Application for security for costs and security for the Award refused by English Court in investment treaty award challenge

In its recent judgment in The Czech Republic vs Diag Human and ors [2023] the English court has refused Diag Human's application for security for costs and security for the award in a relation to a challenge of an English-seated investment treaty award.

While both applications were ultimately unsuccessful, the court carried out an extensive review of s70(6) and s70(7) of the Arbitration Act 1996 (the Act) and the relevant case law. This judgment therefore provides helpful clarification of the legal tests for applications for security for costs and awards when challenge applications are pending.

Background

The background to the underlying case is more fully described in our previous blog posts here and here. Diag Human and Josef Stava (the Defendants) originally commenced an ad hoc arbitration under the Czech Arbitration Act 1994 against the Czech Ministry of Health (the Czech Arbitration). The Czech Arbitration was long and complex, resulting in several awards, "review proceedings", significant allegations of corruption, and multiple enforcement and other legal proceedings across different jurisdictions including the US, France, Luxembourg, Austria and the UK.

In December 2017, the Defendants commenced an English-seated arbitration against the Czech Republic under the Czech and Slovak Federal Republic -Swiss Confederation bilateral investment treaty (the BIT Claim). An award was handed down on 18 May 2022 in favour of the Defendants (the BIT Award).

The Czech Republic proceeded to challenge the BIT Award under ss.67 and 68 of the Act. Within that challenge process, the Defendants applied under s70 of the Act for:

1. Security for their costs of defending the Czech Republic's challenges (s70(6)); and
2. Security for the full amount of the BIT Award (s70(7)).

The Decision

Security for Costs

i. What test should the court apply in deciding whether to order security for costs?

S70(6) of the Act provides that the court may order an applicant "to provide security for the costs of the application or appeal and may direct that the application or appeal be dismissed if the order is not complied with". The court was asked to consider what test should be applied in the exercise of its discretion to award costs, with reference to Azov Shipping Co v Baltic Shipping Co [1999] 2 Lloyd's Rep 39 and the line of cases applying Azov, namely X v Y, Konkola and Progas.

The Defendants argued that the court needed to consider (1) what assets the party challenging the award has; and (2) whether those assets are readily available for the satisfaction of any order for costs. They acknowledged that the Czech Republic had the resources to pay a future costs order, but that the second limb of the test was particularly critical in this case, relying on the difficulties in  enforcement proceedings in the Czech Arbitration as evidence that assets were not "readily available". Meanwhile, the Czech Republic relied on Konkola to argue that s70(6) should be approached in the same way as security for costs applications under CPR 25 of the English civil procedure rules. This would exclude the second limb of "ready availability" and require the applicant to prove that the party challenging the award did not have the assets to meet a costs order, something that the Defendants had acknowledged was not the case.

The Judge disagreed with the Czech Republic's assertions, in particular, the Czech Republic's interpretation of Konkola. The Judge also noted that Konkola referred to Azov and X v Y with approval, both of which referenced the second limb of the test.  Accordingly, the Judge accepted that the two limb analysis should apply.

ii. The relevance of an undertaking to pay

Somewhat unusually in a security for costs application, the Czech Republic did not submit a witness statement prior to the hearing confirming it would pay any costs ordered against it and explaining how such a costs award could be enforced against it if required. After the hearing the Czech Republic submitted a witness statement and gave a formal undertaking agreeing to pay any costs. However, no explanation was given about the availability of any non-sovereign assets for enforcement.

The Defendants submitted that the Judge should give little weight to the undertaking. They alleged that the Czech Republic may have deliberately removed assets to prevent enforcement in the Czech Arbitration, and also relied on allegations of wrongdoing against the Czech Republic within the BIT Award as evidence that the undertaking may not be complied with. The court dismissed these arguments, concluding that general allegations of misconduct were insufficient; the Czech Republic must be shown to have taken steps in relation to their assets that would make it difficult to enforce an order for costs in relation to this specific challenge to the BIT Award.

The court concluded that a formal undertaking should be taken at face value without good reason to the contrary. The Defendant's submissions were not sufficient to displace that assumption and, accordingly no security for costs application should be made. However, had the undertaking not been received, the court would have formed the view that the Czech Republic did, or at least, may not, have assets readily available to satisfy the Court order and granted the application.

In terms of the amount of security (were it to be awarded), the Czech Republic referred to an outstanding English court costs order against the Defendants in relation to the Czech Arbitration. The Judge concluded, obiter, that had he been minded to order security, the sum awarded would have been significantly lower than that asked for by the Defendants (being the difference between the maximum costs of the Defendants in the challenge and the present value of that English costs order).

Security for the BIT Award

S70(7) of the Act provides that "the court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal". As set out in Konkola and Progas, the court must be persuaded that the challenge in some way prejudices the applicant's ability to enforce the award: usually, it is shown that there is a risk that assets will be dissipated prior to the resolution of the challenge. In respect of a s67 challenge, the applicant must also show that the challenge is weak on the merits.

Due to the limited time available for both sides to develop their submissions and the complex background to the case, the Judge concluded that it would not be possible to have a meaningful assessment of the merits until the full challenge was heard in January 2024. As a result, no finding could be made on the weakness or otherwise of the s67 challenge. Regarding the risk of "prejudice" through the dissipation of assets, the Judge found that none of the misconduct alleged by the Defendants (which mirrored the points raised in regard to the undertaking) directly indicated that the Czech Republic might put its non-sovereign assets beyond the Defendant's reach between now and the final hearing. Accordingly, the application for security for the BIT Award failed.

Comment

This case provides helpful guidance on the legal tests for applications for security for costs and security for award when challenge applications are pending before the English courts.

On security for costs, the court confirmed that the applicant must persuade the court that its counterparty does not have assets which are "readily available". The importance of the formal undertaking to the decision not to award security for costs in this case is also of note, as is the quality and focus of any evidence needed to displace the assumption that the undertaking should be taken at face value. On security for the award the court provided a useful explanation of what may constitute "prejudice", requiring an applicant to provide evidence that the prejudice or asset dissipation would occur prior to the resolution of the challenge process itself.

For more information, please contact Hannah Ambrose, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.