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Wednesday, September 28, 2022
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Sultan of Sulu: the story of Spain´s largest arbitration

B. Cremades & Asociados and 4-5 Gray´s Inn Square are representing together with 4-5 Gray's Inn, the heirs of the Sultan of Jolo against Malaysia. This arbitration, which began in Madrid in January 2018, and which could become the largest in the history of Spain, is valued at $32.2 billion. We bring to you the whole story. Although the award was to be made in Spain, the place of arbitration has finally been set for Paris, which is expected by 1 March at the latest. The reason for this was the order of the TSJM (Madrid High Court of Justice) last June 2021 annulling the appointment of the arbitrator. Meanwhile, the heirs have filed an appeal for protection before the Constitutional Court, still pending admission, for violation of the right to effective judicial protection and lack of legal certainty.

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This dispute dates back to 1878 with an agreement signed in 1878 by the Sultan of Sulu (or Jolo) and two British private individuals for the lease in perpetuity of the natural resources of certain territories on the island of Borneo and adjacent islands, now part of Malaysia. At that time the natural resources were pearls, bird’s nests and timber, and the Sultanate was part of the Spanish Empire. The lease price was set at 5,000 Philippine Pesos (1878). This contract is published in the Official Gazette of the Philippines and translated into Spanish by contemporary translators of the Spanish Crown. You can read the contract here.

In 1903, an addendum to the lease was signed, agreeing to an extension of the leased territory and increasing the amount to be paid to 5,300 Philippine Pesos. You can read the addendum here.

The lessees continued to pay the same: first the two original signatories, then the North Borneo Trading Company, which went bankrupt in 1946, so it passed into the hands of the British Crown, and finally to Malaysia in 1963 after its independence, the country to which the island belongs today. In the 1980s and 1990s, the heirs tried to request renegotiations of the lease following the discovery of new natural resources such as oil and gas. But then, the lease ceased to be paid by Malaysia in 2013, so the heirs began a new journey to claim payment.  In figures, the heirs value the compensation at $32.2 billion, not only for the unpaid dues, but also for what they calculate Malaysia has to pay for exploiting a territory rich in oil and gas.

Sultan of Jolo
The Sultan of Jolo (British North Borneo Chartered Company)

The 1878 agreement included an arbitration clause but did not identify the seat of arbitration or the applicable law.  As the contract was signed on Spanish soil, the heirs filed on 31 January 2018 a claim in the Spanish courts against Malaysia for the appointment of an arbitrator. On 8 June 2018, the Spanish Ministry of Foreign Affairs notified the Malaysian Embassy of the request for the appointment of an arbitrator.

In its judgment on 29 March 2019, the High Court of Justice of Madrid appointed Mr Gonzalo Stampa as Sole Arbitrator. The Sole Arbitrator bifurcated the arbitration into two phases: jurisdiction and merits. Malaysia sent two letters to the arbitrator contesting his jurisdiction and even appeared briefly through the Madrid office of a British law firm, but then continued in default. Malaysia never re-participated in the arbitration and instead decided to file an anti-arbitration injunction in the Malaysian courts, which was granted.

On 25 May 2020, the sole arbitrator issued an award on jurisdiction declaring that the contract existed and contained a valid arbitration clause. It further stated that the case should proceed and that the applicable law was the UNIDROIT Principles of International Law.

Malaysia challenged the award on jurisdiction, but the Madrid High Court of Justice has not yet ruled on the matter. However, Malaysia did not appear in the arbitration during the merits phase of the case, and missed the deadline for filing a statement of defence.

While the Sole Arbitrator was in the process of making the award on the merits of the case, the High Court of Justice of Madrid, in an order of 29 June 2021 annulled the appointment of the Sole Arbitrator on the grounds that Malaysia had not been properly notified of the arbitration and had suffered defencelessness. In this order, it is important to highlight the dissenting opinion of Judge Santos Vijande, who explained: “Contrary to what the majority postulates, I understand that, even if the notification made to the State of Malaysia for its appearance in the process of appointment of arbitrator 4/2018 of this Chamber was formally irregular – due to the channel chosen -, I cannot at all maintain that there has been a real and effective lack of defence of the defendant; on the contrary, what the majority order takes for granted is the negligent behaviour of those who, having perfect knowledge of the case and even having participated – as we shall see – in the arbitration that has been carried out under the direction of the Arbitrator appointed by this Court, now intends, many months later, to file a motion for nullity of the proceedings which is totally inadmissible as untimely, in accordance with mis. 241LOPJ and 228 LEC).”

On 5 November 2021, the heirs filed an appeal for constitutional protection before the Spanish Constitutional Court, the admission of which is still pending.

In parallel, the claimants approved the award of jurisdiction in France, which was granted on 17 September 2021. On 29 October, the Sole Arbitrator changed the place of arbitration from Madrid to Paris and decided to continue with the arbitration proceedings, the award of which is scheduled for 1 March 2022 at the latest.

The hairs of the Sultan of Sulu are represented by B. Cremades & Asociados with Bernardo Cremades Jr., together with UK´s 4-5 Gray’s Inn Square, with lawyers Paul H. Cohen and Elisabeth Mason.

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