F1050-R

Kuala Lumpur Regional Centre for Arbitration (KLRCA)

2012

Great Wall Noodle Shop LLC

v.

Adi Budiamman, M.D.

Memorial for Respondent

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Table of Contents

Table of Contents

Index of Authorities I

Statement of Jurisdiction V

Questions Presented VI

Statement of Facts VII

Summary of Pleadings X

Pleadings

A. THE PROPER LAW TO APPLY IN RESOLVING THIS DISPUTE IS THE

SUBSTANTIVE LAW OF INDONESIA OR IN THE ALTERNATIVE LEX

MERCATORIA

1

I. The applicable law is to be determined by the rules of conflict of law that the

arbitrators deem applicable:

1

1. There was no intention of the parties to choose the law of Singapore as the applicable

law

2

2. Lex Fori as the Applicable law in the present dispute 3

3. In the alternative the applicable law is lex mercatoria 5

a. The UNIDROIT Principles are the new lex mercatoria

b. The Shari‟ah is also the applicable lex mercatoria:

6

8

B. THE FRANCHISE, ARBITRATION AGREEMENT ARE INVALID AND

UNENFORCEABLE UNDER BOTH INDONESIAN AND SINGAPOREAN

LAW

11

I. The Arbitration Agreement is invalid and unenforceable under Indonesian law 11

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1. The Arbitration Agreement is against the public policy of Indonesia 11

1.1. Public Policy Exception 13

2. The Arbitral Award is unenforceable without the assistance of Judicial

Authorities of Indonesia

14

2.1. Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award

Enforcement in Indonesia:

14

a. Disregard of „Agreement to Arbitrate‟ 16

2.2.The Absence of Common International Standard of Public Policy Exception

Internationally

17

II. THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIAN

LAW

19

1. Invalidity of contract due to illegal „causa‟ 19

III. ARTICLE XII OF THE FRANCHISE AGREEMENT IS INVALID AS IT

HAD VIOLATED THE UNIDROIT PRINCIPLES ON INTERNATIONAL

COMMERCIAL CONTRACTS

20

IV. A PROPER AND TIMELY NOTICE OF TERMINATION WAS NOT

GIVEN TO THE FRANCHISEE.

22

V. A CONTRACT CAN BE TERMINATED ONLY WHEN THERE IS

MATERIAL BREACH OR SUBSTANTIAL VIOLATION OF THE

PROVISIONS OF THE CONTRACT

22

VI. THE “INHERENT WARRANTY OF GOOD FAITH AND FAIR

DEALING” APPLIES IN INTERPRETING FRANCHISE AGREEMENTS

23

a. The serving of a single Indonesian dish outside the official menu of the 23

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Agreement did not justify the termination of the franchise.

b. The practice of substituting lamb for port was discontinued after the first email

and thus Franchisor could not terminate the franchise agreement based on this

reason.

23

c. The wearing of the “new (white) hijab” by the female Muslim employees was in

accordance with the laws of Indonesia and did not justify the termination of the

franchise.

23

d. A continuing disregard to the franchisee‟s obligations is not reflected in any

manner under the Franchise Agreement to justify its termination.

23

VII. THE EMPLOYMENT REGULATION PROHIBITING THE WEARING OF

A HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION

VIOLATE THE CONSTITUTION AND LAWS OF INDONESIA AND

ICESCR TO WHICH IT IS A MEMBER

24

PRAYER FOR RELIEF 27

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I

INDEX OF AUTHORITIES

MULTILATERAL TREATIES AND CONVENTIONS

European Convention of 1961, Art. VII 2

Rome Convention, Art.3(1), 4 2, 11

New York Convention, Art.III, V.1(a), 2 (b) 3, 12,

16- 18

International Covenant on Civil and Political Rights, Art.2(2). 25

TABLE OF CASES

Compagnie d’Armement Maritime SA v Compagnie Tunisienne de Navigation SA

[1971] A.C. 572

1

Egon Oldendorff v Liberia Corporation [1995] 3

Sonatrach Petroleum v Ferrell International [2002] 1 All E.R. 637. 3

Sanghi Polyesters Ltd (India) v The International Investor KCFC (Kuwait) [2000] 8

U.N. RESOLUTIONS AND DOCUMENTS

UNCITRAL Arbitration Rules, art. 33, 34 (2) (a), 36 (b) (ii) 2, 3, 17

UNIDROIT Principles on International Commercial Contracts 2010, Preamble

6

TREATISES, DIGESTS AND BOOKS

SUDARGO GAUTAMA, HUKUM PERDATA INTERNATIONAL INDONESIA,

CITRA ADITYA BAKTI, BANDUNG, 1998

2

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II

DICEY AND MORRIS, THE CONFLICT OF LAWS (13th

ED. 2000) 3, 5

GARY BORN, INTERNATIONAL COMMERCIAL ARBITRATION (2nd

ED. 2001) 4

UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS,

2004

7

STOLKHOLM ARBITRATION REPORT WITH COMMENTARY BY FERNANDEZ-

ARMESTO, 2002 8

SUDARGO GAUTAMA, HUKUM PERDATA INTERNATIONAL INDONESIA,

CITRA ADITYA BAKTI, BANDUNG, 2002

9

ALAN REDFER, MARTIN HUNTER, NIGEL BLACKBY AND CONSTANTINE

PARTASIDED, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL

ARBITRATION (4th

ED. 2007)

11

VERONICA L TAYLOR, CONTRACT AND CONTRACT ENFORCEMENT IN

INDONESIA: AN INSTITUTIONAL ASSESSMENT, IN INDONESIA LAW AND

SOCIETY, LINDSEY T(ED) (2nd

ED. 2008)

15

ALBERT JAN VAN DEN DERG, THE NEW YORK CONVENTION OF 1958,

KLUWER LAW AND TAXATION, THE NETHERLANDS (1990) 20

18

ARTICLES

Official Journal of the European Union No. C282 [1980] 2

Molineaux, “Applicable law in arbitration – The coming convergence of civil and

Anglo-SSaxon law via Unidroit and lex mercatoria” 1 Journal of World Investment

(2000)

6

Nudrat Majeed, “Good Faith and Due Process: Lessons from the Shari‟ah” 20

Arbitration International (2004)

8

Fifi Junita, “Experience of Practical Problems of Foreign Arbitral Awards 9

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III

Enforcement in Indonesia”, Macquarie Journal of Business Law”, (2008), Vol.5, 369,

392

MISCELLANEOUS

Trakman, “Legal Traditions” and International Commercial Arbitration, 2007,

available at: http://www.austlii.edu.au/au/journals/UNSWLRS/2007/29.html 2

Berkowitz D, Moenius J & Pistor K, Legal Institutions and International Trade Flows,

Michigan Journal of International Law, Vol. 26, 2004, available at:

http://www.pitt.edu/~dmberk/Berkowitz%20Moenius%20Pistor.pdf

13

Mills K, Enforcement of Foreign Arbitral Awards in Indonesia & Other Issues of

Judicial Involvement in Arbitration, available at:

http://209.85.173.104/search?q=cache:DCUp2L_2Q8sJ:www.arbitralwomen.org/files/p

ublication/4310102632224.pdf+ED+%26+F+Man+v.+Yani+Haryanto+and+arbitral+aw

ards+enforcement&hl=id&ct=clnk&cd=2

13

Burton Steven J & Murray John F, The New Judicial Hostility to Arbitration:

Unconscianability and Agreement to Arbitrate, available at:

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID957829_code650352.pdf?abstractid

=95782 9&mirid=1

14

Scodro Michael A, Deterrence and Implied Limits on Arbitral Power, available at:

http//www.law.duke.edu/shell/cite.pl?55+Duke+L.+J.+547+pdf

14

A Barraclough and J Waincymer, Mandatory Rules of Law in International Commercial

Arbitration, available at: http//www.law.monash.edu.au/research/2005-research-

publicationdata. Pdf

15

A Tsakatoura, The Immunity of Arbitrators, available at: <http://www.inter-

lawyer.com/lex-e- cripta/articles/arbitratorsimmunity.htm

15

A Sheppard, Public Policy and the Enforcement of Arbitral Awards: Should there be a

Global Standard?, Transnational Dispute Management, Vol. 1, Issue 01, February 2004,

available at: <http://www.gasandoil.com/ogel/samples/freearticles/article_67.htm - 59k -

18

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IV

>, Viewed on 30 April 2008, p. 3.

Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke

Muka Pengadilan, available at:

<http://www.jurnalhukum.blogspot.com/2006/09/klausul-arbitrasedan-

pengadilan_18.html

17

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V

STATEMENT OF JURISDICTION

The Great Wall Noodle Shop LLC and Adi Budiamman have submitted this present dispute to

this Tribunal in accordance with Article XII A of the Arbitration Agreement signed by the

parties, pursuant to Article 2 of the Kuala Lumpur Regional Centre for Arbitration, Fast Track

Rules. Both parties shall accept the award of the tribunal as final and binding and execute it in

good faith in its entirety.

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VI

QUESTIONS PRESENTED

The Great Wall Noodle Shop LLC asks this tribunal:

I. Whether the law of Singapore or Indonesia or any other country is the proper law to

apply in resolving this dispute;

II. Whether the Arbitration Agreement is invalid under Indonesian Law;

III. Whether Article XII of the Franchise Agreement (Dispute Resolution) is invalid

and/or unenforceable;

IV. Whether a proper and timely Notice of Termination was given to the Respondent;

V. Whether the Franchisor may terminate the franchise for any violation of the Franchise

Agreement or must it be a substantial violation of the Agreement;

VI. Whether the inherent warranty of good faith and fair dealing in interpreting and

applying the franchise agreements apply to this Franchise Agreement;

VII. Whether an employment regulation prohibiting the wearing of a hijab by female

Muslim employees or restriction violate the constitution and/or laws of Indonesia or

any international treaties to which it is a member.

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VII

STATEMENT OF FACTS

The first Great Wall Noodle Shop opened in Tianjin, China on May 20, 1983. It was founded and

co-owned by Jianping Ji and Xuefeng Wang. Ji and Wang have franchised numerous other Great

Wall Noodle Shops in China as well as in Singapore and Malaysia and have expanded the menu

to include a wide variety of Chinese dishes.

In early 2011, they decided to expand to Indonesia. In June Wang traveled to Singapore to meet

with Mr. Bao Shan, the franchise owner of the Singapore restaurants, but he wasn‟t interested in

opening restaurants in Indonesia.

On June 20, 2011, in Changi Airport, Wang met Dr. Adi Budiamman, a prominent Jakarta

surgeon. As Wang explained the purpose of his visit to Singapore, Dr. Budiamman became

highly interested.

Wang retrieved the Franchise agreement intended for Mr. Bao from his briefcase; substituted Dr.

Budiamman‟s name on the contract; and explained the fee arrangements in detail. Dr.

Budiamman read through it quickly and signed it. A photocopy of both the original English and a

Bahasa Indonesia copy were delivered to Dr. Budiamman the next day.

The two new franchises opened in Jakarta and Medan in September 2011 were successful from

the beginning. An email “string” (or “thread”) inadvertently forwarded to Dr. Budiamman

contained the following message from Mr. Ji to Mr. Wang: “The Jakarta restaurant is a „gold

mine.‟ I told you we should have given the franchise to a friend or relative not to a perfect

stranger.”

In late October 2011 Mr. Ji made an unannounced visit to both Indonesian restaurants. He found

several violations of the Franchise Agreement involving the sale of food products not on the

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VIII

“official menu” being served and substitutions for the ingredients of others. He also observed

that some of the female employees wore unauthorized clothing, a head scarf or Hijab. Dr.

Budiamman explained that many of the Muslim women employees asked permission to wear a

Hijab – a request which he felt obliged to approve.

After returning home, Mr. Ji sent the following email (November 4, 2011) to Dr. Budiamman:

As I explained during my recent visit, you must take immediate steps to conform your operations

to those of our other restaurants as required by our Franchise Agreement. I am referring to the

unauthorized menu items and the head scarves worn by many of your female employees. The

Franchise agreement you signed is quite clear: no food items not of the Great Wall Noodle Shop

Standard Menu can be sold at any franchise without our permission.

Our franchise agreement requires that the restaurant – inside and out – be the same at all

locations. It is essential that all of our employees in every country where we operate dress the

same.

If you do not immediately discontinue the above mentioned violations of the Franchise

Agreement, we will have no choice but to terminate your Franchise.

Two weeks later, an “inspector” hired by Mr. Ji visited both Indonesian franchises and submitted

the following report to Mr. Ji electronically:

They are still serving Indonesian food at both locations but they are not listed on the menu.

When, I asked for the Indonesian menu, I was informed that they no longer serve Indonesian

food except for “The Special of The Day” – a single Indonesian dish written in Bahasa Indonesia

on a chalk blackboard. The day I was there it was Ayam Kalasan (I ordered it … it was very

good.). Many of the girls were wearing white scarves.

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IX

The next day Mr. Ji and Mr. Wang sent a letter to Dr. Budiamman terminating the franchise and

directing him to close both restaurants and remove the signage within 15 days. They indicated

that they planned to reopen the Jakarta restaurant within 30 days “Under new Management”.

When Dr. Budiamman refused to close his two restaurants, Wang and Ji submitted a Notice of

Arbitration in conformity with Article 3 of the Kuala Lumpur Regional Arbitration Center

(KLRCA) Fast Track Rules seeking a restraining order against Dr. Budiamman pursuant to

Article XII B of the Franchise Agreement and damages for breach of the Franchise Agreement,

trademark infringement and damage to the reputation of the Great Wall Noodle Shops.

Dr. Budiamman filed a response denying the allegations and asserting a counterclaim for breach

of the franchise agreement and damage to his reputation.

A “Case Management Meeting” was subsequently held by phone during which the parties agreed

on issues to be covered at the November Hearing being held on 18 November 2012 in Bali,

Indonesia.

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X

SUMMARY OF PLEADINGS

1. The proper law to apply in resolving this dispute is the substantive law of indonesia or

in the alternative lex mercatoria

The applicable law is to be determined by the rules of conflict of law that the arbitrators deem

applicable.

There was no intention of the parties to choose the law of Singapore as the applicable law

Lex Fori is the Applicable law in the present dispute

In the alternative the applicable law is lex mercatoria

The UNIDROIT Principles are the new lex mercatoria

The Shari‟ah is also the applicable lex mercatoria:

2. The franchise, arbitration agreement are invalid and unenforceable under both

indonesian and singaporean law

The Arbitration Agreement is invalid and unenforceable under Indonesian law

The Arbitration Agreement is against the public policy of Indonesia

Public Policy Exception can be invoked by Indonesia.

3. The Arbitral Award is unenforceable without the assistance of Judicial Authorities of

Indonesia

Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award Enforcement in

Indonesia.

