In this arbitration, the Claimants are represented by:
Mr. Pierre Bienvenu
Mr. Martin Valasek
Mr. Jacques Demers
Ogilvy Renault SENC in Montréal;
Mr. René Cadieux
Mr. Daniel Picotte
Fasken Martineau DuMoulin LLP in Montréal;
Prof. Dr. Iván Szász
Squire Sanders & Dempsey LLP in Budapest; and
Prof. Dr. James R. Crawford SC
University of Cambridge and Matrix Chambers.
This arbitration arises from an alleged unlawful expropriation by the Respondent of the investment of the Claimants in and related to the Budapest-Ferihegy International Airport ("Airport") which expropriation, as alleged by the Claimant, constituted a breach of the Agreement between the Government of the Hungarian People's Republic and the Government of the Republic of Cyprus on Mutual Promotion and Protection of Investment ("BIT"), which entered into force on May 24, 1989.
Article 7 of the BIT provides:
"1. Any dispute between either Contracting Party and the investor of the other Contracting Party concerning expropriation of an investment shall, as far as possible, be settled by the disputing parties in an amicable way.
2. If such disputes cannot be settled within six months from the date either party requested amicable settlement, it shall, upon request of the investor, be submitted to one of the following:
(a) the Arbitration Institution of the Arbitral Tribunal of the Chamber of Commerce in Stockholm;
(b) the Arbitral Tribunal of the International Chamber of Commerce in Paris;
(c) the International Centre for the Settlement of Investment Disputes in case both Contracting Parties have become members of the Convention of 18 March 1965 on the Settlement of Investment Disputes between States and Nationals of Other States."
On March 8, 2004, the Tribunal, as originally constituted, held its first session in The Hague. Present at the session were the full Tribunal, the ICSID Secretary of the Tribunal, Mr. Ucheora Onwuamaegbu ("Secretary"), and the legal counsel of the Claimants and the Respondent and/or their representatives.
Specifically, the matters considered at the first session were, inter alia, the following:
(a) applicable arbitration rules;
(b) apportionment of costs and advance payments to the Centre;
(d) decisions of the Tribunal by correspondence or telephone conference;
(e) place of arbitration;
(f) procedural language;
(g) pleadings: number, sequence, time limits; and
(h) production of evidence and examination of witnesses and experts.
On July 30, 2004, in accordance with the agreed timetable, the Claimants submitted to ICSID the following:
1) Memorial of the Claimants, dated July 30, 2004;
2) Witness Statement of Mr. Michael Huang, dated July 29, 2004;
3) Exhibits referred to in Witness Statement of Mr. Michael Huang Vol.1;
4) Exhibits referred to in Witness Statement of Mr. Michael Huang Vol.2;
5) Exhibits referred to in Witness Statement of Mr. Michael Huang Vol.3;
6) Exhibits referred to in Witness Statement of Mr. Michael Huang Vol.4;
7) Witness Statement of Mr. Tamás Tahy, dated July 25, 2004 but signed on 28 July, 2004;
8) Witness Statement of Mr. György Onozó, dated July 28, 2004, and English translation thereof;
9) Expert Report by Manuel A. Abdala, Andres Ricover and Pablo T. Spiller of LECG LLC, dated July 29, 2004, entitled Damage Valuation of Claimants' Investment in the Airport ("LECG Report");
10) Annexes to LECG Report Vol.1;
11) Annexes to LECG Report Vol.2;
12) Annexes to LECG Report Vol.3;
13) Annexes to LECG Report Vol.4;
14) Annexes to LECG Report Vol.5;
15) Annexes to LECG Report Vol.6;
16) Annexes to LECG Report Vol.7;
17) Authorities Vol. I;
18) Authorities Vol. II; and
19) Authorities Vol. III.
On January 17, 2005, in accordance with the pleading timetable agreed, the Respondent submitted to ICSID the following:
1) Counter-Memorial of the Respondent, dated January 17, 2005;
2) Expert quantum report by NERA Consulting ("NERA Report");
3) Witness Statement of Dr. László Kiss;
4) Witness Statement of Mr Gyula Gansperger;
5) Witness Statement of Mr. Gabor Somogyi-Tóth;
6) Exhibits of the Respondent's Counter Memorial; and
On July 22, 2005, in accordance with the revised timetable, the Claimants submitted to the Tribunal and the Respondent the following documents:
1) Claimants' Reply, dated July 22, 2005;
2) Reply Witness Statement of Mr. Michael Huang, dated July 21, 2005;
3) Reply Witness Statement of Mr. Tamás Tahy, dated July 14, 2005;
4) Reply Witness Statement of Mr. György Onozó, dated July 20, 2005, and English translation thereof;
5) Supplemental Expert Report by Manuel A. Adbala, Andres Ricover and Pablo T. Spiller of LECG LLC, dated July 22, 2005, entitled Damage Valuation for the Investment of ADC Affiliate Limited and ADC & ADMC Management Limited in the Budapest-Ferihegy International Airport ("Supplemental LECG Report").
On October 6, 2005, the Tribunal informed the Parties that it had decided to amend the schedule in this arbitration as follows:
November 4, 2005 Deadline for filing the Respondent's Rejoinder ;
December 9, 2005 Deadline for filing the Claimants' Sur-Rejoinder on Jurisdiction ;
December 19, 2005 Organizational meeting in London, at 10a.m.;
January 17 to 27, 2006 Hearing on jurisdiction and merits in London or The Hague.
