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 | Global law firm

Background

The choice is the newest in a protracted and procedurally advanced dispute. Briefly:

1. Within the early Nineteen Nineties, Conneco, which later turned Diag Human SE (Diag), and its final proprietor, Mr Josef Stava, had been engaged in negotiations with Czechoslovakia, the predecessor state to the Czech Republic, in relation to the availability of blood plasma.
2. Whereas the tender course of was ongoing, Diag started to produce blood plasma on to hospitals in Czechoslovakia below sure cooperation agreements.
3. In March 1992, the Czechoslovakian Minister of Well being issued a letter to Diag’s third social gathering enterprise companion elevating issues as to Diag’s ethics (the “Letter”). The companion ceased relations with Diag and the cooperation agreements between Diag and hospitals had been cancelled.
4. In September 1996, Diag and the Czech Republic’s Ministry of Well being (“MoH”) – Czechoslovakia having been dissolved in January 1993 – agreed to arbitrate Diag’s declare in relation to losses allegedly suffered on account of the Letter.
5. For the following twelve years (till August 2008), Diag and the MoH participated within the “Business Arbitration”. Later choices have discovered that the Czech Republic interfered with the Business Arbitration by: (i) utilizing the Czech safety and police providers to acquire data; (ii) threatening the arbitrators with legal prosecution; and (iii) assembly Diag’s former lawyer to extricate recommendation as to Diag’s place (finally resulting in his disbarment).
6. The tribunal held that the Letter was a breach of Czech competitors and business legal guidelines and had brought on Diag loss, awarding CZK 8.3 billion in damages. The tribunal criticised the MoH for unwarranted interference within the arbitral course of “by way of public questioning of their skilled professional opinion and an assault on their independence”. To make sure the arbitration’s integrity, the tribunal had needed to switch the file to a secure place overseas.
7. In September 2008, the MoH initiated a second arbitration to overview the Business Arbitration award (because the arbitration settlement allowed). Later choices have discovered that the Czech Republic additionally interfered with the second arbitration. Among the many measures employed had been: (i) appointing the chairman, regardless of the party-nominated arbitrators agreeing to a unique chairman; (ii) excluding Diag’s nominated arbitrator from deliberations, resulting in his resignation; (iii) appointing Diag’s alternative arbitrator (which means the MoH had appointed all three arbitrators); (iv) threatening and trying to affect two of the arbitrators; and (v) launching a legal investigation right into a Czech lawyer’s opinion advising that the Business Arbitration award was enforceable.
8. In July 2014, the tribunal within the second arbitration determined that the Business Arbitration proceedings had been discontinued (the “2014 Decision”). Diag’s makes an attempt to implement the Business Arbitration award abroad had been all unsuccessful on account of the 2014 Decision.
9. In December 2017, Diag and Mr Stava initiated a London-seated UNCITRAL arbitration below the bilateral funding treaty between the Czech Republic and the Swiss Confederation (the “BIT”).
10. On Might 2022, the tribunal held that the Czech Republic had breached its truthful and equitable remedy obligation within the BIT by: (i) issuing the Letter; (ii) “abusing its sovereign powers with the intention to intervene with the Business Arbitration”; and (iii) “manifestly failing to adjust to the precept of due course of through the overview proceedings”, thereby ‘tainting’ the 2014 Decision, with the outcome it was not entitled to recognition throughout the worldwide authorized order. The tribunal upheld the damages award within the Business Arbitration on the premise that it “noticed no cause to not defer to” its quantification of the loss attributable to the Letter and its recognition would compensate Diag and Mr Stava for damages suffered on account of the Czech Republic’s interference with the overview course of (the “Award”).
11. In June 2022, the Czech Republic utilized to put aside the Award on quite a lot of grounds below ss. 67 and 68 of the Arbitration Act 1996 (the “Act”).
12. Given the excessive variety of points put in play by the Czech Republic, the Court docket directed that it could decide three principal points, as follows:

1. whether or not, by advantage of s.73, the Czech Republic is barred from advancing a few of its objections below s.67 of the Act;
2. whether or not sure of the Czech Republic’s s.67 objections are correctly characterised as jurisdictional (versus being questions of admissibility); and
3. the deserves of the Czech Republic’s challenges below s.68 of the Act.

When will s.73 preclude a jurisdiction problem below ss.67 and 68?

The Czech Republic raised eleven s.67 points which Diag and Mr Stava argued had been barred below s.73.

Below s.67, a celebration could search to put aside an award on the premise that the tribunal doesn’t have substantive jurisdiction. S.67 offers {that a} “social gathering could lose the proper to object (see part 73) and the proper to use is topic to the restrictions in part 70(2) and (3)”.

