In Diag Human Se v Czech Republic, the English Commercial Court refused enforcement of a New York Convention Award (the Award) of over 8.3 billion Czech Crowns (approximately GBP245 million) against the Czech Republic, overturning an earlier 2011 English court order (the Order) to the contrary.
Eder J accepted both submissions advanced by the Czech Republic in its challenge to the Order. He found that:
- an April 2013 decision by the Supreme Court of Austria that the Award was non-binding created an “issue estoppel” in favour of the Czech Republic; and
- even if this reasoning was wrong, the Award was in any event not binding within the meaning of s103(2)(f) of the Arbitration Act 1996 (the Act) given that the arbitration agreement between Diag Human and the Czech Republic provided for a special “review” process that was validly triggered by the Czech Republic after the rendering of the Award.
Diag Human and the Czech Ministry of Health agreed to arbitrate claims by Diag Human that the actions of a senior Czech official had crippled its business activities in the Czech Republic. The parties agreed to ad hoc arbitration under the Czech Arbitration Act 1994. Article V of the arbitration agreement provided for an additional review process of any arbitral award issued (the Review Process). If the Review Process was validly triggered, the award in question would not become binding upon the parties until determination of the Review Process.
Eder J described the background to the proceedings as “long and tortuous“. The arbitral tribunal’s first Interim Award was subjected to the Review Process, as was its subsequent Partial Award. The Award (which was the subject of these proceedings) was issued on 4 August 2008. While it was described as a “Final Award”, both the Czech Republic and Diag Human sought to invoke the Review Process, although Diag Human subsequently withdrew its application.
A tribunal was constituted to review the Award under the Review Process. A series of court proceedings then ensued in the Czech Republic challenging that tribunal’s constitution. Even now these proceedings have not been finally resolved, with an appeal to the Supreme Court still pending.
Diag Human has not sought to enforce the Award in the Czech Republic, but has made various attempts to enforce the Award in other jurisdictions. Its attempts to enforce the Award in France and Austria have ultimately failed, and enforcement proceedings in the USA and Luxembourg are still on-going.
In enforcement proceedings brought in Austria, the Supreme Court of Austria had already determined that the Award was not binding and accordingly unenforceable pursuant to Article V(1)(e) of the New York Convention. The Czech Republic submitted that this created an “issue estoppel” in favour of the Czech Republic that the Award was not binding.
Under English law, a decision of a foreign court on an issue can give rise to an estoppel on that same issue in later proceedings between the same parties provided that:
- the foreign court is recognised under English private international law as a court of competent jurisdiction;
- its decision on the issue is final and conclusive; and
- the decision was “on the merits”.
It is irrelevant that the English court may form the view that the decision of the foreign court was wrong either on the facts or as a matter of English law.
The main thrust of Diag Human’s submission was that no issue estoppel arose in this case because the issue determined by the Supreme Court of Austria was different from the issue before Eder J. In particular, it submitted that the Supreme Court of Austria failed to consider whether there was in fact a valid review in process as contemplated by Article V of the parties’ arbitration agreement, and that such consideration was essential as a matter of English law to a determination as to whether the Award was binding under s103(2)(f) of the Act.
Eder J did not accept that submission. He found that the issue actually determined by the Supreme Court of Austria was that the Award was not binding. It made no difference that the decision was reached in the context of enforcement proceedings brought pursuant to the New York Convention rather than under the Act. Diag Human’s complaint was actually that the decision of the Supreme Court was wrong as a matter of English law. For the purposes of considering the question of issue estoppel this was irrelevant.
While reaching the conclusion that there was issue estoppel, Eder J also considered the Czech Republic’s further argument that the Award was not binding.
Section 103 of the Act provides that:
“(1) Recognition or enforcement of a New York Convention award shall not be refused except in the following cases.
(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves – …
(f) that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.”
The wording of s103(2)(f) reflects the wording of, and gives effect to, Article V(1)(e) of the New York Convention.
Whether an award is binding under s103(2)(f) of the Act is a question for the English Court to decide. Although this point was agreed by both parties, they disagreed as to the proper approach of the English Court in determining that issue. Eder J referred to the analysis of Burton J in Dowans Holding SA v Tanzania Electric Supply Co Ltd  2 Lloyd’s Rep 275 at -, and in particular his conclusion that “the binding effect of an award depends upon whether it is or remains subject to ordinary recourse“.
Eder J recognised that there may be a problem of definition as to what constitutes “ordinary recourse” as opposed to “extraordinary recourse”, and that there may well be a fine line between the two. In this case, Diag Human submitted that the term “ordinary recourse” referred to “a genuine appeal on the merits”. In Eder J’s view, it would have been inappropriate for him to provide any definition of either category, but in any event he was not persuaded that “ordinary recourse” should necessarily be defined in such way.
The Czech Republic submitted that the English Court should, in effect, adopt the same approach as that adopted by the Supreme Court of Austria, which was to ask itself whether there was a process of ordinary recourse currently pending. Diag Human’s case was that this was, as a matter of English law, the wrong approach given that its case was that there was no review actually pending. Diag Human argued that it was necessary for the English Court to determine for itself whether or not, as a matter of Czech law, (i) the Review Process had been properly triggered by the Czech Republic and (ii) Diag Human had validly withdrawn its own application for review.
Eder J did not accept Diag Human’s submission, at least in the circumstances of this case. In his view, an issue estoppel was created by a decision of the Municipal Court of Prague that both points were to be resolved by the review tribunal itself. Even if there was no issue estoppel, this decision supported the conclusion, on a balance of probability, that as a matter of Czech law the review tribunal had jurisdiction to decide on these issues. Eder J concluded that it must necessarily follow that the Award was subject to “ordinary recourse” and therefore not binding. Going on to consider, nonetheless, whether the Review Process had been validly triggered as a matter of Czech law, he concluded that it had, and that the Award was therefore the subject of “ordinary recourse”.
This decision underlines how important it is for parties to think carefully about where they seek enforcement of an award, as an unfavourable judgment made in one jurisdiction could have a direct bearing on enforcement proceedings in England. There was no doubt in Eder J’s view that issue estoppel could arise from decisions on enforcement under the New York Convention in other states, although he accepted that questions of arbitrability and public policy may be different in different states and that a decision in a foreign court refusing to enforce an award under the New York Convention on public policy grounds will not ordinarily give rise to an issue estoppel in England.
Although Eder J refrained from defining the terms “ordinary recourse” and “extraordinary recourse”, this case does also provide helpful guidance as to the approach the English Courts will take in determining whether an award is subject to “ordinary recourse” and accordingly not binding for the purposes of the New York Convention. It is highly unusual for an arbitration agreement to provide, as in this case, that a party can apply for review of the tribunal’s award, and that an award will not become binding on the parties until any validly triggered review process has been determined. As a result, judicial consideration of these issues is relatively rare.
For more information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Lawyer, Naomi Lisney, Associate or your usual Herbert Smith Freehills contact.
Vanessa NaishProfessional Support Lawyer
+44 20 7466 2112
+44 20 7466 2749