Kuala Lumpur Regional Centre for Arbitration. Kuala Lumpur, Malaysia. The 2012 LAWASIA International Moot Competition. Great Wall Noodle Shop, LLC

Transcription

1 F1070-R Kuala Lumpur Regional Centre for Arbitration Kuala Lumpur, Malaysia The 2012 LAWASIA International Moot Competition Great Wall Noodle Shop, LLC (Claimant) V. Adi Budiamman, M.D. (Respondent) Memorial for Respondent

2 TABLE OF CONTENTS TABLE OF CONTENTS... I INDEX OF AUTHORITIES... IV STATEMENT OF JURISDICTION... 1 STATEMENT OF FACTS... 4 SUMMARY OF PLEADINGS... 7 PLEADINGS... 9 I. UNIDROIT PRINCIPLES REQUIRE INDONESIAN LAW TO BE APPLIED IN RESOLVING THIS DISPUTE... 9 A. Arbitral Tribunal Should Apply the Principles as the Governing Law of the Agreement Because the Principles Are a Successful Body of Law for International Commercial Transaction... 9 B. The Agreement s Applicable Law Clause Is Invalid Under Article of the Principles Due to Gross Disparity i. The Claimant gained excessive advantage by taking unfair advantage of the Respondent s inexperience in the franchise industry and lack of bargaining skill in negotiating long-term contracts ii. The nature and purpose of the Agreement gave the Claimant excessive advantage because applying Singaporean law would deprive the Respondent of franchise-specific laws of Indonesia C. Indonesian Law Is the Applicable Law under the Franchising Guide i. A reasonable relationship does not exist between Singapore and the Agreement or the parties to the Agreement ii. Indonesia has a reasonable relationship with the Agreement and with the parties to the Agreement because many substantive portions of the Agreement and the dispute in question occurred in Indonesia II. THE AGREEMENT IS VALID UNDER ARTICLE 31 OF INDONESIA S LAW NO. 24 OF I

3 III. THE ARBITRATION AGREEMENT IS VALID AND ENFORCEABLE, BUT THE RESTRICTION ON SPECIFIC PERFORMANCE SHOULD BE DISREGARDED BY THE ARBITRAL TRIBUNAL A. The Arbitration Clause Is Valid and Enforceable Under Indonesia s Arbitration and Dispute Resolution Act B. The Arbitration Clause Is Valid and Enforceable Under the International Arbitration Act of Singapore C. The Agreement s Specific Performance Clause Is Invalid and Should Be Disregarded by the Arbitral Tribunal i. The Specific Performance Clause is invalid under Indonesian law because the Claimant did not act in good faith ii. The Specific Performance Clause is invalid under Singaporean law because it violated the Unfair Contract Terms Act IV. TERMINATION OF THE AGREEMENT BY THE CLAIMANT WAS IMPROPER AND INVALID UNDER BOTH INDONESIAN AND SINGAPOREAN LAWS A. Notice of Termination of the Agreement Is Invalid as a Matter of Law Because the Dissolution of the Agreement Was Not Requested Through a Court B. Notwithstanding the Failure to Seek Court Approval for the Dissolution of the Agreement, the Alleged Nonconformities Did Not Warrant Termination of the Agreement 20 i. Claimant may only terminate the Agreement for substantial violations or for violations that substantially reduce the benefit of the contract ii. The inherent warranty of good faith and fair dealing should apply to the Agreement under both Indonesian and Singaporean laws iii. Claimant may not terminate the Agreement based on the female Muslim Employees wearing of the new hijabs Restriction against wearing of hijabs is invalid as a matter of law under the Indonesian Constitution and the International Covenant on Civil and Political Rights Restriction against wearing of hijab should be invalid under Singaporean law in observance of ICCPR and the Universal Declaration of Human Rights II

4 iv. Serving The Special of the Day did not justify the termination of the Agreement The Special of the Day was offered on a temporary basis and did not jeopardize the uniformity of the restaurants Claimant s restriction on The Special of the Day violated the duty of good faith and fair dealing by failing to observe the reasonable commercial standards of the franchise industry Authorized Menu Clause of the Agreement is unenforceable under Singapore s Competition Act of 2004 because the Claimant s restriction on The Special of the Day placed the Respondent at a competitive disadvantage v. Having the option to substitute lamb for pork for Menu Items did not justify the termination of the Agreement because the Respondent executed the Agreement in good faith vi. The above alleged nonconformities do not reflect a continuing disregard of the Respondent s obligations under the Agreement to justify termination of the Agreement PRAYER FOR RELIEF III

5 INDEX OF AUTHORITIES International Treaties and Conventions UNIDROIT Principles of International Commercial Contracts 10 United Nations, A United Nations Priority (1948) 25 United Nations, International Covenant on Civil and Political Rights (1966) 23, 24 United Nations, The Universal Declaration of Human Rights (1948) 25 Constitution The 1945 Constitution of the Republic of Indonesia 23 Indonesian Laws Indonesian Civil Code 17, 19, 20, 22, 29 Law No. 42 of Law No. 30 of Law No. 42 of Law No. 31 of Law No. 24 of Singaporean Laws International Arbitration Act (Chapter 143A) 16, 17 Unfair Contract Terms Act (Chapter 396) 18, 19 Cases JSI Shipping (S) Pte Ltd v. Teofoongwonglcloong [2007] SGCA Ng Giap Hon v. Westcomb Securities Pte Ltd and Others [2009] SGCA IV