1) the Respondent shall use its best endeavours to procure Mr. Matthew to testify at the hearing in January; if this proves impossible, the Respondent shall serve on the Claimants and the Tribunal, before December 29, 2005, statements of the two new expert witnesses who will state that they entirely agree with and adopt the NERA Report ;
2) the Respondent shall supply to the Claimants before December 23, 2005 various versions of the bid requirements and tender documents together with the agreement entered into by BAA in relation to BAA's acquisition of the shares in Budapest Airport; such production shall be subject to a Confidentiality Agreement annexed to the Procedural Order.
In his Report, Dr. Hunt declared that he had "read, understood, analyzed" and, subject to one exception, "agree(s) with the NERA Report." However, in paragraph 10 of this Report, Dr. Hunt made the important point that he concluded that the definition of the financial contribution made by Airport Development Corporation ("ADC") for the purposes of calculating compensation was US$16,765 million and the Internal Rate of Return ("IRR") computations were to incorporate this initial cash infusion. This point deviated from the NERA Report and as Dr. Hunt noted, "this deviation is in favour of the Claimants' position".
"Any arbitration proceeding shall be conducted in accordance with the provisions of this Section and, except as the parties otherwise agree, in accordance with the Arbitration Rules in effect on the date on which the parties consented to arbitration. If any question of procedure arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall decide the question."
Bearing in mind of these provisions, the Tribunal ruled in the above letter as follows:
14. Having considered all the submissions on this matter, the Tribunal is satisfied that confidentiality does attach to all the documents produced in this ICSID arbitration. Confidentiality is important because parties to ICSID arbitrations may not want the details of the dispute made public and furthermore witnesses who come forward to assist the Tribunal in their difficult task should do so with the knowledge that what they say is confidential and cannot be released without an order of the Tribunal. Such a rule is necessary to preserve the integrity of the arbitral process.
15. That confidentiality is desirable is made evident by the frank statement of Mr. Gansperger that he wanted these documents for the purposes of ‘obtaining satisfaction' against the statement made by Mr. Tahy.
16. Mr. Burmeister suggested that it was only fair to let a witness, who gave evidence in his native language and was translated into English for the benefit of the Tribunal, have the right to check the English translation of what he said and how that was recorded in the transcript. It is clear that Mr. Gansperger does speak English and therefore would be able to check the accuracy of his words.
17. The Tribunal accepts that it is only fair that Mr. Gansperger should be able to have access to the transcript to check the authenticity of the translation.
18. However, for that purpose, he does not require to be given a copy of the transcript of his evidence. What the Tribunal is prepared to allow is that Mr. Gansperger may, only at the offices of the Bodnár law firm, be shown a copy of the transcript of his evidence and be allowed to read it through and check it for accuracy. On no account is he to be given a copy to be taken away from the Bodnár law firm offices.
19. As to the request that Mr. Gansperger be given a copy of the statement or extract of the statement of Mr. Tahy, this application is refused. This refusal is based upon the importance of maintaining the confidentiality of ICSID arbitrations which involves protecting witnesses who come forward to assist the Tribunal. The Tribunal accepts that in ICSID arbitrations it is difficulty for some witnesses to give evidence against their own State and when this is coupled with a request for "satisfaction" from a co-national who is clearly a powerful figure in that country, the importance of confidentiality looms large."
This confidentiality issue was then closed.
On April 7, 2006, after reviewing the relevant correspondence and careful consideration of the issue, the Tribunal, through the Secretary, sent a letter to the Parties in regard to the "new evidence" matter and directed the Respondent to specify its allegation that "new evidence" was contained in the LECG Post-Hearing Report by May 1, 2006.
"After careful reading of the LECG Post-Hearing Report as well as Dr. Hunt's Supplemental Expert Report and thorough consideration of the issue, the Tribunal is now satisfied that it can conclude that no new evidence was introduced in the LECG Post-Hearing Report. Therefore, the objection raised by the Respondent in this regard is rejected. The issue of new evidence is closed."
The Airport is an exclusive and non-negotiable asset of the State, as stated in Section 36/A of the Air Traffic Act (Act XCVII of 1995) and the Hungarian Civil Code. However, pursuant to Decree No. 12/1993 of the Minister of Transport and Water Management ("Ministry of Transport"), the Air Traffic and Airport Administration ("ATAA") had the authority to transfer revenue generating usage and revenue collection rights relating to the operation of certain facilities at the airport.
In September 1992, ATAA initiated a three-phase process to select a partner to renovate Terminal 2/A and to design a new Terminal 2/B at the Airport. The invitation to tender also involved the design of the adjoining public road and traffic entrance areas and related infrastructure, as well as the financing, construction, leasing and operation of Airport facilities ("Airport Project" or "Project").
The first phase of the tender process involved the ATAA's selection of qualified bidders. Only qualified bidders were allowed to participate in the second phase, which involved the ATAA's selection of two "Preferred Tenderers". The third and final phase involved the ATAA's selection of the "Selected Tenderer".
The first phase began in September 1992 with the issuance by the ATAA of an "International Prequalification" document containing information relating to the Airport Project and an "Application", including an Invitation to Prequalification, a description of the prequalification procedure and the Applicant's Questionnaire, or "Request for Qualification" ("RFQ").
