An unusual arbitration case relating to a dispute over a 19th-century land deal has pitted the government of Malaysia and two leading independent European firms against one of the world's largest litigation funders, as the debate over whether to regulate third-party litigation funding in the EU intensifies.

The case centres on a 2018 claim by a group of Filipino citizens, who say they are the descendants of the last Sultan of Sulu, regarding compensation they say they are owed by Malaysia for their ancestors' former land in the oil-rich state of Sabah under a 1878 forever lease agreement. The claimants are being backed by Therium, among the biggest litigation funders.

The Malaysian government made payments to the descendants of the last sultan for 135 years, until 2013 when an armed invasion of Malaysian territory by militants claiming to act in the name of the Sultan of Sulu.

According a person close to the matter, the government stopped making the payments under the 1878 agreement following the invasion of Lahad Datu by the Royal Sulu Forces in 2013. One of the claimants is now subject to an anti-money laundering, anti-terrorism financing, and proceeds of unlawful activities order, due to their connection to the Royal Sulu Forces.

One of the lawyers acting for the claimants told Law.com International that they launched the arbitration case because the lease price for the territory had not changed since 1903.

Paul Cohen of the 4-5 Gray's Inn Square barristers' chambers said: "Malaysia now earns billions of dollars a year from the leased territory, three million times more than it owed the claimants in the lease. But the Attorney General offered an annual increase of $100."

For several lawyers close to the case, the funder is pushing the case so that it can deliver a return to its investors. The situation has resulted in calls for a minimum level of regulation of third-party litigation funders.

Arbitrator Kicked Out

The dispute has raged across various countries in recent years.

In June of 2021, the Spanish Supreme Court annulled the appointment of the sole arbitrator on the case, Gonzalo Stampa, because it found Malaysia—which agreed to resume the payments according to court documents, including late payment fees during an early stage of the proceedings—had not properly been summoned to participate in the arbitration proceedings.

According to a person close to the matter, that promise had been made by the country's former attorney general who, he said, did not act with the Malaysian government's approval.

Tommy Thomas, Malaysia's former attorney-general, wrote in a later 2021 memoir that he saw no evidence of links between the claimants and the armed militants, nor "legal grounds for Malaysia's refusal to pay annually since 2013".

Earlier this year, the Malaysian government said it would create an inquiry commission to investigate Thomas over his alleged exposure of government secrets, abuse of power, professional negligence and seditious statements in his memoir.

In September of 2021, the claimants subsequently turned to a Paris appeals court, which approved their request to move the arbitration procedure to France, where Stampa ordered the Malaysian government to pay the claimants $14.9 billion to settle the dispute last February.

Then in June, a Dutch court rejected a request from the claimants to enforce the near-$15 billion award—enforceable in any of the 172 countries that have ratified the New York Convention on foreign arbitral awards—over the Spanish court's decision to annul the appointment of the arbitrator in 2020.

"The final arbitral award could not be rendered because the assignment to the arbitrator was overturned in an irrevocable decision by the same court that had appointed that arbitrator," it said. "The arbitrator consequently could not render an award, so there is no arbitral award to be recognised."

Questioning the Funders

According to Uría Menéndez and De Brauw Blackstone Westbroek, which are advising the Malaysian government, the case should have never continued after the Spanish court annulled the appointment of the arbitrator.

"Even my 16-year-old son understands that if you're no longer an arbitrator, you cannot proceed to render an award," said Marnix Leijten, a partner at De Brauw. "Because we have a funder with unidentified interests, [the case] continued."

Uría's Álvaro López de Argumedo Piñeiro added: "Very few firms would continue acting in a case like this once the arbitrator has been removed, once the appointment has been annulled. However, the fund has other incentives—it has to reimburse money to its investors with a return."

Therium declined to comment.

Spain's public prosecutor reportedly brought criminal proceedings against Stampa in February of last year for contempt of court over his actions in the arbitration case.

Cohen said that the government of the southeast Asian nation had "consistently misrepresented" the legal matter. "The claimants and their lawyers know exactly what weight to put on the circumstances, and various decisions, of the Spanish court," he said in an email. The Spanish court which annulled the appointment of Stampa also confirmed in a unanimous, 2022 decision that "his award and arbitration is valid, and that Malaysia had deliberately failed to take actions to close it down,"

Cohen added. "The same court judgement accused Malaysia of 'procedural fraud'. Malaysia has consistently misrepresented this complex matter, obscuring the later decision. Indeed, it avoids admitting that this damaging judgment of 2022 even happened." There was a separate opinion to the Spanish court's 2022 majority opinion annulling the appointment of Stampa. In his opinion on the case, judge Jesús María Santos Vijande described the $15 billion award as "preventing the State of Malaysia, in open fraud of procedural law and against its own acts, from exercising in a more or less covert manner an action for annulment of an arbitral award that has expired completely."

Funders Have 'No Interest in Merits'

Geert Van Calster, a Belgium-based, independent lawyer and researcher specialised in international legal procedures, told Law.com International that the Sulu case demonstrates the need for a minimum level of regulation of third-party litigation funders in the form of court oversight and transparency and licencing requirements, "effectively looking at third-party funding like financial products for which you need to have fiduciary duties, etc." he said.

"It's transparency that's needed for all the parties involved—for the funder, for the client whose claim it is and of course for the court system as well," he said, adding that this would prevent abusive litigation.

Abusive litigation, he said, tends to occur when "the person behind the funding has no interest in the merits of the case, other than either vindication of a certain sort of grudge that they hold," he said, or because they "want to make a quick buck."

According to Van Calster, a litigation fund's commercial interests would precisely cause them to abandon claims unlikely to be successful.

"Because a normally functioning funder would not continue to fund a desperate claim, and therefore it's important that one has a way to see through, to see who they are," he said. "The presumption must be that if a case, if it is at least entirely spurious; if it goes on beyond what can be reasonably expected of a market investor; that there must be an ulterior motive to it."

He added: "Very often, the risk is by the way, on the other side – where the funder abandons a claim, even though it does have merits."

Asked whether it's time for the EU to impose transparency requirements on litigation funding, Gary Barnett, the U.S.-based executive director of the International Legal Finance Association, a global trade association for the growing litigation funding industry, told Law.com International that its members do thorough due diligence on potential cases and only pursue meritorious claims.

"ILFA recommends that any EU legislation on legal finance be based on facts and data as well as consultation with key stakeholders, including industry experts and other businesses and organizations that know first-hand the benefits legal finance provides to EU citizens," he said.