S.73 says, briefly, that, if a celebration doesn’t problem jurisdiction “forthwith or inside such time as is allowed by the arbitration settlement or the tribunal or by any provision”, it can not elevate its objection later until: (i) it will possibly present that, on the time, it didn’t know and couldn’t with affordable diligence have found the grounds for the objection; or (ii) the tribunal extends the time for objections. S.73 applies equally to objections primarily based on improper conduct, failures to adjust to arbitration settlement and different irregularities affecting the tribunal or the proceedings (i.e. s.68 challenges, mentioned additional beneath). Below s.73(3), the tribunal is empowered to confess an objection later if it considers the delay to be justified.

To find out whether or not a s.67 objection is barred below s.73, the Court docket needed to contemplate a number of points, together with: (i) what’s an “objection” for the needs of ss. 67 and 73; (ii) what occurs if a degree is raised however not then pursued; and (iii) what occurs if a tribunal addresses an objection raised late with out explicitly extending time below s.73(3).

As to the primary concern, the Court docket regarded to the ideas in Nationwide Iranian Oil Co v Crescent Petroleum Co Worldwide Ltd [2022] EWHC 2641, specifically, that: (i) “every floor of problem to jurisdiction or of objection to jurisdiction should have been raised whether it is to be raised”; (ii) one can’t be prescriptive as to the which means of a “floor of objection”; it can often be apparent if a celebration is making an attempt to lift a brand new floor of objection on attraction; (iii) a broad method ought to be adopted – totally different, broader arguments and new proof don’t essentially quantity to a brand new objection (which might be barred below s.73); and (iv) the “substance of every floor of objection relied upon ought to have been communicated to the opposite social gathering (and the arbitral tribunal)”. It isn’t sufficient to say a problem; it should have been “distinctly put to the arbitral tribunal as denying jurisdiction”.

As to the second concern, the Court docket emphasised the necessity for events to make a “constructive assertion” in substance that goes to jurisdiction. Mere ‘placing to proof’, non-admissions and reservations of rights are inadequate to quantity to a jurisdiction objection. Because the Court docket defined, a jurisdictional objection is “supposed to allow the tribunal to establish and cope with the bottom, not merely to behave as a placeholder for some future listening to”. A celebration can not advance a jurisdiction objection on the s.67 stage if the “tribunal wouldn’t have recognized it was being requested to determine”. The Court docket additionally discovered that events should elevate and preserve an objection below s.67, in any other case a celebration may make jurisdictional factors on the outset and retailer up ones it doesn’t pursue within the arbitration for a s.67 problem.

As to the third concern, the Court docket cited “sturdy pragmatic concerns” favouring the view that, the place the tribunal addresses a late problem on its deserves in an award, having not expressly granted an extension, the Court docket ought to assume that both time had been prolonged or it didn’t should be as a result of the objection had been made earlier in time.

The Court docket dominated that six of the Czech Republic’s eleven s.67 challenges had been barred below s.73 as a result of they’d not been raised earlier than the tribunal or had been formulated too typically within the arbitration.

Negotiating the twilight – jurisdiction and admissibility

Diag and Mr Stava argued that most of the Czech Republic’s challenges below s.67 ought to be correctly characterised as questions of admissibility relatively than jurisdictional objections.

We now have beforehand reported on the now well-established distinction in English legislation between jurisdiction and admissibility (here). Merely put:

• “Problems with jurisdiction go to the existence or in any other case of a tribunal’s energy to adjudge the deserves of a dispute; problems with admissibility go as to if the tribunal will train that energy in relation to the claims submitted to it”;
• The “tribunal versus declare” check is commonly utilized – is the objecting social gathering taking intention on the tribunal (jurisdiction) or at a specific declare (admissibility)?
• If a matter pertains to admissibility, the tribunal’s choice is last (in the identical method because the tribunal’s choice on different deserves of the arbitration is last). If a matter pertains to jurisdiction, it might be topic to judicial recourse below s.67 of the Act.

Issues which can be ‘jurisdictional’ for the needs of s.67 are set out at s.30(1) and comprise: (i) whether or not there’s a legitimate arbitration settlement; (ii) whether or not the tribunal is correctly constituted; and (iii) what issues have been submitted to arbitration in accordance with the arbitration settlement.