The ATAA's tender documentation, which was issued between December 13, 1993 and January 17, 1994, consisted of two parts in eleven volumes ("Tender Documentation"). Part A contained, inter alia, the Invitation to Tender and Instructions to Tenderers, as well as the Project Conditions and Requirements. Part B contained technical documents such as drawings, technical specifications, Bills of Quantities and Technical Descriptions.
The Tender Documentation required bidders to include in their tenders a "Basic Tender" conforming strictly to the conditions set forth by the ATAA. Bidders were also invited, but not obligated, to submit an "Alternative Tender", which did not need to conform to all of the conditions set out in the Tender Documentation.
On April 29, 1994, ADC, acting as an individual corporation, not as a consortium, submitted its tender ("ADC's Tender") to ATAA. ADC's Tender included both a Basic Tender, submitted in compliance with the Tender Documentation, and an Alternative Tender. ADC's Alternative Tender proposed an alternative concept for Terminal 2/B based on the same footprint as the Basic Tender building, but with more cost-effective and efficient design, reduced capital costs and lower operating expenses. It also increased the maximum passenger handling capacity of the terminals by one million passengers per year over the Basic Tender.
The negotiations of the Master Agreement began in August 1994 and it was executed on March 31, 1995. Parties to the Master Agreement are ADC and the ATAA. On the same day a Guarantee Agreement between Huang & Danczkay Properties and the ATAA was executed ("Huang & Danczkay Guarantee").The Master Agreement is a legal instrument that laid down the fundamental structures of the whole Project. As stated in Article 2 of the Master Agreement, the purpose of the Master Agreement
"is to set forth the agreements among the parties as to the terms and conditions with respect to the following subjects:
2.1 the obligations and the satisfaction of the obligations of ADC and the ATAA in connection with the Project prior to the Construction Commencement Date;
2.2 the obligations of ADC, the Project Company and the ATAA in connection with the Project after the Construction Commencement Date;
2.3 the Operating Rights of the Project Company following the Operations Commencement Date;
2.4 the rights and obligations of the Project Company and the ATAA during the Operating Period;
2.5 the participation by ADC and the ATAA, provided that the necessary approvals are obtained, in the equity capital of the Project Company;
2.6 the management of the Project Company; and
2.7 the nature of other agreements to be entered into in connection with the Project."
In particular, the Master Agreement provided, inter alia, for the formation under Hungarian law of a wholly-owned subsidiary of ADC ("Project Company" or "FUF") for the sole purpose of:
"(a) incurring the Project Debt and funding the Construction work following the Initial Drawdown.
(b) preparing operation and asset management plans and engaging in other preparatory work for the Terminal Operations prior to completion of the Construction work; and
(c) conducting the Terminal Operation on and after the Operations Commencement Date and servicing the Project Debt until expiration of the Term.[...]"
The Master Agreement also provided that the ATAA and the Project Company would enter into an operating period agreement, which would grant to the Project Company, subject to certain conditions, the right to conduct the terminal operations and to collect the terminal revenues. It was also intended that the initial term ("Initial Term") of the Master Agreement would be twelve years from the operations commencement date ("Operations Commencement Date"), which would be extended under certain conditions up to six additional years.
The Master Agreement also provided that the Project Company could establish the fees and charges to be levied at the terminals, but only in accordance with the regulatory framework ("Regulatory Framework"). That framework set forth the policies and procedures for preparing the Annual Business Plan, and became Schedule C to the Operating Period Lease.
Subsequently, ADC was advised that the Government had come to the conclusion that, for legal reasons, ATAA needed to make a cash contribution to the Project Company to receive its quota and that the proposed in-kind contribution by the ATAA would not entitle it to receive its 66% quota of the Project Company. In order to address this problem to the satisfaction of the ATAA, the parties agreed to the terms ultimately set out in the Project Agreements, namely that of the US$16,765 million contributed by ADC to the equity of the Project Company, 66% or US$11,065 million would be contributed by ADC to the Project Company on behalf of the ATAA in return for equivalent value from the ATAA, in the form of rental payments from the Project Company that would otherwise be due to ATAA under the Operating Period Lease. These rental payments were in turn converted into a stream of payments under a promissory note ("Promissory Note").
(1) Quotaholders Agreement among ADC, the ATAA and the Project Company, executed on February 17, 1997;
(2) Quota Transfer Agreement between ADC and the ATAA, executed on February 18, 1997;
(3) Association Agreement between ADC and the ATAA, executed on February 18, 1997;
(4) Subscription Agreement among ADC, the ATAA and the Project Company, executed on February 27, 1997;
(5) Receipt and Acknowledgment among ADC, the ATAA and the Project Company, executed on February 27, 1997;
(6) Release and Note Agreement between ADC and the Project Company, executed on February 27, 1997;
(7) Assignment and Assumption Agreement between ATAA, ADC and ADC Affiliate, executed on February 27, 1997;
(8) Operating Period Lease between the ATAA and the Project Company, executed on February 27, 1997;
(9) Terminal Management Agreement for entrepreneurial operations among the ATAA, the Project Company and ADC & ADMC Management Limited, executed on February 27, 1997; and
(10) ATAA Services Agreement between the ATAA and the Project Company, executed on February 27, 1997.
