Sulu Arbitration

The Original Lease Agreement – 1878

Numerous public sources have described the original document that formed the basis for our suit. In early 1878, an Austrian man with the splendid name Gustavus von Overbeck was working for an English concern called Dent Brothers. The Dents were looking for a choice port location that might form a trading post in southeast Asia. They hit upon a slice of North Borneo abutting Brunei. Overbeck initially approached the Sultan of Brunei to request a lease on the land.

It was most definitely a lease, by the way. This is one of the more vexing issues today, because nothing angers Malaysia more than the suggestion that it only holds a lease on the territory.

Reportedly, a contract apparently was signed with the Sultan of Brunei. Whether it was ever paid is a question lost to time. In any event, the Sultan of Brunei apparently told Overbeck that the land was not his to lease; his ancestor had given it to the Sultan of Sulu, across the sea, a couple of centuries earlier.

To be sure of his legal position, Overbeck went to Sulu to see the Sultan there. Overbeck was accompanied by William Treacher, acting [British] Consul General for North Borneo. Treacher also brought along his translator. We know what happened next because of Treacher’s copious correspondence back to the Foreign Office. You can find this correspondence in the UK National Archives in Kew, south of London. Treacher asked the Sultan how much he made from his Borneo territories. The Sultan said he made $5,000 annually from the natural resources, consisting then of bird nests and seed pearls. On that basis, the compensation in the contract was set at $5,000 per year, in exchange for the unlimited use of the Sultan’s Borneo territories.

Someone prepared the agreement in Jawi, a form of traditional Malay in Arabic script. The Sultan set his seal to it, and that was that.

It is unclear why the compensation was denominated in dollars, or indeed which dollars the parties were talking about. But the point remains that the agreement was designed to compensate the Sultan in whole for the loss of his ability to exploit the resources of his territory in North Borneo, and the Dent brothers (and Overbeck) were able to do as they wished with it, within the contract.

Because the controlling version of the agreement was in Jawi, what we know about the document comes to us second-hand – unless you happen to read Jawi, which is a very specialist field. The difficulty we hear most about is the meaning of the word pajakkan: You might translate it as “grant and cede” (i.e., a permanent giveaway), whereas the Philippine Government, the claimants and others translate it as “lease”. So does Google…

The latter translation is more credible, given the structure of the agreement – an annual payment. A complete cession would have entailed a one-time payment, such as the supposed purchase of Manhattan by the Dutch in 1626 for 60 Guilders.

Moreover, Treacher and the Dents’ representatives refer to the territory in their contemporary reports as a “leasehold” or a “rental.” They use these words interchangeably with “cession”. Where cession is (in modern parlance) ambiguous, leasehold and rental are unambiguous. The British side asked for a lease, obtained a lease, and paid for a lease.

The other provision in this ancient agreement – and the one responsible for us discussing it today rather than its languishing in a dusty archive – is the piece on dispute resolution. Again, there are slightly differing translations, but to use the translation from the version Malaysia relies on, it states:

In case any dispute shall arise between His Highness the Sultan his heirs or successors and the said Gustavus Baron de Overbeck or his Company, it is hereby agreed that the matter shall be submitted to Her Britannic Majesty’s Consul-General for Borneo.

This is the provision that our lawyers used to argue that the agreement contained an arbitration clause. Malaysia says that there is no arbitration clause. Gleefully, a Malaysian minister says that the word ‘arbitration’ doesn’t appear in the agreement. Given that there was no word for ‘arbitration’ in Jawi, and Jawi is the archaic language in which the signed agreement was drawn up, it would be very suspicious if the word had appeared in an 1878 document! An arbitration clause is one that sets up the intention to use a third party to adjudicate a dispute. Read that quotation above. The French and Spanish courts (as well as common sense) have ruled that this is an arbitration clause.

The acting Consul General at the time, incidentally, was none other than the Mr. Treacher who had witnessed the deal – although he soon resigned from the Foreign Office to head up the newly-formed North Borneo Charter Company. Some things don’t change.

(By the way, a French judge made a ruling on June 6, 2023, in favor of Malaysia. Having said that there was clearly a lease and an arbitration clause (disastrous decisions in Malaysian eyes) he nonetheless decided that when the arbitration clause of 1878 identified the British Consul General as the future Arbitrator for generations to come, it actually meant this individual Mr. Treacher, though the signatories had specifically not named him. Which is an odd evaluation by the judge, as Treacher himself was not the permanent holder of the consular post, and indeed headed up the Company within three years. By which time he would not have been a third party at all!)

The Lease During the Era of the North Borneo Charter Company

The Company received its official charter in 1881; Dent and Overbeck transferred their rights under the agreement to the Company, and the Company began making payments to successive Sultans of Sulu. There were a few ups and downs, including the Mat Salleh rebellion in the 1890s that resulted in the burning of Jesselton, the town that the Company had built (today, Kota Kinabalu), requiring the Sultan to step in and help secure it. (Why would he do that if he had sold the entire territory?)

