred to as authorities of Malaysian law. II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE 32. The law governing the AA is Malaysian law 39. The AA in this dispute is invalid or alternatively, unenforceable. Since the Tribunal derives its jurisdiction to hear this dispute from that particular AA, then it has to rule on its lack of jurisdiction. The 32 Agreed Facts, p.2, para.3; First Clarifications A-2 33 para.27 of this Memorial 34 s.18(2) MAA Sulamerica Cia Nacional de Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ Supra note.1 37 Supra note.3 38 s.3 & s.5 Malaysian Civil Law Act para.31 of this Memorial 8

29 Tribunal does have the authority to make such ruling by virtue of the doctrine of Kompetenz-Kompetenz 40. [A] THE ARBITRATION AGREEMENT IS INVALID AND THE TRIBUNAL SHALL RULE ON ITS LACK OF JURISDICTION TO HEAR THIS DISPUTE 33. Under the same position in law 41 laid down under the incorporation of the choice of law clause, the Arbitration Clause 42 has also not been validly incorporated into the FA as it is also an onerous and/or unusual term as it contains restrictions of the remedial rights of the Respondent (i.e. restriction of the possibility of specific performance and restraining order as a potential remedy for the Respondent) Having established the onerous and/or unusual nature of the AA, it was incumbent on Mr. Wang, as an authorised agent of the Claimant, to fairly and reasonably bring the particular agreement to the attention of the Respondent 44 at the time of contracting. This duty was again not fulfilled in this dispute. It is therefore unfair to hold the Respondent to the onerous and/or unusual AA in question. Hence, it is not deemed to have been incorporated into the FA and thus is invalid. The Tribunal should therefore rule on its lack of jurisdiction to hear this dispute. [B] THE ARBITRATION AGREEMENT IS UNENFORCEABLE AND THE TRIBUNAL SHALL RULE ON ITS LACK OF JURISDICTION TO HEAR THIS DISPUTE 40 Supra note.5 41 Supra note FA, p.29, para.1 43 Ibid. 44 Supra note.10 9

30 35. The AA is contrary to the public policy of Malaysia and thus it should be set aside by the Tribunal. The public policy consideration of Malaysia includes the exercising of the principle of international comity towards a foreign friendly state In this dispute, the AA is contrary to the language requirement of an Indonesian legislation 46 (i.e. violates a law of Indonesia) that any agreement involving an Indonesian citizen and a foreign party must be executed in Indonesian language and then translated into the language of the foreign party and/or English language. This was not the case as it was instead executed in English language and only then translated into Indonesian language. 37. Hence, the Tribunal should exercise the principle of international comity towards a friendly foreign state that is Indonesia and set the AA aside 47. The Tribunal should therefore rule on its lack of jurisdiction to hear this dispute. III. THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN LAW, SPECIFICALLY UNDER ARTICLE 31 OF LAW NO. 24 OF 2009 ( ARTICLE 31 ) 38. The formal validity of the FA is to be governed under Indonesian law 48, specifically Article 31. In this dispute, the FA did not satisfy its requirement and thus invalid. [A] THE FRANCHISE AGREEMENT DOES NOT COMPLY WITH THE REQUIREMENT OF ARTICLE Supra note Art.31 of Law No.24/ Supra note para.29 of this Memorial 10

31 39. Article 31 requires any agreement involving an Indonesian citizen and a foreign party to be executed in Indonesian language and then translated into the language of the foreign party and/or English language. 40. In this dispute, the FA was executed in English language and a Indonesian copy was only delivered to the Respondent the next day 49. Hence, the FA does not comply with the abovementioned requirement which is clear and unequivocal. [B] NON-COMPLIANCE WITH ARTICLE 31 WILL INVALIDATE THE FRANCHISE AGREEMENT UNDER INDONESIAN LAW 41. Although further provisions regarding the use of the Indonesian language as meant in Law No. 24 of 2009 will be regulated in a Presidential Regulation 50, the fact of the matter is that the Law is effective since its promulgation and cannot be held in abeyance. 42. Hence, the sanction for non-compliance with Article 31must inferred from Article 1320 of the Indonesian Civil Code ( ICC ) 51 which defines a valid contract under Indonesian law. By violating Article 31, the FA would not have fulfilled the fourth requirement of a valid contract under Article 1320 of the ICC that is to have an admissible cause. An agreement will not have an admissible cause if it violates any Indonesian law 52. Hence, the FA is void ab initio under Indonesian law. [C] THE TRIBUNAL MUST DECLINE JURISDICTION TO HEAR THIS DISPUTE AS THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN LAW 49 Agreed Facts, p.2, para.4 50 Art.40 of Law No.24/ PT Nubika Jaya v Standard Charted Bank, Indonesian District Court of Central Jakarta No.286/Pdt.G/2009/PN.JKT.PST 52 Art.1337 ICC 11

