Kuala Lumpur Regional Centre for Arbitration (KLRCA)

Transcription

1 Kuala Lumpur Regional Centre for Arbitration (KLRCA) 2012 Great Wall Noodle Shop LLC v. Adi Budiamman, M.D. Memorial for Respondent

2 Table of Contents Table of Contents Index of Authorities Statement of Jurisdiction Questions Presented Statement of Facts Summary of Pleadings I V VI VII X Pleadings A. THE PROPER LAW TO APPLY IN RESOLVING THIS DISPUTE IS THE 1 SUBSTANTIVE LAW OF INDONESIA OR IN THE ALTERNATIVE LEX MERCATORIA I. The applicable law is to be determined by the rules of conflict of law that the 1 arbitrators deem applicable: 1. There was no intention of the parties to choose the law of Singapore as the applicable 2 law 2. Lex Fori as the Applicable law in the present dispute 3 3. In the alternative the applicable law is lex mercatoria 5 a. The UNIDROIT Principles are the new lex mercatoria b. The Shari ah is also the applicable lex mercatoria: B. THE FRANCHISE, ARBITRATION AGREEMENT ARE INVALID AND UNENFORCEABLE UNDER BOTH INDONESIAN AND SINGAPOREAN LAW I. The Arbitration Agreement is invalid and unenforceable under Indonesian law 11

3 1. The Arbitration Agreement is against the public policy of Indonesia Public Policy Exception The Arbitral Award is unenforceable without the assistance of Judicial 14 Authorities of Indonesia 2.1. Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award 14 Enforcement in Indonesia: a. Disregard of Agreement to Arbitrate The Absence of Common International Standard of Public Policy Exception 17 II. Internationally THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN LAW Invalidity of contract due to illegal causa 19 III. IV. ARTICLE XII OF THE FRANCHISE AGREEMENT IS INVALID AS IT HAD VIOLATED THE UNIDROIT PRINCIPLES ON INTERNATIONAL COMMERCIAL CONTRACTS A PROPER AND TIMELY NOTICE OF TERMINATION WAS NOT GIVEN TO THE FRANCHISEE V. A CONTRACT CAN BE TERMINATED ONLY WHEN THERE IS 22 VI. MATERIAL BREACH OR SUBSTANTIAL VIOLATION OF THE PROVISIONS OF THE CONTRACT THE INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING APPLIES IN INTERPRETING FRANCHISE AGREEMENTS 23 a. The serving of a single Indonesian dish outside the official menu of the 23

4 Agreement did not justify the termination of the franchise. b. The practice of substituting lamb for port was discontinued after the first 23 and thus Franchisor could not terminate the franchise agreement based on this reason. c. The wearing of the new (white) hijab by the female Muslim employees was in 23 accordance with the laws of Indonesia and did not justify the termination of the franchise. d. A continuing disregard to the franchisee s obligations is not reflected in any 23 manner under the Franchise Agreement to justify its termination. VII. THE EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION VIOLATE THE CONSTITUTION AND LAWS OF INDONESIA AND ICESCR TO WHICH IT IS A MEMBER 24 PRAYER FOR RELIEF 27

5 INDEX OF AUTHORITIES MULTILATERAL TREATIES AND CONVENTIONS European Convention of 1961, Art. VII 2 Rome Convention, Art.3(1), 4 2, 11 New York Convention, Art.III, V.1(a), 2 (b) 3, 12, International Covenant on Civil and Political Rights, Art.2(2). 25 TABLE OF CASES Compagnie d Armement Maritime SA v Compagnie Tunisienne de Navigation SA 1 [1971] A.C. 572 Egon Oldendorff v Liberia Corporation [1995] 3 Sonatrach Petroleum v Ferrell International [2002] 1 All E.R Sanghi Polyesters Ltd (India) v The International Investor KCFC (Kuwait) [2000] 8 U.N. RESOLUTIONS AND DOCUMENTS UNCITRAL Arbitration Rules, art. 33, 34 (2) (a), 36 (b) (ii) 2, 3, 17 UNIDROIT Principles on International Commercial Contracts 2010, Preamble 6 TREATISES, DIGESTS AND BOOKS SUDARGO GAUTAMA, HUKUM PERDATA INTERNATIONAL INDONESIA, 2 CITRA ADITYA BAKTI, BANDUNG, 1998 I

6 DICEY AND MORRIS, THE CONFLICT OF LAWS (13 th ED. 2000) 3, 5 GARY BORN, INTERNATIONAL COMMERCIAL ARBITRATION (2 nd ED. 2001) 4 UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS, STOLKHOLM ARBITRATION REPORT WITH COMMENTARY BY FERNANDEZ- ARMESTO, 2002 SUDARGO GAUTAMA, HUKUM PERDATA INTERNATIONAL INDONESIA, 8 9 CITRA ADITYA BAKTI, BANDUNG, 2002 ALAN REDFER, MARTIN HUNTER, NIGEL BLACKBY AND CONSTANTINE 11 PARTASIDED, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION (4 th ED. 2007) VERONICA L TAYLOR, CONTRACT AND CONTRACT ENFORCEMENT IN 15 INDONESIA: AN INSTITUTIONAL ASSESSMENT, IN INDONESIA LAW AND SOCIETY, LINDSEY T(ED) (2 nd ED. 2008) ALBERT JAN VAN DEN DERG, THE NEW YORK CONVENTION OF 1958, 18 KLUWER LAW AND TAXATION, THE NETHERLANDS (1990) 20 ARTICLES Official Journal of the European Union No. C282 [1980] 2 Molineaux, Applicable law in arbitration The coming convergence of civil and Anglo-SSaxon law via Unidroit and lex mercatoria 1 Journal of World Investment (2000) Nudrat Majeed, Good Faith and Due Process: Lessons from the Shari ah Arbitration International (2004) Fifi Junita, Experience of Practical Problems of Foreign Arbitral Awards 9 II

