MALAYSIAN HIGH COURT GRANTS FIRST ANTI-ARBITRATION INJUNCTION ON THE GROUNDS OF SOVEREIGN IMMUNITY

In a recently surfaced judgment, the Malaysian High Court in Government of Malaysia v Nurhima Kiram Fornan & Ors (Originating Summons No. BKI-24NCvC-190/12-2019 (HC2)) for the first time granted an anti-arbitration injunction to restrain foreign arbitration proceedings on the basis of sovereign immunity.

Historical background

The underlying dispute concerns a historic territorial claim by the current heirs of the historic Sultan of Sulu over Sabah (formerly known as North Borneo), a state in the Federation of Malaysia.

Sabah was once known as the British Crown Colony of North Borneo until 1963 when it decided to be part of the new nation named Malaysia, with the Federation of Malaya, Sarawak and Singapore through the Malaysia Agreement 1963. At one time, however, there were competing claims between the Sultanate of Brunei and the Sultanate of Sulu over different parts of Sabah. As a result of these claims, a Deed of Cession 1878 was made between the Sultan of Sulu and Baron Gustavus de Overbeck and Alfred Dent on 22 January 1878 binding upon all their heirs and successors (“Deed of Cession”).

According to the official English translation of the Deed of Cession (which was written in Malay using the Jawi script), the Sultan of Sulu granted and ceded dominion over certain sovereign territories to Overbeck and Dent in perpetuity. The territories and lands were therefore vested to Overbeck and Dent jointly, their heirs, associates, successors or assigns for as long as they choose or desire to hold them. Except with the sanction of Her Britannic Majesty’s Government, the rights and privileges conferred by the grant shall never be transferred to any other nation or company of foreign nationality. In return, Overbeck and Dent were to make a payment of annual cession monies of 5000 Malay Dollars to the Sultan of Sulu, his heirs or successors.

In 1939, payments under the Deed of Cession was the subject of litigation in the North Borneo High Court in the case of Dayang Dayang Haji Piandao Kiram of Jolo, Philippines & 8 Others v The Government of North Borneo & Others (Civil Suit No. 169/39) (“1939 Suit”). In the 1939 Suit, the then heirs of the Sultan of Sulu moved the court for a declaration that they were entitled to receive the cession monies payable by the Government of North Borneo under the Deed of Cession made between the Sultan of Sulu and the predecessors of the Government of North Borneo. The then Chief Justice of the State of North Borneo found in favour of the heirs and declared that they were entitled to monies payable under the Deed of Cession.

Arbitration proceedings in Spain and court proceedings in Malaysia

Premised on the dispute settlement in the Deed of Cession, sometime in 2019, the current heirs to the Sultan of Sulu commenced an ad hoc arbitration against Malaysia pursuant to the Deed of Cession, and obtained an order from the Superior Court of Justice in Madrid to appoint a sole arbitrator. The dispute settlement provision in the Deed of Cession provided as follows:

“In case of any dispute shall arise between His Highness the Sultan, his heirs or successors and the said Gustavus Baron de Overbeck or his Company it is hereby agreed that the matter shall be submitted to Her Britannic Majesty’s Consul-General for Borneo.”

In December 2019, the Government of Malaysia commenced proceedings in the Malaysian courts against the heirs of the Sultan of Sulu and the sole arbitrator (as defendants) to restrain them from proceeding with the arbitration, and for a declaration that (i) there is no arbitration agreement between the parties; (ii) there was no waiver of sovereign immunity by Malaysia in respect of the dispute; and (iii) that Malaysia is the natural and proper forum to resolve the dispute over territorial rights arising from the Deed of Cession.

The defendants did not participate in the proceedings notwithstanding that the cause papers were validly served on them under Malaysian procedural rules. Nevertheless, the Government of Malaysia was required to prove its case on a balance on probabilities on the following issues:

1. Whether the Deed of Cession amounted to a valid and binding agreement between the Government of Malaysia and the heirs of the Sultan of Sulu;
2. Whether there has been a waiver of Malaysia’s sovereign immunity; and
3. Whether the High Court of Sabah is the natural and proper forum to determine the dispute.

