Two courts confirm the logical limits of the validation principle

8 min read

Courts in Paris and The Hague have recently refused to enforce awards from the same arbitration. These decisions confirm the logical limits to the pro-arbitration principle that arbitrators and courts should seek to uphold the validity of an arbitration agreement.

Heirs to the Sultan of Sulu v Malaysia

This dispute began when a group of claimants attempted to terminate an agreement "leasing" a part of Malaysian territory to Malaysia. Malaysia did not participate in the arbitration.

In 2019, the Heirs to the Sultan of Sulu (eight individuals) brought an action against Malaysia on the back of an 1878 Deed granting the British North Borneo Company "in perpetuity all the rights and powers belonging to the Sultan of Sulu, territories and land in the island of Borneo"1 in consideration of 5,300 Malaysian Ringgit.2 The British North Borneo Company assigned all rights under the Deed to the British Crown in 1946, and Malaysia ultimately became the successor of the Deed in 1963. The dispute resolution clause in the Deed provided:

Should there be any dispute, or reviving of all grievances of any kind, between us, and our[] heirs and successors … then the matter will be brought for consideration or judgment of Their Majesties’ Consul-General in Brunei3

As the nominated "arbitrator" ("Their Majesties' Consul-General in Brunei") no longer existed, the Heirs asked the Superior Court of Justice of Madrid to appoint an arbitrator, which it did. The arbitrator decided the seat to be Madrid, as the Deed was silent on this matter.

The main issue was whether the Deed was a commercial lease or an international treaty affecting Malaysia's sovereignty. The arbitrator found the Deed was a commercial lease. Since Malaysia failed to pay "rent" to the Heirs, and because rental payment is a "fundamental duty as tenant",4 the arbitrator decided the Deed was terminated. The Heirs, in principle, sought for Malaysia to return the rights to the territory. However, they acknowledged this type of restitution would be impossible, and asked for money in lieu. The arbitrator ultimately awarded some USD 15 billion in a Final Award.

Before the arbitrator rendered the final award, Malaysia successfully vacated the Superior Court of Madrid's decision to appoint the arbitrator. Subsequently, the Heirs successfully requested the seat to be relocated from Madrid to Paris, reasoning that the vacatur "threaten[ed] to render the Arbitration Agreement inoperative".5&

Three decisions interpreted the dispute resolution clause. All three decisions considered the identity of the named "arbitrator" ("Their Majesties' Consul-General in Brunei"), leading to different results.

Decision 1: Arbitrator’s Award on Jurisdiction

By way of a Preliminary Award on Jurisdiction, the arbitrator appointed by the Superior Court of Justice of Madrid decided the tribunal had jurisdiction under the Deed's dispute resolution clause by making two findings.

First, the parties' choice of a non-judicial institution ("Their Majesties' Consul-General in Brunei") to decide their differences denotes their intention to submit "to a neutral party, an umpire or an arbitrator … [and] to withdraw the present dispute from the jurisdiction of … courts".6

Second, the non-existence of "Their Majesties' Consul-General in Brunei" is no bar to the enforceability of the arbitration agreement. The arbitrator found that the "principle of conservation of the arbitration agreement" can remedy this "pathological aspect by severing what makes it unenforceable, while still retaining enough of the agreement to put the arbitration into operation."7

In short, according to the arbitrator, the choice of "Their Majesties' Consul-General in Brunei" demonstrates the parties' intention to arbitrate, and this intention can be upheld by appointing another arbitrator.

Decision 2: Paris Court of Appeal

The Heirs sought to enforce the Preliminary Award in Paris, but the Paris Court of Appeal overruled the first-instance decision to enforce the Award.8

The Court of Appeal reasoned that the arbitrator was incapable of finding his own jurisdiction, as the dispute resolution clause (which the Court reasoned to be an arbitration agreement9) was unenforceable for two reasons.

First, the Court found that the choice of the nominated arbitrator constituted a "decisive element of the willingness of the parties to have recourse to arbitration".10 And as such, the nominated arbitrator was inseparable from the intention to arbitrate.11

Second, the Court reasoned that since the British Crown became a party to the Deed in 1946, the nominated arbitrator ("Their Majesties' Consul-General in Brunei", who was a representative of the British Crown) could not be regarded as an independent third party.12 And since an independent third party is an "essential element involving arbitration agreements",13 this arbitration agreement was unenforceable.

