LAWASIA MOOT COMPETITION IN THE INTERNATIONAL COURT OF ARBITRATION BALI, INDONESIA GREAT WALL NOODLE SHOP LLC. Claimant ADI BUDJIAMAN, M.D.

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1 LAWASIA MOOT COMPETITION 2012 IN THE INTERNATIONAL COURT OF ARBITRATION BALI, INDONESIA GREAT WALL NOODLE SHOP LLC. Claimant v ADI BUDJIAMAN, M.D. Respondent MEMORIAL FOR THE RESPONDENT

2 TABLE OF CONTENTS TABLE OF CONTENTS... i STATEMENT OF JURISDICTION... vii QUESTIONS PRESENTED... viii STATEMENT OF FACTS...x SUMMARY OF PLEADINGS... xii PLEADINGS AND AUTHORITIES...1 I. INDONESIAN LAW IS THE PROPER LAW TO BE APPLIED IN THIS DISPUTE....1 A. A. The Choice-of-Law Clause in the Franchise Agreement should be disregarded by reason of public policy....1 A.1.Principle of Party Autonomy and Choice-of-Law clause...1 A.2. International public policy as a limitation to the party autonomy principle, particularly the choice-of-law clause...2 A.3. The choice-of-law clause contained in the agreement at bar is to be disregarded...2 B. B. Source of the Applicability of Indonesian Law...3 B.1. The KUALA LUMPUR REGIONAL CENTER FOR ARBITRATION (KLRCA) Fast Track Rules B.2. Determination of the conflict of laws rules the Cumulative Approach...4 B.3. The Singaporean Conflict of Laws rules point to the application of Indonesian law...5 B.4. The Indonesian Conflict of Laws rules point to the application of Indonesian law....6 B.5. The Malaysian Conflict of Laws rules point to the application of Indonesian law....6 II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE...7 A. The Arbitration Agreement is invalid since Dr. Budiamman s consent to the Arbitration Agreement is not unequivocally expressed....7 B. The Arbitration Agreement is unconscionable....8 i

3 C. The franchise agreement is invalid under Indonesian law specifically Article 31 of Law 24 of C.1. The mandate of Article 31 of Law 24 of C.2. The agreement is in violation of Art. 31thus, invalid under the Indonesian Civil Code D. Article XII of the Franchise Agreement is invalid and unenforceable D.1. The dispute resolution is invalid under Indonesian law because it can be construed as a provision which Dr. Budiamman would not have anticipated in a Franchise Agreement D.2. The dispute resolution clause under the Franchise Agreement is not in accord with the basic precepts of good faith and fair dealing D.3. Assuming arguendo that Singaporean Law will apply: E. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not comprise sufficient cause for termination, hence the requirement of notice is rendered moot E.1. Assuming that there are grounds for termination, the notice of termination given is invalid under the Indonesian Contract Law i. Notice of Termination issued violates Art of the Indonesian Civil Code ii. The notice was untimely issued III. THE FRANCHISOR MAY NOT TERMINATE THE FRANCHISE FOR A SUBSTANTIAL VIOLATION OF THE AGREEMENT A. The right to terminate based on substantial violation granted by the Franchise Agreement is a catch-all stipulation contrary to the remedies provided under specific provisions IV. THE INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING IN INTERPRETING AND APPLYING FRANCHISE AGREEMENTS APPLIES TO THIS FRANCHISE AGREEMENT A. The serving of a single Indonesian dish referred to as The Special of the Day do not justify the termination of the franchise B. The giving of customers the option of substituting lamb for pork for menu items does not justify the termination of the franchise ii

4 C. The wearing of the new (white) Hijab by the female Muslim employees does not justify the termination of the franchise D. The above violations of the Franchise Agreement do not reflect a continuing disregard of the franchisee s obligations under the Franchise Agreement to justify its termination V. AN EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION VIOLATES THE CONSTITUTION AND/OR LAWS OF INDONESIA OR ANY INTERNATIONAL TREATIES TO WHICH IT IS A MEMBER PROVIDED SUCH PROHIBITION CONSTITUTES DISCRIMINATION AGAINST AN EMPLOYEE A. The legal authorities and the general obligation of the state against discrimination A.1. The Indonesian Constitution A.2. The Indonesian Labor Law A.3. The International Treaties and/or Conventions ratified by Indonesia B. Employment regulation; when discriminatory CONCLUSION AND PRAYER iii

5 INDEX OF AUTHORITIES Laws, Treaties, Conventions Convention Concerning Discrimination in Respect of Employment and Occupation of Employment Equality Regulations Indonesia Conflict of Laws 14 Indonesia Law 24 of Malaysia Conflict of Laws 14 Singapore Law of Contracts 21 Singapore Conflict of Laws 13 The Decree of the Minister of Industry and Trade Concerning the Provisions on and the Procedure for the Implementation of Franchised Business Registration 18 The ICESCR 34 The Indonesian Civil Code 18, 19, 22, 29 The Indonesian Constitution 34 The Indonesian Labor Law 34 The KLRCA Fast Track Rules of , The UNCITRAL Arbitration Rules of , The UNIDROIT Principles 20, 21, 29, 30 United Nations Conference on Trade and Development 10 Articles & Books An Investor s Perspective, Tengku Nathan Machmud 16 Black s Law Dictionary 25 iv

