Heirs of the Sultan of Sulu and North Borneo v. Malaysia – Explaining the controversial Ad-hoc Arbitration Case

On Feb. 28, 2022, the arbitrator, Dr. Gonzalo Stampa, notified Malaysia to pay the heirs of the Sultan of Sulu and North Borneo $14.92 billion plus 10% interest per year and costs for using the natural resources of northern Borneo. In 1878, the Sultan of Sulu, Mohammed Jamalul Alam, signed a deal that gave Britain’s North Borneo Chartered Company the right to use the natural resources in northern Borneo, which is now Sabah (Malaysia), in exchange for annual rent payments. The claim by the descendants of the Sultan of Sulu is based on the 1878 Grant and nothing else. It was like when the Portuguese handed Bombay to the British in 1661.

After Malaysia became independent in 1963, the government continued to send $1,200 to the Sultan’s descendants in the Philippines, which the Sultan’s descendants assumed was “rent.” But the Malaysian government stopped the payments in 2013 when a group of supporters of the old sultanate tried to invade and claim the former territories in Sabah. After more than a month of fighting, the Malaysian armed forces managed to drive them out. The Sultan’s heirs decided to find a way to make Malaysia pay compensation for breaking the 1878 agreement by also including a percentage of the profits from oil and gas extraction in the calculation. First, they tried to start arbitration in the United Kingdom but failed. In 2017, they decided to take their case to the Superior Court of Justice in Madrid. In 2019, Stampa was chosen as the arbitrator. The descendants of the Sulu Sultan were represented by a Spanish law firm called B Cremades & Asociados, along with Paul Cohen and Elisabeth Mason, both of whom are based in London.

In his 148-page arbitration award on February 28, Stampa said that the agreement from 1878 could be considered an international private lease agreement with a commercial purpose. Stampa said that the eight claimants are direct descendants and legal heirs of the last Sulu Sultan and are successors. They would be the “landlords” of North Borneo, while Malaysia, which was formed in 1963, became the successor in title of the British North Borneo Company under both the 1878 and 1903 documents and would be the “tenant.” In short, Stampa agreed with the claimants that Sabah was rented out through a commercial transaction. This was different from what Malaysia said, which was that the 1878 agreement was an international treaty in which all rights of sovereignty over Sabah were “ceded” or permanently transferred. Stampa said that Malaysia broke the 1878 deal when it stopped making the annual payments in 2013 and didn’t give any legal or contractual reason why it couldn’t pay. He said that the 1878 agreement was over as of Jan. 1, 2013.

In December 2019, the Malaysian government sued the claimants and the Spanish Arbitrator, Stampa. Malaysia asked the High Court of Sabah and Sarawak for nine court orders. One of these was a declaration that the 1878 agreement does not have a clause for arbitration. In another order, it was said that Malaysia does not give up its sovereign immunity to give the Madrid Court-appointed arbitration authority over the case. The High Court said that the “natural and proper forum” is the High Court of Sabah and Sarawak, based on past cases about the agreement that were heard in the High Court of North Borneo. The High Court also asked the High Court in Madrid to carry out the decision made in January 2020. In November 2020, the High Court of Madrid issued a court order that upheld the orders of the High Court of Sabah and Sarawak and told the arbitration to stop. The Spanish lawyer, Stampa, kept going with the arbitration and filed an appeal, and also ended up moving the arbitration proceedings to Paris. The final award of $14.9 billion is more than 4% of Malaysia’s total GDP. Malaysia has never agreed with Sabah’s claim, owing to the fact that the people of Sabah exercised their right to self-determination by voting to join the Malaysian federation in 1963.

The Sulu Sultanate also lost its rights in the Madrid Protocol of 1885, when Spain gave up all of its claims to Sabah and turned it over to the British, who were the predecessors of Malaysia. The heirs asked the arbitrator to decide on the scope and terms of a properly rebalanced agreement “under the hardship doctrine contained in Article 6.2.2 of the UNIDROIT Principles” as an alternative to ending the 1878 Agreement and the 1903 Confirmatory Deed. Since Malaysia is a member of the New York Convention, the claimants will be able to use the award to seize assets from the Malaysian government in any of the 167 states that have signed the convention. On July 12, authorities in Luxembourg seized the assets of two Petronas subsidiaries, said to be worth more than $2 billion, on behalf of the Sulu claimants who wanted to enforce the $14.9 billion arbitration award. Petronas stated that these two subsidiaries had already sold or divested all of their assets in the Republic of Azerbaijan and that the money from the sales had been sent back to Malaysia. It also said that the actions taken against the company were “baseless” and that it is working to defend its legal position on this issue.

[Photo by Dr. Johnstone; A.J. West, via Wikimedia Commons]

The views and opinions expressed in this article are those of the author.

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