Sulu Arbitration

We have absolutely no intention to ‘take over’ Sabah.  We never have done.  The original Sultan who owned the land signed a lease in 1878 and he and his heirs were happy that this lease be transferred from the businessmen that signed it to their Company, then on to the British Government and finally to Malaysia.  That land was not – unlike the Sultanate of Sulu – part of the Philippines, a point that has been made clear at regular intervals.

All these counterparties honored the lease.  As a historical footnote, after the lease was established, the Sultan did intervene in the 1890s when his tenant, then the British North Borneo Company, asked him to help protect their operations from Mat Salleh.  Because it was his territory.

However, years later the Malaysian Government seems to have unthinkingly reacted to the Lahad Datu event of 2013 by breaking the 1878 Agreement that was the bedrock of Sabah’s legal integrity.  In doing so, like any tenant that stops paying rent, they invalidated their own rights, and forced a situation in which Sabah technically reverts to the ownership of Sulu.  Having deliberately taken action that hands Sabah back to us, they now claim that it is our lawsuit that threatens their sovereignty!  You cannot convincingly spend 135 years paying a lease and then, probably in error, pretend that there is no lease, and never was.

The only threat to sovereignty was self-inflicted by Malaysia in 2013, and subsequently repeatedly reinforced in government rhetoric by many Ministers.    We would not choose to create some artificial state in the South China Sea.  We just want Malaysia to honor its debts.

According to Acting British Consul General Treacher’s letter to the Foreign Office in January 1878, the Sultan’s main preoccupation was how much money he would lose from leasing out Sabah and gain by entering into the lease agreement.  The agreed sum of $5,000 represented all his annual earnings in 1878 from what today is called Sabah.  That amount has only increased once, in 1903, to $5,300. (Depending on the price of oil and gas, Malaysia earns between three and nine million times more than that per year from its hydrocarbon revenues in Sabah alone.  That kind of imbalance in contractual arrangements unambiguously calls for redress under international law. And that’s what we asked for and received.)

In fact, large as it seems, the Award represents only a fraction of Malaysia’s revenues from Sabah.  We recognized that Petronas, as the custodian of the hydrocarbon resources in Sabah, was entitled to the lion’s share of any oil and gas revenues.  We proposed that the Arbitrator give us no more than 20% of those revenues; he awarded 15%.

We also had the option of seeking compensation from the outset of Petronas’s exploitation of Sabah’s hydrocarbon resources.  We chose, however, to ask for compensation only from 2013 – when Malaysia stopped making lease payments.

We asked for three heads of damages:

1. i) payments for the period 2013-2020;
2. ii) prospective payments from 2021-2044 (the latest year in which the oil price curve predicted oil prices for the purpose of estimating damages);

iii) a “terminal” value for the oil and gas, representing an estimate of its worth until it ran out.

The Arbitrator awarded (i) and (ii), but declined to award (iii) because he felt that damages that far out were too uncertain.

Read FAQ “Wasn’t that just a token rent?” below for a further study about inflation and valuations.

The Lahad Datu terrorist attacks were not carried out by us, nor on our behalf, nor with our approval in any way at all.  When the 2013 Lahad Datu attack occurred, the 1878 Agreement was in place and was being honored by Malaysia.  The invasion was led by a relative of ours who claimed himself to be a Sultan, and had been excluded from any rights to be a designated heir, pursuant to Sultan Jamalul II’s will.  It was pointless and illegal, and the violence was inexcusable.

(There are many individuals who claim the title Sultan of Sulu.  Who is the successor to that honorific title is debated.  What is not disputed, and is endorsed by court rulings which Malaysia has accepted and indeed been involved with, is who are the Heirs to Sultan Jamalul’s Will, and his possessions, like Sabah.)

There was some shouting by senior Malaysian politicians in 2013 because of Lahad Datu, when it emerged quietly that Malaysia had always paid a lease contract.  But they chose to ignore what they had always accepted before.  That this was a legal contract.  But go look for a documented evaluation and decision on this, in Hansard or elsewhere. Where does the government explain (even to itself) what the situation was?  Nowhere.

It was only in 2023 that Malaysia came up with the ridiculous claim, presented entirely without evidence, that one of us was a ‘terrorist’.  This is bullshit, and beneath contempt.  It was a disgraceful abuse of terrorist legislation, with the simple hope of wrong-footing the International enforcement of the arbitration.

You would have to ask them.  But we suspect it’s because originally the Government was asleep at the wheel while the arbitration was going on, allowing its Spanish counsel to make a number of crucial errors that will end up costing dearly.  More recently, the matter seems to have become an excuse for political self-promotion.

