Czech Republic V Diag Human SE: English Court Hands Down Guidance On Challenges To Awards Under Sections 67 And 68 Of The Arbitration Act 1996

Background

The decision is the latest in a long and procedurally complex dispute. Briefly:

1. In the early 1990s, Conneco, which later became Diag Human SE (Diag), and its ultimate owner, Mr Josef Stava, were engaged in negotiations with Czechoslovakia, the predecessor state to the Czech Republic, in relation to the supply of blood plasma.
2. While the tender process was ongoing, Diag began to supply blood plasma directly to hospitals in Czechoslovakia under certain cooperation agreements.
3. In March 1992, the Czechoslovakian Minister of Health issued a letter to Diag's third party business partner raising concerns as to Diag's ethics (the "Letter"). The partner ceased relations with Diag and the cooperation agreements between Diag and hospitals were cancelled.
4. In September 1996, Diag and the Czech Republic's Ministry of Health ("MoH") – Czechoslovakia having been dissolved in January 1993 – agreed to arbitrate Diag's claim in relation to losses allegedly suffered as a result of the Letter.
5. For the next twelve years (until August 2008), Diag and the MoH participated in the "Commercial Arbitration". Later decisions have found that the Czech Republic interfered with the Commercial Arbitration by: (i) using the Czech security and police services to obtain information; (ii) threatening the arbitrators with criminal prosecution; and (iii) meeting Diag's former lawyer to extricate advice as to Diag's position (ultimately leading to his disbarment).
6. The tribunal held that the Letter was a breach of Czech competition and commercial laws and had caused Diag loss, awarding CZK 8.3 billion in damages. The tribunal criticised the MoH for unwarranted interference in the arbitral process "through public questioning of their professional expert opinion and an attack on their independence". To ensure the arbitration's integrity, the tribunal had had to transfer the file to a safe place abroad.
7. In September 2008, the MoH initiated a second arbitration to review the Commercial Arbitration award (as the arbitration agreement allowed). Later decisions have found that the Czech Republic also interfered with the second arbitration. Among the measures employed were: (i) appointing the chairman, despite the party-nominated arbitrators agreeing to a different chairman; (ii) excluding Diag's nominated arbitrator from deliberations, leading to his resignation; (iii) appointing Diag's replacement arbitrator (meaning the MoH had appointed all three arbitrators); (iv) threatening and attempting to influence two of the arbitrators; and (v) launching a criminal investigation into a Czech lawyer's opinion advising that the Commercial Arbitration award was enforceable.
8. In July 2014, the tribunal in the second arbitration decided that the Commercial Arbitration proceedings had been discontinued (the "2014 Resolution"). Diag's attempts to enforce the Commercial Arbitration award overseas were all unsuccessful on account of the 2014 Resolution.
9. In December 2017, Diag and Mr Stava initiated a London-seated UNCITRAL arbitration under the bilateral investment treaty between the Czech Republic and the Swiss Confederation (the "BIT").
10. On May 2022, the tribunal held that the Czech Republic had breached its fair and equitable treatment obligation in the BIT by: (i) issuing the Letter; (ii) "abusing its sovereign powers in order to interfere with the Commercial Arbitration"; and (iii) "manifestly failing to comply with the principle of due process during the review proceedings", thereby 'tainting' the 2014 Resolution, with the result it was not entitled to recognition within the international legal order. The tribunal upheld the damages award in the Commercial Arbitration on the basis that it "saw no reason not to defer to" its quantification of the loss caused by the Letter and its recognition would compensate Diag and Mr Stava for damages suffered as a result of the Czech Republic's interference with the review process (the "Award").
11. In June 2022, the Czech Republic applied to set aside the Award on a number of grounds under ss. 67 and 68 of the Arbitration Act 1996 (the "Act").
12. Given the high number of issues put in play by the Czech Republic, the Court directed that it would determine three main issues, as follows:
    1. whether, by virtue of s.73, the Czech Republic is barred from advancing some of its objections under s.67 of the Act;
    2. whether certain of the Czech Republic's s.67 objections are properly characterised as jurisdictional (as opposed to being questions of admissibility); and
    3. the merits of the Czech Republic's challenges under s.68 of the Act.

