Data

Date:: 28-02-2022
Country:: Arbitral Award
Number:
Court:: Ad hoc Arbitration
Parties:: Nurhima Kiram Fornan et al. v. Malaysia

Keywords

LONG-TERM CONTRACTS - LEASE CONTRACT - BETWEEN SOME MALAYSIAN INDIVIDUALS AND THE MALAYSIAN GOVERNMENT - CONTRACT SILENT AS TO THE APPLICABLE LAW - ARBITRAL TRIBUNAL APPLIED THE UNIDROIT PRINCIPLES AS THE MOST APPROPRIATE RULES DEFINED AS "GENERALLY ACCEPTED PRINCIPLES AND RULES OF INTERNATIONAL COMMERCIAL LAW"

CONTRACT INTERPRETATION - COMMERCIAL NATURE OF THE TRANSACTION - METHOD OF CONCLUSION OF THE AGREEMENT - REFERENCE TO ARTS. 2.1.1 AND 2.1.6(3) UNIDROIT PRINCIPLES

LEASE AGREEMENT - FAILURE TO PAY THE ANNUAL RENTAL - AMOUNTS TO A CONTRACTUAL NON-PERFORMANCE UNDER ART. 7.1.1 UNIDROIT PRINCIPLES - CONSEQUENT TERMINATION OF THE AGREEMENT PURSUANT TO ART. 7.3.1(1) UNIDROIT PRINCIPLES

LEASE AGREEMENT - LONG-TERM CONTRACT (ART. 1.11 UNIDROIT PRINCIPLES) - LESSOR ENTITLED TO RESTITUTION IN KIND OF THE RIGHTS OF EXPLOITATION OF THE NATURAL RESOURCES OF THE LEASED TERRITORY - RESTITUTION IN KIND NOT POSSIBLE - LESSOR'S RIGHT TO AN ALLOWANCE IN MONEY

CALCULATION OF DAMAGES IN CASE OF NON-PERFORMANCE - PERCENTAGE OF THE ECONOMIC BENEFITS OBTAINED BY THE LESSE AFTER TERMINATION OF THE CONTRACT - REFERENCE TO ART. 7.4.11 UNIDROIT PRINCIPLES

FUTURE DAMAGES - EXCLUDED IF THEY CANNOT BE PRECISELY QUANTIFIED - REFERENCE TO ART. 7.4.3 UNIDROIT PRINCIPLES

RIGHT TO DAMAGES FOR SEVERAL PARTIES - ARBITRAL TRIBUNAL CAN AWARD THE FULL AMOUNT TO ALL CLAIMANTS,AND THEREAFTER CLAIMANTS DISTRIBUTED IT AMONG THEMSELVES.

Abstract

The arbitration concerns a dispute which arose between Claimants, some Philippine individuals, and Respondent, the Government of Malaysia, on the legal characterization and enforcement of an instrument over a portion of territory along the North Coast of Borneo –known today as Sabah, Malaysia- concluded on January 4, 1878, between the Sultan of Sulu and North Borneo, on the one hand, and a representative of the British Government, on the other [hereinafter the 1878 Agreement]. Claimants are direct descendants and legal heirs of the Sultan and successor-in-title of the signatory of the 1878 Agreement, while Respondent became the successor-in-title of the British North Borneo Company upon the establishment of its Federation in 1963.

Claimants characterised the 1878 Agreement as a commercial transaction, a leasing agreement of certain territory along the North Coast of Borneo, constituted for an undetermined period with Malaysia and in return of a series of annual rental payments. On this basis, Claimants complained that Malaysia has incurred in a fundamental breach of its essential payment obligations under the terms of the 1878 Agreement. Claimants seek, as main remedy, the termination of the 1878 Agreement pursuant to Article 7.3.1 of the UNIDROIT Principles.

In a Preliminary Award, the Arbitral Tribunal decided that Claimants’ plead on the application of the UNIDROIT Principles as the lex causæ of the arbitration was well founded.
In defining the UNIDROIT Principles as "generally accepted principles and rules of international commercial law", it affirmed that "the reference to a systematic and well–defined set of rules as is the UNIDROIT Principles may avoid or, at least, considerably reduce the uncertainty accompanying vague concepts for the determination or terms such as «general principles of law» or «usages and customs of international trade»". Therefore, the Arbitrator applied the UNIDROIT Principles of International Commercial Contracts as amended in 2016.

As to the merits of dispute, by interpreting the wording of a letter signed by Respondent, the Arbitral Tribunal concluded in favor of the commercial nature of the transaction articulated under the 1878 Agreement. In the opinion of the Tribunal, this letter demonstrated, in accordance with Articles 2.1.1 and 2.1.6 (3) of the UNIDROIT Principles, that Respondent accepted the validity of the 1878 Agreement, its commercial nature and its binding effects between the Parties.

In the Arbitrator’s view, Respondent's admitted failure to pay the annual rental since 2013 amounts to a contractual non-performance under Article 7.1.1 of the UNIDROIT Principles. Consequently, pursuant to Article 7.3.1(1) of the UNIDROIT Principles, the Arbitrator declared the termination of the 1878 Agreement as of January 1, 2013.

In relation to damages, Claimants pleaded that, being the 1878 Agreement being an international private lease agreement and based on Article 7.3.5 of the UNIDROIT Principles, its termination would require, in principle, that Respondent return the rights of exploitation of the natural resources of the leased territory along the North Coast of Borneo to Claimants. However, Claimants acknowledged that restitution in kind was essentially impossible and therefore sought a sum of money for the loss they suffered after the 1878 Lease Agreement was over. Moreover, Claimants alleged that, based on Articles 6.1.9.(4) and 7.4.12 of the UNIDROIT Principles, U.S. Dollars should be the currency to be used in the Final Award to calculate and to determine the amount Claimants seek to recover from Respondent, to prevent the risk of a fluctuation of exchange rates.

The Arbitral Tribunal established that the 1878 Agreement was constituted for an undetermined period of time and thus conforms long term contracts under Article 1.11 of the UNIDROIT Principles. It also affirmed that Claimants were entitled to damages according to Articles 7.3.6, 7.3.7, 7.4.1, 7.4.2 and 7.4.4 of the UNIDROIT Principles.

In the opinion of the Arbitrator, Claimants had the right to ask for the fair market value at the date of violation of the 1878 Agreement (i.e. January 1, 2013). Therefore Respondent had to pay Claimants, by way of restitution since January 2013 to February 2020, USD 4.87 billion, corresponding to a 15% of the historical benefits obtained by Respondent during that period (i.e., USD 32.49 billion). In doing so the Arbitral Tribunal referred to Article 7.4.11(1) of the UNIDROIT Principles. However, the Arbitral Tribunal, by reference to Art. 7.4.3 UNIDROIT Principles, rejected Claimants' claim for futures damages since the future economic benefits that Respondent could have obtained after a certain year could not be precisely quantified.

Finally, pursuant to Article 11.2.1 of the UNIDROIT Principles in relation to apportion of performance in cases of several obligees, since Claimants' rights were joint and several, the Arbitrator only awarded the full amount to Claimants, and thereafter Claimants distributed the proceeds among themselves.

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