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F2040-R
LAWASIA MOOT COMPETITION
2012
GREAT WALL NOODLE SHOP LLC
Claimant
v.
DR. ADI BUDIAMMAN
Respondent
MEMORIAL FOR THE RESPONDENT
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TABLE OF CONTENTS
INDEX OF AUTHORITIES I
STATEMENT OF JURISDICTION 1
QUESTIONS PRESENTED 2
STATEMENT OF FACTS 4
SUMMARY OF PLEADINGS 7
I. THE TRIBUNAL DOES NOT HAVE JURISDICTION TO HEAR THIS
DISPUTE…………………………………………………………………………….10
A. There is no Arbitration Agreement between the parties under both Singapore law and
Indonesia law
B. Even if there was an Arbitration Agreement between parties, it is invalid and
unenforceable
(i) It violates the public policy of Indonesia
(ii) It violates Article 1338 Indonesian Civil Code
(iii) It violates the Unfair Contract Terms Act
II. THE LAW GOVERNING THE FRANCHISE AGREEMENT IS THE LAW OF
INDONESIA…………………………………………………………………………..17
A. The Malaysian Arbitration Act requires the conflict of laws rules of the seat of
arbitration to be applied
B. Applying conflict of laws rules of the seat is in the spirit of international arbitration
practice
C. Malaysian conflict of laws rules point to Indonesia law as the governing law of the
Franchise Agreement
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III. THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIA LAW....21
A. It does not meet the requirements of Article 1320 Indonesian Civil Code
IV. THE CLAIMANT FAILED TO GIVE THE RESPONDENT PROPER AND
TIMELY NOTICE OF TERMINATION…………………………………………...22
A. The Claimant breached Article VIII of the Franchise Agreement
B. The Claimant violated Article 1338 Indonesian Civil Code
C. The Respondent was not in default of the Franchise Agreement
V. THE CLAIMANT WAS ENTITLED TO TERMINATE THE FRANCHISE
ONLY FOR SUBSTANTIAL VIOLATIONS OF THE FRANCHISE
AGREEMENT………………………………………………………………………...25
VI. THE DUTY OF GOOD FAITH APPLIES TO THE FRANCHISE
AGREEMENT………………………………………………………………………...27
A. At Indonesia law, Article 1338 Indonesian Civil Code imposes a duty of good faith
and fair dealing in the performance and enforcement of contracts
B. In the alternative, at Singapore law, the special character of the franchisor-franchisee
relationship imposes a duty of good faith
VII. THE RESPONDENT’S PURPORTED BREACHES DID NOT JUSTIFY
TERMINATION……………………………………………………………………...29
A. Offering a single Indonesian dish did not justify termination
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B. Offering substitution of lamb for pork did not justify termination
(i) The Respondent’s substitution of lamb for pork was tacitly approved by the
Claimant, and was hence not a breach of Article III(B) Franchise Agreement
(ii) In the alternative, even if tacit approval was not granted, the Claimant had
waived its right to strictly enforce Article III(B) Franchise Agreement
(iii) Further in the alternative, even if the substitution was a breach of Article III(B)
Franchise Agreement, it was not a substantial breach
C. The Respondent’s variation to the uniform either was not a breach, or was not a
breach substantial enough to entitle the Claimant to terminate the franchise
(i) The variation was not a breach of Article II(1)(G) Franchise Agreement
(ii) In the alternative, the uniform variation was not a substantial breach
VIII. THE VARIATIONS DID NOT REFLECT A CONTINUING DISREGARD OF
THE RESPONDENT’S OBLIGATIONS…………………………………………...36
IX. FURTHER AND IN THE ALTERNATIVE, THE CLAIMANT’S PURPORTED
EXERCISE OF ITS RIGHT TO TERMINATE WAS CONTRARY TO GOOD
FAITH, AND IS THUS INVALID…………………………………………………..38
X. THE PROHIBITION ON WEARING OF THE HIJAB VIOLATES THE
CONSTITUTION OF INDONESIA, INDONESIA LAW 39 OF 1999 AND/OR
INTERNATIONAL TREATIES TO WHICH INDONESIA IS A MEMBER…...39
A. It violates the employees’ right to practise their religion
B. It violates Indonesia’s state philosophy, Pancasila
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C. It discriminates against women
CONCLUSION AND PRAYER FOR RELIEF 43
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I
INDEX OF AUTHORITIES
Singapore & English Judicial Decisions Carlill v Carbolic Smoke Ball Co [1892] 1 QB 256…………………………………... 10 Gibson v Manchester City Council [1979] 1 WLR 294.………………………………. 10 Olley v Marlborough Court Ltd [1949] 1 KB 532…………………………………….. 11 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433……... 11 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163…………………………………. 12 Stewart Gill Ltd. v Horatio Myer & Co. Ltd. [1992] QB 600…………………………. 15 Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334………. 17 Black-Clawson v Papierwerke [1981] 2 Lloyds Rep 446……………………………... 17 Whitworth Street Estates (Manchester) Ltd v James Miller and Partners Ltd [1970] AC 583………………………………………………………………………………….
20
Jurong Port Pte Ltd v Huationg Inland Transport Service Pte Ltd [2009] 4 SLR(R) 53…………………
26
Nelson v Dahl (1879) 12 Ch. D. 568………………………………………………….. 28 Chai Cher Watt v SDL Technologies Pte Ltd [2012] 1 SLR 152……………………… 31 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The "Kanchenjunga") [1990] 1 Lloyd's Rep 391…………………………………………...
31
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26………. 35 Telestop Pte Ltd v Telecom Equipment Pte Ltd [2004] SGHC 267…………………… 28 Indonesia Judicial Decision The Indonesian Sup. Ct. Decision No. 1203K/PDT/1990……………………………... 13 The Indonesian Sup. Ct. Decision No. 1205K/PDT/1990……………………………... 13 Karaha Bodas Co. LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina), Decision of the Dist. Ct. of Central Jakarta, No. 86/PDT.G/2002/PN.JKT.PST (Indon.)………………………………………………...
13
Other Judicial Decisions Klockner Pentaplast Gmbh v Advance Technology [2011] HKEC 941……………….. 17 Y K Fung Securities Sdn Bhd v James Capel (Far East) Ltd [1997] 2 MLJ 621……… 20 James Capel (Far East) Ltd v Y K Fung Securities Sdn Bhd [1996] 2 MLJ 97……...... 20 Burger King Corporation v Hungry Jack’s Pty Limited (2001) 69 NSWLR 558……... 26, 38 International Statutes New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
Article V(2)(b)…………………………………………………………………. 13 UNCITRAL Model Law on International Commercial Arbitration 1985
Article 28(2)…………………………………………………………………… 18 International Convention on Civil and Political Rights (16 December 1966), 999 UNTS 1057
Article 18………………………………………………………………………. 39 Convention on the Elimination of All Forms of Discrimination against Women (18 December 1979), 1249 UNTS 13 (entered into force 3 September 1981)
Article 11………………………………………………………………………. 41, 42
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II
Indonesia Statutes Law 24 of 2009
Article 31………………………………………………………………………. 14, 21 Indonesian Civil Code
Article 1320……………………………………………………………………. 12, 21 Article 1338……………………………………………………………………. 14, 22, 23,
27, 38 Article 1267……………………………………………………………………. 15 Article 1238……………………………………………………………………. 24, 25
The Constitution of Indonesia Article 28E(1)………………………………………………………………….. 39 Article 28………………………………………………………………………. 39 Preamble……………………………………………………………………….. 40
Singapore Statutes Unfair Contract Terms Act (Cap 396, 1994 Rev Ed)
Section 3(2)(a)…………………………………………………………………. 15 Section 13(1)(b)………………………………………………………………... 15, 16 Section 11……………………………………………………………………… 16 Section 3(1)……………………………………………………………………. 16 Section 3(2)……………………………………………………………………. 16
Application of English Law Act (Cap 7A, 1994 Rev Ed) Section 3(1)……………………………………………………………………. 28
Malaysia Statutes Arbitration Act 2005 (Act 646)
Section 30(4)…………………………………………………………………... 17, 18
Treatises & Commentaries The Law of Contract in Singapore (A Phang, gen ed) (Academy Publishing, 2012)…. 11 Sudargo Gautama, Contract Law in Indonesian Business Law, (Citra Aditya Bakti, 1995)……………………………………………………………………………………
12, 25
R. Subekti, The Law of Contracts in Indonesia Remedies of Breach, (Haji Masagung, 1989)……………………………………………………………………………………
12
Gary Born, International Commercial Arbitration (Kluwer Law International, 3rd Ed, 2009)……………………………………………………………………………………
19
Halsbury’s Laws of Malaysia vol 3 (LexisNexis Malaysia, 2009 Reissue)…………… 19 A. S. Hartkamp et al, Towards a European Civil Code (Kluwer International, 2004)... 23 Martijn W. Hesselink, “The Concept of Good Faith”, in Towards A European Civil Code, (Arthur S. Hartkamp, Martijn W. Hesselink, Ewoud H. Hondius, Chantal Mak & C. Edgar du Perron, eds.) (Alphen aan de Rijn: Kluwer Law International, 4th Ed, 2010)……………………………………………………………………………………
27
J Beatson, Anson’s Law of Contract (Oxford University Press, 28th Ed, 2002)……… 28 Edwin Peel, Treitel: The Law of Contract (Sweet & Maxwell, 13th Ed, 2011)………. 35 Journals & Articles Julian Lew, “The Law Applicable to the Form and Substance of the Arbitration Clause”, ICCA Congress Series, 1998 Paris Volume 9 pp114–145………………….