7 Enforcement in Indonesia, Macquarie Journal of Business Law, (2008), Vol.5, 369, 392 MISCELLANEOUS Trakman, Legal Traditions and International Commercial Arbitration, 2007, available at: Berkowitz D, Moenius J & Pistor K, Legal Institutions and International Trade Flows, 2 13 Michigan Journal of International Law, Vol. 26, 2004, available at: Mills K, Enforcement of Foreign Arbitral Awards in Indonesia & Other Issues of Judicial Involvement in Arbitration, available at: 13 ublication/ pdf+ed+%26+f+man+v.+yani+haryanto+and+arbitral+aw ards+enforcement&hl=id&ct=clnk&cd=2 Burton Steven J & Murray John F, The New Judicial Hostility to Arbitration: Unconscianability and Agreement to Arbitrate, available at: = &mirid=1 Scodro Michael A, Deterrence and Implied Limits on Arbitral Power, available at: http// A Barraclough and J Waincymer, Mandatory Rules of Law in International Commercial 15 Arbitration, available at: http// Pdf A Tsakatoura, The Immunity of Arbitrators, available at: < cripta/articles/arbitratorsimmunity.htm A Sheppard, Public Policy and the Enforcement of Arbitral Awards: Should there be a Global Standard?, Transnational Dispute Management, Vol. 1, Issue 01, February 2004, available at: < - 59k - III

8 >, Viewed on 30 April 2008, p. 3. Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke 17 Muka Pengadilan, available at: < pengadilan_18.html IV

9 STATEMENT OF JURISDICTION The Great Wall Noodle Shop LLC and Adi Budiamman have submitted this present dispute to this Tribunal in accordance with Article XII A of the Arbitration Agreement signed by the parties, pursuant to Article 2 of the Kuala Lumpur Regional Centre for Arbitration, Fast Track Rules. Both parties shall accept the award of the tribunal as final and binding and execute it in good faith in its entirety. V

10 QUESTIONS PRESENTED The Great Wall Noodle Shop LLC asks this tribunal: I. Whether the law of Singapore or Indonesia or any other country is the proper law to apply in resolving this dispute; II. III. Whether the Arbitration Agreement is invalid under Indonesian Law; Whether Article XII of the Franchise Agreement (Dispute Resolution) is invalid and/or unenforceable; IV. Whether a proper and timely Notice of Termination was given to the Respondent; V. Whether the Franchisor may terminate the franchise for any violation of the Franchise Agreement or must it be a substantial violation of the Agreement; VI. Whether the inherent warranty of good faith and fair dealing in interpreting and applying the franchise agreements apply to this Franchise Agreement; VII. Whether an employment regulation prohibiting the wearing of a hijab by female Muslim employees or restriction violate the constitution and/or laws of Indonesia or any international treaties to which it is a member. VI

11 STATEMENT OF FACTS The first Great Wall Noodle Shop opened in Tianjin, China on May 20, It was founded and co-owned by Jianping Ji and Xuefeng Wang. Ji and Wang have franchised numerous other Great Wall Noodle Shops in China as well as in Singapore and Malaysia and have expanded the menu to include a wide variety of Chinese dishes. In early 2011, they decided to expand to Indonesia. In June Wang traveled to Singapore to meet with Mr. Bao Shan, the franchise owner of the Singapore restaurants, but he wasn t interested in opening restaurants in Indonesia. On June 20, 2011, in Changi Airport, Wang met Dr. Adi Budiamman, a prominent Jakarta surgeon. As Wang explained the purpose of his visit to Singapore, Dr. Budiamman became highly interested. Wang retrieved the Franchise agreement intended for Mr. Bao from his briefcase; substituted Dr. Budiamman s name on the contract; and explained the fee arrangements in detail. Dr. Budiamman read through it quickly and signed it. A photocopy of both the original English and a Bahasa Indonesia copy were delivered to Dr. Budiamman the next day. The two new franchises opened in Jakarta and Medan in September 2011 were successful from the beginning. An string (or thread ) inadvertently forwarded to Dr. Budiamman contained the following message from Mr. Ji to Mr. Wang: The Jakarta restaurant is a gold mine. I told you we should have given the franchise to a friend or relative not to a perfect stranger. In late October 2011 Mr. Ji made an unannounced visit to both Indonesian restaurants. He found several violations of the Franchise Agreement involving the sale of food products not on the VII

