UK Court of Appeal partially sets aside award in Diag Human Case: Diag SE not a qualifying investor under the Swiss-Czech Republic BIT

Introduction

The UK Court of Appeal has partially upheld the Czech Republic's jurisdictional challenge in Czech Republic v Diag Human SE [2025] EWCA Civ 588. The judgment, delivered by Lord Justice Males, Lord Justice Popplewell, and Lady Justice Andrews, addresses complex jurisdictional issues under the Arbitration Act 1996 (the Act) and the interpretation of the bilateral investment treaty (BIT) between Switzerland and the Czech Republic. The award was partially set aside because Diag Human SE (Diag SE) was found not to be under de jure control by a Swiss national, a necessary requirement for jurisdiction under Article 1(1)(c) of the BIT. The decision also explores the requirements of s73 of the Act and its interplay with s31 and analyses the distinction between standing and jurisdiction in the context of BIT claims.

Background

The dispute between the Czech Republic and Diag SE, a Liechtenstein-based company, dates back to the early 1990s. Diag SE, originally Conneco a.s., was involved in the blood plasma industry in Czechoslovakia. Mr Stava, a Czech and Swiss national, was the legal and beneficial owner of the shares in Diag SE. The company entered into an agreement with Danish pharmaceutical company, Novo Nordisk, for the export and processing of blood plasma and submitted several tenders to the Czech government. It faced significant challenges and incidents, resulting in a police investigation in the Czech Republic. In 1992 the Czech Minister of Health wrote to Novo Nordisk expressing reservations about the company's business ethics, prompting the termination of its cooperation agreements with hospitals and Novo Nordisk. Protracted arbitration proceedings culminated in a 2008 arbitral award in Diag SE's favour (the 2008 Award), which the Czech Republic contested. The Ministry of Health initiated a review of the 2008 Award (the Review), a process that continued for over six years.

In May-June 2011, Mr Stava transferred his shares in Diag SE to a Liechtenstein discretionary trust under a complex transaction with Lawbrook Limited to distance himself from Diag SE and facilitate settlement (the 2011 Arrangements). In 2014 the Review declared that the original arbitral proceedings were terminated and the award unenforceable. Diag SE sought to enforce the 2008 Award in various jurisdictions without success. In 2017 Diag SE and Mr Stava (the Claimants) commenced arbitration against the Czech Republic under the Swiss-Czech Republic BIT in a London-seated UNCITRAL arbitration, claiming breach of fair and equitable treatment (FET) in relation to the Review and abuse of the Czech Republic's sovereign powers in interfering in the arbitration resulting in the 2008 Award. The Czech Republic raised five jurisdictional objections in these proceedings. Nonetheless, the Tribunal found several breaches of the FET standard and issued an award in May 2022 (the Treaty Award) awarding damages to the Claimants.

The First Instance judgments

The Czech Republic challenged the Treaty Award under s67 and s68 of the Act for lack of jurisdiction and procedural irregularity. The Czech Republic raised 11 different jurisdictional grounds of challenge and four separate challenges of procedural irregularity, claiming substantial injustice. The Claimants disputed the jurisdictional challenges, arguing that they were barred by s73 of the Act or that some challenges were actually admissibility or merits points. The Claimants also opposed the s68 challenges, arguing that several were precluded because no application for interpretation had been made under the UNCITRAL Rules or the Act.

The challenge to the Treaty Award was heard in the High Court by Mr Justice Foxton. The challenge was divided into two separate hearings, resulting in two judgments. Across the first and second judgments the court found (amongst other things) that:

1. Three of the Czech Republic's jurisdictional challenges under s67 were not barred by s73 (which addresses a party's loss of right to object), despite being raised late in the arbitral process.
2. The Czech Republic's argument around Mr Stava's divestment of shares in Diag SE in the 2011 Arrangements was one of standing, not jurisdiction, and accordingly did not fall within the scope of s67.
3. The court rejected the Czech Republic's jurisdictional challenge based on the nationality of Diag SE. While de jure control was not established, the High Court held that de facto control could suffice under Article 1(1)(c) of the BIT, finding Mr. Stava retained sufficient de facto control.

The Claimants sought to appeal the High Court's finding on the first point (the Timeliness Objection), while the Czech Republic sought to appeal the second (the Standing Objection) and third points (the Control Objection).

The Court of Appeal Decision

The Court of Appeal addressed all three objections, upholding some of the High Court’s conclusions while overturning others.

1. The Timeliness Objection

The Claimants alleged before the High Court that the Czech Republic had not raised its jurisdictional objection within the time required by s31 of the Act and Article 23 of the UNCITRAL Rules, and that no extension of time for raising such an objection had been sought from the tribunal.  