But overall, the Company developed smoothly and paid more or less promptly. The amount increased to $5,300 in 1903, retroactive to 1878, upon mutual recognition that certain islands around North Borneo were included in the agreement. And there the amount stayed locked, until 2013.

We can happily now fast-forward through the decades. Sultan Jamalul Kiram II, who acceded in 1894, ruled until he died, childless in 1936.

The US, which inherited the Philippines after the Spanish-American War of 1898, had little time for royalty. The Americans stripped the Sultan of his remaining political authority over the province of Sulu in 1915, leaving him as a figurehead. The Company promptly inquired whether this meant that the US now purported to exercise influence over the Sultan’s holdings in Borneo now administered by the Company; the US said it did not, and the colonial peace endured.

The Inheritance

In 1936, Jamalul died, childless. He left a Will in which he named his nieces, nephews, and a brother (not the father of those nieces and nephews) as the heirs to his Estate. The succession to his royal title in the Philippines was ambiguous. But the inheritance of his land and assets – including his rights over Sabah – was the province of his Will. Nobody has ever challenged that. Almost immediately someone unrelated in Sulu declared himself Sultan.

This left the Company in a quandary – there had hitherto been no controversy over who was the rightful owner of the contract, and therefore the recipient of the annual $5,300. But now two different factions were asking for it: the heirs of the late Sultan’s will, and the new, self-declared Sultan.

The heirs filed a claim with the Company to vindicate their rights. The Company didn’t dispute that it owed rent; it just wanted to establish who the rightful party for payment was.

The claim was heard by Charles Macaskie, the Deputy Governor of the Company, (also Chief Justice). He decided that the Heirs were in the right. Because the late Sultan had been stripped of his political authority, confirmed Macaskie, his payments from the Company must have been made to him in his personal capacity. Therefore, his right to payment should pass on to the designated heirs in his Will, not to whoever designated himself the next Sultan of Sulu.

And so, from 1939, the annual payments went to Sultan Jamalul’s nine heirs and their descendants, in the shares allotted to them according to Jamalul’s Will (Jamalul’s brother had died by the time the case had gone to court, so his children joined the other nieces and nephews as beneficiaries, splitting the brother’s shares between them.) We, the Claimants in the arbitration, are the court-established descendants of those nieces and nephews. Nobody else is.

The British Colonial Sunset and Independence

North Borneo was invaded by Japan in World War II. After the occupation, the Charter Company was bankrupt. The British Government took over. Notably, the British Government took great care (the matter was authorized by British Prime Minister Attlee personally) immediately to recommence the annual payments to the heirs. Malaysia followed suit when North Borneo – now referred to as Sabah – became a constituent state. At some point in the 1960s, the annual dollar obligation was unilaterally translated into Malay dollars (ringgit), and payments continued, as noted above, until 2013.

This would likely all have been a historical footnote, were it not for one great transformation in Sabah’s economy: oil. In the 1970s and 1980s, vast quantities of oil and natural gas were discovered off the Sabah coast. Sabah went from being a potentially interesting eco-tourism destination to an economic dynamo for Malaysia.

The Heirs took notice. It wasn’t lost on them that they were receiving RM 5,300 a year (about US$ 1,150) in connection with a territory that was generating billions annually for Malaysia. As is evident from the record in the arbitration, the Heirs, our predecessors, made repeated requests in the 1980s, 1990s and beyond to increase the annual payment amount so that it more fairly reflected the original understanding that the Sultan was not going to get the short end of the stick by losing his ability to exploit the territory. Those requests went unanswered.

Then came 2013. There’s no dispute that a cadre of Sulu-based men, some armed, arrived on the shores of Sabah and declared they were staying there. The Malaysian Government issued an ultimatum for them to leave, which they ignored. Fighting broke out, leaving several Malaysian police and dozens of Filipinos dead.

We, the Heirs and Claimants in the arbitration, had nothing to do with what’s become known as the Lahad Datu incursion. Malaysia’s former Attorney-General, Tommy Thomas, says as much in his memoirs:

The often given, unofficial explanation is that Malaysia stopped the payments because of the armed incursion in 2013 into Lahad Datu in Sabah. However, there appears to be no evidence linking the Sulu claimants who were receiving the annual compensation from Malaysia with the armed invaders of Lahad Datu. If the Malaysian government had such evidence, the prudent course would have been to file an action in the High Court of Sabah at Kota Kinabalu against the Sulu claimants (all of whom were known to our embassy in the Philippines where the annual payment was disbursed to them), seeking an order of the Sabah Court that because the Sulu claimants were personally and directly involved in the Lahad Datu invasion they had forfeited their right to receive future payments and that the 1878 Grant had ceased to operate. If that had occurred, the government’s action to cease payment would have received judicial imprimatur. Regrettably, this option was not exercised by those in charge in 2013.

Nonetheless, as Thomas notes, the payments did stop. And the legal action started.