12 official menu being served and substitutions for the ingredients of others. He also observed that some of the female employees wore unauthorized clothing, a head scarf or Hijab. Dr. Budiamman explained that many of the Muslim women employees asked permission to wear a Hijab a request which he felt obliged to approve. After returning home, Mr. Ji sent the following (November 4, 2011) to Dr. Budiamman: As I explained during my recent visit, you must take immediate steps to conform your operations to those of our other restaurants as required by our Franchise Agreement. I am referring to the unauthorized menu items and the head scarves worn by many of your female employees. The Franchise agreement you signed is quite clear: no food items not of the Great Wall Noodle Shop Standard Menu can be sold at any franchise without our permission. Our franchise agreement requires that the restaurant inside and out be the same at all locations. It is essential that all of our employees in every country where we operate dress the same. If you do not immediately discontinue the above mentioned violations of the Franchise Agreement, we will have no choice but to terminate your Franchise. Two weeks later, an inspector hired by Mr. Ji visited both Indonesian franchises and submitted the following report to Mr. Ji electronically: They are still serving Indonesian food at both locations but they are not listed on the menu. When, I asked for the Indonesian menu, I was informed that they no longer serve Indonesian food except for The Special of The Day a single Indonesian dish written in Bahasa Indonesia on a chalk blackboard. The day I was there it was Ayam Kalasan (I ordered it it was very good.). Many of the girls were wearing white scarves. VIII

13 The next day Mr. Ji and Mr. Wang sent a letter to Dr. Budiamman terminating the franchise and directing him to close both restaurants and remove the signage within 15 days. They indicated that they planned to reopen the Jakarta restaurant within 30 days Under new Management. When Dr. Budiamman refused to close his two restaurants, Wang and 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 and damages for breach of the Franchise Agreement, trademark infringement and damage to the reputation of the Great Wall Noodle Shops. Dr. Budiamman filed a response denying the allegations and asserting a counterclaim for breach of the franchise agreement and damage to his reputation. A Case Management Meeting was subsequently held by phone during which the parties agreed on issues to be covered at the November Hearing being held on 18 November 2012 in Bali, Indonesia. IX

14 SUMMARY OF PLEADINGS 1. The proper law to apply in resolving this dispute is the substantive law of indonesia or in the alternative lex mercatoria The applicable law is to be determined by the rules of conflict of law that the arbitrators deem applicable. There was no intention of the parties to choose the law of Singapore as the applicable law Lex Fori is the Applicable law in the present dispute In the alternative the applicable law is lex mercatoria The UNIDROIT Principles are the new lex mercatoria The Shari ah is also the applicable lex mercatoria: 2. The franchise, arbitration agreement are invalid and unenforceable under both indonesian and singaporean law The Arbitration Agreement is invalid and unenforceable under Indonesian law The Arbitration Agreement is against the public policy of Indonesia Public Policy Exception can be invoked by Indonesia. 3. The Arbitral Award is unenforceable without the assistance of Judicial Authorities of Indonesia Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award Enforcement in Indonesia. Disregard of Agreement to Arbitrate The Absence of Common International Standard of Public Policy Exception Internationally 4. The franchise agreement is invalid under indonesian law Invalidity of contract due to illegal causa X

15 Article XII of the Franchise Agreement is invalid as it has violated the UNIDROIT Principles on International Commercial Contracts 5. A proper and timely notice of termination was not given to the franchisee. 6. A contract can be terminated only when there is material breach or substantial violation of the provisions of the contract 7. The inherent warranty of good faith and fair dealing applies in interpreting franchise agreements 8. The serving of a single Indonesian dish outside the official menu of the Agreement did not justify the termination of the franchise. 9. The practice of substituting lamb for port was discontinued after the first and thus Franchisor could not terminate the franchise agreement based on this reason. 10. The wearing of the new (white) hijab by the female Muslim employees was in accordance with the laws of Indonesia and did not justify the termination of the franchise. 11. A continuing disregard to the franchisee s obligations is not reflected in any manner under the Franchise Agreement to justify its termination. 12. The employment regulation prohibiting the wearing of a hijab by female muslim employees or restriction violate the constitution and laws of indonesia and icescr to which it is a member XI

16 PLEADINGS A. THE PROPER LAW TO APPLY IN RESOLVING THIS DISPUTE IS THE SUBSTANTIVE LAW OF INDONESIA OR IN THE ALTERNATIVE LEX MERCATORIA An agreement intended to create legal relations does not exist in a legal vacuum. It is supported by a system of law which is generally known as the substantive law, applicable law or the governing law of the contract. 1 These terms denote the particular system of law and govern the interpretation and validity of the contract, the rights and obligations of the parties, the mode of performance and the consequences of breaches of the contract. 2 I. The applicable law is to be determined by the rules of conflict of law that the arbitrators deem applicable: In the dispute in hand, though Article XII B has mentioned the laws of Singapore to be the applicable law to govern the agreement and the parties right under it and the relationship between the parties, it is silent regarding the laws to be applied regarding the validity of the Franchise and Arbitration Agreement. A significant aspect is also that the dispute settlement clause of the Agreement was not communicated to the Respondent. Thus, there is a dispute regarding the applicable law to be used to interpret the Franchise and Arbitration Agreement. Thus, applicable law is to be determined by the rules of conflict of law. 1 In private international law, it is also known as the proper law of the contract. 2 Compagnie d Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1971] A.C. 572 at 603, per Lord Diplock. 1

