Source(s) of the information:

Lawyers, other representatives, expert(s), tribunal’s secretary

Award

I PROCEDURAL HISTORY

The parties

1.

Telenor Mobile Communications AS is represented in these proceedings by:

Mr. Péter P. Nagy
and Ms, Agnes Szarka
Nagy Es Trocsânyi Ügyvédi Iroda
Ugocsa utca 4/B
Budapest 1126
Hungary

2.

The Republic of Hungary is represented in these proceedings by:

Mr. Whitney Debevoise, Esq.
Arnold & Porter LLP
555 12 Street, N.W.
Washington, D.C. 20004
United States

and

Dr, Éva Derzsényi
Deputy State Secretariat
Ministry of Informatics and Communications
Republic of Hungary
Dob utca 75-81 H-1077
Budapest
Hungary

The Respondent was also represented by Mrs. Zsuzsanna Varga, Director General at Ministry of Finance from 30th September 2004 until 3rd February 2005.

Procedural history

3.
On 16th December 2003, the International Centre for Settlement of Investment Disputes ("ICSID" or "the Centre") received from Telenor Mobile Communications AS ("Telenor" or the "Claimant"), a company established under the laws of the Kingdom of Norway, a Request for Arbitration of 11th December 2003 against the Republic of Hungary ("Hungary" or the "Respondent") pursuant to a bilateral investment treaty ("BIT") between Norway and Hungary. On 13th January 2004, upon receipt of the prescribed lodging fee, the Centre, in accordance with Rule 5 of the ICSID Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings ("the Institution Rules") acknowledged receipt of the request and on the same day transmitted a copy to the Republic of Hungary and to its Embassy in Washington, D.C. In letters dated 1st and 17th June 2004 the Centre requested clarification by Telenor that the dispute involved matters relating to expropriation.
4.
In the light of the replies received by letters of 11th June and 13Ih July 2004, the Centre accepted that the requested arbitration was not manifestly outside its jurisdiction. Accordingly the request, as supplemented by the Claimant's letters of 18lh February, 28th May, 11th June and 13th July 2004, was registered by the Centre on 2nd August 2004, pursuant to Article 36(3) of the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention"). On the same day, the Secretary-General of ICSID, in accordance with Rule 7 of the Institution Rules, notified the parties of the registration and invited them to proceed with the constitution of an Arbitral Tribunal as soon as possible. The Centre drew attention to the fact that registration of the request was without prejudice to the Tribunal's powers and functions, including those relating to jurisdiction.
5.
By a joint letter of 1st October 2004, the parties informed ICSID of their agreement to extend the periods set out in the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings (the "ICSID Arbitration Rules") for the establishment of the Arbitral Tribunal. By a joint letter of 22nd November 2004, the parties agreed that the Arbitral Tribunal would be composed of three arbitrators, one appointed by each party, and the third and presiding arbitrator appointed by the two party-appointed arbitrators. By letter of 13th January 2005, the Claimant appointed Mr. Nicholas W. Allard, a U.S. national, as arbitrator. By letter of 28th February 2005, the Respondent appointed Mr. Arthur L. Marriott, QC, a British national, as arbitrator. Both Mr, Allard and Mr. Marriott accepted their appointments.
6.
On 19th April 2005, the two party-appointed arbitrators appointed Professor Sir Roy Goode, CBE, QC, a British national, to serve as President of the Tribunal. Professor Sir Roy Goode accepted his appointment.
7.
By letter of 22nd April 2005, the Secretary-General of ICSID informed the parties that all the arbitrators had accepted their appointments and that the Tribunal, was deemed to have been constituted and the proceeding to have begun on that date, pursuant to Rule 6(1) of the ICSID Arbitration Rules. By the same letter, the Secretary-General informed the parties that Ms. Eloise Obadia, Counsel, ICSID, would serve as Secretary of the Tribunal. All subsequent written communications between the Arbitral Tribunal and the parties were made through the ICSID Secretariat.
