In a ruling dated 6 June 2023 (Paris Court of Appeal, Pole 5, Chamber 16, 6 June 2023 n°21/21386), the Paris Court of Appeal handed down an important decision in favour of Malaysia, in a long-running dispute, over a colonial-era land deal, against the heirs of the Sultan of Sulu.
The Paris Court of Appeal was asked to rule on a partial award on jurisdiction and upheld Malaysia's appeal preventing this award to be enforced in France.
This decision should be viewed in the context of the final arbitral award which ordered Malaysia to pay the Sultan's heirs USD 14.92 billion. It will lead to a refusal to enforce the final award in France. The final award has already been rejected in the Netherlands on 27 June 2023.
An original 145-year-old colonial-era agreement
In 1878, the Sultan of Sulu granted rights over his territory in northern Borneo (in present-day Malaysia) to two European explorers who represented the British North Borneo Company, in exchange for an annual payment of 5,000 ringgit (the "Agreement").
After Malaysia gained independence from the British Empire in 1963, Malaysia inherited the rights and paid the Sultan of Sulu's heirs (the "Heirs") the financial consideration until they decided to stop paying in 2013, after a self-proclaimed Sultan of Sulu attempted a military invasion of Sabah - current state of Malaysia in North Borneo.
The Heirs complained about Malaysia's failure to continue making the annual payments. In 2017, they asked the British Foreign Office to appoint a person to hear the dispute between them and Malaysia, invoking the clause contained in the Agreement that provides for the intervention of the British Consul General in Borneo in the event of a dispute.
A 15-billion-dollar arbitration
The Heirs claimed restitution of the leased territories or the payment of USD 14.92 billion in compensation for the profits from the territory's various resources, including oil. The British Foreign Office refused to intervene, leading to an action brought by the Heirs for the appointment of a sole arbitrator before the Madrid High Court of Justice, on 2 November 2017.
The Madrid High Court of Justice was used, according to some French authors, as a forum of necessity, with the aim of achieving an "useful effect" of the clause contained in the Agreement, due to the historical context of the Sultanate, which was part of the Spanish Empire at the time the Agreement was signed.
The appointed Spanish arbitrator accepted his jurisdiction by issuing a partial award on 25 May 2020. While he was in the process of making the award on the merits of the case, Malaysia filed an application for the annulment of the proceedings with the Superior Court of Justice in Madrid. On 29 June 2021, the Spanish Court authorised the annulment of the entire proceedings, ruling that Malaysia's summons had not complied with the rules applicable to service of documents on foreign States. Thus, the Court declared that the arbitrator was prohibited from continuing with the proceedings.
At the same time, the Heirs applied to the President of the Paris Court of First Instance, who declared the partial award enforceable (exequatur) in France, on 29 September 2021.
In a very unusual way, to simplify the process of obtaining exequatur of the final award in France, and despite the prohibition against the arbitrator to continuing the proceedings, the arbitrator moved the seat of arbitration to Paris on 29 October 2021.
By accepting its jurisdiction, the Court sought to preserve the reputation of Paris as an arbitration place by committing itself to resolving the dispute rather than withdrawing, as the British Foreign office had done.
In a final award dated 28 February 2022, Malaysia was ordered to pay the Heirs the sum of USD 14.92 billion, on the grounds that Malaysia have breached its contractual obligations and that it was impossible to return the leased territories.
The Government of Malaysia appealed the first decision on the partial award and asked for a declaration that the request for enforcement in Paris was impermissible and therefore, the exequatur was invalid.
The Paris Court of Appeal, in its decision of 6 June 2023, ruled in favour of the Government of Malaysia and ruled that the exequatur of the partial award was invalid as the arbitration clause was void.
- The consequences of finding the arbitration clause void: a refusal to enforce the partial award on jurisdiction and its further impact on enforcement of the final award ordering Malaysia to pay USD 14.92 billion to the Heirs
The Paris Court of Appeal decision of 6 June 2023 only concerns the appeal against the exequatur order granting enforcement of the partial award on jurisdiction.
The final award is currently the subject of a further action for annulment before the Paris Court of Appeal, refusal to enforce the partial award on jurisdiction should also logically result in the refusal of the Paris Court of Appeal to enforce the final award.
In its decision of 6 June 2023, the Paris Court of Appel rejected the exequatur on the grounds that the arbitration clause had expired for two reasons:
- The disappearance of the office of British Consul General. Decolonisation rendered the disputed clause inapplicable, meaning that it was no longer possible to submit the dispute to an arbitration.
- Once Britain extended its control over the territory and took over Borneo as one of their protectorate, the British Consul General could no longer be considered an impartial third party with a view to settling the dispute, thus invalidating the arbitration clause.
The Heirs presented the dispute as a classic commercial arbitration for non-performance of rent, whereas for the Government of Malaysia, the dispute involved a question of territorial sovereignty. The Paris Court of Appeal did not rule on this issue, most likely for issues of public policy and diplomacy.
The Paris Court of Appeal refused to enforce the partial award, declaring the arbitration clause void, which means that the final award of USD 14.92 billion to the Sultan's heirs should also not be enforced in France.
The invalidity of the arbitration clause prevents the partial award from being enforced in France, leaving Malaysia to bear the costs of the proceedings, but at the same time avoiding the enforcement of the final award of USD 14.92 billion to the Heirs.
This case has caused quite a stir in the arbitration arena, given the facts, the financial stakes involved and the multiple jurisdictions involved. It is notable that the annual budget of Malaysia is less than USD 100 billion, while the claim from the Sultan's heirs is almost USD 15 billion, a huge sum.
The Netherlands' Courts also refused to enforce the final award on 27 June 2023.
An issue which we have seen arise in other contexts is what should a party do when an arbitral institution is no longer in existence – such as DIFC-LCIA. How should a party bring a claim? One of the effects of the Paris Court of Appeal's decision could be to discourage the appointment of arbitrators without judicial support in France.
Finally, under the guise of respecting the will of the parties, the Paris Court of Appeal's solution has the paroxysmal effect of depriving the clause of any scope. Following this logic, any clumsy drafting is likely to render the clauses null and void, thereby denying the fundamental principle of useful effect and the parties' will.