We have little interest in explaining the strange way in which successive Malaysian governments have managed this matter.  We had a workable – if unsatisfactory – relationship with the Malaysian Government until the latter stopped paying rent for occupied land.

But it is worth considering that from 1963 onwards, the Philippine Government has repeatedly claimed that Sabah is rightfully part of the Philippines.  This is not our legal argument.  The Sultan of Sulu’s territory on Borneo was never part of the Philippines, and this was confirmed specifically in 1878 and again – when the Philippines was a US colony, in 1915.

It is regrettable that it has been a source of tension between two governments who should be on friendly terms.  We speculate that – if the Malaysian government officials thought this through at all – they may have presumed that the claim caried a risk of weakening Malaysia’s rights in favor of the Philippines.  Successive Prime Ministers (Najib and Mahathir) avoided engaging and learning about the claim, when we offered to talk directly, rather than go to arbitration.

But there is a repeated pattern of falsehoods pushed out by the Malaysian Government, to deflect from the mistakes it made in 2013.  Even recently (May 2024) the Malaysian Minister of Law is fabricating away.  In an interview with a French law journal she states that the Malaysian Government doesn’t really know who we are, and says that she thinks at least one of us is Malaysian!  Our identities are a matter of record, known to the Malaysian Government for years.  We are identified in court documents throughout the world.  None of us is Malaysian, nor ever was.  She cannot be this ignorant, so this is a bizarre lie that she feels she has to tell anyone who will listen:  Including the Malaysian people.  You need to pair this with the childish pretense that some semi-invented group who she claims are in correspondence with her, (and which usefully and implausibly told her – she says!) – that they wanted to sue Malaysia for independence in the US courts.  To be clear:  Malaysia has a constitutional history of engaging with the us since MA63.  The British and their predecessors since long before.  Here, attached, are the Malaysian bank checks that show that they know us – and paid us – by name.

The ‘spin’ that Malaysia pumps out on sovereignty, the fantasies about terrorism and our anonymity deflect public attention from the simpler reality of a lack of strategic management by a series of past governments.  But this unsatisfactory handling is a matter for the Malaysian people.  Is this farce really how you defend the integrity of Malaysia?

International arbitration is an expensive process.  Many claimants lack the money to pursue it.  Over the past 15 years or so, litigation funding firms have arisen.  These funds pool money from investors and look for meritorious international claims to bring.  When they find them, they pay the lawyers’ fees for the claimants in return for a share of any money the claimants recover.

Funders are not interested in speculative and hopeless cases.  The more that Malaysian Ministers deride the funders, the more one should think about the investment.  Funders are not fools, nor do they have secret political agendas or any of the other childish criticisms that we have heard from the Malaysian Government.

London-based Therium and other litigation funders pick their cases very carefully.  They don’t want to lose their money any more than anyone else does.  They therefore do a great deal of due diligence on cases before funding them, ensuring that the legal grounds are solid and that the claimants are reputable.

In this case, Therium spent nearly a year vetting us and the claim before deciding to fund it.

More information about Therium can be found here.

Arbitration is a centuries-old process for resolving disputes in a binding manner without going to court. Arbitration has become particularly popular in international disputes, in which neither party trusts the other’s courts to be fair to them. Because of a 1958 Treaty known as the New York Convention (which 170 countries have signed, including Malaysia in 1985), arbitrations in one member country are accepted in other member countries.

Arbitration requires that both parties be invited to present their case, but it does not require that both parties show up. Of course, you fail to show up at your peril. This is what occurred in an arbitration between the Philippines and China concerning territory in the South China Sea; China declined to participate, but the arbitration went ahead.

Arbitration comes in many flavors, but the most common is so-called commercial arbitration. Those are usually disputes over money owed under contracts. The contract itself will specify that a dispute should go to arbitration rather than to a court. The contract usually will also provide some information about how the arbitration should work – how many arbitrators should hear the case (usually one or three), where it will be held, and what rules might apply.

The Malaysian government claims that the 1878 Agreement has no arbitration clause. They say that the word “arbitration” doesn’t appear. Actually, there is a clause which agrees how any dispute between the parties would be arbitrated. The Spanish and French judges agree on this, just as they agree that this Agreement was a lease concession. Shouting repeatedly in the domestic press that there is no arbitration clause or that this was a one-off transfer may be good politics for ministers. It just happens not to be true.

No. The ICJ (International Court of Justice) can only hear disputes between sovereign States. Malaysia is a State; we, obviously, aren’t. Private parties such as us have no standing to bring an ICJ claim.