Disregard of „Agreement to Arbitrate‟

The Absence of Common International Standard of Public Policy Exception Internationally

4. The franchise agreement is invalid under indonesian law

Invalidity of contract due to illegal „causa‟

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XI

Article XII of the Franchise Agreement is invalid as it has violated the UNIDROIT Principles

on International Commercial Contracts

5. A proper and timely notice of termination was not given to the franchisee.

6. A contract can be terminated only when there is material breach or substantial violation

of the provisions of the contract

7. The “inherent warranty of good faith and fair dealing” applies in interpreting franchise

agreements

8. The serving of a single Indonesian dish outside the official menu of the Agreement did

not justify the termination of the franchise.

9. The practice of substituting lamb for port was discontinued after the first email and thus

Franchisor could not terminate the franchise agreement based on this reason.

10. The wearing of the “new (white) hijab” by the female Muslim employees was in

accordance with the laws of Indonesia and did not justify the termination of the

franchise.

11. A continuing disregard to the franchisee‟s obligations is not reflected in any manner

under the Franchise Agreement to justify its termination.

12. The employment regulation prohibiting the wearing of a hijab by female muslim

employees or restriction violate the constitution and laws of indonesia and icescr to

which it is a member

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1

PLEADINGS

A. THE PROPER LAW TO APPLY IN RESOLVING THIS DISPUTE IS THE

SUBSTANTIVE LAW OF INDONESIA OR IN THE ALTERNATIVE LEX

MERCATORIA

An agreement intended to create legal relations does not exist in a legal vacuum. It is supported

by a system of law which is generally known as “the substantive law”, “applicable law” or “the

governing law” of the contract.1 These terms denote the particular system of law and govern the

interpretation and validity of the contract, the rights and obligations of the parties, the mode of

performance and the consequences of breaches of the contract.2

I. The applicable law is to be determined by the rules of conflict of law that the

arbitrators deem applicable:

In the dispute in hand, though Article XII B has mentioned the laws of Singapore to be the

applicable law to govern the agreement and the parties‟ right under it and the relationship

between the parties, it is silent regarding the laws to be applied regarding the validity of the

Franchise and Arbitration Agreement. A significant aspect is also that the dispute settlement

clause of the Agreement was not communicated to the Respondent. Thus, there is a dispute

regarding the applicable law to be used to interpret the Franchise and Arbitration Agreement.

Thus, applicable law is to be determined by the rules of conflict of law.

1 In private international law, it is also known as the “proper law” of the contract.

2 Compagnie d’Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1971] A.C. 572 at 603, per Lord

Diplock.

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2

The European Convention of 1961, for instance, provides that: “Failing any indication by the

parties as to the applicable law, the arbitrators shall apply the proper law under the rules of

conflict that the arbitrators deem applicable”.3

A similar approach is adopted in the UNCITRAL Rules, which state that failing any designation

of the applicable law by the parties the arbitral tribunal shall apply “the law determined by the

conflict of laws rules which it considers applicable.”4 The Model Law adopts the same

terminology.

The arbitration practices are traditionally based on a strong dichotomy of private and public

international law traditions which can expand global barriers of international business practices.5

This sort of approach stems from traditional concept of territorial sovereignty (jurisdictional

theory) root.6 The most common feature of this sovereignty based approach is the dominancy of

national or domestic basis.7

1. There was no intention of the parties to choose the law of Singapore as the applicable

law:

The Rome Convention provides that a choice of law must be “expressed or demonstrated with

reasonable certainty by the terms of the contract or the circumstances of the case”.8 The Report

by Professors Guiliano and Lagarde,9 which was published with the Convention, has a special

status in the interpretation of the Convention. The Report states that the parties may have made a

real choice of law, although not expressly stated in their contract, but that the court is not

3 European Convention of 1961, Art. VII.

4 UNCITRAL Arbitration Rules, Art.33.

5 See Trakman, “Legal Traditions” and International Commercial Arbitration, 2007, available

at:<http://www.austlii.edu.au/au/journals/UNSWLRS/2007/29.html>, viewed on 20 September 2012, p. 6. 6 See article 436 of the Code of Civil Procedure.

7 The jurisdictionalists often claims that each sovereign state has its own international public policy. Thus, there is

no international character of public policy since it is basically derived from national public policy. See Gautama,

Hukum Perdata International Indonesia, Citra Aditya Bakti, Bandung, 1998, p. 125. 8 Rome Convention, Art.3(1) (emphasis added).

9 [1980] Official Journal of the European Union No. C282, p.1.

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3

permitted to infer a choice of law that the parties might have made, where they had no clear

intention of making a choice.10

In the dispute in hand, the parties had no intention of making a

choice of law as the clause was not communicated to the Respondent.

In such an event, the arbitral tribunal will generally decide that the contract is to be governed by

the law of the country with which it is most closely connected. It will be presume that this is the

country which is the place of business or residence of the party that is to effect the performance

characteristic of the contract.11

In the dispute in hand, this party is an Indonesian party so the

laws of Indonesia should be applicable.

2. Lex Fori as the Applicable law in the present dispute

One criterion for attributing a choice of law to the parties, in the absence of any express choice,

is that based on a choice of forum by the parties. This assumption is expressed in the maxim qui

indicem forum elegit jus: a choice of forum is a choice of law.

The choice of a particular place of arbitration is sometimes taken as an implied choice of the law

governing the contract.12

Thus, in a case where the choice of the substantive law of the contract

was unenforceable, but the arbitration clause was clear in its provision for arbitration in London,

it was held that the arbitration agreement was a valid agreement and was governed by English

law.13

The New York Convention14

points to the same conclusion. In the provisions relating to

enforcement, the Convention stipulates that the agreement under which the award is made must

be valid “under the law to which the parties have subjected it” or failing any indication thereon,

10

Ibid,. p.17; and see Dicey & Morris, The Conflict of Laws (13th

ed,. Sweet & Maxwell, 2000), pp.1198 (emphasis

added). 11

Rome Convention Art.4; and see Dicey & Morris, op. cit., pp.1236. for a commentary on this provision of the

Convention, which is based on Swiss and, subsequently, Dutch law. 12

See, for instance, the English case of Egon Oldendorff v Liberia Corporation [1995] 2 Lloyd‟s Rep. 64; (No.2)

[1996] 2 Lloyd‟s Rep. 380. 13

Sonatrach Petroleum v Ferrell International [2002] 1 All E.R. 637. 14

New York Convention, Art.V.1(a). There is a similar provision in the Model Law, at Art.34(2)(a).

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4

“under the law of the country where the award was made” (which will be the law of the seat of

the arbitration).

At the end of the day, selecting the law governing the parties‟ arbitration agreement (absent an

express agreement) usually requires choosing between two principal alternatives – the

substantive law of the parties‟ underlying contract or the law of the place where the arbitration

has its seat.15

There are a number of cases, in different jurisdictions, in which a court or arbitral tribunal has

taken the law of the seat of the arbitration as the appropriate law to govern the parties‟ arbitration

agreement. The following examples illustrate this:

In ICC Case No.6162,16

the main contract contained an arbitration clause providing for

arbitration in Geneva under the IC Arbitration Rules. It also provided that “Egyptian laws will be

applicable”. The respondent submitted that, as the arbitrators were not designated by the

arbitration clause nor by a separate agreement, the arbitration clause void under Art.502(3) of the

Egyptian Law of Civil and Commercial Procedures. As a matter of Egyptian law, this argument

appears to have been well founded; but it would have brought the arbitral proceedings to an end.

