The Court of Appeal's decision in Czech Republic v Diag Human SE & Anor [2025] EWCA Civ 588, handed down yesterday, provides crucial guidance on how English courts approach jurisdictional challenges of investment treaty arbitration awards. The significant ruling emphasises that jurisdictional challenges must be raised promptly during arbitration proceedings. Furthermore, the Court clarified that, to qualify as an investor under the bilateral investment treaty between Switzerland and the Czech Republic (the Treaty), a legal entity from a third state must be de jure (rather than de facto) controlled by a qualifying investor.
Relevant background
This long and procedurally complex dispute arises from the alleged wrongdoing by the Czech Ministry of Health in the early 1990s. In 2022, a Tribunal, constituted under the Treaty, unanimously found that the Czech Republic had abused its sovereign powers and breached its treaty obligations, awarding damages of approximately US$350 million plus interest to a blood plasma company (the Award), which are now believed to be worth over US$750 million. The arbitration was administered under the UNCITRAL Rules.
The Czech Republic challenged the Award in the English courts, where the arbitration was seated.
Central to the challenge is Mr Josef Stava, a Swiss national who founded a Czech company, which later became Diag Human SE (Diag SE), a Liechtenstein entity. Mr Stava was the sole shareholder of Diag SE, which qualified the company as an "investor" under the Treaty as the definition extends to legal entities "controlled" by Swiss nationals. In 2011, Mr Stava transferred his shares into a Liechtenstein trust (the Koruna Trust) (the 2011 arrangements). The Czech Republic argued that this transfer meant that Mr Stava and Diag SE no longer qualified as investors under the Treaty. The Czech Republic's challenge was based on lack of substantive jurisdiction and serious irregularity under sections 67 and 68 of the Arbitration Act 1996 (AA 1996).
In March 2024, the High Court ruled that all but three of the Czech Republic's challenges were barred by section 73 AA 1996 and/or were not jurisdictional in nature (the March Judgment). In a subsequent hearing on the merits in August 2024, the High Court determined that Mr Stava retained control of Diag SE at the end of 2011, thereby rejecting the jurisdictional challenge concerning Diag SE (the August Judgment).
The Court of Appeal decision addressed three appeals:
- First Appeal: Mr Stava and Diag SE appealed the March Judgment, which determined that three of the Czech Republic’s grounds for challenge under section 67, which collectively relied on the 2011 arrangements, were not barred by section 73.
- Second Appeal: The Czech Republic appealed the March Judgment, which found that the ground of challenge regarding Mr Stava’s claim from June 2011 was not jurisdictional in nature and did not fall under the scope of section 67.
- Third Appeal: The Czech Republic appealed the August Judgment, which determined that Mr Stava retained control of Diag SE at the end of 2011.
The First Appeal: The timeliness objection
Under section 31 AA 1996, objections to jurisdiction must be raised no later than “the time [a party] takes the first step in the proceedings to contest the merits.” Article 23 of the UNCITRAL Rules determines that objections to jurisdiction "shall be raised no later than in the statement of defence".
During the arbitration, the Czech Republic raised three jurisdictional objections in its Rejoinder, approximately 11 months after its Counter-Memorial. Mr Stava and Diag SE had the opportunity to address these jurisdictional objections in their Rejoinder on Jurisdiction, at the hearing and in post-hearing briefs, which they did without challenging whether these objections had been raised in time.
The Court of Appeal had to determine whether the Tribunal could be considered to have justified the time it allowed the Czech Republic under section 31(3) AA 1996 by addressing the jurisdictional objection on its merits.
The Court of Appeal dismissed the First Appeal for three reasons:
- The timeliness objection itself falls within the scope of section 73(1)(c). Since it was never raised during the arbitration, section 73 AA 1996 precludes it from being introduced when the Award is being challenged.