In any event, this isn’t a case about where a maritime boundary should be drawn. It’s a case about how much one party owes to another under the terms of a long-term contract between them, which one party breached. That is also why international courts don’t accept Malaysia’s defense that it doesn’t have to face legal process because it can claim sovereign immunity. If a government is in a commercial contract, it can’t hide behind ‘sovereign immunity’, whether it be our dispute or a supplier dispute with a Malaysian ministry or Petronas.

First, this was an arbitration: It was not heard in any court, Malaysian or otherwise.

It may seem logical that a case about Malaysia should be heard in Malaysia. But in international dispute resolution, it is normal to hear cases in places where the government might be relied upon not to interfere with courts or tribunals.

We could theoretically have opted for AIAC arbitration in Kuala Lumpur, but the AIAC frankly lacks a reputation for objectivity. It is meant to be independent of the Malaysian Government. But take a look at its board, at the current relationship with the Minister of Law, and its colloquia in support of the Malaysian Government in this matter. And its statement of support. This isn’t a body that is serious about independence.

The 1878 contract was signed in Jolo City, in the Philippines. But we reasoned that the Philippines would be an unfairly prejudiced locale against Malaysia, and likewise opted not to bring our claim there.

The key to dispute settlement was written into the contract: If the two parties disagreed, they could appeal to the British Consul General in the region. When the parties were a pair of roving businessmen on one side and a Sultan on the others, this was a reasonable and common arbitration arrangement.

So, our first move was to get an arbitrator appointed to take on the already agreed role. We approached the British Government, asking if, as they no longer had a Consul General there, the British would be willing to appoint an arbitrator? The British Government did not – as the Malaysian Government pretends – reject the arbitration or make a judgment of any kind, except to say that the British didn’t themselves want to be involved in arbitrating this matter.

So, as we were looking for the traditional independent but relevant jurisdiction, we applied – with full Malaysian knowledge – to Spain. Why Spain? Because Spain was the government in power at the place and time of the signing of the Agreement.

On this basis, we applied to the High Court of Madrid (TSJM) asking three things:

1. Was Spain a reasonable place to initiate the selection of an arbitrator?
2. Did Malaysia have “sovereign immunity”?
3. Could Spain help by selecting an independent arbitrator?

Malaysia brought an anti-arbitration suit in Sabah, which dutifully said that the whole arbitration should stop. This demonstrated why the Philippines and Malaysia would have been such inappropriate locations.

So why did Stampa move it to France? Very simple. His duty as arbitrator was to protect the arbitration from interference. And he was spectacularly interfered with by the Spanish Government on behalf of Malaysia. QED.

Actually, he wasn’t.

Be warned: the developments in Spanish court have so little basis in legal reality that they can only be the result of a corrupt process.  It took us years to come to that conclusion – we couldn’t believe that a respected EU jurisdiction functioned more like a banana republic.  To his credit, Stampa seems to have understood the threat much better, and it is exactly why he moved the arbitration to France.

Here’s what happened.   The Spanish TSJM court selected Stampa as arbitrator in May 2019 out of the proverbial – or perhaps even an actual – hat.  His was one of three names supplied to the court by the Madrid Bar of qualified, English-speaking arbitrators with no connections to Malaysia or the Philippines. It was up to the selected arbitrator, not the court, to determine whether he had authority to act as an arbitrator.  That in turn would depend on how the arbitrator (not the court) interpreted the language of the dispute clause in the 1878 Agreement.

It’s a peculiarity of arbitration, but it makes sense: in this situation, the arbitrator derives his authority not from the body that took his name out of a hat; he draws it from justifying his role as the arbitrator.  If you don’t like – and wish to challenge – the arbitrator’s authority, you are welcome to do so by application of the arbitration law.  That is the one thing Malaysia has wanted to avoid above all else.

Perhaps the above explains why there is no provision in the Spanish Arbitration Act for reversing an arbitrator’s appointment.  But that is exactly what a different panel of the Spanish court purported to do, under highly suspicious circumstances in June 2021.

The court’s reasoning? Two out of the three judges agreed with a Malaysian claim that because Malaysia had received the official notices in its Embassy in Madrid, this Embassy didn’t count as part of the Malaysian Foreign Ministry so could not receive legal notices from the Spanish Government.  Yes:  Read that again… Exactly.  It is that ridiculous.

But it gets better…

Malaysia said that the etiquette of delivery meant that Malaysia suffered serious prejudice, so great that it was legally defenseless.  If this is sounding ridiculously improbable, then you are reading it correctly.  And don’t think that this was because Malaysia didn’t receive the material.  Service was acknowledged, and the Attorney General’s Chambers even filed service documents to court in Kota Kinabalu in 2019.  (For more about the technicalities of that service, see here; for more about the 2021 decision and its infirmities, see here.)

