Czech Republic draws blood after English High Court finds serious irregularity in investment treaty arbitration award

The award in the investment treaty claim

The case concerns a long-standing dispute regarding the distribution and processing of blood plasma derivatives in the Czech Republic and Slovakia. As part of its latest instalment, the Czech Republic raised various challenges to a tribunal’s award in an investment treaty claim rendered on 18 May 2022 (the BIT Award). The High Court handed down its judgment on 8 March 2024.

The BIT Award was rendered in a London-seated arbitration under the UNCITRAL Rules under the bilateral investment treaty between the Czech and Slovak Federal Republic and Switzerland (the BIT).

In the BIT Award, the tribunal found that the Czech Republic had breached the BIT, including by breaching its fair and equitable treatment obligation and abusing its sovereign powers, by trying to interfere with a domestic arbitration involving the same parties to the BIT Award. The tribunal also declared that the award rendered in the prior domestic arbitration remained valid and was appropriate compensation to the claimants for the treaty breaches by the Czech Republic.

The Czech Republic’s challenges to the BIT Award

The Czech Republic challenged the BIT Award in the English court alleging a lack of jurisdiction and/or a serious procedural irregularity under ss.67 and 68 of the Arbitration Act 1996 (the Act). The High Court handed down its judgement on 8 March 2024.

S.73 of the Act bars several jurisdictional challenges raised by Czech Republic

One of the key issues before the court was whether various challenges to the tribunal’s jurisdiction were barred by operation of s.73 of the Act. The effect of s.73 is that if a party takes part in arbitral proceedings without raising an objection regarding an irregularity affecting the tribunal or the proceedings, they may not raise that objection subsequently. That is unless, at the time of their participation, they did not know and could not with reasonable diligence have discovered the grounds for the objection.

On the issue of what a ground of objection is, and when it is made, the court emphasised the importance of parties positively asserting a particularised jurisdictional challenge. Merely putting the claimant to proof on jurisdiction, or raising broad categories of jurisdictional objection, will not be sufficient to give free rein for any jurisdictional challenge at the s.67 stage.

Moreover, parties are required to raise and maintain a ground of objection under s.67, as opposed to merely raising but not pursuing it. 

Finally, the court cited “strong pragmatic reasons” for endorsing the view that where the tribunal addresses a late jurisdictional challenge on its merits in an award, despite not expressly granting an extension of time, the court should accept that time was either extended or that the objection was taken in time.

Applying these principles, the court ruled that s.73 barred five of the 11 s.67 challenges to the BIT Award, as they had either not been raised with the tribunal or were formulated too generally.

The court handed down a further judgment on 27 March 2024, deciding issues left unresolved in the first judgment. In its second judgment, the court held that the Czech Republic was barred from raising a new jurisdictional challenge to the BIT award based on the multiple nationalities of one of the claimants. Specifically, the Czech Republic argued that the claimant was not a protected investor under the BIT because, in order to claim under the treaty, his dominant and effective nationality needed to be Swiss, and it was not. The court held that this objection was barred under s.73 because there was “more than enough material” to alert the Czech Republic of the claimant’s multiple nationalities. Whether such an objection would have succeeded, if raised in a timely fashion, is an unsettled question under international law.

Jurisdiction vs admissibility

Another key issue before the court was whether some of the Czech Republic’s challenges were not in fact jurisdictional objections, but points going to admissibility, which would fall outside the scope of s.67 of the Act. 

The court recited the familiar principle that s.68 challenges are typically reserved for “extreme” cases where, but for the irregularity, the outcome of the arbitration might well have been different. Following this reasoning, the court upheld one of the Czech Republic’s challenges on the basis that the tribunal had failed to deal with an issue put to it, but rejected two others, finding that the tribunal had otherwise adequately addressed the Czech Republic’s arguments in reaching its conclusion in the BIT Award.

The court also considered whether the Czech Republic should be barred from bringing its s.68 challenges pursuant to 70(2) of the Act (which requires a challenging party to first “exhaust any available arbitral process for review and any available recourse under s.57”). This was on the basis that the Czech Republic had not sought an interpretation of the BIT Award under art. 37 of the UNCITRAL Rules or made an application under s.57 (which provides a mechanism for correcting awards or making additional awards, but which is disapplied by art. 1(3) of the UNCITRAL Rules) before bringing this challenge. The court found that s.70(2) of the Act did not prevent the Czech Republic from challenging the award. It added that s.57 “was not intended to be a ritual pre-cursor to any [s.68] application”.

The court reserved judgment on one further s.68 challenge, concluding that the tribunal had failed to deal with an issue of quantum (in respect of one of the claimants), but it was “not presently persuaded” that this had caused substantial injustice to the Czech Republic.

Comment

This judgement provides instructive guidance on the English court’s approach to challenges under ss.67 and 68 of the Act, especially when the challenges are made to an award arising from an investment treaty. 

It is worth bearing in mind that the Law Commission has proposed changes to the legislative regime on jurisdictional challenges, which are currently making their way through Parliament. If the changes are passed, a party will be subject to three restrictions on advancing a s.67 claim (discussed here). First, the party may not raise an objection to jurisdiction which was not raised before the tribunal. Second, the court will not hear new evidence unless it could not with reasonable diligence have been put before the tribunal. Third, the court will not rehear evidence already heard by the tribunal unless this would be in the interests of justice. Notably, the court in this case applied a similar reasoning in rejecting five of the Czech Republic’s challenges on the basis that the arguments were either insufficiently made or not raised in the arbitral proceedings. The case thereby illustrates that the reforms to s.67 may change practice less than may be anticipated.

In respect of s.68, the Law Commission has proposed no additional reforms to the current practice.

Judgment: The Czech Republic v Diag Human SE & Anor & The Czech Republic v Diag Human SE & Anor (Amendment)