6 PT Prima International Development v. Kempinski Hotels SA and other appeal [2012] SGCA Books Black s Law Dictionary (9th ed. 2009) 22, 27, 29 Born, Gary B., International Commercial Arbitration Vol Frederick, William H., GPO For The Library of Congress, Indonesia: A Country Study Kartakusuma, Galinar R., Remedies for Internalational Seller of Goods Vol. 2 UNIDROIT, Guide to International Master Franchise Arrangements (1998) 25, , 14 Scholarly Works and Articles Bonell, Michael Joachim, Towards a Legislative Codification of the UNIDROIT Principles? (2007) Carlsen, Anja, Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law? (1998) Carpinello, George F., Testing the Limitations of Choice of Law Clauses: Franchise Contracts as a Case Study (1990) Liu, Benjamin Pi-Wei, A Prisoner s Right To Religious Diet Beyond the Free Exercise Clause (2004) Perillo, Joseph M., UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and A Review (1994) Tumbuan, Fred B.G., Certain Indonesian Contract Law Principles That Are Relevant in International Arbitration (2008) Vignali, Claudio, McDonald s: Think Global, Act Local the Marketing Mix (2001) , 30 V

7 Independent Organization Publications American Law Institute, Restatement (Second) of Contracts , 29 Min, Yeo Tiong, Differences in English Law, New York Law, and Singapore Law Singapore Institute of International Affairs, What are Human Rights? The Nature & Sources of Human Rights Tan, Christopher & Kor, Sia Aik, Singapore Competition Law 28 Think Centre, Universal Periodic Review on Singapore 2 (2011) 26 Yin, Goh-Low Seon, Valerie De Toit-Low & Lee Kiat Seng, Singapore Insurance Law 22 Woan, Lee Pey, Pearlie Koh & Tham Chee Ho, Singapore Contract Law 21 Online Resources Anggraeni, Retno, Law on Flag, Languages, State Symbol and National Anthem Indonesia 15 Chooi, Yew Woon, Franchising in Singapore 11 Cornell University, Southeast Asia Program: Indonesian Food 29 Levy, Janet, Outlawing the Pig 29 McDonald s Official Website 30 Shah, Dhawal, India: Market for the Masses 27, 30 Wilgoren, Jodi, A Nation Challenged: Arab Americans; Struggling to Be Both Arab and American 29 VI

8 STATEMENT OF JURISDICTION The Great Wall Noodle Shop, LLC has submitted the present franchise dispute before the Kuala Lumpur Regional Centre for Arbitration ( KLRCA ), pursuant to the terms of the arbitration agreement between the Parties and the KLRCA Fast Track Rules. Dr. Budiamman, as the Respondent, does not challenge the authority of the Arbitral Tribunal. 1 The Parties shall accept any Judgment of the Tribunal as final and binding upon them and shall execute it in its entirety and in good faith. 1 Second Clarifications 9, 10. 1

9 QUESTIONS PRESENTED I. Whether Singapore, Indonesia, or some other law should be applied in resolving this dispute. II. Whether the Franchise Agreement is invalid under Article 31 of Indonesia s Law No. 24 of III. Whether Article XII of the Franchise Agreement (Dispute Resolution) is invalid and/or unenforceable because it authorizes specific performance for the Franchisor while prohibiting the same for the Franchisee. IV. Whether the termination of the Franchise Agreement was proper. More specifically: A. Whether a proper and a timely Notice of Termination was given to the Franchisee. B. Whether the Franchisor may terminate the Franchise Agreement for only substantial violations or for any violations. C. Whether the inherent warranty of good faith and fair dealing apply in interpreting and applying the Franchise Agreement. If so: 1. Whether wearing of the new hijabs by the female Muslim employees justified the termination of the franchise, 2. Whether serving of a single Indonesian dish called The Special of the Day justified the termination of the franchise, 3. Whether giving customers the option of substituting lamb for pork for menu items justified the termination of the franchise, and 4. Whether the above alleged nonconformities of the Franchise Agreement reflect a continuing disregard of the Franchisee s obligations under the Franchise Agreement to justify its termination. 2

10 V. Whether the employment regulation prohibiting the wearing of hijabs by female Muslim employees violated the Constitution and/or laws of Indonesia or any international treaties to which Indonesia is a member. 3

11 STATEMENT OF FACTS Mr. Ji and Mr. Wang are the founders and co-owners of the Great Wall Noodle Shop, LLC ( Claimant ). Over the past twenty-five years, the Claimant has franchised its restaurants throughout China, Singapore, and Malaysia. On June 20, 2011, Dr. Budiamman ( Respondent ), a prominent surgeon, met Mr. Wang while waiting for his return flight at Changi Airport in Singapore. When the Respondent learned that Mr. Wang had just failed to convince a franchise owner from Singapore to expand into Indonesia, the Respondent became interested in the opportunity. As his flight was being called for boarding, the Respondent uttered excitedly that he would like to operate the restaurants in his spare time. The respondent quickly asked, Where do I sign? The Agreement Mr. Wang immediately produced a copy of the franchise agreement ( Agreement ) that was intended for another party. Mr. Wang simply substituted the Respondent s name on the Agreement. The Respondent did not have time to review the entire Agreement, including the sections labeled Authorized Menu, Authorized Products and Ingredients, Dispute Resolution, and Default and Termination. However, Mr. Wang explained the fee arrangements in detail. Although Mr. Wang suggested that the Respondent take the Agreement home to review it, the Respondent signed the Agreement, referring to the contents as, lawyer mumbo jumbo. The Claimant sent over a photocopy of the original English and a Bahasa Indonesia copy of the Agreement to the Respondent the next day. 4

