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Award

I. THE PARTIES

A. The Claimants

1.

The Claimants ("Claimants") are ADC Affiliate Ltd. ("ADC Affiliate") and ADC & ADMC Management Ltd. ("ADC & ADMC Management"). Both are companies incorporated under the laws of the Republic of Cyprus.

2.

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.

B. The Respondent

4.

The Respondent ("Respondent") is the Republic of Hungary and is a sovereign State.

5.

In this arbitration, the Respondent was originally represented by:

Mr. John Beechey
Mr. Audley Sheppard
Clifford Chance LLP, London; and

Mr. Peter Köves
Köves & Társai Ügyvédi Iroda, Clifford Chance LLP, Budapest.

6.
By letter dated 12 August, 2005, Clifford Chance LLP informed the Tribunal and ICSID that they no longer served as legal counsel for the Respondent in this arbitration.
7.

By letter dated 29 September, 2005, the Respondent advised ICSID that it had appointed Prof. Dr. László Bodnár of the Bodnár Ügyvédi Iroda Law Firm ("Bodnár Law Firm") as its replacement legal counsel in this arbitration.

8.
Subsequently, the Respondent informed ICSID that Mr. Jan Burmeister and Dr. Szabo Levente Antal of BNT Budapest and Dr. Inka Handefeld of New York and Hamburg were retained as Co-Counsel for the Respondent.
9.
Hence throughout the hearing on the merits the Respondent has been represented by Bodnár Law Firm and the Co-Counsel referred to above.
10.

The Claimants and the Respondent are referred to hereinafter together as the "Parties".

II. PROCEDURAL HISTORY

A. Arbitration Agreement and Constitution of Arbitration Tribunal

11.

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.

12.

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."

13.
The Claimants have invoked the ICSID arbitration provisions in the BIT.
14.
On May 7, 2003, the Claimants submitted their Request for Arbitration against the Respondent in which they invoked the ICSID arbitration provisions in the BIT.
15.
On July 17, 2003, the Acting Secretary-General of ICSID registered the Request for Arbitration pursuant to Article 36(3) of the ICSID Convention and ICSID Institution Rule(6)(1)(a).
16.
Shortly thereafter, the Parties agreed that there should be three arbitrators in this case and also agreed on the method of their appointment.
17.
Further to that agreement, the Claimants appointed the Honorable Charles N. Brower, a national of the United States of America, as arbitrator and the Respondent appointed Professor Albert Jan van den Berg, a national of The Netherlands. The two party-appointed arbitrators appointed Mr. Allan Philip, a national of Denmark, to serve as President of the Tribunal.
18.
By letter of January 26, 2004, the Acting Secretary-General of ICSID notified the Parties and the above-appointed arbitrators that the Tribunal had been constituted and the proceeding deemed to have begun on that day in accordance with ICSID Arbitration Rule 6(1).
19.
On September 3, 2004, due to ill health, Mr. Allan Philip resigned from the Tribunal.
20.
Immediately after Mr. Philip's resignation, the two party-appointed arbitrators appointed Mr. Neil T. Kaplan CBE, QC, a national of the United Kingdom, as President of the Tribunal to fill the vacancy created.
21.
On September 28, 2004, with Mr. Kaplan's acceptance of the appointment, the Tribunal was reconstituted and the proceedings continued in accordance with ICSID Arbitration Rule 12.

B. Proceedings

22.

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.

23.
At this first session, the Tribunal considered a series of procedural matters together with several other non-procedural matters as listed in the provisional Agenda circulated by the Secretary prior to the session and adopted at the start of the session.
24.

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;
(c) quorum;
(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.

25.
On May 11, 2004, the amended Minutes of the First Session, dated March 8, 2004 as signed by the President on behalf of the Tribunal and by the Secretary, were dispatched to the Parties by the Secretary.
26.
Paragraph 15.3 of the Minutes of the First Session set out a procedural timetable for pleadings agreed by the Parties.
27.

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.

28.
On August 19, 2004, the Secretary confirmed with the Parties an agreed adjusted timetable for meetings and hearings which replaced the original timetable set forth in the Minutes of the First Session.
29.

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
7) Authorities.

30.
On February 7, 2005, and in accordance with the agreed timetable, both Parties served their Requests for Production of Documents on the other party.
31.
As agreed at the First Session of the Tribunal, on February 14, 2005, a telephone conference was held between the Parties and the Tribunal to assess the status of the proceeding. At that telephone conference, the Respondent submitted to the Tribunal its Application for Bifurcation of Jurisdiction from the Merits.
32.
On February 15, 2005, the Tribunal issued its Decision on the Respondent's Application for Bifurcation of Jurisdiction from the Merits in which it rejected the Respondent's application for bifurcation.
33.
On February 22, 2005, in accordance with the agreed procedural timetable, the Parties submitted to the Tribunal their respective objections to the request by the other side for production of documents. Replies to the objections were filed on March 7, 2005.
34.
On March 10, 2005, a hearing was held by the Tribunal in London on the requests for production of documents. At the hearing, the Tribunal granted certain of the Claimants' requests, and with respect to the Respondent's requests, it was agreed that the Respondent would file a revised request by March 21, 2005; the Claimants would file their response thereto by April 1, 2005; and the Tribunal would thereafter issue its decision on the revised requests.
35.

On March 22, 2005, the Respondent filed its amended request for production of documents ("Amended Request").

36.
On April 5, 2005, as agreed by the Parties, the Claimants made their submission in response to the Respondent's Amended Request. In this submission, the Claimants agreed to produce a number of documents requested by the Respondent but rejected the remaining requests. The Claimants' objections were mainly based on the argument that the remaining requests still violated specific instructions and observations made by the Tribunal at the hearing on March 10, 2005.
37.
On April 15, 2005, having considered the Amended Request by the Respondent and the Claimants' submission in response, the Tribunal, in its decision of that date, granted several requests in the Amended Request and refused others.
38.
On June 2, 2005, following correspondence between the Parties in regard to the adjustment of the procedural timetable, the Tribunal agreed and confirmed a revised schedule for the remaining written submissions, organizational meeting and main hearing.
39.

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").

40.
As stated above, on August 12, 2005, the Tribunal was notified by Clifford Chance LLP that the Respondent had terminated its engagement of the firm in this arbitration.
41.
On September 15, 2005, in response to the Tribunal's inquiries as to whether it intended to appoint replacement legal counsel and to follow the fixed deadlines, the Minister of Finance of the Republic of Hungary sent a letter to ICSID in which it was stated that the Respondent was in the process of appointing new legal counsel. Further, the Respondent requested that the Tribunal re-schedule the deadline for filing the Respondent's Rejoinder to January 2006 and adjust the ensuing deadlines accordingly.
42.
On September 21, 2005, the Tribunal informed the Parties that it was not satisfied with the grounds given by the Respondent for the postponement of the deadlines and that the schedule of this arbitration would remain unchanged. It also confirmed its decision that the organizational meeting, for which December 15, 2005 had been set aside, would be held in London at a venue to be determined.
43.
On September 29, 2005, the Respondent notified ICSID via fax that it had appointed the Bodnár Law Firm as its counsel of record in this arbitration in replacement of Clifford Chance LLP. A copy of the Power of Attorney was attached to the fax.
44.
On October 4, 2005, Prof. Dr. László Bodnár of Bodnár Law Firm, as legal counsel of the Respondent, sent a letter to the Tribunal requesting the deadline for service of Respondent's Rejoinder, Claimants' Sur-Rejoinder on Jurisdiction and the date of the Organizational Meeting be postponed while the date for final hearing should remain unchanged.
45.