From the outset of the tender process, the ATAA made it clear that the Project should be financed on a non-recourse project basis, and that all tenders should assume that neither the ATAA nor any other entity of the Government of Hungary would guarantee any debt incurred in connection with the Airport Project. These conditions were listed as the first "fundamental objective" and the first "financial assumption" in the Tender Documentation.
The Credit Agreement (the "Facility Agreement" as the document was titled) was executed on February 27, 1997 in Budapest. Mr. Medgyessy himself signed the guarantee ("Guarantee"), on behalf of the Government, on the very same day. The syndicate of lending banks had agreed to provide US$103 million of financing to the Project Company to realize the Project at an interest rate of LIBOR plus 0.95% to be paid over a period of ten years.
• Prior to each operational year of the Project Company, the Terminal Manager was to prepare and submit to the ATAA a new draft Annual Business Plan covering each financial year, or portion thereof, for the remainder of the Term;
• The ATAA had twenty days, following submission of such first draft, to comment in writing on the draft;
• If no comments were made, such draft Annual Business Plan was to be submitted to the Quotaholders' meeting for approval;
• If comments were made, a second (or third) draft would be produced by the Terminal Manager following consultations between the ATAA, the Terminal Manager and the Project Company; and
• The agreed draft of the Annual Business Plan would be submitted to the Quotaholders' meeting for approval.
• The Quotaholders approved the Annual Business Plan for the year 1999 on October 9, 1998;
• The Quotaholders approved the Annual Business Plan for the year 2000 on September 13, 1999; and
• The Quotaholders approved the Annual Business Plan for the year 2001 on October 2, 2000.
"Pursuant to the Regulatory Framework, the Terminal Manager is required to prepare and submit to the ATAA a new draft Annual Business Plan by May 31 of each year. Accordingly, ADC & ADMC Management Ltd. (the "Terminal Manager") submitted the first draft of the Annual Business Plan dated May 29, 2001. The ATAA provided its comments on the first draft by letter dated June 20, 2001. The Terminal Manager submitted the second draft on June 30, 2001. Based on the request by the ATAA, the Terminal Manager submited the third draft on August 23, 2001. On September 21, 2001, the ATAA requested further modifications to the third draft. The Terminal Manager submitted the Fourth Draft on October 12, 2001. Upon receipt of comments on November 15, 2001, the terminal manager submits this Fifth Draft for approval of the Quotaholders."
The Claimants contend that the Quotaholders approved the Annual Business Plan for the year 2002 on December 11, 2001. The Respondent disputes this contention. By letter dated December 11, 2001 from Mr. Somogyi-Tóth, Acting Director of ATAA, addressed to Mr. Tamás Tahy, the Commercial Director of Ferihegy ADC Limited, it was stated as follows:
"We have received the 5th version of the Business Plan for 2002. Thank you very much for your taking into consideration our comments when revising it. We inform you that we accept the 5th version of the Business Plan and we ask you to do your best to perform all the tasks defined in the plan.
At the same time we ask you again to consult with MALÉV regarding the planned parking (bridge) fee structure and please to inform us about the results of this discussion at your earliest convenience. In addition we ask you to update the exchange rate forecast for the whole project period when preparing the next year plan."
In the light of this letter, the Tribunal fails to see how it could be contended that the Annual Business Plan for the year 2002 was not approved. The Tribunal is satisfied that it was.
• Independent auditors' report on Project Company's 1995 Annual Report dated May 30, 1996;
• Independent auditors' report on Project Company's 1996 Annual Report dated February 4, 1997;
• Independent auditors' report on Project Company's 1997 Simplified Annual Report dated May 4, 1998;
• Independent auditors' report on Project Company's 1998 Simplified Annual Report dated May 31, 1999;
• Independent auditors' report on Project Company's 1999 Annual Report dated March 31, 2000;
• Independent auditors' report on Project Company's Financial Statements for 2000, dated March 14, 2001; and
• Independent auditors' report on Project Company's 2001 Annual Report dated August 27, 2002.
From autumn 2001, a change took place in the management of the ATAA in order to prepare for its transformation: Mr. Somogyi-Tóth remained Acting Director in charge of the day-to-day operations; Mr. Gansperger became responsible for starting up Budapest Airport Rt (the new company) ("BA Rt") and the commencement of its operations; and Mr. Istvan Mudra became responsible for starting up HungaroControl (Mr. Mudra had been the Deputy Director of Air Traffic Control).
Decree No. 45/2001 (XII.20) KöViM ("Decree") was issued on December 20, 2001, by the Minister of Transport ("KöViM Minister"). It was issued with the agreement of the Minister of Finance, the Minister of the Prime Minister's Office, the Minister of the Interior, the Minister of Health, the Minister of Defence and the Minister of Environment Protection.
Section 45(5) of the Air Traffic Act found its way into the Bill due to a subsequent Amendment Motion introduced by a Government MP, Dr. Dénes Kosztolányi. The Amendment Motion, introduced on November 8, 2001, advanced as justification, the following reasoning:
The activities listed in Section (1) have substantial influence on the operation and development of Budapest-Ferihegy International Airport, and thus the State has such strategic interest connected to these activities that the law itself specifies that the operator performing such activities may only be an organization in which the State is the majority owner, or if it is a minor shareholder then it owns preference shares, or the organization is a concession company. If any of the activities specified in Section (1) may be transferred to a third party under a contract it may not be ensured that the strategic requirements of the State are fulfilled, in other words, the limitations and restrictions established under Section (1) may be circumvented pursuant to a contract concluded with a third party."