32 43. The fact that the FA is invalid under Article 31 is significant for two alternative reasons and the Tribunal must decline jurisdiction to hear this dispute for either these reasons: (a) The Franchise Agreement is formally invalid 44. While the FA (except the choice of law clause) is substantially valid under its putative proper law (i.e. Singapore law), it is formally invalid under its proper law (i.e. Indonesian law), specifically Article 31. Hence, the Tribunal must decline jurisdiction to hear this dispute. (b) The Tribunal has an overriding duty to render an enforceable award 45. Even if the Tribunal finds that the formal validity of the FA is governed by lex loci contractus (i.e. Singapore law) and not the proper law of the FA (i.e. Indonesian law) 53, the Tribunal still has the abovementioned duty as illustrated by the International Chamber of Commerce Award No.4132 of 1983 where the arbitrator made reference to the following argument: Although arbitrators are neither guardians of the public order nor invested by the State with the mission of applying its mandatory rules, they ought nevertheless have an incentive to do so out of a sense of duty to the survival international arbitration as an institution...[a]rbitrators should pay heed to the future of their award Hence, the Tribunal must decline jurisdiction to hear this dispute as it is not in a position to render an enforceable award due to the following reasons: 53 Supra note Mayer, Mandatory Rules of Law in International Arbitration, 2 Arb. Int'l 274,

33 46.1 Either party will seek enforcement of the award that will be conferred by the Tribunal in Indonesia under the supervision of the Indonesian courts Indonesian courts will not enforce an arbitral award involving an agreement which is invalid under Indonesian law as it would be contrary to the forum s public policy 55. IV. ONLY THE TERM WHICH RESTRICTS THE TRIBUNAL'S POWER TO COMPEL SPECIFIC PERFORMANCE AGAINST THE CLAIMANT IS UNENFORCEABLE, NOT ARTICLE XII OF THE FRANCHISE AGREEMENT IN TOTO 47. The law governing the restriction of the Tribunal's power is the lex arbitri i.e. Malaysian law because it is a procedural matter of the arbitral proceedings. Although MAA 56 states that the parties to an agreement are free to agree on the procedure to be followed by the Tribunal in conducting its proceedings, the abovementioned restriction must be set aside as it is a product of unconscionable bargain. [A] THE TERM RESTRICTING THE TRIBUNAL'S POWER TO COMPEL SPECIFIC PERFORMANCE AGAINST THE CLAIMANT IS UNCONSCIONABLE AND SHOULD BE SET ASIDE 55 Art.66, Para.(c) of Law No.30/1999; E.D. & F (Man) Sugar Ltd. v Yani Haryanto, Indonesian Supreme Court No.1205 K/PDT/ s.21(1) MAA

34 48. The doctrine of unconscionability in Malaysian law is illustrated in the Malaysian Court of Appeal case of Saad Marwi v Chan Hwan Hua & Anor 57 where Gopal Sri Ram JCA held that: 49. This is to adopt the English doctrine but apply it in a broad and liberal way as in Canada. I find this the most just solution. It is a method by which practical justice may be achieved within a framework of principle The Canadian position as illustrated by Black v Wilcox 59 (referred to in Saad Marwi) is such that whenever there is inequality of bargaining power between contracting parties and a contractual imbalance, there shall be a presumption raised that the stronger party had taken advantage of the other. The factors held to indicate the necessary inequality include: 50.1 old age 60, 50.2 emotional distress 61, 50.3 alcoholism 62, and 50.4 lack of business experience Hence, the stronger party will have to prove that the bargain was indeed fair and reasonable. Failing that, the unconscionable bargain shall be set aside. 57 [2001] 3 CLJ Ibid., para.115h, per Gopal Sri Ram JCA, affirming Paris v Machnick [1972] 32 DLR 723 and Black v Wilcox [1976] 70 DLR (3d) [1976] 70 DLR (3D) Prof. Waddams, 2 nd Edition of The Law of Contracts, Page Ibid. 62 Ibid. 63 Ibid. 14