The High Court found that the Czech Republic's jurisdictional objections were first taken in the Rejoinder, some 11 months after it first responded in the case, but the Claimants had not raised any timeliness objection in response or at any other time during the proceedings. It then considered the operation of s73 at some length, looking at it within the existing jurisprudence, the wider Act, and the context of the specific case. The High Court ultimately concluded that it should proceed on the principle that time has been extended by the tribunal or that no extension was necessary where a jurisdictional objection is raised and determined on its merits without the tribunal or any party raising the timing issue. Accordingly, the grounds were not barred by s73.

The Court of Appeal considered that the High Court's conclusion on the Timeliness Objection was correct, but reached on the basis of a principle that it preferred not to express in those terms. Emphasising the aims of efficiency and party autonomy, it found that the appeal failed for three reasons:

1. An objection to the timeliness of the jurisdictional challenge was never made to the tribunal by the Claimants during the arbitration, and s73 therefore precluded it being made later before the court. This was a complete answer to the objection and sufficient to dismiss the appeal.
2. The Czech Republic's jurisdictional objectives were addressed by the Claimants on their merits and determined by the tribunal in accordance with the apparent agreement of the parties that it should do so. The terms of s31(3) did not require a positive action by the Tribunal. Accordingly, the jurisdictional objections were made within the time "allowed" by the Tribunal and, therefore, within the time permitted by s73. While both s31 and s73 of the Act were mandatory provisions, s31 did not provide the single source of how and when jurisdictional challenges are to be made. Rather, it was qualified by s73, and fulfilling the requirements of s73 could be sufficient, irrespective of whether s31 was fulfilled.
3. In any event, even if it were necessary for the Czech Republic to bring itself within s31(3), it did so because the tribunal "admitted" the jurisdictional objections in the passive sense of "permitting" them to be made, and no positive action by the tribunal was required.

2. The Standing Objection

The Czech Republic argued before the High Court that Mr Stava could not claim under the BIT for any conduct arising following the 2011 Arrangements, since he no longer held the investment at the time of the alleged breaches. The Czech Republic contended that the tribunal lacked substantive jurisdiction to consider claims by him after that date. The High Court held that this objection was an issue of standing rather than jurisdiction and could not be pursued under s67 of the Act. Mr Stava was a qualifying investor who made qualifying investments under the terms of the BIT, and the specific language of the BIT did not limit the offer to arbitrate to breaches that occurred solely when the investor still owned the investments made. Accordingly, divestment of the qualifying investment would give rise to an issue as to the standing of Mr Stava to bring claims arising thereafter and not a question of substantive jurisdiction.  The Court of Appeal endorsed the High Court's approach, rejecting the Czech Republic's contention that it was inconsistent with that adopted by international arbitral tribunals, and dismissed the second appeal.

3. The Control Objection

It was common ground that, as a Liechtenstein company, Diag SE could only qualify as an investor under Article 1(1)(c) of the BIT if it was directly or indirectly controlled by Mr Stava as a Swiss national. It was also agreed that Mr Stava controlled Diag SE until the transfer of the company's shares in the 2011 Arrangements. However, the Czech Republic argued that, following the 2011 Arrangements, Mr Stava ceased to control the company, meaning that the arbitral tribunal no longer had substantive jurisdiction. A key issue in the High Court was whether "control" under Article 1(1)(c) of the BIT required de jure (legal) control or could include de facto (factual) control. The High Court held that, while Mr Stava did not have de jure control, de facto control could suffice in some circumstances. Based on the factual evidence, it found that Mr Stava had sufficient de facto control of Diag SE for the company to qualify as an investor for the purposes of the Article 1(1)(c). This conclusion was challenged by the Czech Republic.

The Court of Appeal allowed the Czech Republic's appeal on this third limb. After an extensive review of the BIT's object and purpose, the additional Protocol to the BIT, the principles of interpretation under Article 31 of the Vienna Convention, and the investment treaty jurisprudence, it concluded that de jure control was indeed required. The court emphasized the importance of legal rights and ownership in determining control, reasoning that de facto control would introduce uncertainty and unpredictability, contrary to the BIT's aims to promote investment by providing clear and predictable protections. Accordingly, the award in favour of Diag SE needed to be set aside.

Comment

The Court of Appeal's decision in Czech Republic v Diag Human SE has resulted in the partial set aside of the award in this long running and complex dispute. While the Claimants' Timeliness Objection ultimately failed, the court's exploration of the requirements of s73 and s31 of the Act highlights the importance of raising timely and clear objections to jurisdictional challenges in any arbitration proceedings, at the risk of forfeiting the ability to raise them later.

Although the court's approach to interpreting the BIT regarding jurisdiction, standing, and control will not bind other courts and tribunals outside the jurisdiction, its careful reasoning may still be persuasive outside the sphere of English-seated investment treaty awards, and in particular the case is likely to be cited in arguments around de jure and de facto control. The decision underscores the need to carefully consider the legal structure and control of investments when seeking treaty protections since by emphasizing the requirement for de jure control, the court has reinforced the importance of legal rights and ownership in determining investor status.