10, 17
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III
Fifi Junita, “Refusing enforcement of foreign arbitral awards under Article (V)(2)(b) of the New York Convention: The Indonesian Perspective”, (2009) 2 Contemp. Asia. Arb. J 301………………………………………………………………………………
13, 14
Fred B. G. Tumbuan, “Certain Indonesian Contract Law Principles That Are Relevant in International Arbitration” (2008) 3 Indonesian Arbitration Quarterly Newsletter 19…………………………………………………………………………...
14, 15
R.J.P. Kottenhagen, “From Freedom of Contract to Forcing Parties To Agree” Rotterdam Institute of Private Law Accepted Paper Series, 14………………………..
15
Carlo Croff, “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws Problem?” (1982) 16 Int'l L 613……………………………...
18, 19
Nancy J Smith-Hefner, “Javanese Women and the Veil in Post-Soeharto Indonesia”, The Journal of Asian Studies Vol. 66, No. 2 (May) 2007: 389–420…………………...
34
Heather Marie Akou, “Interpreting Islam through the Internet: making sense of hijab”, (2010) 4 Contemporary Islam 331……………………………………………..
40
Simon Butt, “Islam, the State and the Constitutional Court in Indonesia” (2010) 19(2) Pacific Rim Law & Policy Journal 279………………………………………………...
40
Web Resources Herbert Smith “Update: Indonesian language requirement for contracts - current position” (20 November 2009) available online <http://www.herbertsmith.com/NR/rdonlyres/98296D71-FE70-4CB1-9B9C-E4BF98F42AC1/13419/1120Indolanguagereq.htm>………………………………….
14
Davidson and Rajoo, “Arbitration Act 2005: Malaysia Joins the Model Law”, The Malaysia Bar (10 July 2006) available online <http://www.malaysianbar.org.my/adr_arbitration_mediation/arbitration_act_2005_malaysia_joins_the_model_law.html>…………………………………………………
18
Sunaryati Hartono et al, “The Indonesian Law on Contracts”, IDE Asian Law Series No. 10, available online <http://www.ide.go.jp/English/Publish/Download/Als/pdf/10-a.pdf>………………...
21, 26
“Code of Ethics”, Franchising and Licensing Association (Singapore) available online <http://www.flasingapore.org/files/FLA%20Code%20of%20Ethics.pdf>…….
24, 27, 29, 38
“Our Mission Statement, Vision, and Code of Ethics”, International Franchise Association, available online <http://www.franchise.org/industrysecondary.aspx?id=3554……………………….....
27, 29
Oscar Chung, “Going Southward Once Again”, Taiwan Review (12 January 2011), available online <http://taiwanreview.nat.gov.tw/ct.asp?xItem=179864&CtNode=1355> ……………
32
“Subway FAQs”, available online <http://www.subway.com/ContactUs/CustServFAQs.aspx> ………………………….
32
McDonalds Indonesia, “Tentang Kami » Staff & Restoran Kami » Karyawan”, available online <http://www.mcdonalds.co.id/about-us/our-people-our-restaurant/our-people/>…………………………………………………………………
34
UN Women, available online <http://www.unwomen-eseasia.org/docs/factsheets/03%20INDONESIA%20factsheet.pdf>…………………..
39
46th CEDAW Session, “Turkey’s Sixth Report on its Complaince with the Convention on the Elimination of All Forms of Discrimination against Women” (June 2011) available online <http://www2.ohchr.org/english/bodies/cedaw/docs/ngos/CPRER_Turkey46.pdf>…..
41
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IV
Miscellaneous Qur’an………………………………………………………………………………….. 40 Arbitration Rules Kuala Lumpur Regional Centre for Arbitration Fast Track Rules
Article 6(2)…………………………………………………………………….. 17
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1
STATEMENT OF JURISDICTION
Dr. Adi Budiamman (the “Respondent”) objects to the Tribunal’s jurisdiction. The
agreement to arbitrate is invalid because the Respondent did not agree to the dispute
resolution clause embodied in Article XII of the Franchise Agreement. Any award by the
Tribunal would not be enforceable as it would be contrary to Article V of the New York
Convention.
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2
QUESTIONS PRESENTED
1 Whether Singapore Law, Indonesia Law, and/or some other law, is the proper law to
apply in resolving the dispute.
2 Whether the Arbitration Agreement is valid and enforceable.
3 Whether the Franchise Agreement is invalid under Indonesia Law; specifically under
Article 31 of Law 24 of 2009.
4 Whether Article XII of the Franchise Agreement is invalid and/or unenforceable
because it authorises the granting of specific performance should the Respondent be
found to have violated a provision of the Franchise Agreement while prohibiting the
granting of specific performance should the Claimant be found to have violated a
provision of the Franchise Agreement.
5 Whether proper and timely Notice of Termination was given to the Respondent.
6 Whether the Claimant may terminate the franchise for any violation of the Franchise
Agreement or must the violation be substantial.
7 Whether the “inherent warranty of good faith and fair dealing” used in interpreting
franchise agreements applies to this Franchise Agreement and, if so, whether
a. by the serving of single Indonesian dish referred to as “The Special of the
Day”;
b. by giving customers the option of substituting lamb for pork in menu items;
c. by wearing of the “new (white) hijab” by the female Muslim employees; and/
or
d. because the above violations of the Franchise Agreement reflect a continuing
disregard of the Respondent’s obligations under the Franchise Agreement
termination was justified.
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3
8 Whether an employment regulation prohibiting the wearing of a hijab by female
employees Muslim employees or restricting the colour type of the hijab violates the
Constitution of the Republic of Indonesia and/or the laws of Indonesia or any
international treaties to which it is a member.
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4
STATEMENT OF FACTS
Signing of the Franchise Agreement
1 On 20 June 2011, Mr. Xuefeng Wang (“Wang”), who is a director of the Great Wall
Noodle Shop LLC (the “Claimant”), and Dr. Adi Budiamman (the “Respondent”) met
by happenstance at the Singapore Airlines Lounge in Changi Airport. Wang explained to
the Respondent that he had visited Singapore for the purpose of seeing if Mr. Bao Shan
(“Bao”), who is the Claimant’s partner in Singapore, was interested in opening several
franchise restaurants in Indonesia. However, Bao was not interested.
2 The Respondent expressed his interest in opening a few Chinese restaurants in Indonesia.
Wang retrieved the Franchise Agreement (the “FA”) from his briefcase and substituted
Bao’s name for the Respondent’s on the contract, and explained the fee arrangements, as
stipulated in paragraphs B, D, and F of Article V FA, in detail.
3 As Wang did not have the opportunity to go over the entire FA with the Respondent, he
encouraged the Respondent to take the FA home to understand its terms. However, the
Respondent was satisfied with reading the FA quickly and even referred to all the terms
as “lawyer mumbo jumbo”.
4 The Respondent signed the FA before boarding his flight.
5 The next day, a copy of the FA and a Bahasa Indonesia copy were delivered to the
Respondent.
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5
6 In September 2011, two franchise restaurants were opened in Jakarta and Medan
(collectively “the Restaurants”).