35 52. In this dispute, there is a clear contractual imbalance where the term restricting the Tribunal's powers allows the Claimant to compel specific performance against the Respondent but never vice-versa At the time of contracting, the Respondent was also in an inferior bargaining position visa-vis the representative for the Claimant, Mr. Wang who has at least a quarter of a century worth of commercial experience in franchising 65. On the other hand, the Respondent: 53.1 had no prior commercial experience in franchising 66, 53.2 had no room for negotiations as the FA is a standard form of agreement 67, 53.3 had no independent legal advice while contracting 68, 53.4 concluded the FA in a very short period of time 69, and 53.5 was clouded by a sense of nostalgia, thus over-enthusiastic Hence, both inequality of bargaining power and contractual imbalance were present in this dispute which raise the presumption that the Claimant had taken advantage of the Respondent. The onus is then on the Claimant to prove that the bargain was a fair and reasonable. Failing that, the Tribunal must set aside the said term. 64 FA, p.29, para.2 & 4 65 Agreed Facts, p.2, para.1 66 Agreed Facts, p.2, para.2; First Clarifications C First Clarifications C-8 68 Agreed Facts, p.2, para.4 69 First Clarifications C-2 70 Agreed Facts, p.2, para.3 15

36 [B] THE VALIDITY AND/OR ENFORCEABILITY OF ARTICLE XII SHALL NOT BE AFFECTED BY THE UNCONSCIONABLE TERM AS THE DOCTRINE OF SEVERABILITY WILL SEVER THE PARTICULAR UNCONSCIONABLE TERM FROM ARTICLE XII 55. The doctrine of severability under Malaysian law 71 operates in a manner that if the violating term goes only to part of the consideration, so that it can be ignored and yet leave the rest of the deed a reasonable arrangement between the parties, then the deed stands and can be enforced in every respect save in regard to the 72 violating term. 56. In this dispute, the term which restricts the Tribunal's powers to compel specific performance against the Claimant is capable of being severed from Article XII because the rest of the agreement within Article XII is still functional. Hence, the unconscionable term shall not affect those untainted ones. 57. However, both the AA and choice of law clause nonetheless: 57.1 have not been validly incorporated into the FA 73, or alternatively 57.2 are unenforceable being contrary to the public policy of the forum 74. V. THE CLAIMANT CAN TERMINATE FOR ANY VIOLATION OF THE FRANCHISE AGREEMENT [A] THE TERMINATION CLAUSE ALLOWS THE CLAIMANT TO TERMINATE FOR ANY BREACH OF THE CONTRACT 71 Murugesan v Krishnasamy [1958] MLJ 92; New Zealand Insurance Co. Ltd. v Ong Choon Lin [1992] 1 MLJ Bennett v Bennett (1952) 1 All E.R. 413, 421, per Denning LJ 73 para.19 & 34 of this Memorial 74 para.25 & 37 of this Memorial 16

37 58. A prima facie reading of the Termination Clause suggests that the Claimant can only terminate for a substantial violation of the Agreement. 59. However, the phrase we deem substantial in the Termination Clause shows that the Claimant has reserved the right to deem any breach as a substantial breach of the contract Therefore, the Claimant can deem any breach to be substantial and subsequently be entitled to terminate the contract. (a) Singapore Law 61. The Singapore Court of Appeal case of RDC Concrete v Sato Kogyo 76 recognizes 4 ways a contract can be terminated The relevant method is one where the contract clearly and unambiguously states an event(s) which allows the innocent party to terminate the contract Where parties have agreed on a termination clause, this provision will be binding between both parties. (b) Indonesian Law 62. Under Indonesian Law, the party terminating for breach of contract must first place the other party in default 77 by sending the defaulting party a letter clarifying the breaches, the 75 FA, p.31, Article XIIIB 76 [2007] 4 SLR(R) Art.1238 ICC 17

38 time which the party has to remedy the breaches and also the intention to terminate if the breaches are not remedied There is no dispute that this has been complied with by the Claimant However, Article 1266 of the ICC states that parties cannot unilaterally terminate a contract without seeking the permission of the Indonesian Courts unless there is an express waiver of Article There is no term in the contract between the Claimant and the Respondent that expressly waives Article Hence, the Claimant can only terminate for any violation of the contract after placing the Respondent in default and requesting for permission from the Indonesian Courts. VI. WARRANTY OF GOOD FAITH AND FAIR DEALING APPLIES TO THE FRANCHISE AGREEMENT, AND THE BREACHES DO NOT JUSTIFY TERMINATION [A] THE CLAIMANT HAS A DUTY TO TERMINATE THE CONTRACT IN GOOD FAITH 67. The applicability of inherent warranty of good faith and fair dealing determines whether the Claimant has a duty to terminate the contract in good faith. (a) The inherent warranty of good faith and fair dealing is implied into the contract under Singapore Law 78 Ibid. 79 Agreed Facts, p.3 18