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.

46.
On November 4, 2005, the Respondent's counsel served its Rejoinder on the Tribunal and the Claimants.
47.

On December 11, 2005, the Claimants' counsel served on the Tribunal and the Respondent the following:

1) Sur-Rejoinder on Jurisdiction ; and
2) Supplemental Reply Witness Statement of Mr. Michael Huang.

48.
On December 19, 2005, a second organizational meeting was held in London. Mr. Pierre Bienvenu, Mr. Martin Valasek, Mr. René Cadieux and Prof. Dr. Iván Szász appeared on behalf of the Claimants. Prof. Dr. Lazlo Bodnár, Mr. Jan Burmeister, Dr. Inka Hanefeld and Dr. Janka Ban appeared on behalf of the Respondent. Present at the meeting were the full Tribunal and the Secretary of the Tribunal.
49.
At this meeting, the Parties agreed to and confirmed a series of administrative matters in regard to the conduct of the main hearing.
50.
Also at the meeting, the Respondent informed the Tribunal and the Claimants that Mr. Matthew, author of the NERA Report and key expert witness for the Respondent, would be unavailable for cross-examination at the main hearing; instead, two new expert witnesses recently appointed by the Respondent would be produced at the hearing for cross-examination in regard to the NERA Report.
51.
The Claimants' counsel opposed such arrangement and requested that Mr. Matthew be produced for cross-examination.
52.

The Claimants also requested that the Respondent produce the transactional documents entered into by British Airports Authority ("BAA") a week previously in its acquisition of the majority shares of the company owning Budapest Airport.

53.
Having heard the Parties at the meeting, the Tribunal issued its Procedural Order dated December 19, 2005, in which it was ordered, inter alia, that:

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.

54.

In accordance with the above Procedural Order, on December 31, 2005, counsel for the Respondent filed a CRAI Rebuttal Report issued and signed by its new expert witness, Dr. Alister L. Hunt ("Hunt Report").

55.

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".

56.
On the same date, the Respondent's counsel in its covering letter attached to the Hunt Report informed the Tribunal and the Claimants that Dr. Kothari, its other proposed new expert, would not be produced at the January hearing and therefore was withdrawn.

C. The Hearing

57.
The hearing took place at the International Dispute Resolution Centre in Fleet Street, London. It commenced on Tuesday January 17, 2006 and concluded on Wednesday January 25, 2006. Audio recording of the hearing was made and verbatim transcripts were also produced, the latter being concurrently available with the aid of LiveNote computer software.
58.
At the hearing, the following appeared as legal counsel for the Claimants: Messrs. Pierre Bienvenu, Martin Valasek, Jacques Demers and Azim Hussein of Ogilvy Renault, Mr. René Cadieux of Fasken Martineau Dumoulin, Prof. Dr. Iván Szász and Miss Judith Kelman of Squire Sanders & Dempsey and Prof. Dr. James Crawford SC.
59.
The following appeared as legal counsel for the Respondent: Prof. Dr. Bodnár of the Bodnár Law Offices, Messrs. Jan Burmeister and Dr. Levente Szabo of B&T law firm of Budapest and Dr. Inka Hanefeld, Dr. Ulf Renzenbrink and Mr. Daniele Ferretti of RRKH law firm of Hamburg. Ms. Bernadette Marton also appeared at the hearing as a representative of the Hungarian Ministry of Finance.
60.
Both sides made an oral presentation at the opening of the hearing. With regard to post-hearing submissions, the Tribunal confirmed the dates set forth in its December 19, 2005 Procedural Order, namely, written closing submissions to be served on March 7, 2006 and the written rebuttals to be served by March 21, 2006.
61.

At the hearing, the following witnesses gave evidence, in sequence, for the Claimants and were cross-examined by the Respondent's counsel:

Mr. Michael Huang
Mr. György Onozó
Mr. Tamás Tahy
Mr. Manuel A. Abdala, Mr. Andres Ricover and Mr. Pablo T. Spiller of LECG LLC

62.

The following witnesses gave evidence for the Respondent and were cross-examined by the Claimants' counsel:

Dr. László Kiss
Mr. Gyula Gansperger
Mr. Gabor Somogyi-Tóth
Dr. Alister L. Hunt of CRA International

63.
At the conclusion of his evidence, Mr. Gansperger asked the Tribunal for a copy of the transcript of the proceedings and a copy of Mr. Tahy's witness statement.
64.
The Tribunal heard oral arguments on the issue of confidentiality and made its decision on this issue in a letter to the Parties dated January 31, 2006. In this letter, the Tribunal referred to ICSID Arbitration Rule 19 and Articles 44 and 48(5) of the Convention.
65.

Arbitration Rule 19 provides:

"The Tribunal shall make the orders required for the conduct of the proceeding."

66.
Article 44 of the Convention provides:

"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."

67.

Article 48 (5) of the Convention provides:

"The Centre shall not publish the award without the consent of the parties."

68.

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.

69.
On March 6, 2006, the Respondent's counsel informed the Tribunal by email that by mutual agreement, the Parties agreed to postpone the dates for post-hearing submissions to March 10, 2006 and March 24, 2006 respectively.
70.
On March 10, 2006, the Claimants served on the Tribunal their Post-Hearing Brief together with an LECG Post-Hearing Report. On the same date, the Respondent served on the Tribunal its Closing Submissions.
71.

On March 16, 2006, Prof. Bodnár, on behalf of the co-counsel for the Respondent, by a letter to the Tribunal, objected to the newly submitted LECG Post-Hearing Report and claimed that said report and an updated electronic model therewith "constitute new evidence".

72.
On March 24, 2006, the Respondent served on the Tribunal the Respondent's Closing Reply. On the same date, the Claimants served on the Tribunal Claimants' Post-Hearing Rebuttal.
73.
On March 30, 2006, the Claimants' counsel, by a letter to the Tribunal, denied that the disputed report and model constituted new evidence.
74.
In a letter to the Tribunal dated April 3, 2006, the Respondent reiterated its position concerning the report and the model in question and further claimed that the report also contained new factual allegations. The Respondent therefore requested the Tribunal to disregard the LECG Post-Hearing Report as well as the electronic model submitted with it.
75.

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.