The First Inspection
7 In October 2011, Mr. Jianping Ji (“Ji”), the other director of the Claimant, made an
unannounced visit to the Restaurants. Ji found several violations of the FA. Specifically,
he found that traditional Indonesian dishes were being served in addition to food items on
the Authorized Menu and that customers were allowed to request for pork to be
substituted with lamb in the Chinese dishes. Further, he observed that some female
employees were wearing red hijab which were not part of the official uniform.
8 On 4 November 2011, Ji sent an email to the Respondent to follow up on the
Respondent’s violations. In his email, Ji explained the importance of maintaining
uniformity across the Claimant’s franchises. He asked the Respondent to rectify the
violations of the FA immediately. Further, he alerted the Respondent to a possibility of
terminating the franchise if the violations continued.
The Second Inspection
9 On 28 November 2011, an inspector visited the Restaurants. The inspector reported that
an Indonesian dish, called “The Special of the Day”, was still being served at the
Restaurants. The availability of this Indonesian dish was advertised on a chalk
blackboard. The inspector also reported that female employees were wearing white hijab.
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6
Termination of the Franchise
10 The next day, Wang and Ji sent a letter to the Respondent terminating the franchise. In it,
the Respondent was directed to close the Restaurants and remove the signage within 15
days.
11 The Respondent refused to close the Restaurants.
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7
SUMMARY OF PLEADINGS
The Tribunal does not have jurisdiction to hear this dispute
1 The parties do not have a valid agreement to arbitrate under either Singapore or Indonesia
law. Further, any award by the Tribunal would violate Indonesia’s public policy and be
unenforceable.
The law governing the Franchise Agreement is the law of Indonesia
2 Section 30(4) MAA requires the Tribunal to apply the conflict rules of Malaysia.
Malaysian conflict rules point to the law of Indonesia as the governing law of the FA as
Indonesia has the closest connection to it.
The Franchise Agreement is invalid under Indonesia law
3 The FA violates Article 31 of Law 24 because it was not written in Bahasa Indonesia.
Accordingly, it does not have the required legal cause.
The Claimant failed to give the Respondent proper and timely Notice of Termination
4 The Respondent was entitled to five days to rectify any violation of the FA following
notice by the Claimant. The Claimant purported to terminate the franchise only one day
after giving such notice.
The Claimant was entitled to terminate the franchise only for substantial violations of
the Franchise Agreement
5 Article XIII(B) FA requires that a violation actually be substantial, in addition to its being
deemed so. Although Recital 4 FA requires strict conformity, failure to conform strictly is
F2040-R
8
not necessarily a substantial violation. Further, because minor violations inevitably occur
in any complex long-term contract, allowing termination for any violation would
effectively allow the Claimant to terminate at will. The contra proferentem rule should be
used to avoid such an unreasonable interpretation.
The duty of good faith does apply to the Franchise Agreement
6 At Indonesia law, Article 1338 ICC provides that contracts “shall be performed in good
faith”. At Singapore law, the Tribunal may imply a duty of good faith in franchise
agreements by custom, as the term is notorious within the franchise industry, uniform,
reasonable, and certain.
The Respondent’s purported breaches did not justify termination
7 The addition of a single Indonesian dish, the substitution of ingredients, and the variation
to the employees’ uniform did not sufficiently detract from uniformity to be substantial
violations of Articles III(A), III(B), and II(1)(G) FA respectively.
The variations did not reflect a continuing disregard of the Respondent’s obligations
8 Even if the Respondent’s breaches were continuing, they were not deliberate, and so
cannot be described as “disregard”.
Further and in the alternative, the Claimant’s purported exercise of its right to
terminate was contrary to good faith, and is thus invalid
9 The Claimant used the purported breaches as a pretext to terminate, violating its duty to
enforce the FA in good faith.
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9
The prohibition on wearing of the hijab violates the Constitution of Indonesia,
Indonesia Law 39 of 1999 and/or international treaties to which Indonesia is a member
10 The prohibition on wearing the hijab violates the right to freedom of religion.
Additionally, the prohibition violates CEDAW as it encourages discrimination on the
basis of gender.
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10
PLEADINGS
I. THE TRIBUNAL DOES NOT HAVE JURISDICTION TO HEAR THIS
DISPUTE
1 The Tribunal does not have jurisdiction to hear this dispute as the Respondent and the
Claimant (collectively “the parties”) do not have a valid agreement to arbitrate under
either Singapore or Indonesia law. Even if the Tribunal has jurisdiction, any award
made would be unenforceable as it would be contrary to public policy.
A. There is no Arbitration Agreement between the parties under both Singapore
law and Indonesia law
2 The direct effect of an arbitration agreement is to establish a special forum to
adjudicate disputes between parties and to exclude the jurisdiction of national courts
that would otherwise have jurisdiction.1 Thus, an invalid arbitration agreement would
mean that the Tribunal does not have jurisdiction to hear the dispute.
3 Under Singapore law, a contract is formed when there is a valid offer by one party
and an acceptance of that offer by the other party.2 The essential requirement of an
offer is that the party making it intends to be bound by its acceptance.3 There was an
offer to submit disputes to arbitration in Article XII FA (“Article XII”).
1 Julian Lew, “The Law Applicable to the Form and Substance of the Arbitration Clause”, ICCA Congress Series, 1998 Paris Volume 9 pp114–145 [hereinafter Lew], p125 2 Carlill v Carbolic Smoke Ball Co [1892] 1 QB 256, 262 3 Gibson v Manchester City Council [1979] 1 WLR 294, 297
F2040-R
11
4 Further, for a valid contract to be formed, there has to be an acceptance by the
offeree.4 An acceptance is an unqualified expression of assent to the terms proposed
by the offeror.5 For there to be an unqualified expression of assent to the terms of an
offer, there must be precise correspondence of offer and acceptance.6 Although the
Respondent signed the FA, there was no precise correspondence of offer and
acceptance to constitute an acceptance. The Respondent had not agreed to submit
disputes to arbitration as he was unaware that the FA contained Article XII.7 Thus,
there is no valid arbitration agreement between the parties.
5 Even if the Tribunal finds that the Respondent’s signature on the FA is a valid
acceptance of the Claimant’s offer to arbitrate disputes, Article XII was not
incorporated into the FA. Terms would only be legally binding if they were
incorporated into a contract.8
6 Incorporation is only possible if notice of the term was given at or before the time of
the contract’s formation.9 Where a term is particularly onerous or unusual, the party
seeking to enforce it must show it was fairly brought to the attention of the other
party.10 The arbitration clause is an unusual and onerous term because it ousts the
jurisdiction of the courts; thus, reasonable notice of the clause should be given.
4 The Law of Contract in Singapore (A Phang, gen ed) (Academy Publishing, 2012), [3.004] 5 Id., [3.103] 6 Id.,[3.104] 7 First Clarifications C-6 8 Olley v Marlborough Court Ltd [1949] 1 KB 532, 548–549 9 Ibid. 10 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439
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12
7 During the negotiations between parties, Mr. Wang (“Wang”), director of the
Claimant, failed to give notice of the existence of Article XII11 within the FA before it
was signed hurriedly. The Respondent should not be bound to such terms that were
given without sufficient reasonable notice before the contract is made.12
8 Under Indonesia law, there is a valid contract if the four conditions in Article 1320
Indonesian Civil Code13 (“ICC”) are satisfied. Namely, consent, capacity of parties, a
specific subject matter and a legal cause. Here, the requirement of consent was not
satisfied.
9 For a contract to be valid, the parties must consent to the basic matters contained in
the agreement.14 Consent means a meeting of minds.15 The most basic matter in an
arbitration agreement is the agreement between parties to submit their disputes to
arbitration.
10 The Respondent was unaware that the FA contained Article XII. 16 Since the
Respondent was unaware of the existence of the submission to arbitration in Article
XII, there was no meeting of minds.
