Sulu Arbitration

Trying to Avert a Legal Dispute

In 2013 Malaysia broke the lease agreement.

All we wanted was a fairer deal. And now, to add injury to insult, the Malaysian Government not only wasn’t talking to us but also refused to pay even the annual RM 5,300. This was flat-out breach of contract, but it also represented an opportunity to reset the agreement on more reasonable terms.

Accordingly, Paul Cohen, our global counsel, wrote to the Malaysian Prime Minister, Najib Razak, in 2017 to advise him that we had a legal grievance but that we were ready to resolve it privately and promptly. In that initial letter, our counsel invoked the Unidroit Principles. These are a synthesis of international contract norms. They include the idea that, when a long-term contract becomes skewed beyond the terms of the bargain that the parties originally contemplated, the affected party should ask the counterparty to renegotiate; if negotiations fail, the affected party can then ask a judge or arbitrator to redress the grievance.

Malaysia ignored that letter. A couple of months later, our counsel wrote another letter to Prime Minister Najib, giving him notice of our intention to bring an arbitration. The Malaysian Government later included our letter to Najib in its own French court papers. So, there is no question of failure of delivery.

Our counsel followed up with three further letters in 2017 about the arbitration claim. [See Key Documents 10, 11, 12]. All went unanswered.

These letters would logically have hit the desk of the Minister for Legal Affairs in the Prime Minister’s Office, at that time Azalina Othman Said. Draw what conclusions you will from the fact that she is now Malaysia’s loudest thumper of the nationalist drum, ignoring and obscuring the realities about the lease, the claim, and the opportunity that Malaysia had in 2017 to nip it in the bud.

Setting up the Arbitration Claim

Recall that the agreement of 1878 contained a dispute resolution clause invoking the British Consul-General for North Borneo as the arbitrator. Unfortunately, no such official had existed for well over half a century. Our first port of call was to the UK Foreign Office, asking it to appoint a substitute arbitrator. The British Foreign Office (presumably smelling a diplomatic nightmare miles away) politely declined.

Our next stop was Spain. A Spanish law from 2015 permitted Claimants who would otherwise be denied justice to come to Spanish court to have an arbitrator selected, in a dispute that had some nexus with Spain. That nexus was the Sultan’s status in 1878 as a subject of the Spanish Empire, and the fact that the contract was signed in Spanish territory.

Having hired highly reputable Spanish counsel with the assistance of our global counsel Paul Cohen and Elisabeth Mason, we began the process of finding an arbitrator in Spain.

A quick aside: arbitration clauses are strange legal constructs. They are deemed to survive all kinds of legal mishaps, including the disappearance or demise of people and institutions originally designated to run them.

In modern arbitration, finding an arbitrator and a place to arbitrate isn’t usually an issue. Most modern contracts providing for arbitration usually state something like: “in case of any dispute arising under this agreement, it will be heard by [insert number of arbitrators] in [insert city] under the laws of [insert jurisdiction], applying the rules of [insert arbitration institution, such as the International Chamber of Commerce]”

The agreement of 1878 had none of that detail. There was only a provision stating that the holder of the title of Consul-General for North Borneo, a defunct position, would decide the dispute.

The Process

So, back to Spain. Our Spanish counsel wrote to the Malaysian Ambassador to apprise him of an imminent request to appoint an arbitrator. That request was made in early 2018. The Spanish court hearing the request was the Tribunal Superior de Justicia de Madrid (often referred to as the High Court of Madrid, or TSJM), a court system for civil and criminal procedures responsible for supervising arbitrations. The TSJM operates in panels of three judges, with one serving as the presiding judge.

Shortly after it received the request to appoint an arbitrator, the TSJM sent the file to the Spanish Foreign Ministry for an advisory opinion as to whether Malaysia enjoyed sovereign immunity from any such suit. This was a standard request.

In its response, the Foreign Ministry said that the agreement contained an arbitration clause. Sovereigns who had entered into – or, in this case, inherited – an agreement with an arbitration clause could not invoke sovereign immunity to be allowed to ignore the contract.

The court was free to ignore the advisory opinion, but chose to accept it. It then asked the Foreign Ministry to serve the papers our lawyers had prepared. Again, this was standard procedure where a foreign sovereign was concerned, and common worldwide. The justice system communicates with foreign governments using the Foreign Ministry as its delivery system.

The Foreign Ministry duly served Malaysia with the papers requesting the appointment of an arbitrator. It did so by handing those papers over to the Malaysian Embassy in Madrid; this was the same way in which the Foreign Ministry had served sovereigns in the past. The Malaysian Embassy accepted service with a so-called note verbale (despite the ‘verbale’, this is a written, formal diplomatic communication for the record).

Malaysia had three months to respond to our request for arbitration – a standard 30 days, plus an additional bonus two months for being a sovereign state. Nonetheless, Malaysia did not file any response.

The court considered the request. Under Spanish law, if (on the face of it), there appears to be an arbitration clause, a court will defer to an arbitrator and let him or her sort it out. That’s what the TSJM did here. It stated that the clause discussed certainly appeared to call for arbitration rather than litigation in court. The TSJM therefore would grant our request, select an arbitrator and let the arbitrator decide if there was an arbitration clause – or not.

The TSJM’s judgment came down in March 2019. Unusually, by the standards of many jurisdictions, it was not subject to appeal to a higher court. The TSJM asked the Madrid Bar to supply the names of three experienced arbitrators, fluent in English and with no connection to Malaysia or the Philippines.

In May 2019, the Bar duly sent three names to the court. The court picked one out of a hat (so it said – we don’t know the actual selection method, but it was supposedly random), and came up with the name Gonzalo Stampa.

