The Sultan of the Island of Sulu, Jamalul Kiram II. Philipp Kester (Ullstein Bild/Getty)

Important Victory for Malaysia in Its Longstanding Conflict with the Heirs of the Sultan of Sulu Over a €13 Billion Compensation Claim.

Malaysia has achieved a significant legal victory in its protracted dispute with the heirs of the Sultan of Sulu, who have been seeking compensation exceeding €13 billion. On Wednesday, France's Supreme Court annulled the decision by Spanish arbitrator Gonzalo Stampa to move the arbitration proceedings to Paris. This decision follows the annulment of Stampa's appointment by Madrid's High Court of Justice (TSJM), according to legal sources cited by CincoDías. The ruling will influence various courts analyzing the legality of the multimillion-dollar award against Malaysia and its enforcement for breaching a 19th-century natural resource lease, as well as an arbitration claim filed by eight Filipino descendants of the former ruler against Spain for allegedly obstructing the resolution of the conflict.

The French Court of Cassation rejected the heirs' appeal against a prior ruling by the Court of Appeal that revoked the "exequatur" (jurisdictional or partial award). This earlier decision had allowed Stampa to handle the arbitration claim against Malaysia in Paris and issue a final award recognizing the heirs’ right to compensation of $14.92 billion (€13 billion). The French high court, after a hearing in mid-September, upheld the view that the original contract contained an arbitration clause to resolve disputes. However, this clause is now deemed invalid because it referred to the authority of the Brunei consul, a position that no longer exists, as per consulted sources.

Origins of the Dispute.

This litigation, considered one of the most expensive in arbitration history, dates back to 1878. The Sultan of Sulu—whose territory included an island in the southwest Philippines now part of Malaysia—signed a lease agreement with two European merchants. The deal granted rights to exploit pearls, bird nests, and timber in northern Borneo and adjacent islands for 5,000 Philippine pesos annually. Payments were made until 1946, when the British Crown assumed control of the contract rights. The situation shifted again in 1963, after Malaysia gained independence in 1957 and assumed the lease obligations.

In the 1980s and 1990s, the discovery of new natural resources like oil and gas prompted the heirs to seek renegotiation of the lease, which Malaysia refused. Relations broke down entirely in 2013 when Malaysia asserted that the territory of Sulu had legitimately belonged to it since 1957. This prompted the heirs to initiate arbitration proceedings in 2018, following advice from the British Foreign Office to address the matter directly with Malaysia.

The heirs initially filed their arbitration claim with the International Centre for Settlement of Investment Disputes (ICSID), affiliated with the World Bank, and chose Madrid as the venue for the dispute, citing historical ties between northern Borneo and the Spanish Empire. Madrid's High Court appointed Stampa as arbitrator, but this appointment was annulled in 2021 after Malaysia successfully challenged it, arguing it had not been properly notified about the proceedings. Stampa then moved the arbitration to Paris, where he issued the final award recognizing the billion-dollar compensation.

Judicial Developments

Malaysia, represented by the law firm Uría Menéndez, challenged the validity of this final award before the Paris Court of Appeal. However, the case was put on hold pending the French Supreme Court’s ruling, which has now invalidated the recognition procedures for the award in France. Separately, Luxembourg courts are also awaiting French rulings, particularly regarding the final award, as one court had provisionally frozen assets of two Petronas subsidiaries in the country tied to projects in the Caspian Sea to secure enforcement of the award.

"This important decision confirms that the initial basis of the false final award ordering Malaysia to pay $15 billion is not recognized under French law. The Paris Court of Appeal will now proceed, in due course, to annul the purported final award issued by Mr. Stampa, definitively resolving the matter in favor of the Malaysian people," Malaysian Justice Minister Azalina Othman Said stated on social media.

The French Supreme Court’s decision aligns with a similar ruling by the Dutch Supreme Court, which also found no valid arbitration clause or grounds for Stampa's jurisdiction. Stampa himself is awaiting a decision from Spain’s Supreme Court on his appeal against a criminal conviction for disobedience, which resulted in a six-month prison sentence and a one-year suspension from serving as an arbitrator.

New Arbitration Claim Against Spain

Facing difficulties in collecting the compensation, the Sultan’s descendants have now targeted Spain. They filed a new arbitration claim seeking $18 billion (€16.3 billion), which includes the original award plus accrued interest. According to the ICSID, the claim was registered on October 24. The heirs allege that Spain has hindered their ability to pursue arbitration against Malaysia and enforce the award. They argue that Spain’s Ministry of Foreign Affairs used a flawed notification process for the arbitration claim against Malaysia and judicial resources to challenge Stampa's role as arbitrator.

The outcome of this case will also depend on French judicial decisions. If French courts ultimately refuse to recognize the €13 billion award against Malaysia, the claim against Spain will lack a legal basis to proceed.