76.
On May 1, 2006, in accordance with the Tribunal's direction, the Respondent served on the Tribunal a Supplemental Expert Report prepared by Dr. Hunt which addressed the defects as the Respondent sees them in the LECG Post-Hearing Report.
77.
On May 12, 2006, the Claimants' co-counsel wrote a letter to the Tribunal in response to the Supplemental Expert Report. In this letter, the Claimants acknowledged certain minor calculation errors in the LECG Post-Hearing Report but maintained its position that no new evidence was introduced therein and argued that Dr. Hunt's criticism on LECG's methodology was unfounded.
78.
On May 19, 2006, the Tribunal, through its Secretary, wrote to the Parties with the following ruling:

"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."

III. FACTS

79.
At a fairly early stage in these proceedings, the Tribunal requested the Parties to agree a non-contentious narrative statement of the background facts of this case. The Tribunal's intention was to incorporate such agreed text in this Award. After much delay, doubtless caused by the change of counsel and through no fault of the Respondent's able and new legal team, all that was provided was the Claimants' version. The Respondent's legal team had, by the end of the hearing, not been able to agree this text although they were not in a position to state with what they disagreed. The Tribunal gave the Respondent a period of two weeks following the conclusion of the hearing to either agree the Claimants' text or to make suggested amendments. The text contained in paragraph 80 to 213 represents the Claimants' version with some textual change made by the Tribunal. The Tribunal has also taken into account the Respondent's version which was finally received on March 10, 2006.

A. THE PARTIES

80.
The Claimants are companies incorporated under the laws of the Republic of Cyprus.
81.
The Claimants were established on February 25, 1997 for the sole purpose of the Airport Project as defined in paragraph 94 below.

B. THE AIRPORT

86.
The Airport is located approximately 18 km south-east of Budapest, the capital of the Republic of Hungary.
87.
The Airport is the principal airport in Hungary for both domestic and international scheduled passenger flights.
88.
The Airport also plays a military role, and, for example, was used during the Balkans War by NATO Member States for transporting military personnel, supplies and equipment.
89.
In 1992, the Airport comprised of two passenger terminals. Terminal 1 had been built in 1950, and had a capacity of two million passengers a year, but it no longer met the then current commercial and security standards. Terminal 2/A, which had an additional capacity of two million passengers a year, had been built in 1985.
90.

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.

91.
The Airport was held, managed and operated by ATAA, a Hungarian state entity, which was under the auspices of the Ministry of Transport. As from 1 January 1988, the Director of the ATAA had been Mr. Tamás Erdei. Before that he had been the Technical Deputy Director.
92.
In 1992, United States and Hungarian advisors concluded that to accommodate future passenger requirements, the Airport would need to be expanded. It was also considered that the Airport had the potential to be developed into a hub with a much higher passenger turnover.
93.
It was further concluded that it would be preferable financially to construct a new terminal, rather than renovate Terminal 1. Accordingly, the ATAA initiated a tender process for expansion of the Airport.

C. THE TENDER PROCESS

94.

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").

95.
The ATAA was, at the time, an agency of the Hungarian Ministry of Transport and wholly under the control of the Respondent.
96.

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".

1. First Phase

97.

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").

98.
ATAA received a total of 17 RFQs. On November 23, 1992, ADC submitted a RFQ to the ATAA.
99.
The ATAA brought the first phase of the tender process to a close by announcing its short list of qualified tenderers. The ATAA's short list of qualified tenderers included ADC and five other bidders.

2. Second Phase

100.
In the second phase of the tender process, each qualified bidder was invited to submit a tender to the ATAA for the Airport Project. The invitation also included a tender on the construction of a covered and open air parking facility, a hotel and a business centre.
101.

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.

102.

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.

103.

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.

104.

As part of its tender, ADC agreed to procure that the Canadian Commercial Corporation ("CCC"), a Canadian Crown corporation and agent of the Government of Canada, would enter into a turnkey fixed price contract for the construction of Terminal 2/B and the renovation of Terminal 2/A.

105.
The ATAA received proposals from at least three other qualified bidding teams or consortia, led respectively by Siemens, Schiphol (Amsterdam) Airport and Lockheed.
106.
The second phase of the tender process ended when ATAA selected ADC and Lockheed as Preferred Tenderers.

3. Third Phase

107.
The third and final phase of the tender process went from May 1994 to August 1994, culminating in August 1994 with the selection of ADC as the Selected Tenderer.
108.
ADC was selected as the Selected Tenderer on the basis of a unanimous recommendation from a selection jury of eleven persons. It is ADC's Alternative Tender that was chosen by the ATAA.
109.
In specific, ADC was awarded contracts by the ATAA to (a) renovate Terminal 2/A, (b) construct Terminal 2/B, and (c) participate in the operation of Terminals 2/A and 2/B.

D. NEGOTIATION OF THE AGREEMENTS

110.
Following ADC's selection as the Selected Tenderer, negotiations with the ATAA with respect to the legal documentation were officially launched. ATAA had reserved the right to enter into negotiations with the second Preferred Tenderer (i.e., Lockheed).
111.
ADC's negotiating team consisted of Mr. Huang and Mr. Béla Danczkay. ADC's legal advisers were Meighen Demers, since merged with Ogilvy Renault, and local Hungarian counsel. For its part, the ATAA was represented in the negotiations by a team led by Mr. Tamás Erdei, its General Director, and they were assisted by the global law firm Debevoise & Plimpton LLP, by local Hungarian counsel and by Lehman Brothers, as financial adviser.
112.
The parties proceeded by first negotiating a "Master Agreement ", which set out the fundamental terms and conditions of the transaction and provided the framework under which all the other agreements would be negotiated and ultimately executed.

1. The Master Agreement and the Incorporation of the Project Company

113.

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."

114.

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.[...]"

115.

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.

116.

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.

117.

The Master Agreement and the Regulatory Framework also refer to the concept of ADC's "IRR". The parties agreed on a target IRR on ADC's initial equity investment of 15.4% ("Target IRR"), and an absolute ceiling of 17.5%.

118.
Concurrently with the execution of the Master Agreement on March 31, 1995, ADC formed the Project Company, which was registered as a one-member limited liability company on June 15, 1995, with legal effect as of March 31, 1995. The Project Company was established by ADC for the limited purposes of the Project. Its objects included incurring and servicing Airport Project debt, funding construction of the Airport Project, preparing operation and asset management plans prior to completion of construction, and operating the terminals following construction. Under the terms of its Charter, the Project Company was established for an initial term of fourteen years. This term could be extended, on one occasion, by no more than four years.

2. The Project Agreements

119.
The "Project Agreements ", as defined by the Master Agreement, means all those legal instruments as required in order to implement the contractual structure of the Project and to set out the terms and conditions of all parties' participation in, and involvement with, the Project Company.
120.
The Master Agreement set a target date for the execution of the Project Agreements as of six months after execution of the Master Agreement. The complexities of the Project did not permit the completion of the Project Agreements and the commencement of the Project by the initial target date. The parties mutually agreed to extend the target date with the final target date being set at March 31, 1997.
121.
In its tender, ADC had proposed that the ATAA would receive its share in the Project Company in return for providing the Project Company with an in-kind contribution consisting of its rights to operate the airport terminals. This concept was accepted by the ATAA in the Master Agreement, but conditional on the ATAA receiving Government authorization, as required by Hungarian law, to acquire its quota in the Project Company.
122.