11 Accordingly, there is no agreement to arbitrate.
11 First Clarifications C-6 and C-10 12 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, 169 13 Burgerlijk Wetboek voor Indonesie S. 1847-23 (Kitab Undang-undang Hukum Perdata) 14 Sudargo Gautama, Contract Law in Indonesian Business Law, (Citra Aditya Bakti, 1995) [hereinafter Gautama], pp67–118 15 R. Subekti, The Law of Contracts in Indonesia Remedies of Breach, (Haji Masagung, 1989) 16 First Clarifications C-6
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13
B. Even if there was an Arbitration Agreement between parties, it is invalid and
unenforceable
(i) It violates the public policy of Indonesia
12 Under Article V(2)(b) 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, recognition and enforcement of an
arbitration award may be refused if the competent authority of the enforcement
country finds that “the recognition or enforcement of the award would be contrary to
the public policy of that country”. Since an award by the Tribunal would necessarily
be enforced in Indonesia, the Tribunal should consider the public policies of
Indonesia.
13 The Indonesian courts have equated mandatory rules with public policy. In E.D. & F.
MAN (Sugar) Limited v Yani Haryanto,17 the Supreme Court held that the contract for
the sale and purchase of sugar to an Indonesian private entrepreneur was invalid due
to illegal “cause” since it was contrary to the Presidential Decree No. 43 of 1971 and
No. 39 of 1978 providing that only BULOG (the Indonesian Logistic Bureau) can
import sugar into Indonesia.18 A similar outcome was reached in Karaha Bodas
Company v Perusahaan Pertambangan Minyak dan Gas Bumi Negara
(PERTAMINA),19 where contravention of public policy meant that it was contrary to
17 The Indonesian Sup. Ct. Decision No. 1203K/PDT/1990 & No. 1205K/PDT/1990 18 Fifi Junita, “Refusing enforcement of foreign arbitral awards under Article (V)(2)(b) of the New York Convention: The Indonesian Perspective”, (2009) 2 Contemp. Asia. Arb. J 301 [hereinafter Junita], 319 19 Karaha Bodas Co. LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina), Decision of the Dist. Ct. of Central Jakarta, No. 86/PDT.G/2002/PN.JKT.PST (Indon.)
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the fundamental conception of morality and justice.20 Thus, a violation of domestic
rules per se is sufficient to ground the public policy defence.21
14 Article 31 Law 24 of 2009 (“Law 24”) states that “Indonesian language must be used
for a memorandum of understanding or an agreement which “involves” Indonesian
parties, not only Indonesian State Owned Enterprises and government institutions, but
also Indonesian companies and individuals”22(emphasis added).
15 Since the FA signed by parties was in English, Law 24 has been violated.
Consequently, the violation of Indonesia’s domestic rules is against its public policy
and would render an award by the Tribunal unenforceable. It must be noted that the
violation of Law 24 also has consequences on the validity of the FA.23
(ii) It violates Article 1338 Indonesian Civil Code
16 Article 1338(3) ICC states, “Agreements must be executed in good faith.” Article
1338 applies equally to pre-contractual negotiations.24
17 In 1957, the Dutch Supreme Court explained that a legal relationship, which is
governed by the principle of good faith, is established between parties during
negotiations. It held that parties in negotiations have to take into account the “justified
20 Junita, p319 21 Ibid. 22 Herbert Smith “Update: Indonesian language requirement for contracts - current position” (20 November 2009) available online <http://www.herbertsmith.com/NR/rdonlyres/98296D71-FE70-4CB1-9B9C-E4BF98F42AC1/13419/1120Indolanguagereq.htm> (accessed 11 September 2012) 23 See [42] below 24 Fred B. G. Tumbuan, “Certain Indonesian Contract Law Principles That Are Relevant in International Arbitration” (2008) 3 Indonesian Arbitration Quarterly Newsletter 19 [hereinafter Tumbuan], 26
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15
interests of the other party”.25 This is instructive as the ICC is a replica of the 1838
Dutch Civil Code.26
18 Article 1267 ICC states that a party against whom an obligation has not been fulfilled
may choose the remedy of specific performance. The right to seek the remedy of
specific performance represents the Respondent’s “justified interest”. The Claimant
disregarded the Respondent’s interest by drafting Article XII so as to deny the
Respondent the remedy of specific performance.
19 Accordingly, the Claimant violated its duty of good faith towards the Respondent.
(iii) It violates the Unfair Contract Terms Act
20 Section 3(2)(a) Unfair Contract Terms Act (Cap 396, Rev Ed 1994) (“UCTA”)
prohibits a contracting party from excluding any liability of his own breach. Section
13(1)(b) UCTA extends the scope of Section 3(2)(a) UCTA by defining “exclusion or
restriction of any liability” as the exclusion or restriction of “any right or remedy in
respect of the liability, or subjecting a person to any prejudice in consequence of his
pursuing any such right or remedy”.27
21 Article XII prevents the Respondent from seeking the remedy of specific performance
should the Claimant breach the FA whilst allowing the Claimant to seek the remedy
25 R.J.P. Kottenhagen, “From Freedom of Contract to Forcing Parties To Agree” Rotterdam Institute of Private Law Accepted Paper Series, 14, available online <http://repub.eur.nl/res/pub/14270/from%20freedom%20of%20contract.pdf> (accessed 11 September 2012) 26 Tumbuan, p21 27 Stewart Gill Ltd. v Horatio Myer & Co. Ltd. [1992] QB 600, 607
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of specific performance should the Respondent breach the FA. As such, Article XII
falls within Section 13(1)(b) UCTA.
22 For Article XII to be invalidated, two further requirements must be met. First, the
Respondent must have contracted “on the [Claimant’s] written standard terms of
business.” 28 Second, it must be shown that Article XII does not satisfy the
requirement of reasonableness.29
23 Here, the Respondent dealt with the Claimant on its “written standard terms of
business” as the FA is identical to those signed by the franchisees in Singapore and
Malaysia.30
24 The exclusion of liability also does not satisfy the requirement of reasonableness.
Section 11 UCTA explains that to satisfy the requirement of reasonableness, “the term
shall have been a fair and reasonable one to be included having regard to the
circumstances which were, or ought reasonably to have been, known to or in the
contemplation of the parties when the contract was made.”
25 Wang had failed to highlight to the Respondent that Article XII denies him the
remedy of specific performance. As it was the first time that the Respondent had dealt
with the Claimant, it was not reasonable for him to have known of such an exclusion
of liability.
28 Section 3(1) UCTA 29 Section 3(2) UCTA 30 First Clarifications C-9
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26 As Article XII violates both the principle of good faith under the Indonesia law and
the Singapore law, this Tribunal should declare it invalid and unenforceable.
II. THE LAW GOVERNING THE FRANCHISE AGREEMENT IS THE LAW OF
INDONESIA
A. The Malaysian Arbitration Act requires the conflict of laws rules of the seat of
arbitration to be applied
27 The conflict of laws rules (“conflict rules”) approach is used to determine the law
applicable to the law governing the substantive rights, obligations and performance.31
28 The Kuala Lumpur Regional Centre for Arbitration Fast Track Rules32 (“KLRCA
Rules”) apply to the proceedings. Article 6(2) KLRCA Rules states that the “seat of
arbitration shall be Malaysia”. Courts in countries adopting the UNCITRAL Model
Law on International Commercial Arbitration 1985 (“Model Law”), as Malaysia
does, have held that the governing law of the arbitration agreement is the law of the
seat. 33
29 Since the seat of the arbitration is Malaysia, the Malaysian Arbitration Act 34
(“MAA”) applies. Section 30(4) MAA requires the Tribunal to “apply the law
31 Lew, p135 32 Moot Problem Clause XII(A) 33 Klockner Pentaplast Gmbh v Advance Technology [2011] HKEC 941, [26] and [33]; Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, 357A–358A; C v D [2007] EWCA Civ 1282, [26]; Black-Clawson v Papierwerke [1981] 2 Lloyds Rep 446, 483 34 Arbitration Act 2005 (Act 646)
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determined by the conflict of laws rules”. The conflict rules referred to in Section
30(4) are those of the seat of arbitration, Malaysia.
30 Section 30(4) MAA does not afford the Tribunal the choice of the conflict rules it
considers appropriate. It differs from its Model Law counterpart in Article 28(2)
Model Law which provides that the Tribunal “shall apply the law determined by the
conflict of laws principles which it considers applicable”.
31 As the MAA was meant to implement the Model Law with modifications,35 almost all
the provisions in the MAA follow their Model Law counterparts to the letter. Section
30(4) MAA’s departure from Article 28(2) Model Law must therefore be deliberate.
This is indicative of Parliament’s intent to constrain the Tribunal to a single set of
conflict rules. Since the Tribunal does not have the freedom to apply the conflict rules
which it considers applicable, the conflict rules in the MAA must refer to Malaysia’s
conflict rules.
