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F1050-R
Kuala Lumpur Regional Centre for Arbitration (KLRCA)
2012
Great Wall Noodle Shop LLC
v.
Adi Budiamman, M.D.
Memorial for Respondent
F1050-R
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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“…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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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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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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12
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.