8.
The first session was held on 8th June 2005 in London. Present at the session were the Members of the Tribunal, Ms. Johanne Cox, Assistant to the Tribunal and the Secretary of the Tribunal; Mr. Péter Nagy for the Claimant; Mr. Whitney Debevoise, Mr. Michael Ryan, Ms. Jean Kalicki, Ms, Emma Wright and Dr, Éva Derzsényi for the Respondent.
9.
During the first session, the parties expressed agreement that the Tribunal had been properly constituted (Rule 6 of the ICSID Arbitration Rules) and stated that they had no objections in this respect. During that session the number and sequence of pleadings and the time limits for their submissions were agreed. Hungary having indicated that it might be objecting to the Tribunal's jurisdiction, the Tribunal directed that any such objections should be taken in Hungary's counter-memorial, with an answer by Telenor and a reply by Hungary, with alternative directions for pleadings on the merits in the event that no objections to jurisdiction and/or admissibility were raised.
10.
As agreed at the first session, the Claimant fled its Memorial on the merits on 8th August 2005. The Respondent filed its Objections to Jurisdiction on 11th October 2005 contending that all the claims were outside the Tribunal’s jurisdiction. The effect was to suspend the proceeding on the merits pursuant to Rule 41(3) of the ICSID Arbitration Rules, so that there were no further pleadings on the merits. The Claimant filed its Answer to the Respondent’s Objections to Jurisdiction on 9th November 2005. Finally, the Respondent filed its Reply in Further support of Objections to Jurisdiction on 9îh December 2005.
11.
The Filings on the objections to jurisdiction having been completed, by letter of 12th December 2005, the Tribunal consulted the parties on the length of time required for a hearing on jurisdiction. By letter of 23rd December 2005, the Tribunal informed the parties, having taken into account their comments, that it had decided to hold a one-day-hearing on jurisdiction in London and consulted the parties on their availability. By letter of 5th January 2006, the Tribunal confirmed that the hearing would take place on 15th March 2006.
12.
By letter of 22nd February 2006, the Secretary of the Tribunal informed the parties that due to an unforeseen event, the hearing on jurisdiction would have to be postponed. By letter of 22nd March 2006, the parties were consulted on a new date for the hearing on jurisdiction. By letter of 29th March 2006, the Tribunal informed the parties that the hearing would be held on 28th April 2006 in London.
13.
During the hearing on jurisdiction the following persons were present: the Members of the Tribunal, Ms. Johanne Cox, Assistant to the Tribunal, and the Secretary of the Tribunal; Mr. Espen Skovly, Mr Balâzs Bird, Mr. Péter Nagy, Mr. Gergely Szikla, and Mr. Jânos Burai-Kovâcs for the Claimant; Mr, Whitney Debevoise, Mr. Michael Ryan, Ms. Jean Kalicki, Ms. Emma Wright, Dr. Éva Derzsényi and Dr, Janos Katona for the Respondent. Both parties fully presented their arguments and answered the Tribunal's questions. The parties also made submissions on costs.
14.
As agreed upon at the hearing on jurisdiction, the Claimant and the Respondent, having made brief oral submissions on costs at the invitation of the Tribunal, furnished their written submissions on costs and statements of costs on 16th May 2006 and on 15th and 23rd May 2006, respectively.
15.
The Members of the Tribunal deliberated through various means of communication, including a meeting in Oxford on 21-22 June 2006. The Tribunal has taken into account all pleadings and documents in this case.