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").

123.
Among all the Project Agreements concluded, those executed in February 1997 (concurrently with the execution of the Credit Agreements described in the section below) included the following:

(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.

124.
The Claimants contend that, at the end of the day (i.e., referred to in the Subscription Agreement as the Equity Closing Date), through the simultaneous execution and operation of the Operating Period Lease, the Receipt and Acknowledgment and the Release and Note Agreement, ADC held a 34% quota in the Project Company and the Promissory Note from the Project Company, representing collectively a single investment in, and capital contribution to, the Project Company, in the amount of US$16,765 million. The Respondent originally contested this but abandoned the point at the hearing in the light of Dr. Hunt's inability to support it.

3. Credit Agreement

125.

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.

126.
As part of its tender, ADC had secured letters of interest from the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), each of which was prepared to lead a syndicate of lenders to finance the debt portion of the Airport Project. During the negotiations of the Credit Agreements, EBRD emerged as the front-runner to lead the lending syndicate. EBRD offered to provide the A-loan portion of the financing at an interest rate of LIBOR plus 2.5%. The negotiations proceeded on this basis through 1995 and through the better part of 1996.
127.
In the course of 1996, Mr. Péter Medgyessy, who at the time was Hungary's Finance Minister, involved himself personally in the negotiations of the credit facility. Mr. Medgyessy wanted the Airport Project debt to be financed by a syndicate of commercial banks only and he thus rejected the EBRD loan offer. To this end, the Government was willing to provide a guarantee of the Airport Project debt in order to secure a precedent in the international commercial banking community for a long term Hungarian Government guaranteed debt of ten years at a favourable interest rate.
128.
This was a significant departure from the financing conditions that the Government of Hungary had earlier set out in the Tender Documentation, where it was specified that there would be no sovereign guarantee of debt. In connection with the higher profile and greater risk the Government of Hungary was now taking in the Airport Project, the ATAA took the position that its share of the voting capital in the Project Company should be increased from 49% to 66%, matching the ATAA's share capital, and the Project Agreements were amended accordingly.
129.

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.

E. THE CLAIMANTS' INVESTMENTS

130.
The Claimants' investments in the Project Company are set out below.

1. ADC Affiliate's Investment

2. ADC & ADMC Management's Investment

F. Construction of Terminal 2/B

153.
The Project Company and the ATAA entered into a turnkey contract with CCC for the construction of Terminal 2/B on December 19, 1996. When the credit facility transaction closed in February 1997, monies were disbursed to the Project Company in order to fund the construction. CCC broke ground in March 1997 and construction proceeded through 1997 and 1998.
154.
Terminal 2/B was commissioned and transferred to the Government of Hungary on or about December 25, 1998. Both the ATAA and the Project Company signed the Taking-Over Certificate dated November 25, 1998. The completed Terminal 2/B was opened to the public on or about 19 December 1998.

G. Business Planning Process for the Project Company

155.
The original business plan for the Airport Project was contained in ADC's Tender dated April 29, 1994. This business plan was developed by ADC in cooperation with KPMG. In order to carry out the financial analysis of the project, KPMG developed a computerized financial model which generated projections for the duration of the Project. The original and subsequent business plans projected the Project Company's financial results for the entire twelve year operating period (1997-2009), subject to further extension.
156.

An updated version of the business plan was prepared by KPMG in December 1996. The parties referred to this updated business plan as the "feasibility study," and it was defined in the Master Agreement as the "KPMG Feasibility Study".

157.
Pursuant to Section 2.0 of Schedule C to the Operating Period Lease, the KPMG Feasibility Study served as the basis for the Project Company's initial "Annual Business Plan," as defined in Section 4.1 of the Operating Period Lease. Section 2.0 of Schedule C to the Operating Period Lease defines the procedure to be followed in order to develop subsequent Annual Business Plans for the Project Company. The highlights of that procedure are as follows:

• 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.

158.
In keeping with the procedure set out in Schedule C of the Operating Period Lease, the Annual Business Plans for the years 1999 through 2002 were each approved by the Quotaholders as follows:

• 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.

159.
Regarding the Annual Business Plan for the year 2002, the first paragraph of the 2002 Business Plan describes the drafting and review process for the document as follows:

"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."

160.

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.

H. Project Company's Financial Results

161.
The Project Company began reporting its financial results as of its establishment in 1995. The Project Company's results from 1995 through 2001 were presented in audited financial statements as follows:

• 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.

162.
Two types of distributions were made by the Project Company to ADC Affiliate. The first consisted of payments on the Promissory Note. These payments were made semiannually. The second consisted of dividends from the profit of the Project Company, which were paid around March of each year (based on the profit of the previous year). The management fees payable to ADC & ADMC Management were paid semi-annually, after the semi-annual payments of debt service.
163.
The Claimants contend that the financial results of the Project Company generally show that it was performing over and above the projections in the Business Plans. The Tribunal accepts that this was so.

I. Project Company's Operations from 1999 through 2001

171.
In 2001, the ATAA launched an investigation whose objective was to gather detailed information concerning many aspects of the Project Company.

J. Transformation of the ATAA, Legislative Amendments and the Decree

172.
In 1999, the Ministry of Transport prepared a Proposal for the Government's Air Transportation Strategy, which requested that plans be drawn up to transform the ATAA. The ATAA was a State budgetary organ. The ATAA had two principal tasks: air traffic control and the operation of the Airport. There had been concern that these two functions should be separated to prevent possible conflicts in decision-making and to ensure transparency in financial matters. It was also necessary to separate these two functions to comply with international and regional requirements and standards.
173.
On November 25, 1999, a Ministerial Commissioner was appointed by the Ministry of Transport to prepare a plan for transformation of the ATAA.
174.
The Government developed a national aviation strategy, embracing the entire aviation sector, of which part of its programme was to align with and implement EU law within the aviation sector in preparation for accession to the EU.
175.
This national aviation strategy was adopted on April 14, 2000, when the Government passed Resolution No. 2078/2000 on The Strategic Tasks of the Development of Air Transport. The Resolution was published in the official Gazette "Collection of Resolutions". This set out a 9-point programme to implement the national aviation strategy and harmonise the aviation sector with EU law. The plan included transformation of the ATAA. The Minister of Transport was in charge of the transformation. The Government Resolution required transformation to be complete by January 31, 2002.
176.
The Ministry of Transport appointed a Management Committee to prepare, discuss, and implement proposals for transformation of the ATAA.
177.

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).

178.
On September 20, 2001, BA Rt was established. On October 25, 2001, BA Rt was registered in the Court of Registration in Budapest.
179.

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.

180.

The Decree was adopted under the authority of the Act No. XCVII of 1995 on Air Traffic ("Air Traffic Act"), following amendments made to the Air Traffic Act by Act No. CIX of 2001 on the Amendment of Various Traffic-Related Laws ("Amending Act").

182.

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:

"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."

183.

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:

"Reasoning

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."

