Court of Appeal finds claimant in arbitration not “investor” under investment treaty

The Czech Republic -v- Diag Human SE & another [2025] EWCA Civ 588

This is a lengthy and detailed judgment from the Court of Appeal, dealing with three appeals and various challenges under s.67 and s.68 of the Arbitration Act 1996 to an investment treaty award. 

The judgment is the latest in a long-running dispute between the parties which has given rise to the analysis of many points of international law by the English courts. The Court of Appeal has dismissed most of the challenges but allowed the appeal on the point that one of the claimants in the investment treaty arbitration proceedings did not qualify as an “investor” for the purposes of the relevant investment treaty.

The background facts

The underlying dispute related to a bilateral investment treaty (BIT) between Czechoslovakia, subsequently the Czech Republic (CZR), and Switzerland that came into force in August 1991. 

In very brief terms, in the late 1980s the Czech Ministry of Health ran a tender process for the supply of blood plasma to local hospitals. Conneco, a Czech company, was originally the only participant in the tender process. Conneco was ultimately owned by a Swiss company, Diag AG, whose ultimate owner, Mr Joseph Stava, was also Swiss. Mr Stava qualified as an “investor” under the BIT.

Subsequently, in 1992, the new Czech Minister of Health took certain actions that resulted in Conneco’s tender bid being rejected and its ongoing cooperation agreements regarding the supply of blood plasma with hospitals and third-party business partners being cancelled.

Attempts between Conneco and the Ministry of Health to settle their disputes failed. In 1996, they entered into an arbitration agreement, pursuant to which they would arbitrate their disputes (Commercial Arbitration). 

In 2001, Conneco merged with another company to form Diag SE (Diag), a Liechtenstein company. Diag was ultimately wholly owned by Mr Stava.

In 2003, following a partial interim award in favour of Diag, CZR issued criminal investigations in relation to evidence submitted in the Commercial Arbitration and in relation to Mr Stava. Some of the material obtained through these investigations was deployed by the Ministry of Health in the Commercial Arbitration. 

In August 2008, the Commercial Arbitration tribunal issued its final award (2008 Award), awarding Diag additional damages of about CZK 8.3 billion. The tribunal criticised the Ministry of Health for unjustified interference in the tribunal’s decisions and for attacking its independence. 

Both parties then initiated a review of the 2008 Award (Review) with each party appointing an arbitrator and the Prague 6 District Court appointing the presiding arbitrator pursuant to an application by the Ministry of Health. The Review culminated in a resolution (2014 Resolution) declaring that the arbitral proceedings were discontinued. Mr Stava and Diag alleged that CZR had corruptly interfered in the Review process.

Diag tried to enforce the 2008 Award in a number of foreign jurisdictions but was unsuccessful, largely due to the review process and 2014 Resolution. Diag and Mr Stava then commenced UNCITRAL arbitration proceedings, seated in London, against CZR under the BIT. 

The BIT Award was issued in May 2022. The tribunal found that CZR had breached the BIT in a number of ways and upheld the damages (approximately US$350 million plus interest) awarded in the Commercial Arbitration.

CZR applied to the English Court to set aside the BIT Award on a number of grounds.

The Commercial Court decision

CZR raised eleven issues as part of its challenge under s.67 (substantive jurisdiction) Arbitration Act 1996 (AA 1996). Diag and Mr Stava argued that CZR had lost the right to make these objections pursuant to s.73 AA 1996 because it could and should have raised those objections in the arbitration proceedings. S.73 imposes a “with reasonable diligence” requirement on a party wishing to argue that it did not and could not have been aware of the relevant objection at the time of the arbitration proceedings.

The Court dismissed the argument that many of the challenges were not jurisdictional in nature and could not be brought under s.67. Nonetheless, the Court found that many of the jurisdictional challenges were barred either because they had not been raised before the tribunal or because they had been formulated too generally in the arbitration proceedings. The Court remitted one issue to the tribunal for its consideration. The remaining jurisdictional challenges that were not barred were all dismissed.

The remaining challenges by CZR were brought under s.68 AA 1996 (serious irregularity amounting to substantial injustice) on the basis that the tribunal had allegedly failed to address certain issues when assessing damages and had made findings based on grounds that had not been argued. The Court upheld only one of these challenges.

The Court of Appeal decision

The first issue for the Court of Appeal was whether the Commercial Court had been right to find that three of the jurisdictional challenges raised by CZR were not barred by s.73. It dismissed the appeal on this point. 

One interesting question that arose in this regard was the position where a jurisdictional objection is brought before the tribunal out of time, but nonetheless the tribunal rules on it in its award on the merits, and no reference is made to the fact that the objection was brought out of time. 

S.31(1) and (2) AA 1996 set out when a party wishing to challenge the tribunal’s jurisdiction must do so. However, s.31(3) permits a tribunal to admit a late objection if it considers the delay to be justified.

The Court of Appeal confirmed that a party wishing to take such a timing point should do so before the tribunal, otherwise s.73 precludes it from making that argument before the Court. In this case, the Court of Appeal decided that CZR’s objections were made within the time allowed by the tribunal and the tribunal had admitted the objections within the meaning of s.31(3). A party that did not raise an objection within the time specified in s.31 was not precluded from relying on the point if it established that it did not know and could not with reasonable diligence have discovered the grounds for the objection until some time later. That was not, however, the case here.

The Court of Appeal then dismissed the appeal relating to the Commercial Court’s finding that one of CZR’s challenges was not jurisdictional in nature. 

The final issue for the Court of Appeal related to Diag’s status as an “investor” for the purposes of the BIT. CZR argued that as a result of the placing of Diag’s shares in a trust in 2011, Diag ceased to be controlled by Mr Stava, with the consequence that it no longer fell within the definition of “investor”.

The definition of “investor” in Article 1(1) of the BIT included:

"(b) legal entities, including companies, corporations, business associations and other organizations, which are constituted or otherwise duly organized under the law of that Contracting Party and have their seat, together with real economic activities, in the territory of that same Contracting Party;

(c) legal entities established under the law of any country which are, directly or indirectly, controlled by nationals of that Contracting Party or by legal entities having their seat, together with real economic activities, in the territory of that Contracting Party."

Diag was a Liechtenstein company and could only qualify as an “investor” if it came under subsection (c). The Commercial Court had held that de jure control was not required because it was a matter of form. Rather, what was required was de facto control, which was a matter of substance. 

The Court of Appeal allowed the appeal on this point. Having considered investment treaty jurisprudence, it concluded that to qualify as an investor under Article 1(1)(c), a third country legal entity must be controlled de jure either by a Swiss national or by a legal entity which, if it were the investor, would qualify under subsection (b). Therefore, the award against Diag was set aside.

Among other things, the Court of Appeal highlighted the importance of certainty and predictability. A broad test of de facto control was vague and unmanageable. The Court also stated that even if it were wrong and de facto control were sufficient in certain circumstances, Mr Stava did not have de facto control of Diag in a sense necessary to qualify as an investor for these purposes.

Comment

The award in favour of Mr Stava stands, notwithstanding the ruling against Diag. 

This is an important decision for those participating in investment treaty arbitrations and should be reviewed closely by those dealing with similar issues including jurisdiction challenges.