Client Alerts

Malaysia and Singapore settle decades-long dispute through arbitration at the PCA

Volterra Fietta Client Alert
1 December 2014

On 30 October 2014, an Arbitral Tribunal established under the auspices of the Permanent Count of Arbitration (“PCA”) rendered its award (the “Award”) in the Railway Land Arbitration (Malaysia/Singapore).1 Robert Volterra, of Volterra Fietta, was appointed lead counsel by Malaysia in the case.2

At the heart of the dispute was the question whether a company – M-S Pte Ltd (“M-S”) – established under the laws of Singapore, and jointly owned by Malaysia and the Republic of Singapore (“Singapore”), would have been liable to pay to Singapore a tax worth more than a billion Singaporean dollars for its development of land in Singapore. The Tribunal, composed of Lord Phillips of Worth Matravers KG, PC (President), the Honourable Murray Gleeson AC, QC, and Judge Bruno Simma, found that M-S would not have been liable to pay the tax. The Tribunal’s decision marks the conclusion of a dispute that has existed for many decades.

Background

The dispute revolved around the interpretation of a sui generis treaty concluded between Malaysia and Singapore dated 27 November 1990 and titled “Points of Agreement on Malayan Railway Land in Singapore” (the “POA”). Under the POA, Malaysia agreed to return to Singapore land that Malaysia had held in Singapore since the early twentieth century. That land was restricted, in the main, to use for the operation of a railway that ran through Singapore, from Johor Bahru in Malaysia to the terminus at Keppel, on the southern coast of Singapore, as illustrated on the map below.3

malaysia_720

In return, the POA gave Malaysia the option (among other options) to vest for development three parcels of the railway lands it had surrendered (namely, the land at Keppel, Kranji and Woodlands, “the POA parcels”) in a company to be jointly owned by Malaysia (60%) and Singapore (40%).

Almost 20 years after the conclusion of the POA, Malaysia accepted Singapore’s proposal to amend the POA. Under the amended arrangement, M-S would receive from Singapore a total of six parcels of land reclaimed from the sea near the Marina South peninsula and the Ophir-Rochor area (see map above) in exchange for the POA parcels and an additional three parcels at Bukit Timah (“Bukit Timah parcels”). The exchange was on the basis that these parcels should be of equivalent value to the value the POA parcels and the Bukit Timah parcels would have had with planning permission for development. Under this arrangement, Malaysia agreed to pay development charges (“DC”) (a tax levied over the increased value of the land) on the increase in the value of the Bukit Timah parcels that would have occurred upon the grant of planning permission over that land.

The two States differed, however, on the question of whether M-S would have been liable to pay DC had M-S actually developed (rather than swapped) the POA parcels in accordance with the proposed land uses set out in the annexes to the POA. On 9 January 2012, the Governments of Malaysia and Singapore therefore signed a Submission Agreement, submitting this question to arbitration.

Malaysia and Singapore agreed in advance on the quantum of the DC that would be payable if the Tribunal answered the question in the affirmative: S$1.47 billion plus interest (approximately £720 million). Therefore, the Tribunal had to decide only whether or not DC was in fact payable.

Malaysia’s submissions

Malaysia’s position was that the POA, an international treaty, itself conferred permission on M-S to use the POA parcels for the purposes set out in the annexes to the POA. It argued that it would have been contrary to Singapore’s obligations under the treaty to impose DC (a municipal law obligation) as a precondition to obtaining permission to use the POA parcels in accordance with the proposed land uses set out in the annexes to the POA. Malaysia argued that there were no provisions in the POA, or anywhere else, which would oblige, expressly or implicitly, M-S to pay DC in order to develop the POA parcels.