12 By September 2011, the Respondent opened two franchises in Indonesia one in Jakarta and one in Medan. While both locations were successful, the Jakarta location fared significantly better than the one in Medan. In an thread between Mr. Ji and Mr. Wang, Mr. Ji mentioned, [t]he 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. The Alleged Nonconformities In late October, Mr. Ji made an unannounced visit to both locations with his wife. Mr. Ji observed that the Respondent, in addition to the official menu, offered a Special Menu with traditional Indonesian dishes to customers who requested one. Moreover, the restaurant allowed for the substitution of pork for lamb in all dishes. Mr. Ji also noticed that some female Muslim employees in the Jakarta restaurant and almost all the female employees in the Medan restaurant wore a hijab. The Respondent explained that he felt obliged to approve his employees request to wear the hijab. Also, the Respondent s wife specifically selected a red hijab to match the official uniform. Mr. Ji s wife commented that the hijab matched the uniforms quite well. After returning home, Mr. Ji sent an to the Respondent about his visit. Mr. Ji specified that the Respondent had not received permission to sell food items not on the Authorized Menu, and that the Respondent cannot be given such permission. Mr. Ji also stated that the Claimant s restriction against wearing hijabs had nothing to do with religion; rather, he feared that allowing any deviations from the Agreement would encourage other locations to change their operations as well. In his , Mr. Ji also threatened to shut down the franchise if the Respondent did not immediately fix the alleged nonconformities. 5

13 Two weeks later, Mr. Ji hired an inspector to visit the Respondent s franchises. The inspector reported that a single Indonesian dish written in Bahasa Indonesia on a chalk board was offered in each restaurant. The inspector also noted that the employees began wearing white headscarves, as the Respondent had requested the female employees to wear something less noticeable than the red hijabs. Termination of the Agreement The day after receiving the inspector s report, the Claimant sent a letter to the Respondent terminating the Agreement. The Claimant demanded that the Respondent shut down both restaurants and remove the signage within fifteen days. The Claimant also indicated that it planned to reopen the Jakarta restaurant within thirty days under new management, but that no decision had been made for the Medan location. The Jakarta location was reopened under the management of Mr. Wang s son, who is also the CFO of the Claimant. The Arbitration The Claimant seeks a restraining order against the Respondent and damages for breach of the Agreement, trademark infringement, and damage to the reputation of the Claimant. The Respondent has filed a response denying the allegations and counterclaims for breach of Agreement and damage to his reputation. 6

14 SUMMARY OF PLEADINGS I. Indonesian law should apply in resolving this dispute. The Principles govern the validity of the Agreement because the Principles are a successful body of law for international commercial transaction. As such, the Applicable Law Clause of the Agreement is invalid under Article of the Principles due to gross disparity. Instead, the Franchising Guide dictates that Indonesian law should apply here because a reasonable relationship exists between Indonesia and the Agreement and the parties to it. II. The Agreement is valid under Article 31 of Indonesia s Law No. 24 of If an agreement involves a foreign party, the agreement should be written in Bahasa Indonesia and in the foreign party s language and/or in English. This requirement was satisfied because the Agreement was written in English and a copy in Bahasa Indonesia was delivered to the Respondent the next day. III. The Arbitration Agreement is valid and enforceable, without the restriction on specific performance for the Respondent. The Arbitration Clause is valid and enforceable under Indonesia s Arbitration and Dispute Resolution Act and Singapore s International Arbitration Act. However, the Agreement s Specific Performance Clause is invalid and should be disregarded. The Claimant entered the Specific Performance Clause into the Agreement in bad faith, which violated the Unfair Contract Terms Act. 7

15 IV. The termination of the Agreement was improper and invalid. The Notice of Termination is invalid as a matter of law because the dissolution of the Agreement was not requested through a court. Notwithstanding such failure, the Claimant may only terminate the Agreement for substantial violations or for violations that substantially reduce the benefit of the contract. In evaluating possible violations, the inherent warranty of good faith and fair dealing should apply. The wearing of hijabs by the female Muslim employees did not justify the termination because such restriction is invalid as a matter of law. Serving The Special of the Day did not justify the termination because it was offered on a temporary basis and did not jeopardize the uniformity of the restaurants. The Claimant s restriction against The Special of the Day also violated the duty of good faith and fair dealing. Additionally, such restriction is unenforceable under Singapore s Competition Act of Having the option to substitute lamb for pork did not justify the termination because the Respondent executed the Agreement in good faith. Lastly, the above alleged nonconformities do not reflect a continuing disregard of the Respondent s obligation under the Agreement to justify its termination. V. The employment regulation prohibiting the wearing of hijabs by female Muslim employees violated the Constitution of Indonesia and the ICCPR The Constitution of Indonesia states that freedom of religion cannot be limited under any circumstances. This includes freedom of worship, according to his or her religion. Similarly, the ICCPR protects everyone s right to freedom of thought, conscience and religion. While the Claimant did not restrict the wearing of hijabs based on religious reasons, such restriction nonetheless violated the protection prescribed by the Constitution of Indonesia and the ICCPR. 8

