The Czech Republic v Diag Human SE

Hearing dates: 30 and 31 January and 1, 5, 6 and 7 February 2024

Further written material: 14, 20, 22 and 26 February 2024

Draft Judgment Circulated: 27 February 2024

Approved Judgment

This judgment was handed down remotely at 10:00am on 08 March 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

The Honourable

On 18 May 2022, a tribunal appointed under the Agreement between the Czech and Slovak Federal Republic and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments of 5 October 1990 ( “the Investment Treaty”) made an award in an arbitration commenced by Diag Human SE and Mr Stava (“ the Claimants”) against the Czech Republic ( “the Award”).

The Award:

i) rejected various jurisdictional objections raised by the Czech Republic, save that made in respect of events pre-dating the entry into force of the Investment Treaty on 7 August 1991;

ii) found that the Czech Republic had breached the “fair and equitable treatment” obligation arising under Article 4(2) of the Investment Treaty in certain respects; and

iii) ordered the Czech Republic to pay damages of US$350m and interest, and to pay 70% of the costs.

On 15 June 2022, the Czech Republic brought challenges to the Award under sections 67 and 68 of the Arbitration Act 1996 ( “the 1996 Act”). The court made orders for the exchange of statements of case and the service of evidence, and the hearing of the entirety of the Czech Republic's challenge was fixed for a 7-day hearing, beginning with a solitary judicial reading day on 29 January 2024. However, issues arose in December 2023 and January 2024 from the service of further evidence by the Claimants and of an amended statement of case by the Czech Republic which made it impracticable to hold the entirety of the hearing on that date.

In those circumstances, on 16 January 2024 I adjourned aspects of the challenge, and ordered that this hearing would address the following issues:

i) whether the Czech Republic was barred under s.73 of the 1996 Act from advancing certain of its challenges;

ii) whether certain of the matters raised by the Czech Republic under s.67 of the 1996 Act are properly characterised as jurisdictional;

iii) the Czech Republic's challenge under s.68 of the 1996 Act; and

iv) certain procedural issues.

A very large number of issues have been put in play by the Czech Republic's various challenges. As is often the case, the merits of the points taken vary considerably. One consequence of the decision to run quite so many points is that the parties' advocacy efforts, and the court's time, have been spread thinly over a large area. Particularly on the Czech Republic's part, the 50-page skeleton limit was met by including lengthy, dense, footnotes, one of which cited 9 authorities (the court being taken to none of them in argument). However hard-fought the litigation, greater selectivity in the points run would have allowed more time and attention to be devoted to the points which really mattered, which raised a number of interesting points.

A THE BACKGROUND

In circumstances in which the jurisdictional challenges are not being considered on their merits at this stage, I have provided what is intended to be a relatively brief and uncontentious summary of what is a lengthy and highly contested dispute.

The first Claimant ( “Diag SE”) is a Liechtenstein company which is the successor to a Czech company, Conneco. Conneco was founded by the second Claimant ( “Mr Stava”).

Conneco was incorporated on 15 March 1990 as a subsidiary of a Swiss company, Diag Human AG ( “Diag AG”) with a view to operating in the blood plasma market in the Czechoslovakia. By the late 1980s, there was an acute shortage of certain blood plasma derivatives in Czechoslovakia, which led the Ministry of Health to begin discussions with potential foreign partners, including Diag AG. A draft framework agreement between Diag AG and the Ministry of Health was prepared, but never signed. In addition, the Ministry of Health ran a tender process, in which Conneco was the only participant to submit full documentation within the required period. Its bid anticipated that it would export blood plasma to a Danish company called Novo Nordisk A/S ( “Novo Nordisk”) who would process the blood plasma, with the appropriately fractionated plasma being imported back into Czechoslovakia.

