LAW ASIA International Moot 2012 AT KUALA LAMPUR REGIONAL CENTER FOR ARBITRATION IN THE MATTER OF

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1 AT KUALA LAMPUR REGIONAL CENTER FOR ARBITRATION IN THE MATTER OF GREAT WALL NOODLE SHOP LLC (REPRESENTED BY MR. JIANPING JI AND MR. XEUFANG WANG).(CLAIMANT) VERSUS DR. ADI BUDIAMMAN.(RESPONDENT) MEMORIAL FOR CLAIMANT

2 TABLE OF CONTENTS INDEX OF AUTHORITIES... iv STATEMENT OF JURISDICTION... viiii QUESTIONS PRESENTED... ix STATEMENT OF FACTS... x SUMMARY OF PLEADINGS... xiiii PLEADINGS... 1 Issue I: The Law applicable in resolving the Dispute is Singaporean Law... 1 Issue II: The Arbitration Agreement is Valid and Enforceable... 7 Issue III: Article 31 of Law 24 of 2004 of the Republic of Indonesia does not render the Franchisee Agreement invalid Issue IV: A proper and timely notice of termination was given to the Respondent (Dr. Budiamman) Under Singapore Law Under Indonesian Law Issue V: The Franchisor can terminate the Agreement for a material breach of the Agreement, which is a substantial violation of the Agreement Under Singapore Law Under Indonesian Law Issue VI: The inherent warranty of good faith and fair dealing in interpreting and applying franchise agreements does apply to this Franchise Agreement, but it is not a duty to put the interests of the Franchisee over the Franchisor Under Singapore Law Under Indonesian Law Issue VI (A) :The serving of a single Indonesian dish referred to as The Special of the Day justified the termination of the franchise Under Singapore Law Under Indonesian Law Issue VI (B): Giving customers the option of substituting lamb for pork for menu items justified the termination of the franchise Under Singapore Law Under Indonesian Law Issue VI (C): The wearing of the new (white) hijab by the female Muslim employees justified the termination of the franchise MEMORIAL FOR THE CLAIMANT Page ii

3 Under Singapore Law Under Indonesian Law Issue VI (D): The above violations of the Franchise Agreement do reflect a continuing disregard of the franchisee s obligations under the Franchise Agreement and justify its termination Under Singapore Law Under Indonesian Law Issue VII: An employment regulation prohibiting the wearing of a hijab by female Muslim employees or restriction (or the colour type of the hijab) does not violate the constitution and/or laws of Indonesia or any international treaties to which it is a member PRAYER MEMORIAL FOR THE CLAIMANT Page iii

4 INDEX OF AUTHORITIES Cases AG Securities v. Vaughan [1990] 1 AC Amerada Hess Corp. v. Quinn, 142 NJ. Super. 237, 252, 362 A.2d 1258, 1266 (NJ. 1976) Article 18, International Covenant on Civil and Political Rights Brogden v. Metropolitan Rly. Co., (1877) 2 App Cas Cecrop Co. v. Kinetic Sciences Inc., [2001] BCSC 532 (CanLII)... 8 Cecrop Co. v. Kinetic Sciences Inc., 16 B.L.R.3d 15 (B.C S.Ct )... 8 Couchman v. Hill, [1947] 1 All ER Dalkhia Utilities Services Plc v. Celtech International Ltd., [2004] All ER (D) 197 (Feb) Decro - Wall International SA v. Practioners in Marketing Limited, [1971] 1 WLR Ferris v. Plaister, 34 N.S.W.L.R 474( N.S.W. Court of Appeal 1994)... 9 Final Award in ICC Case No. 8938, XXIVa Year Book of Commercial Arbitration 174, 176(1999)... 2 Fisser v. International Bank, 282 F.2d 231, 233 (2d cir. 1960) Hamlyn & Co. v. Talisker Distillery [1894] A.C. 202, 209, Heyman v. Darwins Ltd1942 AE 356, at Jack Niemman s Schnitzel Baron Foods Ltd. v. Fuest, 9 CPR (3d) McNeese v. McNeese, (1923) 190 Cal Mitsubishi Motors Corp. v. Soler-Chrysler, Plymouth, Inc, 473 U.S. 614, 638-9(1985)... 4 Mona Jabarin v. Minister of Education, PD 48 (5) Municipalite de Khoms El Mergeb v. Societe Dalico, 1994 Rev. arb MEMORIAL FOR THE CLAIMANT Page iv

5 Nat l Thermal Power Corp. v. The Singer Co., XVIII Yearbook of Commercial Arbitration 403, (Indian S.Ct. 1992) (1993)... 3 National Power Plc v. United Gas Co. Ltd., [1998] All ER (D) NetSys Technology Group AB v. Open Text Corp., [1999] CanLII 14937(ON SC)... 8 Ontario Inc. c/o Harvey s Restaurant v. Cara Operations Ltd., B.L.R. (4 th ) Paper Reclaim Ltd v. Aotearoa International Ltd, [2007] NZSC Republic of Nicragua v. Standard Fruit Co., 937 F.2d 469, 478 (9 th Cir. 1991) Sahin v. Turkey [2004] ELR 73 (ECTHR); Karadumman v. Turkey, (1993) 74 DR Smith v. Hughes, [1871] LR 6 QB United States v. P&D Coal Mining Co., 358 F.2d 619 (6 th Cir. 1996)... 7 Vee Networks Ltd. v. Econet Wireless International Ltd [2004] EWHC 2909 (Comm.)... 3 Zulla Steel Inc. v. A&M Gregos Inc., 174 N.J. Super. 124 (1980) Statutes Constitution... i Rules Article 27, SIAC Rules, SIAC Rules, Article 35, KLRCA Arbitration Rules, Articles Ernest Gellhorn, Limitations on Contract Termination Rights: Franchise Cancellations, Duke Law Journal, Vol. 1967, No. 3 (Jun., 1967), p. 482, Hadfield K. Gillian, Problematic Relations: Franchising and the Law of Incomplete Contracts, Stanford Law Review, Vol. 42, No. 4 (Apr., 1990), pp Karrer & Kaelin-Nauer, Is There A Favor Iurisdictionis Arbitri?, 13(3) J. Int l Arb. 21(1996)... 7 MEMORIAL FOR THE CLAIMANT Page v