II THE BACKGROUND TO THE DISPUTE

The basic issues

16.
The dispute arises from a BIT between the Government of the Republic of Hungary and the Government of the Kingdom of Norway dated 8!h April 1991 and a concession agreement for the provision of public mobile radiotelephone services made between the Hungarian Minister of Transport, Communications and Water Management and Pannon GSM Telecommunications RT (Pannon), dated 4th November 1993, as amended on various occasions and finally consolidated in an agreement dated 7th October 1999, Through various direct and indirect holdings Pannon is the wholly owned subsidiary of Telenor, which itself is 75% owned by the State of Norway.
17.
Telenor claims damages for loss alleged to have been suffered by reason of Hungary's breaches of the BIT in respect of the years 2002 and 2003:

(1) in expropriating Teiertor's investment, or part thereof, without compensation, in breach of Article VI of the BIT; and

(2) in failing to accord Telenor fair and equitable treatment and protection for Telenor's investment, in breach of Article III of the BIT.

18.
Hungary contests the jurisdiction of the Tribunal on the grounds that:

(1) Telenor has failed to plead facts showing a prima facie case of expropriation, even assuming the truth of the allegations of fact made by Telenor; and

(2) disputes arising under Article III are outside the jurisdiction of the Tribunal, which is confined by Article XI of the BIT to issues of expropriation.

19.
Hungary therefore contends that the necessary element of consent to jurisdiction is lacking. Hungary does not dispute that all the other conditions of ICSID jurisdiction, including the making of an investment by Telenor and the existence of a legal dispute arising directly out that investment, are satisfied. Telenor's investment is in its wholly owned subsidiary, Pannon, rather than directly in the rights conferred by the investment agreement, to which it is not a party, but though Hungary briefly alluded to the point in the course of the jurisdiction hearing it has not sought to contend that this is material to the present case.
20.
Telenor contends, first, that it has made out a prima facie case for expropriation and, secondly, that the Tribunal has jurisdiction to entertain claims under Article III by virtue of the "procedural link" established by the most-favoured-nation ("MFN") clause in Article IV, which Telenor claims entitles it to invoke the widest of the dispute resolution clauses under other BITs entered into by Hungary with other States. This is contested by Hungary, which contends that the MFN clause is limited to substantive rights and cannot be invoked to extend the jurisdiction of the Tribunal beyond that conferred by Article XI of the Hungary-Norway BIT.
21.
The Tribunal is not at this stage concerned with the merits of Telenor's claims, which would arise for consideration only if and to the extent that the Tribunal were to conclude it had jurisdiction. Accordingly in the rest of this Award the Tribunal has assumed the correctness of the factual allegations made by Telenor to the extent that these are prima facie valid and admissible on the pleadings. The description of the facts which follows reflects this assumption.

III THE REORGANISATION OF THE HUNGARIANPUBLIC TELEPHONE SERVICE

22.
In 1990 Hungary decided to reorganize its state-controlled telecommunications system and to invite tenders from the private sector for the provision of public mobile radiotelephone services. This was in part motivated by Hungary's prospective commitment under European Community law to abandon the grant of special and exclusive rights to State-owned entities, liberalise its telecommunications system and promote competition. One of the two winners.of the tendering process was the GSM Consortium, of which Pannon was a member, and a concession agreement was then entered into between Hungary and the GSM Consortium. Subsequently the GSM Consortium transferred all its rights and obligations under the concession agreement to Pannon. The concession was limited to mobile telephone services. Fixed-line telecommunications services remained in the hands of the fixed-line operators, including Matav, a subsidiary of Deutsche Telekom and by a considerable margin the market leader in the Hungarian fixed-line telephone service. Matav is itself the parent company of a company formerly called Westel Mobil Tavkozlesi ("Westel"), now T-Mobile, a mobile telephone services operator and thus a competitor of Pannon.
24.
The Hungarian Government also introduced a regulated price regime for mobile service providers with significant market power ("SMP"), and this substituted regulated prices for free market prices in respect of interconnection (or "call termination") services.

IV THE BILATERAL INVESTMENT TREATYBETWEEN HUNGARY AND NORWAY

25.

The provisions of the Hungary-Norway BIT relevant to the present proceedings are Articles III, IV, VI and XI, which provide as follows:

ARTICLE III
PROMOTION AND PROTECTION OF INVESTMENTS

Each Contracting Party shall promote and encourage in its Territory' investments made by investors of the other Contracting Party and accept such investments in accordance with its laws and regulations and accord them fair and equitable treatment and protection. Such investments shall be consistent with the national objectives of and he subject to the laws and regulations of the Contracting Party in the Territory of which the Investments are made.

ARTICLE IV
MOST FAVORED NATION TREATMENT

1. investments made by Investors of one Contracting Party in the territory of the other Contracting Party, as also the returns therefrom, shall be accorded treatment no less favourable than that accorded to investments made by Investors of any third State.

2. The treatment granted under paragraph 1 of this Article shall not apply to:

- any advantage accorded to Investors of a third State by the other Contracting Party based on any existing or future customs or economic union, or similar international agreement, or free trade agreement to which either of the Contracting Parties is or becomes a Party.

- any advantages accorded to Investors of a third State by the other Contracting Party by virtue of a double taxation agreement or other agreements regarding matters of taxation or any domestic legislation relating to taxation.