17 The European Convention of 1961, for instance, provides that: Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rules of conflict that the arbitrators deem applicable. 3 A similar approach is adopted in the UNCITRAL Rules, which state that failing any designation of the applicable law by the parties the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. 4 The Model Law adopts the same terminology. The arbitration practices are traditionally based on a strong dichotomy of private and public international law traditions which can expand global barriers of international business practices. 5 This sort of approach stems from traditional concept of territorial sovereignty (jurisdictional theory) root. 6 The most common feature of this sovereignty based approach is the dominancy of national or domestic basis There was no intention of the parties to choose the law of Singapore as the applicable law: The Rome Convention provides that a choice of law must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. 8 The Report by Professors Guiliano and Lagarde, 9 which was published with the Convention, has a special status in the interpretation of the Convention. The Report states that the parties may have made a real choice of law, although not expressly stated in their contract, but that the court is not 3 European Convention of 1961, Art. VII. 4 UNCITRAL Arbitration Rules, Art See Trakman, Legal Traditions and International Commercial Arbitration, 2007, available at:< viewed on 20 September 2012, p See article 436 of the Code of Civil Procedure. 7 The jurisdictionalists often claims that each sovereign state has its own international public policy. Thus, there is no international character of public policy since it is basically derived from national public policy. See Gautama, Hukum Perdata International Indonesia, Citra Aditya Bakti, Bandung, 1998, p Rome Convention, Art.3(1) (emphasis added). 9 [1980] Official Journal of the European Union No. C282, p.1. 2

18 permitted to infer a choice of law that the parties might have made, where they had no clear intention of making a choice. 10 In the dispute in hand, the parties had no intention of making a choice of law as the clause was not communicated to the Respondent. In such an event, the arbitral tribunal will generally decide that the contract is to be governed by the law of the country with which it is most closely connected. It will be presume that this is the country which is the place of business or residence of the party that is to effect the performance characteristic of the contract. 11 In the dispute in hand, this party is an Indonesian party so the laws of Indonesia should be applicable. 2. Lex Fori as the Applicable law in the present dispute One criterion for attributing a choice of law to the parties, in the absence of any express choice, is that based on a choice of forum by the parties. This assumption is expressed in the maxim qui indicem forum elegit jus: a choice of forum is a choice of law. The choice of a particular place of arbitration is sometimes taken as an implied choice of the law governing the contract. 12 Thus, in a case where the choice of the substantive law of the contract was unenforceable, but the arbitration clause was clear in its provision for arbitration in London, it was held that the arbitration agreement was a valid agreement and was governed by English law. 13 The New York Convention 14 points to the same conclusion. In the provisions relating to enforcement, the Convention stipulates that the agreement under which the award is made must be valid under the law to which the parties have subjected it or failing any indication thereon, 10 Ibid,. p.17; and see Dicey & Morris, The Conflict of Laws (13 th ed,. Sweet & Maxwell, 2000), pp.1198 (emphasis added). 11 Rome Convention Art.4; and see Dicey & Morris, op. cit., pp for a commentary on this provision of the Convention, which is based on Swiss and, subsequently, Dutch law. 12 See, for instance, the English case of Egon Oldendorff v Liberia Corporation [1995] 2 Lloyd s Rep. 64; (No.2) [1996] 2 Lloyd s Rep Sonatrach Petroleum v Ferrell International [2002] 1 All E.R New York Convention, Art.V.1(a). There is a similar provision in the Model Law, at Art.34(2)(a). 3

19 under the law of the country where the award was made (which will be the law of the seat of the arbitration). At the end of the day, selecting the law governing the parties arbitration agreement (absent an express agreement) usually requires choosing between two principal alternatives the substantive law of the parties underlying contract or the law of the place where the arbitration has its seat. 15 There are a number of cases, in different jurisdictions, in which a court or arbitral tribunal has taken the law of the seat of the arbitration as the appropriate law to govern the parties arbitration agreement. The following examples illustrate this: In ICC Case No.6162, 16 the main contract contained an arbitration clause providing for arbitration in Geneva under the IC Arbitration Rules. It also provided that Egyptian laws will be applicable. The respondent submitted that, as the arbitrators were not designated by the arbitration clause nor by a separate agreement, the arbitration clause void under Art.502(3) of the Egyptian Law of Civil and Commercial Procedures. As a matter of Egyptian law, this argument appears to have been well founded; but it would have brought the arbitral proceedings to an end. The tribunal decided that the law of Switzerland, as the law of the place of arbitration, was the law applicable to the form and validity of the arbitration agreement - and not the law that had been chosen by the parties to govern their contract. In the Bulbank case, 17 the Bulgarian Foreign Trade Bank (Bulbank) concluded a contract with an Austrian bank. The contract contained an arbitration clause that expressed a choice of Austrian 15 Gary Born, International Commercial Arbitration (2 nd Edn., Transnational Publishers Inc and Kluwer Law International, 2001), p See Lew, op.cit., p.27, para, Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc (2001) XXVI Yearbook Commercial Arbitration 291, Swedish Supreme Court, October 27, 2000, Case No. T It should be noted that the Swedish Arbitration Act 1999 provides, in s.48, that where an arbitration agreement has an international connection, and the parties have not agreed upon a choice of law, the arbitration agreement will be governed by the law of the seat of the arbitration. 4

