Sultan of Sulu or the passing of time in international arbitration

France: Sultan of Sulu and a novel necessity of renewal of the intent of the parties 

In 1878, Jamalul Alam Kiram, the Sultan of Sulu whose realm covered part of the island of Borneo and the nearby Sulu archipelago, and two private individuals, Alfred Dent and Baron Gustavus Von Overbeck, signed a contract whereby the Sultan ceded to the individuals a number of rights and obligations over territories in North Borneo. In return, a sum of money was to be paid annually to him and, upon his death, to his descendants.

For decades, the agreement continued to be executed between the descendants of Jamalul Alam Kiram and eventually the state of Malaysia, succeeding to the rights of Dent and Von Overbeck following the State of Sulu (now Sabah) joining Malaysia in 1963.

The contract contained a clause which – although its scope is disputed by the parties due in part to its redaction in the jawi script of the classical Malay language – mandated that any dispute between the parties be submitted to the now-defunct office of the British Consul-General in Brunei.

In 2013, a self-proclaimed Sultan of Sulu attempted a military invasion of Sabah, and Malaysia stopped paying the price stipulated in the agreement. Eight Filipino citizens claiming to be the successors of Jamalul Alam Kiram brought an arbitration claim in Spain against the State of Malaysia, claiming breach of contract.

In 2020, a partial award was rendered by the Spanish arbitrator fixing the seat of arbitration in Madrid. The claimants filed an application in France for exequatur of this partial award before the Paris judicial court, which was granted.

Malaysia appealed the judgment, claiming in part that even if the 1878 agreement included an arbitration clause, this clause had lapsed due to the disappearance of the office of the British Consul General in Borneo. The claimants, however, affirmed that the arbitration clause was valid despite the disappearance of the proposed arbitrator.

In the meantime, a final award on the merits was rendered in Spain, which granted USD 14.92 billion to the claimants.

On 6 June 2023, the Paris Court of Appeal (Paris, 6 June 2023, n°21/21386) ruled that although the parties had validly agreed upon arbitration to settle their disputes, it could be inferred from historical documentation that the reference made to the British consul general in Borneo was inseparable from the personal trust that the parties placed in the office holder at the time, William Treacher. The Court therefore found that the clause had lapsed due to the disappearance of the office of British Consul General in Borneo in 1946. In the absence of a new agreement between the parties regarding the arbitrator to be designated, the arbitration clause was unenforceable.

The ruling’s reasoning is debatable as although the Paris Court of Appeal, in support of its findings, asserts that the reference to the Consul-General was made intuitu personae to William Treacher, his name is not mentioned in the clause. Furthermore, one could reasonably have expected, due to the nature of the contract and the foreseeable effects of the passing of time, that Treacher would eventually pass on, in all likelihood before the lapsing of the agreement, which provided for the continuation of the contract after the death of the original signatories. The parties therefore would likely have wanted arbitration to take place in spite of the death of their preferred arbitrator, regardless of the latter’s personal qualities.

When faced between the choice of protecting the effect of the arbitration clause (i.e. the intent of the parties that disputes be settle by arbitration) and that of respecting the (alleged) will of the parties regarding its implementation, the Court made the choice of  following the latter, leading to the parties’ primary intent of entrusting the matter to arbitration being effectively superseded. 

US: Baker Hughes Saudi Arabia v. Dynamic and a restrictive approach to the consent to arbitration 

On 14 September 2021, the Emirates Maritime Arbitration Centre (EMAC) was merged via royal decree of the Ruler of Dubai with the Dubai International Financial Centre (DIFC) in order to form the new Dubai International Arbitration Centre (DIAC).

The royal decree ordering the merger provides, under its article 6 (a), that “All agreements to resort to arbitration at [EMAC and DIFC], concluded by the effective date of this Decree, are hereby deemed valid. The DIAC will replace the Abolished Arbitration Centres in considering and determining all Disputes arising out of the said agreements unless otherwise agreed by the parties thereto.” It was therefore the intent of the arbitral institution, although not necessarily that of the parties, that any prospective arbitration under its predecessors’ rules be transmitted to DIAC.

A dispute emerged between the Saudi subsidiary of American energy company Baker Hughes and several subsidiaries of offshore oil & gas specialist Dynamic Industries International regarding the supply of materials, products and services for an oil project to be performed by Dynamic in Saudi Arabia.

The contract between the parties stated that any dispute would be referred to by either party to, and finally resolved by, arbitration under the Arbitration Rules of the DIFC with the DIFC in Dubai being designated as the seat of the arbitration proceedings.

Baker Hughes Saudi Arabia brought the dispute before the United States District Court for the Eastern District of Louisiana, to which Dynamic opposed the arbitration clause and petitioned the Court for a motion to dismiss for forum non conveniens or to compel arbitration. In response, Baker Hughes Saudi Arabia claimed that the disappearance of the DIFC made the arbitration provision unenforceable despite the DIAC’s overt claim to being its successor.

On 6 November 2023 (Baker Hughes Saudi Arabia Co. v. Dynamic Industries et. al., n° 2:23-cv-1396, 6^th November 2023), the Louisianian court dismissed Dynamic’s claim for forum non conveniens due to the lack of an available forum before which to enforce the arbitration clause and ruled, in line with earlier cases, that it was outside of its powers to rewrite the parties’ contract and compel arbitration in a forum to which the defendant had not contractually agreed since “whatever similarity the DIAC may have with the DIFC, it is not the same forum in which the parties agreed to arbitrate”.

From a French perspective, the ruling serves to illustrate the comparative friendliness of French jurisdictions to arbitration, and, by extension, the peculiarities of the Sultan of Sulu case. It is indeed case-law in France that the disappearance of an arbitral institution does not in itself prevent arbitration from taking place before its successor (Paris, 20 March 2012, n° 10/23578), as it is the will of the parties to arbitrate, rather than the particulars of the planned arbitration, which should in principle prevail. This position is shared by other civil law jurisdictions around the world (see, in Brazil, Lojas v. Capital, n° 0008851-23, 19 August 2023).

The position of French jurisdictions has long been not to frustrate the lawful will of the parties to remove a dispute from the jurisdiction of national courts, it being illustrated by the fact that art. 1452 et seq. and art. 1505 4° of the French Civil Code provide that a party in risk of a denial of justice may ask a French support judge to appoint an arbitrator as long as the will of the parties to arbitrate is clear, even when the dispute presents no link with France.

Therefore, it remains to be seen in the coming years whether the Sultan of Sulu ruling announces a shift from the long held preference in French jurisdiction for the efficiency of arbitration clauses towards a more restrictive understanding of the will of the parties.

In any case, any party planning on arbitration as a means of dispute resolution may want to plan for the eventual demise of those in whom they place their trust. Indeed, if all men and even states are mortal, arbitral institutions are doubly so.