184.
The plenary session of the Hungarian Parliament considered the Amendment Motions on December 11, 2001. There were a total of seventeen Amendment Motions relating to the Bill. Parliament accepted the Motion of Dr. Kosztolányi as contained in the Supplementary Amendment Motion. On December 18, 2001, two days before the issuance of the Decree, the Hungarian Parliament voted in favour of the consolidated text of the Bill.
185.

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.

187.
Also on December 22, 2001, ADC & ADMC Management received a similar letter from the Joint Stock Co. notifying it of the Decree and its principal provisions, including Article 1(5). The letter concluded that the Terminal Management Agreement between the Project Company, ATAA and ADC & ADMC Management:

"... 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."

188.
On December 27, 2001 (the first business day following Christmas), Mr. Tahy was informed that the Project Company's offices in Terminal 2/B had to be vacated within three business days, namely by 2 January 2002.
189.
As a result of the Amending Act, the Decree and the actions taken in reliance thereon, the Project Company was no longer able to operate the Terminals and collect the associated revenues.
190.
Since the Decree, ADC Affiliate has received no dividends on its Quota and no payments on the Promissory Note from the Project Company (including dividends due from the Project Company's 2001 profit), and ADC & ADMC Management has received no management fees from the Project Company (including management fees due for the second part of 2001).

K. Developments after the Decree

1. Separation of the Functions of the ATAA

191.

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".

192.
The separation of the ATAA's functions and the establishment of HungaroControl were deemed to be necessary to modernize Hungary's aviation industry and to harmonize the aviation sector with EU law.

2. Passenger Traffic

193.

Since 2001, passenger traffic at the Airport has increased substantially year over year, and is projected to continue to grow:

Period Total Passengers (million)
2002 4.5
2003 5.0
2004 6.5
2005 7.5
2008 10
2010 Above 11
194.
Data for the first quarter of 2005 show an increase in passenger traffic of 35.6% over the same period in 2004. This is triple the average growth in passenger traffic in Europe.
195.
According to IATA, Hungary will be the world's third-fastest growing market during the period 2004 through 2008, behind only China and Poland, with a projected annual growth rate of 9.6%.

3. Parking Facility

196.
Prior to the Decree, the Government hired a consultant to develop plans for a parking garage. A request for proposals for architectural services in connection with a parking facility dated April 23, 2004 was followed by a feasibility study for a parking facility prepared by PricewaterhouseCoopers dated September 2004.

4. Terminal Expansion and Reconstruction

197.

Reconstruction of Terminal 1 started in October 2004 and was completed on July 15, 2005. According to a press release from Budapest Airport, this is the "first stage" in the "long-term development" of the Airport.

198.
According to statements reported in the March 30, 2005 issue of the Budapest Business Journal, the deputy CEO of Budapest Airport, Mr. Balazs Bella, acknowledged that the Airport will soon be facing terminal capacity problems. He noted that "further extension [of Terminal 1] is hindered by the fact that [Terminal 1] is listed as a building under national monument protection." He confirmed that the Airport plans to "inaugurate" a new Terminal 2/C in 2009. Mr. Bella also indicated that plans were under way to improve public transit and road accessibility to the Airport.

L. The Privatization of Budapest Airport

199.

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.").

200.
Pursuant to Article 5.2 of the invitation to tender, eleven interested parties submitted written non-binding expressions of interest to ÁPV Rt. by the deadline of June 28, 2005.
201.
On July 12, 2005, ÁPV Rt. announced that all but one of these parties were invited to participate in the first round of the tender, namely the submission of non-binding bids by August 9, 2005. On August 26, 2005, ÁPV Rt. invited five bidders from among those who had submitted timely non-binding bids to participate in the second round of the tender, namely the submission of legally binding bids by November 2, 2005.
202.
In the first round, the financial bids of the bidders were between HUF 202 billion (US$1.01 billion) and HUF 390 billion (US$1.96 billion).
203.
On September 29, 2005, the Budapest Metropolitan Court invalidated the tender process on the grounds that the workers at Budapest Airport Rt. were not given a sufficient opportunity for input into the process. On October 20, 2005, ÁPV Rt. recalled the call for final binding bids from the five bidders it had invited into the second round of the invalidated process.
204.
On October 28, 2005, ÁPV Rt. announced a closed, single-round tender for the sale of Budapest Airport Rt. (75% minus one vote) to replace the cancelled process. The bidders invited to participate in the restricted tender were those that had been selected for the second round of the previous tender, namely:

• 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.

205.
The five bidders were invited to make their bids by November 14, 2005. Three bidders submitted binding bids by the deadline: BAA, Hochtief and Fraport. The highest bid was submitted by BAA, which offered more than HUF 400 billion (US$1.86 billion). On 8 December 2005, ÁPV Rt. announced its ranking of the bids based on technical and financial criteria. BAA was ranked first.
206.
On December 18, 2005, ÁPV Rt. announced that it had signed a privatization contract for Budapest Airport Rt. with BAA (International Holdings) Ltd., for US$ 2.23 billion (£ 1.26 billion).
207.
On December 22, 2005, BAA (International Holdings) Ltd. closed the deal with BA Rt. Under the terms of the deal, BAA acquired a 75% minus one share stake in the Airport as well as moveable assets and agreed on a 75-year asset management contract with Hungary.
208.
The press in Hungary has reported that Hungary's opposition Fidesz party has said that it would renationalize the Airport if it wins power in the elections to be held in the spring of 2006.
209.
An illustration of the relevant contracts was set out in Claimants' Chart 3 which was submitted at the hearing and helpfully agreed by the Respondent. For ease of understanding the complex structure relevant to this case, the Tribunal sets this out as Appendix 1 to this Award.

M. Arbitration Proceedings Brought by the Project Company

210.
In November and December 2005, the Project Company commenced four arbitration proceedings against the Joint Stock Co., which is the legal successor of the ATAA.
211.
In the arbitration proceedings initiated on November 29, 2005, the Project Company seeks additional relief amounting to approximately US$ 19.3 million in compensation for advance lease payments under the Operating Period Lease allegedly paid by the Project Company to the ATAA in excess of the actual utilization period of the Terminals.
212.
In the arbitration proceedings initiated on December 15, 1005, the Project Company claims compensation for certain development and repair works under the Operating Period Lease in an amount of approximately US$ 145,000.
213.
The other two arbitration proceedings were both initiated on December 21, 2005. In one of these two proceedings, the Project Company claims damages in a preliminary amount of approximately US$ 101.5 million on the grounds of an alleged breach of the Operating Period Lease by the Joint Stock Co. and consequential losses of income emanating from rights under the Operating Period Lease. In the other, the Project Company demands refund of VAT allegedly charged erroneously by the ATAA in an amount to be determined following submission of an itemised accounting.

