The Czech Republic v Diag Human SE

Hearing dates: 3, 4, 5, 6 & 7 February 2025

Approved Judgment

This judgment was handed down remotely at 10.30am on Wednesday 6 May 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Lord Justice Males, Lord Justice Popplewell AND

Introduction

These three appeals arise from two judgments of Mr Justice Foxton (‘the Judge’) in which he dealt with a large number of issues in a challenge by the Czech Republic (‘CZR’) under s. 67 and 68 of the Arbitration Act 1996 (‘AA 1996’) to an arbitration award by which Mr Josef Stava and Diag Human SE (‘Diag SE’) were awarded sums approximately equivalent to US$350 million plus interest against CZR. The award (‘the Treaty Award’) was made pursuant to a bilateral investment treaty (‘the Treaty’ or ‘the BIT’) between Switzerland and CZR which protected investments in one contracting state (here CZR) by investors of the other contracting state (here Switzerland). Mr Stava was at all material times a Swiss national and qualified as an investor under the Treaty. He founded a Czech company Conneco a.s. (‘Conneco’) in 1990 to which Diag SE, a European company (societas Europaea) with its seat in Liechtenstein, became the successor in 2001. Conneco (prior to 2001) and Diag SE (from 2001) owned the relevant investments. Mr Stava was the indirect majority shareholder in Conneco and sole shareholder in Diag SE, which he controlled, until events in 2011 which are at the heart of the current appeals. That rendered Diag SE a Swiss investor under the Treaty up to that time because the Treaty definition of investors included legal entities controlled by Swiss nationals.

In May 2011 arrangements were put in place in what has been referred to as the Lawbook Transaction. We consider this more fully below, but in summary its effect was that the shareholding in Diag SE was at the end of 2011 transferred to the trustee of the Koruna Trust, a Liechtenstein trust established by Mr Stava under which he and his daughters were, amongst others, discretionary beneficiaries. CZR contended in its s. 67 challenge that because Mr Stava no longer owned or controlled Diag SE as a result of these arrangements, both Mr Stava and Diag SE thereby ceased to be qualifying investors in the investments, and the tribunal had no jurisdiction to determine claims by either of them in respect of the conduct of CZR towards the investments thereafter.

In the first of the two judgments, [2024] EWHC 503 (Comm) (‘the March judgment’), the Judge addressed whether a number of the s. 67 grounds advanced by CZR were barred by s. 73 AA 1996 and/or were jurisdictional in nature within the meaning of s. 30 AA 1996 so as to amount to legitimate grounds of challenge under s. 67. Amongst other things he determined that three of CZR's grounds of challenge under s. 67, which overlapped and collectively relied upon the 2011 arrangements as depriving the tribunal of jurisdiction in relation to alleged treaty breaches by CZR thereafter, were not barred by s. 73. In appeal number CA-2024-000986 (‘the first appeal’), Mr Stava and Diag SE appeal against that decision with the leave of the Judge.

In the March judgment the Judge also decided that the ground of challenge vis à vis Mr Stava's claim from June 2011 was not jurisdictional in nature and did not fall within the scope of s. 67. In appeal number CA-2024-000977 (‘the second appeal’) CZR appeals against that decision with the leave of the Judge.

In the March judgment the Judge determined that the challenge to jurisdiction in relation to Diag SE's claim from June 2011 was jurisdictional in nature and should be determined at a subsequent hearing. There is no appeal from that aspect of his decision. At that subsequent hearing the Judge addressed the substance of that challenge, amongst other issues, which turned upon whether Mr Stava controlled Diag SE after the relevant transactions in 2011. The Judge heard evidence from factual witnesses, including Mr Stava, and from experts on Liechtenstein law. In his second decision, [2024] EWHC 2102 (Comm) (‘the August judgment’), the Judge determined that Mr Stava retained control of Diag SE at the end of 2011, so that the jurisdiction challenge vis à vis Diag SE failed on its merits. In appeal number CA-2024-002663 (‘the third appeal’) CZR appeals against that determination.

The Bilateral Investment Treaty

The Treaty was signed between the Czech and Slovak Federal Republic (‘Czechoslovakia’) and the Swiss Federation (‘Switzerland’) on 5 October 1990 in two originals in German, Czech and English, which were to be treated as equally authentic but with the English text to prevail in the case of divergence. We were only referred to the English text. It came into force on 7 August 1991. On 1 January 1993 Czechoslovakia was dissolved and CZR succeeded to its rights and obligations under the Treaty.

The Preamble provides that:

“The Czech and Slovak Federal Republic and the Swiss Confederation,

Desiring to intensify economic cooperation to the mutual benefit of both States,

Intending to create and maintain favourable conditions for investments by investors of one Contracting Party in the territory of the other Contracting Party,

Recognizing the need to promote and protect foreign investments with the aim to foster the economic prosperity of both States.

Considering the Final Act of the Conference on Security and Cooperation in Europe,

Have agreed as follows:”

Article 2 identifies the scope of the Treaty. It provides:

“(1) The present Agreement shall apply to investments in the territory of one Contracting Party by investors of the other Contracting Party, if the investments have been made later than 1st January 1950 in accordance with the laws and regulations of the former Contracting Party.

(2) The present Agreement shall not affect the rights and obligations of the Contracting Parties with respect to investments that are not within the scope of the Agreement.”

Article 1 contains the relevant definitions of investor and investment in the following terms:

“For the purpose of this Agreement:

(1) The term “investor” refers with regard to either Contracting Party to

(a) natural persons who are nationals of that Contracting Party in accordance with its laws;

(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.

2) The term “investments” shall include every kind of assets and particularly:

(a) movable and immovable property as well as any other rights in rem such as servitudes, mortgages, liens, pledges;

(b) shares, parts or any other kinds of participation in companies;

(c) claims and rights to any performance having an economic value;

(d) copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), know-how and goodwill;

(e) concessions under public law, including concessions to search for, extract or exploit natural resources as well as all other rights given by law, by contract or by decision of the authority in accordance with the law.

…”

Article 1(1)(c) was the subject matter of further clarification in the Protocol, which was signed at the same time as the Treaty and as an integral part of it:

“(1) An investor according to Article 1, paragraph (1), letter (c) may be required to submit proof of such control in order to be recognized by the Contracting Party in the territory of which the investment has been or is to be made as an investor of the other Contracting Party.”

Articles 3 to 7 contain the substantive obligations of the Contracting Parties. Articles 3 to 5 are what are generally referred to as fair and equitable treatment provisions. Article 6 is an expropriation provision. Article 7 is a most favoured nation provision.

Article 9 provides:

“Disputes between a Contracting Party and an investor of the other Contracting Party

(1) For the purpose of solving disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party and [without] prejudice to Article 10 of this Agreement (Disputes between Contracting Parties), consultations will take place between the parties concerned.

(2) If these consultations do not result in a solution within six months, the dispute shall upon request of the investor be submitted to an arbitral tribunal....