6 Law, Mistelis and Kroll, Comparitive International Commercial Arbitration (Kluwer Law (Int, 2003) Para Pawel Moskwa, Interpretation of Commercial Contracts in the Future European Civil Code Objective or Subjective Method?, ELSA SPEL 2004 (1) Thomas M. Pitegoff, Franchise Relationship Laws: A Minefield for Claimants, 45 Bus. LAW. 289 (1989) National Legislation 1965, Civil Code of Indonesia Article 1267, Indonesian Civil Code Article 1338, Indonesia Civil Code Article 1342, Indonesian Civil Code Article 29, Constitution of Indonesia accessed on 13/9/ International Instruments Article 9, European Convention on Human Rights UNIDROIT Articles Article 1.10 (1), UNIDROIT Principles of International Commercial Contracts, Awards Alan Redfern & Martin Hunter (eds.), Law And Practice of International Commercial Arbitration, pp et seq (4 th ed. 2004)... 1 Final Award in ICC Case No. 6162, XVII Year Book of Commercial Arbitration 153, (1992)... 9 MEMORIAL FOR THE CLAIMANT Page vi

7 CLOUT Cases A/CN.9/264, Analytical commentary on draft text of a model law on international commercial arbitration, under article 1, paras , available at 1 CLOUT case No. 101 [Private Company Triple V Inc. Ltd. v. Star (Universal) Co. Ltd. and Sky Jade Enterprises Group Ltd.,High Court Court of First Instance, Hong Kong, 27 January 1995]... 1 CLOUT case No. 690 [Mayers v. Dlugash, High Court Court of First Instance, Hong Kong, 10 June 1994]; CLOUT case No. 627[Sport Maska Inc. v. Zittrer and others, Supreme Court, Canada, 24 March 1988]... 1 Websites Article 178(2) of Swiss Law on Private International Law... 2 MEMORIAL FOR THE CLAIMANT Page vii

8 STATEMENT OF JURISDICTION The Claimant has approached the Kuala Lumpur Regional Centre for Arbitration (KLRCA) pursuant to the arbitration agreement between the Claimant and The Respondent. The Claimant maintains that the arbitration agreement is valid and the claim is admissible against the Respondent. The same has been argued further in the pleadings. MEMORIAL FOR THE CLAIMANT Page viii

9 QUESTIONS PRESENTED I. What is the proper law to apply in resolving this dispute: Singapore Law, Indonesian Law, or some other law? II. Is the Arbitration agreement valid and enforceable? III. Is the Franchise Agreement invalid under Indonesian Law specifically Article 31 of Law 24 of 2009? IV. Was a proper and timely Notice of Termination given to the Franchisee [Dr. Budiamman]? V. May the Franchisor terminate the franchise for any violation of the Franchise Agreement or must it be a substantial violation of the Agreement? VI. Does the inherent warranty of good faith and fair dealing in interpreting and applying franchise agreements apply to this Franchise Agreement and, if so: VIA. Did the serving of a single Indonesian dish referred to as The Special of the Day justify the termination of the franchise? VIB. Did giving customers the option of substituting lamb for pork for menu items justify the termination of the franchise? VIC. Did the wearing of the new (white) hijab by the female Muslim employees justify the termination of the franchise? VID. 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? VII. Does an employment regulation prohibiting the wearing of a hijab by female Muslim employees or restriction (or the colour type of the hijab) violate the constitution and/or laws of Indonesia or any international treaties to which it is a member? MEMORIAL FOR THE CLAIMANT Page ix

10 STATEMENT OF FACTS 1. The Great Wall Noodle Shop LLC (hereinafter referred to as GWNS), (founded and coowned by Mr. Jianping Ji and Mr. Xeufang Wang) the Claimant and Franchisor, started as a single restaurant, opened in Tianjin, China, on 20 th May, 1983 and expanded its Franchise to various locations within China itself and to Singapore and Malaysia. The Respondent is Dr. Budiamman, the Franchisee, is a prominent Jakarta surgeon, who signed the Franchise Agreement on June 20 th, 2011, which is the subject matter of this case. 2. Mr. Xeufang Wang came to Singapore in June, 2011 to meet Mr. Bao Shan, the franchise owner of the Singapore restaurants, to see if he would be interested in opening several restaurants in Indonesia as well. He was not interested. 3. On 20 th June, 2011, at Changi Airport, Mr. Wang met Dr. Budiamman. After Mr. Wang explained the purpose of his visit to Singapore, Dr. Budiamman showed interest in signing the Agreement intended for Mr. Bao Shan. 4. Dr. Budiamman s name was substituted for Mr. Bao Shan s name on the Agreement and Dr. Budiamman signed the Agreement, after a quick review. As Dr. Budiamman did not want to miss his flight, only the fee details were explained to Dr. Budiamman by Mr. Wang. However, an English copy and a copy of the Agreement in Bahasa Indonesia were sent to Dr. Budiamman the next day. 5. The two Franchises as agreed upon were opened in September, In late October 2011, Mr. Ji, as authorised by the Agreement, made an unannounced visit to both Indonesian restaurants. He discovered several violations of the Agreement. There was a second menu also being offered, apart from the authorised, official menu as stipulated by the Agreement, for the sale of Indonesian food, which had not been sanctioned by MEMORIAL FOR THE CLAIMANT Page x

