In long-running legal dispute, High Court adopts several principles that will inform future challenges to ISDS Awards
On 9 August 2024, Mr Justice Foxton handed down the most recent judgment in a long-running dispute between Mr Josef Stava and the Czech Republic (the “Republic”). In dismissing the Republic’s remaining challenges to an investor-state arbitral award issued under the bilateral investment treaty between Switzerland and the Republic (the “Treaty” or the “BIT”), the court endorsed several general principles that will likely have future impact on challenges to investor-state arbitration awards in English courts. These principles include: the “holistic approach” set forth in the unity of investment theory; elevating “substance over form” when determining “control” of an investment; and the preclusive effect of unchallenged portions of an arbitration award during a challenge to the Tribunal’s jurisdiction brought under section 67 of the Arbitration Act 1996 (the “Act”).
Background
The dispute stems from Mr Stava’s creation of a Czech blood plasma fractionation company in the early 1990s. To date, the parties have engaged in Czech court proceedings, a commercial arbitration, and an English-seated arbitration under the Treaty in accordance with the UNCITRAL Rules. Following a 2022 award in favour of Mr Stava (the “Award”), the Republic commenced set aside proceedings in the High Court by bringing several challenges to the Award under sections 67 (lack of substantive jurisdiction) and 68 (serious irregularity) of the Act. In an earlier judgment, Mr Justice Foxton dismissed the majority of the Republic’s s 67 and s 68 claims. In the 9 August judgment, the court disposed of the remaining s 67 and s 68 challenges, although the Republic has obtained permission to appeal one issue.
The Court Endorses the “Unity of Investment” Theory
The basis of one of the Republic’s s 67 challenges was that certain, isolated aspects of the claimant’s Czech operation did not fall within the Treaty’s definition of “investment”, and thus were outside the Treaty tribunal’s jurisdiction. Because challenges under s 67 are heard de novo, the court was required to undertake its own, independent review of the evidence and law to decide whether the tribunal properly decided the issue. (The pending Arbitration Bill recommends new rules of court for section 67 challenges that will limit the ability to bring jurisdictional objections that were not brought before the tribunal and will limit the re-hearing of evidence, which may avoid complex re-hearings of this nature in the future).
After a lengthy summary of various ISDS cases and other legal authorities, the court found that the challenged portions of the investment were part of the investment. In doing so, the court repeatedly endorsed the view of many ISDS tribunals and commentators that “whether there is an investment should be looked at holistically rather than by considering different components of an integrated activity in isolation”—also known as the “unity of investment” theory.
The Court Adopts a Broad View of “Control”
The Republic also argued that, due to a restructuring that involved transferring ownership of shares to a Liechtenstein-based trust, the Swiss claimants no longer “controlled” their investment. In the Republic’s view this meant that the claimants failed to satisfy the Treaty’s definition of “investor”, which requires a claimant to either be Swiss or be controlled by a Swiss national or legal entity.
As part of its de novo review of the meaning of “control”, the court looked at the various ways in which the term “control” has been defined and applied in myriad ISDS cases and commentaries. Some of the authorities focused only de jure, or legal, ownership and control. Others gave equal or more weight to de facto, or effective, control. Ultimately, after a lengthy review, the court decided the better approach is to focus on “substance rather than form”. Thus, the court found that the word “control” in the BIT “carries both of its ordinary meanings”, and that, on the facts before it, the claimant exercised sufficient de facto control over the investment to qualify as an investor under the BIT.
The Court Finds that Unchallenged Portions of an Award Can Have Preclusive Effect on s 67 Challenges
As a related issue, the claimants argued that the Republic was estopped from denying the claimant’s control over the investment. They said that the arbitral tribunal had already dealt with the issue and that portion of the Award was not challenged. The Republic argued that, because a s 67 challenge involves a de novo hearing, the doctrine of issue estoppel should not apply.
While the court ultimately found that the issue in question had not been covered in the Award and thus was not precluded, the court agreed with the claimants as a matter of law. The court acknowledged that the challenged portions of an award would have no preclusive effect on the challenge proceedings. However, the court also noted that the findings in an unchallenged partial award have preclusive effect on a subsequent challenge to a final award. Thus, there was “no reason of principle” why a tribunal’s decision to issue one award instead of two would change the preclusive effect of the unchallenged portions of the award in s 67 proceedings. To find otherwise would remove the “requisite element of finality” to arbitral awards.
While Dismissed for Now, Other Objections May Emerge
Whie the decision dismissed all other remaining s 67 and s 68 challenges, the Republic has obtained permission to appeal the earlier March 8 order dismissing the majority of its challenges, and other appeals may be brought forth. Depending on the outcome of the appeals, the Republic may revive some of its dismissed claims, and the saga will continue. However, regardless of the future proceedings for the parties in this case, the court’s findings on unity of investment, de facto control, and issue estoppel will certainly be relevant to future jurisdictional challenge applications in relation to ISDS awards.
