Special Report: Malaysia on right track to contest US$15 bil award to Sultan of Sulu’s heirs, says former AIAC arbitrator

This article first appeared in The Edge Malaysia Weekly, on July 18, 2022 - July 24, 2022.
Special Report: Malaysia on right track to contest US$15 bil award to Sultan of Sulu’s heirs, says former AIAC arbitrator
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MALAYSIA has a strong case to contest the whopping US$14.92 billion final award handed down by arbitrator Dr Gonzalo Stampa to the heirs of Sulu Sultan Mohamet Jamal Al Alam, but it will be a difficult and costly process, according to a former senior arbitrator.

Asian International Arbitration Centre (AIAC) director Datuk Professor N Sundra Rajoo says the main grounds of contention include the manner in which Stampa had shifted the arbitration process as well as the exorbitant sum awarded.

Malaysia is scrambling to contain the damage after it was revealed last week that heirs to the Sulu Sultan had seized two units of Petronas in Luxembourg — Petronas Azerbaijan (Shah Deniz) and Petronas South Caucasus.

The seizures took the country — already unsettled by political and economic uncertainties made worse by soaring inflation, a depreciating currency and incessant flooding — by utter surprise, and immediately prompted a blame game as to which administration is responsible given that Malaysia has had three different governments over four years. Earlier administrations may also be responsible for the current problem.

Several members of parliament have filed a motion for the matter to be debated in parliament next week when the session resumes.

A few days after the seizures, de facto law minister Datuk Seri Wan Junaidi Tuanku Jaafar issued a statement saying that the Malaysian government had obtained a stay of the final award of US$14.92 billion in the French courts.

Sundra Rajoo, who was AIAC director from 2010 to 2018, says that getting a stay order was a good move and the right step to contesting the award.

“The present government should not be faulted for this final award, as it is not their wrongdoing. However, they are taking immediate steps to rectify it.

“However, with the final award being made, Malaysia has the unenviable task to contest the award wherever the heirs of the Sultan of Sulu want to enforce it and this would be quite difficult and costly,” says Sundra Rajoo, who had just left the Prime Minister’s Department, where the matter was discussed, when contacted by The Edge.

Malaysia has “a strong case” to contest the final award, he said, citing the manner in which the arbitrator had shifted the arbitration process and secondly, the exorbitant sum of the award. The award of US$14.92 billion is said to be the second largest in arbitration history.

The arbitration process began in Madrid in July 2019 but following Malaysia’s initial contest of the arbitration process and its arbitrator, Stampa, the proceedings were moved to Paris in 2021.

Was moving proceedings to Paris legal?

Sundra Rajoo, formerly an arbitrator himself, questions the legality of moving the proceedings to Paris after the Spanish superior courts of justice had granted Malaysia’s request to vacate all rulings as well as the choice of arbitrator.

In an ex-parte application, the heirs of the Sultan Sulu succeeded in having the preliminary award proceedings moved to the Tribunal de Grande Instance de Paris (Paris court), according to the write-up “The Sultan of Sulu award: Is it enforceable in the US under the New York Convention?” The article by Gary J Shaw and Rafael T Boza was published in The Journal of the Institute of Transnational Arbitration.

“The way the arbitration of the suit was shifted from Madrid to Paris raises questions over whether this could be done following the Madrid superior court ruling. Shifting the seat from Spain to France is highly irregular,” Sundra Rajoo opines.

He also questions how the exorbitant US$14.9 billion figure was reached or decided by Stampa.

“There are irregularities as to the sum of the award, as to how it reached US$14.92 billion from some RM5,300 when the purported payments were stopped in 2013.

“US$14 billion does not make sense at all and hence, it was right for the Malaysian government to obtain the stay,” he adds.

Even so, Sundra Rajoo points out that the government has to sort the matter out as it may cause an international problem. He believes that the Sulu claimants may have been influenced by a third party to make the claim.