20 law. When a dispute arose between the two parties, arbitral proceedings were initiated under the UNECE rules in Stockholm. The award was challenged by Bulbank in the Swedish courts on the basis that the arbitration agreement was void. The Supreme Court of Sweden held that the arbitration agreement was valid under the law of the seat of arbitration, Swedish law, stating: no particular provision concerning the applicable law for the arbitration agreement itself was indicated [by the parties]. In such circumstances the issue of the validity of the arbitration clause should be determined in accordance with the law of the state in which the arbitration proceedings have taken place, that is to say, Swedish law. In both the cases, the court or tribunal acted consistently with the choice of law principles which are generally applicable where there is no express choice of law, since an agreement to arbitrate is usually more closely connected with the country of the seat of the arbitration than any other country. 18 As the arbitration award is to be enforced in Indonesia, the forum has been selected by the parties to be in Indonesia. Once, the forum has been selected the laws to be applied during the arbitration to consider the validity and enforceability of the Agreements should be dealt by the laws of Indonesia. 3. In the alternative the applicable law is lex mercatoria For Professor Goldman, the distinguishing features of the lex mercatoria were its customary and spontaneous nature. 19 It was his view that international commercial relationships: 18 See Dicey & Morris, The Conflict of Laws (13 th Ed., Sweet & Maxwell, 2000), p Goldman, La Lex Mercatoria dans les contrats d arbitrage internationaux: Realite et Perspectives (1979) Clunet Journal du Droit International 475; Lalive, Transnational (or Truly International) Public Policy and International Arbitration, ICC Congress Series No. 3 (New York, 1986), p.257; Gaillard, Transnational Rules in International Arbitration 1993 ICC Publication No.480/4 (a very helpful review of aspects of transnational law by distinguished contributors). 5

21 may perfectly well be governed by a body of specific rules, including transnational custom, general principles of law and arbitral case law. It makes no difference if this body of rules is not part of a legal order comporting its own legislative and judicial organs. Within this body of rules, the general principles of law are not only those referred to in Article 38(a) of the Statute of the International Court of Justice; there may be added to it principles progressively established by the general and constant usage of international trade. 20 This is a pertinent observation. Under the guise of applying the lex mercatoria, an arbitral tribunal may in effect pick such rules as seem to the tribunal to be just and reasonable which may or may not be what the parties intended when they made their contract. 21 a. The UNIDROIT Principles are the new lex mercatoria: If the UNIDROIT Principles embody concepts already in the lex mercatoria, these Principles would seem to provide a point of explicit reference for arbitral tribunals. And this is exactly what appears to be happening: the UNIDROIT Principles have already been referred to in about thirty ICC cases, it has been reported, in order to identify general legal principles. 22 The Preamble of UNIDROIT Principles of International Commercial Contracts 2010, states that the principles set forth shall be applied when the parties have not chosen any law to govern their contract, or to interpret or supplement international uniform law instruments or to interpret or supplement domestic law Goldman, op.cit,. p Redfern, n(4), p Molineaux, Applicable law in arbitration The coming convergence of civil and Anglo-SSaxon law via Unidroit and lex mercatoria (2000) 1 Journal of World Investment UNIDROIT Principles on International Commercial Contracts 2010, Preamble. 6

22 The UNIDROIT Principles represent a system of rules of contract law. 24 They apply only when the parties choose to apply them to their contract, so that in this sense they supplement (but do not replace) the substantive law of the contract. However, in practice, arbitral tribunals may themselves decide to refer to the UNIDROIT Principles as an aid to the interpretation of contract terms and conditions; or even as a standard to be observed for instance, in the negotiation of a contract. Indeed in a case, a European claimant had concluded a contract for technology exchange with a Chinese counterparty without incorporating a governing law clause. The European claimant argued in favour of Swedish law, basing itself on the choice of Sweden as a place of arbitration. The Chinese party argued in favour of Chinese law, because China had the closest connection with the contract. The tribunal relied on Art.24(1) of the rules of the Arbitration Institute of the Stockholm Chamber of Commerce, which permitted it to apply the law or rules of law which the tribunal considers to be most appropriate. Having decided that no common intention as to a particular national system of law could be found the tribunal decided as follows: In the Tribunal s view, it is reasonable to assume that the contracting parties expected that the eventual law chosen to be applicable would protect their interest in a way that any normal business man would consider adequate and reasonable, given the nature of the contract and any breach thereof, and without any surprises that could result from the application of domestic laws of which they had no deeper knowledge. This lead the Tribunal to conclude that the issues in dispute between the parties should primarily be based, not on the law of any particular jurisdiction, but on such rules of law that have found their way into international 24 A commentary on the revised principles has been published by UNIDROIT entitled: UNIDROIT Principles of Internationa Commercial Contracts,

23 codifications or suchlike that enjoy a widespread recognition among countries involved in international trade the only codification that can be considered to have this status is the UNIDROIT Principles of International Commercial Contracts The Tribunal determines that the rules contained therein shall be the first source employed in reaching a decision on the issues in dispute in the present arbitration. 25 b. The Shari ah is also the applicable lex mercatoria: This Islamic law, which applies across a broad swathe of Muslim countries, 26 embodies not only the Quran but also the other sources of Islamic law. 27 Modern codes of law in Islamic countries take account of the Shari ah, often as a principal source of law 28 ; and the Shari ah itself contains general principles, which ar basic to any civilized system of laws, such as good faith in the performance of obligations and the observance of due process in the settlement of disputes. 29 In a case which came before the English court, 30 a financial transaction had been structured in a manner which ensured that the transaction conformed with orthodox Islamic banking practice. There was provision for any disputes to be settled by arbitration in London under the ICC Rules of Arbitration; and there was a choice of law clause which provided for any dispute to be governed by the Law of England except to the extent it may conflict with Islamic Shari ah, which shall prevail. A dispute arose and the ICC appointed as sole arbitrator Mr. Samir Saleh, an experienced lawyer and expert on Shari ah law. The arbitrator s award was challenged by the 25 See Stockholm Arbitration Report 2002 at 59, with commentary by Fernandez-Armesto. 26 There range from Arab countries such as Saudi Arabia, UAE, Kuwait, Oman, Bahrain, Syria, Yemen and Iraq, to African states such as Egypt, Tunisia, Sudan, Morocco and Algeria; and to Asian states such as Pakistan, Bangladesh, Malaysia and Indonesia. 27 Namely, the Sunnah (the sayings and practices of Muhammad), Ijma (consensus among recognized religious authorities) and Qiyas (inference by precedent). 28 The constitutions of Yemen, Qatar and Egypt, e.g., state that the Shari ah is a primary source of law. 29 See Nudrat Majeed, Good Faith and Due Process: Lessons from the Shari ah (2004) 20 Arbitration International Sanghi Polyesters Ltd (India) v The International Investor KCFC (Kuwait) [2000] 1 Lloyd s Rep

