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International Arbitration Forum

Heirs of the Sultan of Sulu v. Malaysia

Case summary

At a glance

Parties
Nurhima Kiram Fornan, Fuad A. Kiram, Sheramar T. Kiram, Permaisuli Kiram-Guerzon, Taj-Mahal Kiram-Tarsum Nuqui, Ahmad Nazard Kiram Sampang, Jenny K.A. Sampang and Widz-Raunda Kiram Sampang (heirs of the Sultan of Sulu) v. Malaysia
Forum and rules
Ad hoc arbitration under the Spanish Arbitration Act 60/2003. Seat Madrid, moved to Paris by Procedural Order 44. Merits governed by general principles of international law and the UNIDROIT Principles (2016)
Treaty
No treaty. The dispute clause in the 1878 Agreement (Deed) between Sultan Mohammed Jamalul Alam and Alfred Dent and Baron Gustavus de Overbeck, and the 1903 Confirmatory Deed
Tribunal
Dr. Gonzalo Stampa (Sole Arbitrator), appointed by the Civil and Criminal Chamber of the Superior Court of Justice of Madrid
Sector
Leased territory in North Borneo (Sabah); oil, gas and palm oil
Outcome
Final Award of 28 February 2022 for the Claimants. Malaysia took no part in the merits phase. The 1878 Agreement is a private commercial lease; Malaysia breached it; it is terminated as of 1 January 2013.
Amount
Claimed: up to USD 32.20 billion. Awarded: USD 14.92 billion (including pre-award interest at 3.96% a year), plus 10% simple post-award interest after a three-month grace period. Costs: USD 3,502,394.24 in legal and expert costs; USD 2,351,592.64 in arbitration costs; USD 1,675,000 for Malaysia's share of the deposits. The Preliminary Award had already awarded USD 1,386,313.42 plus arbitration costs for the jurisdictional phase.

The dispute

The Claimants are the heirs of Jamalul Kiram II, the last Sultan of Sulu. On 4 January 1878 Sultan Mohammed Jamalul Alam made an agreement with Alfred Dent and Baron Gustavus de Overbeck over territory on the north coast of Borneo (today Sabah), for 5,000 dollars a year. The 1903 Confirmatory Deed added islands and 300 dollars a year. Malaysia admitted that it became successor-in-title to the British North Borneo Company on 16 September 1963. It also admitted that it paid 5,300 a year from 1963 to 2012 and stopped in 2013. The Claimants said the instrument was a commercial lease. They sought its termination under Article 7.3.1 of the UNIDROIT Principles and the restitution value of the rights. In the alternative, they sought rebalancing for hardship because of the later discovery of oil, gas and palm oil. Malaysia did not defend the merits. In letters and court filings it argued that the instrument was a permanent cession of sovereignty, so the dispute could not be arbitrated and the arbitration breached its sovereign immunity. It also argued that the arbitrator's appointment was irregular.

