No objection: When is a party barred from challenging jurisdiction where it continues in the arbitration?

The High Court has provided invaluable guidance on the factors that it will consider when determining when a party is barred from challenging jurisdiction under s. 67 of the Arbitration Act 1996 (the Act) by failing to raise an objection while continuing to take part in the arbitration.

The decision in Czech Republic v Diag Human SE [2024] EWHC 503 (Comm) also provides guidance on the style of pleadings in arbitrations where practitioners anticipate that they may ultimately be challenging any award.

The facts

The judgment of Mr Justice Foxton is the latest instalment in a long-running saga that dates back to the 1990s.

One of the Claimants, Diag Human SE (Diag), had supplied blood plasma to hospitals in what was then Czechoslovakia. In March 1992, the Health Minister of Czechoslovakia wrote a letter to Diag's business partner making certain allegations (the Minister's Letter).  As a result, the business partner cancelled its contracts with Diag and the contracts between Diag and the Czechoslovak hospitals were also cancelled.

In September 1996, Diag and the Ministry of Health of the Czech Republic (the Ministry) agreed to arbitrate Diag's claims for losses that were said to have arisen from the Minister's Letter (the Commercial Arbitration). It later emerged that the Czech Republic had interfered in the Commercial Arbitration, including by using its security services to obtain confidential information.

Ultimately, the arbitral tribunal in the Commercial Arbitration held that the Minister's Letter had breached Czech law and caused loss to Diag. It awarded the Claimants CZK 8.3 billion in damages (the 2008 Award).

As permitted by the arbitration agreement, the Ministry initiated a review of the award in August 2008 (the Review Process).  The Review Process culminated in a resolution on 23 July 2014 that the Commercial Arbitration was discontinued. As a consequence, Diag was unable to enforce the 2008 Award, save for in Luxembourg, where it transpired that the Czech Republic had no assets.

On 22 December 2017, Diag commenced an investment treaty arbitration (the Investment Treaty Arbitration) 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).

In the Investment Treaty Arbitration, Diag made various allegations that the Czech Republic had corruptly interfered in the Review Process.  These included allegations that the Ministry had sought to influence two of the members of the review panel to procure a favourable outcome by a combination of threats and bribes.

In May 2022, the arbitral tribunal in the Investment Treaty Arbitration rendered an award (the Award) in which it found that there had been the following breaches of the fair and equitable treatment standard in the Investment Treaty: a) the sending of the Minister's Letter; b) the abuse of the Czech Republic's powers to interfere in the Commercial Arbitration; and c) a failure to comply with due process during the Review Process.

In June 2022, the Czech Republic applied to the court to set aside the Award on various grounds, including under s. 67 of the Act.

The Claimants' challenge under s. 73 of the Act

The Claimants submitted that eleven of the jurisdictional objections raised by the Czech Republic were barred by s. 73 of the Act.

S. 73 provides, in summary, that a party loses the right to raise a jurisdictional or procedural objection if they continue to take part in the arbitration without raising the objection, unless at the time they took part or continued to take part in the proceedings, they did not know and could not with reasonable diligence have discovered the grounds for the objection.

In order to determine whether the jurisdictional objections raised by the Czech Republic were barred under s. 73, the court considered a number of issues.

First, the judge considered what is a ground of objection and when it is made. The judge cited with approval the judgment of Mr Justice Butcher in National Iranian Oil Co v Crescent Petroleum Co International Ltd [2022] EWHC 2641 (Comm) in which it was held that:

a) Each ground of challenge to jurisdiction or of objection to jurisdiction must have been raised if it is to be raised. By this is meant the jurisdictional objection that the party considers renders the whole or the relevant part of the arbitral process invalid

b) It is wrong to be prescriptive or try to lay down precise limits in the abstract for the meaning of the phrase 'ground of objection', but it is usually easy to recognise (or obvious) in particular cases whether a party is attempting to raise a new ground of objection to jurisdiction on an appeal

c) The 'grounds of objection' should not be examined closely as if a pleading, but broadly, or adopting a broad approach. The fact that different and broader arguments are raised or new evidence is put forward does not mean that there is a new ground.

d) The substance of each ground of objection relied upon should have been communicated to the other party (and the arbitral tribunal).

e) It is not enough that the party mention an issue. The issue must be distinctly put to the arbitral tribunal as denying jurisdiction.