When will s.73 preclude a jurisdiction challenge under ss.67 and 68?

The Czech Republic raised eleven s.67 issues which Diag and Mr Stava argued were barred under s.73.

Under s.67, a party may seek to set aside an award on the basis that the tribunal does not have substantive jurisdiction. S.67 provides that a "party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3)".

S.73 says, in short, that, if a party does not challenge jurisdiction "forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision", it cannot raise its objection later unless: (i) it can show that, at the time, it did not know and could not with reasonable diligence have discovered the grounds for the objection; or (ii) the tribunal extends the time for objections. S.73 applies equally to objections based on improper conduct, failures to comply with arbitration agreement and other irregularities affecting the tribunal or the proceedings (i.e. s.68 challenges, discussed further below). Under s.73(3), the tribunal is empowered to admit an objection later if it considers the delay to be justified.

To determine whether a s.67 objection is barred under s.73, the Court had to consider several issues, including: (i) what is an "objection" for the purposes of ss. 67 and 73; (ii) what happens if a point is raised but not then pursued; and (iii) what happens if a tribunal addresses an objection raised late without explicitly extending time under s.73(3).

As to the first issue, the Court looked to the principles in National Iranian Oil Co v Crescent Petroleum Co International Ltd [2022] EWHC 2641, namely, that: (i) "each ground of challenge to jurisdiction or of objection to jurisdiction must have been raised if it is to be raised"; (ii) one cannot be prescriptive as to the meaning of a "ground of objection"; it will usually be obvious if a party is trying to raise a new ground of objection on appeal; (iii) a broad approach should be adopted – different, broader arguments and new evidence do not necessarily amount to a new objection (which would be barred under s.73); and (iv) the "substance of each ground of objection relied upon should have been communicated to the other party (and the arbitral tribunal)". It is not enough to mention an issue; it must have been "distinctly put to the arbitral tribunal as denying jurisdiction".

As to the second issue, the Court emphasised the need for parties to make a "positive assertion" in substance that goes to jurisdiction. Mere 'putting to proof', non-admissions and reservations of rights are insufficient to amount to a jurisdiction objection. As the Court explained, a jurisdictional objection is "intended to permit the tribunal to identify and deal with the ground, not simply to act as a placeholder for some future hearing". A party cannot advance a jurisdiction objection at the s.67 stage if the "tribunal would not have known it was being asked to decide". The Court also found that parties must raise and maintain an objection under s.67, otherwise a party could make jurisdictional points at the outset and store up ones it does not pursue in the arbitration for a s.67 challenge.

As to the third issue, the Court cited "strong pragmatic considerations" favouring the view that, where the tribunal addresses a late challenge on its merits in an award, having not expressly granted an extension, the Court should assume that either time had been extended or it did not need to be because the objection had been made earlier in time.

The Court ruled that six of the Czech Republic's eleven s.67 challenges were barred under s.73 because they had not been raised before the tribunal or were formulated too generally in the arbitration.

Negotiating the twilight – jurisdiction and admissibility

Diag and Mr Stava argued that many of the Czech Republic's challenges under s.67 should be properly characterised as questions of admissibility rather than jurisdictional objections.

We have previously reported on the now well-established distinction in English law between jurisdiction and admissibility (here). Simply put:

• "Issues of jurisdiction go to the existence or otherwise of a tribunal's power to adjudge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it";
• The "tribunal versus claim" test is often applied – is the objecting party taking aim at the tribunal (jurisdiction) or at a particular claim (admissibility)?
• If a matter relates to admissibility, the tribunal's decision is final (in the same way as the tribunal's decision on other merits of the arbitration is final). If a matter relates to jurisdiction, it may be subject to judicial recourse under s.67 of the Act.

Matters that are 'jurisdictional' for the purposes of s.67 are set out at s.30(1) and comprise: (i) whether there is a valid arbitration agreement; (ii) whether the tribunal is properly constituted; and (iii) what matters have been submitted to arbitration in accordance with the arbitration agreement.