IV. CONTENTIONS OF THE PARTIES

A. Contentions of the Claimants

214.
The Claimants contend that the construction phase of the Project was completed without any significant problems or delays. The Project Company operated Terminal 2/A and 2/B efficiently, effectively and profitably.
215.
The Claimants claim that under the business structure set forth in the Project Agreements, they constructed and operated Terminals of world class standards.
216.
The Claimants claim that the parties put in place a business planning process that was rational, consensual and conservative. The annual business plans for the Project Company were subject to discussion and revision before, in each case, being expressly approved by the ATAA and ADC Affiliate, the Project Company's two quotaholders.
217.
The Claimants contend that the distributions to ADC Affiliate and the management fees paid to ADC & ADMC Management were strictly in accordance with the agreements in place between the parties and were reasonable in light of the risks assumed by the Claimants and the value of the know-how transferred to the Airport and the Government partners.
218.
The Claimants contend that the Respondent's issuance of the Decree and the following taking-over of all activities of the Project Company in the airport by BA Rt constitute an expropriation of the Claimants' investments in Hungary.
219.
The Claimants contend that the Respondent's expropriation of the Claimants' investments, in December 2001, was unexpected, unjustified and uncompensated. As a result of the expropriation, the Project Company has been unable to pursue the sole purpose for which it has been established, namely the operation of the Terminals.
220.
The Claimants contend that by reason of such expropriation, ADC Affiliate has been deprived of the stream of dividends on its quota and the payments due on the Promissory Note from the Project Company, and ADC & ADMC Management has been deprived of the management fees payable to it by the Project Company.
221.
The Claimants also contend that had the expropriation not occurred, the Project Company would have benefited from the improvements in the market for commercial air travel, and the Project Company would have had the opportunity to participate in the financing, building and operation of the proposed new Terminal 2/C or in the renovation and reopening of Terminal 1, as well as in the construction and operation of a new parking facility.
222.

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.

B. Contentions of the Respondent

223.
The Respondent denies the Claimants' claims and contentions in their entirety.
224.
The Respondent claims that 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 Civil Code.
225.
According to the Respondent, the Airport was managed by the ATAA, which was under the administration of the Ministry of Transport, Communications and Water Management.
226.

The Respondent claims that ADC and the Claimants have not established a Terminal of "world class standards". They have not made it a hub airport, or attracted new carriers. They have not provided management services. They have made minimal investment and have taken on minimal risk.

227.
The Respondent claims that neither ADC nor the Claimants took on any risk during the construction phase.
228.
The Respondent claims that the Claimants and ADC have received back to date amounts in the order of US$20 million.
229.
The Respondent claims that ADC recovered its bidding and preparation costs during the construction phase.
230.
The Respondent contends that the construction of Terminal 2/B was not completed on schedule nor on budget and there were also problems with the renovation of Terminal 2/A.
231.
The Respondent claims that ADC & ADMC Management did not fulfil its obligations as the Terminal Manager. Rather, it was the ATAA that in reality managed and operated the Airport.
232.
The Respondent contends that following the legislative changes, especially the issuance of the Decree, BA Rt has managed and operated the Airport.
233.
The Respondent claims that BA Rt has offered to settle the accounts of the Project Company, but ADC and the Claimants have failed to cooperate.
234.
The Respondent claims that the Claimants mischaracterized the dispute between the parties. Specifically the Respondent claims that the Claimants' claims are claims for damages for breach of contract and should be pursued against the Project Company, through the dispute resolution procedures prescribed in the applicable agreements.
235.
The Respondent contends that the Claimants have not been deprived of their rights in the Project Company or under the Project Agreements. Nor have the Claimants been deprived of theirs rights to seek redress from the Project Company.
236.
Without prejudice to its contention that this Tribunal lacks jurisdiction, the Respondent denies that it has violated the BIT.
237.
In particular, the Respondent claims that it has not taken a measure that deprives the Claimants of their investments.
238.
In the alternative, the Respondent claims that even if the Respondent's measure deprived the Claimants of their investments, any such measure was lawful, in that it was in the public interest, under due process of law, not discriminatory, and accompanied by provision for the payment of just compensation.
239.
In any event, the Respondent claims that it has not violated any other standards of protection in the BIT, namely fair and equitable treatment, reasonable or nondiscriminatory measure, and full security and protection (Article 3(1) and (2)).
240.
The Respondent therefore claims that the Claimants are not entitled to the damages claimed.

V. RELIEF SOUGHT BY THE PARTIES

A. Relief Sought by the Claimants

241.
The Claimants claim that they are entitled to damages measured under the international law standard of compensation for an unlawful taking.
242.
The Claimants contend that due to the fact that actual restitution of the contractual rights confiscated by the Respondent is impractical and considering Article 4 of the BIT in the context of the relevant rules of international customary law, the Claimants are entitled to (a) the consequential damages of the taking, plus (b) the greater of:

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.

243.

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.

244.
The Tribunal notes that while the Claimants have continued to reserve their right to claim consequential damages caused by the expropriation, which include, as submitted by the Claimants, administrative and overhead costs and damages to the Claimants' reputation, such claims were never substantiated and pursued in the course of these proceedings. The Tribunal therefore deems it appropriate to treat these claims as being effectively withdrawn by the Claimants.

B. Relief Sought by the Respondent

245.
The Respondent's requests to the Tribunal are threefold.
246.
First, the Respondent requests the Tribunal to dismiss the Claimants' claims in their entirety on grounds of lack of jurisdiction and/or inadmissibility and/or their lack of merit.
247.
Second and alternatively, the Respondent requests a stay of the arbitration to allow the Claimants to pursue their contractual remedies.
248.

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."

249.

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."

VI. FINDINGS OF FACT

A. Credibility of Witnesses

250.
The Tribunal has no difficulty in accepting the evidence of the Claimants' witnesses of fact, Messrs Huang, Tahy and Onozó. They gave their evidence in such a way as to give the Tribunal confidence that they could be relied upon. They all had intimate knowledge with this matter - in Mr. Huang's case, from inception of the Project to this arbitration. Their oral evidence was consistent with their written statements and, to be fair, their evidence was not seriously challenged in cross-examination.
251.
The Respondent called three witnesses. Unfortunately for the Respondent, one of these witnesses, Mr. Somogyi-Tóth, cast considerable doubt on the testimony of Messrs. Gansperger and Kiss.
252.
Dr. Kiss was asked when he first heard that the Project Company would be displaced and its operations taken over. Given his then position as the General Director of the General Directorate of Civil Aviation, which was at the time part of the Ministry of Transport, he gave the surprising answer that it was not until January 2002.
254.
Mr. Somogyi-Tóth, on the other hand, told the Tribunal that all through the autumn and early winter months of 2001 talk was in the air about the impending changes. He confirmed that this possibility was being discussed between, inter alia, Messrs. Gansperger and Kiss from the Transport Department. He further confirmed that both these gentlemen were advocating in favour of the takeover.
255.
It is the clear view of the Tribunal that Mr. Somogyi-Tóth's evidence is obviously correct and the Tribunal accordingly accepts it.
256.
Even without his testimony, it would seem most unlikely that figures so involved as Messrs. Gansperger and Kiss were not aware of such major impending changes. With the evidence of Somogyi-Tóth, the Tribunal can be convinced that Messrs. Gansperger and Kiss were well aware of what was being planned.
257.
Having considered the evidence of Messrs. Gansperger and Kiss in the light of the testimony not only of the witnesses of the Claimants but also that of Mr. Somogyi-Tóth, the Tribunal has no doubt that the evidence of the Claimants' witnesses is to be preferred when there is any conflict with the Respondent's witnesses. The Tribunal will deal with the expert witnesses under the quantum section of this award.