11 the Claimant. The menu gave the option of a substitution of pork with lamb, which had not been authorised by the Claimant. 6. Further, Dr. Budiamman had, on the request of a few of the waitresses, allowed them to wear a hijab along with their official uniform, and the colour of this hijab was fixed at red. Mr. Ji s wife particularly noticed the hijab and commented on how attractive they were. 7. After Mr. Ji s returning home, on 4 th November, 2011, an was sent to Dr. Budiamman, illustrating the need for discontinuity of these violations. All three of the issues to which Mr. Ji had already objected during his visit were clearly explained here as well. Dr. Budiamman was asked to conform his operations to those already of the other restaurants, as required by the Franchise Agreement. 8. The clearly informed Dr. Budiamman that the serving of unauthorized menu items cannot be allowed to continue. The franchise was a Chinese restaurant, and meant to serve Chinese food only. No other food items could be sold without the express consent of the Claimant, as required by the Agreement, and no such consent had been granted by the Claimant in this case. 9. The Claimant has explicitly stated in this that the need for the correction of these violations is that the uniformity of the restaurants must be maintained, i.e., the restaurants must all operate in exactly the same manner, inside and outside. 10. The Claimant clarified that the question of not allowing the wearing of the hijabs with the official uniform is not due to any religious bias, but rather, maintaining uniformity, which the Claimant has clearly stressed is the key issue to any successful franchise operation. If all the employees at all the restaurants did not dress exactly the same, the factor of common appearance would be lost. MEMORIAL FOR THE CLAIMANT Page xi

12 11. The Claimant ended the with a caveat to Dr. Budiamman that if the violations mentioned in the Agreement were not discontinued, the Claimant would be left with no choice but to terminate the Agreement. 12. Two weeks after this, an inspector was hired by the Claimant to visit both restaurants. He reported to Mr. Ji that Indonesian food, though not listed on the menu, was being served as a single Special of the Day, written on a blackboard. The colour of the hijab of the waitresses had been changed to white. 13. The next day, the Claimant sent a letter to Dr. Budiamman, terminating the Agreement, ordering him to close both restaurants and remove the signage within fifteen days. 14. On Dr. Budiamman s refusal to close the two restaurants, the Claimant submitted a Notice of Arbitration. MEMORIAL FOR THE CLAIMANT Page xii

13 SUMMARY OF PLEADINGS I The Agreement between in question provided for international commercial arbitration. The principle of Seperability of Arbitration Agreements dictates that different laws may govern the arbitration agreement and the underlying contract. Further, when the parties have expressly mentioned such a law, it must be given effect. Further, the principle of neutrality of laws dictates that the parties to an arbitration agreement should opt for a law other than that of the law of the countries. II The principle of Presumptive Validity of the Arbitration Agreement supports the notion that the parties agreement should be interpreted to give effect to them wherever possible. Further, the principle of Seperability of Arbitration Agreement confers on the parties separate obligations which cannot be avoided simply on the challenge or even nullification of the original contract. III Article 31 of the Law 24 of 2009 of the Republic of Indonesia does not render the Franchise Agreement invalid as the signature requirements are not absolute and the most minimal indication of the parties intent must be given full effect. Also, Respondent s consent to the contract can be deemed from his conduct. IV Reasonable time of notice is time required to make alternate arrangements. Actual notice is a proper notice. The Claimant has given sufficient time to the Respondent. The Respondent MEMORIAL FOR THE CLAIMANT Page xiii

14 was a prominent surgeon and had continued his practice. The sent to the Respondent was an actual notice. V For termination, a breach can be material. Claimant had expressed to the Respondent the damage that would be caused because of the Respondent s actions. Respondent s breach was material and substantial. VI Franchisor acts in good faith if he deals honestly and reasonably. The Claimant had followed proper procedure and given a chance to cure, before terminating. VIA The Respondent is expected to follow the Agreement to the letter. Even a single Special of the Day goes against the serving of only the authorised menu. VIB A contract is interpreted literally. The unauthorised use of lamb in place of pork is a violation of the Agreement. VIC An express term in a contract must be followed exactly. A hijab is not a part of the official uniform and is a distraction. Thus, there has been a violation. VID If a material breach is not cured, the contract can be terminated. The Respondent had not made the changes as required. Therefore, termination was justified. MEMORIAL FOR THE CLAIMANT Page xiv

15 VII Islam is not so staunchly observed in Indonesia; there is more liberalism here. Where the issue is one of uniformity, a rule prohibiting the wearing of headscarves does not violate right to freedom of religion. MEMORIAL FOR THE CLAIMANT Page xv

16 PLEADINGS ISSUE I: THE LAW APPLICABLE IN RESOLVING THE DISPUTE IS SINGAPOREAN LAW 1.1. The Contract provides for International Commercial Arbitration Article 2 of the UNCITRAL (United Nations Commission on International Trade Law) Model law defines arbitration as the situation where disputes are referred to a third party. 1 Alternatively it can be defined as a situation where two or more parties, faced with a dispute which they cannot resolve for themselves, agreeing that some private individual(s) will resolve it for them Further, Article 3 (a) of the UNICTRAL Model Law states that arbitration is international if the parties have, at the time of conclusion of agreement, their places of business in different States 3. Also, the term place of business has been considered in some courts to include any location from which a party participates in economic activities in an independent manner. 4 Additionally, the term commercial is given a broad definition under footnote to Article 1(1) of the UNCITRAL Model Law This provision is mirrored in the Kuala Lumpur Regional Centre for Commercial Arbitration Rules (KLRCA), under Article 1 (1) In the present matter, Mr. Wang, one of the partners of the Great Wall Noodle Shop LLC, met Dr. Budiamman while waiting for his flight at the Changi airport. During the course of the discussion, Mr. Wang divulged the purpose of his visit to Dr. Budiamman and told him that he was looking to extend the sphere of his Franchise to Indonesia. 1 CLOUT case No. 690 [Mayers v. Dlugash, High Court Court of First Instance, Hong Kong, 10 June 1994]; CLOUT case No. 627[Sport Maska Inc. v. Zittrer and others, Supreme Court, Canada, 24 March 1988] 2 Alan Redfern & Martin Hunter (eds.), Law And Practice of International Commercial Arbitration, pp et seq (4 th ed. 2004) 3 CLOUT case No. 101 [Private Company Triple V Inc. Ltd. v. Star (Universal) Co. Ltd. and Sky Jade Enterprises Group Ltd.,High Court Court of First Instance, Hong Kong, 27 January 1995] 4 CLOUT case No. 106 [Supreme Court, Austria, 2 Ob 547/93, 10 November 1994] 5 A/CN.9/264, Analytical commentary on draft text of a model law on international commercial arbitration, under article 1, paras , available at MEMORIAL FOR THE CLAIMANT Page 1