39 68. Under Singapore Law, the inherent warranty of good faith and fair dealing is not automatically assumed in contracts The case of Ng Giap Hon v Westcomb Securities 80 stated that the courts will not imply good faith to a general set of contracts However, the courts can imply good faith in circumstances that necessitate the courts to imply such a duty to the contract Good faith can be implied if it satisfies the officious bystander test and the business efficacy test In common law, good faith is implied where there is unfettered discretion in the contract 82. This is to give effect to the reasonable expectation of parties at the time of contracting The Claimant s unfettered discretion allows them to regard any violation as a substantial violation of the agreement that entitles them to terminate the contract This discretion is unfair as both parties entered into this long term contract with intentions to develop and run the franchise in their best efforts Good faith must be implied to ensure that the execution of the contract will proceed reasonably and fairly to ensure both parties can safely perform the contract with no fear of arbitrary termination of obligations and rights. 80 [2009] SGCA Liverpool City Council v Irwin [1977] A.C Abu Dhabi National Tanker v Product Star Shipping [1993] Lloyd s Rep 397; Paragon Finance v Nash [2001] EWCA Civ

40 70. Hence, the tribunal must imply a duty of good faith into the contract and as such, the Claimant has a duty to terminate the contract in good faith. (b) The inherent warranty of good faith and fair dealing applies under Indonesian Law 71. Under Indonesian law, Article 1338 of the ICC requires that all contracts must be executed in good faith. Hence, it is clear that the Claimant has a duty to terminate in good faith. 72. The Indonesian Courts rely on Dutch authorities to define good faith because the ICC was drafted with reference to the Dutch Civil Code. Good faith has been defined to be a standard of objective fairness and reasonableness expected in conduct of parties. 83 [B] THE BREACHES DO NOT JUSTIFY TERMINATION UNDER BOTH SINGAPORE AND INDONESIAN LAW (a) The termination was not made in Reasonable Business Judgment because it was made in bad faith 73. The Claimant has agreed to exercise all discretions and rights under the contract in line with Reasonable Business Judgment ( RBJ ) 84 and this obligation extends to termination as well Proper exercise of RBJ under the contract requires the Claimant to make a decision in whole or in significant part to promote or benefit the System. 83 Hengsten Vereniging v Onderlinge Paarden en Vee Assurantie (Artist De Laboureur Arrest), 9 th February 1923, NJ 1923, FA, p.27, Article X, para.2 20

41 73.2 RBJ would also be fulfilled even if other reasonable or even arguably preferable alternatives are available The decision made may also benefit financial and personal interests of the Claimant as long as the decision is in significant part to promote or benefit the System. 74. Singapore Law stipulates that where there has been a correct exercise of RBJ, the courts should not interfere with the decision made by the Claimant The tribunal cannot substitute the decision made by the directors if the decision was objectively 86 found to be made in honest and reasonable belief that they were in the best interest of the company However, the tribunal can interfere with the decision made if the Respondent proves that RBJ has not been exercised. 75. Under Indonesian Law, Law 40 of 2007 requires the Claimant to prove that he has exercised RBJ in terminating the agreement. (b) The alleged breaches committed by the Respondent (i) Serving of a single Indonesian dish referred to as The Special of the Day does not justify termination. 76. The Respondent does not deny that this is a violation of the FA. However, it is not a violation that justifies termination. 85 ECRC Land Pte Ltd v Ho Wing On Christopher [2003] SGHC Intraco v Multi-Pak Singapore Pte Ltd [1994] SGCA Ibid. 21

42 77. Before the dated 4 th November ( Notice of Default ) was sent, both Great Wall Noodle Shop ( GWNS ) branches in Indonesia have been serving Indonesian food since the opening of the restaurants. 78. A significant fraction of the store s profit is attributable to the Indonesian dishes being served at both venues. 89 The Respondent remedied the breaches to his benefit and the benefit of the System. 79. The Respondent removed the entire Indonesian Menu and only left the Special of the Day A total removal of Indonesian dishes could have resulted in a drastic drop in the store s profits. Both the Indonesian branches must be eased out of serving Indonesian dishes to ensure profitability of the stores is maintained. 81. The Respondent s efforts in remedying the breach while preserving the interest of the System is not a breach that would justify termination. (ii) The Claimant is estopped from using the breach of giving customers the option to substitute lamb for pork as a breach that justifies termination. 82. The Claimant is estopped from using the option to substitute lamb for pork as a breach to justify termination because there was no mention of the need to remedy this breach in the Notice of Default Agreed Facts, p.3 89 Second Clarifications SR#12, SR#15 90 Agreed Facts, p.5, para.1 91 Spiro v Lintern [1973] 3 All E.R