16 PLEADINGS I. UNIDROIT PRINCIPLES REQUIRE INDONESIAN LAW TO BE APPLIED IN RESOLVING THIS DISPUTE. The Agreement s choice-of-law provision under Section XII-B states that: This agreement and the parties right under it and the relationship between the parties shall be governed by, and will be interpreted in accordance with the laws of Singapore. You specifically waive any rights and protections that might be provided through the laws of any other country including the place where the franchise is operated. ( Applicable Law Clause ). While the Respondent does not dispute the applicability of KLRCA or its Fast Track Rules 2, the Applicable Law Clause of the Agreement is invalid under The UNIDROIT Principles of International Commercial Contracts ( Principles ). Furthermore, The UNIDROIT Guide to International Master Franchise Arrangements ( Franchising Guide ) dictates that Indonesian law be applied in this dispute. A. Arbitral Tribunal Should Apply the Principles as the Governing Law of the Agreement Because the Principles Are a Successful Body of Law for International Commercial Transaction. The International Institute for the Unification of Private Law ( UNIDROIT ) drafted the Principles. Although the Principles were prepared as soft law instruments, the reception has been extremely favorable. 3 The Principles were recognized as a significant step towards the globalization of legal thinking. 4 The UNIDROIT consists of sixty-three countries, including China and Indonesia. Considering both parties to the Agreement are citizens of China or Indonesia, and the Principles are regarded favorably by the international community, the Arbitral Tribunal should apply the Principles as the governing law of the Agreement. 2 Second Clarifications 9. 3 Michael Joachim Bonell, Towards a Legislative Codification of the UNIDROIT Principles?, 16 REV. DR. UNIF. 233, 234 (2007); see Anja Carlsen, Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law?, PACE LAW SCHOOL (August 24, 2012, 2:13 PM), 4 Joseph M. Perillo, UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and A Review, 63 FORDHAM L. REV. 281, 282 (1994). 9

17 B. The Agreement s Applicable Law Clause Is Invalid Under Article of the Principles Due to Gross Disparity. Article of the Principles states: A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. 5 To determine if a party is given an excessive advantage, Article explicitly considers two factors: whether a party has (a) taken unfair advantage of the first party s... improvidence, ignorance, inexperience or lack of bargaining skills, and (b) the nature and purpose of the contract. 6 If a party is entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing. 7 i. The Claimant gained excessive advantage by taking unfair advantage of the Respondent s inexperience in the franchise industry and lack of bargaining skill in negotiating long-term contracts. Here, the Claimant took unfair advantage of the Respondent. The Respondent is a prominent surgeon with limited experience in operating franchise restaurants. In fact, the Respondent s only experience in the restaurant industry comes from working at a Chinese restaurant in Singapore while he was in college. Also, the Respondent s carelessness and ignorance were apparent when the Respondent referred to the language in the Agreement as, lawyer mumbo jumbo, and signed the Agreement. Additionally, the Claimant possessed bargaining skills than the Respondent at the conclusion of the Agreement. First, the Claimant has been operating and expanding the franchise for more than twenty-five years in multiple countries. The Respondent on the other hand, possessed no practical business experience in negotiating long-term contracts. While the 5 UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS Article 3.2.7(1) (emphasis added) (2010). 6 Id. at 3.2.7(1)(a)-(b). 7 Id. at 3.2.7(2). 10

18 Respondent may have understood the fee arrangements of the Agreement and supervised all the billings in his medical office 8, this experience is unrivaled by the bargaining skills of the Claimant. Based on the reasons set forth above, the Claimant has clearly taken unfair advantage of the Respondent under Article 3.2.7(1)(a) of the Principles. 9 ii. The nature and purpose of the Agreement gave the Claimant excessive advantage because applying Singaporean law would deprive the Respondent of franchise-specific laws of Indonesia. The comment to subsection (b) of Article 3.2.7(1) states that [t]here are situations where an excessive advantage is unjustifiable even if the party who will benefit from it has not abused the other party s weak bargaining position, depending on the nature and purpose of the contract. 10 The purpose of the Agreement is to govern franchising of the Claimant s restaurant. Singapore does not have specific laws governing franchising. 11 However, Indonesia has specific laws governing franchising, such as a government regulation and a decree from the Minister of Trade. 12 Consequently, applying Singaporean law might have adverse effects. For example, The Government Regulation No. 42 of 2007 of Indonesia ( Regulation No. 42 ) imposes specific disclosure requirements on franchisors. 13 Under Chapter IV, Article 7 of the Regulation No. 42, franchisors must disclose, among other things, information regarding history of business activities, list of franchisees, and financial statement in the last two years. 14 By applying Singaporean law which does not have specific laws governing disclosure of 8 First Clarifications C Principles 3.2.7(1)(a). 10 Principles 3.2.7(1)(b) cmt. (2010). 11 Yew Woon Chooi, Franchising in Singapore, FRANCHISING AND LICENSING ASSOCIATION (SINGAPORE), (August 30, 2012, 10:00 AM) 12 Peraturan Pemerintah No. 42/2007 Ch. IV, Article 7 (No. 42 / 1997) [Law 42 of 1997] (Indonesia); Regulation of Minister of Trade Decree No. 31/M-DAG/PER/8/2008 (No. 31 / 2008) (Indonesia). 13 Law 42 of 1997 Ch. IV, Article Id. at Ch. IV, Article 7. 11