Stampa at the time was in his late 40s. He held an LLM in international law from the University of London and a doctorate from Complutense University in Spain, and was one of Spain’s foremost arbitrators.

The Arbitration

Stampa set about requesting information from the parties. As is customary, he asked us, as the Claimants, to file a notice of arbitration, setting forth in general terms our claims and demands. According to Stampa’s schedule, the notice of arbitration was supposed to be followed with a response by Malaysia within 30 days (Stampa described the procedures in excruciating detail in his Preliminary Award)

Stampa operated principally by email. There are a large number of references to read-receipts sent to the parties. These record Malaysia’s Attorneys-General in particular opening and reading emails, but not actually responding in the arbitration itself.

There are a couple of notable exceptions to this pattern. On September 19, 2019, the Attorney-General of Malaysia (Tommy Thomas) wrote to our lead counsel copying Dr. Stampa. In his letter, Thomas acknowledged that the claimants had been paid up through 2012 and regretted the cessation of payments. He offered to resume those payments, with a 10% increase, provided that we dropped the arbitration.

This might have been a confidential settlement communication between lawyers on opposing sides – except that Thomas copied Stampa on the correspondence. In any event, we rejected the offer, given that 10% on top of RM 5,300 was hardly what we were looking for.

Thomas wrote a second time to Stampa, putting on record his objection to the jurisdiction of both the Spanish courts and Stampa himself. But he didn’t claim that Malaysia had been in any way harmed or constrained by the way that he and his Government had received the documentation from the Spanish Foreign Ministry some months before. It would be hard to imagine how he could.

Stampa called a procedural hearing on October 25, 2019. Malaysia did not appear. During the hearing, Stampa ‘bifurcated’ the claim and set forth a briefing and hearing schedule.

(Bifurcation is a frequent device in international arbitrations, whereby a tribunal first determines whether it has jurisdiction to hear the case, and then proceeds further only if and when it proves that it does. Here Stampa was going to consider the language of the 1878 agreement to see whether it contained an arbitration clause – and if it did, whether he could properly step into the shoes of the Consul-General. In other words, Stampa was going to do what the court had asked of him.)

Mere hours after the procedural hearing on October 25, a law firm did appear on the scene on Malaysia’s behalf. Madrid-based lawyers for the major London firm Herbert Smith Freehills contacted Stampa saying that they represented Malaysia and wished to be heard on the issue of jurisdiction. Stampa adjusted the procedural schedule to help them, and invited the lawyers to participate as soon as they had a Power of Attorney from Malaysia’s Attorney-General.

No such Power of Attorney came. Tommy Thomas writes in his memoirs about an international law firm that wanted to represent Malaysia, but that he found far too expensive. Herbert Smith Freehills dropped out of the picture, for now. Malaysia did not directly participate in the arbitration after that.

That’s not to say Malaysia remained idle. It moved instead to sabotage the arbitration. In early December 2019, Stampa was served at his office with papers by lawyers from Uria Menendez, a prominent Spanish firm, on which there is much more of below.

The Uria Menendez lawyers were delivering a summons to Stampa to appear in court in Kota Kinabalu in one week’s time to defend himself against an anti-arbitration injunction suit filed in that court by the Malaysian Government.

An anti-arbitration injunction is much as it sounds: it’s a court order telling an arbitrator and/or parties to stop conducting an arbitration. But as you can imagine, what a Malaysian court tells a Spain-based arbitrator not to do is unlikely to weigh heavily on the latter’s conscience – especially when it contradicts the actions of a Spanish court appointing the arbitrator in the first place.

The Malaysian court ultimately issued an anti-arbitration injunction, which Stampa (consistent with doctrines of international law) ignored. Notably, one of the arguments Malaysia made in the papers filed in the injunction suit in Sabah, courtesy of a report on Spanish law by Uria Menendez, was that the Spanish Foreign Ministry had improperly served Malaysia. According to Uria, the proper method of service was not upon the Malaysian Embassy in Madrid, but rather via the Spanish Embassy in Kuala Lumpur and thence to the Malaysian Foreign Ministry. Bear this in mind as we proceed, and remember the date: December 2019.

Stampa issued his Preliminary Award on May 25, 2020. He found that there was a valid arbitration clause in the 1878 agreement, and he was empowered to substitute for the defunct Consul-General position. Stampa also found that he ought to apply the Unidroit Principles as the applicable law, in the absence of a specified law in the agreement. As noted earlier, the Unidroit Principles are a modern synthesis of national and transnational contract doctrines, reflecting general principles of international contract law.

The arbitration thus proceeded to its ‘merits’ phase. Our lawyers filed a lengthy statement of claim in June 2020, requested up to $32 billion in damages. Their argumentation, in a nutshell, was that Malaysia had become so grossly better-off from the bargain than originally could be conceived of that it was legally necessary and proper to “rebalance” the contract to reflect the current state of affairs more accurately. Both the Unidroit Principles and the doctrine of changed circumstances under Spanish law, dubbed rebus sic stantibus, illustrated and supported this conclusion.

Malaysia as usual was invited to submit a statement of defense but declined to respond to Stampa’s repeated requests to do so. The one thing Malaysia did do during this time period was to lodge a motion to annul Stampa’s Preliminary Award with the TSJM, in October 2020. Uria Menendez was representing Malaysia.

Stampa called for a hearing on the merits in February 2021. The hearing was conducted remotely, because of the ongoing pandemic. Malaysia again was invited but did not join. Stampa officially closed the proceedings on March 5, 2021, and undertook to issue the Final Award by September 2, 2021.