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A French arbitration court has awarded that Malaysia is legally obliged to pay RM62.6 billion to the descendants of the defunct Sulu Sultanate for violation of a land lease agreement in 1878. To lay the ground, what is this award based on?

Few private international disputes today involve contracts nearly 150 years old. This is one of them.

The claimants (plaintiffs) in this case are eight members of a Philippine family who comprise heirs to the Sulu Sultanate. The defendant is the Government of Malaysia. The essence of the claim is that the family’s ancestor – the Sultan of Sulu – leased a swath of territory in North Borneo to a British concern in 1878. The amount, representing the Sultan’s share of income from the territory at the time, was fixed at 5,000 local dollars per year. The amount was raised once, in 1903, to 5,300 local dollars [equivalent to about US$1,200], where it remains to this day.

In the intervening century and more, the British company morphed into the Crown Colony of North Borneo, and ultimately into the State of Sabah, one of the constituent parts of Malaysia. Each successive holder of the territory (including Malaysia from 1963 onward) nonetheless made the annual payments. Those payments went initially to the sultans, then, after the last universally recognised sultan died childless in 1936, to his nieces and nephews and their acknowledged descendants, following a decision in 1939 by Chief Justice Charles F Macaskie of the High Court of North Borneo.

In 2013, after the Lahad Datu incursion, Malaysia stopped paying the sultan of Sulu’s heirs their annual compensation, which was equivalent to RM5,300.

Following several unanswered communications to the Malaysian Government, the claimants launched an arbitration. They claim their right to arbitrate is embedded within the original 1878 contract. The arbitrator agreed and issued a decision on 28 February 2022, awarding the claimants USD14.92 billion. The decision had no effect on Sabah’s sovereignty status.

An arbitration agreement must be in writing and must deal with any future disputes in connection with any defined legal relationship, contractual or not. It must concern matters which are capable of settlement by arbitration. Any claim that seeks only damages arising out of the breach of commercial undertakings in any legal relationship is deemed to be a commercial dispute and not a dispute relating to sovereignty.

- How does the New York Convention enter the picture?

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention, was adopted by a United Nations diplomatic conference on 10 June 1958 and entered into force on 7 June 1959. The Convention requires courts of contracting states to recognise and enforce arbitration awards made in other contracting states.

For example, if a Singapore company has an arbitral award against a Malaysian company, the Singapore company can seek to have the arbitral award enforced in Malaysia against that Malaysian company, subject to certain conditions. This is because Singapore and Malaysia are both parties to the New York Convention.

As of December 2021, the convention has 169 state parties, which includes 166 of the 193 United Nations member states.

Malaysia is a party to the New York Convention since 5 November 1985. - Malaysia had continued to make payments of approximately 1,000 US dollars, but stopped in 2013. What legal grounds did the country have in refusing to continue making payments?

From my understanding, in 2013 Malaysia stopped making payments to the claimants because there was an incursion into Sabah by insurgents, loyal to a self-proclaimed Sultan then. Whether or not this provides a legal basis for stopping the payments, it should be noted with interest what Malaysia’s Attorney-General from 2018-2020 (during the main phase of this current case) said in his memoirs:

Although there appears to be no evidence of any link between the Sulu descendants who were receiving the annual fees from Malaysia, under the 1878 Agreements [sic], and the armed invaders into Lahad Datu, the Malaysian government ceased payments from 2013.

There were no legal grounds for Malaysia’s refusal to pay annually since 2013. It resulted in Malaysia being in breach of the 1878 Agreement.

Arbitrator Gonzalo Stampa has claimed that the agreement was an international private lease agreement. What is this claim based on, and what would it legally entail?

The dispute itself concerns the 1878 Deed of Cession between the then sultan of Sulu, Sultan Jamal al Alam, and Baron de Overbeck, the then Maharaja of Sabah, and British North Borneo Company’s Alfred Dent.

Under the agreement, Jamal ceded sovereignty over large parts of Sabah – from the northwest coast and extending beyond the east coast as far as the Sibuco River in the South – to Dent and Overbeck.

In exchange Dent, Overbeck and their future heirs were to pay the heirs of the sultan 5,000 Mexican dollars annually.

Payments to the heirs continued into modern times as Malaysia became the successor of the agreement following Sabah’s independence and the formation of the Federation of Malaysia in 1963.

But in 2013, after the Lahad Datu incursion, Malaysia stopped paying the sultan of Sulu’s heirs their annual compensation, which is equivalent to RM5,300.