Malaysia should have entered representation

Up to 2013, Malaysia had been paying the agreed sum under an 1878 agreement. But following an armed incursion by a group of Sulu bandits into Lahad Datu, Sabah, the payments were halted.

In late 2017, the heirs of the Sultan Sulu initiated action by serving a notice of intention to commence arbitration to the Malaysian embassy in Spain. The Barisan Nasional coalition under Datuk Seri Najib Razak was then in power.

Malaysia did not respond to the notice and this inaction resulted in the heirs appointing an arbitrator — Stampa, from the superior court of justice of Madrid — in February 2018. This was done pursuant to the Spanish Arbitration Act.

The proceedings were initiated in Spain because the Philippines (including the empire of the Sultan of Sulu) was previously under Spain. In April 1851, the sultan signed an agreement with Spain in which he agreed to submit to its rule.

In July 2019, the Sulu heirs filed a notice of arbitration, but Malaysia — then under the Pakatan Harapan (PH) government led by Tun Dr Mahathir Mohamad — did not participate in the process.

The heirs sought to terminate the agreement and claimed US$5 billion in unpaid rent, as well as US$26 billion in post revenue following the termination.

“Over the next two years, the arbitration proceeded with little participation from Malaysia,” Shaw and Boza observe in their article, adding that Malaysia’s non-participation in the arbitration process may cause a slight problem when it comes to contesting the final award.

Obtaining injunction in Sabah

Malaysia did make an attempt to stop the arbitration process, but only within the country’s borders. It obtained an injunction at the Kota Kinabalu High Court on March 2020 before the preliminary award was issued. Around this time, the PH government had just been thrown out after about 22 months in power when a group of lawmakers bailed out of the coalition under the so-called Sheraton Move.

Subsequently, the Perikatan Nasional (PN) coalition was formed under the leadership of Tan Sri Muhyiddin Yassin, but he did not last long either, having been felled by shifting loyalties and replaced in August 2021 by Umno vice-president Datuk Seri Ismail Sabri.

In Kota Kinabalu, the High Court ruled that as the 1878 agreement did not mention anything about arbitration, the Sabah court was the proper venue to hear the matter.

In any event, outside of Malaysia, the arbitration proceedings continued and it was only in June 2021 — several months after proceedings ended — that Malaysia moved to vacate all rulings from the Madrid superior court.

The Spanish superior court allowed Malaysia’s application but Stampa went against the order as he ruled that such intervention was not allowed by the Spanish Arbitration Act.

The Sulu claimants then applied ex-parte to have the proceedings resumed in Paris in October 2021 as it was sanctioned by the French courts.

In December 2021, Malaysia appealed to the Paris Court of Appeal in what is seen as possibly a last-ditch effort to stop the arbitration process.

According to the journal, the Paris Court of Appeal stayed the confirmation order. Malaysia sent the decisions to Stampa requesting that proceedings be discontinued, but he did not heed the request.

In February this year, Malaysia went ahead with criminal proceedings against Stampa for not abiding by the June 2021 Madrid decision and again requested that proceedings be discontinued. Again, Stampa ignored the request and proceeded to issue the final award on Feb 28 this year.

Shaw and Boza, who are practising lawyers and arbitrators in the US, write in conclusion that the 150-year-old contract is ambiguous and does not mention arbitration — arguments which may be in Malaysia’s favour.

Also in Malaysia’s favour, they say, is Stampa’s actions, which they find to be “unreasonable, extreme or even defiant in relocating the seat of arbitration” and, ultimately, coming up with the award.

“Any enforcement effort (of the final award) will likely be met with substantial resistance,” they say, adding that they believe there are sufficient arguments and procedural peculiarities in the process that an American court would be justified in denying and enforcing the final award.

In May, Foreign Minister Datuk Saifuddin Abdullah had sent diplomatic notes to the 168 countries that are signatories of the New York convention, informing them of Malaysia’s intention to strike out the final award.

The former attorney general under the PH government, Tan Sri Tommy Thomas, declined comment when contacted.

 

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