Drawing a clear distinction between jurisdiction and admissibility in investment treaty arbitrations is generally more difficult than in commercial arbitrations; Jan Paulsson memorably compared it to trying to perceive the divide between night and day in twilight. That is mainly because of the different way in which the arbitration agreement comes into being. In investor-state disputes, the treaty between two states contains an offer to non-parties (i.e. qualifying investors) to arbitrate certain disputes against the other state, which the investor then accepts by initiating the arbitration. The treaty comprises an offer and the investor's claim is acceptance. The Court therefore has to interpret the terms of the state's offer of arbitration in the treaty in order to determine to whom the offer is made and to which disputes it applies. The question is whether the parties to the particular arbitration have agreed to arbitrate the particular dispute in question. Issues that are "hard-edged" and have a binary answer are likely to be jurisdictional for the purpose of s.30(1) of the Act whereas issues which "permit a range of responses rather than an all or nothing effect are less likely to be jurisdictional".

The Court found that the Czech Republic's offer in the BIT was broad, encompassing all "disputes with respect to investments", and found that the majority of the Czech Republic's objections were jurisdictional in nature.

When can it be said that a tribunal has failed to deal with all of the issues?

The Czech Republic brought four challenges under s.68 of the Act, contending that the tribunal had failed to decide certain issues when assessing damages and made findings on grounds that had not been argued.

Under s.68, a party may challenge an award on the ground of "serious irregularity affecting the tribunal, the proceedings or the award". Serious irregularity means (among other things): (i) a tribunal's failure to comply with its duties under s.33; (ii) the tribunal exceeding its power (other than jurisdictionally); and (iii) the tribunal's failure to deal with all the issues put to it. As with s.67, a party may forfeit the right to object under s.73.

Serious irregularity objections are traditionally limited to the "extreme", high-threshold cases and focus on the tenets of due process, rather than the correctness of the decision. Moreover, evidencing serious irregularity is not in itself sufficient. The irregularity must cause substantial (i.e. more than some) injustice; typically, that means that the outcome of the arbitration might have been different if the irregularity had not occurred.

For challenges on the basis of tribunal's failure to deal with all the issues put to it (s.68(2)(d), the Court had to consider: (i) what is an 'issue'; (ii) whether the issue had been 'put to' the arbitrators; and (iii) if so, whether the arbitrators had failed to deal it. There is an important difference between issues (on one hand) and arguments, points, or lines of reasoning (on the other). To be an "issue", the matter must be so fundamental to the decision in the award that its determination could have affected the outcome. To be considered 'put to' the arbitrators, the issue must have been drawn to the tribunal's attention in the same terms as in the s.68(2) objection, determined holistically in view of all the parties' pleadings and written and oral submissions. Failure to deal with an issue means just that; a challenge is not viable if the issue is dealt with "badly or indifferently". That question comes down to a fair, commercial and commonsense reading of the award in its proper context.

Applying these principles, the Court upheld one of the Czech Republic's challenges on the ground that the tribunal had failed to deal with an issue put to it, but rejected the others on the basis that the tribunal had sufficiently addressed the issues in reaching its conclusions.

The Court dismissed the Czech Republic's a challenge to the tribunal's finding that Diag and Mr Stava should be compensated for the impact of the Letter by the quantum award rendered in the Commercial Arbitration. The Court described it as a feature of s.68 challenges that "damages issues are over-analysed at the point of challenge before the supervisory court, having been under-analysed in the arbitration". The Court held that "matters of quantification and valuation frequently lead to the tribunal taking a course which is not that put forward by either party". That the tribunal must 'do the best it can' based on the material before it usually means coming to a decision that is neither party's case but somewhere between.

The Court found that both parties were aware that the tribunal might decide that the Commercial Arbitration award had 'preclusive' effect in terms of the damages claim. Both parties had the opportunity to (and did in fact) object. By finding that the 2014 Resolution was "deficient in some fashion – due to lack of due process [and] corruption", the tribunal did not 'invalidate' it, as the Czech Republic suggested, but rather concluded that it would not recognise the 2014 Resolution as having cancelled the Commercial Arbitration award for the purposes of its damages assessment. There was therefore no basis for the Czech Republic to allege that tribunal had exceeded its procedural powers under s.68(2).