6 Committee on International Commercial Arbitration of the ILA, above n 62, 3 [11] 10 Definitions - Copyright by Gerald N. Hill and Kathleen T. Hill 23 Nigel Blackbaby and Constatine Partasides with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration (Oxford University Press, 5 th ed, 2009), 85 9 Practical Law, Multi-jurisdictional Guide , Labor and Employee Benefits; Nafis Adwani and Freya Weston, Ali Budiardjo, Nugroho, Reksodiputro 35 Silberman, Linda & Ferrari, Franco, Getting to the Law applicable to the Merits in International Arbitration and the Consequences of Getting it Wrong; September The Indonesian Production Sharing Contract: The Indonesian Law of Contracts by Prof. Dr. C.F.G. Sunaryati Hartono, SH 30 The Islamic Veil and Freedom of Religion, the Rights to Education and Work: a Survey of Recent International and National Cases 37 West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. 23 Cases Québec Inc. v. Fafard, Court of Appeal of Quebec, Canada, 31 March 2004, [2004] 16 Andrés v. Díez Carrillo S.L., Audiencia Provincial de Palma de Mallorca (sección 5ª), Spain, 5 October Bonython v Commonwealth of Australia [1951] AC 201 (Privy Council on appeal from Australia), at page v

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8 STATEMENT OF JURISDICTION At the request of the claimant, Great Wall Noodle Shop LLC, a written claim was submitted before the Kuala Lumpur Regional Arbitration Center (KLRCA) for Arbitration. The respondent, Adi Budiamman, M.D. does not question the authority of the KLRCA. Hence, this Tribunal is called upon to resolve the dispute. vii

9 QUESTIONS PRESENTED A. What is the proper law to apply in resolving this dispute: Singapore Law, Indonesian Law, or some other law? B. In order to minimize additional delay in resolving this dispute, the parties are directed to address each of the following questions in the alternative: i.e., under both Indonesian and Singaporean law if they are different. 1. Is the Arbitration agreement valid and enforceable? 2. Is the Franchise Agreement invalid under Indonesian Law specifically Article 31 of Law 24 of 2009? 3. Is Article XII of the Franchise Agreement (Dispute Resolution) invalid and/or unenforceable as it authorizes the granting of specific performance should the Franchisee be found to have violated a provision of the Franchise Agreement while prohibiting the granting of specific performance should the Franchisor(s) be found to have violated a provision of the Franchise Agreement? 4. Was a proper and timely Notice of Termination given to the Franchisee [Dr. Budiamman]? 5. May the Franchisor terminate the franchise for any violation of the Franchise Agreement or must it be a substantial violation of the Agreement? viii

10 6. Does the inherent warranty of good faith and fair dealing in interpreting and applying franchise agreements apply to this Franchise Agreement and, if so: a. Did the serving of a single Indonesian dish referred to as The Special of the Day justify the termination of the franchise? b. Did giving customers the option of substituting lamb for pork for menu items justify the termination of the franchise? c. Did the wearing of the new (white) hijab by the female Muslim employees justify the termination of the franchise? d. Do the above violations of the Franchise Agreement reflect a continuing disregard of the franchisee s obligations under the Franchise Agreement to justify its termination? 7. Does an employment regulation prohibiting the wearing of a hijab by female Muslim employees or restriction (or the color type of the hijab) violate the constitution and/or laws of Indonesia or any international treaties to which it is a member? ix

11 STATEMENT OF FACTS The Claimants Mr. Xuefeng Wang and Mr. Jianping are owners of the Great Wall Noodle Shop, LLC. The Respondent Dr. Adi Budiamman is the franchisee of the GWNS in Jakarta and Medan, authorized under the Franchise Agreement. The encounter and the offer of the Franchise As part of the GWNS plan to expand to Indonesia, Mr. Wang travelled to Singapore. On June 20, 2011, Mr. Wang met Dr. Adi Budiamman, a prominent Jakarta surgeon while waiting for his flight home in the Singapore Airlines Lounge in Changi Airport. Their conversation led to the offer of franchise agreement originally intended Mr. Bao Shan, a franchise owner of Singapore restaurants. Mr. Wang retrieved the Franchise Agreement and explained the fee arrangements in detail, Article V: A,B, D & E. However, he was not able to go through the entire Franchise Agreement and suggested that Dr. Budiamman take it home. A photocopy of both the original English and a Bahasa Indonesia copy were delivered to Dr. Budiamman the next day. On September 2011, the two new franchises opened in Jakarta and Medan. The Jakarta location is more successful than the Medan location. The discovery of uniformity violations which led to the dispute On October 2011, Mr. Ji made an unannounced visit to both Indonesian restaurants. This is authorized under Article III G and/or Article VIII of the Franchise Agreement. Several violations were found such as: the sale of food products not on the official menu ; substitutions for the ingredients of others; wearing of unauthorized clothing, a head scarf or Hijab. x