17 Dr. Budiamman was visibly interested in the proposal and agreed to sign the Franchisee Agreement (hereinafter referred to as Agreement or Contract ). Within the said Franchisee agreement was an Arbitration Clause 6 which stipulated that any disputes arising out of the contract would be referred to The Kuala Lumpur Regional Centre for Arbitration, which was a third party in accordance with the Agreement. Further, at the time of signing the Agreement, Mr. Wang was operating in China whereas Dr. Budiamman was working as a surgeon in Jakarta, Indonesia. Finally, as the Agreement involved the running of a commercial entity i.e., restaurants, the Agreement was commercial in nature As all the aforementioned requirements are fulfilled, the Agreement can be safely said to mandate International Commercial Arbitration Application of the doctrine of Seperability The law governing the agreement to arbitrate is mentioned in the arbitration clause and this arises out of the principle of seperability The principle of seperability states that the arbitration agreement mentioned in a contract is completely separable from the rest of the underlying contract. In other words, the arbitration clause and the rest of the contract form two separate entities. Thus, the arbitration clause is autonomous and juridically independent from the main contract in which it in contained Thus is follows that the validity of the arbitration agreement is not necessarily affected by the invalidity or avoidance of the main contract. 9 Further, Article V (1) (a) of the New York Convention and correspondingly Articles 6 Chapter XII(A), Franchisee Agreement 7 Article 178(2) of Swiss Law on Private International Law; Municipalite de Khoms El Mergeb v. Societe Dalico, 1994 Rev. arb Final Award in ICC Case No. 8938, XXIVa Year Book of Commercial Arbitration 174, 176(1999) 9 Vee Networks Ltd. v. Econet Wireless International Ltd [2004] EWHC 2909 (Comm.) MEMORIAL FOR THE CLAIMANT Page 2

18 34(2) (a) (I) and 36(1) (a) of the UNCITRAL Model Law provide that an arbitral award can be refused if the agreement was invalid under the law to which the parties have subjected it to These provisions are based on the basic premise that parties may expressly select a particular law to govern only the arbitration agreement and expressly establish this to be different from the law governing the rest of the underlying contract. 10 This derives its origins from the aforementioned seperability principle The dispute in the present matter is the termination of the Agreement by the Franchisor for breach of the Agreement The Agreement drawn between the two parties, namely Mr. Wang and Dr. Budiamman, clearly mentions the laws to be applied in order to resolve the dispute. Chapter XII (B) of the Agreement clearly laws down that The agreement and the parties' rights under it (The Agreement) and the relationship between the parties shall be governed by, and will be interpreted in accordance with the laws of Singapore In doing so, the parties have exercised their rights under the aforementioned provisions to select Singaporean law to be applied to the arbitration agreement, as removed from the rest of the agreement. As the arbitration clause mentioned in Chapter XII (B) of the contract between the two parties is independent from the rest of the contract, the contracting parties can allow different laws to pertain to the two different entities i.e. Chapter XII (B) and the rest of the contract. Hence the law to be applied to Substantive matters would be Singaporean Law Application of the doctrine of Will of the Parties It is humbly submitted that the principle basis of Arbitration is the maxim of l autonomic de la volonte i.e. will of the parties to be Supreme, which was also 10 Nat l Thermal Power Corp. v. The Singer Co., XVIII Yearbook of Commercial Arbitration 403, (Indian S.Ct. 1992) (1993) MEMORIAL FOR THE CLAIMANT Page 3

19 recognized in Article V (1) (a) of the New York Convention. The theory of Party Autonomy, also stipulates that any decision of the arbitration must be based on the will of the parties. 11 In other words, if any dispute arises, it has to be solved by reference to the will of the parties Further, as arbitration is based upon the will of the parties, the parties can waive their right to national judicial remedies through litigation. It is an exercise of their individual autonomy and choice by which effect is given to their civil liberties. It is freely and securely selected by parties to acquire the benefits of prompt, neutral and effective dispute resolution It is also submitted that the will of the parties would be evident in the contract that was drawn up between them. In the present case, the agreement was drawn between the Great Wall Noodle Shop, LLC and Dr. Adi Budiamman. As the contract was duly understood and signed by, both the contracting parties, the will of the parties can be inferred from the terms and provisions mentioned in the said agreement as they have consented to be bound by the terms of the contract. Under Chapter XII (B), the said agreement expressly mentioned that the determination of rights of the parties would be done in accordance to Singaporean Law. This agreement was duly signed by Dr. Budiamman and Mr. Wang (on behalf of the Great Wall Noodle Shop, LLC) and the right to select the law to be governing the dispute in arbitration is an expression of the will of the parties As the will of the contracting parties in arbitration is supreme, the applicable law would be that of Singapore as decided conclusively by the parties in the aforementioned contract. 11 Mitsubishi Motors Corp. v. Soler-Chrysler, Plymouth, Inc, 473 U.S. 614, 638-9(1985) MEMORIAL FOR THE CLAIMANT Page 4