19 information for franchising the Respondent will not be protected from financially-unstable or over-expanding franchises. Also, Indonesia would be stripped of its privilege to control its domestic franchise industry. In discussing the results of choice-of-law clauses in franchise contracts, one author states that: choice of law clauses is often to deprive the franchisee of protective legislation, specifically enacted by the franchisee s own legislature for the purpose of addressing the imbalance in bargaining power between the franchisor and franchisee, and to protect the franchisee from what the legislature deems to be unfair or coercive tactics by the franchisor. 15 As discussed above, such policy concern is strong here. For instance, the Respondent had no bargaining power in choosing the Applicable Law Clause. Additionally, applying Singaporean law would deprive the Respondent from being protected under the franchise-specific Indonesian laws. The nature and purpose of the Agreement dictate that Singaporean law should not be used here. Conclusion In short, the Applicable Law Clause of the Agreement is an excessive advantage [that] is unjustifiable. 16 The Claimant gained excessive advantage by taking unfair advantage of the Respondent s inexperience in the restaurant industry and lack of bargaining skill in negotiating long-term contracts. Also, the nature and purpose of the Agreement gave the Claimant excessive advantage because applying Singaporean law would deprive the Respondent of franchisespecific laws of Indonesia. Overall, the Applicable Law Clause should be voided because such term will unjustifiably give the Claimant an excessive advantage. 15 See generally George F. Carpinello, Testing the Limitations of Choice of Law Clauses: Franchise Contracts as a Case Study, 74 MARQ. L. REV. 57 (1990). 16 Principles 3.2.7(1)(b) cmt. (2010). 12

20 C. Indonesian Law Is the Applicable Law under the Franchising Guide. The Franchising Guide states that a reasonable relationship should exist between the law of the state chosen and the master franchise agreement or the parties to it. 17 A reasonable relationship should exist because the parties will have to comply with any particular legislation of the jurisdiction in which the franchise business is to be exploited... that enshrin[es] domestic public policy, such as competition laws and consumer protection and foreign investment laws. 18 i. A reasonable relationship does not exist between Singapore and the Agreement or the parties to the Agreement. The parties entered into the Agreement at Singapore s Chanqi Airport. However, this factor alone is negligible in determining Singapore s relationship with the transaction. More specifically, the Respondent happened to be present at the airport, without the intention of meeting Mr. Wang. The same can be said for Mr. Wang, who in fact was carrying a copy of the Agreement intended for a third party. Given this wholly fortuitous circumstance surrounding the signing of a contract, it is clear that the parties did not plan to execute the Agreement in Singapore. Additionally, neither contractual obligations nor substantial events under the Agreement take place in Singapore. The Claimant s franchise was neither founded nor managed by coowners located in Singapore. While there are other franchise restaurants in Singapore, those locations are unrelated to the Agreement in question and to the Respondent. There is no reasonable relationship between Singapore and the Agreement or the parties to the Agreement. 17 UNIDROIT, GUIDE TO INTERNATIONAL MASTER FRANCHISE ARRANGEMENTS, 198 (1998). 18 Id. at

21 ii. Indonesia has a reasonable relationship with the Agreement and with the parties to the Agreement because many substantive portions of the Agreement and the dispute in question occurred in Indonesia. The restaurants at the heart of this dispute are in Indonesia for several reasons. First, Indonesia is the principal and the only place of business of the Respondent s two restaurants. Second, the alleged nonconformities and the two inspections occurred in Indonesia. Third, the payments and business communications that took place prior to the attempted termination of the Agreement were made directly between the parties in China and Indonesia. It should be noted that the Claimant did know or should have known that most of the above stated events would occur in Indonesia. Considering that the Respondent s two restaurant locations were scheduled to open in Indonesia, the Claimant should have reasonably known given his twenty-five years of experience in operating the franchise. Lastly, choosing Indonesian law also addresses the concern of having to comply with the local legislations and not violating any domestic public policy. 19 For example, the Government Regulation of Indonesia discussed in Section I-B-ii protects domestic public policy. The same is not true for China or Singapore since the Respondent s two restaurants are actually located in Indonesia. Conclusion Overall, Indonesian law is the applicable law to govern the Agreement under the Franchising Guide. While Singapore lacks a reasonable relationship to the Agreement or the parties to the Agreement, Indonesia has a strong connection to the Agreement and the parties to the Agreement. All substantive transactions under the Agreement occurred in Indonesia, including operations of the restaurants and the alleged nonconformities. 19 Id. at

22 II. THE AGREEMENT IS VALID UNDER ARTICLE 31 OF INDONESIA S LAW NO. 24 OF The Republic of Indonesia ratified Law No. 24 of 2009 to create a standard law that regulates the use and penalty of misuse of national attributes. 20 Article 31(1) of Law No. 24 states that, Indonesian language must be used in the memorandum of understanding or any agreement that is involving... individual citizen of Indonesia. 21 Furthermore, paragraph (2) states that if the memorandum of understanding or the agreement involves a foreign party, the agreement should also be written in the foreign party s language and/or in English. 22 Here, the Agreement that the Claimant and the Respondent entered into was written in English. While the Respondent did not have a chance to review the Agreement in Bahasa Indonesia, the Respondent received a copy of the Agreement in Bahasa Indonesia the next day. Additionally, no law governs the penalty and sanction for violating Article 31 of Law No Therefore, even if the formation of the Agreement violated Article 31 of Law No. 24, the Agreement is still valid. Overall, the Agreement is valid under Article 31 of Law No. 24 of III. THE ARBITRATION AGREEMENT IS VALID AND ENFORCEABLE, BUT THE RESTRICTION ON SPECIFIC PERFORMANCE SHOULD BE DISREGARDED BY THE ARBITRAL TRIBUNAL. The Agreement s arbitration provision under Section XII, Dispute Resolution, states that any dispute arising out of the Agreement shall be settled by arbitration in accordance with the Kuala Lumpur Regional Centre for Arbitration Fast Track Rules ( Arbitration Clause ). The Agreement s Section XII prohibits the granting of specific performance if the Claimant breaches the Agreement, while reserving the Claimant s right to request specific performance in the event 20 Retno Anggraeni, Law on Flag, Language, State Symbol and National Anthem Indonesia, HG.ORG (Aug. 14, 2012, 12:15 PM), 21 Id. 22 Id. 23 Id. 15

