This article first appeared in The Edge Malaysia Weekly on August 1, 2022 - August 7, 2022

THE standoff between the heirs of the late Sultan of Sulu, Sultan Jamalul Kiram II, and the Malaysian government over the US$14.92 billion (RM66.4 billion) claim over unpaid yearly leases continues to make the headlines, with former attorney general Tan Sri Tommy Thomas saying last week that the award is “completely illegitimate”.

Many questions have been raised over the claim and arbitration award, among which is how an annual payment of RM5,300 that ceased in 2013 could balloon to a massive US$14.92 billion claim less than 10 years later. There is also the view that the entire dispute and arbitration is a means of forcing Malaysia to the negotiation table, potentially giving the Sulu Sultan’s heirs and their financial backer, Therium Capital Management Ltd, a huge payday.

Asked by The Edge about the government’s stand and what will be done next, Minister in the Prime Minister’s Department for Parliament and Law Datuk Seri Wan Junaidi Tuanku Jaafar would only say, “We cannot comment at the moment on this issue. The reason is very simple. In fact, I received not only the reminder by the AG’s Chambers — on top of that our lawyers in Madrid and Paris also reminded us — that the things we disclose might be used by the other side.

“That is why when members of parliament asked for this (issue) to be debated, we were not able to entertain them because the need to protect the nation far outweighs the need for the MPs to debate this issue ... because our answer may jeopardise our position. So, that is our position at the moment,” he explained.

To recap, the legal dispute erupted after the eight heirs of the Sulu Sultan initiated international arbitration proceedings against the government of Malaysia at end-January 2018 in Madrid, based on an 1878 agreement between Sultan Mohamet Jamal Al Alam (the Sultan of Sulu then) and two men — Baron de Overbeck and Alfred Dent — which granted perpetual sovereign rights over what is parts of Sabah today, in return for an annual RM5,300 token payment.

The annual payment that began in 1878 continued with the formation of Malaysia in 1963.

The Datuk Seri Najib Razak administration ceased the yearly payments in 2013. Najib has pointed the finger at former AG Thomas, who wrote to the heirs’ lawyers in September 2019 offering to pay circa RM48,000 for the unpaid amounts with interest.

Others, meanwhile, questioned why the Najib administration ceased to pay the RM5,300 — a paltry sum. Certain quarters close to Najib say that an incursion into Lahad Datu in 2013 by more than 200 armed militants, which resulted in 78 deaths, caused a breach of the 1878 agreement. While Malaysia says the militants are linked to the Sultan of Sulu, the heirs dispute this claim.

Nevertheless, Malaysia ceased payments after the incursion.

Thomas’s statement last week, in a nutshell, urged Malaysians to stop pointing fingers but “stand united to repel such attacks”.

He also questioned how the claim for compensation of US$14.9 billion was arrived at when the loss was for breach of contract of only RM60,000.

“Without ever having given any reason to cease payments to the Sulu claimants after 50 years, and without ever having sought judicial approval of the termination of payments, the Sulu claimants would have a right to specific performance, which in practical terms means that Malaysia must restore the arrears of annual compensation of RM5,300 from 2013 until 2022, and undertake to pay the said sum annually thereafter,” Thomas said in his statement.

He has come under fire from some people who say his explanation is “too little and three years too late”, suggesting that he should have sorted the issue out when he was AG between 2018 and 2020. Thomas’s letter to the lawyers of the Sulu Sultan’s heirs in September 2019, offering to pay RM48,000 in arrears including interest, some say, may seem like an acknowledgment of guilt.

Asked to comment on Thomas’ statement, Paul Cohen, co-lead counsel for the heirs, says, “The claimants tried for some years to get Malaysia to take part in the legal and arbitration process. It was Thomas’ policy to reject that at the time. We continued to work through the courts in various jurisdictions. We see no need respond to, or comment on, Thomas’s thesis now that he is a private citizen without a mandate and without access to all the facts.”

Therium, the funders of the Sulu Sultan’s heirs, declined to comment for this article. International news media have reported that Therium has invested about US$10 million in the heirs’ dispute with Malaysia thus far.

While many brush aside the claim as nonsensical, people with knowledge of how litigation funds like Therium work say thorough due diligence would have been undertaken, and because no collateral is involved, these funds must be quite certain of the merits of the cases they choose to back.

If there had been any uncertainty as to what extent the heirs could progress in their claim, such views may have changed on July 11, when bailiffs in Luxembourg, acting for them, seized two companies belonging to national oil company Petroliam Nasional Bhd (Petronas) — Petronas Azerbaijan (Shah Deniz) Sàrl and Petronas South Caucasus Sàrl — to satisfy the US$14.92 billion award by the Spanish arbitrator, Dr Gonzalo Stampa.

Petronas later clarified that there was nothing of significance in the two companies as all monies had been repatriated.

However, a person with knowledge of the goings-on says the seizure was just to show that it could be done.

In a brief chat last week, he says, “Malaysia will doubtless get its day in court in Luxembourg to retrieve those empty Petronas companies.”

On what may happen next, he foresees that there will “be more enforcement actions at some stage”, but declines to elaborate.

Meanwhile, the Spanish arbitrator is in the spotlight as well. In an article, “The Sultan of Sulu Award: Is it enforceable in the US under the New York Convention?”, arbitration specialists Gary J Shaw and Rafael T Boza commented, “The award against Malaysia is one of the largest awards ever issued against a state. It arises out of a 150-year-old contract with very ambiguous terms.

“It was issued in the context of a highly disputed ad hoc arbitration, in which neither the alleged arbitration clause, nor the conduct of the proceedings, was accepted by the parties or the courts of the seat, Spain. The arbitrator took actions, which may be considered unreasonable, extreme, or even defiant, such as relocating the seat of arbitration, to ultimately issue a polarising award. Any enforcement effort, in any jurisdiction, will likely be met with substantial resistance.”

Stampa had been instructed by the Madrid High Court to cease the arbitration and was terminated, as Malaysia claimed that it had not been properly notified about the proceedings. To circumvent the court decision, he shifted the arbitration to Paris, which came across as odd as he was appointed by the Spanish courts in the first place. The Malaysian ambassador in Madrid has filed a criminal complaint against him.

Meanwhile, Wan Junaidi notes that the government has set up a task force. “If you look at it, we have engaged lawyers in Madrid and we have engaged lawyers in Paris. On top of that, the government has agreed to form a task force, comprised of very experienced people in the fields of litigation as well as law. This has just been approved by the Cabinet, and we are waiting for the PM to sign the appointment letters for each individual member of the task force.

“This task force will look into it (the issue at hand),” he says. He adds that the task force will undertake a study and look into and research the history of all the claimants and everything.

Interestingly, Thomas, in his July 27 statement, questioned the need for a special task force, saying it is a “bureaucratic excuse for indecision”.

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