20 1.3.5 Further, the contract in the present matter was duly singed by both parties and the same stipulated arbitration proceedings by barring national litigation. Since the contract was based on the parties consent, the theory of the Will of the Parties will dictate that the parties have agreed to waive their right to national judicial proceedings Thus, the contract or the arbitration clause cannot be said to be invalid on grounds of barring national court proceedings, since the provision pertaining to the same was based on the will and consent of the contracting parties Application of the principle of Neutrality of Laws The principle of Neutrality of Laws 12 dictates that the parties to an arbitration agreement should opt for a law other than that of the law of the countries. This is done to ensure that the two contracting parties are on a level legal field and neither of them can claim any advantage by applying a law that they would be well versed with i.e. their own national law. At the same time this would be severely disadvantageous to the opposite party, thereby defeating the concept of equality of the contracting parties In the present matter, the two parties are GWNS LLC (represented by Mr. Wang and Mr. Ji, who are of Chinese origin) and Dr. Budiamman, who is of Indonesian origin Chapter XII (B) of the Contract between the parties clearly mentions that Singaporean law is to be applied to resolve any dispute that may arise between the two parties during the course of discharge of the said contract. This was meant to distance the contract between the two parties form their respective national laws i.e. Indonesian and Chinese laws. 12 Law, Mistelis and Kroll, Comparitive International Commercial Arbitration (Kluwer Law (Int, 2003) Para 6-66 MEMORIAL FOR THE CLAIMANT Page 5

21 1.4.4 The principle behind selecting this law was to ensure that both Mr. Wang and Dr. Budiamman are not burdened with the task of facing an opponent who has an advantage of using his own national law in the present matter If the alternative to this situation is taken i.e. if Indonesian law is applied, it would be unfairly disadvantageous and at the same time it would confer additional benefits to Dr. Budiamman, which should not be permitted. Hence, the law to be applied should be a neutral law i.e. Singaporean Law. MEMORIAL FOR THE CLAIMANT Page 6

22 ISSUE II: THE ARBITRATION AGREEMENT IS VALID AND ENFORCEABLE 2.1 Application of the Principle of Presumption of Validity of Arbitration Agreements The principle of favour validitatis 13 dictates that there must be presumption of validity in favor of the arbitration agreement. This is supported by the notion that the parties agreement should be interpreted to give effect to them wherever possible In the celebrated case of Hamlyn & Co. v. Talisker Distillery, 15 it was reasoned that it is more reasonable to hold that the parties contracted with the common intention of giving the entire effect, including the arbitration clause, effect On 20th June, 2011, Mr. Wang who is the part time owner of the Great Wall Noodle Shop expressed his intention of opening an Indonesian franchisee to Dr. Budiamman. The latter was extremely interested and agreed to enter into an agreement for the running of the Indonesian restaurant. The said agreement / contract also contained a dispute resolution clause, which called upon the parties to refer any subsisting disputes to arbitration Dr. Budiamman s signature on the said agreement clearly shows that he agreed to all the terms of the agreement, including the dispute resolution clause In the present situation, the contention of Dr. Budiamman regarding the validity of the arbitration agreement should not be taken into account as there is a presumption of validity in favor of the arbitration agreement that Dr. Budiamman has voluntarily entered into. Thus, the arbitration agreement should be presumed to be valid owing to the free consent given by both the parties. 13 Karrer & Kaelin-Nauer, Is There A Favor Iurisdictionis Arbitri?, 13(3) J. Int l Arb. 21(1996) 14 United States v. P&D Coal Mining Co., 358 F.2d 619 (6 th Cir. 1996) 15 Hamlyn & Co. v. Talisker Distillery [1894] A.C. 202, 209, 214 MEMORIAL FOR THE CLAIMANT Page 7

23 2.2 The Arbitration Agreement is independent of the underlying contract As enshrined in Article 16(1) and Article 21(2) of The UNCITRAL Model Law, the principle of Autonomy of the Arbitration Agreement or pactonomic de la clause compromission stipulates that parties cannot unilaterally withdraw from arbitration agreement even if the contract comes to an end as the said arbitration agreement is a part which is separate from the rest of the contract. Thus, it confers on the parties separate obligations which cannot be avoided simply on the challenge or even nullification of the original contract. The reasoning behind the same is that the arbitration agreement is a part separate from the rest of the contract. Therefore, even if the contract comes to an end or its validity is challenged, the arbitration clause is alive It is established that the agreement to arbitrate is a particular characteristic of the underlying contract with distinct procedure for dispute resolution and hence is a separate part of the contract. If this concept did not exist, arbitration would be selfdefeating because if a breach of contract were to render the entire agreement invalid, then there would be no point in arbitration Thus, a party cannot resist arbitration simply by relying on the fact that the main contract was invalid because a condition precedent to the entry into force of that contract had not been fulfilled. 18 In other cases, the seperability principle was relied upon by courts to dismiss objections to arbitral jurisdiction asserting that the main contract was void because the parties were mistaken as to their respective rights and obligations when they entered into it Cecrop Co. v. Kinetic Sciences Inc., 16 B.L.R.3d 15 (B.C S.Ct ) 17 Heyman v. Darwins Ltd1942 AE 356, at Cecrop Co. v. Kinetic Sciences Inc., [2001] BCSC 532 (CanLII) 19 NetSys Technology Group AB v. Open Text Corp., [1999] CanLII 14937(ON SC) MEMORIAL FOR THE CLAIMANT Page 8