But it gets even better….

Malaysia still had to deal with the fact that, whatever its ridiculous story, it had 20 days in which to file a complaint of ‘defenselessness’.  And its Spanish lawyers, Uria Menendez had first made a fuss about the delivery etiquette in December 2019, in Malaysia’s own courtroom in Kota Kinabalu.   It was far too late to play this card.

So, in 2020 Malaysia hired a different Spanish lawyer, David Arias, who in 2021 suddenly announced that he had read the court file that had recently been sent to him and was shocked to see that the delivery of documents in 2019 (supposedly) broke diplomatic norms.  And everyone had to pretend that the Malaysian Attorney General’s Chambers, which first flagged up this issue in 2019, and its Spanish lawyers Uria Menendez who had filed documents on his in 2019 and 2020 had not known about any of this until Mr. Arias discovered it all over again in March 2021.  Then Mr. Arias filed it again within 20 days of Malaysia ‘finding out’.  (When it was really nearly two year later.)

Arbitration just doesn’t work that way, in Spain or elsewhere.  In other such cases, where local courts start interfering with the arbitral process, arbitrators have moved the procedure elsewhere.  That’s exactly what Stampa did when he moved the arbitration to France.

One thing that the 2021 decision never did was to dismiss Stampa from his position as arbitrator.  Also, the TSJM in 2022 said that it would not – and could not – undo his appointment.  To the extent that there was ever any instruction to Stampa to stop arbitrating, it came from the Court Clerk. That clerk is now under criminal investigation for overstepping his authority and misrepresenting the Court’s position.

We also know why the Court Clerk sent the instruction to Stampa.  It was because Malaysia’s lawyers told him to.  The Clerk admitted as much in a document, submitted to the prosecutors, that came to light in Stampa’s criminal trial.

But, you will say:  Didn’t Stampa just get convicted for continuing to act as Arbitrator when he was told to stop?  Actually, he was convicted for not stopping when a clerk of the court told him to stop. Notably, the judges themselves had not given him any instruction. This is, of course, as crazy as it sounds.

So, Stampa is now appealing to the Supreme Court a criminal conviction for “disobeying” a supposed instruction to stop the arbitration.  But that instruction was sent by a Court Clerk not at the request of the judges but of Malaysia.

If all that sounds to you like a fair result arising out of a disinterested justice system, there may be a place for you in some parts of the Spanish judiciary.

There’s no official, contemporaneous record of why the annual payments – a few thousand ringgit – stopped, or even of a considered decision to do so.  We were never told that they had stopped, let alone why.  We have never found a clear answer.  The timing with Lahad Datu, however, is hard to ignore.

After the arbitration, it became clear from comments that then-Prime Minister Najib had unilaterally stopped the payments, even though Attorney General Tommy Thomas, in his autobiography, made clear that this had been a breach of contract because we had nothing to do with the attacks on Lahad Datu.  It was an expensive mistake by the Malaysian Government, putting itself in breach of the contract that gave it the authority over –  and the wealth of – an entire state.  Amid all the trumpeting from Sabah politicians, they miss three important points.

• It was never our intention to ‘take back’ Sabah. Just to enforce and renegotiate a contract, leaving Sabah under the control of the Malaysian Government once more.
• It was the Federal Government that always paid the lease, and it was the Federal Government that stopped paying, in what has to be one of its maddest decisions.
• Our dispute is with the leaseholder, the Federal Government. Not with the State Government of Sabah.

But with all the noise coming from The Law Minister, it is striking that she has never publicly addressed herself to why the UMNO government put Malaysia in this precarious position.

The 1878 Agreement had all the elements of a valid contract: the Sultan agreed to lease what became Sabah to Messrs. Dent and Overbeck, in exchange for an annual sum.  There was no prohibition on the Sultan’s doing so, and no problem with his receiving compensation in return (though the amount, because it didn’t materially change, eventually failed to reflect the original bargain.)

These kinds of perpetual leases and similar agreements were common in 18^th and 19^th Century commerce and diplomacy.  The reason it’s still valid today is simple: the parties kept abiding by its terms.  Those terms were unchanged and straightforward – money for the use of territory and its resources.  True, the parties changed identity over time, but that was contemplated in the agreement itself (the contract was open-ended, and it referred to “successors-in-interest” to the original parties.)

A contract doesn’t lose its validity out of age; it just usually expires or falls into mutual disuse.  Neither happened here.

No.  MA63 concerned the status of Sabah as part of Malaysia, but was entirely silent on the obligation of annual payments to our predecessors and us.  Except that, like the British Empire, Malaysia immediately took over those payments and continued to make them until 2013.  MA63 simply has no bearing on this dispute.