12 On November 4, 2011, Mr. Ji sent an to Dr. Budjiaman informing the latter to take immediate steps to conform to the operations required in the Franchise Agreement. Mr. Ji claims that the objection to the serving of dessert items presents a uniformity issue. It is clear in the franchise agreement that no food items not of the Great Wall Noodle Shop Standard Menu can be sold at any franchise without their permission. Two weeks, thereafter, a report of the inspector hired by Mr. Ji was submitted to the latter stating that Indonesian foods were still being served, a single Indonesian dish called Special of The Day written in Bahasa Indonesia. And, many of the girls were still wearing scarves. Thus, Mr. Wang and Mr. Ji sent a letter to Dr. Budiaman terminating the franchise and directing him to close both restaurants and signage within 15 days. Dr. Budiaman refused to close his two restaurants. The Case Mr. Wang and Mr. Ji submitted a Notice of Arbitration in conformity with Article 3 of the Kuala Lumpur Regional Arbitration Center (KLRCA) Fast Track Rules seeking a restraining order against Dr. Budiamman pursuant to Article XII B of the Franchise Agreement, trademark infringement and damage to the reputation of the Great Wall Noodle Shop. A counterclaim was filed, thus a case management Meeting was held thru phone. The hearing will be held on November 18, 2012 in Bali, Indonesia. xi

13 SUMMARY OF PLEADINGS I. The Indonesian Law is the proper law to be applied in this dispute because the Choiceof-Law clause in the Franchise Agreement should be disregarded by reason of public policy. Under the principle of party autonomy and choice-of-law clause, there is a recognition that stipulations entered into by parties are to be accorded the highest respect. The Indonesian law should apply based on the International Rules on Conflicts of Laws. In the absence of the choice-of-law clause, Article 6(1) of the Kuala Lumpur Regional Center for Arbitration (KLRCA) Fast Track Rules 2010 allow it to apply the law it deems applicable as guided by the cumulative approach in the determination of the conflict of laws rules. II. The arbitration agreement is invalid and unenforceable. The Arbitration Agreement is invalid because Dr. Budiamman s consent to the arbitration agreement is not unequivocally expressed. The Arbitration Agreement is also unconscionable, hence unenforceable. Dr. Budiamman only read and signed the English copy of the Franchise Agreement, and not the Indonesian copy which is a violation of Article 31 of law 24 of III. Article XII of the Franchise Agreement is invalid and unenforceable. The dispute resolution clause under the Franchise Agreement is not in accord with the basic precepts of good faith and fair dealing. It is invalid under Indonesian law because it xii

14 can be construed as a provision which Dr. Budiamman would not have anticipated in a Franchise Agreement. IV. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not comprise sufficient cause for termination, hence the requirement of notice is rendered moot. Assuming that there are grounds for termination, the notice of termination given is invalid under the Indonesian Contract Law because notice of termination issued violates Art of the Indonesian Civil Code and was untimely issued. V. The franchisor may not terminate the franchise for a substantial violation of the agreement since to do so will is in contravention of the specific remedies available to the franchisor in more specific provisions. The right to terminate based on substantial violation granted by the Franchise Agreement is a catch-all stipulation detrimental to the interests of the franchisee and contrary to the remedies provided under specific provisions of the Agreement. VI. The Inherent Warranty of Good Faith and Fair Dealing in interpreting and applying franchise agreements applies to this franchise agreement. The uniformity violations do not justify the termination of the franchise. It does not reflect a continuing disregard of the franchisee s obligations under the Franchise Agreement to justify its termination. xiii

15 VII. An employment regulation prohibiting the wearing of a Hijab by female Muslim employees or restriction does not violate the Constitution and/or Laws of Indonesia or any International Treaties to which it is a member provided such prohibition does not constitute discrimination against an employee. xiv

16 PLEADINGS AND AUTHORITIES I. INDONESIAN LAW IS THE PROPER LAW TO BE APPLIED IN THIS DISPUTE. A. A. The Choice-of-Law Clause in the Franchise Agreement should be disregarded by reason of public policy. A.1.Principle of Party Autonomy and Choice-of-Law clause The terms and provisions made by the parties in their agreements are binding among them. In international commercial contracts, they are free to stipulate the terms and conditions as well as choosing the law that will govern their agreement, the rights under it and the obligations of each. Such agreements are respected by Arbitrators as this is considered as the well-known principle of party autonomy recognized in International Commercial Arbitration and considered primarily as the foundation stone of international arbitration. 1 One manifestation of the principle of party autonomy is the choice-of-law clause. It is a provision in an agreement or contract whereby parties are free to stipulate the law that will govern any disputes that may arise between the parties. The parties specify or stipulate that any dispute or lawsuit which arises out of the contract between them shall be determined according to the law of a particular jurisdiction. This choice usually becomes binding when the dispute is arbitrated. 2 1 Nigel Blackbaby and Constatine Partasides with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration (Oxford University Press, 5 th ed, 2009),

17 The arbitrators are thus bound to apply the merits of the dispute the rules of law chosen by the parties. This is the general rule of international arbitration law. 3 A.2. International public policy as a limitation to the party autonomy principle, particularly the choice-of-law clause There is a limitation on the applicability of the party autonomy, particularly on the Choice-of-Law Clause in any agreement concluded by parties. The arbitrators may disregard the application of the rules of law chosen by the parties by reason of international public policy. International public policy is defined as a country s conception of international public policy or, the the part of a public policy of a State which, if violated, would prevent a party from invoking a foreign law or foreign judgment or foreign award. 4 A.3. The choice-of-law clause contained in the agreement at bar is to be disregarded Franchise Agreement between Great Wall Noodle Shop, LLC (GWNS) and Dr. Adi Budiamman contained a clause 5 which states: 3 United Nations Conference of Trade and Development, International Commercial Arbitration, 5.5 Law Governing the Merits of the Dispute 4 Committee on International Commercial Arbitration of the ILA, above n 62, 3 [11] 5 Compromis, XII-B 3 rd par., page 30 2