Drawing a transparent distinction between jurisdiction and admissibility in funding treaty arbitrations is mostly harder than in business arbitrations; Jan Paulsson memorably in contrast it to making an attempt to understand the divide between evening and day in twilight. That’s primarily due to the totally different method by which the arbitration settlement comes into being. In investor-state disputes, the treaty between two states incorporates a suggestion to non-parties (i.e. qualifying traders) to arbitrate sure disputes in opposition to the opposite state, which the investor then accepts by initiating the arbitration. The treaty contains a suggestion and the investor’s declare is acceptance. The Court docket due to this fact has to interpret the phrases of the state’s provide of arbitration within the treaty with the intention to decide to whom the provide is made and to which disputes it applies. The query is whether or not the events to the actual arbitration have agreed to arbitrate the actual dispute in query. Points which can be “hard-edged” and have a binary reply are more likely to be jurisdictional for the aim of s.30(1) of the Act whereas points which “allow a spread of responses relatively than an all or nothing impact are much less more likely to be jurisdictional”.

The Court docket discovered that the Czech Republic’s provide within the BIT was broad, encompassing all “disputes with respect to investments”, and located that almost all of the Czech Republic’s objections had been jurisdictional in nature.

When can it’s stated {that a} tribunal has didn’t cope with the entire points?

The Czech Republic introduced 4 challenges below s.68 of the Act, contending that the tribunal had didn’t determine sure points when assessing damages and made findings on grounds that had not been argued.

Below s.68, a celebration could problem an award on the bottom of “critical irregularity affecting the tribunal, the proceedings or the award”. Critical irregularity means (amongst different issues): (i) a tribunal’s failure to adjust to its duties below s.33; (ii) the tribunal exceeding its energy (apart from jurisdictionally); and (iii) the tribunal’s failure to cope with all the problems put to it. As with s.67, a celebration could forfeit the proper to object below s.73.

Critical irregularity objections are historically restricted to the “excessive”, high-threshold instances and give attention to the tenets of due course of, relatively than the correctness of the choice. Furthermore, evidencing critical irregularity shouldn’t be in itself ample. The irregularity should trigger substantial (i.e. greater than some) injustice; usually, that implies that the result of the arbitration may need been totally different if the irregularity had not occurred.

For challenges on the premise of tribunal’s failure to cope with all the problems put to it (s.68(2)(d), the Court docket needed to contemplate: (i) what’s an ‘concern’; (ii) whether or not the problem had been ‘put to’ the arbitrators; and (iii) in that case, whether or not the arbitrators had didn’t deal it. There is a vital distinction between points (on one hand) and arguments, factors, or traces of reasoning (on the opposite). To be an “concern”, the matter should be so basic to the choice within the award that its willpower may have affected the result. To be thought of ‘put to’ the arbitrators, the problem should have been drawn to the tribunal’s consideration in the identical phrases as within the s.68(2) objection, decided holistically in view of all of the events’ pleadings and written and oral submissions. Failure to cope with a problem means simply that; a problem shouldn’t be viable if the problem is handled “badly or indifferently”. That query comes all the way down to a good, business and commonsense studying of the award in its correct context.

Making use of these ideas, the Court docket upheld one of many Czech Republic’s challenges on the bottom that the tribunal had didn’t cope with a problem put to it, however rejected the others on the premise that the tribunal had sufficiently addressed the problems in reaching its conclusions.

The Court docket dismissed the Czech Republic’s a problem to the tribunal’s discovering that Diag and Mr Stava ought to be compensated for the impression of the Letter by the quantum award rendered within the Business Arbitration. The Court docket described it as a characteristic of s.68 challenges that “damages points are over-analysed on the level of problem earlier than the supervisory courtroom, having been under-analysed within the arbitration”. The Court docket held that “issues of quantification and valuation incessantly result in the tribunal taking a course which isn’t that put ahead by both social gathering”. That the tribunal should ‘do the most effective it will possibly’ primarily based on the fabric earlier than it often means coming to a choice that’s neither social gathering’s case however someplace between.

The Court docket discovered that each events had been conscious that the tribunal would possibly determine that the Business Arbitration award had ‘preclusive’ impact by way of the damages declare. Each events had the chance to (and did the truth is) object. By discovering that the 2014 Decision was “poor in some vogue – attributable to lack of due course of [and] corruption”, the tribunal didn’t ‘invalidate’ it, because the Czech Republic urged, however relatively concluded that it could not recognise the 2014 Decision as having cancelled the Business Arbitration award for the needs of its damages evaluation. There was due to this fact no foundation for the Czech Republic to allege that tribunal had exceeded its procedural powers below s.68(2).