B. The Nature of the Claimants' Investment

258.
The Tribunal is satisfied that Mr. Huang was the most competent witness to explain the tender process and the negotiation of the Project Agreements. The Tribunal accepts his evidence. The Tribunal is satisfied that the essence of this transaction never changed. The deal discussed and agreed in 1995 was the same deal as executed in the suite of agreements in 1997. The Tribunal accepts that the 1997 agreements involved a more complex structure. However, it was proposed by the Hungarian side for reasons which they thought necessary.
259.
The Tribunal accepts that the return on equity contribution and management fees were part of one package deal. The Tribunal accepts the evidence of Messrs Huang and Ricover that this approach is prevalent in the airport industry.
260.
It is worth noting that the competing Lockheed bid also contained such features. The Claimants' bid was the lowest and it is not now open to the Respondent to challenge these matters which were voluntarily agreed at that time.
261.
The Tribunal accepts that it was understood and agreed that expenses would be incurred and work executed prior to the Operation Commencement Date because without it the Project would have been delayed. The annual management fee was an integral part of the return which the Hungarian party agreed to return to the Claimants. The Tribunal is satisfied that a management contribution was made by ADC & ADMC Management. If the management fee represented in part deferred compensation the Tribunal can see nothing wrong with this. It seems clear from the management agreement that this would be the case.

C. Complaints about the construction of the Terminal

262.
Poor performance in the construction of Terminal 2B and the renovation of Terminal 2A has been hinted at as a possible reason why the agreements were terminated. It is clear to the Tribunal that this was not the reason. The contemporary documents do not support such a conclusion and the Respondent's witnesses got no where near to establishing this as a justification. At the best, it was a half-hearted ex post facto attempt at justification. The Tribunal is satisfied that any problem that existed whether arising from construction or management was sorted out in the normal course of events.
263.

Finally, it is not without significance that the third-party consulting firm of Booz-Allen Hamilton referred to Terminal 2B shortly before the events of December 2001 as "one of Europe's safest and most modern establishments, which the Ministry of Transport can deservedly be proud of" (sic).

Effect of takeover

264.
The Tribunal accepts that since the Decree was issued ADC Affiliate Limited has received no dividends on its quota and no payment under the Note. Further, the Terminal Manager has received no management fees. Even dividends and management fees due prior to the Decree have not been paid.
265.
To add insult to injury, the Respondent caused, permitted or allowed BA Rt to claim debt repayment from the Project Company. Even the Ministry of Finance has refused to clarify the status of the project loan until this arbitration has been concluded.
266.
It is also clear beyond any doubt that as from the date of the Decree the rights of the Claimants ceased to exist (the very language used in the Information Memorandum prepared for the purposes of the recent tender exercise that eventuated in the sale to BAA) and that the Decree has resulted in a total loss of the Claimants' investment in the Airport Project.

D. Attempted Reasons for and Justification of the Decree

267.

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.

(a) EU Law

268.
As noted by the Claimants in their written closing submissions, two points have been raised under this head. The first is that ground handling at the Airport had to be harmonized with EU Directive 96/97 and the second is that air traffic control had to be separated from airport operation services pursuant to EU law.
269.
As to ground handling, the Tribunal accepts the evidence of Mr. Tahy, who told the Tribunal that although the Project Company had responsibility for ground handling, it had discharged this responsibility by entering into contracts with ATAA as well as Malév, who were the actual ground handling providers. Furthermore, Mr. Tahy told the Tribunal, and the Tribunal accepts, that the EU Directive was never mentioned by Mr. Gansperger as a reason for the expropriation and that the Project Company was never asked to consider ground handling services being carried out by any third party. It is also not without significance that the position up to the BAA acquisition at the end of 2005 remains the same - ground handling is still in the hands of BA Rt (the legal successor of ATAA) and Malév.
270.
As to the separation of air traffic control, it was never made clear to the Tribunal why ATAA could not have been reorganized to meet EU requirements relating to the separation of air traffic control from the commercial operation of the airport without the need for taking over the activities of the Project Company and without the need of the Decree. Mr. Somogyi-Tóth told the Tribunal that the transformation of ATAA did not require the exclusion of the Project Company.
271.
Dr. Kiss was somewhat contradictory on this issue. However, he accepted that neither the Government Resolution of April 14, 2000 nor the May 2000 Draft Strategy paper contemplated the cancellation of the Operating Period Lease and the takeover of the activities of the Project Company. Mr. Gansperger's evidence on this point was also unconvincing because the Tribunal fails to see how the transformation of ATAA into a company limited by shares was in any way related to the takeover of the activities of the Project Company as in fact occurred.
272.

The Tribunal does not accept that compliance with EU law mandated the steps actually taken by the Respondent, the subject matter of this arbitration.

(b) Strategic Interests

273.

The term "strategic interests" finds it origins in the Amendment Motion dated November 8, 2001 put forward by Dr. Kosztolany. The same sort of phraseology appears in the Respondent's memorials, Dr. Kiss' witness statements and the Respondent's opening statement.

274.

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.

(c) Contractual Non-performance

275.
This has already been touched on by the Tribunal above. Three areas of contractual non-performance were mentioned. Terminal management issues, hub development and North American expertise.
276.
The problem with all three grounds, in so far as they are relied upon as a justification for the Decree, was that neither the Respondent nor any other Hungarian instrumentality ever put the Claimants on notice that they were allegedly in breach of their contractual obligations. No written notice was ever given and Mr. Tahy stated, and the Tribunal accepts, that no suggestion was ever made to him that the Project Company was derelict in its contractual obligations.
277.
The Tribunal has already referred to the favourable comments in the Booz-Allen Report. Dr. Kiss attempted to dismiss these conclusions by simply stating that he did not agree with them without stating why these conclusions were incorrect. It should be noted that this report was financed by the US Trade and Development Agency at the specific request of the Ministry of Transport and, significantly, was not made available to Parliament when it was considering the bill that resulted in the Decree.
278.
As to complaints concerning terminal management, the Tribunal does not believe that Messrs Kiss and Gansperger had much knowledge as to what the Project Company actually did. However, Mr. Somogyi-Tóth did have such knowledge and was in regular contract with Messrs Tahy and Onozó. He did accept that there had been some construction problem at Terminal 2B but the Tribunal accepts the evidence of Mr. Huang that all such problems were dealt with under the contractual warranty provisions of the contract and that ATAA ultimately approved such work. Doubtless this was why no notice of default was ever served.
279.
As to the allegation that the Claimants were in breach by not providing North American experience, the Tribunal is satisfied that there is nothing in the point. Mr. Huang was from Canada. Mr. Tahy had experience with Malév in the USA. Mr. Huang had satisfied himself that there was sufficient talent within Hungary and, absent complaint at the time, this just cannot stand as a reason for the extreme measures taken by the Respondent.
280.
As to the allegation that the Claimants were somehow in breach of their contractual obligations by not developing a hub development at the airport, this simply cannot be accepted because obviously it is for the airline, not the airport operator, to decide where to hub. This was confirmed by the Claimants' aviation expert Mr. Ricover, whose testimony and expertise the Tribunal accepts.
281.