23 that the Respondent breaches or threatens to breach the Agreement ( Specific Performance Clause ). While the Arbitration Clause is valid and enforceable under both Indonesian and Singaporean laws, the Specific Performance Clause is not valid, and should be disregarded by the Arbitral Tribunal. A. The Arbitration Clause Is Valid and Enforceable Under Indonesia s Arbitration and Dispute Resolution Act. Article 4 of the Law No. 30 of 1999, Indonesia s Arbitration and Dispute Resolution Act ( Indonesia s Arbitration Act ), states that arbitrators have the authority to determine awards when the parties have agreed to arbitration. 24 The Indonesia s Arbitration Act further states that the parties are free to refer to any national or international arbitration institution. 25 The Agreement s Arbitration Clause designates KLRCA as the arbitration institution that governs the dispute. Also, neither the Claimant nor the Respondent challenges the authority of the Arbitral Tribunal. 26 As such, the Arbitration Clause is valid and enforceable under Indonesia law. B. The Arbitration Clause Is Valid and Enforceable Under the International Arbitration Act of Singapore. The International Arbitration Act of Singapore, Chapter 143A, ( IAA ), has the force of law in Singapore in governing international arbitrations. 27 Under the IAA, arbitration is international if at least one of the parties has its place of business in any state other than Singapore, at the time the arbitration agreement was concluded. 28 The IAA states that parties may resolve disputes by arbitration as long as the parties have agreed to do so unless the 24 Law No. 30 of 1999 of the Republic of Indonesia, Aug. 12, 1999, translated in Arbitration Chambers, Indonesia s Arbitration and Dispute Resolution Act, Arbitration Chambers (last visited Sept. 15, 2012), (referring to Article 4). 25 Id. (referring to Article 34). 26 Second Clarifications 9, International Arbitration Act (Chapter 143A) art. 3(a) (Act No. 23 / 1994) (Sing.). 28 Id. at 5(2)(a). 16

24 arbitration agreement is contrary to public policy. 29 Public policy, however, is related to enforceability of an arbitration award, not enforceability of arbitration agreements. 30 Here, both the Respondent and the Claimant have stores outside of Singapore. As argument against public policy cannot be made since no arbitration award has yet been made. As such, the dispute on hand is a valid international arbitration. C. The Agreement s Specific Performance Clause Is Invalid and Should Be Disregarded by the Arbitral Tribunal. i. The Specific Performance Clause is invalid under Indonesian law because the Claimant did not act in good faith. Article 1338 of the ICC states that, [a]ll legally executed agreements shall bind the individuals... [and] they shall be executed in good faith. 31 Although the unconscionability doctrine is not generally applied in Indonesian law, Indonesian courts have either reduced or extended the obligations in contracts based on the doctrine of good faith. 32 Furthermore, the duty to act in good faith not only applies to the performance of the contract, but also to the formation of the contract. 33 Good faith in the formation of the contract implies that the contract should have fair clauses and have benefit for both parties. 34 Here, the Claimant acted in bad faith by including the Specific Performance Clause in the Agreement. Inclusion of such a clause was bad faith because it made the Agreement vulnerable to potential exploitation. For example, the Specific Performance Clause would not allow the Respondent to keep the franchise restaurants, even if the Claimant breached the Agreement. The 29 Id. at 11(1). 30 PT Prima International Development v. Kempinski Hotels SA and other appeals, [2012] SGCA 35 (Sing., Court of Appeal), citing Gary B. Born, INTERNATIONAL COMMERCIAL ARBITRATION vol. 1 page 835 (Kluwer Law International, 2009). 31 CODE CIVIL art (Indonesia). 32 Galinar R. Kartakusuma, Indonesia, in 2 REMEDIES FOR INTERNATIONAL SELLERS OF GOODS 173, 178 (Dennis Campbell ed., 2007). 33 Fred B.G. Tumbuan, Certain Indonesian Contract Law Principles That Are Relevant in International Arbitration, 3 Indonesia Arbitration 19, 23 (2008) (Indonesia). 34 Id. at

25 Claimant may intentionally breach the Agreement in order to take the restaurants from the Respondent if they are found to be profitable. Alternatively, the Claimant can accuse the Respondent of allegedly breaching the Agreement when no such breach has taken place. In an thread accidentally forwarded to the Respondent, Mr. Ji and Mr. Wang mentioned that [t]he 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. Thereafter, the Claimant terminated the Agreement based on alleged nonconformities by the Respondent. Although these facts do not show bad faith alone, the Claimant s subsequent actions do show bad faith. After the Agreement s termination, the Jakarta location reopened under the management of Mr. Wang s son. However, the Medan location did not reopen. Based on the unfolding of the events above, the Specific Performance Clause was less than fair and did not benefit both. This is bad faith in the formation of the contract. The Agreement s Specific Performance Clause is invalid and should be disregarded by the Arbitral Tribunal. ii. The Specific Performance Clause is invalid under Singaporean law because it violated the Unfair Contract Terms Act. The Unfair Contract Terms Act ( UCTA ) prohibits contract terms that may limit or exclude business liability. 35 Article 1(3) of the UCTA defines business liability as, liability for the breach of obligation or duties arising from things done or to be done by a person in the course of business. 36 The UCTA prevents excluding or restrict[ing] any right or remedy in 35 Unfair Contract Terms Act (Chapter 396) (Original Enactment in United Kingdom 1977, c. 50, revised and adopted in May 20, 1994) (Sing.). 36 Id. at 1(3). 18