- The Czech Republic’s jurisdictional objections were made within the time allowed by the Tribunal, thus complying with section 73 AA 1996. The term "allowed" in section 73 is used in the passive voice, indicating what the Tribunal permits. The Court of Appeal clarified that, in some circumstances, such as this case, “time allowed by the tribunal” and “time allowed by any provision of [section 73 AA 1996]” can be alternatives in relation to substantive jurisdictional objections.
- The Tribunal admitted the jurisdictional objections under section 31(3), which permits a tribunal to allow a delayed objection if it considers the delay justified. All that is required by the language of this subsection is that the tribunal admits the objection at a later time than specified in section 31(1).
The First Appeal was therefore dismissed.
The Second Appeal: The Stava June 2011 objection
The second appeal focused on whether the Tribunal lacked substantive jurisdiction to consider claims by Mr Stava relating to breaches of the Treaty after his (alleged) disposal of interest in the qualifying investments in June 2011.The High Court found that this objection was limited to breaches after June 2011. The effect of this objection would be that even if Mr Stava is Swiss and made the investments before June 2011, the Tribunal would have no jurisdiction to determine the dispute about whether Mr Stava retained those investments after June 2011.
The Court of Appeal held that the High Court was right to conclude that the Stava June 2011 Objection was not a jurisdictional issue falling within section 30 AA 1996. The offer to arbitrate outlined in Article 9 of the Treaty is intended for a qualifying investor who, after 1 January 1950, makes a qualifying investment in the Czech Republic. When an individual becomes a qualifying investor through a qualifying investment, the rights to protection conferred by the Treaty are vested in them. Thus, to establish substantive jurisdiction, the critical moment for linking the investor and the investment is when the investment is made.
The Court of Appeal noted that the scope of Article 9 of the Treaty is broad. It does not require the investor to hold the investment at the time of the breach or when accepting the offer to arbitrate, although these factors may be relevant to the merits of a claim. If the investor disposes of the investment, this raises questions about admissibility concerning claims arising thereafter and falls outside the scope of section 30(1) AA 1996.
The Second Appeal was therefore dismissed.
The Third Appeal: The qualifying investor objection
Mr Stava was the sole shareholder of Diag SE until 2011, which allowed Diag SE to qualify as an investor under the Treaty, as the definition of an investor included legal entities that are "controlled" by Swiss nationals. The issue in the Third Appeal was whether the placement of shares in Diag SE into the Koruna Trust in 2011 meant that Diag SE was no longer controlled by Mr Stava, with the result that Diag SE would no longer meet the definition of "investor."
The High Court held that, if de jure control was required, the result of the 2011 arrangements was that Mr Stava did not have control of Diag SE. However, the High Court went on to hold that in certain circumstances, de facto control would be sufficient and that Mr Stava did have sufficient de facto control over Diag SE for the company to qualify as an investor under the Treaty.
The Court of Appeal disagreed, holding that de jure control was required. The reasoning of the Court of Appeal can be summarised as follows:
- The ownership requirement: The Court examined the definition and function of an "investor" under the Treaty, concluding that it should be someone who receives returns from their investment as a result of their ownership of that investment. The Court noted further that although the Treaty does not refer to ownership in terms, ownership is inherent in the function of the definition of “investor”.
- De jure control requirement: Article 1(1)(c) of the Treaty defines a qualifying "investor" to include "legal entities established under the law of any country which are, directly or indirectly, controlled by nationals of that Contracting Party". The Court interpreted that article with reference to Article 31 of the Vienna Convention and highlighted several indications within the Treaty that point towards a requirement for de jure control. It noted that to qualify under paragraph (a), a person must be a national of the Contracting Party “in accordance with its laws,” and under paragraph (b), a legal entity must be constituted “under the law” of a Contracting Party. It is therefore to be expected that paragraph (c), in issue here, would also be concerned with legal rights.
- Importance of the protocol: The Court of Appeal placed emphasis on the Protocol (signed at the same time as the Treaty). The Protocol states that an investor "may be required to submit proof of […] control". The Court was of the view that meaningful proof must entail de jure control, such as legal documentation showing company structure. It reasoned that proof of de facto control would necessitate uncertain and potentially extensive evidence, while demonstrating de jure control could involve straightforward administrative procedures.
