Reasonable diligence: The importance of identifying all grounds for challenging arbitral awards

Following an investment treaty arbitration, the Czech Republic (defendant in the arbitration) sought to challenge the substantial award on various grounds under ss. 67 (substantive jurisdiction) and 68 (serious irregularity) of the Arbitration Act 1996 (the Act). The Czech Republic subsequently sought to raise a new s.67 challenge by way of amending its amended particulars of claim. 

The Court found that the Czech Republic had lost its right to raise the new challenge to the award because at the time that it continued to participate in the arbitration proceedings, it could with reasonable diligence have discovered the grounds for the objection. The Court, therefore, refused leave to amend.

Section 73 of the Act

This deals with loss of the right to object and provides as follows:

1. “If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection—
    
   1. that the tribunal lacks substantive jurisdiction,
       
   2. that the proceedings have been improperly conducted,
       
   3. that there has been a failure to comply with the arbitration agreement or with any provision of this Part, or
       
   4. that there has been any other irregularity affecting the tribunal or the proceedings,

      he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.”

The background facts

The substantive award was dated 18 May 2022. On 8 March 2024, the Court handed down judgment dealing with various aspects of the challenges brought by the Czech Republic. Shortly before the hearing which resulted in that judgment, the Czech Republic sought to raise a new jurisdictional challenge and sought leave to amend its Amended Particulars of Claim.

The new ground of objection was that the second claimant, Mr Stava, did not have dominant or effective Swiss nationality and was not therefore a protected investor under the Switzerland-Czechoslovakia Investment Treaty (the Investment Treaty).

The Investment Treaty defines the concept of investor solely by reference to whether the investor is a national of a Contracting Party. The Court accepted that it was arguable that this concept falls to be interpreted by reference to the customary international law rule regarding dual nationals. For the purposes of the application, the Court found that the new ground of objection was at least arguable and that the objection raised would go to jurisdiction for the purposes of s.67 of the Act. The issue was whether the objection was barred by s.73(1).

The Commercial Court decision

Reasonable diligence

The burden was on the Czech Republic to establish that, at the time it took part or continued to take part in the arbitral proceedings, it did not know and could not with reasonable diligence have discovered the grounds for the objection it now sought permission to advance. 

Reasonable diligence may be considered in two distinct stages: (1) whether there was anything to put the applicant on notice of the need to investigate; and (2) what a reasonably diligent investigation would then reveal and whether the applicant could with reasonable diligence have discovered the relevant facts.

On the authorities:

• where a party neither believed nor had grounds to suspect the existence of particular facts, it would usually be wrong to find that it could with reasonable diligence have discovered those facts;
• an applicant was only required to do what an ordinary prudent person would do having regard to all the circumstances;
• the issue was whether the relevant matter could, not should, be discovered; 
• however, the concept of “reasonable diligence” carried with it the notion of a desire to know and, indeed, to investigate;
• furthermore, while the requirement of reasonable diligence was a continuing one, it became more exacting if there was a “trigger” ie an event or fact which ought reasonably to have led that party to undertake some form of investigation.

The Court dismissed an allegation that Mr Stava made dishonest or false statements as to his nationality (and specifically the extent of his links to Switzerland) in the arbitration. However, the Court was satisfied that there was enough material in the arbitration to alert the Czech Republic and its legal team that, if the argument had legal merit, it was worth investigating. Therefore, the proposed new ground of objection would be barred by s.73(1) and the Court refused permission to amend.

Time extension

In view of the Court’s finding on s.73(1), the issue of an extension of time for bringing the challenge did not arise. However, the Court addressed it as it had been fully argued. 

Firstly, would an extension of time have been required? The Court said yes. Only one arbitration claim form had been issued. S.70(3) requires an “application or appeal” to be brought within 28 days of the award. An attempt to raise a new ground of objection, as opposed to an amendment to an existing objection not amounting to a new ground of objection, involved an “application” for these purposes. 

Secondly, would the extension have been granted? The Court stated that it would on balance have been minded to grant the extension if the issue had been a live one. While the delay was considerable - a period of 18 months - the objection raised was at least arguable. This was a substantial award against the Czech Republic, and if there was an arguable case that it had been made without jurisdiction, the court of the seat would not lightly shut the challenge out.

Comment

The decision is a useful example of how the Court will approach the “reasonable diligence” proviso in s.73(1) and highlights the importance of arbitral parties remaining continuously alert to events or facts that ought reasonably to be investigated. It also interesting to note that while the Court will not lightly grant time extensions for challenges to arbitration awards, it would have done so in this case, if there was an arguable case that the award had been made without jurisdiction.