B. Applying conflict of laws rules of the seat is in the spirit of international
arbitration practice
32 Utilising the conflict rules of the seat promotes predictability and uniformity of result
and avoids the complexity and ambiguity of arbitrators deciding between various
existing conflicts rules, or even developing new ones.36
35 Davidson and Rajoo, “Arbitration Act 2005: Malaysia Joins the Model Law”, The Malaysia Bar (10 July 2006) available online <http://www.malaysianbar.org.my/adr_arbitration_mediation/arbitration_act_2005_malaysia_joins_the_model_law.html> (accessed 11 September 2012) 36 Carlo Croff, “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws Problem?” (1982) 16 Int'l L 613 [hereinafter Croff], p625
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33 The conflict rules of the seat are able to function as a neutral and non-partisan set of
rules. Furthermore, they are also derived from a place which the parties can be
considered to have impliedly regarded as acceptable.37
34 Applying the conflict rules of the seat is therefore practical, and consistent with the
foundational principle of international arbitration of respecting parties’ will.38
C. Malaysian conflict of laws rules point to Indonesia law as the governing law of
the Franchise Agreement
35 Under Malaysian conflict rules, a tribunal would have to determine the proper law of
the contract. Primarily, the system of law governing the contract would be that which
the parties choose or intended. Where their intention is neither expressed nor to be
inferred from the circumstances, the system of law which the transaction has its
closest and most real connection would prevail.39
36 The Applicable Law clause40 is found within Article XII. The Respondent was not
aware of the presence of Article XII and the Applicable Law clause because the
Claimant had failed to bring this to the Respondent’s attention.41 Since there was no
meeting of minds between the parties on Article XII under Singapore and Indonesia
contract law,42 Article XII, including the Applicable Law clause is not valid. The
37 Gary Born, International Commercial Arbitration (Kluwer Law International, 3rd Ed, 2009), p2139 38 Croff, p625 39 Halsbury’s Laws of Malaysia vol 3 (LexisNexis Malaysia, 2009 Reissue), [90.156] 40 Moot Problem p30 41 First Clarifications C-6 and C-10 42 See [3]–[9]
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Applicable Law clause cannot be taken to be the express intent of parties.
Accordingly, the Tribunal should not apply Singapore law as specified within the
Applicable Law clause.
37 The facts provide no guidance as to the inferred intention of the parties. In the
absence of express or inferred intention, the applicable law is that with the “closest
and most real connection” to the transaction.43 The Malaysian Court of Appeal44
affirmed that the determination of the law with the “closest and most real connection”
involved consideration of several connecting factors. These include: the place of
performance, the place of contracting, the places of residence or business of the
parties, and the nature and subject-matter of the contract.45 Varying weight will be
placed on each of these factors depending on the circumstances.46
38 Indonesia law should govern the FA as Indonesia is the place with the closest and
most real connection. The place of the performance and the place of business of the
FA is Indonesia. The Respondent had carried out his obligations under the FA in
Indonesia by setting up and operating the restaurants in Medan and Jakarta,47 selling
the Claimant’s food items.
39 The place of contracting is Singapore. However, this factor should be given little
weight, if at all. The place of contracting was purely fortuitous in the present case.
Wang was awaiting his flight back to China at Changi Airport after negotiations with
43 Whitworth Street Estates (Manchester) Ltd v James Miller and Partners Ltd [1970] AC 583 [hereinafter Whitworth Street], 603 44 Y K Fung Securities Sdn Bhd v James Capel (Far East) Ltd [1997] 2 MLJ 621, [138] 45 James Capel (Far East) Ltd v Y K Fung Securities Sdn Bhd [1996] 2 MLJ 97, 109–110 46 Whitworth Street, 615 47 Moot Problem p3
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the Singapore Franchisee failed. It was there that the parties first met and concluded
the contract.
40 Taking the above factors in totality, Indonesia is the country with the closest
connection to the FA. Thus, Indonesia law should govern the FA.
III. THE FRANCHISE AGREEMENT IS INVALID UNDER INDONESIA LAW
A. It does not meet the requirements of Article 1320 Indonesian Civil Code
41 One requirement that has to be satisfied under Article 1320 ICC is that of a legal
cause. Legal cause means that what has to be performed by either party is not contrary
to the law, public order or public morality.48
42 Since the FA was in English, it violates Law 24.49 Consequently, the FA does not
have a legal cause and is therefore invalid.
48 Sunaryati Hartono et al, “The Indonesian Law on Contracts”, IDE Asian Law Series No. 10 [hereinafter Hartono] available online <http://www.ide.go.jp/English/Publish/Download/Als/pdf/10-a.pdf> (accessed 11 September 2012), p18 49 See [15]
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IV. THE CLAIMANT FAILED TO GIVE THE RESPONDENT PROPER AND
TIMELY NOTICE OF TERMINATION
A. The Claimant breached Article VIII of the Franchise Agreement
43 Under Article VIII FA, the Respondent is contractually entitled to five days to correct
any deficiencies detected by the Claimant. Nevertheless, the Claimant sent a letter
purporting to terminate the franchise (the “Letter of Termination”) one day after the
inspection on 28 November 2011.50
44 As the contractually stipulated timeframe of five days was not afforded to the
Respondent to remedy the defects, i.e. wearing of white hijab by employees and
serving a single Indonesian dish, the Letter of Termination was neither proper nor
timely.
B. The Claimant violated Article 1338 Indonesian Civil Code
45 Although Article XIII(B) FA (“Article XIII(B)”) entitled the Claimant to terminate
the FA unilaterally under certain circumstances, it is silent as to the manner in which
a notice of termination should be given. There are no requirements as to the form and
content of a notice of termination, nor are there requirements as to the time that
should be afforded to the Respondent before he is required to cease operations.
50 Moot Problem p5
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46 Nevertheless, the manner in which the Claimant terminates the FA ought to be
circumscribed by the principle of good faith.51 The standard of good faith means that
a party has to take into account the interest of the other party.52
47 The Claimant failed to exercise his contractual right in good faith because he had not
given the Respondent a reasonable time to remedy the violations and/or to cease
operations.
48 To remedy the violations of the FA, the Respondent would have had to effect
significant changes to the management of both restaurants. Employees would have to
be re-educated about the official uniform. And if employees wanted to quit because
they could not comply with the official uniform, the Respondent would have needed
more time to hire new workers. To effect these changes, a reasonable time would be
measured in weeks rather than in days.
49 It was also not commercially reasonable to expect the Respondent to cease serving
Indonesian dishes within a matter of days, as this would cut off the Respondent’s
revenue stream abruptly.
50 The Letter of Termination demanded that the Respondent close the restaurants and
remove the signage within 15 days.53 This is contrary to good faith because the
Respondent had spent a considerable amount of money and time in setting up the
restaurants and the Claimant failed to take into account his legitimate business
interest. 51 Article 1338 ICC 52 A. S. Hartkamp et al, Towards a European Civil Code (Kluwer International, 2004), p472 53 Moot Problem p5
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51 The Respondent’s expenditure included the Initial Franchise Free of $75,000.54 In
light of the considerable expense, the period of 15 days given to the Respondent to
cease operations is unreasonably short. The period of time afforded to the Respondent
to close the restaurants has to be evaluated in terms of the cost he had expended in
relation to his revenue stream so as to take into account his legitimate business
interest.
52 In a similar vein, Article 14 Code of Ethics promulgated by the Franchising and
Licensing Association of Singapore (the “FLA Code”) states that a franchisor “shall
act in an ethical, honest and lawful manner and endeavor to pursue best franchise
business practice of the time and place”55 (emphasis added).
53 The convergence of the principle and good faith and the FLA Code is telling that the
Claimant had failed to give proper and timely Notice of Termination.
C. The Respondent was not in default of the Franchise Agreement
54 Article 1238 ICC provides that a debtor is not found to be in default merely by virtue
of a failure to perform his contractual obligations or performing it in a way contrary to
the terms of the agreement.