24 losing party, but this challenge was rejected by the English court which held that the award was a clear and full evaluation of the issuers and had all the appearances of being right. The enforceability of foreign arbitral awards in Indonesia has a great correlation with the Indonesian legal tradition and culture. The emergence of pluralistic legal culture in Indonesia was inherently influenced by the article 131 and 163 of the Dutch regulation i.e. the Indische Staatsregeling (abbreviated IS) which divided the Indonesian population into three distinct groups based on their racial origin 31, namely: (1) Europeans and Japanese, (ii) the indigenous Indonesians, (iii) East Asians (including Chinese, Arabs and Indians) and (iv) other groups not falling within these three categories. 32 Each of those groups has its judicial institution and procedures and each group has possibility to settle dispute over the juru pisah (arbitrator). 33 Not only does this pluralistic legal feature confines to the coexistence of national and the ancient Dutch legal system, but it also relates to the application of customary law which is known adat law and Islamic law (sharia law) as part of the Indonesian legal system. Thus, each of racial origin of the pluralistic society may have its own customary law or adat law. 34 Since an individual ethnic group pursues its own self interest, the recognition and enforcement of foreign arbitral awards will be influenced by the variety of domestic rules which are inconsistent with the global economy objective. 35 Conclusion: 31 See Sudargo Gautama, The Commercial Laws of Indonesia, Citra Aditya Bakti, Bandung, 1998, p. 1. See also Sudargo Gautama, Indonesian Business Law, Citra Aditya Bhakti, Bandung, 2002, p Ibid. Although this provision is no longer valid after the independence of the Republic of Indonesia based on the article II of the Constitution 1945 concerning the Transitional Regulation, it still likely to be practically applied in some cases such as inheritance law, property law and contract law etc. 33 The judicial institution and procedures of the indigeneous Indonesian (Bumiputera) is Landraad and its procedural law is Herziene Inlandsch Reglement (abbreviated HIR). See Gautama S, n(8), at. 4. The dispute between the indigenous Indonesia (bumiputera) v. East Asians can be solved by arbitrator upon their consents based on the Code of Civil Procedure. See article 377 Herziene Inlandsch Reglement (HIR) and article 705 Reglement Buitengewesten (RBg). See Widjaja G & Yani A, Hukum Arbitrase, RajaGrafindo Persada, Jakarta, 2003, p See Gautama, above no. 8, at Fifi Junita, Experience of Practical Problems of Foreign Arbitral Awards Enforcement in Indonesia, Macquarie Journal of Business Law, (2008), Vol.5, p ,

25 The above legal principles suggest that the proper law to be applied is the law of Indonesia as it is the lex fori where the award is to be enforced. In the alternative, lex mercatoria can also be the applicable law. Even if it is not considered to be the proper law, it always has a supplementing role. 10

26 B. THE FRANCHISE, ARBITRATION AGREEMENT ARE INVALID AND UNENFORCEABLE UNDER BOTH INDONESIAN AND SINGAPOREAN LAW I. The Arbitration Agreement is invalid and unenforceable under Indonesian law 1. The Arbitration Agreement is against the public policy of Indonesia Every state reserves for itself, as a matter of public policy, what might perhaps be called as state monopoly over certain types of dispute. Accordingly, whether or not a particular dispute - for instance, over the validity of franchise agreement and arbitration agreement - is legally capable of being resolved by arbitration is a matter which each state will decide for itself. It is a matter on which states may well differ, with some taking a more restrictive attitude than others. Thus, a claim may be arbitrable under the law governing the arbitration agreement and under the lex arbitri but not under the law of the place of enforcement. An award on such a dispute, although validly made under the lex arbitri, might prove to be unenforceable under the New York Convention. 36 There may be limited restrictions on the rule, designed to ensure that the choice of law is bona fide and is not contrary to public policy. Thus, the Rome Convention, for example, does not allow the choice of a foreign law to override the mandatory rules of law of a country to which all the factual elements of the contract point so that, for example, the choice of a foreign law for the purposes of tax evasion would not be permissible. And the relevant court may apply its own national rules of public policy or ordre public. Thus in Soleimany v Soleimany, 37 the English Court of Appeal refused to enforce an award where the transaction was not illegal under the applicable law, but was illegal under English law. If any justification for this delayed choice (or even change) of law is sought in legal philosophy, it appears to lie in the concept of the 36 Alan Redfer, Martin Hunter, Nigel Blackby and Constantine Partasides, Law and Practice of International Commercial Arbitration (Fourth Edn, Ashford Colour Press 2007) [1999] Q.B