Had the dispute resolution clause been amended to appoint an independent third party (for example, during the negotiations post-1946), the arbitration agreement perhaps could have been enforceable. However, this was not the case.14

The Heirs have stated that they are "considering their options before the French Supreme Court."15

Decision 3: Court of Appeal in The Hague

The Heirs also sought to enforce the Final Award in the Netherlands, but the Court of Appeal in The Hague denied the Heirs' application. However, the Court of Appeal took a different approach from the Paris Court of Appeal: it held that the Deed did not contain an arbitration agreement at all.16

The Court found that the nominated "arbitrator" was not an independent third party, and thus the dispute resolution clause cannot be considered an arbitration agreement.17 Rather, it may be closer to a mediation agreement.18

Their Majesties’ Consul-General in Brunei was not an independent third party because "the person who then held office … was involved in the conclusion of the Agreement, as an intermediary and/or advisory of (at least) one of the parties, the Sultan of Sulu."19

The Court further reasoned that the Deed does not suggest that the dispute resolution arrangement (whether described as an arbitration or mediation) would continue after the nominated decision maker is no longer able to act.20

Lessons Learned?

These three decisions reveal that there must be a logical limit to the longstanding principle that arbitration clauses must be upheld as much as possible (the validation principle).

Originally, the arbitrator sought to apply the validation principle. In doing so, he held that the Deed denoted an intention to arbitrate, and thus he should remedy any pathological errors to give it valid effect.

Yet, once brought before the courts of Paris and The Hague — both traditionally pro-arbitration jurisdictions — both courts held that the arbitration clause was unenforceable, albeit on slightly different grounds:

  • The Paris Court of Appeal found that the dispute resolution clause is an arbitration agreement, albeit an unenforceable one; and
  • The Court of Appeal in The Hague found that the dispute resolution clause is not an arbitration agreement.

These decisions indicate that the validation principle has limits. The validation principle is a well-established one, especially in jurisdictions which are arbitration-friendly: that when a clause indicates an intention to arbitrate, a decision-maker should try to make it valid even if it is somewhat flawed. It has roots in fundamental contractual interpretation rules — that when a contract is ambiguous, an interpretation that gives it valid effect should be preferred over one that does not.

Yet, when a 'dispute resolution clause' clearly identifies an entity that could not be fairly considered to be an independent third party (as was the case here), a decision-maker should not go the extra mile to give it effect as an arbitration clause. This is the case even if they could, in theory, appoint an independent third party individual (as was initially done here).

1 Heirs to the Sultanate of Sulu v Malaysia, Final Award dated 28 February 2022, para. 182; the 1878 Deed initially granted the rights, territories, and land to two individuals; the British North Borneo Company replaced them in 1881.
2 Approximately 1,100 USD. The 1878 Deed originally stated 5,000 dollars, but this was increased to 5,300 dollars via the 1903 Confirmation Deed. Ever since the federation of Malaysia in 1963, “dollars” has been interpreted to mean the Malaysian Ringgit.
3 Heirs to the Sultanate of Sulu v Malaysia, Preliminary Award dated 25 May 2020, para. 10 (emphasis added). The 1878 Deed was written in Jawi (a Malay language written in Arabic script) and the proper translation of this clause was disputed. For the purposes of this client alert, the varying interpretations is a non-issue.
4 Heirs to the Sultanate of Sulu v Malaysia, Final Award dated 28 February 2022, para. 248.
5 Heirs to the Sultanate of Sulu v Malaysia, Final Award dated 28 February 2022, para. 141.
6 Heirs to the Sultanate of Sulu v Malaysia, Preliminary Award dated 25 May 2020, para. 114.
7 Heirs to the Sultanate of Sulu v Malaysia, Preliminary Award dated 25 May 2020, para. 119.
8 Judgment of the Paris Court of Appeal 21/21386, 6 June 2023 (“Paris Court of Appeal Decision”).
9 Paris Court of Appeal Decision, para. 76.
10 Paris Court of Appeal Decision, para. 77 (translated by author).
11 Paris Court of Appeal Decision, para. 78.
12 Paris Court of Appeal Decision, para. 79.
13 Paris Court of Appeal Decision, para. 81 (translated by author).
14 Paris Court of Appeal Decision, para. 80.
15 Global Arbitration Review, Malaysia overturns enforcement of jurisdictional award in mega-case, 6th June 2023, available at [last accessed on 2 November 2023].
16 Judgment of the Court in The Hague (case number 200.317.091/01), 27 June 2023, para. 6.27 (“The Hague Court of Appeal Decision”).
17 The Hague Court of Appeal Decision, para. 6.24.
18 The Hague Court of Appeal Decision, paras. 4.2.5, 6.20.2.
19 The Hague Court of Appeal Decision, para. 6.24 (machine translation).
20 The Hague Court of Appeal Decision, para. 6.25.

Nolan Lee (White & Case, Legal Manager, Singapore) contributed to the development of this publication.

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