The Court upheld one of the Czech Republic's challenges on the ground that the tribunal had failed to determine whether damages should be reduced to reflect an alleged assignment by Diag of 30% of the value of its claim to its former lawyer, holding that it did not "feel sufficiently confident as to the manner in which the tribunal would have determined the issue to be confident that there has been no substantial prejudice". In doing so, the Court considered whether the Czech Republic should be precluded from bringing the challenge by operation s.70(2) of the Act, which requires the challenging party to "exhaust any available arbitral process for review and any available recourse under s.57". Diag and Mr Stava had argued that the Czech Republic should have sought an "interpretation" of the Award under Article 37 of the UNCITRAL Rules or applied to the Court under s.57 of the Act, which provides a mechanism for correcting or making additional awards.

The Court endorsed the view that 'interpretation' under Article 37 of the UNCITRAL Rules involves clarification of the purpose of the award to resolve ambiguities in its wording; it does not however allow parties to revisit issues that the tribunal should have decided but did not. The Court also found against Diag and Mr Stava on the basis that: (i) under Article 1(3), only mandatory laws of the seat supplement the UNCITRAL Rules and s.57 is not a mandatory provision of the Act; and (ii) in any event, "Section 57 was not intended to be a ritual pre-cursor to any s.68 application".

Commentary

The decision provides useful guidance on the factors the Court will consider when faced with ss. 67 and 68 challenges where it is unclear whether the challenges have already been properly raised before the tribunal (as they must be under s.73). The important point is that challenges must have been raised (and maintained) in the arbitration, and must have made in a timely manner and sufficiently clearly so that the tribunal understands the precise nature of the challenge and what it is being asked to decide. An objection will only comprise an "objection" if a party makes a positive assertion which, in the case of s.67, denies the tribunal's jurisdiction. Mere non-admissions and reservations of rights are not sufficient, nor is raising a miscellany of objections at the outset and then pursuing the ones not maintained as grounds for challenge in the courts.

The Court also made some interesting comments regarding the style of written case presentation in arbitration, observing that the parties' pleaded assertions were "less starkly presented than they would be in statements of case served in this court" with the result that it had taken the court considerable time to identify the material relevant to the issues. The Court suggested that parties should have "at least a fraction of an eye" on clearly identifying points which may be significant if a challenge were to be made to the supervisory courts. Some might say that that approach is somewhat hopeful, given highlighting in written submissions that certain points may be the subject of a future challenge is perhaps unlikely to enamour the target audience. It would however mitigate the risk that s.73 operates to disqualify challenges.

The decision follows other challenges to awards that arguably illustrate some of the limitations of arbitration. While the fact pattern bears little resemblance to that in Nigeria v P&ID (which we reported on here), both cases demonstrate arbitration's potential susceptibility to outside influence, whether because of state interference in the arbitral process or because the arbitration itself is "a shell" as in Nigeria v P&ID (or even because the arbitration and award are fictions (as in Contax Partners Inc BVI v Kuwait Finance House & Ors [2024] EWHC 436)). These cautionary exempla are obviously (for very different reasons) exceptional. They do however show that, without the tribunal adopting a robust approach to its general duties under s.33 of the Act (see, for example, the tribunal's actions in the Commercial Arbitration) and without robust oversight from the supervisory court, arbitration can be vulnerable to abusive practices and parties and practitioner alike need to exercise vigilance in ensuring the integrity of the process.

A further point is that, if the Act is amended as proposed (as appears likely), there will be changes to how the English courts approach set aside applications under s.67 (albeit implemented through amendments to the English court rules of procedure). Under the amended regime, there will be three conditions to advancing a challenge under s.67: (i) a party may not raise an objection which was not raised before the tribunal (reflecting the current position under s.73); (ii) a party cannot adduce new evidence unless it could not, with reasonable diligence, have been put before the tribunal; and (iii) the court will not embark on a full hearing of the evidence and arguments (as is the current approach) unless in the interests of justice. As both parties raised various new arguments during the Czech Republic's appeal, it is possible that the proceedings (if perhaps not the decision) would have been quite different (and shorter) if conducted after the amendments come into force.

Finally, the Court handed down a further judgment in Czech Republic v Diag on 27 March 2024 (here), deciding certain issues left unresolved in the first judgment. In its further judgment, the Court held that the Czech Republic was barred from raising a new jurisdictional challenge to the Award on the ground that Mr Diag's dominant and effective nationality was not Swiss and he was therefore not a qualifying investor.