On November 28, 2001, the same MP who had submitted the Amendment Motion submitted a "Supplementary Amendment Motion" in which he recommended that Section 45 of the Air Traffic Act be amended by the addition of two more paragraphs, paragraphs (6) and (7), in addition to paragraph (5). The reasoning for this Supplementary Amendment Motion reads as follows:
The aim of the amendment motion is to implement the Community liberalization of air transport with respect to the ground service market when our country joins the European Union.
The amendment establishes the obligation for service providers with significant market power to enter into a contract. Pursuant to the Civil Code conclusion of a contract can be rendered obligatory by a legal regulation."
On December 21, 2001, the Project Company was informed of the Decree upon reception of a copy of same by Mr. Tahy. On Saturday, December 22, 2001, the Project Company received a letter from Mr. Gansperger and Mr. Gábor Somogyi-Tóth further notifying it of the Decree. Mr. Gansperger signed the letter in his capacity as representative of the new Budapest Ferihegy International Airport Management Ltd. ("Joint Stock Co.") and statutory successor of ATAA, and Mr. Somogyi-Tóth signed as representative of ATAA.
"... shall similarly lapse and become void, and the activities performed by your company will be taken over and performed by the JS Co. as of January 1, 2002, with full competence. In order to facilitate the maintenance of normal business operations, it is respectfully suggested that we should begin consultations on the transfer without delay."
On January 1, 2002, ATAA's function were separated and allocated to BA Rt and HungaroControl as a result of the Amendment to the Air Traffic Act and the subsequent Decree. HungaroControl, according to the Decree, became "the legal successor with respect to the management of air traffic, the performance of other aviation services and related activities". BA Rt, on the other hand, became "the legal successor with respect to the operation of the Budapest Ferihegy International Airport and related activities".
In anticipation of privatization, on June 1, 2005, Hungary amended Section 45(1) of the Air Traffic Act so that the majority shares in the Joint Stock Co. could be owned by a foreign entity. On June 6, 2005, the Government of Hungary issued an invitation to tender for Budapest Airport Rt. The subject of the tender was the sale of shares representing 75% minus one vote of the registered capital of Budapest Airport Rt., which is currently wholly-owned by the Hungarian Privatization and State Holding Company Ltd. ("ÁPV Rt.").
• Fraport AG Frankfurt Airport Worldwide (Germany) - operator of the Frankfurt and Frankfurt-Hahn airports, among others;
• BAA international Ltd. (United Kingdom) - operator of Heathrow, Gatwick and Standsted airports in London, among others;
• Hochtief Airport GmbH and Hochtief AirPort Capital (Germany) - operators of the Düsseldorf, Hamburg and Athens airports, among others;
• Macquarie Airports (Australia) - operator of the Rome, Brussels, Birmingham and Sydney airports, among others; and
• Copenhagen Airports (Denmark) - operator of Copenhagen airport, among others.
The Claimants contend that the expropriation of the Claimants' interest constituted a depriving measure under Article 4 of the BIT and was unlawful as: (a) the taking was not in the public interest; (b) it did not comply with due process, in particular, the Claimants were denied of "fair and equitable treatment" specified in Article 3(1) of the BIT and the Respondent failed to provide "full security and protection" to the Claimants' investment under Article 3(2) of the BIT; (c) the taking was discriminatory and (d) the taking was not accompanied by the payment of just compensation to the expropriated parties.
a. the market value of the expropriated investment at the moment of expropriation; and
b. the sum of (x) the market value of the expropriated investment at the date of the award, calculated with the benefit of post-taking information and (y) the value of the income that the Claimant would have earned from the expropriated investments between the date of the taking and the date of the award.
Based on the LECG Report, the LECG Supplemental Report and the LECG PostHearing Report, all produced by Messrs. Abdala, Ricover and Spiller of LECG LLP, the Claimants submit that the damages to which they are entitled under each calculation approach as of 30 September, 2006 (including interest) as follows:
damages under the Time of Expropriation Approach US$ 68,423,638
damages under the Restitution Approach US$ 76,227,279
damages under the Unjust Enrichment Approach US$ 99,722,430
plus further interest as of October 1, 2006 until the date of payment.
Third, in the event that the Tribunal should award compensation to the Claimants, the Respondent requests as a condition of any payment to the Claimants and ADC, on its behalf and on behalf of any companies controlled by ADC, that they first waive in writing any and all rights they may have under the Project Agreement (including Promissory Note) and transfer the 34% Quota in the Project Company to the Respondent (including any rights to unpaid dividends, and any rights to share in the assets of the Project Company). In a letter dated January 13, 2006 from Ogilvy Renault to the Bodnár Law Firm copied to the Tribunal, Ogilvy Renault stated in response to the argument that the FUF arbitration proceedings could lead to a double recovery:
"...this Tribunal has the discretion to fashion a remedy that would avoid any risk of double recovery. For example, as was done in other ICSID cases, the Tribunals award can provide that upon payment of the sum awarded by the Tribunal to the Claimants in this case, ADC Affiliate must surrender its quota in the Project Company to the Respondent. Indeed, paragraph 488 of the Respondent's Rejoinder contemplates precisely such an approach."
On Day 1 of the Oral Hearing, at the end of his helpful opening submission, Mr. Burmeister stated as follows:
"I may conclude with our prayers for relief, but only very briefly addressed. They have been set out in the submissions and briefs.