The tribunal decided that the law of Switzerland, as the law of the place of arbitration, was the

law applicable to the form and validity of the arbitration agreement - and not the law that had

been chosen by the parties to govern their contract.

In the Bulbank case,17

the Bulgarian Foreign Trade Bank (Bulbank) concluded a contract with an

Austrian bank. The contract contained an arbitration clause that expressed a choice of Austrian

15

Gary Born, International Commercial Arbitration (2nd

Edn., Transnational Publishers Inc and Kluwer Law

International, 2001), p.111. 16

See Lew, op.cit., p.27, para, 116. 17

Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc (2001) XXVI Yearbook Commercial Arbitration 291,

Swedish Supreme Court, October 27, 2000, Case No. T1881-99. It should be noted that the Swedish Arbitration Act

1999 provides, in s.48, that where an arbitration agreement has an international connection, and the parties have not

agreed upon a choice of law, the arbitration agreement will be governed by the law of the seat of the arbitration.

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5

law. When a dispute arose between the two parties, arbitral proceedings were initiated under the

UNECE rules in Stockholm. The award was challenged by Bulbank in the Swedish courts on the

basis that the arbitration agreement was void. The Supreme Court of Sweden held that the

arbitration agreement was valid under the law of the seat of arbitration, Swedish law, stating:

“… no particular provision concerning the applicable law for the arbitration agreement itself was

indicated [by the parties]. In such circumstances the issue of the validity of the arbitration clause

should be determined in accordance with the law of the state in which the arbitration proceedings

have taken place, that is to say, Swedish law.”

In both the cases, the court or tribunal acted consistently with the choice of law principles which

are generally applicable where there is no express choice of law, since an agreement to arbitrate

is usually more closely connected with the country of the seat of the arbitration than any other

country.18

As the arbitration award is to be enforced in Indonesia, the forum has been selected by the parties

to be in Indonesia. Once, the forum has been selected the laws to be applied during the

arbitration to consider the validity and enforceability of the Agreements should be dealt by the

laws of Indonesia.

3. In the alternative the applicable law is lex mercatoria

For Professor Goldman, the distinguishing features of the lex mercatoria were its “customary”

and “spontaneous” nature.19

It was his view that international commercial relationships:

18

See Dicey & Morris, The Conflict of Laws (13th

Ed., Sweet & Maxwell, 2000), p.598. 19

Goldman, “La Lex Mercatoria dans les contrats d‟arbitrage internationaux: Realite et Perspectives” (1979) Clunet

Journal du Droit International 475; Lalive, “Transnational (or Truly International) Public Policy and International

Arbitration”, ICC Congress Series No. 3 (New York, 1986), p.257; Gaillard, “Transnational Rules in International

Arbitration 1993” ICC Publication No.480/4 (a very helpful review of aspects of transnational law by distinguished

contributors).

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6

“…may perfectly well be governed by a body of specific rules, including

transnational custom, general principles of law and arbitral case law. It makes no

difference if this body of rules is not part of a legal order comporting its own

legislative and judicial organs. Within this body of rules, the general principles of

law are not only those referred to in Article 38(a) of the Statute of the

International Court of Justice; there may be added to it principles progressively

established by the general and constant usage of international trade.”20

This is a pertinent observation. Under the guise of applying the lex mercatoria, an arbitral

tribunal may in effect pick such rules as seem to the tribunal to be just and reasonable – which

may or may not be what the parties intended when they made their contract.21

a. The UNIDROIT Principles are the new lex mercatoria:

If the UNIDROIT Principles embody concepts already in the lex mercatoria, …these Principles

would seem to provide a point of explicit reference for arbitral tribunals. And this is exactly what

appears to be happening: the UNIDROIT Principles have already been referred to in about thirty

ICC cases, it has been reported, in order to identify general legal principles.22

The Preamble of UNIDROIT Principles of International Commercial Contracts 2010, states that

the principles set forth shall be applied when the parties have not chosen any law to govern their

contract, or to interpret or supplement international uniform law instruments or to interpret or

supplement domestic law.23

20

Goldman, op.cit,. p.21. 21

Redfern, n(4), p.133. 22

Molineaux, “Applicable law in arbitration – The coming convergence of civil and Anglo-SSaxon law via Unidroit

and lex mercatoria” (2000) 1 Journal of World Investment 130. 23

UNIDROIT Principles on International Commercial Contracts 2010, Preamble.

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7

The UNIDROIT Principles “represent a system of rules of contract law”.24

They apply only

when the parties choose to apply them to their contract, so that in this sense they supplement (but

do not replace) the substantive law of the contract. However, in practice, arbitral tribunals may

themselves decide to refer to the UNIDROIT Principles as an aid to the interpretation of contract

terms and conditions; or even as a standard to be observed – for instance, in the negotiation of a

contract.

Indeed in a case, a European claimant had concluded a contract for technology exchange with a

Chinese counterparty without incorporating a governing law clause. The European claimant

argued in favour of Swedish law, basing itself on the choice of Sweden as a place of arbitration.

The Chinese party argued in favour of Chinese law, because China had the closest connection

with the contract. The tribunal relied on Art.24(1) of the rules of the Arbitration Institute of the

Stockholm Chamber of Commerce, which permitted it to apply “the law or rules of law which

the tribunal considers to be most appropriate”. Having decided that no common intention as to a

particular national system of law could be found the tribunal decided as follows:

“In the Tribunal‟s view, it is reasonable to assume that the contracting parties

expected that the eventual law chosen to be applicable would protect their interest

in a way that any normal business man would consider adequate and reasonable,

given the nature of the contract and any breach thereof, and without any surprises

that could result from the application of domestic laws of which they had no

deeper knowledge. This lead the Tribunal to conclude that the issues in dispute

between the parties should primarily be based, not on the law of any particular

jurisdiction, but on such rules of law that have found their way into international

24

A commentary on the revised principles has been published by UNIDROIT entitled: “UNIDROIT Principles of

Internationa Commercial Contracts, 2004”.

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8

codifications or suchlike that enjoy a widespread recognition among countries

involved in international trade … the only codification that can be considered to

have this status is the UNIDROIT Principles of International Commercial

Contracts… The Tribunal determines that the rules contained therein shall be the

first source employed in reaching a decision on the issues in dispute in the present

arbitration.”25

b. The Shari‟ah is also the applicable lex mercatoria:

This Islamic law, which applies across a broad swathe of Muslim countries,26

embodies not only

the Quran but also the other sources of Islamic law.27

Modern codes of law in Islamic countries

take account of the Shari‟ah, often as a principal source of law28

; and the Shari‟ah itself contains

general principles, which ar basic to any civilized system of laws, such as good faith in the

performance of obligations and the observance of due process in the settlement of disputes.29

In a case which came before the English court,30

a financial transaction had been structured in a

manner which ensured that the transaction conformed with orthodox Islamic banking practice.