Key holdings

  1. The 1878 Agreement and the 1903 Confirmatory Deed are not valid instruments of permanent cession of sovereignty under international law. Dent and Overbeck acted as private individuals, not as agents of a State, and there was no acquiring State. The instruments therefore do not affect Malaysia's sovereignty. ¶¶ 209–212
  2. The 1878 Agreement is an international private lease agreement of a commercial nature, entered into for an undetermined period in return for annual rent. The Jawi word 'pajakan' means lease or leasehold. The Sultan remained freeholder and landlord; the counterparties, and later Malaysia, were tenants. ¶¶ 219–222, 244
  3. Malaysia's objection to admissibility, based on sovereign immunity and non-arbitrability, is rejected. Under the restrictive doctrine of immunity, the transaction is commercial. Malaysia's payments from 1963 to 2012 and its offer of 19 September 2019 to pay the arrears were inconsistent with its later claim that the dispute concerned sovereignty. ¶¶ 230–239
  4. Malaysia's failure to pay the rent from 2013, which it admitted and did not excuse, is a fundamental non-performance. The 1878 Agreement is terminated as of 1 January 2013 under Article 7.3.1(1) of the UNIDROIT Principles. Because the principal claim succeeded, the alternative hardship claim was not decided. ¶¶ 247–249
  5. Restitution in kind is not possible, so the Claimants receive money in its place at fair market value, relying on Article 7.3.6(2) of the UNIDROIT Principles and the Chorzów Factory case. The Arbitrator accepted the Brattle and Meehan valuations of Malaysia's oil, gas and palm-oil benefits and applied a 15% share (rejecting 10% and 20%). The award is USD 14.92 billion: USD 4.87 billion for 2013 to February 2020 and USD 10.05 billion for future benefits up to 2044. ¶¶ 273–276
  6. The claim for USD 9.23 billion for benefits after 2044 is rejected as too uncertain under Article 7.4.3 of the UNIDROIT Principles. Post-award interest is 10% a year, simple, the rate Malaysia itself had offered. It runs after a three-month grace period. ¶¶ 275, 282–283
  7. Malaysia bears all costs: USD 3,502,394.24 for the Claimants' counsel and experts, USD 2,351,592.64 in arbitration costs, and USD 1,675,000 for its share of the deposits, which the Claimants had paid. ¶¶ 293–296; Decision B
  8. The Madrid court's Decision of 29 June 2021 and the clerk's communications ordering the arbitration to stop were treated as unauthorised court interference, contrary to Article 7 of the Spanish Arbitration Act. The Arbitrator stayed the proceedings and then moved the seat to Paris. He found that the Paris Suspension Order of 16 December 2021 did not affect the arbitration. ¶¶ 126–127, 141–145, 150

Procedural history

  1. 2 November 2017The Claimants serve a notice of intention to commence arbitration at the Embassy of Malaysia in Madrid.
  2. 1 February 2018The Claimants apply to the Civil and Criminal Chamber of the Superior Court of Justice of Madrid for the court to appoint an arbitrator (docket 4/2018).
  3. 29 March 2019Judgment 11/2019 orders the appointment of an arbitrator. On 22 May 2019 the court appoints Dr. Gonzalo Stampa, who accepts on 31 May 2019.
  4. 30 July 2019Notice of Arbitration filed.
  5. 25 May 2020Preliminary Award on Jurisdiction and Applicable Law: Malaysia's objections are dismissed, the UNIDROIT Principles apply, and Malaysia must pay the costs of this phase.
  6. 30 September 2020Malaysia files an action to set aside the Preliminary Award in Madrid (Annulment Proceeding 88/2020). The proceeding is declared discontinued on 14 October 2021.
  7. 15–16 February 2021Remote hearing on the merits. Malaysia does not attend.
  8. 29 June 2021The Madrid Chamber, by majority, vacates the rulings on the arbitrator's appointment. Procedural Order 42 (20 July 2021) puts the arbitration in abeyance.
  9. 17 September 2021The Tribunal de Grande Instance de Paris grants exequatur of the Preliminary Award. Procedural Order 44 then moves the seat from Madrid to Paris. On 16 December 2021 the First President of the Paris Court of Appeal issues an ex parte order staying the exequatur.
  10. 28 February 2022Final Award: Malaysia is ordered to pay USD 14.92 billion plus interest and costs.

Tribunal, counsel and experts

Decided by
  • Gonzalo Stampa Sole arbitrator — appointed by a court (Appointed by the Civil and Criminal Chamber of the Superior Court of Justice of Madrid; the court vacated the appointment rulings on 29 June 2021, but the arbitrator continued in office)
For the claimant
4-5 Gray's Inn Square Chambers · B. Cremades & Asociados · Romulo Mabanta Buenaventura Sayoc & De los Ángeles
For the respondent
Attorney General's Chambers of Malaysia · Herbert Smith Freehills LLP · Tim Portwood
Experts
Eckart Brödermann (claimant) · Ernst Ulrich Kratz (claimant) · Nathan Meehan (claimant) · Richard Caldwell (claimant) · Carlos Lapuerta (claimant)

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Keywords

Summary generated with AI from the published documents — refer to the award for the authoritative text.

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