ARTICLE VI
EXPROPRIATION AND COMPENSATION

1. Investments made by Investors of one Contracting Party in the territory of the other Contracting Party cannot be expropriated, nationalized or subjected to other measures having a similar effect (hereinafter referred to as "Expropriation") unless the following conditions are fulfilled:

(I) The expropriation shall be done for public interest and under due process of law.

(II) It shall not be discriminatory.

(III) It shall be done against compensation.

2. Such compensation shall amount to the market value of the investment immediately before the date of expropriation and shall be paid without delay and shall carry an annual rate of interest equal to 12 months LIBOR quoted for the currency in which the investment was made until the time of payment. The payment of such compensation shall be effectively realizable and freely transferable.

ARTICLE XI
DISPUTES BETWEEN AN INVESTOR AND A CONTRACTING PARTY

1. This Article shall apply to any legal disputes between an Investor of one Contracting Party and the other Contracting Party in relation to an investment of the former either concerning the amount or payment of compensation under Article V and VI of the present Agreement, or concerning any other matter consequential upon an act of expropriation in accordance with Article VI of the present Agreement or concerning the consequences of the non-implementation or of the incorrect implementation of Article VII of the present agreement.

2. Any such disputes which have not been amicably settled within a period of three months from written notification of a claim, shall if either Party to the dispute so wishes, be submitted for conciliation or arbitration under the Convention of IS March 1965 on the settlement of investment disputes between States and nationals of other States (the Washington Convention).

26.
Of the three other Articles referred to in Article XI, two, namely Articles V and VII, dealing respectively with compensation for loss through revolution, etc., and repatriation of investments, are not relevant to the present proceedings, leaving only Article VI, which is confined to expropriation. The first question in the present case is whether the acts complained of by Telenor constitute expropriation of Telenor's investment for the purposes of Article VI.

V THE CONCESSION AGREEMENT

27.
Though claims based purely on breaches of contract are outside the Tribunal's mandate - a point discussed in more detail later - the concession agreement between Pannon and Hungary is obviously of central importance in determining the nature and extent of the investment. Strictly speaking, Telenor's investment is in Pannon, not in Pannon's rights under the agreement, but since Pannon is Telenor’s wholly owned subsidiary the Tribunal considers that in practical terms this can be regarded as a distinction without a difference, and it is common ground that this is not an issue in the case.
28.
Article 2 of the concession agreement granted Pannon the right to provide integrated GSM 900/DCS 18002 public mobile radiotelephone services, including services to and from foreign points, on the territory of the Republic of Hungary, together with a range of specified additional services. The concession for the GSM 900 was to be for a period of 15 years, running from 4th November 1993 (the date of the original concession agreement) to 4th November 2008 and for the DCS 1800 for a period of 15 years from the execution of the consolidated agreement, that is, from 7th October 1999 to 7th October 2014. The Minister was empowered to extend for seven years without.issuing a tender invitation.
29.
Under the original agreement the GSM Consortium had paid USD 50 million as the concession fee for the GSM 900 under the original agreement and under Article 3 of the consolidated agreement Pannon was required to pay HUF 11,000,000,000 (11 billion Hungarian forints) in stages. Also payable were a frequency allocation fee (originally HUF 256 million per year, later reduced to HUF 512,000 per year) and a frequency usage fee of HUF 200,000 a year- for the GSM 900 and HUF 10 million per annum for each 1 MHz frequency band, as well as fees for base stations and certain other items.
30.
Various obligations were imposed on Pannon by Article 6 of the concession agreement. These included the provision of the services which were the subject of the concession, the duty not to suspend services without prior consent and notification to subscribers, the establishment and operation of a digital cellular radiotelephone network, the assurance of quality on a continuous basis and co-operation with other public telecommunications operators to ensure interconnection with their networks. For his part the Minister undertook, in Article 9, to treat the telecommunications operators equally both in the administrative proceedings and as telecommunications market players and to ensure that each and any regulatory and administrative proceedings relating to the rights obligations and activities of Pannon and other operators was impartial, transparent and controllable. He also accepted the content of the concession agreement as binding on the Hungarian State and declared that it would not invoke sovereign immunity from the jurisdiction of the court.
31.
The concession agreement contained numerous other provisions, such as amendment and termination, to which it is unnecessary to refer here.
32.
Under Article 19, the concession agreement was to be governed and construed under the laws of the Republic of Hungary and exclusive jurisdiction was given to the Hungarian Court to settle legal disputes.