There was provision for any disputes to be settled by arbitration in London under the ICC Rules

of Arbitration; and there was a choice of law clause which provided for any dispute to be

“governed by the Law of England except to the extent it may conflict with Islamic Shari‟ah,

which shall prevail”. A dispute arose and the ICC appointed as sole arbitrator Mr. Samir Saleh,

an experienced lawyer and expert on Shari‟ah law. The arbitrator‟s award was challenged by the

25

See Stockholm Arbitration Report 2002 at 59, with commentary by Fernandez-Armesto. 26

There range from Arab countries such as Saudi Arabia, UAE, Kuwait, Oman, Bahrain, Syria, Yemen and Iraq, to

African states such as Egypt, Tunisia, Sudan, Morocco and Algeria; and to Asian states such as Pakistan,

Bangladesh, Malaysia and Indonesia. 27

Namely, the Sunnah (the sayings and practices of Muhammad), Ijma (consensus among recognized religious

authorities) and Qiyas (inference by precedent). 28

The constitutions of Yemen, Qatar and Egypt, e.g., state that the Shari‟ah is a primary source of law. 29

See Nudrat Majeed, “Good Faith and Due Process: Lessons from the Shari‟ah” (2004) 20 Arbitration International

97. 30

Sanghi Polyesters Ltd (India) v The International Investor KCFC (Kuwait) [2000] 1 Lloyd‟s Rep. 480.

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losing party, but this challenge was rejected by the English court which held that the award was a

clear and full evaluation of the issuers and had all the appearances of being right.

The enforceability of foreign arbitral awards in Indonesia has a great correlation with the

Indonesian legal tradition and culture. The emergence of pluralistic legal culture in Indonesia

was inherently influenced by the article 131 and 163 of the Dutch regulation i.e. the Indische

Staatsregeling (abbreviated IS) which divided the Indonesian population into three distinct

groups based on their racial origin31

, namely: (1) Europeans and Japanese, (ii) the indigenous

Indonesians, (iii) East Asians (including Chinese, Arabs and Indians) and (iv) other groups not

falling within these three categories.32

Each of those groups has its judicial institution and

procedures and each group has possibility to settle dispute over the “juru pisah” (arbitrator).33

Not only does this pluralistic legal feature confines to the coexistence of national and the ancient

Dutch legal system, but it also relates to the application of customary law which is known “adat”

law and Islamic law (sharia law) as part of the Indonesian legal system. Thus, each of racial

origin of the pluralistic society may have its own customary law or “adat” law.34

Since an

individual ethnic group pursues its own self interest, the recognition and enforcement of foreign

arbitral awards will be influenced by the variety of domestic rules which are inconsistent with

the global economy objective.35

Conclusion:

31

See Sudargo Gautama, The Commercial Laws of Indonesia, Citra Aditya Bakti, Bandung, 1998, p. 1. See also

Sudargo Gautama, Indonesian Business Law, Citra Aditya Bhakti, Bandung, 2002, p. 4. 32

Ibid. Although this provision is no longer valid after the independence of the Republic of Indonesia based on the

article II of the Constitution 1945 concerning the Transitional Regulation, it still likely to be practically applied in

some cases such as inheritance law, property law and contract law etc. 33

The judicial institution and procedures of the indigeneous Indonesian (Bumiputera) is Landraad and its procedural

law is Herziene Inlandsch Reglement (abbreviated HIR). See Gautama S, n(8), at. 4. The dispute between the

indigenous Indonesia (bumiputera) v. East Asians can be solved by arbitrator upon their consents based on the Code

of Civil Procedure. See article 377 Herziene Inlandsch Reglement (HIR) and article 705 Reglement Buitengewesten

(RBg). See Widjaja G & Yani A, Hukum Arbitrase, RajaGrafindo Persada, Jakarta, 2003, p. 13. 34

See Gautama, above no. 8, at. 4. 35

Fifi Junita, “Experience of Practical Problems of Foreign Arbitral Awards Enforcement in Indonesia”, Macquarie

Journal of Business Law”, (2008), Vol.5, p.369 – 392, 371.

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The above legal principles suggest that the proper law to be applied is the law of Indonesia as it

is the lex fori where the award is to be enforced. In the alternative, lex mercatoria can also be the

applicable law. Even if it is not considered to be the proper law, it always has a supplementing

role.

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B. THE FRANCHISE, ARBITRATION AGREEMENT ARE INVALID AND

UNENFORCEABLE UNDER BOTH INDONESIAN AND SINGAPOREAN LAW

I. The Arbitration Agreement is invalid and unenforceable under Indonesian law

1. The Arbitration Agreement is against the public policy of Indonesia

Every state reserves for itself, as a matter of public policy, what might perhaps be called as “state

monopoly” over certain types of dispute. Accordingly, whether or not a particular dispute - for

instance, over the validity of franchise agreement and arbitration agreement - is legally “capable

of being resolved by arbitration” is a matter which each state will decide for itself. It is a matter

on which states may well differ, with some taking a more restrictive attitude than others. Thus, a

claim may be arbitrable under the law governing the arbitration agreement and under the lex

arbitri but not under the law of the place of enforcement. An award on such a dispute, although

validly made under the lex arbitri, might prove to be unenforceable under the New York

Convention.36

There may be limited restrictions on the rule, designed to ensure that the choice of law is bona

fide and is not contrary to public policy. Thus, the Rome Convention, for example, does not

allow the choice of a foreign law to override the mandatory rules of law of a country to which all

the factual elements of the contract point – so that, for example, the choice of a foreign law for

the purposes of tax evasion would not be permissible. And the relevant court may apply its own

national rules of public policy or ordre public. Thus in Soleimany v Soleimany,37

the English

Court of Appeal refused to enforce an award where the transaction was not illegal under the

applicable law, but was illegal under English law. If any justification for this delayed choice (or

even change) of law is sought in legal philosophy, it appears to lie in the concept of the

36

Alan Redfer, Martin Hunter, Nigel Blackby and Constantine Partasides, Law and Practice of International Commercial Arbitration (Fourth Edn, Ashford Colour Press 2007) 110. 37

[1999] Q.B. 785.

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autonomy of the parties. Parties are generally free to vary the terms of the agreement; in the same

way, they should be allowed to vary by agreement the law applicable to a dispute arising out of

that contract.38

The case concerned a contract between a father and son, which involved the smuggling of

carpets out of Iran in breach of Iranian revenue laws and export controls. The father and son had

agreed to submit their dispute to arbitration by the Beth Din the Court of the Chief Rabbi in

London, which applied Jewish law. Under the applicable Jewish law, the illegal purpose of the

contract had no effect on the rights of the parties and the Beth Din proceeded to make an award

enforcing the contract. In declining to enforce the award, the English Court of Appeal stated:

“The Court is in our view concerned to preserve the integrity of its process and to see that it is

not abused. The parties cannot override that concern by private agreement. They cannot by

procuring an arbitration conceal that they or rather one of them, is seeking to enforce an illegal

contract. Public policy will not allow it.”39

The implementation of the New York Convention is subject to three basic conditions namely: (1)

reciprocity reservation; (2) commercial reservation and (3) public policy exception. After the

ratification of the New York Convention, however, the enforcement of foreign arbitral awards

still have an inherent flaw regarding the lack of implementing legislation. The lack of arbitration

legal framework has led to the inconsistency and uncertainty of the implementation of the

Presidential Decree No. 34 of 1981. The case of Navigation Maritime Bulgars v. PT Nizwar was

38

Redfer (n 4) 113. 39

[1999] Q.B. 800.