24 2.2.4 Further, Chapter XII (A) in the agreement between the parties mandates that any dispute, controversy or claim arising out of or relating to this franchise agreement, the operation of the franchise or its termination contract shall be settled by arbitration in accordance with the Kuala Lumpur Regional Centre for Arbitration Fast Track Rules. In the present matter, if the underlying contract between the parties is challenged, the arbitration clause still stands valid and thus the parties must still submit any dispute to the KLRCA as specified in the contract. In the present case, the dispute resolution clause clearly stipulated Singapore law as the substantive law of the contract Historically, the validity of international arbitration agreements will be upheld notwithstanding challenges to those agreements based on the law governing the parties underlying contract Hence, even if the validity of the original, underlying contract is challenged, the validity of the arbitration agreement stands as, a claim that the underlying contract was null and void does not impeach the arbitration clause Dr. Budiamman provided his consent and assent to the Contract In terms of arbitration, it is settled that a party s consent to an arbitration agreement or a written instrument containing arbitration a clause can be expressed as a substantive matter by means other than a signature on the said agreement. It is accepted that while entering into a contract, the consent of the contracting party can be expressed through his/her conduct 23 or acquiescence. Most legal systems recognize consent derived from conduct. 20 Clause B, Chapter XII, Franchise Agreement 21 Final Award in ICC Case No. 6162, XVII Year Book of Commercial Arbitration 153, (1992) 22 Ferris v. Plaister, 34 N.S.W.L.R 474( N.S.W. Court of Appeal 1994) 23 Brogden v. Metropolitan Rly. Co., (1877) 2 App Cas 666 MEMORIAL FOR THE CLAIMANT Page 9

25 2.3.2 Thus, it is humbly submitted that if a party, does not provide his/her signature to the contract but at the same time fulfills the terms and conditions mentioned in the contract, it is deemed that he has given his consent for the said contract Further, if a contracting party does not expressly object to any provision of the contract that he/she has entered into, it is to be believed that he has accepted the said contract In the present matter, on 20 th June 2011, a contract was entered into by Dr. Budiamman and Mr. Wang which included a provision to refer any dispute the two parties to arbitration. For the benefit of Dr. Budiamman, the contract was drawn up in both English and Bahasa Indonesian It is humbly accepted that Dr. Budiamman signed the English version of the contract but did not do the same for the Bahasa Indonesian Copy However, this cannot be said to negate consent from the side of Dr. Budiamman. This is because after the contract had been duly drawn up, a photocopy of the English and Bahasa Indonesian version of the contract was provided to Dr. Budiamman the very next day to review. Further, since Dr. Budiamman had pursued his studies in the United States of America, it can be reasonably assumed that he was well-versed in the English language It is further submitted that around four months after signing of the contract, Dr. Budiamman began the operations for the Indonesian franchisee of the Great Wall Noodle Shop After receiving the contracts for review, Dr. Budiamman never expressed any objection to the terms and conditions of the contract In the present scenario it would be only reasonable to assume that in the span of four months, Dr. Budiamman would have thoroughly gone over the contract and found out MEMORIAL FOR THE CLAIMANT Page 10

26 if he had any reservations to any term of the same. However, since no objection was raised from his side and he duly began operations of the Indonesian restaurants, it can be deemed through his conduct that has accepted the provisions of the contract and he cannot arbitrarily withdraw from the same, when the time for discharge of obligations has come. MEMORIAL FOR THE CLAIMANT Page 11

27 ISSUE III: ARTICLE 31 OF LAW 24 OF 2004 OF THE REPUBLIC OF INDONESIA DOES NOT RENDER THE FRANCHISEE AGREEMENT INVALID 3.1 Signature requirement is not absolute Article 31(1) of Law No.24/2009 of Indonesia stipulates that Indonesian must be used in agreements that involve (inter alia) individuals who are the citizens of the Republic of Indonesia However, it is submitted that it is an accepted principle in international Arbitration that if an agreement is in writing, it need not be signed. 24 The reasoning behind this well-accepted principle is that the most minimal indication of the parties intent to arbitrate must be given full effect. 25 Forcing Indonesian parties to draft all of their agreements in Indonesian language may cause unnecessary risk due to the ambiguity arising from translations. In the present matter, the agreement between the Dr. Budiamman and Mr. Wang was drawn up in both English and Bahasa Indonesian for the benefit of the former party. It is duly accepted that Dr. Budiamman had failed to sign the latter and only singed the English version However, the application of the aforementioned principle of minimal indication theory completely negates the requirement of a signature on the Bahasa Indonesian Copy of the Agreement. The fact that Dr. Budiamman provided his signature to the English version of the contract signifies his intent to enter into the said contract and be bound by all the terms and conditions of the same A perusal of the law requiring the signature of the parties in both English and Bahasa Indonesia clearly shows that the intention of the legislature was to ensure that the parties entering into the contract clearly understood the terms. In the present, Dr. Budiamman was a surgeon who had studied in the US and therefore it can be presumed that he understood the English language clearly and comprehended the 24 Fisser v. International Bank, 282 F.2d 231, 233 (2d cir. 1960) 25 Republic of Nicragua v. Standard Fruit Co., 937 F.2d 469, 478 (9 th Cir. 1991) MEMORIAL FOR THE CLAIMANT Page 12

28 exact terms of the contract drafted in English. Hence, the contract cannot be said to be invalid due to the lack of signature of one of the contracting parties. MEMORIAL FOR THE CLAIMANT Page 13

29 ISSUE IV: A PROPER AND TIMELY NOTICE OF TERMINATION WAS GIVEN TO THE RESPONDENT (DR. BUDIAMMAN) Under Singapore Law 4.1 Reasonable Notice of Termination A reasonable period for notice of termination is decided based on the point of view of two reasonable businessmen and the nature of the relationship in question 26 and what is sufficient time for the terminated party to find alternate arrangements. 27 When the Agreement has been executed and the franchise has been operating for sometime, the duration for period of notice can be quite short In the sent to the Respondent on 4 th November, 2011, the Claimant clearly notified the Respondent of their disapproval of these violations of the Agreement. They provided time to the Respondent to correct these errors. Mr. Ji had informed the Respondent about the violations during his visit, and it was after a period of five days that the notice of termination was sent The Claimant gave clear reasons to the Respondent for their disapproval of these variations from the Agreement, laying stress on the issue of uniformity. It is important in a franchise business to ensure that all the restaurants under the franchise name remain in perfect uniformity Another inspection was conducted two weeks later which showed that the Respondent was aware of the various violations. Yet, steps were not taken by the Respondent to ensure uniformity of the restaurant with the other restaurants under the same franchise. This action of the Respondent of not making due amendments in time lead to the termination of the Agreement by the Claimant. 26 Decro - Wall International SA v. Practioners in Marketing Limited, [1971] 1 WLR Paper Reclaim Ltd v. Aotearoa International Ltd, [2007] NZSC Ernest Gellhorn, Limitations on Contract Termination Rights: Franchise Cancellations, Duke Law Journal, Vol. 1967, No. 3 (Jun., 1967), p. 482, 483 MEMORIAL FOR THE CLAIMANT Page 14