No valid and binding arbitration agreement

The High Court held that the there was no valid and binding arbitration agreement, for the following reasons:

• The requirement to submit disputes to Her Britannic Majesty’s Consul-General for Borneo (a long defunct position) could not be interpreted as an arbitration agreement as it lacks the essential elements of an arbitration agreement. Nor can it be imputed as a standing consent by the parties to refer disputes arising from the Deed of Cession to arbitration.
• Even if the dispute settlement provision could be interpreted as an arbitration agreement, it is now inoperative and incapable of being performed as the position of Her Britannic Majesty’s Consul-General for Borneo no longer exists. This position was deemed to be acknowledged by the current heirs, given their own request to the British Government for the appointment of an appropriate person to fulfil the Consul-General’s role in determining the alleged dispute in the arbitration proceedings (the request was declined by the UK Foreign & Commonwealth Office in December 2017).
• The 1939 Suit, which was brought by the then-existing heirs to the Sultan of Sulu, was evidence that the previous heirs and successors of the Sultan of Sulu have recognised and acknowledged that there is no arbitration provision in the Deed of Cession. The act of the previous heirs and successors of the Sultan of Sulu in bringing their cause before the High Court of the State of North Borneo is a deemed waiver of any form of arbitration under the Deed of Cession.

No waiver of sovereign immunity

The High Court acknowledged that the customary international law principle of sovereign immunity is given domestic effect in Malaysia through case law. As such, under domestic law, Malaysia had sovereign immunity from foreign judicial and arbitration proceedings unless waived or if the dispute falls within the acta jure gestionis exception to the rule.

The High Court considered that, since the Deed of Cession is not a trading or commercial agreement, but one relating to the cession of land by a then-sovereign to the predecessors of a now sovereign State, Malaysia had, in the absence of any waiver, absolute immunity from the jurisdiction of the Spanish proceedings which appointed the arbitrator, and from the arbitrator himself. Further, disputes which concerned territorial rights over Sabah was also found to be non-arbitrable.

Malaysia is the natural and proper forum to determine the territorial dispute

The High Court in Sabah concluded that it was the natural and proper forum to determine the dispute, being the successor of the former State of North Borneo. It took into account the following factors:

• In the 1939 Suit, the heirs of the Sultan of Sulu at that time duly accepted the jurisdiction of the High Court of the State of North Borneo, having submitted its claim there. Further, the Chief Justice of the State of North Borneo in the 1939 Suit also expressly indicated that it was the proper forum of any dispute arising from the Deed of Cession, on the basis of the official stand of the then North Borneo Government which was received in evidence.
• The Chief Justice of the State of North Borneo, in granting its declaration in the 1939 Suit, also directed that “any party is at liberty to apply to this Court in the event of any dispute arising thereon.” The High Court took this to mean that any subsequent disputes arising from the Deed of Cession affecting subsequent heirs and successors to the deed is bound by their predecessors’ submission to the jurisdiction of High Court of the State of North Borneo (and consequently its successor the High Court of Sabah).
• The High Court was also properly seised of jurisdiction over the dispute under the matrix of Malaysia’s domestic jurisdictional and procedural laws currently in force.

In arriving at its decision, the High Court considered that the heirs had unilaterally decided Spain to be the forum for the appointment of the sole arbitrator, seat of arbitration, and supervisory court over the dispute.

For the High Court, this decision was an act of forum shopping, and disregarded well-established rules on conflict of laws. The court pointed out that by the current heirs’ own account in their Notice of Arbitration dated 30 July 2019, the Madrid Protocol of 1885 (“Protocol”) resulted in the renunciation by the Spanish Government of all claims of sovereignty over the territories in the State of North Borneo. The Protocol settled the colonial border dispute between the British and Spanish Government by affirming the position of the British Government over North Borneo and any Spanish claim to sovereignty over it was void. As such, such Protocol had severed any connection Spain has over the dispute as well as the parties to the dispute. Due to such lack of nexus, Spain could not be the natural and proper forum to be hearing this matter.

Comment

This case is notable for being one of a rare cases where Malaysian courts were asked to determine whether Malaysia has the protection of foreign sovereign immunity against claims brought by foreign entities concerning issues outside of commercial activity. Malaysia does not have any equivalent legislation to the State Immunity Act in the UK and Singapore, nor is it a signatory to the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property (which is yet to be in force). However, the manner in which the law of foreign state immunity is applied in Malaysia has been by reference to a few domestic case laws which accepts that the restrictive theory of sovereign immunity applies.

More broadly, this case also suggests that the Malaysian courts are willing to issue anti-arbitration injunctions against foreign arbitration proceedings where, in the absence of a valid and binding arbitration agreement, Malaysia is the natural and proper forum to determine a dispute.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Daniel Chua, Associate, or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.