18 Applicable Law: This agreement and the parties rights under it and the relationship between the parties shall be governed by, and will be interpreted in accordance with the laws of Singapore. You specifically waive any rights and protections that might be provided through the laws of any other country including the place where the franchise is operated xxx The choice of law of the parties is clear in the Agreement that the laws of Singapore will govern their relationship, their rights and their obligations. However, the international public policy of Indonesia mandates that the laws, customs and rules of Indonesia will be taken into consideration in every contract. An implied waiver of these policies as when mistakenly agreed into in a contract, will hurt and encroach Dr. Budiamman s and his employees rights enshrined under the Indonesian Constitution and particular laws governing franchise regulations, which is a direct contravention of the state s notion of fundamental morality and justice. Therefore, the Choice-of-Law clause, designating Singaporean Laws to apply in the dispute, in the agreement should be disregarded. B. B. Source of the Applicability of Indonesian Law B.1. The KUALA LUMPUR REGIONAL CENTER FOR ARBITRATION (KLRCA) Fast Track Rules 2010 The KLRCA is the arbitration tribunal designated by the parties in the Franchise Agreement as the tribunal to govern their dispute. It was agreed that the 3

19 parties are to submit to arbitration any dispute, controversy or claim arising out of or relating to the Agreement. 6 Thus applying the principle of party autonomy, the KLRCA and its rules shall govern the conduct of arbitration proceedings between GWNS and Dr. Budiamman. It is provided in the KLRCA Fast Track Rules 2010, 2 nd edition, that: The Arbitral Tribunal shall apply the law designated by the parties as applicable to the substance of this dispute. Failing such designation by the parties, the Arbitral Tribunal shall apply the law determined by the conflict of laws rules, which it considers applicable. 7 In the present dispute, since it has been established that the choice-of-law clause or the designation of the law of the parties has failed for reasons of international public policy, the KLRCA has to apply the law basing on the conflict of laws rules which it considers applicable. B.2. Determination of the conflict of laws rules the Cumulative Approach The cumulative approach is a guideline generally used by arbitrators in determining what law will apply to the merits of the dispute in case the designation of law of the parties fails or is not applicable. The approach looks into the various sets of conflict of laws rules linked to the dispute. 8 6 Compromis, XII-A 1 st par., page 29 7 Article 6(1) KLRCA Fast Track Rules 2010, 2 nd Edition 8 Silberman, Linda & Ferrari, Franco, Getting to the Law applicable to the Merits in International Arbitration and the Consequences of Getting it Wrong; September

20 The various sets of conflict of laws that may be looked into by the arbitrator in the present case are the Conflict of Laws rules of Singapore (the law chosen by the parties in the Agreement), Indonesia (the law of the contracting party Dr. Budiamman) and Malaysia (the law of the seat of arbitration). B.3. The Singaporean Conflict of Laws rules point to the application of Indonesian law The rule under the Choice of Law for Contracts in Singaporean Conflict of Laws provides that If the court cannot find any choice by the parties, then the proper law is the law of the country or system of law with the closest and most real connection with the transaction and the parties. 9 The Franchise Agreement is with a view to establishing the franchise in Indonesia. The business operation and the restaurants are located in Jakarta and Medan, Indonesia. The franchisee (Dr. Budiamman) is a citizen and resident of Indonesia and the same country to which Mr. Jianping Ji (one of the franchisors) had visited for an inspection. All the incidents and alleged acts of violation happened in Indonesia. 9 Conflict of Laws of Singapore, Chapter 6, Sec

21 B.4. The Indonesian Conflict of Laws rules point to the application of Indonesian law. The principles underlying the Conflict of Laws of Indonesia are considered fundamental and guide in determining what law to apply. One well-accepted principle is that legal acts are subject to the law of the place where they are performed. 10 In the present dispute, the acts, transactions and business operations including the alleged violations of Dr. Budiamman are performed in Jakarta and Medan, Indonesia where the two restaurants are located respectively. Therefore, any rights, obligations, issues and disputes that may arise from such acts and transactions are subject to the laws of Indonesia. B.5. The Malaysian Conflict of Laws rules point to the application of Indonesian law. Under the Malaysian Conflict of Laws, the law to be applied to resolve the merits of the case will depend on either the express or implied intention of the parties. Failing such intention, resort will be had to choosing the applicable law which has the closest and most real connection to the transaction. 11 It has already been established that Indonesia is the country which has the closest and most connected to the dispute and its circumstances. 10 Indonesian Law, Chapter on Conflict of Law, page 347, S. Pompe 11 Bonython v Commonwealth of Australia [1951] AC 201 (Privy Council on appeal from Australia), at page 219 6