On 29 June 1990, Dr Martin Bojar was appointed as the new Minister of Health. He received a report from the committee running the tender who identified two options – contracting with Conneco if it was decided that there was an urgent need to enter into a contract to address the issue or restarting negotiations with companies who had issued tenders outside the stipulated period. Dr Bojar appointed a second committee to evaluate those options, and that committee recommended against contracting with Conneco.

After the second committee had issued its report recommending a new tender process, Conneco entered into negotiations with hospitals and transfusion centres in Czechoslovakia. There is a dispute as to the extent to which those negotiations culminated in cooperation agreements with those bodies, and as to the commercial significance of those agreements. On 20 February 1991, Dr Bojar wrote a letter ordering the directors of various health facilities in Czechoslovakia to stop any negotiations with a foreign partner operating in blood plasma processing. Some, but not all, of those facilities terminated negotiations.

The second tender was initiated on 10 May 1991, and Conneco was among the companies invited to participate. Conneco's bid was rejected on 25 June 1991. Conneco sought to challenge that rejection, but the tender culminated in a recommendation to commence a project with Immuno Wien, with Instituto Grifols Barcelona as the second choice. On 12 August 1991, the Ministry of Health informed local hospitals that these two companies were the only foreign companies permitted to operate in the blood plasma sphere, an instruction repeated on 5 November 1991. Once again, some hospitals continued to engage with Conneco notwithstanding these letters.

While this was going on, Conneco obtained a certificate for the distribution of drugs and medical supplies from the Ministry of Health on 27 August 1991, and approval from the Czechoslovak Customs Office on 30 October 1991 to export blood plasma for processing by Novo Nordisk, and to import blood plasma derivatives back into Czechoslovakia.

Following an incident in which unlabelled frozen blood plasma was discovered at a state-owned storage facility, which the Czech Republic alleged had been stored at Conneco's request and had originated from a co-operation agreement between Conneco and the Frýdek Místek hospital, Dr Bojar initiated a police investigation into Conneco and its associates. In addition, on 9 March 1992, Dr Bojar wrote to Novo Nordisk expressing strong reservations about Conneco's business ethics and explaining that Novo Nordisk had not been successful in the tenders on account of its connection with Conneco. This letter ( “the Bojar Letter”) stated:

“Expert Committee of the Czech Ministery [sic] of Health have considered carefully all the projects submitted and have decided, unfortunately, in the favour of other companies than Your's [sic]. One of the reasons was a doubt about respectability of the Conneco a.d., the company which has had intermediate [sic] the cooperation. In contradiction with the decision of the Czech Ministery [sic] of Health and discrepantly with general ethical principles of blood donation and fractionation the Conneco a.d. is buing [sic] plasma in the Czech Republic and sending it for fractionation to your company (the contract being mediated possibly through Diag-Human). Respecting a good name of your company and our possible cooperation in the future we consider necessary let you know about this. We expect that You will draw appropriate conclusions from the problem mentioned above not only for the next cooperation with Conneco a.s., but also in deal with all irresponsible plasma suppliers”.

On 18 March 1992, Novo Nordisk informed Conneco of the Bojar Letter and informed Conneco that, until further notice, all plasma cooperation agreements between them were cancelled. Following a meeting between Novo Nordisk and the Ministry of Health, Novo Nordisk later informed Diag AG that it had decided not to accept blood plasma originating from Czechoslovakia until certain issues were clarified. In the aftermath of the Bojar Letter, co-operation arrangements between Conneco and certain Czechoslovak hospitals were cancelled by mutual consent.

On 1 January 1993, the state of Czechoslovakia was dissolved, with the Czech Republic and the Slovak Republic coming into existence as successor states.

Various meetings between Conneco and the Ministry of Health took place in the aftermath of the Bojar Letter, and Dr Bojar sent Mr Stava a letter on 22 June 1993 accepting Conneco's good faith and insisting that he did not want to damage the good name of Diag AG or Novo Nordisk. On 23 November 1993, Conneco changed its name to Diag Human...