- A lot of this seems to rest on the interpretation of the payments, with the Malaysian government viewing it as ‘cession’ payments, and the heirs of the Sulu Sultanate regarding it as ‘rent’. What can you tell us about this? For the purposes of the arbitration concerned, it did not matter what the payments were called, the families of the Sulu descendants had been receiving an annual payment of RM5,300 for 135 years under the treaty signed on Jan 22, 1878.

Malaysia only stopped paying this money since 2013.

- 62.59 billion ringgit is a far cry from the RM5000 per year that Malaysia had been paying previously. How was this number arrived at? 

The claimants claimed that the payment amount – which had once represented the totality of the Sultan’s annual income from the territory – became dwarfed by Malaysia’s revenues from local hydrocarbons after massive oil reserves were discovered and extracted in the 1980s. They claim that even in years with low oil prices, Malaysia reaps about three million times more in hydrocarbon revenues than it owes under the contract.

International law provides for rebalancing of contracts when the fundamental circumstances under which they were agreed change. Consistent with this principle, the claimants sought for decades to renegotiate the deal on more equitable terms. Malaysia ignored their requests, while continuing to pay them the annual 5,300 local dollars (now rendered in Malaysian Ringgit).

The Sulu sultan’s descendants had initially wanted to claim US$32.2 billion (RM135.08 billion) from Malaysia. This was to recover the unpaid cession money along with how much they believe they should have been paid for the oil and gas found in the region.

- We’ve also seen a different verdict arrived at in the Sabah High Court in 2020. Which decision is going to take precedence? There will be a very interesting situation if the Claimants decide to enforce the Award as a New York Convention Award in a foreign state outside Malaysia. In contrast to the very large number of signatories under the New York Convention, Malaysia has signed a very limited number bilateral agreements with foreign states to recognise and enforce Malaysian court judgments. While Malaysia did not appear as a party to the international arbitration proceedings, unlike the Malaysian court where default judgments can be issued, it is not possible to issue a default award in international arbitration.

This means that the arbitral tribunal will have to look at all the evidence, hear and test the witnesses and satisfy itself that the claiming party is able to succeed in its claim. This means that the weight accorded to an arbitral award is usually much heavier than the weight accorded to a default court judgment where a default judgment can be given automatically under court procedural rules. Foreign courts are generally thought to be likely to have to give more weight and priority to tested conclusions contained in international arbitration awards rather than to untested conclusions contained in default court judgments. This will be an interesting situation and it remains to be seen if foreign courts will give more priority to the New York Convention than to bilateral treaties in respect of reciprocal enforcement of court judgments.

- Going back to the New York Convention, what does it mean for Malaysia’s assets to be seized globally? 

As Malaysia is a signatory to the New York Convention, it is obliged to enforce the award. If Malaysia refuses to make payment, the Claimants will have the right under the New York Convention to enforce the award against Malaysian state assets in any of the 169 signatory state parties around the world.

- What are Malaysia’s options in contesting this decision? What might happen next?

In the joint statement released today by the Ministry of Foreign Affairs and the Attorney General’s Chambers, it is stated that the claimants, without the Government of Malaysia’s knowledge, proceeded to obtain an ex parte order from the Tribunal de Grande Instance in Paris to recognize the Partial Award on Jurisdiction rendered by Dr. Stampa on 25 May 2020 which had been previously annulled as a consequence of the decision of the Nullification Decision of the High Court of Justice of Madrid for the reason that the service of notice of the proceedings for appointment of arbitrator for purposes of the Claim was not properly served to Malaysia in accordance with peremptory international rules and Spanish law.

On the basis French Order, Dr. Stampa changed the seat of the arbitration to Paris, France to render the Final Award. The Government of Malaysia had filed an appeal against the French Order in the Courts in Paris whereby the Government of Malaysia had also successfully obtained an ex parte order dated 16 December 2021 (“Suspension Order”) from the First President of the Paris Court of Appeal suspending the effects of the French Order in France and barring the Claimants from relying on it. In violation and defiance of this Suspension Order, the Claimants maintained that the French Order was in force and that a final award should be rendered with a seat set in Paris, France.

Regardless, as it stands, there is an arbitration award. Malaysia has the option of making the appropriate applications including an application to set the award aside in France, where the award was rendered.

The time limit for applying for the setting aside of an arbitral award is one month from the notification of the award (Code of Civil Procedure, Article 1519). This deadline is extended by two months when the requesting party is domiciled abroad, pursuant to regular civil procedure rules.

Under Article 1520 of the Code of Civil Procedure, French courts may set aside an award on one of the following grounds:

- the arbitral tribunal wrongly upheld or declined jurisdiction;

- the arbitral tribunal was irregularly constituted;

- the arbitral tribunal ruled without complying with the mandate conferred on it;

- the due process requirement was violated; or

- recognition or enforcement of the award would violate international public policy.