Sulu Arbitration

This all refers to what is now called Sabah.

This legal saga stems from Malaysia’s unilaterally ceasing lease payments on what today is the State of Sabah, a slice of territory on the northern end of the island of Borneo, as well as the waters around it. In the 18th and 19th centuries, the territory belonged to the Sultan of Sulu, a local ruler who oversaw a seafaring empire stretching across southeast Asia. This territory is leased from us under an agreement from 1878, in our capacity as the Heirs to the Sultan of Sulu who initiated the Agreement, and whose descendant willed it to us in 1936. To be clear, it makes no legal difference who claims to be the current Sultan of Sulu. What matters is who inherited the contract of 1878 on our side. Malaysia inherited the other side of the contract, and honored it for years.

Through a decision-making process that has never been made public to the Malaysian people, Malaysia stopped paying the rent for the territory in 2013, triggering a legal and financial crisis when we went to arbitration, winning an award of $14.9 billion.

It also triggered a constitutional disaster entirely of Malaysia’s own making: If Malaysia stops paying the lease, the territory reverts to the heirs of the Sultan of Sulu, even though we had no intention to see the lease terminate. Oddly, although Malaysian politicians are quick to shout about a “threat to sovereignty”, they have difficulty in admitting that they generated this threat by treating the Sabah lease as an inherited toy, but failing to read the instructions on the box.

In 1878, the Sultan signed a contract with a British concern (Dent Brothers and Co.) for the perpetual lease of his North Borneo holdings. The Dent Brothers formed a Charter Company; it went bankrupt in 1946, leading to the contract’s takeover by the British Government. Britain handed over the territory to Malaysia in 1963. Each of these successive parties paid the Sultans of Sulu and their descendants (the “Heirs”, whose website this is) an annual sum for the territory’s lease, up until Malaysia silently stopped paying in 2013.

During the lifetime of the contract, the annual rent was raised only once, in 1903, from 5,000 (Mexican) dollars (a standard international currency back then) to 5,300 dollars. At the same time, the value of the territory increased exponentially – especially after oil and gas fields were discovered. In recent years, the value of that oil and gas alone has been between three and nine million times greater than the annual lease payment.

Once Malaysia stopped paying, the Heirs – after trying to negotiate – brought an arbitration claim under the contract. That claim was heard first in Spain, then in France (for reasons you can read about elsewhere on this site.) The end-result was that, in February 2022, the arbitrator awarded the Heirs just under $15 billion for the breach of contract and for a legal concept variously known as change of circumstances, unforeseeability, or imprévision – essentially the idea that long-term agreements often need to be revised because unpredictable things (like massive hydrocarbon discoveries) happen.

Since then, the Heirs have become Claimants, and have been attempting to enforce the arbitration judgment (known as an “Award”) in various jurisdictions. This is a technical legal process involving applying to local courts to have them convert an arbitral award into a court judgment. Malaysia chose not to participate in the Arbitration process that it had inherited when it inherited Sabah, but is now contesting the enforcement in those jurisdictions.

Malaysia is also retrospectively challenging the underlying arbitral Award, something it can do only in the place where that award was rendered (in this case, France). That process will play out over the next couple of years.