I only want to stress one point, again, and this is basically the last one. In the event that any award would be granted to the Claimants, this may only be conditional upon the transferring back the share in the Project Company to the Respondent, giving back the Promissory Notes they have received and waiving any future rights in relation to the Project Agreements."
Judge Brower then said he "expected those conditions would be agreeable to the Claimants".
Mr. Bienvenu then stated:
"You have seen the statement in our letter of January 13, 2006 subject to payment."
During the course of this arbitration, the Respondent has sought to rely on the following justifications for the Decree:
(a) compliance with EU law;
(b) strategic interests;
(c) contractual non-performance by the Claimants;
(d) lack of operating license; and
(e) financial interest in terminating the Project Agreements.
Two points satisfied the Tribunal that this argument is groundless. First, it is a fact that the airport was privatized in December 2005 by the sale to BAA. Second, Mr. Gansperger in his attempt to minimize the role played by the Project Company said in terms "I did not see that FUF would have dealt with activities of strategic importance...it did nothing". It seems to the Tribunal that the Respondent cannot have it both ways. If it wishes to minimize the Project Company's role and allege non-performance, it cannot in the same breath justify its actions by the mantra of "strategic interests", economic or security.
The Tribunal accepts that the Project Company performed at the very least in accordance with the projections contained in the business plans agreed from time to time. It is highly significant that the 2002 Business Plan was signed off by Mr. Somogyi-Tóth on behalf of ATAA on December 11, 2001 just days before the events complained of in this arbitration. Further, Mr. Somogyi-Tóth fairly confirmed that his deputy at ATAA, Mr. Vertes (also a member of the Supervisory Board), must have reviewed the 2002 business plan prior to Mr. Somogyi-Tóth signing it.
This point was raised for the first time at the hearing in London by Messrs Kiss and Gansperger. Furthermore, as Mr. Gansperger admitted, it was not stated at the time as a reason for the takeover. Still further, as is indicated by the discussion on this point during the evidence of Mr. Gansperger on Day 4, it was never satisfactorily explained why the authorizations contained in the Operating Period License did not of themselves constitute the necessary license. It was never explained why, if this was a valid reason, the Respondent accepted the position and never raised it until January 2006. On any basis this point is unconvincing to the Tribunal.
Having considered all the submissions and evidence in this arbitration, the Tribunal is being asked to decided the following main issues:
a. Applicable Law
Does the Tribunal have jurisdiction to hear the present case? If it has, should the Tribunal limit its jurisdiction to certain claims of the Claimants and if so which ones?
c. Breach of the BIT
Has the Respondent breached any provision of the BIT by depriving the Claimants of their investments? If so, what are the consequences?
d. Quantum of compensation
If the Respondent's deprivation of the Claimants' assets breached the BIT, what compensation are the Claimants entitled to receive from the Respondent? In calculating the appropriate compensation due to the Claimants, what compensation standard should the Tribunal use? Is it the one set forth in the BIT or is the matter to be dealt with under customary international law? When deciding the quantum of the compensation, what should be the appropriate assessment approach? Is the Discounted Cash Flow ("DCF") approach the appropriate one? If it is not, what other approach is appropriate?
"The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable."
The first main issue this Tribunal must decide is whether it has jurisdiction to hear all the claims made in the present case in the light of Art.25(1) of the ICSID Convention. While Article 25 of the Convention refers to the "jurisdiction of the Centre" and Article 41(1) to the "competence" of the Tribunal, the Tribunal will use the term "jurisdiction" and "competence" of the Tribunal interchangeably.
The following articles of the BIT are applicable or relevant in deciding the Tribunal's jurisdiction. They read as follows:
" Article 1
For the purpose of this Agreement:
1. The term "investments" shall comprise every kind of asset connected with the participation in companies and joint ventures, more particularly, though not exclusively:
(a) movable and immovable property as well as any other property rights in respect of every kind of asset;
(b) rights derived from shares, bonds and other kinds of interests in companies [emphasis added];
(c) title to money, goodwill and other assets and to any performance having an economic value;
(d) rights in the field of intellectual property, technical processes and knowhow.
These investments shall be made in compliance with the laws and regulations and any written permits that may be required thereunder of the Contracting Party in the territory of which the investment has been made.
A possible change in the form in which the investments have been made does not affect their substance as investments, provided that such a change does not contradict the laws and regulations and written permits of the Contracting Parties.
2. The term "income" means those net amounts received from the investments for a certain period of time [emphasis added], such as shares of profits, dividends, interest, royalties and other fees, proceeds from total or partial liquidation of the investments, as well as any other sums emanating from such investments which are considered as income under the laws of the host country.
3. The term "investor" shall comprise with regard to either Contracting Party:
i. natural persons having the citizenship of that Contracting Party in accordance with its laws;
ii. legal persons constituted or incorporated in compliance with the law of that Contracting Party [emphasis added],
who, in compliance with this Agreement are making investments in the territory of the other Contracting Party.
3. In cases of approved reinvestments, the incomes ensuing therefrom enjoy the same protection as the original investments . [emphasis added]
1. Each Contracting Party shall ensure fair and equitable treatment to the investments of investors of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those investors [emphasis added].
2. More particularly, each Contracting Party shall accord to such investments full security and protection which in any case shall not be less than that accorded to investments of investors of any third State.