26 respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy. 37 As explained in Section III-C-ii, the Specific Performance Clause prejudices the Respondent by restricting the Respondent s remedy. More specifically, enforcement of the Specific Performance Clause prohibits the Respondent to maintain ownership of his restaurants regardless which party breaches the Agreement. Such restriction is a type of limitation on business liability that the UCTA was designed to prevent. The Specific Performance Clause is invalid under Singaporean law and should be disregarded by the Arbitral Tribunal. Conclusion Overall, the Arbitration Clause is valid and enforceable, but the Specific Performance Clause is invalid and should be disregarded. The Arbitration Clause is valid under Indonesia s Arbitration Act and the International Arbitration Act of Singapore. However, the Agreement s Specific Performance Clause is invalid due to Claimant s bad faith and its violation of the UCTA. IV. TERMINATION OF THE AGREEMENT BY THE CLAIMANT WAS IMPROPER AND INVALID UNDER BOTH INDONESIAN AND SINGAPOREAN LAWS. A. Notice of Termination of the Agreement Is Invalid as a Matter of Law Because the Dissolution of the Agreement Was Not Requested Through a Court. Article 1266 of the Indonesian Civil Code ( ICC ) stipulates that a party seeking to terminate a contract unilaterally must obtain a court approval. 38 Such request must be submitted, even if the agreement should express the condition of dissolution due to non-compliance with 37 Id. at 13(1)(b). 38 CODE CIVIL art (Indonesia). 19

27 the obligation. 39 Here, the Claimant attempted to terminate the Agreement unilaterally. However, the Respondent did not waive his rights under Article 1266 of the ICC. Therefore, as a matter of law, the termination of the Agreement by the Claimant was invalid under Indonesia law. B. Notwithstanding the Failure to Seek Court Approval for the Dissolution of the Agreement, the Alleged Nonconformities Did Not Warrant Termination of the Agreement. i. Claimant may only terminate the Agreement for substantial violations or for violations that substantially reduce the benefit of the contract. Even in the absence of the Article 1266 argument, the Claimant s termination of the Agreement is invalid and improper. The Agreement states that the Claimant has the right to terminate [the] Agreement for any substantial violation of the terms and conditions of [the] Agreement [the Claimant] deem substantial ( Termination Clause ). The wording of the Termination Clause suggests that violations of the Agreement must be substantial in order for the Claimant to have the right to terminate the Agreement. While the latter part of the Termination Clause could be interpreted as reserving the Claimant s right to decide which violations are substantial, this is not clear. Applying such interpretation permits the Claimant to terminate the contract for any violation, whether substantial or not. However, a simple and literal reading of the Termination Clause without the intention to cause confusion to the bounded parties suggests that any violation must be substantial for the Claimant to rightfully terminate the Agreement. Article 1349 of the ICC states that for contracts, [i]n the event of ambiguity, the agreement shall be interpreted against the party who stipulated something, and in favor of the party who has bound himself thereto Id. 40 Id. at

28 Here, if the Claimant s intended to reserve itself the right to terminate the Agreement for any violation, the Claimant could have explicitly stated such intention. In fact, the Claimant could have expressed such intention more clearly if the clause did not contain the word substantial at all. As for the Respondent, it would be more beneficial if the Agreement can only be terminated by a substantial violation. Accordingly, Article 1349 dictates that the Termination Clause should allow the termination of the Agreement by the Claimant only when violations are substantial. Alternatively, Singaporean law allows aggrieved parties to discharge contracts for actual breach if the breach deprives the aggrieved party of substantially the whole of the benefit of the contract. 41 Meaning, the contract will persist despite the breach, if the breach does not deprive the aggrieved party of substantially the whole of the benefit of the contract. 42 Therefore, to terminate a contract under Singaporean law, a violation of terms of conditions must not only be substantial, but also substantially reduce the benefit of the contract. In other words, an aggrieved party must be able to show that the effect of the violation was not inconsequential. Overall, the Claimant may not terminate the Agreement for any violation. Any nonconformity must be substantial under Indonesian law or substantially reduce the benefit of the Agreement under Singaporean law. ii. The inherent warranty of good faith and fair dealing should apply to the Agreement under both Indonesian and Singaporean laws. Under the duty of good faith and fair dealing, [e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. 43 The phrase good 41 Lee Pey Woan, Pearlie Koh & Tham Chee Ho, Singapore Contract Law, (last updated Apr. 30, 2009), (referring to Section ) (emphasis added). 42 Id. 43 Restatement (Second) of Contracts 205 (1981). 21

29 faith is defined as [a] state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage. 44 In Indonesia, [a]ll legally executed agreements... shall be executed in good faith. 45 More specifically, [a]greements shall bind the parties not only to that which is expressly stipulated, but also to that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs, or the law. 46 Therefore, when executing contract under the Indonesian law, parties should be mindful about conforming to socially acceptable conducts and customs. In Singapore, the contractual doctrine of good faith does not currently exist. 47 However, the principles and doctrines that perform similar functions as the doctrines of good faith in other jurisdiction exist in Singapore law. 48 For example, Singapore s insurance laws require parties to act in the utmost good faith towards each other before the contract is concluded. 49 In an insurer-insured relationship, the insurer is the dominant party while the insured is a subordinate party in terms of bargaining power. Similarly, a franchisor is the dominant party who has the bargaining power over a franchisee. Additionally, the dominant parties have the ability to cost-spread any loss arising from disputes. Based on such similarities, duty of good faith observed in other parts of Singapore laws should be extended to here. 44 BLACK S LAW DICTIONARY 762 (9th ed. 2009). 45 CODE CIVIL art (Indonesia). 46 Id. 47 Ng Giap Hon v Westcomb Securities Pte Ltd and Others, [2009] SGCA 14 (Sing., Court of Appeal) Yeo Tiong Min, Differences in English Law, New York Law, and Singapore Law, (last visited Sept. 15, 2012), See generally, JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm), [2007] SGCA 40 (Sing., Court of Appeal). 49 Goh-Low Soen Yin, Valerie Du Toit-Low & Lee Kiat Seng, Singapore Insurance Law, (last updated Apr. 30, 2009), (referring to Section ). 22