27 autonomy of the parties. Parties are generally free to vary the terms of the agreement; in the same way, they should be allowed to vary by agreement the law applicable to a dispute arising out of that contract. 38 The case concerned a contract between a father and son, which involved the smuggling of carpets out of Iran in breach of Iranian revenue laws and export controls. The father and son had agreed to submit their dispute to arbitration by the Beth Din the Court of the Chief Rabbi in London, which applied Jewish law. Under the applicable Jewish law, the illegal purpose of the contract had no effect on the rights of the parties and the Beth Din proceeded to make an award enforcing the contract. In declining to enforce the award, the English Court of Appeal stated: The Court is in our view concerned to preserve the integrity of its process and to see that it is not abused. The parties cannot override that concern by private agreement. They cannot by procuring an arbitration conceal that they or rather one of them, is seeking to enforce an illegal contract. Public policy will not allow it. 39 The implementation of the New York Convention is subject to three basic conditions namely: (1) reciprocity reservation; (2) commercial reservation and (3) public policy exception. After the ratification of the New York Convention, however, the enforcement of foreign arbitral awards still have an inherent flaw regarding the lack of implementing legislation. The lack of arbitration legal framework has led to the inconsistency and uncertainty of the implementation of the Presidential Decree No. 34 of The case of Navigation Maritime Bulgars v. PT Nizwar was 38 Redfer (n 4) [1999] Q.B

28 one of the legal realities of an unfriendly execution of foreign arbitral award in Indonesia right after the ratification of the Convention due to the violation of national sovereignty. 40 One of the most prominent feature of inconsistency application of the new Arbitration Act is the huge level of municipal court intervention. It can be seen from the case between PT Perusahaan Dagang Tempo v. PT Roche Indonesia Public Policy Exception Despite the fact that arbitral awards are deemed final and binding, it has to be noted that not all of the foreign arbitration awards can be enforced in Indonesia. Based on the 1999 Act, the arbitration awards can be enforced in Indonesia if: firstly, the awards was made by the member country having a bilateral or multilateral agreement with Indonesia in respect of the recognition and enforcement of foreign arbitral awards (reciprocity reservation); secondly, the scope of the awards is commercial or trade under the Indonesian law (commercial reservation); thirdly, the awards do not violate the public order (ketertiban umum) of Indonesia. 42 The controversy of a judicial decision which was rendered by the District Court and the Supreme Court can be seen from the case of E.D. & F. Man (Sugar Ltd) v. Yani Haryanto. In this case, the Central Jakarta District Court had annulled the underlying contract based on the violation of the Indonesian public policy. 43 On the other hand, the Indonesian Supreme Court (the Mahkamah 40 Green Stephen B, above no. 14, at 296. See also Berkowitz D, Moenius J & Pistor K, Legal Institutions and International Trade Flows, Michigan Journal of International Law, Vol. 26, 2004, available at: < Viewed on 8 May 2008, p See article 11 of the Act no. 30 of 1999 regarding the Arbitration and the Alternative Dispute Resolution (ADR).. 42 See article 66 of the Act No. 30 of 1999 regarding the Indonesian Arbitration and Alternative Dispute Resolution. 43 The contract was considered as contrary to public policy since it violates the Presidential Decree No. 43 of 1971 and Decree No. 39 of 1978 concerning the prohibition of private individual to import sugar. Based on these decrees, only the Indonesian government procurement agency (BULOG) that can import sugar. See Mills K, Enforcement of Foreign Arbitral Awards in Indonesia & Other Issues of Judicial Involvement in Arbitration, available at: +F+Man+v.+Yani+Haryanto+and+arbitral+awards+enforcement&hl=id&ct=clnk&cd=2>, viewed on 2 May 2008, p

29 Agung) rendered the exequatur (writ of execution) upon this case. However, the exequatur of the Supreme Court was then considered as unenforceable since the underlying contract was invalid. 2. The Arbitral Award is unenforceable without the assistance of Judicial Authorities of Indonesia Secondly, the effective conduct of an international commercial arbitration may depend upon the provisions of the law of the place of arbitration. One way of illustrating this dependence is by reference to any provisions of the local law for judicial assistance in the conduct of arbitration. Even if the arbitrators have the power to order interim measures of protection, such as orders for the preservation and inspection of property, they are unlikely to have the power to enforce such orders. For this, it is necessary to turn to national courts for assistance Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award Enforcement in Indonesia: This judicial hostility to arbitration is not only concerned with the enforceability of pre-dispute arbitration clauses, but it also includes any arbitration agreement and the unenforceability of foreign judgments See, e.g., the Swiss Private International Law Act 1987, Ch. 12, Art. 183 which provides that its arbitral tribunal may request the assistance of the court where a party does not voluntarily comply with a protective measure; the Netherlands Arbitration Act 1986, Art. 1022(2), which provides a party to request a court to grant interim measures of protection; the English Arbitration Act s.44(1) and (2), which gives the court the same powers to order the inspection, photocopying preservation, custody or detention of property in relation to an arbitration as it has in relation to litigation; and the Model Law, Art.9, which allows a party to seek interim measures of protection from a court. 45 The old judicial hostility was also visible in the United States of America (the US) in the nineteenth century. In this period, as the reflection of judicial hostility to arbitration, agreement to arbitrate was considered as non enforceable and revocable. See Burton Steven J & Murray John F, The New Judicial Hostility to Arbitration: Unconscianability and Agreement to Arbitrate, available at: 9&mirid=1, Viewed on 24 April 2008, p See also Scodro Michael A, Deterrence and Implied Limits on Arbitral Power, available at: <http// viewed on 24 April 2008, p