22 Thus, from the foregoing, it is submitted that the law of Indonesia which has the closest connection with the transactions, circumstances and the parties, is the law that will apply in this dispute. II. THE ARBITRATION AGREEMENT IS INVALID AND UNENFORCEABLE A. The Arbitration Agreement is invalid since Dr. Budiamman s consent to the Arbitration Agreement is not unequivocally expressed. KLRCA Fast Track Rules 2010 is the governing law under the Franchise Agreement that will guide the Arbitral Tribunal in the arbitration proceeding. It includes, among others, the determination of the validity of arbitration agreements. The Fast Track Rules 2010 is adopted from the UNCITRAL Model Law on International Commercial Arbitration. In lieu, the UNCITRAL Model Law on International Commercial Arbitration has provided for a universal guideline regarding the formalities and requirements of a valid arbitration agreement. Article 7 of the UNCITRAL Model Law on International Commercial Arbitration provides that the arbitration agreement must be in writing. 12 It is important to determine whether the parties intention to submit a dispute to an arbitration tribunal is expressed unequivocally. 13 Courts in various jurisdictions have 12 Art. 7(2), UNCITRAL Model Law on International Commercial Arbitration Québec Inc. v. Fafard, Court of Appeal of Quebec, Canada, 31 March 2004, [2004] 7

23 occasionally held that the parties undertaking to resort to arbitration must be unambiguously expressed. 14 Dr. Budiamman, in a sworn written statement after the commencement of the Arbitration, 15 declared that he did not read the entire Franchise Agreement and was not aware of certain provisions. In the same matter, Mr. Wang in his sworn statement stated he could not recall whether there was any discussion of Article XII. It is clear therefore that the intention of Dr. Budiamman to obligate himself to submit the any dispute arising from the Agreement to arbitration and thus it is submitted that his consent was not expressed in an unequivocal manner. B. The Arbitration Agreement is unconscionable. The Doctrine of Unconscionability is well-settled and known in Indonesia. 16 It is characterized by contracts which are often one-sided, abusive or that the freedom of contract is undermined by a stronger party. The effect of unconscionability is to annul or make void contracts based on it. It is a matter of public policy in order to prevent oppression and avoid abuses. The arbitration clause contained in the Agreement is one-sided because it leaves Dr. Budiamman no other option to negotiate and agree on fair terms the manner and substance of the arbitration clause. 14 D. Andrés v. Díez Carrillo S.L., Audiencia Provincial de Palma de Mallorca (sección 5ª), Spain, 5 October Compromiss, Requests for Clarifications, Sworn Statement by Dr. Budiamman 16 The Indonesian Production Sharing Contract: An Investor s Perspective, Tengku Nathan Machmud 8

24 Thus as a matter of accepted principle of contract law, when the arbitration agreement is invalid it therefore follows that it is unenforceable. C. The franchise agreement is invalid under Indonesian law specifically Article 31 of Law 24 of 2009 C.1. The mandate of Article 31 of Law 24 of 2009 Article 31 of Law 24 of 2009 is clear. It provides: (1) Indonesian must be used in memoranda of understanding and/or agreements that involve state organs, government institutions of the Republic of Indonesia, private Indonesian institutions or individuals who are citizens of the Republic of Indonesia. (2) Memoranda of understanding and/or agreements as specified in paragraph (1) that involve foreign parties shall also be written in the national language of the foreign parties and/or English. The Franchise Agreement signed by Dr. Budiamman was only the English copy. Although the Indonesian copy was delivered to Dr. Budiamman, the same was not signed by him. Further, there was no response or acknowledgment from him regarding the receipt of the Indonesian copy of the Agreement. 9

25 C.2. The agreement is in violation of Art. 31thus, invalid under the Indonesian Civil Code. Art of the Indonesian Civil Code provides, to wit: Agreements shall bind the parties not only to that which is expressly stipulated, but also to that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs, or the law. In accordance with this provision, the Agreement is therefore invalidated. Art. 31 of Law 24 of 2009, in addition to Art. 2 of the Decree of the Minister of Industry and Trade, 17 imposes an obligation on the parties in the present dispute to use Indonesian language and the language of the Franchisors and/or English. Failing to comply with the mandate of Art. 31 will not bind the parties to the agreement, thus, invalid D. Article XII of the Franchise Agreement is invalid and unenforceable. D.1. The dispute resolution is invalid under Indonesian law because it can be construed as a provision which Dr. Budiamman would not have anticipated in a Franchise Agreement. The pertinent provisions of the Indonesian Civil Code are the following: Art Agreements shall bind the parties not only to that which is expressly stipulated, but also that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs, or the law. 17 Art. 2, The Decree of the Minister of Industry and Trade Concerning the Provisions on and the Procedure for the Implementation of Franchised Business Registration 10

26 Art Customary stipulations shall be deemed to be implied in the agreement, notwithstanding that these have not been expressed. Art In the event of ambiguity, the agreement shall be interpreted against the party who stipulate something, and in favour of the party who has bound himself thereto. In the customary practice of entering into agreements and contracts, it can be reasonably expected that each party can demand the performance by the other of his or her end of the agreement. In this case, there is a unilateral and biased stipulation in favour of Wang and Xi to the detriment of Dr. Budiamman s right to adjust the performance of his obligations to conform with the Indonesian customs and sales practices. D.2. The dispute resolution clause under the Franchise Agreement is not in accord with the basic precepts of good faith and fair dealing. Art. 1.7 of the UNIDROIT Principles on International Commercial Contracts which is supported by the Indonesian Civil Code, and furthered under Art renders ineffective surprise terms unless expressly accepted by the other party. The same provision defines surprise terms as such terms which is of such a character that the other party could not have reasonably expected it, based on the content, language and presentation. The UNIDROIT principles also provide in Article that a party may avoid the contract or an individual term 11