Malaysia further argued that while planning permission was indispensable for M-S to comply with its obligations under the POA, it was not the planning permission per se that increased the value of the land; the increase in value was the result of Singapore’s undertakings under the POA. In other words, Singapore undertook an international obligation in the POA to permit the land to be developed in the way set out in the treaty’s annexes. It was this undertaking that unlocked the development value of the lands.
Alternatively, Malaysia argued that even if the Tribunal were to apply Singaporean municipal law instead of international law, M-S would still be exempt from paying DC. Malaysia argued that the POA deal was analogous to the Singaporean domestic law exemption from DC that applies when the State sells land to be developed for a specific purpose.

Singapore’s submissions

Singapore argued that the two States had agreed to the establishment of a joint venture company under the laws of Singapore. Accordingly, as a Singaporean company, M-S is subject to the normal incidents of Singaporean municipal law – including the need to obtain planning permission – just like all other Singaporean companies. Payment of DC is a prerequisite to obtaining planning permission; therefore Singapore’s municipal law required M-S to pay DC. Since nothing in the POA absolved M-S of the obligation to pay the municipal tax, M-S would therefore have been obliged to pay it.

Alternatively, Singapore argued that Malaysia, by its conduct in and after 2008 (the period in which negotiations to implement the POA recommenced), agreed or at least appeared to agree with Singapore’s assertion that DC should be paid. Such conduct, Singapore submitted, provided valuable evidence of the two States’ understanding in relation to the POA.

It was also Singapore’s case that the variation of the POA in 2010 was agreed on the basis that DC should be paid on all six parcels of land (i.e., both the POA parcels and the Bukit Timah parcels). Therefore, Malaysia was estopped “or otherwise precluded” from arguing that DC was not payable on the POA parcels.

The Tribunal’s decision

The Submission Agreement required the Tribunal to decide the submission question in accordance with international law, and municipal law if and to the extent that the Tribunal found it relevant to do so.
The Tribunal therefore applied the relevant principles of interpretation under international law, referring to Articles 31 and 32 of the Vienna Convention on the Law of Treaties (1969). The Tribunal noted that, in applying the principles of treaty interpretation, it was important not to lose sight of the “object of the exercise”, which it described as identifying “the common intention of the Parties at the time that the treaty was concluded as to its meaning and effect”.

In this regard, both Malaysia and Singapore submitted witness evidence as to the subjective intentions of the officials from each State who participated in the negotiations leading to the POA. An interesting – albeit brief – aspect of the Tribunal’s decision is its treatment of the admissibility of such evidence. The Tribunal accepted Singapore’s submission that, in the absence of a rule excluding evidence of subjective intentions, it is admissible. It is then for the Tribunal to attach to it what weight they see fit (paragraphs 130 and 131 of the Award). In this case, the Tribunal found that the witness evidence did “not assist in the interpretation of the treaty”, since it did not demonstrate a “common understanding of the Parties to the treaty” but instead a “conflict” (paragraph 163).

The Tribunal found that neither the context nor the object and purpose of the POA afforded assistance in resolving the dispute. It instead focused its attention on the ordinary meaning of the POA and the need, in its view, to give the terms of the POA an interpretation that is “commercially sensible” (paragraph 146). In a similar vein, the Tribunal agreed with Singapore that there is no particular difference between the principles governing treaty interpretation and those governing interpretation of commercial contracts, while also emphasising the importance of the principle of good faith in the interpretation of treaties (paragraph 43).

Applying these principles, the Tribunal concluded that Malaysia’s interpretation of the POA was to be preferred to that of Singapore (paragraph 152). It found that the Parties agreed not merely that the POA parcels could be used for the specified developments, but that they should be so used. Consequently, the ordinary meaning of the POA and its annexes was that Malaysia provided consideration to Singapore by releasing the balance of the railway lands, in return receiving permission to develop the POA parcels. It was therefore the terms of the POA, and not the municipal grant of planning permission, that “unlocked the development value of the lands” (paragraph 153).