54 First Clarifications C-4 55 “Code of Ethics”, Franchising and Licensing Association (Singapore) available online <http://www.flasingapore.org/files/FLA%20Code%20of%20Ethics.pdf>
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55 For a failure to perform to amount to a default, the creditor must serve the debtor with
summons in the form of a warrant issued by the clerk of the District Court or a
registered letter to demand that the obligation be performed.56
56 The purpose of this rule is to give the debtor a reasonable time limit during which he
can fulfill his obligation. If he does not perform his obligations within the time
specified, or if he does not perform them adequately, his failure would amount to a
default.57
57 Since the procedural requirements under Article 1238 have not been met, the
Respondent is not in default and the Letter of Termination is improper and untimely.
V. THE CLAIMANT WAS ENTITLED TO TERMINATE THE FRANCHISE
ONLY FOR SUBSTANTIAL VIOLATIONS OF THE FRANCHISE
AGREEMENT
58 Article XIII(B) provides that “We [the Claimant] have the right to terminate this
Agreement for any substantial violation of the terms and conditions of this Agreement
we deem substantial.” Article XIII(B) contains two conditions for termination. First,
there must be a “substantial violation”. Second, it must be “deem[ed] substantial” by
the Claimant. The second criterion may be subjective, but the first criterion is
objective; both must be satisfied to allow for termination.
56 Gautama, p9 57 Ibid.
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59 Recital 4 FA is not sufficient to make any violation a substantial breach. Although it
requires “strict accordance and conformity with the standards, specifications and
procedures” of the FA, the fact that the Respondent owed strict compliance meant
only that any deviation would violate his obligations. It does not follow that any
deviation would necessarily be a “substantial violation” entitling the Claimant to
terminate.
60 Further, if Article XIII(B) were interpreted not to require an objectively substantial
violation, that clause would be unduly onerous for the Respondent. The slightest
breach of any specification—for instance, a discrepancy of a few centimetres in the
width of signage from the guidelines laid down by the Claimant pursuant to Article
II(1)(F)—would then entitle the Claimant to terminate, should it deem the violation to
be substantial. Given the high likelihood that at least a trivial or minor breach would
be committed at some point in the course of a complex, long-term contractual
relationship such as a franchise, the Respondent would, in effect, be entirely at the
mercy of the Claimant.58
61 Both Indonesia law and Singapore law militate against such an unreasonable
interpretation of Article XIII(B). The contra proferentum rule would apply at
Indonesia law59 and at Singapore law.60 The principle states that where the meaning
of a contractual clause is ambiguous, it should be interpreted against the party (the
Claimant) which introduced the clause.61
58 See Burger King Corporation v Hungry Jack’s Pty Limited (2001) 69 NSWLR 558 [hereinafter Hungry Jack’s], [183] 59 Hartono, pp 66–67 60Jurong Port Pte Ltd v Huationg Inland Transport Service Pte Ltd [2009] 4 SLR(R) 53, [15] 61 Hartono, pp 66–67
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62 For these reasons, there is no justification for departing from the plain meaning of the
words of Article XIII(B), which is that a violation must be substantial (and not only
deemed to be substantial by the Claimant) to allow for termination of the franchise.
VI. THE DUTY OF GOOD FAITH APPLIES TO THE FRANCHISE AGREEMENT
A. At Indonesia law, Article 1338 Indonesian Civil Code imposes a duty of good
faith and fair dealing in the performance and enforcement of contracts
63 Article 1338 ICC provides that contracts “shall be performed in good faith”. Although
the content of the duty of good faith is not defined within the code, international
academic consensus is that it comprehends, at minimum, honesty and a reasonable
regard for the interests of the other party.62
64 Further guidance can be taken from other jurisdictions which recognise such a duty,
either generally or in specific contracts. The Uniform Commercial Code of the United
States of America defines good faith as “honesty in fact and the observance of
reasonable commercial standards of fair dealing”. 63 “Reasonable commercial
standards” here should be determined with regard to the FLA Code and the
International Franchise Association’s Code of Ethics 64 and adhered to within the
franchise industry.
62 Martijn W. Hesselink, “The Concept of Good Faith”, in Towards A European Civil Code, (Arthur S. Hartkamp, Martijn W. Hesselink, Ewoud H. Hondius, Chantal Mak & C. Edgar du Perron, eds) (Kluwer Law International, 4th Ed, 2010), p621 63 § 1-201(b)(20) 64 FLA Code; “Our Mission Statement, Vision, and Code of Ethics”, International Franchise Association, available online <http://www.franchise.org/industrysecondary.aspx?id=3554> (accessed 14 September 2012)
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B. In the alternative, at Singapore law, the special character of the franchisor-
franchisee relationship imposes a duty of good faith
65 Although Singapore law does not recognise a general duty of good faith in contracts,
it does not exclude the possibility that a good faith requirement may apply to specific
kinds of contracts due to their special character. Telestop Pte Ltd v Telecom
Equipment Pte Ltd65 left open the possibility that a good faith requirement applies to
franchise agreements, although the court in that case declined to consider the claim in
that case due to its having been improperly pleaded.
66 The duty of good faith falls within the category of terms implied by custom. The
common law will imply a term where that term is in such wide usage (despite its
absence from the express terms of contracts), and is so familiar to persons in the
relevant trade and/or locality, that it governs all such contracts which do not expressly
exclude it.66 Although there has not yet been a local reported decision using this
principle, it is part of Singapore law pursuant to Section 3(1) Application of English
Law Act.67
67 The duty of good faith in franchise agreements satisfies the common law
requirements that a term implied by custom must be notorious, uniform, reasonable,
and certain.68 It is uniform (it applies to all franchises, and not only some), reasonable
(necessarily so, as good faith is essentially bound, in its effect, by what is reasonable),
and certain (comprehending honesty and regard for the interests of the other party).
65 [2004] SGHC 267, [67] 66 J Beatson, Anson’s Law of Contract (Oxford University Press, 28th Ed, 2002), p151 67 Cap 7A, 1994 Rev Ed 68 Nelson v Dahl (1879) 12 Ch. D. 568, p575
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68 Regarding notoriety, industry standards demonstrate that the duty of good faith is
widely known amongst those in the trade. The FLA Code provides, inter alia, that
“Fairness shall characterise all dealings between a franchisor and its franchisees”; that
franchisors shall not perform or “conduct which is not reasonably necessary for the
protection” of legitimate business interests; and that any disputes arising shall be
resolved “with good faith and good will”.69 The duty of good faith arises out of the
necessary closeness of the franchisor-franchisee relationship, which has been
recognised not only by the FLA Code, but by the franchise industry internationally.
For instance, the International Franchise Association’s Code of Ethics speaks of the
“willing interdependence between franchisors and franchisees, and the trust and
honesty upon which it is founded”. It goes on to state that “franchising is a unique
form of business relationship” and that no other business relationship “embodies such
a significant degree of mutual interdependence”.
VII. THE RESPONDENT’S PURPORTED BREACHES DID NOT JUSTIFY
TERMINATION
A. Offering a single Indonesian dish did not justify termination
69 Every variation cannot be equally harmful. Article XIII FA provides that variations to
the usual uniformity of the franchise may at times be beneficial or necessary.70 The
Claimant did authorise such variations at the Claimant’s franchise restaurants in
China,71 even though it could create a risk of disappointment (for instance, a customer
visiting an Indonesian branch could be disappointed not to find his or her favourite 69 FLA Code Rules 14 and 17, pp3–4 70 Moot Problem p28 71 Second Clarifications SR#16
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local Chinese dish on the standard menu). This demonstrates that different variations
to the standard menu may differ in the extent of harm (or benefit) that they cause.
Thus, every unauthorised variation must be examined with reference to the harm
which the Claimant wished to prevent to determine whether, on its facts, it constitutes
a substantial breach.
70 The Claimant objected to the addition of Indonesian items on the basis that “they will
destroy the uniformity of the products … and in so doing, damage the identity and
value of the Great Wall Noodle Shops trademarks”. 72 The Claimant was also
concerned that customers who purchased and enjoyed non-standard menu items
would subsequently be disappointed by the absence of those items from other
franchise outlets.73
71 The addition of a single Indonesian dish (as a daily special), although a breach, was
not a substantial one. The authorised menu contains 74 items, so that the Indonesian
dish constituted only 1.33% of the entire menu, a minor proportion. Further, because
the daily special is a variable dish, no customer would expect that a particular dish
would be available during a given visit in any case, reducing the risk of
disappointment.