27 of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to (a) the fact that the other party has taken unfair advantage of the first party s dependence, economic distress or urgent needs, or of its improvidence, ignorance or lack of bargaining skill, and (b) the nature and purpose of the contract. Further, it is improper for Wang to fail to acknowledge Budiamman s right to demand specific performance as well since this is implied from the nature of the Franchise Agreement concluded between the parties. Art provides that implied obligations stem from the (a) nature and purpose of the contract; practices established between the parties and usages; good faith and fair dealing; and reasonableness. D.3. Assuming arguendo that Singaporean Law will apply: The unilateral right of the Franchisors to specific performance excluding such right on the Franchisee violates the Singaporean Law of Contracts which provides for a right to specific performance on an aggrieved party sometimes damages will not be an adequate remedy for a breach 18. Thus the provision on XII of the Franchise Agreement is invalid and unenforceable under the Singaporean Law. 18 Chapter Singaporean Law of Contracts 12

28 Finally, unlike its predecessor Article 28 of the CISG, the UNIDROIT principles mandate the court to order specific performance unless one of the exceptions laid down in the Article applies. Hence, such principle cannot be limited by stipulations in the Franchise Agreement. 19 E. The acts alleged by Mr. Ji and Mr. Wang against Dr. Budiamman do not comprise sufficient cause for termination, hence the requirement of notice is rendered moot. Based on the submissions raised under the next issue, the claimant does not have a solid ground to terminate the Franchise Agreement. Hence, the issue of proper and timely notice of termination given to the Franchisee is rendered moot. E.1. Assuming that there are grounds for termination, the notice of termination given is invalid under the Indonesian Contract Law. i. Notice of Termination issued violates Art of the Indonesian Civil Code Art of the Indonesian Civil Code states that: The termination requirement always deemed that is stipulated in the reciprocal agreement, if one party does not fulfill its obligation. In such case, the agreement isn t null and void, but termination must be requested to the Court. The said request shall be conducted, although the termination 19 Page 240 UNIDROIT Principles with annotations 13

29 requirement on non-performance obligations is stipulated in the agreement. If the termination requirement is not stipulated in the agreement, then the Judge reviews the conditions, based on the request of the defendant; freely provide a certain period to fulfill obligations, but that certain period cannot be longer than a month. It is clear from the express wording of this provision that in order for a party to exercise his right to terminate the agreement, court approval must first be sought even if such right is already stipulated in the agreement. Mr. Ji and Mr. Wang sent an notifying Dr. Budiamman of their intention to terminate the Franchise the day after Mr. Ji received a report from his hired inspector. This notice of termination is in contravention of Article 1266 because Court approval is necessary in order for the Franchisors to terminate the agreement. Thus, the issuance of such notice was improper as is violates this provision. ii. The notice was untimely issued. For a notice to be timely, it must be within the time required by statute, court rules or contract. 20 Also, term timely must, in a number of 20 Copyright by Gerald N. Hill and Kathleen T. Hill 14

30 situations, be determined on the basis of the facts and circumstances of each individual case. 21 The notice of termination sent by Mr. Ji and Mr. Wang indicated that Dr. Budiamman should close down and remove the signage within 15 days. It is contradictory to the provision set out in the Franchise Agreement, to wit: XIV. Post-Termination Obligations You must promptly at your expense remove or obliterate all Restaurant signage, displays or other materials (electronic or tangible) in your possession at the Authorized Location or elsewhere that bear any of the Trademarks and so alter the appearance of the Restaurant as to differentiate the Restaurant unmistakably from duly licensed restaurants identified by the Trademarks. If, however, you refuse to comply with the above provisions within 30 days, we have the right to enter the Restaurant and remove all signage, displays or other materials that bear any of the Trademarks, and you must reimburse us for our costs incurred. Notwithstanding the foregoing, in the event of expiration of this Agreement, you will remain liable for your obligations pursuant to this Agreement or any other agreement between you and us or our affiliates that expressly or by their nature survive the expiration or termination of this Agreement. 21 West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. 15

31 Article XIV of the Agreement imposes a 30-day period within which Dr. Budiamman may remove all signage and displays. The notice of termination given to him allotting a 15-day period to which he should perform his posttermination obligation is a clear violation of the provision contained in Article XIV. Therefore the issuance of the notice becomes untimely as it does not follow the period prescribed in the Agreement. III. THE FRANCHISOR MAY NOT TERMINATE THE FRANCHISE FOR A SUBSTANTIAL VIOLATION OF THE AGREEMENT. A. The right to terminate based on substantial violation granted by the Franchise Agreement is a catch-all stipulation contrary to the remedies provided under specific provisions. The term substantial refers to something of real worth and importance; something worthwhile as distinguished from something without value or merely nominal 22 A violation in the agreement therefore can be said to be substantial if it affects the essence and relevant provisions thereof. In legal terms, it is synonymous to material violation. The right to terminate on the ground of substantial violation is conferred by the Franchise Agreement itself to wit: 22 Black s Law Dictionary 16