30 The Claimant has followed proper procedure in the termination of the Agreement. The notice was sent to the Respondent on 4 th November, It was two weeks later that the inspector arrived at the restaurants, and it was after that that the Agreement was officially terminated by the franchisors. Thus, the termination period of fifteen days were given to the Respondent. It was fifteen days after that, as per the termination letter, that the restaurants were supposed to be shut down. The Claimant also provided the Respondent with enough time to correct the violations, which would stall the termination process. Therefore, it can be ascertained that the Respondent had been properly informed of the violations and as the Respondent was still violating the Agreement, the Claimant decided to follow their right pursuant to Article XIII B and terminate the Agreement, giving the Respondent a reasonable notice In the present case, the Respondent is a prominent surgeon and has kept up his practice even after signing the Agreement. The termination of the Agreement would not be such a loss as to completely deprive him of a proper means of income as he could still revert to his practice and it cannot be claimed that the said termination deprived him of his livelihood. 4.2 Proper Notice of Termination It is sufficient if the notice clearly represents the intention to rescind; it need not be formal and explicit. 29 A notice may be given by any means appropriate to the circumstances The Claimant expressly informed the Respondent via this that if the Respondent failed to make the necessary corrections to his operation of the two restaurants, the Claimant would terminate the Agreement, This clearly proves that the intention to terminate the Agreement was duly communicated to the respondents 29 McNeese v. McNeese, (1923) 190 Cal Article 1.10 (1), UNIDROIT Principles of International Commercial Contracts, 2010 MEMORIAL FOR THE CLAIMANT Page 15

31 fulfilling the requisites of a valid notice. The notice sent to the Respondent was a proper notice. The notice was duly received by the Respondent and thus, he was aware of this intention of the Claimant Thus, the Claimant has followed proper procedure and served the Respondent with a proper and timely notice of termination, including reasonable notice of termination and time to correct the violations as per the Agreement. Under Indonesian Law Indonesian Civil Code provides that all contracts can only be terminated by a court of law. 31 However, it is common practice in Indonesia to waive this particular provision. Had this Agreement been drafted directly under Indonesian Law, keeping in mind all its legislations and provisions and the common practice prevailing in Indonesia, the Agreement would have incorporated this waiver Upon such a waiver, the Claimant would have followed proper procedure and terminated the Agreement correctly, as they have already done. Thus, even if such a waiver has not been made, it can be ascertained that proper procedure to terminate the Agreement has been followed. 31 Article 1266, Civil Code of Indonesia MEMORIAL FOR THE CLAIMANT Page 16

32 ISSUE V: THE FRANCHISOR CAN TERMINATE THE AGREEMENT FOR A MATERIAL BREACH OF THE AGREEMENT, WHICH IS A SUBSTANTIAL VIOLATION OF THE AGREEMENT. Under Singapore Law 5.1 Fundamental Breach A contract does not have to be terminated only for a repudiatory breach; it can be terminated for a material breach as well. 32 A "material breach" is a breach that has a serious effect on the benefit that the innocent party would have otherwise derived from the contract Article XIII B of the Agreement allows the franchisor to terminate the Agreement for any substantial violation of the Franchise Agreement The reason for the termination of the Agreement by the Franchisor in this case is three-fold; firstly, due to the serving of Indonesian food in the restaurant which is unauthorized. Secondly, due to the substitution of pork with lamb by the Respondent, this, again, was not authorized by the Claimant. Thirdly, the wearing of the Hijab by the waitresses of both restaurants These clauses are all express terms of the Agreement, without which the Claimant would never have entered into the Agreement in the first place. A literal interpretation of the Agreement would then make it clear that the violation of these clauses would be a substantial violation of the Agreement, as a material breach of the Agreement would have occurred Therefore, the Claimant has correctly exercised the right to terminate the Agreement. The violations of the Agreement on the part of the Respondent were of as substantial nature as they were a material breach of the terms of the Agreement. Thus, the Agreement can be validly terminated based on these clauses. 32 Dalkhia Utilities Services Plc v. Celtech International Ltd., [2004] All ER (D) 197 (Feb) 33 National Power Plc v. United Gas Co. Ltd., [1998] All ER (D) 321 MEMORIAL FOR THE CLAIMANT Page 17

33 Under Indonesian Law The Indonesian Civil Code states that the aggrieved party has the option of demanding the other party to fulfill the Agreement or to terminate the Agreement, with or without compensation. 34 Further, the Civil Code also demands a literal interpretation of the Agreement where the words are straightforward, with no ambiguous meanings A literal interpretation of the Agreement shows that the abovementioned clauses, the violation of which has lead to termination of the Agreement, are terms that are essential to the Agreement, and thus, their violation would be a substantial violation of the Agreement Thus, the Claimant has rightly terminated the Agreement for substantial violation of the Agreement and not just any breach of the Agreement. 34 Article 1267, Indonesian Civil Code 35 Article 1342, Indonesian Civil Code MEMORIAL FOR THE CLAIMANT Page 18