72 Moot Problem p4 73 Ibid.
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B. Offering substitution of lamb for pork did not justify termination
(i) The Respondent’s substitution of lamb for pork was tacitly approved by the Claimant,
and was hence not a breach of Article III(B) Franchise Agreement
72 Mr. Ji (“Ji”) detected the unauthorised substitution when he inspected the
Respondent’s branches, but did not raise the issue either in person or in the 4
November email. That email specified the non-conformities which the Claimant
wanted the Respondent to remedy as being the unauthorised menu items and the
wearing of hijab.74 The reasonable implication of Ji’s email was that all other matters
which Ji had determined through his inspection were conforming. The Respondent
thus had tacit approval from the Claimant for the substitution.
(ii) In the alternative, even if tacit approval was not granted, the Claimant had waived its
right to strictly enforce Article III(B) Franchise Agreement
73 By informing the Respondent that conformity could be achieved by eliminating the
unauthorised menu items and the wearing of hijab, the Claimant represented that the
Respondent would be treated, in all other respects which the Claimant knew of at the
material time, as having conformed. It is contrary to good faith for the Claimant to
rely on the substitution as grounds for termination now. Furthermore, even if good
faith did not apply, equitable principles would estop the Claimant from enforcing its
strict rights in this regard.75
74 Id., p3 75 See Chai Cher Watt v SDL Technologies Pte Ltd [2012] 1 SLR 152, [33], quoting and endorsing the UK House of Lords decision in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The "Kanchenjunga") [1990] 1 Lloyd's Rep 391
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(iii) Further in the alternative, even if the substitution was a breach of Article III(B)
Franchise Agreement, it was not a substantial breach
74 Whether a breach is substantial should be assessed with regard to the harm caused.
The substitution of meats to accommodate customer’s religious (or otherwise) dietary
requirements is commonplace in Indonesia and elsewhere in Asia, and that the option
would therefore not harm the strength of the Claimant’s brand. Taiwanese franchisor
Din Tai Fung also specialises in Chinese food (albeit from a different tradition) and
markets itself as a Chinese restaurant chain. Despite this, it uses chicken instead of
pork in all dishes served at its six branches in Jakarta,76 without apparent damage to
its brand. Similarly, Subway’s branches in India allow substitution of meats to
accommodate Muslim or Hindu customers,77 also without apparent damage to its
branding as a Western sandwich company.
75 Since the Claimant’s interests in this respect are no different from those of any other
franchise, it is unrealistic to claim that any significant harm resulted from the
substitution; there was therefore no substantial breach of Article III(B) FA.
76 Oscar Chung, “Going Southward Once Again”, Taiwan Review (12 January 2011), available online < http://taiwanreview.nat.gov.tw/ct.asp?xItem=179864&CtNode=1355> (accessed 14 September 2012) 77 “Subway FAQs”, available online <http://www.subway.com/ContactUs/CustServFAQs.aspx> (accessed 14 September 2012)
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C. The Respondent’s variation to the uniform either was not a breach, or was not a
breach substantial enough to entitle the Claimant to terminate the franchise
(i) The variation was not a breach of Article II(1)(G) Franchise Agreement
76 Article II(1)(G) FA (“Article II(1)(G)”) required the Respondent to ensure that
employees complied with two requirements: first, wear uniforms complying with the
Claimant’s specifications, and second, refrain from wearing jewellery and other
distracting adornment. Neither requirement was breached by the wearing of the white
hijab.
77 The first requirement was complied with, for the employees in question did wear the
uniform specified. They merely wore another piece of clothing in addition to the
uniform. The requirement of wearing the uniform is distinct from the requirement to
not add certain adornments to it; this is reflected in the structure of the clause itself.
78 The second requirement was also complied with. The employees who wore the hijab
did present a neat and clean appearance. As for the second part of this requirement, on
a plain reading of the clause, only “adornment which detracts from the uniform
appearance of [the] employees” was prohibited, not all adornment.
79 As the party alleging a breach, it is for the Claimant to show that the white hijab
detracted from uniformity of appearance. Whether or not a given adornment detracts
from uniformity of appearance is a question of fact, depending, inter alia, on visual
factors and local custom.
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80 Visual factors determine whether the appearance of the adornment is visually
distracting. In the context of the uniform, the hijab was not visually distracting.
According to Ji’s wife, the original red hijab “matched the uniforms quite well”.78
The Respondent subsequently switched to the white hijab, which he considered to be
less noticeable. In determining the standard of uniformity to be achieved, it should be
noted that that the uniform for male employees permits either white pants or white
shorts to be worn together with the red shirt (Article II(1)(G)). The fact that this very
noticeable inconsistency between employees is not considered distracting should be
taken into account when assessing the visual effect of hijab.
81 Local custom determines whether the adornment is recognised as common and
generally acceptable. An adornment that is sufficiently common is unlikely to be seen
as strange or unusual. The wearing of hijab, although not obligatory in most of
Indonesia, is a commonplace habit with which all customers would be familiar.79 This
is reflected, among other things, by the practice of leading international franchisors
such as McDonalds Corporation, which is open about its practice of allowing
Indonesian employees to wear hijab.80
82 For these reasons, the Respondent did not breach Article II(1)(G) by allowing his
employees to wear white hijab in addition to their uniforms.
78 Moot Problem p3 79 Although no general statistics are available on the prevalence of hijab-wearing in Indonesia, smaller-scale surveys suggest that the practice is common. A 2002 survey conducted by Professor Nancy J Smith-Hefner showed that 60% of female students at Gadjah Mada University (a large, secular state university in Yogyakarta) wore hijab. See Nancy J Smith-Hefner, “Javanese Women and the Veil in Post-Soeharto Indonesia”, The Journal of Asian Studies Vol. 66, No. 2 (May) 2007: 389–420, p390. 80 See the staff photo displayed at the website of McDonalds Indonesia, “Tentang Kami » Staff & Restoran Kami » Karyawan”, available online <http://www.mcdonalds.co.id/about-us/our-people-our-restaurant/our-people/> (accessed 11 September 2012)
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(ii) In the alternative, the uniform variation was not a substantial breach
83 Even if Article II(1)(G)(ii) prohibited all adornments, the breach was not a substantial
one.
84 Whether or not the breach was substantial should be assessed with regard to the
degree to which it deprived the Claimant of the benefit which the FA was intended to
confer on it.81 In respect of Article II(1)(G), this can be determined with reference to
the harm which the said Article was intended to prevent. According to the 4
November email, 82 the reason for having a uniform was to “distinguish [the
Claimant’s] restaurants from other establishments serving Chinese food”. Variations
were prohibited on the basis that they could “cause a customer to doubt that a
particulate [sic] restaurant is affiliated with all of the other Great Wall Noodle Shops”.
85 Accordingly, the measure of whether the breach was substantial should be the degree
to which it undermined the Claimant’s objective of distinguishing itself from other
establishments and the degree to which the variation was likely to cause a customer to
doubt a branch’s association with the Claimant’s chain.
86 The white hijab were not visually distracting when weighed against the variations in
male employees’ uniforms already permitted by Article II(1)(G). There is thus no
reason why they should detract from the distinctiveness conferred by the Claimant’s
uniform, which the employees did wear.
81 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 70; Edwin Peel, Treitel: The Law of Contract (Sweet & Maxwell, 13th Ed, 2011), p866 82 Moot Problem p4
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87 Customers in Indonesia are accustomed to seeing women wearing hijab, and are
aware that said hijab are expressions of religious belief particular to the persons
wearing them. It is implausible that seeing a waitress wearing a hijab would “cause a
customer to doubt that a particulate [sic] restaurant is affiliated with all of the other
Great Wall Noodle Shops”. Indonesian customers would realise that some employees
wear hijab, and others do not, as a result of their differing religious beliefs; they
would not misunderstand the presence or absence of hijab as indicating differing
brand affiliations.
88 Consequently, the harm caused by the Respondent’s breach (if breach it was) was
non-existent to minor, and the breach was therefore not a substantial one.
VIII. THE VARIATIONS DID NOT REFLECT A CONTINUING DISREGARD OF
THE RESPONDENT’S OBLIGATIONS
89 The word “disregard” implies not just breach, but deliberate breach. Even if the
Respondent committed continuing breaches of the FA, this cannot amount to
“continuing disregard”, for the Respondent intended and attempted to comply with
the Claimant’s demands.