VI THE CLAIMS BY TELENOR

Introduction

33.
The Tribunal has not found it easy to identify with precision the claims that Telenor is making and their relationship with the BIT. This is partly because they have been put differently at different stages of the arbitral proceedings and partly because they have remained very diffuse despite the Tribunal’s direction at the first session that they should be pleaded with particularity, It is therefore necessary to take each stage separately. In the last analysis the Tribunal is, of course, concerned with Telenor's pleading in its final form, as clarified at the hearing, but to the extent that such pleading raises claims not originally set out in Telenor’s Request for Arbitration this may bear on the credence to be attached to them, a point quite properly made by Hungary at the jurisdiction hearing.

The claims made in the Request for Arbitration

36.
Telenor's Request for Arbitration concluded with claims for a declaration that Hungary's ETTA regime violated Article VI of the BIT, compensation for loss suffered by Telenor and Pannon in respect of the ETTA levies, further compensation for using the ETTA regime to strengthen the position of Pannon's competitor Matav through the ETTA subsidy, an award of interest, and costs. However, no sum was claimed in respect of the costs of defending the market abuse allegation, which had been the fourth ground of complaint. Nor was any reference made to Article III of the BIT, which featured for the first time as a separate ground for relief in Telenor's Answer to Objections on Jurisdiction.

The Centre's request for clarification

38.
The Centre replied by letter dated 17th June 2004 stating that Telenor's response did not appear to address any expropriation of Pannon and asking for a full explanation in that respect. By letter to the Centre dated 13th July 2004 Telenor referred to ICSID arbitration case law showing that the concept of expropriation was not confined to the seizure of the investor's property (direct expropriation.) but extended to other measures depriving the investor of the reasonably expected economic benefits of its investment (indirect expropriation) and did not necessarily involve a single measure or set of measures at a particular time but was wide enough to encompass "creeping" expropriation, that is, a series of acts over a period of time no one of which itself amounted to expropriation but all of which together produced the effect of expropriation. Telenor contended that the pay-in obligation, in subsidising Pannon’s main competitor Matav at Pannon's expense to the extent of approximately HUF 3-5 billion, "shows that this regulatory action of the Hungarian State is discriminatory, unfair and inequitable, therefore it should qualify as expropriation" [emphasis added]. Similarly, Telenor contended that its designation as an SMP provider and the consequent imposition of the State-regulated pricing regime for such providers resulted in a loss of revenue to Pannon of some HUF 4.5 billion (approximately USD 22 million) a year, producing the same effect as expropriation, and that the same was true of the breach of Hungary's duty to preserve competition by favouring Pannon's competitors at Pannon's expense. The latter does not appear to he an independent claim but rather an overall effect attributed to the other acts alleged to constitute expropriation. While reference was made to the fact that universal service providers, which could apply for financial subsidy from the ETTA fund, were designated from the existing fixed-line providers, thus excluding Pannon, this complaint did not feature in the details of alleged violations of Article VI of the BIT set out in section IV of the July 13th, 2004 letter or in the questions for the Tribunal listed in section V of that letter. Again, there was no attempt to show the magnitude of Telenor's loss in relation to the total value of its investment.

Telenor's Memorial

39.
The claims set out in Telenor's Memorial departed in some respects from those advanced in its Request for Arbitration, The decision to restrict universal service provision to fixed-line operators, which had been the first ground of complaint in the arbitration request, did not feature at all in the Memorial, which in this respect followed Telenor's above-mentioned letters to the Centre of 11th June and 13th July. On the other hand, two new grounds of complaint were added, namely the obligation imposed on Pannon, but not on Westel, to refrain from offering handset subsidies and the fact that the right to use telephone numbers was charged by the number of digits, mobile telephone numbers having nine digits as opposed to eight digits for fixed-line numbers, so that Pannon and other mobile service providers incurred charges 10% higher than those payable by fixed-line providers.
40.