30 Principally, based on the jurisdictional theory, the enforcement of foreign judgments and awards can be considered as a violation of state sovereignty. 46 The juridictionalists legitimate the dominant role of sovereign states (jurisdiction) in regulating any activities within their territories by implementing a given system of domestic laws and they have rights to control both substantive and procedural of awards enforcement based on their own mandatory rules. 47 In Indonesia, where municipal courts greatly interfere with the enforcement of foreign arbitral awards, it reflects a major juridical sovereignty. Hence, it seems that the Indonesian judicial system is primarily based on a jurisdictional theory emphasizing on national sovereignty rather than contractual theory. 48 The controversy of judicial hostility to arbitration and foreign judgments enforcement was expressly stated in the Code of Civil Procedure which was taken over from the Dutch Code of Civil Procedure known as the Reglement op de Burgerlijke Rechtsvordering (Rv) based on the concordance principle (concordantie beginsel). 49 The implementation of Rv was fundamentally based on the Dutch Gazette (Staatblad Hindia Belanda) No. 52 of 1947 jo No Taylor Veronica L, Contract and Contract Enforcement in Indonesia: An Institutional Assessment, in Indonesia, Law and Society, Lindsey T (ed), 2nd edition, Federation Press, Sydney, 2008, P Ibid. 48 Barraclough A & Waincymer J, Mandatory Rules of Law in International Commercial Arbitration, available at: http// pdf>, viewed on 24 April 2008, p. 3. The jurisdictional theory has been challenged by the contractual theory. Based on contractualists, the agreement to arbitrate which is agreed by the parties has a paramount importance of the authority of the arbitrators to make the awards. The arbitrator, thus, play a major role as an agent of the parties. The states have no control over the arbitration authority and it hostile to mandatory rules. See also Tsakatoura A, The Immunity of Arbitrators, available at: < cripta/articles/arbitratorsimmunity. htm>, viewed on 27 April 2008, p Louis Tuegeh Longdong, Asas Ketertiban Umum dan Konvensi New York 1958, Sebuah Tinjauan atas Pelaksanaan Konvensi New York 1958 pada Putusan-Putusan Mahkamah Agung RI dan Pengadilan Asing, Citra Aditya Bakti, Bandung, 1998, p Concordance principle is a principle stating that all of Dutch Law can also be implemented in Indonesia as a colonialized state. Previously, the arbitration law in Indonesia was enshrined in the Code of Civil Procedure of 1847, Book III, articles See also Adolf H, Arbitrase komersial Internasional, Raja Grafindo Persada, Jakarta, 2002, p

31 of The article 436 of Rv expressly provides that the foreign judgments cannot be enforced voluntarily in Indonesia. 51 Thus, these judgments had to be re-examined or re-trial by the Indonesian court as a new case. 52 In addition, the article 23 of Algemene Bepalingen (hereafter AB) provided the exception of the recognition and enforcement of foreign judgments in Indonesia on the ground of public order (ketertiban umum). 53 Not only does this article attempts to limit the party autonomy principle in regards to contractual issue, but it also confines to all legal activities (rechtshandelingen). 54 This means that public policy exception as an escape clause can be applied widely. 55 The article III of the New York Convention left much discretionary power of foreign arbitral enforcement to the rule of procedure of the territory where the award relied upon. Since the enforcement of foreign arbitral awards left open to the procedural rule of the enforcing states, it may lead to more exhaustive conditions of enforcement procedure. Based on the article 66 (d) of the Indonesian Arbitration Act, foreign arbitral awards can be enforced in Indonesia after it receives exequatur (writ of execution) from the Central Jakarta District Court or the Supreme Court. 56 This enforcement mechanism of foreign arbitral awards confine to the rules of procedure of Indonesia as the enforcing state. In other words, the Indonesian municipal courts have a judicial authority to intervene to the enforcement of international arbitral awards. a. Disregard of Agreement to Arbitrate 50 Adolf, above no. 12, at See article 436 Rv, Staatblad No. 52 of 1947 jo No. 63 of Longdong, above no. 18, at Gautama, above no. 9, at Ibid. 55 Gautama, above no. 9, at See article 66 (d) and (e) of the Act No. 30 of 1999 regarding the Arbitration and Alternative Dispute Resolution (ADR). The enforcement of state contracts should be based on the exequatur of the Supreme Court. 16

32 In practice, however, Indonesian court usually disregard agreement to arbitrate. Although article 3 and 11 of the Act No. 30 of 1999 embody a limited court involvement values 57 and expressly states that domestic courts have no authority or competency to litigate the case of the contracting parties, it is not always the case in practice. Inconsistency of application of this provision remain exists. This situation can be noted from the case of Bankers Trust Company and Bankers Trust International PLC (BT) v. Mayora Ltd which has raised concerns. 58 The court disregard the arbitration clause provision of the contract and issued a court decision No. 46/Pdt.G/1999 on 9 December 1999 due to the lack of commerciality. 2.2.The Absence of Common International Standard of Public Policy Exception Internationally The emergence of on going issues of judicial hostility on a legal basis of public policy exception has not only been provided in the article V (2) (b) of the New York Convention 1958, but it is also stated in the article 36 (b) (ii) of the UNCITRAL Model Law on International Commercial Arbitration. Both international conventions provide: Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (b) the recognition or enforcement of the award would be contrary to the public policy of that country. 59 Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only: (b) If the court finds that: 57 Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke Muka Pengadilan, available at: < pengadilan_18.html>, Viewed on 24 April 2008, p Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke Muka Pengadilan, available at: < Viewed on 24 April 2008, p See article V (2) (b) of the New York Convention