UPDATE – Paris Court of Appeal granted Malaysia a stay of the enforcement of multi-billion award in France while its enforcement is pursued in Luxembourg
Jacques Bouyssou, Marie-Hélène Bartoli Vallet and Juan Diego Niño-Vargas
The Paris Court of appeal granted the Malaysian government’s application to stay the enforcement of the USD 14.92 billion award granted earlier this year in favor of the heirs of the Sultan of Sulu and North Borneo, while the heirs attached assets of the Malaysia's state energy company in Luxembourg.
Now, in addition to its unique historical background and the considerable amounts at stake, this matter evolves interestingly at the stage of the recognition and enforcement of the sole arbitrator’s decisions before the Paris Court of Appeal.
Brief background of the case
In 1878, Muhammad Jamalul Alam, Sultan of Sulu and North Borneo, entered into an agreement with German and British merchants, by which the Sultan received annual rental payments in exchange for the exploitation of natural resources of the north coast of the island of Borneo, at the time a Spanish territory under his control, today in the Malaysian State of Sabah.
The merchants’ rights were transferred in 1963 to the Malaysian State, which became responsible for the payments, but stopped paying the annual rental in 2013.
In 2017, the Sultan’s heirs launched an ad-hoc arbitration and obtained from Spanish Courts the appointment of Dr. Gonzalo Stampa as sole arbitrator. Dr. Stampa issued a Preliminary Award confirming its jurisdiction, determining Madrid as the seat of arbitration and the international principles as lex causae.
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, the Sultan's heirs obtained from the Judiciary Tribunal of Paris an Enforcement Order of the Preliminary Award and Dr. Stampa then relocated the seat of arbitration from Madrid to Paris on 29 October 2021.
In parallel, Malaysia lodged an appeal against the Enforcement Order before the Paris Court of Appeal and obtained an order suspending its effects on 16 December 2021.
On 28 February 2022, after four years of proceedings, the sole arbitrator delivered a Final Award in favor of the heirs of the Sultan, allocating them USD 14.92 billion in damages for Malaysia’s breach of the agreement.
Request to set aside the Final Award and stay its enforcement
Malaysia applied before the Paris Court of Appeal to set aside the Final Award and to stay its enforcement. A judge was assigned to the case to issue a preliminary ruling on the request to stay enforcement.
Under French law, international arbitration awards are enforceable even when a request to set aside the award is pending. Under Article 1526 of the French Code of civil proceedings, a party may however obtain a stay of the enforcement if it proves that the “enforcement could severely prejudice/damage [its] rights”.
Malaysia alleged that the enforcement of the Final Award could severely prejudice its rights on two grounds.
Firstly, Malaysia alleged that the Final Award could infringe its sovereignty since it provides that Malaysia is not the owner of the territories subject to the 1878 Agreement, but merely the tenant. Malaysia argued that its sovereignty over these territories was recognized by the international community and that the permanent sovereignty of a State over its natural resources is a component of its territorial sovereignty.
Secondly, Malaysia alleged that the procedural context under which the Final Award was rendered would be prejudicial, referring to Dr. Stampa’s decision to relocate the seat from Madrid to Paris after the annulment of his appointment by Spanish Courts and to the fact that he rendered the Final Award after the Paris Court of Appeal decided to suspend the Enforcement Order of the Preliminary Award.
The Paris judge first dismissed these allegations regarding the procedural background, considering that they would be assessed by the Court when ruling on the merits of the application to set aside the Final Award, but that they did not characterize any prejudice to Malaysia’s rights resulting from the enforcement of the Final Award.
Then, however, the Paris judge accepted Malaysia’s main argument based on the potential infringement of its sovereignty. He pointed out that even if Dr. Stampa held that the award did not affect Malaysia’s sovereignty, the Paris judge was not precluded from considering the merits of Malaysia’s allegations regarding the potential consequences of an immediate enforcement of the Final Award on its sovereignty.
The judge noted that the Final Award allocated damages to the Sultan’s heirs that were equivalent to the value of the exploitation of natural resources of the disputed territories which were under Malaysia sovereignty. On this basis, he decided that such indemnity was a financial equivalent to a restitution of the territories, and that the enforcement of such indemnity cannot not be considered as the mere enforcement of a commercial contract.
Additionally, the judge highlighted the geopolitical context of the matter. He noted that Malaysia had stopped paying the annual rental after a Filipino armed rebel group launched an attack against the Malaysian State of Sabah. He also pointed out that the Sultan’s heirs had themselves submitted to the sole arbitrator that a restitution of the territories could provoke uprisings, civil war, unrest, or other disturbances in the region.
The judge concluded that the enforcement of the award could seriously prejudice Malaysia’s rights.
In its decision dated 12 July 2022, the judge of the Paris Court of appeal stayed the enforcement of the Final Award.
Attachment of Petronas assets in Luxembourg
In parallel, the Sultan’s heirs started the enforcement of the Final Award in Luxembourg. Both the Preliminary Award and the Final Award were recognized by local courts.
On 11 July 2022, a day before the Paris Court of Appeal ordered the stay of the enforcement of the Final Award in France, assets of Malysia’s state energy company, Petronas, were attached in Luxembourg.
The Sultan’s heirs had bailiffs in Luxembourg serve two seizure notices (saisies-arrêts) by local courts to two subsidiaries of Petronas, Petronas Azerbaijan (Shah Deniz) and Petronas South Caucasus.
The attached subsidiaries formerly managed the State entity’s operations in Azerbaijan. The specialized press reports that the relevant assets amount to over USD 2 billion.
However, Petronas published a statement indicating it had “previously divested its entire assets in the Republic of Azerbaijan and the proceeds from the exercise have been duly repatriated” and is, in any case, preparing its legal position to challenge the attachments.
This historic case will continue evolving and will be subject of study due to its geopolitical implications and to the unprecedented decisions of the sole arbitrator and State courts.
There are high expectations for the decision of the Paris Court of Appeal on the request to set aside the award and for the outcome of the enforcement proceedings that the Sultan’s heirs could launch around the world.