Second, the judge considered the position of a respondent who puts the claimant to proof of some or all of the jurisdictional requirements in the relevant investment treaty.  The judge held that a bare putting to proof of either jurisdiction in general or broad categories of jurisdiction cannot be sufficient to give free rein for any jurisdictional challenge at the s. 67 stage.  Nor can non-admission be treated as a category of jurisdictional objection in its own right because at the s. 67 stage it is for the challenging party to establish lack of jurisdiction.    

Third, the judge considered what should happen where a party takes a ground of objection to the arbitral tribunal's jurisdiction at an early stage, but fails to maintain that objection, and does not ask the arbitral tribunal to rule on it in the exercise of its kompetenz-kompetenz jurisdiction under s. 30 of the Act. The judge held that a party can only raise a ground of objection on a s. 67 challenge if it has not only taken that point before the arbitral tribunal, but maintained it in the sense that the tribunal ought reasonably to have understood that it was a matter engaging s. 31(4) of the Act. That provision holds that where an objection is duly taken to the tribunal's substantive jurisdiction and the tribunal has the power to rule on its own jurisdiction, the tribunal may either rule on the matter in a jurisdiction award or deal with the objection in its award on the merits.

Fourth, the judge considered the situation in which the tribunal has not expressly exercised its power to extend time but has nonetheless determined an out of time jurisdictional objection. The judge concluded that if the point is raised before the tribunal, and determined on its merits without reference to the timing of the objection, the court should proceed on the basis that time has been extended by the tribunal, or it has concluded that no extension is necessary because the point had been sufficiently taken at an earlier stage. 

In light of the above reasoning, the judge held that out of the Czech Republic's eleven s. 67 challenges, six were barred by s. 73 of the Act.

The judge's remarks on the style of pleadings in arbitration

The judge commented that the key assertions made by the parties in the Investment Treaty Arbitration in their memorials were: "less starkly presented than they would be in statements of case served in this court". As a consequence, it had: "taken the court considerable time in the court challenge to identify material relevant to the issues it has to determine".

The judge suggested that where investment treaty arbitrations are seated in England and Wales: "the parties may wish to consider having at least a fraction of an eye, in preparing their arbitral filings, on the issues which might later arise under ss.67, 68 and 73 of the 1996 Act, ensuring a clear labelling of the points which will be significant in any challenge brought in the supervisory court". He also suggested that: "this might ease the considerable burden on investment treaty arbitral tribunals faced with vast written filings as well".

Commentary

Although this judgment concerns an investment arbitration, it is of relevance to both commercial and investment cases. It contains a wealth of learning on jurisdictional challenges to arbitral awards and, in particular, to the question as to when a challenge to jurisdiction is barred under s. 73 of the Act.

The key takeaway is that although it is unnecessary in international arbitrations to adopt the English High Court style of written pleadings, practitioners should take care to ensure that any jurisdictional objections are spelt out as clearly and as early as possible.

Those that plead jurisdictional challenges in a vague manner and then fail to prosecute those challenges before the arbitral tribunal are likely to receive short shrift if they then challenge the award on the same basis before the court.

In practical terms, if an arbitral tribunal renders an award on jurisdiction that a party objecting to jurisdiction wishes to challenge, it is advisable for that party to make clear to the other parties and arbitral tribunal that it objects to the decision and to lodge any challenge with the court as soon as possible.

The judge's implied criticism of the parties' pleadings is also a reminder to practitioners to limit the excesses of the more effusive style of drafting that can sometimes be found in arbitration pleadings, particularly where points may need to be re-taken before a national court.