30 iii. Claimant may not terminate the Agreement based on the female Muslim Employees wearing of the new hijabs. 1. Restriction against wearing of hijabs is invalid as a matter of law under the Indonesian Constitution and the International Covenant on Civil and Political Rights. The wearing of hijab by the female Muslim employees did not justify the termination of the Agreement under Indonesian law because such restriction violates the Constitution of Indonesia and an international treaty to which Indonesia is a member. The unofficial translation of The 1945 Constitution of the Republic of Indonesia ( Constitution ) states that the freedom of religion along with other human rights cannot be limited under any circumstances. 50 More specifically, the Constitution states that [t]he State guarantees all persons the freedom of worship, each according to his/her own religion or belief. 51 Additionally, such prohibition violates the International Covenant on Civil and Political Rights ( ICCPR ). The ICCPR was adopted by the United Nations General Assembly in 1976 and currently has 167 parties, including the Republic of Indonesia. 52 Article 18 of the ICCPR states that [e]veryone shall have the right to freedom of thought, conscience and religion. This right shall include freedom to have or to adopt a religion or belief of his choice, and freedom... to manifest his religion or belief in worship, observance, practice and teaching. 53 It is clarified that such freedom may be subject only to such limitations as are prescribed by law and are 50 UNDANG-UNDANG DASAR REPUBLIK INDONEISA 1945 [UUU 45] [CONSTITUTION] Aug. 18, 1945, art. 28I (Indonesia). 51 Id. at United Nations, International Covenant on Civil and Political Rights, UNITED NATIONS TREATY COLLECTION (last visited Sept. 15, 2012, 10:40 PM), 4&chapter=4&lang=en International Covenant on Civil and Political Rights art. 18, Dec. 16, 1966, 999 U.N.T.S

31 necessary to protect public safety, order, health, or morals, or the fundamental rights and freedoms of others. 54 Here, some of the female employees in the Jakarta location and almost all of the female employees from the Medan location wore hijabs. The Respondent felt obligated to approve the wearing of the religious clothing when his employees asked for permission. However, the Claimant wrote to the Respondent that hijabs cannot be permitted in [the] restaurants as they will destroy the uniformity of... appearance of the restaurants and their employees and doing so, damage the identity and value of the Great Wall Noodle Shops trademarks. The Claimant also claimed that prohibiting the wearing of hijabs by female Muslim employees has absolutely nothing to do with religion. However, wearing of hijab is a part of observing the practice and teaching of the employees religion. So it follows that the Claimant is only allowed to limit that freedom if such observance contradicts Indonesia laws, public safety, order, health, or moral, or the fundamental rights and freedom of others. 55 However, the Claimant failed to indicate whether wearing of hijabs by the Respondent s employees violated any of the factors listed under Article 18 of the ICCPR. The Agreement requires that: All employees who have any contact with the customers while working in our restaurants to (i) wear uniforms of such color, design, and other specifications as Company may designate from time to time... (ii) Jewelry or other adornment which detracts from the uniform appearance of our employees must not be permitted. However, the Agreement does not explicitly prohibit religious clothing. It should also be noted that the pictured model is not wearing any headwear in the Agreement. 54 Id. 55 Id. 24

32 According to the data collected by the U.S. Library of Congress, over eighty-five percent of the Indonesian population is Muslim. 56 As a Muslim, the Respondent doubtlessly understood the importance of wearing a Hijab by his female employees. As a result, the Respondent appropriately approved the wearing of hijab by the female employees at work. Additionally, the Claimant neither suggests nor are there any indications that the wearing of Hijabs by the female employees violates any law of Indonesia or any of the limitations set forth in the ICCPR. Overall, the employment regulation prohibiting the wearing of religious clothing, including hijab, violates the Constitution of the Republic of Indonesia and an international treaty. 2. Restriction against wearing of hijab should be invalid under Singaporean law in observance of ICCPR and the Universal Declaration of Human Rights. The ICCPR was drafted as an international treaty that focused on specific issues focused in the United Nations Universal Declaration of Human Rights ( Declaration ). Similar to the ICCPR s Article 18 which discusses right to religion Article 18 of the Declaration states that: Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief, and freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship and observance. 57 The United Nations General Assembly unanimously adopted the Declaration on December 10, Although Singapore was not a state when the Declaration was adopted, Singapore s leaders have referred positively to the [Declaration] as the basis of international 56 GPO FOR THE LIBRARY OF CONGRESS, INDONESIA: A COUNTRY STUDY (William H. Frederick et al. eds., 1993) available at 57 United Nations, THE UNIVERSAL DECLARATION OF HUMAN RIGHTS (1948) (emphasis added). 58 United Nations, A United Nations Priority, HUMAN RIGHTS TODAY (last visited Sept. 14, 2012, 8:32 AM), (UDHR was adopted by the UN General Assembly on December 10, 1948 by a vote of 48 in favor, 0 against, 8 abstentions). 25