The Court docket upheld one of many Czech Republic’s challenges on the bottom that the tribunal had failed to find out whether or not damages ought to be decreased to mirror an alleged task by Diag of 30% of the worth of its declare to its former lawyer, holding that it didn’t “really feel sufficiently assured as to the way by which the tribunal would have decided the problem to be assured that there was no substantial prejudice”. In doing so, the Court docket thought of whether or not the Czech Republic ought to be precluded from bringing the problem by operation s.70(2) of the Act, which requires the difficult social gathering to “exhaust any accessible arbitral course of for overview and any accessible recourse below s.57”. Diag and Mr Stava had argued that the Czech Republic ought to have sought an “interpretation” of the Award below Article 37 of the UNCITRAL Guidelines or utilized to the Court docket below s.57 of the Act, which offers a mechanism for correcting or making extra awards.

The Court docket endorsed the view that ‘interpretation’ below Article 37 of the UNCITRAL Guidelines includes clarification of the aim of the award to resolve ambiguities in its wording; it doesn’t nonetheless enable events to revisit points that the tribunal ought to have determined however didn’t. The Court docket additionally discovered in opposition to Diag and Mr Stava on the premise that: (i) below Article 1(3), solely necessary legal guidelines of the seat complement the UNCITRAL Guidelines and s.57 shouldn’t be a compulsory provision of the Act; and (ii) in any occasion, “Part 57 was not supposed to be a ritual pre-cursor to any s.68 software”.

Commentary

The choice offers helpful steerage on the components the Court docket will contemplate when confronted with ss. 67 and 68 challenges the place it’s unclear whether or not the challenges have already been correctly raised earlier than the tribunal (as they should be below s.73). The necessary level is that challenges should have been raised (and maintained) within the arbitration, and should have made in a well timed method and sufficiently clearly in order that the tribunal understands the exact nature of the problem and what it’s being requested to determine. An objection will solely comprise an “objection” if a celebration makes a constructive assertion which, within the case of s.67, denies the tribunal’s jurisdiction. Mere non-admissions and reservations of rights will not be ample, neither is elevating a miscellany of objections on the outset after which pursuing those not maintained as grounds for problem within the courts.

The Court docket additionally made some attention-grabbing feedback relating to the fashion of written case presentation in arbitration, observing that the events’ pleaded assertions had been “much less starkly offered than they’d be in statements of case served on this courtroom” with the outcome that it had taken the courtroom appreciable time to establish the fabric related to the problems. The Court docket urged that events ought to have “at the least a fraction of an eye fixed” on clearly figuring out factors which can be vital if a problem had been to be made to the supervisory courts. Some would possibly say that that method is considerably hopeful, given highlighting in written submissions that sure factors will be the topic of a future problem is maybe unlikely to enamour the audience. It might nonetheless mitigate the danger that s.73 operates to disqualify challenges.

The choice follows different challenges to awards that arguably illustrate among the limitations of arbitration. Whereas the actual fact sample bears little resemblance to that in Nigeria v P&ID (which we reported on here), each instances exhibit arbitration’s potential susceptibility to outdoors affect, whether or not due to state interference within the arbitral course of or as a result of the arbitration itself is “a shell” as in Nigeria v P&ID (and even as a result of the arbitration and award are fictions (as in Contax Companions Inc BVI v Kuwait Finance Home & Ors [2024] EWHC 436)). These cautionary exempla are clearly (for very totally different causes) distinctive. They do nonetheless present that, with out the tribunal adopting a strong method to its normal duties below s.33 of the Act (see, for instance, the tribunal’s actions within the Business Arbitration) and with out sturdy oversight from the supervisory courtroom, arbitration may be weak to abusive practices and events and practitioner alike have to train vigilance in guaranteeing the integrity of the method.

An additional level is that, if the Act is amended as proposed (as seems possible), there will likely be modifications to how the English courts method put aside functions below s.67 (albeit applied by way of amendments to the English courtroom guidelines of process). Below the amended regime, there will likely be three situations to advancing a problem below s.67: (i) a celebration could not elevate an objection which was not raised earlier than the tribunal (reflecting the present place below s.73); (ii) a celebration can not adduce new proof until it couldn’t, with affordable diligence, have been put earlier than the tribunal; and (iii) the courtroom is not going to embark on a full listening to of the proof and arguments (as is the present method) until within the pursuits of justice. As each events raised varied new arguments through the Czech Republic’s attraction, it’s attainable that the proceedings (if maybe not the choice) would have been fairly totally different (and shorter) if performed after the amendments come into drive.

Lastly, the Court docket handed down an extra judgment in Czech Republic v Diag on 27 March 2024 (here), deciding sure points left unresolved within the first judgment. In its additional judgment, the Court docket held that the Czech Republic was barred from elevating a brand new jurisdictional problem to the Award on the bottom that Mr Diag’s dominant and efficient nationality was not Swiss and he was due to this fact not a qualifying investor.

Thanks to Jasmine Shepard, Trainee Solicitor, for contributing in direction of this text.