The Tribunal’s findings on the interpretation of the treaty rendered the position under domestic law irrelevant (c.f., paragraph 145). However, before reaching its conclusion on the correct interpretation of the POA, the Tribunal did consider whether the POA land swap fell within the exemption from DC set out in domestic Singaporean law. The purpose behind the DC regime is to enable the State to capture for itself a portion of the valuable benefit that is conferred by its grant of planning permission. The exemption from payment of DC applies when land has been transferred by the Singaporean Government pursuant to a contract under which the development for which the land is sold is specified and the price paid represents the full development of the land. In such circumstances, the State receives the benefit of the increase in value at the point of sale and not as a result of the subsequent grant of planning permission (paragraph 152).

The Tribunal found (and indeed Malaysia accepted) that the POA was a unique transaction, which did not fall “fairly and squarely” within the exemption to DC (paragraph 143). There was, however, in its view, a “close analogy” between the POA and a sale by Singapore of land for a specified purpose (paragraph 153). As a party to the POA Singapore was in a position to negotiate terms that balanced the benefit that Singapore would obtain from the return of most of the railway lands against the benefit that Malaysia would receive, through its holding in M-S, in the value that the specified developments would give to the parcels to be vested in M-S (paragraph 156). In the Tribunal’s view, however, even though the municipal law exemption did not strictly apply, the “‘competent authority’ should give effect to Singapore’s obligations under international law when ruling whether or not DC falls to be paid on an application for planning permission” (paragraph 145).

The Tribunal dismissed Singapore’s argument that the subsequent conduct of Malaysia and Singapore in the period in and after 2008 provides “valuable evidence of the Parties’ intention and understanding” of the POA. The Tribunal found Singapore’s reliance on the Beagle Channel decision inapt, since the acts Singapore relied upon bore little relation to those relevant to that decision. In addition, the Tribunal found it significant that the original participants in the POA negotiations had “left the landscape” (a reference to paragraph 142(3) of the Beagle Channel decision) (paragraph 168). The Tribunal also dismissed Singapore’s argument that a 2010 Joint Statement by the Parties was a “subsequent agreement” that DC would be payable, on the basis that the Parties were acting under a common mistake as to the effect of the POA in its original and amended form (paragraph 197).

Finally, in addressing Singapore’s estoppel argument, the Tribunal found that it would be “inequitable” to hold Malaysia to an obligation on M-S to pay DC in respect of all the parcels merely because the Parties shared a misunderstanding that the POA imposed such an obligation (paragraph 204).

Commentary

At the outset of the Award (paragraph 3), the Tribunal noted that Malaysia and Singapore agreed to refer their dispute to arbitration for resolution in a “very cordial and friendly manner, and not in any way acrimonious”. In the final paragraph of the Award, the Tribunal concluded that “[t]he arbitration has been conducted in the cordial and friendly manner that the Prime Ministers intended, and we hope that its resolution will be a chapter in the continued fruitful cooperation between the two countries involved.”
This case is an excellent example of how binding third-party dispute resolution can result in the successful resolution of a long-standing dispute between two States. The cooperative spirit of both Malaysia and Singapore is an example to other States, from their voluntary submission of the dispute to arbitration by agreement to their joint reception of the Award.

The case also demonstrated how third-party dispute resolution can enable difficult bilateral issues to be resolved between States whilst at the same time enabling those States to engage constructively with each other on other issues. In a joint statement published on the websites of the Ministries of Foreign Affairs of Malaysia4 and Singapore5, the two States note that “by resolving this matter through third party arbitration, both countries have demonstrated our common commitment to settling disputes in an amicable manner, in accordance with international law”. The Parties also noted that “[t]he full and successful implementation of the POA has paved the way for joint development projects and closer collaboration between Singapore and Malaysia. Both countries look forward to working closely together to further strengthen and broaden our bilateral cooperation.”

(1) The Award is available at www.pca-cpa.org. This Client Alert is prepared only on the basis of the Award and other publicly-available information.
(2) Laura Rees-Evans and Dr James Upcher (no longer with the firm) were also on the Volterra Fietta team as counsel for Malaysia.
(3) This map is taken from page 22 of the Award.
(4) Available at www.kln.gov.my.
(5) Available at www.mfa.gov.sg.