It’s definitely a lease.  The original term in Jawi was “pajakkan”.  No one seriously contests that that word means “lease.”

Malaysia likes to say that this was a permanent cession of territory.  That not only goes against the plain language of the contract and the contemporaneous understanding of the parties (there’s correspondence in 1878 from the British referring to a “rental” and “leasehold”); it also defies the mechanics of the agreement – what kind of one-off transfer calls for a permanent annual payment?

Some people argue that the status changed in 1903, when an additional agreement changed the sum from $5,000 to $5,300.  In that agreement, the first paragraph uses the term “menyarakhan” (“handover”).  But no one seems to have bothered to read the second paragraph of the 1903 agreement:

The reason why these islands were not named in the agreement made with Baron de Overbeck and Mr Alfred Dent on 19 Muharam 1295, equivalent to 22 January 1878, is that it was understood and assumed by both parties that these islands were included in the lease of territories and islands as stated in that agreement. And in verification and confirmation of the above, we therefore set our seal to this statement.

So, the 1903 agreement reinforced the fact that this was a lease.

Moreover, even British contemporaries referred to the agreement as a “rental” or a “leasehold”.  Part of the confusion may lie in the word “cession” used in the 19^th Century English; although today we think of a cession as a giveaway, the writers in 1878 used it interchangeably with what today we call a “concession” – a territory or function handed over to a private party to control and make money out of, in exchange for some kind of payment.

Finally, some people argue that the grant of authority from the Sultan to Baron Overbeck accompanying the agreement, giving the Baron “power of life and death” over the Sultan’s subjects in Borneo, could only constitute a cession of sovereignty.  This fundamentally misunderstands what the Sultan was doing: he was making Overbeck his viceroy, giving him the authority to stand in the Sultan’s shoes.  He didn’t make him Sultan.

Thus far, the Philippine Government has (correctly) stated that this is a commercial dispute that does not directly involve the Philippines. The fact that we are Philippine citizens does not entitle the Philippines to step into our shoes.

We’ve undertaken enforcement proceedings in Luxembourg, the Netherlands, and France. We’re preparing others. In Luxembourg, we froze assets in Luxembourg banks belonging to Malaysia. We also froze the assets of two Luxembourg subsidiaries of Petronas associated with Petronas’s stake in a gas field in Azerbaijan. That was in 2022. Petronas made a public statement that the Luxembourg company accounts were empty, but nonetheless asked the Luxembourg courts to release the funds! In early 2023, a Luxembourg judge temporarily lifted the freezes on a technicality; we corrected the issue shortly thereafter, and the freezes were reimposed. The seizures remain the subject of ongoing litigation.

In the Netherlands, we launched an action to enforce in 2023. The appellate court denied the motion. The Dutch Supreme Court is currently reviewing.

In France, the Court of Appeal stayed enforcement of the big Final Award, pending appeals (the Final Award has not yet been before the Court of Appeal).

But Malaysia already owed unpaid fees for the Preliminary Award. Enforcement of this debt had not been stayed.

So, we put charges on Malaysian properties in Paris (contrary to Malaysian reports, these were not diplomatic properties – those are immune from seizure.)

When the Court of Appeal reversed the recognition in France of the Preliminary Award June 2023, we agreed to remove these charges, for now. As you will have read elsewhere on this site, that Court of Appeal decision is currently under review by the French Supreme Court.

No. There are no civil or criminal proceedings against Stampa outside Spain, and none at all against Therium in this case. What happened in June 2024 was that two Luxembourg subsidiaries of Petronas [see FAQ “Enforcing Arbitral Award in Courts” ] launched a discovery proceeding in New York. The companies in this proceeding have asked a judge to order Therium and a series of Spanish banks to disclose “illegal” payments made to Stampa in order to render his Award. This is what’s known as a “fishing expedition”. They have no facts, but they are hoping to generate noise and maybe find something to object to.

Spoiler alert: there are no illegal payments, and Malaysia has produced no evidence or suggestion of any. This may be a case of one side having engaged in dirty tricks assuming that the other side has done the same, and accusing it accordingly. We (obviously) have no control over Therium and the banks, so we can’t tell you whether they’ll resist the subpoenas on principle. But we’re confident they have nothing to hide.

It’s ironic that the two Petronas Luxembourg subsidiaries, associated with a $2 billion+ transaction in Azerbaijan, should be the entities making this demand in New York. Given Malaysia’s appalling record for corruption in the US, and the tendency of New York authorities to be fixated on source of funds (as Jho Low and his political friends know) this might have been an unwise approach…