A recent judgment in The Czech Republic v Diag Human SE & Anor [2024] EWHC 2102 (Comm) brought an end to a long-running series of disputes which date back to the 1990s.
The judgment, handed down on 9 August 2024, saw that the investors Diag Human SE and Josef Stava were successful in resisting the challenge to the arbitration award, brought by the Czech Republic. Enforcement of the c.$750 million award should now be straightforward.
Brief Background
Diag Human SE is a life-sciences company founded by a Swiss-Czech entrepreneur Josef Šťáva. The company entered into a commercial agreement to supply Czechoslovakia (as it then was) with blood plasma.
The Czechoslovakian minister for health terminated the agreement in 1992 by a letter now known as the ‘Bojar letter’. The termination was later held to be a misuse of power.
Diag Human took its dispute to arbitration in 1996, invoking the Czech Republic-Switzerland Bilateral Investment Treaty of 1990 (BIT), and began a second arbitration in 2008.
The proceedings levelled criticism at the Czech state for improper conduct and attempted interference with the impartiality of the arbitral process.
In 2022, a three-person Tribunal constituted under the Swiss-Czech bilateral investment treaty, unanimously found that the Czech Republic had abused its sovereign powers and breached its treaty obligations, and it had interfered in the arbitral review process. The award was handed down on 18 May 2022 (the 2022 Award).
The Tribunal’s award of damages now stands at around US$750 million, taking into account the accrued interest.
The Czech Republic challenged the 2022 Award on multiple grounds under s.67 (substantive jurisdiction) and s.68 (serious irregularity) Arbitration Act 1996. The Commercial Court heard the first of those challenges in January – February 2024, with Foxton J handing down judgment in March 2024.
A further two-week trial took place in the Commercial Court in June – July 2024 for the remaining issues.
The August Decision
The judgment handed down on 9 August 2024 (the August Decision) addressed three surviving jurisdictional s.67 challenges:
- The “No Investment” objection: The Czech Republic alleged that the investments did not qualify for protection under the Treaty
- The “Ratione Temporis” objection: the dispute arose before the Treaty came into force.
- The objection that Diag Human is not a protected investor: The Czech Republic contented that Diag Human SE was not controlled by a Swiss national after June 2011 and could not therefore benefit from the protection of the Treaty.
The August Decision also considered a residual issue in relation to one of the s.68 challenges which was left open in earlier judgment in March 2024.
The No Investment Objection
The Czech Republic’s “No Investment” objection involved three different contentions:
- There was no (or no sufficient) contribution by the investor.
- An investment must involve the assumption of investment risk, and that commercial or sovereign risk of the kind which arise in commercial trading, is not sufficient.
- The matters relied upon to constitute the protected investment are simply too insubstantial in their content, value and duration to meet the threshold for constituting a protected investment under the BIT.
The Court approached this issue by considering the substance of the investment established before it.
The main question was: What constitutes an investment in international law, specifically under the Swiss–Czech treaty?
The judge found that claimants in a BIT claim will normally be required to do more than simply point to ownership or control of an asset to establish the existence of a protected investment.
He found that the investors held a number of qualifying investments in the Czech Republic. The Judge pointed out the tension in the Czech Republic’s argument that on the one hand there was no qualifying investment and, on the other, it made considerable efforts to undermine those investments in 1992.
The objection was rejected.
The Ratione Temporae Objection
The ratione temporae objection relates to the timing of the arbitration.
The question in relation to this objection was: Was the tribunal, in substance, being asked to take jurisdiction over a dispute which came into existence before the treaty came into force?
The Czech Republic argued that the Tribunal did not have jurisdiction to determine a dispute which was in existence before the BIT came into force on 7 August 1991.
The Court held that the Bojar Letter dispute:
- had a different subject-matter to any disputes concerning the 1990 and 1991 tenders;
- had a different “real cause”, and rested on essentially different facts (the sending of the Bojar Letter);
- was capable of being resolved independently of any disputes regarding the 1990 and 1991 tenders; and
- targeted different conduct to any dispute about the 1990 and 1991 tenders.
For those reasons, the Czech Republic’s ratione temporae challenge was dismissed.
The Qualifying Investor Objection
Described as “the most important and most difficult issue in this arbitration challenge” was the question that was central to this objection: Did the placing of the shares in Diag SE in the Koruna Trust in June 2011 have the effect that it ceased to be a Swiss company for the purposes of the BIT? If so it would be ineligible to accept the standing offer to arbitrate investment disputes contained in Article 9 of the BIT when the Request for Arbitration was served.
The judge accepted the investor’s contention that “control” for the purposes of the treaty encompasses “de facto” control, and that Mr Stava had “de facto” control of Diag Human SE. As such, the company qualified for the protection of the Swiss–Czech treaty.
This objection was also dismissed.
Conclusion
The Commercial Court dismissed all of the Czech Republic’s challenges and supported the Tribunal’s findings.
Diag Human SE and Mr Stava will now seek to enforce the award without restrictions.
