FILE PHOTO: How Malaysia ended up owing $15 billion to a sultan

How Malaysia Ended Up Owing $15 Billion to a Sultan’s Heirs

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In 1878, two European settlers signed an agreement with the sultan for the use of his territory in what is now Malaysia – an agreement that independent Malaysia honored until 2013, paying the monarch’s descendants around $1,000 a year .

Now, 144 years after the original deal, Malaysia must pay the second-largest arbitration award on record for ceasing payments after a bloody raid by supporters of Sultan Mohammed Jamalul Alam’s heirs, in which more than 50 people were killed.

“This is a fascinating and unusual case,” said solicitor Paul Cohen, a lead co-counsel to the Sultan’s heirs at British law firm 4-5 Gray’s Inn Square.

For years, Malaysia has largely dismissed complaints, but in July two Luxembourg subsidiaries of state-owned energy company Petronas received a notice of seizure to enforce the award the heirs won in February.

The arbitration decision in France follows eight years of legal efforts by the heirs and $20 million in funds raised for them from unidentified third-party investors, according to interviews with key figures in the case and legal documents seen by Reuters.

Malaysia has neither participated in nor recognized arbitration – allowing heirs to present their case without rebuttal – despite warnings that it would be dangerous to ignore the process.

The plaintiffs, some of whom are retirees, are Filipino citizens leading middle-class lives, a far cry from their royal ancestors in the Sultanate of Sulu, which once spanned rainforest-covered islands in the southern Philippines and parts of Borno Island.

The heirs claim that the 19th century agreement was a commercial lease, which is why they chose arbitration. They also demanded compensation for the vast reserves of energy that have since been discovered in the territory they abandoned in the Malaysian state of Sabah, on the island of Borno.

Malaysia disputes this point, claiming that the sultanate ceded its sovereignty and that the arbitration was illegitimate.

“Arbitration is a sophisticated fiction, veiled as a legal process,” Uria Menendez, a Spanish law firm representing Malaysia, told Reuters.

Malaysia won a stay in France pending an appeal – a process that could take years – but the award remains globally enforceable under a UN convention on arbitration.

THE POOREST SULTAN

Malaysia honored the colonial-era deal until 2013, when supporters of the late Jamalul Kiram III, who claimed to be the rightful Sultan of Sulu, attempted to reclaim Sabah.

Clashes erupted when some 200 supporters arrived by boat from the Philippines and lasted nearly a month.

Kiram, who claimed to be the “poorest sultan in the world”, was not among the court-recognized heirs who received payments from Malaysia.

The eight arbitration claimants – including Kiram’s daughter and cousins ​​- who received the annual payment condemned the attack.

Until the intrusion, the Malaysian Embassy Manila issued a check to claimants every year for “surrender money”, according to checks and correspondence from the embassy to the heirs and shared with Reuters by the heirs’ lawyers. .

Malaysia’s prime minister at the time, Najib Razak, told Reuters he had stopped payments due to public anger over the incursion, acknowledging the reason publicly for the first time.

“I felt it was my duty and responsibility to protect the sovereignty of Sabah and its people,” he said, adding that he had not planned any retaliatory legal action. .

The applicants, through their lawyers, refused to be interviewed.

Cohen, the heirs’ lawyer, first heard about their claims from an oil and gas expert whom he cross-examined in 2014 in an unrelated case.

Knowing they didn’t have the financial means, in 2016 Cohen brought in Therium, a British company that funded legal actions by raising money from institutional investors, including a sovereign wealth fund.

Therium conducted nine rounds of financing for the deal, during which third-party investors repeatedly weighed its merits, said Elisabeth Mason, a senior co-counsel to the plaintiffs at 4-5 Gray’s Inn Square.

The case cost more than $20 million, including lawyers and researchers in eight jurisdictions, she said.

“Investors don’t invest lightly in such deals,” she added.

Therium said it would continue to fund efforts to enforce the award. She declined to provide details.

LUDICROUS

The heirs gave notice of their intention to start arbitration in 2017 in Spain and initially sought $32.2 billion in compensation, according to the statement of the award.

Malaysia’s first response came in 2019, when then-Attorney General Tommy Thomas offered to resume annual payments and pay 48,000 ringgits ($10,800) in arrears and interest if the arbitration was abandoned.

Thomas thought the demands were “absurd and ridiculous” but made the offer after colleagues advised him it was “perilous” to ignore arbitration because Malaysia’s overseas assets could be in danger, he wrote in a 2021 memoir.

The heirs rejected Thomas’s offer and the arbitration proceeded without Malaysia’s participation.

Malaysia successfully challenged Gonzalo Stampa’s appointment as sole arbitrator in a Spanish court last year.

But Stampa argued in his statement of award that the courts had no jurisdiction in arbitration, and moved the case to France to make the award – actions which Malaysia said were illegal.

Stampa is now the subject of criminal proceedings in Spain following a complaint lodged by Malaysia. He declined to comment to Reuters.

By snubbing arbitration, Malaysia is merely arguing about the validity of the procedure rather than arguing against the heirs’ claims, said N. Jansen Calamita, head of investment law and policy at the National University from Singapore.

“It was a risky strategy and ultimately I don’t think it served them well,” he said.

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