Sulu Arbitration

Now we get to the sinister part of the story. Go back for a moment all the way to March 2019.

How to detain a ship that has already sailed?

Malaysia had to stop the arbitration, after it was all but completed, without arguing the case.  The only way to do this was to knock out the distinguished arbitrator who had been proposed by the Spanish Bar and selected out of a hat by the Spanish court, and had not been rejected at the time by Malaysia.

It was not realistic to object to him personally.  Attacking him personally only became a campaign when later, he refused to comply with a corrupt instruction from a court official.   So, they had to try to get the Spanish authorities to reverse all their decisions.  And, with the assistance of the Spanish authorities and some clever Spanish lawyers, this is what they set out to do.

You may remember that the TSJM’s ruling to appoint an arbitrator was not subject to appeal.  That’s actually not 100% accurate – a losing party can ask for an “extraordinary vacatur” of a decision if it discovers something that causes it indefension real (which translates as “actual defenselessness,” or less accurately but perhaps more aptly under common law, “serious prejudice”).  This would be a very unusual situation which destroys the ability of a party to take part in a case.

Malaysia was desperate. It had disastrously decided not to fight its corner in the arbitration. But that was before it had seen the outcome of the Preliminary Award, and the shattering scale of the Statement of Claim that we filed, in the wake of the Preliminary Award, in 2020.

Our legal case was solid.  Our procedure was flawless. But Malaysia needed to find a fault to which we couldn’t respond. So, it fixed upon a plan to inflate the minor issue about the Spanish Foreign Ministry’s diplomatic procedure of delivering the court’s papers to the Malaysian Government in 2019.  Could Malaysia make this into a reason to annul the ongoing arbitration?  It was far too thin, and Malaysia would need a lot of help.  And it would need that help from Spanish officials.  That would include people in the Spanish Foreign Ministry ready to criticize its own actions, in court evidence that would humiliate Spain (if anyone was watching) but help Malaysia.  We will see here and below some indicators of why the Spanish Government would be prepared to do this.  With a defense deal in prospect and an angry and frustrated customer with a demand of $32 billion filed in a Spanish court, nothing was going to be too much trouble.

But there was another problem with this plan.  Under Spanish law, any party that claims “indefension real” must alert the court and bring such a case within 20 days of finding out the issue.  Malaysia, however, had been aware of exactly how it was served the papers since the day they arrived at the embassy in Madrid, and were formally acknowledged in 2018.   Worse, Malaysia had also referred to this service procedure when it filed a complex anti-arbitration suit in its own courts in late 2019.  Malaysia’s own favorite Spanish lawyers Uria Menendez had authored this point. So, they had formally documented that they didn’t like the way the filings had been delivered, as early as 2019.  In 2020, suddenly changing strategy, it was too late to bring a twenty-day objection.

The solution was to bring in a lawyer who had not already made this point, and have him “discover” it.  And he couldn’t rely on Malaysia’s own files, because that would show that Malaysia had been aware of – and failed to act on – this issue many months before.

So, Malaysia re-tasked a separate lawyer, David Arias of Herbert Smith Freehills, in 2020.  He made a formal request of the TSJM court for the entire court file from 2018-2019.  The court clerk declined, unsurprisingly given that a) Malaysia already had the file, and b) the case was closed.

Finally, the TSJM judges over-ruled their own clerk, and she was compelled to hand over the file. (For the record, our lawyers didn’t object, having at that stage no idea of this game.)  In March 2021, after months of unforeseen delays, Arias could read for the “first” time the documents that his client had held for over a year, and file a complaint that … the Spanish Foreign Ministry had broken diplomatic protocol to such an extent – never explained – that Malaysia was legally crippled.

Receiving this, the judges didn’t laugh, as far as we know.  They went along with this, and dramatically asked the Foreign Ministry for an “emergency opinion” on whether its diplomatic engagement with Malaysia had been correct. The judges ignored the fact that there is no such thing as an “emergency opinion” in these matters: requests to the Spanish Foreign Ministry for advisory opinions are limited to questions about sovereign immunity.  And if a court really wanted an objective opinion of the legality of a Ministry’s actions, why ask that same Ministry’s legal department?   Why not ask an independent expert? Unless you hope for a particular, pre-planned response – as has been alleged elsewhere.

An indication of why the judges chose to do this is sadly obvious.  Within less than 24 hours of receiving this request, the Foreign Ministry’s Legal Department had responded with a complex piece of analysis, which upended its own previous procedures. There is no Foreign Ministry in the world that can examine a complex constitutional issue, evaluate all options, form a view that overrides its own previous practice, and write it up as a legal document in less than 24 hours.  With the greatest respect to civil servants and lawyers worldwide, this speed of response – which ensured our lawyers could not react – is unheard of in Ministry lawyers, anywhere.  And if we are to believe them and the TSJM, they did all this without any prior warning or co-ordination.  Yeah, right.

(We have an application in train, and are currently waiting to hear whether all three judges will confirm publicly and for the record that this all took place without political interference.  A dangerous and difficult question to answer.)