1. Neither Contracting Party shall take any measures depriving, directly or indirectly, investors of the other Contracting Party of their investments unless the following conditions are complied with:
(a) the measures are taken in the public interest and under due process of law;
(b) the measures are not discriminatory;
(c) the measures are accompanied by provision for the payment of just compensation. [emphasis added]
2. The amount of compensation must correspond to the market value of the expropriated investments at the moment of the expropriation. [emphasis added]
3. The amount of this compensation may be estimated according to the laws and regulations of the country where the expropriation is made.
4. The compensation must be paid without undue delay upon completion of the legal expropriation procedure [emphasis added], but not later than three months upon completion of this procedure and shall be transferred in the currency in which the investment is made. In the event of delays beyond the three-months' period, the Contracting Party concerned shall be liable to the payment of interest based on prevailing rates.
1. In compliance with its regulations in force, either Contracting Party will permit the investors of the other Contracting Party to transfer, in any convertible currency, income from investments and proceeds from total or partial liquidation of the investments.
1. Any dispute between either Contracting Party and the investor of the other Contracting Party concerning expropriation of an investment shall, as far as possible, be settled by the disputing parties in an amicable way.
2. If such disputes cannot be settled within six months from the date either party requested amicable settlement, it shall, upon request of the investor, be submitted to one of the following:
(a) the Arbitration Institute of the Arbitral Tribunal of the Chamber of Commerce in Stockholm;
(b) the Arbitral Tribunal of the International Chamber of Commerce in Paris;
(c) the International Centre for the Settlement of Investment Dispute in case both Contracting Parties have become members of the Convention of 18 March 1965 on the Settlement of Investment Dispute between State and Nationals of Other States."
The governing provision in the ICSID Convention in regard to jurisdiction of the Centre is Article 25, which reads as follows:
"(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision of agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State [emphasis added], which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.
(2) "National of another Contracting State" means:
(a) any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include an person who on either date also had the nationality of the Contracting State party to the dispute; and
(b) any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purpose of this Convention.
(3) Consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies the Centre that no such approval is required.
(4) Any Contracting State may, at the time of ratification, acceptance or approval of this Convention or at any time thereafter, notify the Centre of the class or classes of disputes which it would or would not consider submitting to the jurisdiction of the Centre. The Secretary-General shall forthwith transmit such notification to all Contracting States. Such notification shall not constitute the consent required by paragraph (1)."
"Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention."
In order to do justice to all the points on jurisdiction raised by the Respondent, it is necessary to break the submissions down into a list of sub-issues. This involves breaking down the component parts of the Convention and the BIT. These sub-issues are:
a. Is the nature of the dispute governed (a) by the BIT or (b) is it simply contractual in nature?
b. If the answer to (a) is that it is governed by the BIT, did the Claimants make any investment in Hungary within the definition of the BIT and the ICSID Convention?
c. Does the dispute arise "directly" out of an investment as required by the Convention?
d. Does the dispute involve "investors" under the BIT who are nationals of a Contracting State to the ICSID Convention?
e. Does the dispute fall within the scope of Art. 7 of the BIT?
In its Rebuttal, the Claimants contended that the Respondent's "contractual in nature" argument was a mischaracterization of their claims. In support, the Claimants referred to the ICSID case of SGS Société Générale de Surveillance S.A. v. The Republic of the Philippines (ICSID Case No. ARB/02/06), in which the Tribunal confirmed its jurisdiction to hear the case based on the fact that the Claimants in that case "fairly raise questions of breach of one or more provisions of the BIT". The Claimants claimed that the facts in this case raised questions about the breach of the Respondent's BIT obligations. On this basis, the Tribunal would have jurisdiction to hear the case.
In their Memorial, the Claimants state that since the ICSID Convention does not provide a specific definition of "investment", it is "necessary to refer to the Cyprus- Hungary BIT" to find what an "investment" is. After a brief review of Article 1 of the BIT, the Claimants conclude that their investment in the Airport and their corresponding returns, i.e., ADC Affiliate's 34% quota-holding in the Project Company, ADC & ADMC Management's entitlement to 3% of each year's net revenue of the Airport, "qualify as ‘investments'" under the BIT and the Convention. The Claimants further state that these investments are "at the very least ‘assets' connected with the participation in the Project Company."
The Respondent lists four claims of the Claimants in relation to their "alleged" investments, namely:
1. ADC Affiliate's claim in relation to its lost dividends derived from its 34% quotaholding in the Project Company;
2. ADC Affiliate's claim in relation to non-payment under the Promissory Note;
3. ADC & ADMC Management's claim of lost Terminal Management fees; and
4. the Claimants' claim in relation to future development of the Airport.
In line with the above claims, the Respondent raised the argument that in order to meet the BIT "investment" criteria, not only must the Claimants make investments in the host country, but also such investments must be "fresh". Because ADC Affiliate merely received ADC's rights and obligations via assignment, ADC Affiliate cannot be deemed to have made any "fresh" investment in Hungary.
Moreover, the Respondent further contends that under Article 25(1) of the ICSID Convention, only those investors who bear "risk" can claim they made an investment in the host State. Since ADC Affiliate did not bear much risk as a quotaholder of the Project Company, it cannot claim they made an investment in Hungary.