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one of the legal realities of an unfriendly execution of foreign arbitral award in Indonesia right

after the ratification of the Convention due to the violation of national sovereignty.40

One of the most prominent feature of inconsistency application of the new Arbitration Act is the

huge level of municipal court intervention. It can be seen from the case between PT Perusahaan

Dagang Tempo v. PT Roche Indonesia.41

1.1 Public Policy Exception

Despite the fact that arbitral awards are deemed final and binding, it has to be noted that not all

of the foreign arbitration awards can be enforced in Indonesia. Based on the 1999 Act, the

arbitration awards can be enforced in Indonesia if: firstly, the awards was made by the member

country having a bilateral or multilateral agreement with Indonesia in respect of the recognition

and enforcement of foreign arbitral awards (reciprocity reservation); secondly, the scope of the

awards is commercial or trade under the Indonesian law (commercial reservation); thirdly, the

awards do not violate the public order (ketertiban umum) of Indonesia.42

The controversy of a judicial decision which was rendered by the District Court and the Supreme

Court can be seen from the case of E.D. & F. Man (Sugar Ltd) v. Yani Haryanto. In this case, the

Central Jakarta District Court had annulled the underlying contract based on the violation of the

Indonesian public policy.43

On the other hand, the Indonesian Supreme Court (the Mahkamah

40 Green Stephen B, above no. 14, at 296. See also Berkowitz D, Moenius J & Pistor K, Legal Institutions and International

Trade Flows, Michigan Journal of International Law, Vol. 26, 2004, available at:

<http://www.pitt.edu/~dmberk/Berkowitz%20Moenius%20Pistor.pdf>, Viewed on 8 May 2008, p. 22.

41

See article 11 of the Act no. 30 of 1999 regarding the Arbitration and the Alternative Dispute Resolution (ADR).. 42 See article 66 of the Act No. 30 of 1999 regarding the Indonesian Arbitration and Alternative Dispute Resolution. 43 The contract was considered as contrary to public policy since it violates the Presidential Decree No. 43 of 1971 and Decree

No. 39 of 1978 concerning the prohibition of private individual to import sugar. Based on these decrees, only the Indonesian

government procurement agency (BULOG) that can import sugar. See Mills K, Enforcement of Foreign Arbitral Awards in

Indonesia & Other Issues of Judicial Involvement in Arbitration, available at:

http://209.85.173.104/search?q=cache:DCUp2L_2Q8sJ:www.arbitralwomen.org/files/publication/4310102632224.pdf+ED+%26

+F+Man+v.+Yani+Haryanto+and+arbitral+awards+enforcement&hl=id&ct=clnk&cd=2>, viewed on 2 May 2008, p. 10.

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Agung) rendered the exequatur (writ of execution) upon this case. However, the exequatur of the

Supreme Court was then considered as unenforceable since the underlying contract was invalid.

2. The Arbitral Award is unenforceable without the assistance of Judicial Authorities of

Indonesia

Secondly, the effective conduct of an international commercial arbitration may depend upon the

provisions of the law of the place of arbitration. One way of illustrating this dependence is by

reference to any provisions of the local law for judicial assistance in the conduct of arbitration.

Even if the arbitrators have the power to order interim measures of protection, such as orders for

the preservation and inspection of property, they are unlikely to have the power to enforce such

orders. For this, it is necessary to turn to national courts for assistance.44

2.1. Presence of Judicial Hostility and Jurisdictional Approach in Arbitral Award

Enforcement in Indonesia:

This judicial hostility to arbitration is not only concerned with the enforceability of pre-dispute

arbitration clauses, but it also includes any arbitration agreement and the unenforceability of

foreign judgments.45

44

See, e.g., the Swiss Private International Law Act 1987, Ch. 12, Art. 183 which provides that its arbitral tribunal may request the assistance of the court where a party does not voluntarily comply with a protective measure; the Netherlands Arbitration Act 1986, Art. 1022(2), which provides a party to request a court to grant interim measures of protection; the English Arbitration Act s.44(1) and (2), which gives the court the same powers to order the inspection, photocopying preservation, custody or detention of property in relation to an arbitration as it has in relation to litigation; and the Model Law, Art.9, which allows a party to seek interim measures of protection from a court. 45

The old judicial hostility was also visible in the United States of America (the US) in the nineteenth century. In

this period, as the reflection of judicial hostility to arbitration, agreement to arbitrate was considered as non

enforceable and revocable. See Burton Steven J & Murray John F, The New Judicial Hostility to Arbitration:

Unconscianability and Agreement to

Arbitrate, available at:

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID957829_code650352.pdf?abstractid=95782 9&mirid=1, Viewed

on 24 April 2008, p. 9-10. See also Scodro Michael A, Deterrence and Implied Limits on Arbitral Power, available

at: <http//www.law.duke.edu/shell/cite.pl?55+Duke+L.+J.+547+pdf>, viewed on 24 April 2008, p. 549.

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Principally, based on the jurisdictional theory, the enforcement of foreign judgments and awards

can be considered as a violation of state sovereignty.46

The juridictionalists legitimate the

dominant role of sovereign states (jurisdiction) in regulating any activities within their territories

by implementing a given system of domestic laws and they have rights to control both

substantive and procedural of awards enforcement based on their own mandatory rules.47

In

Indonesia, where municipal courts greatly interfere with the enforcement of foreign arbitral

awards, it reflects a major juridical sovereignty. Hence, it seems that the Indonesian judicial

system is primarily based on a jurisdictional theory emphasizing on national sovereignty rather

than contractual theory.48

The controversy of judicial hostility to arbitration and foreign judgments enforcement was

expressly stated in the Code of Civil Procedure which was taken over from the Dutch Code of

Civil Procedure – known as the Reglement op de Burgerlijke Rechtsvordering (Rv) – based on

the concordance principle (concordantie beginsel).49

The implementation of Rv was

fundamentally based on the Dutch Gazette (Staatblad Hindia Belanda) No. 52 of 1947 jo No. 63

46

Taylor Veronica L, Contract and Contract Enforcement in Indonesia: An Institutional Assessment, in Indonesia,

Law and Society, Lindsey T (ed), 2nd edition, Federation Press, Sydney, 2008, P. 581.

47

Ibid. 48

Barraclough A & Waincymer J, Mandatory Rules of Law in International Commercial Arbitration, available at:

http//www.law.monash.edu.au/research/2005-research-publicationdata. pdf>, viewed on 24 April 2008, p. 3. The

jurisdictional theory has been challenged by the contractual theory. Based on contractualists, the agreement to

arbitrate which is agreed by the parties has a paramount importance of the authority of the arbitrators to make the

awards. The arbitrator, thus, play a major role as an agent of the parties. The states have no control over the

arbitration authority and it hostile to mandatory rules. See also Tsakatoura A, The Immunity of Arbitrators, available

at: <http://www.inter-lawyer.com/lex-e- cripta/articles/arbitratorsimmunity.

htm>, viewed on 27 April 2008, p. 4.

49 Louis Tuegeh Longdong, Asas Ketertiban Umum dan Konvensi New York 1958, Sebuah Tinjauan atas Pelaksanaan Konvensi

New York 1958 pada Putusan-Putusan Mahkamah Agung RI dan Pengadilan Asing, Citra Aditya Bakti, Bandung, 1998, p. 189.

Concordance principle is a principle stating that all of Dutch Law can also be implemented in Indonesia as a colonialized state.

Previously, the arbitration law in Indonesia was enshrined in the Code of Civil Procedure of 1847, Book III, articles 615-651. See

also Adolf H, Arbitrase komersial Internasional, Raja Grafindo Persada, Jakarta, 2002, p. 131.

