The Czech Republic v Diag Human SE and Josef Stava: Permission to Appeal Refused

At a Glance

• The Court of Appeal recently refused an application for permission to appeal a decision of the High Court concerning section 70(7) of the Arbitration Act 1996 (Act).
• Lord Justice Males stated that if the Court of Appeal had jurisdiction, he would have granted permission to appeal, as section 70(7) of the Act has not yet been considered at appellate level.
• It remains to be seen how future applications under section 70(7) will be considered in light of Lord Justice Males' comments in this case.

In a recent decision, the Court of Appeal refused an application for permission to appeal a decision of the High Court concerning section 70(7) of the Arbitration Act 1996 (Act). This section states that the court has discretion to order that any money payable under an arbitration award shall be brought into court or otherwise secured, pending the determination of a challenge to the validity of the award. 

Background

In May 2022, an arbitral tribunal awarded the applicant, Diag Human SE, CZK 4 billion (the approximate equivalent of £140 million) having found that the respondent, the Czech Republic (Republic), had breached the requirement for fair and equitable treatment set out in a contract signed between the parties in 1990. The Republic is challenging the award under sections 67 (substantive jurisdiction) and 68 (serious irregularity) of the Act in an eight-day hearing that is due to take place on 29 January 2024. In the interim period, Diag Human SE has sought an order from the court that the money payable under the award be secured pending the determination of the Republic’s challenge and that if such security was not provided, the Republic’s challenge should be dismissed. 

In July 2023, the High Court dismissed this application for security and refused permission to appeal, as the court found that there was no real evidence that the Republic was likely to dissipate its assets so as to put them beyond the reach of Diag Human SE. Mr Justice Bright also rejected the submission that in a case where the award debtor had acted egregiously, that should itself be enough to justify an order for security under section 70(7). In making this argument, Diag Human SE highlighted evidence that previous arbitral proceedings that had taken place between the parties had been corrupted, as the Republic unlawfully used its intelligence services, police force and a Parliamentary Enquiry Commission to obtain information and pressure members of the arbitral tribunal.

Diag Human SE then applied to the Court of Appeal for permission to appeal.

Jurisdiction

Lord Justice Males found that the Court of Appeal did not have jurisdiction to grant leave to appeal from a decision under section 70(7). Section 70 is supplementary to an application under sections 67, 68 or 69 and cannot be applied independently of those sections. For example, an order can be made under section 70(7) that if security is not provided, the challenge under section 67 or 68 would be dismissed. These sections include provisions to the effect that the court of first instance must grant permission for any appeal resulting from a decision under the sections. Section 70 decisions are regarded as part of a section 67, 68 or 69 challenge which include these provisions and, as a result, Lord Justice Males found that it was only the court of first instance that could grant permission to appeal a decision made under section 70(7). 

Obiter Discussion

However, Lord Justice Males stated that if the Court of Appeal had jurisdiction, he would have granted permission to appeal, as section 70(7) of the Act has not yet been considered at appellate level. He explained that the Court of Appeal should reconsider the threshold that has developed through case law that a challenge to an arbitral award must be considered “flimsy” for the court's power under section 70(7) to be exercised. Lord Justice Males argued that the merits of the challenge should be irrelevant to a section 70(7) decision and the only question under consideration should be whether the making of the challenge is likely to prejudice the ability of the award creditor to enforce the award or the ability of the award debtor to honour it. If a challenge is considered “flimsy”, then it should be summarily dismissed, so that the question of security does not arise. Otherwise, a form of “minitrial” will have to be held to assess the merits of the case, which is undesirable. 

Review of the Act

As we have discussed in previous updates, the Law Commission has published its final report in review of the Act. This report, and the Arbitration Bill that is currently making its way through the House of Lords, do not reference section 70(7) as a provision that requires consideration. A suggestion was made by a respondent to the Commission’s first consultation that the Act should provide guidance on the circumstances in which a court should exercise its power under section 70(7). However, the Commission rejected this suggestion and concluded that any such guidance should be left for development through the courts. It remains to be seen how future applications under section 70(7) will be considered in light of Lord Justice Males' comments in this case.