Malaysia ordered to pay USD 14.92 billion under a 19th century agreement
Jacques Bouyssou, Marie-Hélène Bartoli-Vallet and Juan Diego Niño-Vargas
Case : Heirs of the Sultan of Sulu and North Borneo v. Malaysia – Ad-hoc Arbitration
On 28 February 2022, a sole arbitrator, Dr. Gonzalo Stampa, ordered Malaysia to pay USD 14.92 billion plus a 10% annual interest and costs to the heirs of the Sultan of Sulu and North Borneo, under a 19th century agreement.
This case has been the subject of great interest and debate in the arbitration community both in Spain and France.
Its unique historical background and the considerable amount claimed by the heirs of the last Sultan of Sulu and North Borneo (USD 32.20 billion) were already enough to attract the public’s attention.
In addition to that, the case involves an uncommon arbitration agreement, provides a valuable precedent regarding the relocation of the seat of arbitration and is expected to raise interesting questions at the stage of the recognition and enforcement of the decisions of the sole arbitrator before domestic courts.
Historical and Factual Background
On 4 January 1878, Muhammad Jamalul Alam, Sultan of Sulu and North Borneo, and Messrs. Alfred Dent and Baron Gustavus de Overbeck (the Austro-Hungarian Consul-General in Hong Kong), entered into a contract for the exploitation of natural resources in a territory along the north coast of the island of Borneo under the Sultan’s control (at the time a Spanish territory, now in the Malaysian State of Sabah). In exchange, the Sultan would receive annual rental payments.
Baron de Overbeck relinquished his rights under the 1878 agreement to Mr. Dent. From 1882 the British North Borneo Company assumed the management of Mr. Dent’s rights under the 1878 agreement.
On 22 April 1903, the Sultan and the British North Borneo Company entered into a confirmatory deed which provided that any dispute between them would be “brought for consideration or judgment of Their [British] Majesties’ Consul-General in Brunei”. At the time, the relevant territory had become a protectorate of the United Kingdom.
In 1963, the rights managed by the British North Borneo Company were transferred by the British government to the Malaysian State, which became responsible for the payments.
In 2013, a Filipino armed rebel group launched an attack against the Malaysian State of Sabah, where the territory subject to the 1878 agreement is found. After Malaysia secured back the territory, it refused to continue paying the annual rental, alleging links between the Sultan’s heirs and the armed rebel group.
On 2 November 2017, the Sultan’s heirs notified Malaysia of their intention to initiate ad-hoc arbitration proceedings based on the 1878 agreement and the 1903 deed.
Appointment of the sole arbitrator by the Superior Court of Justice of Madrid
The Sultan’s heirs were confronted with difficulties submitting the case to an arbitrator.
Their British Majesties’ Consul-General in Brunei was an institution at the time of the British protectorate which did not exist anymore in 2017, and the British Foreign Secretary refused to assume the role of arbitrator in the dispute.
In this context, the heirs requested Malaysia to proceed to the joint appointment of an arbitrator. Malaysia failed to do so. The heirs thus filed an application before the Superior Court of Justice of Madrid for the appointment of an arbitrator under Articles 8 and 15 of the 2003 Spanish Arbitration Act. The heirs chose Madrid as Spain had sovereignty over the territory at the time of the signature agreement.
On 8 May 2018, the Superior Court of Justice of Madrid upheld the jurisdiction of its Civil and Criminal Chamber to appoint an arbitrator based on a debated interpretation of Article 8.1 of the 2003 Spanish Arbitration Act and the possibility of a forum necessitatis. The Court also noted that Spain had sovereignty over the relevant territory at the time of the signature of the agreement.
On 22 May 2019, the Civil and Criminal Chamber of the Superior Court of Justice of Madrid appointed Dr. Gonzalo Stampa as sole arbitrator.
Jurisdiction, seat of arbitration and applicable law
Malaysia challenged the existence of the arbitration agreement and argued that Malaysian courts had jurisdiction over the matter, given the impossibility to refer the dispute to Their British Majesties’ Consul-General in Brunei.
In 2020, Malaysia obtained an anti-arbitration injunction from the High Court of Sabah and Sarawak (Malaysia), to prevent the arbitration from moving forward.
Despite this injunction, Dr. Stampa upheld his jurisdiction by a Preliminary Award dated 25 May 2020.
In the absence of detailed provisions in the 1878 agreement, the Preliminary Award determined Madrid as the place of the arbitration, considering it a neutral seat, and decided that the general principles of international law would apply as lex causae, specifically the UNIDROIT Principles.
Proceedings before domestic courts
In parallel, Malaysia challenged the appointment of Dr. Stampa before the Superior Court of Justice of Madrid which, on 29 June 2021, annulled Dr. Stampa’s appointment.
However, Dr. Stampa remained in office, stressing that he should not be “swayed by outside pressures, including unauthorised intrusion by local courts”, as he would later write in his Final Award.
On 17 September 2021, the Sultan’s heirs obtained from the Judiciary Tribunal of Paris an Enforcement Order of the Preliminary Award.
On 29 October 2021, Dr. Stampa then relocated the seat of arbitration from Madrid to Paris.
Malaysia lodged an appeal against the Enforcement Order before the Paris Court of Appeal and obtained an order to stay its effects.
In parallel, the heirs of the Sultan filed a constitutional recourse against the decision of the Superior Court of Justice of Madrid that voided the sole arbitrator’s appointment.
Meanwhile, Malaysia sent the sole arbitrator ex parte communications demanding the discontinuance of the arbitration and initiated criminal proceedings against him before the Criminal Court of Madrid.
The Final Award ordering Malaysia to pay USD 14.92 billion
Before the sole arbitrator, the Sultan’s heirs submitted that the 1878 agreement was an international private lease agreement of a commercial nature that was breached by Malaysia. They requested the termination of the 1878 agreement and the payment by Malaysia of the restitution value of the rights over the leased territory, which they estimated to USD 32.20 billion based on the fair market value of the hydrocarbon and palm oil related revenues from the relevant territory up until 2044.
On the contrary, Malaysia argued that the 1878 agreement was not a commercial agreement but an instrument for the permanent cession of territorial sovereignty which would be a non-arbitrable subject matter. However, Malaysia did not rebut the breach of the agreement, nor did it refute the valuation submitted by the heirs of the Sultan.
On 28 February 2022, after four years of proceedings, the sole arbitrator ruled in favor of the heirs of the Sultan, while reducing the restitution value to USD 14.92 billion.
On 3 March 2022, Malaysia applied before the Paris Court of Appeal to set aside the Final Award.
Comments
This historic case is significant not only due to the high value of the rights at stake and its geopolitical implications, but also due to the role played by Spanish and French courts in proceedings, as well as the tenacity of the sole arbitrator.
Indeed, this case is a welcome example of the assistance that State courts may provide to parties to allow arbitration proceedings to progress, even when confronted with the pressure of another State involved in the proceedings.
Moreover, the sole arbitrator’s confirmation of his jurisdiction and his decision to relocate the arbitration to Paris highlight the importance of the independence of arbitrators and their ability to resist to outside pressures.
Now, the proceedings pending before State courts will certainly give rise to interesting decisions in the future, notably regarding the interpretation and applicability of the arbitration agreement, the arbitrability of the subject-matter and more generally the enforceability of the Final Award.
Jacques Bouyssou, Partner, Marie-Hélène Bartoli-Vallet, Counsel & Juan Diego Niño-Vargas, Associate