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of 1849.50

The article 436 of Rv expressly provides that the foreign judgments cannot be

enforced voluntarily in Indonesia.51

Thus, these judgments had to be re-examined or re-trial by

the Indonesian court as a new case.52

In addition, the article 23 of Algemene Bepalingen

(hereafter AB) provided the exception of the recognition and enforcement of foreign judgments

in Indonesia on the ground of public order (ketertiban umum).53

Not only does this article

attempts to limit the party autonomy principle in regards to contractual issue, but it also confines

to all legal activities (rechtshandelingen).54

This means that public policy exception as an escape

clause can be applied widely.55

The article III of the New York Convention left much discretionary power of foreign arbitral

enforcement to the „rule of procedure‟ of the territory where the award relied upon. Since the

enforcement of foreign arbitral awards left open to the procedural rule of the enforcing states, it

may lead to more exhaustive conditions of enforcement procedure. Based on the article 66 (d) of

the Indonesian Arbitration Act, foreign arbitral awards can be enforced in Indonesia after it

receives „exequatur‟ (writ of execution) from the Central Jakarta District Court or the Supreme

Court.56

This enforcement mechanism of foreign arbitral awards confine to „the rules of

procedure‟ of Indonesia as the enforcing state. In other words, the Indonesian municipal courts

have a judicial authority to intervene to the enforcement of international arbitral awards.

a. Disregard of „Agreement to Arbitrate‟

50

Adolf, above no. 12, at. 131. 51

See article 436 Rv, Staatblad No. 52 of 1947 jo No. 63 of 1849. 52

Longdong , above no. 18, at. 187. 53

Gautama , above no. 9, at. 59 54

Ibid. 55

Gautama, above no. 9, at. 59. 56 See article 66 (d) and (e) of the Act No. 30 of 1999 regarding the Arbitration and Alternative Dispute Resolution (ADR). The

enforcement of state contracts should be based on the exequatur of the Supreme Court.

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In practice, however, Indonesian court usually disregard „agreement to arbitrate‟. Although

article 3 and 11 of the Act No. 30 of 1999 embody a “limited court involvement values”57

and

expressly states that domestic courts have no authority or competency to litigate the case of the

contracting parties, it is not always the case in practice. Inconsistency of application of this

provision remain exists. This situation can be noted from the case of Bankers Trust Company

and Bankers Trust International PLC (BT) v. Mayora Ltd which has raised concerns.58

The court

disregard the arbitration clause provision of the contract and issued a court decision No.

46/Pdt.G/1999 on 9 December 1999 due to the lack of commerciality.

2.2.The Absence of Common International Standard of Public Policy Exception

Internationally

The emergence of on going issues of judicial hostility on a legal basis of public policy exception

has not only been provided in the article V (2) (b) of the New York Convention 1958, but it is

also stated in the article 36 (b) (ii) of the UNCITRAL Model Law on International Commercial

Arbitration. Both international conventions provide:

“Recognition and enforcement of an arbitral award may also be refused if the competent

authority in the country where recognition and enforcement is sought finds that:

(b) the recognition or enforcement of the award would be contrary to the public policy of that

country.”59

“Recognition or enforcement of an arbitral award, irrespective of the country in which it was

made, may be refused only:

(b) If the court finds that:

57 Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke Muka Pengadilan, available at:

<http://www.jurnalhukum.blogspot.com/2006/09/klausul-arbitrasedan- pengadilan_18.html>, Viewed on 24 April 2008, p. 9. 58 Faiz Mohamad, P, Kemungkinan Diajukannya Perkara dengan Klausula Arbitrase ke Muka Pengadilan, available at:

<http://www.jurnalhukum.blogspot.com/2006/09/klausul-arbitrasedan-pengadilan_18.html>, Viewed on 24 April 2008, p. 9. 59

See article V (2) (b) of the New York Convention. 1958.

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(ii) the recognition and enforcement of the award would be contrary to the public policy of this

state”.60

It can be noted from these provisions that these two international conventions did not attempt to

establish a unified and global standard of public policy exception.61

Furthermore, there has not

been a fixed definition of what should be categorized as a public policy exception.62

Moreover, it

also implies a common principle that the municipal courts of the enforcing states have an

exclusive authority to set aside the awards on the ground of public policy.63

This discretionary

power of the court of the country of origin in regard to the application of public policy exception

may lead to an extensive interpretation of public policy principle.64

Article III of the New York

Convention, however, has restricted the discretionary power of the states‟ courts in respect of the

enforcement of international arbitral awards.65

This provision implies that public policy

exception should be construed narrowly and it should confine to international public policy

rather than domestic public policy. However, this provision remain vague since there has not

been a clear cut distinction between domestic and international public policy exception.66

The Act No. 30 of 1999 concerning the Indonesian Arbitration and Alternative Dispute

Resolution (ADR) also has a similar concept of the Convention. The article 66 (c) of the 1999

Act provides that: “foreign arbitral awards can be recognized and enforced in Indonesia unless

they violates the Indonesian public order (ketertiban umum).”67

However, there is no clear

60 See article 36 (b) (ii) of the UNCITRAL Model Law on International Commercial Arbitration

61 Sheppard A, Public Policy and the Enforcement of Arbitral Awards: Should there be a Global Standard?, Transnational

Dispute Management, Vol. 1, Issue 01, February 2004, available at:

<http://www.gasandoil.com/ogel/samples/freearticles/article_67.htm - 59k ->, Viewed on 30 April 2008, p. 3. 62

Ibid. 63

Albert Jan Van den Berg, The New York Convention of 1958, Kluwer Law and Taxation, The Netherlands, 1990, p. 20. 64

Ibid. 65

See article III of the New York Convention 1958. 66

Green Stephen B, above no. 37, at. 295. 67

See article 66 (c) of the Act No. 30 of 1999.

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definition or standard interpretation of the meaning of public order in this Act. The explanatory

remarks of the 1999 Act has not strictly defined the scope and meaning of what can be

characterized as the Indonesian public order. As a result of this vague concept of public order

(ketertiban umum), thus, it can be widely applied. In addition, this principle is patently used as a

protective devise of national interests of the country.68

II. The Franchise Agreement is invalid under Indonesian law

1. Invalidity of contract due to illegal „causa‟

The article 1320 of Burgerlijk Wetboek states that: the validity of contract is mainly based on

offer and acceptance, subject capability, subject matter and legitimate „causa‟. It means that the

objectives of the contracting parties should not be contrary to the Indonesian public order and

mandatory law (dwingend rechts). If a contract is contrary to national mandatory rules, it can be

deemed as null and void, thus it cannot be enforced in Indonesia. From this point, the validity of

contract as stated in article 1320 of the Civil Code (Burgerlijk Wetboek) can be equated with

public order (ketertiban umum).69

The coexistence of public policy and the validity of contract

has become the major feature of the refusal of enforcement of foreign arbitral awards in

Indonesia. This, of course, may expand the application of public policy exception. Mandatory

rules of economic regulations also play a significant role in the application of public policy

exception.70

Article 31(1) of Law 24 of 2009 of Indonesia states that “the Indonesian language shall be used

in memoranda of understanding and agreements involving state institutions, government

agencies of the Republic of Indonesia, Indonesia‟s private institutions or individual Indonesian

68

Ibid., at. 280. 69

Junita… 70

Ibid.

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20

citizens.71

The Franchise Agreement has not been signed in the Indonesian language but a copy

in the Indonesian language was sent to the Respondent a day later. Thus, the agreement is clearly

against the public policy having illegal „causa‟ and is thus invalid.

Furthermore, Article 6 and 7 of the Business Franchise Guide of Indonesia has not been

complied by the parties which has further invalidated the contract.