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.

(d) Lack of Operation License

282.

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.

(e) Financial Interest in Terminating the Project Agreements

283.
The absence of primary evidence as to the reasons for the takeover is, to say the least, surprising. If Hungarian law did in fact require these extremes steps to be taken, one might have expected some evidence from ministerial level.
284.
The Claimants invite the Tribunal to draw the inference that the Respondent was simply unhappy with the contractual arrangement with the Project Company and wished to determine them unilaterally. Mr. Somogyi-Tóth told the Tribunal that there was talk that the current contractual arrangements were disadvantageous to Hungary's interests. It goes without saying that one option open to the Hungarian Government, if the contracts were truly disadvantageous to Hungary's interests, was to buy the Claimants out. There is no evidence before the Tribunal to suggest that Hungary ever considered doing this. The Claimants seek to rely upon contemporaneous newspaper articles quoting Mr. Gansperger and others. Mr. Gansperger denied making the statements attributed to him and the Tribunal does not think it necessary to resolve this factual issue.
285.
The Tribunal concludes that no satisfactory explanation has ever been given for the takeover and none of the reasons now sought to be relied upon are tenable.

VII. ISSUES TO BE CONSIDERED IN THIS ARBITRATION

286.

Having considered all the submissions and evidence in this arbitration, the Tribunal is being asked to decided the following main issues:

a. Applicable Law

b. Jurisdiction

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?

287.
The Tribunal will decide each of these main issues as well as sub-issues arising thereunder. The Tribunal will refer to the main arguments put forward by each side in relation to the material arguments. However, the Tribunal will not mention each and every argument raised by the Parties although the Parties can rest assured that all of their arguments have been carefully considered by each member of the Tribunal and are subsumed in the reasons set forth below. Furthermore, because the Tribunal has attempted to do justice to the Parties' submissions, it proposes to give its decision on each material issue as succinctly as possible.

A. Applicable Law

289.
Article 42(1) of the ICSID Convention provides:

"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."

292.
The sole exception to the foregoing is Article 4(3) of the BIT which provides: "The amount of this compensation may be estimated according to the laws and regulations of the country where the expropriation is made." In the present case, that law is Hungarian law. As the reference to domestic law is used for one isolated subject matter only, it must be presumed that all other matters are governed by the provisions of the Treaty itself which in turn is governed by international law.

B. Jurisdiction

294.

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 BIT Provisions and the ICSID Convention

295.

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.

Article 2

3. In cases of approved reinvestments, the incomes ensuing therefrom enjoy the same protection as the original investments . [emphasis added]

Article 3

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.

Article 4

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.

Article 5

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.

Article 7

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."

296.

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)."

297.
The Respondent also refers to Article 26 of the ICSID Convention in support of its rebuttals concerning the Tribunal's jurisdiction:

"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."

298.
The Claimants contend in their submissions that all jurisdictional requirements in the ICSID Convention and the BIT have been satisfied and therefore the jurisdiction of the Tribunal has been duly established. The Respondent denies the Claimants' claims and contends that the Tribunal lacks jurisdiction to hear the matter.
299.

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?

1. Is the Nature of the Dispute Governed by the BIT or Is It Simply Contractual in Nature?

300.
The Claimants claim that the dispute between the Parties in this arbitration arose from Respondent's breach of its BIT obligations towards the Claimants. The present dispute, therefore, is one between the investor and the host State where the investor made investments.
301.
The Respondent, however, claims that all the claims brought by the Claimants are contractual in nature rather than those that arise between investors and host States. Further, the Respondent contended that due to the fact that the legal recourse for breach of contracts was fully available to the Claimants, the commencement of this arbitration was premature.
302.

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.

Discussion

2. Did the Claimants Make Any Investment in Hungary within the Definition of the BIT and the ICSID Convention?

305.

The issue of whether Claimants actually made investments in Hungary and therefore qualify as "investors" as defined in the ICSID Convention and the BIT was heavily debated by the Parties.

306.

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."

307.

The Respondent denies the Claimants' above assertion vigorously and claims, in its Counter-Memorial, that the Claimants did not make any investment and cannot qualify as "investors" under the BIT and the Convention standards.

308.

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.

309.
In regard to the first claim of ADC Affiliate, the Respondent claims that it was ADC rather than ADC Affiliate who made the equity contribution in the amount of US$5.7 million to the Project Company. The Respondent also claims that there is no evidence that ADC Affiliate paid any consideration when it received ADC's assignment of its rights and obligations under the Quotaholders' Agreement.
310.

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.

311.

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.

312.

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."

313.
The Claimants rebut each of the above claims of the Respondent in their Reply.
314.

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".

315.

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. [...]"

316.
In regard to the Promissory Note, the Claimants deny the Respondent's claim that it is a loan to the ATAA. After a review of the economics of the Airport Project, the Claimants reaffirm that the Promissory Note is a finance instrument that constitutes a form of investment.
317.

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."

318.

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.

319.

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.

320.

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.

321.

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.

322.

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.

323.

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.

324.
In support of the above rebuttal, the Claimants, in their Sur-Rejoinder, again refer to Fedax v. Venezuela (Ibid.), which was challenged by the Respondent in its Rejoinder. The Claimants argue that the Tribunal should consider the substance of the transaction and examine whether any investment was made and should not be prevented from finding its jurisdiction by the wording of the relevant BIT.

Discussion

3. Does the Dispute Arise "Directly" out of An Investment as Required by the ICSID Convention?

326.

The Parties dispute the meaning of the phrase "arising directly" in Article 25 (1) of the ICSID Convention.

327.
The Claimants claim that the current dispute arose directly out of their investments in Hungary. In the Claimants' contention, a direct cause of action was rendered available to the Claimants by the Respondent's issuance of the aforementioned Amending Act and the Decree, which, according to the Claimants, breached the obligation under the BIT and affected the investments made by the Claimants in Hungary. The Claimants also claimed that the jurisdiction of the Centre is established as long as the actions of the Respondent breached its BIT commitments of investment protection, even if such actions can be characterized as general economic measures.
328.
Among all the cases the Claimants relied upon in support of their proposition in this regard, the Tribunal found the following passages of the following cases to be of particular relevance. In CMS Gas Transmission company v. The Republic of Argentina (ICSID Case No. ARB/01/8), the Tribunal held that:

"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]

329.
In Enron Corporation, et al. v. The Argentine Republic (ICSID Case No. ARB/01/03), the Tribunal wrote:

"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]

330.

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.

Discussion

4. Does the dispute involve "investors" under the BIT who are nationals of a Contracting State to the ICSID Convention?

Discussion