32 XIII-B. Termination by us. We have the right to terminate this Agreement for any substantial violation of the terms and conditions of this Agreement we deem substantial. However, it is submitted that the condition for the finding of substantial violation is arbitrary and unjust because its determination is left to the whim and judgment of the franchisors without any standards of reasonableness or fairness provided in the Agreement. It may be an instrument of abuse on the part of the franchisors and may most likely be exercised to the prejudice of the franchisee. In addition, specific provisions of the Franchise Agreement provide for more specific courses of action in case of noncompliance with the terms of the Franchise Agreement, to wit: I. Article III (Products and Operations Standards and Requirements) G. Evaluations. We or our authorized representative have the right to enter your restaurant at all reasonable times during the business day for the purpose of making periodic evaluations, ascertaining if the provisions of this Agreement are being observed by you; or inspecting and evaluating your supplies, ingredients and products, as well as the storage, preparation and formulation and the conditions of sanitation and cleanliness in the storage, production, handling and serving. 17

33 If we determine that any condition in the Restaurant presents a threat to customers or public health or safety, we may take whatever measures we deem necessary, including requiring you to immediately close the Restaurant until the situation is remedied to our satisfaction. This provision relates to the compliance with the production and sale of the Menu Items listed and/or approved in writing by the Franchisor exclusively. 23 It also limits the use of the proprietary and non-proprietary ingredients, recipes, formulas, cooking techniques and processes and supplies, and the preparation and service Menu Items and products in such portions, sizes, appearance, taste and packaging as the Franchisor has specified in its most current product preparation materials or otherwise in writing in the preparation of the items to be served in the Restaurant. 24 The claimant alleges that respondent violated these provisions of the Agreement when Indonesian food and desserts were served in the Jakarta and Medan locations of GWNS. 25 Claimant alleges that the service of such products will destroy the uniformity of the GWNS franchise and cause damage to the identity and value of the GWNS trademarks. 26 In the same , claimant threatened termination of the Franchise based on these grounds. 27 This cannot be alleged by the claimant without violating the Franchise Agreement he bases his claims upon. At the most, claimant can require 23 Art. 3 paragraph A 24 Art. 3 paragraph B 25 paragraph 8 of the compromiss, dated 4 November paragraph 8 of the compromiss, dated 4 November paragraph 8 of the compromiss, dated 4 November

34 respondent to temporarily close the Restaurant to enable the latter to comply with the requirements under the Agreement to the satisfaction of the claimant. However, it should be noted that Mr. Wang already recognized the need to make the necessary adjustments to accommodate local tastes when he specifically revised the Indonesian menu to include the use of spices. 28 It will be a belated for him to now argue a strict compliance with Chinese food items to maintain uniformity in all franchises. Further, Article 3 paragraph I (Operating Procedures) states in part that the franchisee must use its best efforts to promote and increase the sale and service of Menu Items and to effect the widest and best possible distribution throughout the Designated Area. The same provision gives the Franchisor an option to revise the manuals and standards, procedures, techniques and management systems periodically to meet changing conditions of retail operation in the best interest of restaurants operating under the Proprietary mark. This statement, unlike other statements in the Agreement, does not expressly prohibit or exclude the Franchisee from introducing the necessary changes to boost the sales of the Restaurant. 28 Clarifications, G-4 19

35 However, use of lamb as alternative to pork 29 was not raised by claimant in the as ground for breach of contract by Dr. Budiamman. Art. III paragraph H (Period of Operation)....You acknowledge and agree that if your restaurant is closed for a period of 2 consecutive days or 5 days or more days in any 12-month period without our prior written consent, such closure constitutes your voluntary abandonment of the franchise and business and we have the right, in addition to the other remedies provided for herein, to terminate this Agreement. This is not an issue in this case, hence cannot be alleged as a ground for termination of the Agreement by the claimant. Further, this provision is contrary to the provision above-cited as well as Article 8 second paragraph [Inspection (of all records, books of account, tax returns and other documents and materials in possession or under your control relating to this Agreement, including without limitation, all records required to be maintained pursuant to applicable law)]of the Agreement which states in part that In the event that we give you notice of any deficiency detected during such inspection, you must correct them within 5 days after receipt of such notice. Under Art of the Indonesian Civil Code, if the wording of the contract is clear, one shall not deviate from it by way of interpretation. Hence, the grounds for termination of contract being explicit under the provisions relevant in this case, Wang 29 footnote 5, compromiss 20

36 cannot now unduly expand by implication the said grounds to the prejudice of Budiamman. In any case, the Article 1.9 (2) of the UNIDROIT Principles of International Commercial Contracts of 2010 provides that the parties are bound a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of the usage would be unreasonable. In this case, the serving of Indonesian food and desserts in the Jakarta and Medan franchises can be arguably considered as widely observed. IV. THE INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING IN INTERPRETING AND APPLYING FRANCHISE AGREEMENTS APPLIES TO THIS FRANCHISE AGREEMENT. Under Article 1338 of the Indonesian Civil Code, All legally executed agreements shall bind the individuals who have concluded them by law. They cannot be revoked otherwise than by mutual agreement, or pursuant to reasons which are legally declared to be sufficient. They shall be executed in good faith. It requires parties to a contract to perform their respective obligations in good faith and with the exercise of reasonable discretion or judgment. 21

