'Zombie' $15 Billion Legal Award Infecting European Courts—A Wake-Up Call For UK Arbitration Reform

It's often said that speed kills good law, but with zombie legal awards haunting European courts and billions at risk, Britain can't stay complacent in legal reform.

In July, the Labour government introduced the UK Arbitration Bill— an update to 25-year-old provisions. With debate in the House of Commons now underway, the Bill aims to maintain Britain's reputation as a leading global hub for settling disputes.

The timing is critical, as the government recently secured a record-breaking $80 billion from an investment summit, signalling high investor confidence. Britain must modernize its arbitration laws to maintain this appeal, the legal basis for international commerce.

Crucial Steps

This reform is urgently needed, as European courts across the English Channel are reeling from a costly legal mess. They have wasted significant time and resources on a baseless award tied to a dubious legal challenge that jurisdictions from Spain to the Netherlands consider long over.

This "award" ignited a series of erratic challenges, dragging entire countries into a legal vortex. This exposes deep flaws in arbitration—a stark warning for Britain to urgently upgrade its own provisions.

In November, the French Supreme Court issued a landmark decision rejecting the enforcement of an interim award in the case between Malaysia and the alleged heirs of the Sultan of Sulu. The formal annulment of the award now appears all but certain.

This decision complements previous judgements from Madrid, Luxembourg, The Hague, and Paris, where the heirs' legal team exploited a venue-hopping strategy, hoping to cash in on the invalid award. Yet, their efforts have repeatedly failed, as successive verdicts affirm a simple truth: no valid arbitration has ever existed.

How It Started

The dispute traces back to an 1878 agreement in which the Sultanate ceded what is now Sabah, Malaysia, to two colonial explorers for a nominal annual fee. Malaysia honoured these obligations after gaining independence but stopped paying following a failed invasion by supporters of a purported heir. Backed by British barrister Paul Cohen and London-based funder Therium, the heirs launched a lawsuit seeking $15 billion.

The real issue isn't whether Malaysia should have honoured a deal it never signed or the jaw-dropping sum for the alleged grievance. The problem lies with the arbitrator Gonzalo Stampa, who issued an award for the Sulus that wasn't lawful. An earlier Madrid court order had already revoked his authority in the case. Stampa chose to defy the order, which subsequently led to his criminal conviction.

The Supreme Courts of France and the Netherlands confirmed this in their verdicts. So why was an illegal award allowed to drag on?

Clues within this legal saga hint at troubling issues, particularly around Stampa's unusually high $2 million fee, sparking suspicions of financial influences undermining legal proceedings. These worries only deepened when Therium invested over $20 million into the Sulu cause in exchange for a share of the potential award. Legal experts, including U.S. Attorney General Keith Ellison, warn that these funding practices foster fertile ground for "potential corruption" in arbitration.

Moreover, emboldened by Stampa's defiance, the dead award was disguised as legitimate, with Cohen racing swiftly to push its hollow corpse into any European venue that could enforce it. Before its stench could surface, Cohen obtained a Luxembourg order to freeze the assets of a Malaysian firm unrelated to the case.

'Zombie' Award

Cohen's legal team has weaponized the zombie award even further, resorting to extreme tactics. They recently sued Spain for $18 billion at the International Centre for Settlement of Investment Disputes—a venue for investment disputes, not colonial-era claims. The inflated demand, exceeding their original claim from Malaysia, appears more like a desperate cash grab than a legal strategy.

Moreover, they're now brazenly challenging Malaysia's sovereignty over Sabah. After losing in Paris, Cohen contends the Sulus are free to lease Sabah to foreign powers, jeopardizing the peace of its 3.5 million residents in a desperate ploy to overturn a legal defeat.

To label this a legitimate legal strategy is madness. The damage is immense: millions wasted on lawyers, endless hours lost untangling chaos, Spain facing billions in liabilities for ousting a rogue arbitrator, and Malaysia's sovereignty over Sabah rattled—enough for the Philippines to launch their rival claim in July.

This legal saga shows the arbitration sector is open to abuse—a lesson Britain can't ignore.

The proposed Arbitration Bill offers some hope. Its provisions requiring arbitrators to disclose conflicts of interest could have precluded Stampa's appointment, potentially defusing this debacle early on.

The Bill, though promising, has flaws. It permits arbitrators to issue peremptory orders and seek court enforcement, risking rushed verdicts and exposing Britain to liabilities akin to Spain's current plight.

To prevent such abuses, the legislation must address jurisdictional loopholes exploited by Cohen to delay outcomes. Furthermore, while litigation funding laws have delivered justice in cases like the Post Office scandal, they require refinement. Introducing caps on third-party awards could curb profit-driven claims and avert destabilizing escalations of this scale.

If Britain fails to learn from the havoc unleashed by a single zombie award in European courts and strengthen its legal framework to block arbitration abuse, its leadership in global dispute resolution risks crumbling—reduced to a playground for ruthless, profit-driven chaos.

About the author: Emir Gürbüz is an expert in international law. He has been a Managing Partner of Legart Law & Consultancy since 2016 and Managing Director of Hariciye since August 2023. He has worked in various think tanks across Prague and Berlin and is currently an executive board member for the Turkish Atlantic Council. Gürbüz graduated from Bahcesehir University (BAU) Law School before completing his legal internship in Schindhelm, Turkey. During his internship, he co-founded the Orhun Consulting Firm in Istanbul, focusing on bankruptcy, real estate, and commercial law.