34 ISSUE VI: THE INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING IN INTERPRETING AND APPLYING FRANCHISE AGREEMENTS DOES APPLY TO THIS FRANCHISE AGREEMENT, BUT IT IS NOT A DUTY TO PUT THE INTERESTS OF THE FRANCHISEE OVER THE FRANCHISOR. Under Singapore Law 6.1 Good Faith As long as the franchisor deals honestly and reasonably with the franchisee, the franchisee s interests are not paramount. Principles of good faith do not block use of terms that actually appear in the contract. 36 The KLRCA Rules 37 and the Singapore International Arbitration Centre Rules 38 both provide that the Arbitration Agreement will not be decided ex aequo et bono unless specifically provided for in the Agreement itself The Agreement, as per Article XII A clearly provides that the Agreement will not be decided ex aequo et bono The Claimant has followed the procedure under the Agreement. The Respondent was given due notice and time for the cure of the breach. A proper and timely notice, giving reasonable time for termination, was given to him. The Respondent was explicitly told the Agreement will be terminated in case of a continued breach. The Respondent did not take adequate steps to remedy the breach which lead to the termination. Therefore, there has been no mala fide act on the part of the Claimant. Under Indonesian Law The Civil Code of Indonesia recognises a statutory duty to act in good faith. 39 Civil Law systems as a general rule recognise the principle of inherent good faith and fair 36 Ontario Inc. c/o Harvey s Restaurant v. Cara Operations Ltd., B.L.R. (4 th ) Article 35, KLRCA Arbitration Rules, Article 27, SIAC Rules, SIAC Rules, Article 1338, Indonesia Civil Code MEMORIAL FOR THE CLAIMANT Page 19

35 dealing in the law of contracts. 40 However, the Code states that it is upon the alleging party to prove good faith; good faith will be presumed It has been proved already that the Claimant took requisite steps to inform the Respondent of the causes for the termination and so, mala fide intentions on the part of the Claimant do not exist accessed on 13/9/ , Civil Code of Indonesia MEMORIAL FOR THE CLAIMANT Page 20

36 ISSUE VI (A) :THE SERVING OF A SINGLE INDONESIAN DISH REFERRED TO AS THE SPECIAL OF THE DAY JUSTIFIED THE TERMINATION OF THE FRANCHISE. Under Singapore Law 6A.1.1. If a person s conduct is such as to lead a reasonable man to believe that he has bound himself to the contract, he must follow the other parties terms. 42 Signboards and menus must be operated only as according to the Agreement or directions of the Franchisors. 43 6A.1.2. The Agreement mandates that Respondent should not serve items that are not on the official menu of the Agreement. The Claimant has even previously directed the Respondent to stop the serving of all food items within the restaurant that are not of the official menu. GWNS is a Chinese food restaurant and thus, must serve Chinese food only. 6A.1.3. Therefore, the serving of a single Indonesian dish called Special of the Day goes directly against the Agreement and the directions of the Claimant. It is imperative for running of a Chinese food restaurant to sell only Chinese food, wherever it operates. Therefore, this system of the Special of the Day is a continued breach of the Agreement, giving the Claimant a just and reasonable cause for termination of the Agreement. 6A.1.4. The Claimant has taken this decision based on their reasonable business judgment and in good faith, as per Article X. 2. of the Agreement. They have been operating the GWNS LLC for more than twenty-five years and would have precise judgment in all matters relating to the functioning of all the GWNS restaurants. 42 Smith v. Hughes, [1871] LR 6 QB Jack Niemman s Schnitzel Baron Foods Ltd. v. Fuest, 9 CPR (3d) 561 MEMORIAL FOR THE CLAIMANT Page 21

37 Under Indonesian Law 6A.1.5. Claimant has followed all needed procedure, and it is for the Respondent to prove that there has been bad faith. 44 6A.1.6. The Claimant took their decision based on their reasonable business judgment and good faith as mandated by, Article X. 2., The fact that they are running the franchise for more than twenty-five years elucidates their expertise and commercial acumen while dealing with similar situations and it can be reasonably assumed that such good faith and business judgment was relied upon while terminating the Agreement on the abovementioned grounds. 44 Ibid. at 16 MEMORIAL FOR THE CLAIMANT Page 22

38 ISSUE VI (B): GIVING CUSTOMERS THE OPTION OF SUBSTITUTING LAMB FOR PORK FOR MENU ITEMS JUSTIFIED THE TERMINATION OF THE FRANCHISE. Under Singapore Law 6B.1.1. It is not the intention of the parties, but their assent to the contract that will determine the interpretation of the contract, 45 as Common Law interprets Contracts literally. 46 A formula for a soft drink must be mixed correctly; a method of losing weight must be taught correctly; a procedure for serving food quickly must be followed correctly. 47 6B.1.2. The Respondent has committed a breach of the Franchise Agreement by allowing the substitution of pork with lamb. The Respondent did not approach the Claimant for the sanctioning of this substitution as stated in the Agreement. 6B.1.3. A perusal of the official menu reveals that almost 33% of the dishes have pork as an ingredient to them. Substitution of lamb in place of pork alters 33% of the menu, which is a substantial part of the menu. 6B.1.4. Such alteration clearly shows that the words of Article III B of the Agreement state that the franchise will not have any right to use unauthorised ingredients. 6B.1.5. Indonesia is not a country ruled by Islamic Law. The situation would have been looked at differently had Indonesia been a theocratic state. In absence of any express law based on religious grounds, it is humbly requested to isolate religious sentiments from the issue at hand. 6B.1.6. Chinese dishes use pork as a key ingredient; pork is popular in Chinese food and gives it its distinct flavour. The purpose of the GWNS is to serve purely Chinese food. It is to enjoy this Chinese food that people come to the GWNS. Substitution of pork with lamb is a deviation from the literal terms of the Agreement. Serving of 45 AG Securities v. Vaughan [1990] 1 AC Pawel Moskwa, Interpretation of Commercial Contracts in the Future European Civil Code Objective or Subjective Method?, ELSA SPEL 2004 (1) 47 Hadfield K. Gillian, Problematic Relations: Franchising and the Law of Incomplete Contracts, Stanford Law Review, Vol. 42, No. 4 (Apr., 1990), pp MEMORIAL FOR THE CLAIMANT Page 23