The Ministry’s new opinion stated that Malaysia’s receiving and formally acknowledging the document in its Embassy in Madrid was the wrong procedure; instead, the court papers should have been delivered by the Spanish Embassy in Kuala Lumpur.

To buy Malaysia’s story, the court had to accept three false propositions:

• First, that Malaysia hadn’t been aware of the facts of 2018’s delivery of the documents until March 2021.
• Second, the court had to believe (or profess it believed) that the technicality of being served via one embassy in one place, rather than a different embassy in another place, so fundamentally prejudiced Malaysia that it had no means of defending itself. (Anyone reading this would assume that Malaysia was claiming it hadn’t received the document, or documents.  Or maybe not in full.  No:  Malaysia always admitted to having received them but that the etiquette was wrong!)
• Third, the court had to believe that David Arias of Herbert Smith Freehills had never read the client’s file in 2019 when he was briefly tasked with the arbitration, and had never received a brief from his client or fellow lawyers about the diplomatic etiquette issue when hired. Herbert Smith Freehills is a fine firm, and Dr. Arias has a reputation as an experienced and intelligent professional.  His client is a nation with an Attorney-General directly in command of the case.  How could he not have been briefed?  And how could he file a claim that his client – headed by an Attorney-General’s Chambers that had taken this issue into court in Kota Kinabalu in 2019 – had not heard of it till 2021?

Why did Spain’s Government intervene, at this stage?   It has been alleged that it may well have had something to do with a bid Malaysia’s military had put out for certain aircraft.  Airbus, the European conglomerate, has a big factory in Seville; that factory was responsible for manufacturing the aircraft in question.  Malaysia was narrowing the roster of bidders in 2020 and 2021.  To be clear, that’s speculation.

More broadly, Malaysia is a significant country, with major long term industrial interests, and security cooperation.  It votes in the UN.  Countries need friends and cooperation. And Spain found itself hosting an arbitration that had just been priced at $32 billion, in which the claimants are a family of individuals, with no military procurement program, no oil, no palm oil, no economy, no vote at the UN. And at that stage it was not widely known that we had financial litigation support.  If Malaysia asked for foreign government assistance, as it proudly tells the world it has, who would ever know?

But there is another angle which is now becoming obvious.  Back in 2018, Spain’s Foreign Ministry had opined that Malaysia could not claim the defense of sovereign immunity against this arbitration claim.  Which is normal.  But by 2020, a particular Spanish scandal, with awkward parallels, was emerging.  Spain had entered into some unwise renewable energy deals where the Government had guaranteed foreign investments.  The deals had collapsed, and the investors had begun to win arbitration cases for compensation.  Even if Spain hadn’t wanted to help Malaysia, it firmly did not want to promote the cause of investor arbitration against a state.  The Ministry was now appalled to see that it had accepted Sulu’s right to arbitration against a sovereign state.  We will soon find out how Malaysia and Spain worked together in this matter, in Brussels, as recently as 2024.

Just as in 2018, the Ministry officials could have had no idea that they would, a couple of years later, deeply regret their honest evaluation of the Sulu claim.  Which of these players would have imagined in 2021, with this piece of chicanery, that this game would end up in the prosecution of one of Spain’s foremost arbitrators in 2023, for refusing to comply with the scheme and refusing to shut up?

Was there any logic as to why The Spanish Foreign Ministry should have served the documents to Malaysia in Kuala Lumpur, not Madrid, and harmed Malaysia by not doing so?

On closer inspection, all the Foreign Ministry had done was to cite a bunch of applicable and inapplicable treaties.  The key such treaty was the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property (You can find it here). Article 22, concerning service of process on States, reads in relevant part that, where the two countries have no other agreement in place for how to serve each other (as was true here), service should occur “by transmission through diplomatic channels to the Ministry of Foreign Affairs of the State concerned.” (emphasis added)

In 2018, the Spanish Foreign Ministry had quite reasonably concluded that this provision contemplated serving a State through its Embassy in Madrid.  What, after all, could possibly constitute a more diplomatic channel than an embassy – run, as all embassies are, by the State’s Ministry of Foreign Affairs.  The diplomatic channel to the Malaysian Ministry of Foreign Affairs is rationally that ministry’s embassy.  What else is an Embassy for?

After quoting this passage of the Treaty, however, the Foreign Ministry Opinion now stated that its own prior method of service had been wrong, and that the only proper method of serving a sovereign was via the Spanish Embassy in the served State – as Uria Menendez had suggested.  That is a dishonest reading of the phrase “through diplomatic channels”.

More to the point:  How was Malaysia harmed by receiving the documents through either route?  It wasn’t,  and the TSJM judges were not prepared to explain how – even in theory – it could have been.  It was another conjuring trick that doesn’t stand up to bright light. Malaysia’s triumph was undermined by the third judge on the panel.  Calling it like it was, he decried Malaysia’s fictitious invocation of the 20-day rule after one set of its lawyers received the full court file.  The dissenting judge said that the majority decision opened the door for any litigants who disliked a prior judgment to contrive some new fact or circumstance warranting extraordinary reconsideration on their own timeline.