In regard to the other three claims listed above, the Respondent contends, in sequence, a) that ADC Affiliate did not make any investment through the Promissory Note, b) ADC & ADMC Management did not make any investment nor provide management services during the Operating Period and c) "contractual provisions to which the Claimants are not a party does not constitute investment under the BIT."
The Claimants contend that ADC Affiliate's shareholding in the Project Company and its right under the Promissory Note fell well within the scope of "investment" as defined in the BIT. The Claimants refer in this regard to Generation Ukraine, Inc. v. Ukraine (ICSID Case No. ARB/00/9) where the Tribunal concluded that a shareholding interest is an "investment" when "investment" was defined to include "shares of stock or other interest in a company".
The Claimants deny that there is a "fresh" investment requirement under the BIT and contend that the argument that an investment must be "fresh" in order to establish the Centre's jurisdiction has been rejected by "ICSID jurisprudence". In support of this assertion, the Claimants refer to Fedax NV v. Venezuela (ICSID Case No. ARB/96/3) and quote the Tribunal's statement that:
"[...] the investment itself will remain constant, while the issuer will enjoy a continuous credit benefit until the time the notes become due. To the extent that this credit is provided by a foreign holder of the notes, it constitutes a foreign investment which in this case is encompassed by the terms of the Convention and the [BIT] Agreement. [...]"
The Claimants deny that there is a "risk-bearing" requirement under Article 25 (1) of the ICSID Convention. The Claimants contend that the cases and legal literature relied upon by the Respondent in its Counter-Memorial were misread. The Claimants argue that rather than supporting the Respondent's "risk-bearing requirement" conclusion, Professor Christopher Schreuer said in the same article which was relied upon by the Respondent that "risk" is only a factor for the Tribunal to consider when deciding jurisdiction, rather than a legal requirement under the ICSID Convention. The Claimants cite Professor Schreuer's writing in regard to "risk" that:
"These features should not necessarily be understood as jurisdictional requirements but merely as typical characteristics of investments under the Convention."
The Claimants deny that no investment was made by ADC & ADMC Management. The Claimants contend that ADC & ADMC Management's entitlement of the 3% net revenue qualifies as "property rights" and the Terminal Management Agreement qualifies as "title to money [...] and to any [...] performance having an economic value" under the BIT.
In response to the Respondent's claim that the Management Fees are "income" rather than "investment" under the definition in Article 1(2) of the BIT, the Claimants refer to Article 1(2), Article 2(3) and Article 5(1) of the BIT and contend that the BIT protects both "original investments and approved re-investments and all income derived therefrom". As a result, the Respondent's characterization of the Management Fees as "income" will not change the fact that they are protected by the BIT.
In regard to the Respondent's future development claims, the Claimants reply that the Respondent misunderstood their claims. As the Claimants put it, "ADC Affiliate does not claim rights as an investor in lieu of the Project Company, but rights in the Project Company". The Claimants also contend that arguments made by the Respondent in this regard are more quantum-related rather than jurisdiction-related.
Another round of debate on this "investment" issue followed between the Parties in their further submissions of the Rejoinder and the Sur-Rejoinder. Besides the reiteration and affirmation of certain arguments made in their previous submissions, a new point has been raised and argued by the Parties.
In the Respondent's Rejoinder submitted by its new legal counsel, it is argued that that the wording of Article 1(3) of the BIT that "who... are making investments in the territory of the other Contracting Party [emphasis added]." indicates that only those who are taking active actions of investment are qualified to claim for BIT protection. The Respondent claims that since ADC Affiliate did not take any action of investment and at most could be said to be "holding" some investment in Hungary, it cannot claim for BIT protection.
In rebuttal to this point, the Claimants argue that the Respondent's argument is "unavailing" because Article 1(3) was drafted to limit the BIT's application to investments made "in the territory of the other Contracting Party [emphasis added]" and was not intended to and does not set another threshold for the injured party to seek BIT protection. Moreover, the Claimants contend that even if another test is imposed as argued by the Respondent, the fact that ADC Affiliate paid consideration for the assignment from ADC would pass such test.
"27. It follows that, in this context, questions of general economic policy not directly related to the investment, as opposed to measures specifically addressed to the operations of the business concerned, will normally fall outside the jurisdiction of the Centre. A direct relationship can, however, be established if those general measures are adopted in violation of specific commitments given to the investor in treaties, legislations or contracts. What is brought under the jurisdiction of the Centre is not the general measures in themselves but the extent to which they may violate those specific commitments ." [emphasis added]
"60. The Tribunal has noted above that the right of the Claimants can be asserted independently from the rights of TGS [the local project company] or CIESA [an intermediate holding company]. As the Claimants have a separate cause of action under the Treaty in connection with the investment made, the Tribunal concludes that the present dispute arises directly out of the investment made and that accordingly there is no obstacle to a finding of jurisdiction on this count ." [emphasis added]
The Respondent denied that the Claimants met the "directness requirement" in Article 25(1) of the ICSID Convention. In its submissions, the Respondent claimed that the Claimants' claims arose from contractual disputes under the Project Agreements and therefore do not pertain to disputes that arise "directly" out of an investment for the purpose of Article 25. The Respondent further challenged the Claimants "directness" arguments by saying that it is the rights of the Project Company which are "directly" affected and those of the Claimants can only be said as "indirectly" affected. The Respondent claimed that cases referred to by the Claimants were irrelevant.