Article 5 of the Franchising and Licensing Association (Singapore), Code of Ethics has also not

been complied by the parties which has specifically mentioned that “A franchisor shall disclose

to the franchisee at least 7 days prior to the execution of the franchise agreement, its current

operations, the investment required, performance records and any other information reasonably

required by the franchisee that are material to the franchise relationship including the details that

are set forth in Appendix A.72

III. ARTICLE XII OF THE FRANCHISE AGREEMENT IS INVALID AS IT HAS

VIOLATED THE UNIDROIT PRINCIPLES ON INTERNATIONAL

COMMERCIAL CONTRACTS

According to article 1397 of the Civil Code (Burgerlijk Wetboek), not only do the contracting

parties bind to the written provisions, but they also bind to usage and customs in relation to the

contract. This, of course, exemplifies the receptiveness of the Indonesian law to the

implementation of the general principles of international law and the new lex mercatoria such as

pacta sunt servanda (sanctity of contract), freedom of contract, force majeure, good faith etc.

However, it should be noted that the uncertainty of those general principles application can also

be a problematic issue in the finality and enforceability of the awards.73

ARTICLE 3.2.7 of the UNIDROIT Principles on International Commercial Contracts states:

71

See Article 31, Law 24 of 2009 72

Appendix A includes Financial Statement, Balance Sheet and Statement of Profit and Loss. 73

Junita…

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21

(1) 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. 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,

inexperience or lack of bargaining skill, and

(b) the nature and purpose of the contract.

(2) Upon the request of the party entitled to avoidance, a court may adapt the

contract or term in order to make it accord with reasonable commercial standards

of fair dealing.

(3) A court may also adapt the contract or term upon the request of the party

receiving notice of avoidance, provided that that party informs the other party of

its request promptly after receiving such notice and before the other party has

reasonably acted in reliance on it. Article 3.2.10(2) applies accordingly.

The dispute settlement clause is therefore unenforceable and invalid 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.

ARTICLE 2.1.20 has laid down the inapplicability of the surprising terms. The provision of

Article XII B of the Franchise Agreement is a surprising term and thus can be avoided.74

74 (1) No term contained in standard terms which is of such a character that the other party could not reasonably

have expected it, is effective unless it has been expressly accepted by that party.

(2) In determining whether a term is of such a character regard shall be had to its content, language and presentation.

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IV. A PROPER AND TIMELY NOTICE OF TERMINATION WAS NOT GIVEN

TO THE FRANCHISEE

ARTICLE 7.3.2 of the UNIDROIT Principles talks about notice of termination of international

commercial contracts:

(1) The right of a party to terminate the contract is exercised by notice to the other party.

(2) If performance has been offered late or otherwise does not conform to the contract the

aggrieved party will lose its right to terminate the contract unless it gives notice to the other party

within a reasonable time after it has or ought to have become aware of the offer or of the non-

conforming performance.

V. A CONTRACT CAN BE TERMINATED ONLY WHEN THERE IS MATERIAL

BREACH OR SUBSTANTIAL VIOLATION OF THE PROVISIONS OF THE

CONTRACT

When a contract is intended to be discharged on the grounds of breach, and has relied upon

renunciation as a ground for discharge, they must be such as to lead to the conclusion that the

other party no longer intends to be bound by the contract. But this is not the case here as the

Respondent made significant changes to their menu and uniform after the first email was sent to

him by the Claimant.

The Franchise Agreement also specifically mentions that the Agreement can be terminated only

for any substantial violation of the terms and conditions of this Agreement.75

ARTICLE 7.3.1 of the UNIDROIT Principles has stated:

(1) A party may terminate the contract where the failure of the other party to perform an

obligation under the contract amounts to a fundamental non-performance.

75

See Franchise Agreement, Art. XIII B.

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(2) In determining whether a failure to perform an obligation amounts to a fundamental non-

performance regard shall be had, in particular, to whether

(a) the non-performance substantially deprives the aggrieved party of what it was entitled to

expect under the contract unless the other party did not foresee and could not reasonably have

foreseen such result;

(b) strict compliance with the obligation which has not been performed is of essence under the

contract;

(c) the non-performance is intentional or reckless;

(d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the

other party‟s future performance;

(e) the non-performing party will suffer disproportionate loss as a result of the preparation or

performance if the contract is terminated.

(3) In the case of delay the aggrieved party may also terminate the contract if the other party fails

to perform before the time allowed it under Article 7.1.5 has expired.

These conditions have not been fulfilled in the case in hand.

V. THE “INHERENT WARRANTY OF GOOD FAITH AND FAIR DEALING”

APPLIES IN INTERPRETING FRANCHISE AGREEMENTS

ARTICLE 1.7 of the UNIDROIT Principles has laid down the principles of good faith and fair

dealing to be applied in international commercial contracts.76

This cannot be avoided by the parties in any case.

76 (1) Each party must act in accordance with good faith and fair dealing in international trade.

(2) The parties may not exclude or limit this duty.

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a. Serving of a single Indonesian dish referred to as “The Special of the Day” did not justify

the termination of the franchise. It does not relate to material breach of the agreement.

b. Giving the customers the option of substituting lamb for pork for menu items does not

justify the termination of the franchise. This practice was abolished after the first email

was sent to the Respondent.

c. The wearing of the “new white hijab” by the female Muslim employees does not justify

the termination of the franchise as the Muslim population in Indonesia follow the

Shari‟ah that prescribes them to wear the hijab.

d. The above alleged violations does not show any continuing disregard of the franchisee‟s

obligations under the Franchise Agreement to justify its termination.

VII. THE EMPLOYMENT REGULATION PROHIBITING THE WEARING OF A

HIJAB BY FEMALE MUSLIM EMPLOYEES OR RESTRICTION VIOLATE THE

CONSTITUTION AND LAWS OF INDONESIA AND ICESCR TO WHICH IT IS A

MEMBER

Article 28E of the Constitution of Indonesia states:

(1) Every person shall be free to choose and to practice the religion of his/her

choice, to choose one's education, to choose one's employment, to choose one's

citizenship, and to choose one's place of residence within the state territory, to

leave it and to subsequently return to it.

Article 29 of the Constitution states:

(1) The State shall be based upon the belief in the One and Only God.

(2) The State guarantees all persons the freedom of worship, each according to

his/her own religion or belief.

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Indonesia has ratified the International Covenant on Civil and Political Rights, whose Article

2(1) states:

The States Parties to the present Covenant undertake to guarantee that the rights enunciated in

the present Covenant will be exercised without discrimination of any kind as to race, colour, sex,

language, religion, political or other opinion, national or social origin, property, birth or other

status.77

Article 18 of ICCPR states:

1. Everyone 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, either individually or in community with others and in

public or private, to manifest his religion or belief in worship, observance,

practice and teaching.

2. No one shall be subject to coercion which would impair his freedom to have or

to adopt a religion or belief of his choice.

3. Freedom to manifest one's religion or beliefs may be subject only to such

limitations as are prescribed by law and are necessary to protect public safety,

order, health, or morals or the fundamental rights and freedoms of others.

4. The States Parties to the present Covenant undertake to have respect for the

liberty of parents and, when applicable, legal guardians to ensure the religious and

moral education of their children in conformity with their own convictions.

Thus, enforcing an employment regulation that prohibits the practice of the Islamic rules of

Shari‟ah, has violated not only the constitution but the international treaties to which Indonesia is

a party to.

77

See ICCPR, Art.2(2).

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PRAYER FOR RELIEF

In light of the arguments advanced and authorities cited, the Respondent denies the allegations

and asserts a counterclaim for breach of the franchise agreement and damage to his reputation.