- Certainty and predictability: The Court of Appeal warned that uncertainty and flexibility in proving de facto control could deter investment decisions, which require predictability, and would undermine the purpose of the Treaty.
- Form over substance: The Court of Appeal rejected the argument that de jure control prioritises form over substance. The Court reasoned that the Koruna Trust was established for succession planning and asset protection. The transfer of shares into a discretionary trust, where potential beneficiaries, including Mr Stava, had no legal rights to ownership or control, was a matter of substance and was critical. The trust was valid only because of the transfer of legal rights.
- Investment treaty jurisprudence: The Court dismissed the assertion that most investment treaty jurisprudence accepts de facto control as sufficient. Firstly, public international law lacks a rule of precedent. Secondly, differing academic views indicate that there is no settled consensus on this issue. Thirdly, none of the referenced cases contained an equivalent Protocol. Fourthly, some awards define "investor" not merely by control but by "effective control", allowing for factual inquiry. Lastly, while some treaties may define "control", there was no such definition under the Treaty.
For these reasons, the Court of Appeal held that under the Treaty, to be an "investor," a legal entity from a third state must be de jure controlled by a qualifying investor and that this would typically be established through majority share ownership.
The Third Appeal was allowed on the basis that the Award in favour of Diag SE was made without substantive jurisdiction. Consequently, the Award in favour of Diag was set aside.
Having established this, the Court of Appeal went on to consider whether Mr Stava had de facto control of Diag SE at the relevant time, assuming de facto control had been sufficient. The High Court found that the control Mr Stava exercised over Diag SE stemmed from his formal positions as chairman, holder of the bearer shares, and protector of the Koruna Trust. Additionally, the trustee would likely act in accordance with his wishes. As a result, Mr Stava "held the economic attributes of 'ownership'".
The Court of Appeal disagreed. Despite Mr Stava exercising complete control over Diag SE's business conduct, he acted as an agent for the trustee in all his capacities related to the company. His actions were bound by obligations to serve the best interests of the Koruna Trust rather than his own. Therefore, any control exercised was considered as that exerted by the trust, not by Mr Stava. The Court distinguished that while Mr Stava could have acquired direct control over Diag SE if he desired, this was different from actually having acquired such control.
Consequently, even if de facto control was sufficient under certain circumstances, Mr Stava did not possess de facto control necessary to qualify as an investor under the Treaty.
Analysis
The Court of Appeal's decision underscores several key principles governing jurisdictional reviews of investment treaty arbitration awards by the English courts. This is a notably important decision as the success rate of challenges to arbitration awards (even those that are partially set aside) remains extremely low.
First, the ruling reinforces the importance of promptly raising jurisdictional challenges during arbitration proceedings. The Court’s dismissal of the First Appeal highlights that timing objections must be made at the earliest opportunity to avoid being barred by section 73 AA 1996. This serves as a crucial reminder for parties to vigilantly adhere to procedural timelines, ensuring that any jurisdictional objections are timely and appropriately raised. This is specifically the case for arbitrations seated in England, even if the dispute is resolved under international law.
The Court's dismissal of the Second Appeal clarifies the position in cases where the investor disposes of the investment, by reiterating that this would raise questions about standing or admissibility of claims arising after such disposal, which pertains to the jurisdiction ratione materiae of the arbitral tribunal.
Finally, the Court's interpretation of investor qualifications under the Treaty adds significant clarity. By distinguishing between de jure and de facto control, it established that only entities legally controlled by qualifying investors meet the Treaty’s definition. This clarification has substantial implications for future arbitrations under the Treaty, particularly in matters involving changes in ownership structures or control mechanisms. Legal documentation evidencing de jure control will be paramount. Interpretation of "control" may be broader in disputes under other bilateral investment agreements, depending on the exact wording of those instruments. In addition, supporting sources such as protocols should be given adequate attention and analysis. In this case, the explanations of "control" in the Protocol were an important distinguishing feature.
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