90 After being notified of the first set of purported breaches by the Claimant, the
Respondent attempted in good faith to remedy them. He removed all Indonesian
dishes from the menu except for the daily special, a change which cost him 15% of
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his revenue.83 Despite this significant fall in profits, he did not resume serving the
other Indonesian dishes.
91 The Respondent further instructed his employees who wore hijab to switch to a colour
which he thought would be less noticeable, telling them that the change was necessary
“for uniformity”.84 The change was achieved at the cost of three of his employees at
the Medan branch resigning.85
92 Regarding the unauthorised substitution of lamb for pork, the 4 November email did
not inform the Respondent that the Claimant viewed this variation as a breach.86
(Indeed, the inspector subsequently sent by the Claimant does not even appear to have
investigated whether the Respondent was still allowing the substitution.)87 Thus, any
failure to remedy this inconsistency cannot indicate the Respondent’s disregard of his
obligations.
93 Taken as a whole, the conduct of the Respondent showed that he took the Claimant’s
complaints seriously, and made significant and costly efforts towards achieving
compliance with his obligations. He may have been mistaken in believing that he had
fulfilled his obligations, but it cannot be said that he showed a continuing disregard
for them.
83 Second Clarifications SR#15 84 First Clarifications F-3 85 First Clarifications F-3 86 Moot Problem p3 87 Moot Problem p4
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IX. FURTHER AND IN THE ALTERNATIVE, THE CLAIMANT’S PURPORTED
EXERCISE OF ITS RIGHT TO TERMINATE WAS CONTRARY TO GOOD
FAITH, AND IS THUS INVALID
94 The Claimant had a duty to enforce the FA in good faith under Article 1338 ICC
and/or under the implied duty of good faith between franchisor and franchisee. By
denying the Respondent the opportunity to remedy the purported breaches detected
during the inspector’s visit, the Claimant acted contrary to good faith. The
Respondent’s conduct up to that point had provided no basis for believing that he
would not fulfil his obligations if called upon to do so.
95 In purporting to terminate, the Claimant was using the Respondent’s purported
breaches as a pretext for taking back a profitable franchise opportunity, in order to
give that opportunity to a friend or relative, as strongly hinted at by Ji’s email to
Wang.88 Such a use of the Claimant’s right is impermissible under a duty of good
faith and fair dealing and, specifically, under Rule 14 FLA Code.89
88 Fn 3, Moot Problem p3. A similar situation arose in Hungry Jack’s, where a contractual right was improperly exercised “for a purpose extraneous to the contract … so as to thwart [the franchisee’s] rights under the contract” (Hungry Jack’s, [195]). 89 FLA Code, p3
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X. THE PROHIBITION ON WEARING OF THE HIJAB VIOLATES THE
CONSTITUTION OF INDONESIA, INDONESIA LAW 39 OF 1999 AND/OR
INTERNATIONAL TREATIES TO WHICH INDONESIA IS A MEMBER
96 The domestic laws of Indonesia safeguards human rights through two instruments.
Namely, the Constitution of Indonesia (the “Constitution”) and Law 39 of 1999 (the
“Human Rights Law”).
97 Indonesia has also signed and ratified 90 the International Convention on Civil and
Political Rights (“ICCPR”)91 and the Convention on the Elimination of All Forms of
Discrimination against Women (“CEDAW”)92.
A. It violates the employees’ right to practise their religion
98 The Constitution guarantees that every person is “free to…practise the religion of
his/her choice”.93 Further, the Constitution states that freedom of religion is a human
right that “cannot be limited under any circumstances”.94
99 Similarly, Article 22(2) Human Rights Law states, “Everyone has the right to freedom
to choose his religion and to worship according to the teachings of his religion and
beliefs.” Article 18 ICCPR states, “Everyone shall have the right to freedom
90 Law 12 of 2005 91 ICCPR (16 December 1966), 999 UNTS 1057 (entered into force 23 March 1976) 92 CEDAW (18 December 1979), 1249 UNTS 13 (entered into force 3 September 1981); UN Women, available online <http://www.unwomen-eseasia.org/docs/factsheets/03%20INDONESIA%20factsheet.pdf> (accessed on 5 September 2012) 93 Article 28E(1) Constitution 94 Id., Article 28
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of…religion. This right shall include …freedom…to manifest his religion or belief in
worship, observance, practice and teaching.”
100The Qur’an instructs Muslim women to dress modestly and encourages the use of
hijab95. Hence, the employees who chose to wear the hijab were exercising their right
to practise the religion of their choice.
101As the right to freedom of religion cannot be limited under any circumstances, it is
implicit in the FA that stipulations as to the official uniform will not infringe on such
right. Consequently, the donning of the hijab by the employees cannot be viewed as a
violation of the FA.
B. It violates Indonesia’s state philosophy, Pancasila
102The Preamble of the Constitution embodies Indonesia’s state philosophy consisting
five principles. These principles are known as Pancasila. The first principle is
Ketuhanan Yang Maha Esa, meaning the Belief in a Unitary Deity.96
103As Pancasila is the state philosophy, both government and citizens need to give effect
to the principles97. Consequently, it is implicit that contracting parties may not form
contracts that contradict these principles. Where a contractual stipulation contradicts
the principle of Ketuhanan Yang Maha Esa, the principle must take precedence.
95 24:30-31 and 33:53, the Qur’an. Heather Marie Akou, “Interpreting Islam through the Internet: making sense of hijab”, (2010) 4 Contemporary Islam 331 96 Preamble, Constitution 97 Simon Butt, “Islam, the State and the Constitutional Court in Indonesia” (2010) 19(2) Pacific Rim Law & Policy Journal 279, 283
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Hence, the absolute prohibition against wearing of the hijab is against the
Constitution.
104Further, the Respondent was under the obligation to give effect to Ketuhanan Yang
Maha Esa by encouraging and promoting the exercise of faith. As such, a deviation
from the official uniform by virtue of employees wearing the hijab cannot be
considered a breach of the FA.
C. It discriminates against women
105Article 11 CEDAW obligates signatories to “take all appropriate measures to
eliminate discrimination against women in the field of employment in order to ensure,
on a basis of equality of men and women, the same rights”.98
106In particular, states have to ensure that men and women enjoy the right to “the same
employment opportunities, including the application of the same criteria for selection
in matters of employment” (emphasis added).
107The example of Turkey is instructive. The 46th CEDAW Session reported that Turkey
had abdicated its responsibilities arising from Article 11 CEDAW because of bans on
the hijab in areas such as public service, private schools, colleges and commercial
organisations.99
98 Article 11 CEDAW 99 46th CEDAW Session, “Turkey’s Sixth Report on its Complaince with the Convention on the Elimination of All Forms of Discrimination against Women” (June 2011) available online < http://www2.ohchr.org/english/bodies/cedaw/docs/ngos/CPRER_Turkey46.pdf> (accessed 11 September 2011), p23
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108The report explained that “women [who wear the hijab] are kept away from the
employment network regardless of whether they are qualified or not” in violation of
Article 11 CEDAW. 100
109The Claimant’s prohibition on the hijab violates Article 11 CEDAW. The prohibition
prevents females who adhere to the Islamic practice of wearing the hijab from
employment at the restaurants. These females will be denied employment even
though they are as qualified as their male counterparts.
110Given that Muslim men will not face exclusion from employment on the same ground
as his female counterpart because it is not customary for men to put on hijab, the
prohibition unfairly discriminates against women.
111Accordingly, the prohibition on wearing of the hijab violates Article 11 CEDAW.
100 Id., p22
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CONCLUSION AND PRAYER FOR RELIEF
Counsel makes the above submissions on behalf of the Respondent. For the reasons stated in
this Memorandum, Counsel respectfully requests the Tribunal to declare that:
1. Indonesia law is the proper law to apply in resolving the dispute.
2. The AA is invalid and unenforceable.
3. The FA is invalid under Indonesia law, specifically Law 24.
4. Article XII is invalid and unenforceable for lack of mutuality.
5. Proper and timely Notice of Termination was not given to the Respondent.
6. The Claimant may not terminate the franchise for any violation of the FA, but only
for substantial violations.
7. The “inherent warranty of good faith and fair dealing” does apply to the FA.
8. The variations implemented by the Respondent, even if they were breaches of the FA,
did not justify termination of the FA.
9. The uniform regulations stipulated by the Claimant violate the Constitution, the
Human Rights Law, and CEDAW.
Respectfully submitted,
COUNSEL FOR DR BUDIAMMAN
