09/08/2024

Diag Human SE and Josef Stava successfully resist challenge to US$750 million investment treaty award against Czech Republic

The Commercial Court has handed down judgment today in the highly anticipated challenge to an investment treaty award against the Czech Republic under ss.67 and 68 of the Arbitration Act 1996. A team of Twenty Essex barristers – Lord Verdirame KC, Philip Riches KC, Dr Kate Parlett, Sam Goodman, Dr Jonathan Ketcheson and Isabelle Winstanley – acted for the successful investors, Diag Human SE and Josef Stava, resisting the challenge. This case was listed in The Lawyer Top 20 cases for 2024.

Background

The Czech Republic sought to overturn a 2022 BIT award against it in the sum of c.US$750 million. This is a long-running dispute relating to wrongdoing by a former Czech health minister in the early 1990s and involving interference in and corruption of a commercial arbitration by the Czech state, including in the arbitral review process. Twenty Essex barristers Lord Verdirame KC, Philip Riches KC and Jonathan Ketcheson successfully represented Diag Human and Mr Stava in the BIT arbitration, in which it was held that the Czech Republic had in the commercial arbitration abused its sovereign powers and breached its treaty obligations, including as a result of its egregious interference in the arbitral review process.

The Czech Republic brought a challenge to the BIT award on multiple grounds under s.67 and s.68. A two-week Commercial Court hearing took place in January–February 2024, before Mr Justice Foxton. It was concerned primarily with the s.68 challenge and whether s.73 of the Act precluded any of the s.67 challenges. Judgment was given on those issues in March 2024: [2024] EWHC 503 (Comm). Foxton J found that the majority of challenges which the Czech Republic sought to pursue were barred by s.73 of the Act. He remitted one narrow issue to the tribunal for its consideration.

Today’s judgment

A further two-week trial took place in June–July 2024 on the remaining three s.67 challenges and one further s.68 challenge, leading to the judgment of Foxton J handed down today. On all of the challenges, Foxton J found in favour of the defendant investors for whom the Twenty Essex team acted.

• The Czech Republic brought a s.67 challenge on the ground that the investors had no protected investment. Foxton J rejected this challenge. He noted the interesting distinction between jurisdiction challenges to commercial arbitration awards, which generally offer a binary outcome, and those to investment treaty awards, where a granular evidential analysis of the underlying facts is often required. For example (and as here), if the jurisdictional challenge concerns the existence of an investment qualifying for treaty protection, questions may arise as to what constituted a contribution, what assets were or were not owned or controlled by an investor, and when they came into existence. The judge noted that the supervisory court would not ordinarily expect to be required to undertake this kind of exercise on a s.67 challenge. The judge then grappled with the question of what constitutes an investment in international law, and specifically under the Swiss–Czech treaty, and 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, and that the concepts of contribution, duration and risk are of assistance in this regard. He found, on the facts, that the investors did hold a number of qualifying investments in the Czech Republic, and noted in particular the disconnect between the Czech Republic’s contention in its challenge that there was no qualifying investment and, in contrast, the lengths it went to in efforts to undermine those investments in 1992.
• The Czech Republic brought a s.67 challenge on the ground that the dispute arising from the Czech health minister’s letter (the so-called Bojar Letter) pre-dated the entry into force of the treaty and was therefore outside the scope of the tribunal’s jurisdiction ratione temporis. Foxton J rejected this challenge, accepting the investors’ arguments on the interpretation of the treaty and that the dispute relating to the Bojar Letter was a new dispute within the tribunal’s temporal jurisdiction.
• The Czech Republic brought a s.67 challenge to the jurisdiction of the tribunal over Diag Human SE, on the ground that it was not controlled by a Swiss national after June 2011 because it was then placed in a Liechtenstein trust and under the legal control of a trustee. Foxton J rejected this challenge, accepting 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 – and therefore Diag Human SE qualified for the protection of the Swiss–Czech treaty. He did not consider the existence of restrictions on Mr Stava’s influence over distribution of the fruits of any investment by Diag Human SE to be definitive. Those with majority ownership or control of a legal entity may find their ability to distribute the proceeds of its activities curtailed for any number of reasons: contractual commitments, legal obligations arising from the interest of creditors, the presence of minority preference shares, and so on. The key factors were rather that Mr Stava was materially and determinatively influential in the conduct of Diag Human SE’s business: the trustee was dependent upon Mr Stava to conduct the company’s business; it was Mr Stava who was the source of the value in Diag Human SE; its success or failure would have materially financially affected him and his family, not the trustee; and it was Mr Stava who had taken the financial risk, with the trustee in contrast not exposed to a risk of loss.
• A final point addressed by Mr Justice Foxton concerned the remainder of a determination on a s.68 challenge that he had held over from his March judgment, concerning whether substantial injustice had resulted from the tribunal’s failure to deal with a point (in short, whether Mr Stava’s entitlement to sums should be reduced to reflect his percentage shareholding at the time of the 1992 breach by the Czech Republic). On the basis of his findings in this judgment, he concluded that it had not, albeit noting that an existing appeal on foot from his earlier judgment may result, if successful for the Czech Republic, in that point coming into issue once again.

The judgment represents an extensive foray into what is, for the English Commercial Court, new ground on many points of international law. It provides well-reasoned, extensive and helpful guidance for those involved in challenges to investment treaty awards from English-seated tribunals.

The judgment also takes the investors considerably closer to final resolution of their long battle to obtain justice and compensation for wrongs suffered over 30 years ago and hopefully draws the parties close to the conclusion of this extraordinary dispute.

The Twenty Essex team was instructed by Mishcon de Reya LLP.