37 This principle is an affirmation of the covenant of good faith and fair dealing 30 under the UNIDROIT Principles of International Commercial Contracts. Article 1.7 of the same provides that in 1) international commerce, each party must act according to the principle of good faith and fair dealing; and 2) that the parties may not ignore this responsibility. 31 Thus, in this Franchise Agreement, the inherent warranty of good faith and fair dealing is required of the parties in that: A. The serving of a single Indonesian dish referred to as The Special of the Day do not justify the termination of the franchise. The serving of a single Indonesian dish is a mere deviation of what has been authorized by the Franchise Agreement. It does not constitute a material or substantial violation as to warrant the franchisors in terminating the contract. The Franchise Agreement (and all franchise agreements) is founded on the relationship of both the franchisors and the franchisee, so reasonable discretion must be employed to carry out the essence of such relationship. The serving of a single Indonesian dish is a minute violation. Mr. Ji and Mr. Wang could have exercised a reasonable discretion in allowing Dr. Budiamman to rectify his violation by giving succeeding warnings, in case. The outright termination of the Franchise on the basis of the serving of a single Indonesian dish destroys the essence of the franchise relationship between the parties because reasonable discretion could have been exercised. 30 Art. 1.7 UNIDROIT Principles of International Commercial Contracts 31 The Indonesian Law of Contracts by Prof. Dr. C.F.G. Sunaryati Hartono, SH 22

38 B. The giving of customers the option of substituting lamb for pork for menu items does not justify the termination of the franchise. The culture of Indonesia is diverse including its population. The majority consists of Muslim population. The giving of customers the option of substituting lamb for pork does not justify the termination. It is expected of Mr. Ji and Mr. Wang to take into consideration the nature of the business in relation to its geographical location. As the franchise is operated in Indonesia, it is expected that there are customers who, living by their customs and traditions, would always ask for lamb instead of pork. If this is indeed a violation that would warrant the termination of the franchise, reasonable means should be achieved in arriving at the decision of termination. The room is always open for subsequent reprimands or warning if negotiations could not be achieved. The warning was only given once by Mr. Ji. He could have exercised reasonable discretion in allowing Dr. Budiamman to correct his ways through a series of suggestions or even warning. Such outright termination is unjustifiable considering that the franchise restaurants run by Dr. Budiamman are successful. C. The wearing of the new (white) Hijab by the female Muslim employees does not justify the termination of the franchise. The termination of the franchise based on the ground that female Muslim employees are wearing the new (white) hijab is violative of the Indonesian Constitution 23

39 and other regulations and treaties that ensure protection to individuals of their freedom to practice religion. The reason by the Franchisors that wearing of the hijab by the employees will lose the common appearance 32 is not sufficient to justify the termination of the Franchise. When the rights of the employees are at issue, especially rights fundamental under the Indonesian Constitution, the restriction on wearing of hijab and the mere reason of ensuring uniformity in the appearance of the employees should never prevail. Thus, the termination on the ground that some female employees are wearing hijab is not justified. D. The above violations of the Franchise Agreement do not reflect a continuing disregard of the franchisee s obligations under the Franchise Agreement to justify its termination. The above violations are not intended by Dr. Budiamman to disregard or to willfully disrespect his obligations under the Franchise Agreement. As submitted earlier, these violations are made on reasonable and just causes taking into consideration the nature of the business in relation to the location and area where it is operated. Mr. Ji and Mr. Wang could have exercised their obligation in fairly dealing with the acts of Dr. Budiamman because these acts do not manifest a malicious or willful intent to deviate from the obligations and rules set forth in the Agreement. The violations therefore do not reflect a continuing disregard of the franchisee s obligations in order to justify its termination because the violations are founded upon reasonable causes. 32 Letter sent to Dr. Budiamman on Nov. 4, 2011, Compromis page 4 24

40 Assuming arguendo that Singaporean Law applies, no implied warranty of good faith and fair dealing is enforced or supported by its laws or jurisprudence. In the present dispute, the effect of such would be to remove the obligation on the part of the Franchisors to act in accordance with the implied obligation of fair dealing with Dr. Budiamman. It would be thus, prejudicial to the Franchisee as he would have little protection of his and his employees rights by the mere fact that the implied warranty of good faith and fair dealing is not applicable in this Franchise Agreement. V. AN EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION VIOLATES THE CONSTITUTION AND/OR LAWS OF INDONESIA OR ANY INTERNATIONAL TREATIES TO WHICH IT IS A MEMBER PROVIDED SUCH PROHIBITION CONSTITUTES DISCRIMINATION AGAINST AN EMPLOYEE. A. The legal authorities and the general obligation of the state against discrimination As stated by the INTERNATIONAL CONVENANT ON ECONOMIC, SOCIAL AND CULTURAL RIGHTS (ICESCR), states are bound by the obligation to respect the right of women to have access to decent work and thus to take measures to combat discrimination and to promote equal access and opportunities. 25

41 In the context of Article 6 of the ICESCR, the core obligation of States encompasses the obligation to ensure nondiscrimination and equal protection of employment in the private and public sectors of disadvantaged and marginalized individuals and groups. A.1. The Indonesian Constitution. According to the Indonesian Constitution 33 Every person shall have the right to work and to receive fair and proper remuneration and treatment in employment. It is with this regard that any person seeking employment is entitled to a fair and proper treatment regardless religion, among others that may affect his/her employment. The purpose of such constitutional provision is to forestall the possibility of oppression and discrimination on account of these factors. A.2. The Indonesian Labor Law. Article 5 and 6 of the Labor Law provides to wit: Art. 5 - All persons that are qualified to perform a job have the same opportunity to get the job without discrimination. 33 Article 28-D(2)), Indonesian Constitution 26