In support of its contention that the various measures referred to above constituted expropriation Telenor referred to:

(1) a decision of an ICSID tribunal that violation of the "fair and equitable treatment" requirement might well amount to expropriation,4

(2) decisions of other ICSID tribunals that substantial interference with an investor's property rights constituted expropriation even if effected through otherwise internally legitimate legislation or court rulings;

(3) decisions to the effect that if government actions (legislative, administrative or judicial) were discriminatory or arbitrary or perhaps unfair or inequitable, they were more likely to be viewed as expropriatory.5

Telenor's Memorial concluded with the following summary:

"• Any measure attributable to a State - should it be individual or regulatory - qualifies as expropriation if such measure interferes with one’s right to property.

• In deciding whether a regulatory measure has this effect, public interest and rule of law shall both be considered.

• Regulatory measures pursuing aims other than the interest of the public (lack of legitimate aim) or that are disproportional (lack of fair balance between the aim sought and means employed) qualify as expropriation with no doubt.

• Also, arbitrary, unfair, inequitable, unreasonable, discriminating nature of a measure, or violation of due process of law (lack of lawfulness) shall qualify as expropriation."

41.
At this stage Telenor’s case was based exclusively on Article VI of the BIT dealing with expropriation; it was only at a later stage, in its Answer to Objections to Jurisdiction, that it raised for the first time claims based on Article III, dealing with fair and equitable treatment, and invoked Article IV (the MFN clause) as the "procedural link" establishing the Tribunal's jurisdiction under Article III despite the fact that Article III is not one of the provisions listed in Article XL
42.
As regards the expropriation claim it is notable that once again Telenor, while referring to cases on substantial deprivation of the investor's property rights, did not address the substantiality of its loss in relation to the total value of its investment beyond a fleeting reference in paragraph 42 of the Memorial to "preliminary indications" by Deloitte & Touche LLP (London) that the direct damage suffered as the result of the violation of Article VI of the BIT and the concession agreement was between HUF 15-30 billion (approximately USD 76-152 million), coupled with a statement in paragraph 43 that the preliminary indications "do not as yet calculate with cumulative effect of concerted actions on the part of Hungary resulting in indirect and ancillary damage," For the reasons set out later in this Award these "preliminary indications" by Deloitte's in a draft document not disclosed to the Tribunal or to Hungary are not matters which the Tribunal feels able to take into account in deciding whether a prima facia case of expropriation has been made out, assuming the truth of the allegations of fact.

Subsequent development of Telenor's case

43.
This, then, was the manner in which Telenor's claims had been presented up to the point where Hungary challenged the Tribunal's jurisdiction. Those claims were later elaborated in Telenor's pleadings on the issue of jurisdiction by way of answer to Hungary's jurisdictional challenge and in oral argument at the jurisdiction hearing as described below.

VII SUBSEQUENT PLEADINGS

Hungary's Objections to Jurisdiction

44.
The Objections to Jurisdiction by Hungary as Respondent were filed on 11th October 2005 and were supported by nine bundles consisting of 93 exhibits.
45.
A major complaint by Hungary was that Telenor's pleadings had been consistently confusing, vague and contradictory, despite the Tribunal's directions about pleading clearly and with particularity what it is that Telenor was contending. Thus at times Telenor appeared to condemn the whole structure of Hungary's regulatory efforts, such as the funding mechanism it established to support its universal service programme and the restriction of universal service providers to fixed-line operators. If this were the case, the same charge could be brought against dozens of countries worldwide, including EU Member States, a fact hardly implying that the initiatives taken by Hungary constituted an expropriation within the meaning of Article VI of the BIT.
46.
Hungary also pointed out that some of Telenor's latest complaints were entirely new, having never been mentioned either in the consultations that preceded Telenor's Request for Arbitration or in the Request itself, and that its Memorial had increased its overall damage claim more than tenfold in a single conclusory sentence, with no explanation of the difference in the figures and no attempt to allocate its claimed damages against its various claims.
47.
The more specific grounds of objection may be summarised as follows:

(1) Telenor repeatedly invoked claims under the concession contract which were outside the jurisdiction of the Tribunal and were governed by Hungarian law and subject to the exclusive jurisdiction of the Hungarian courts. ICSID jurisdiction was based on consent and Hungary had not consented to jurisdiction by the Tribunal over contract claims. Only if a breach of contract rose independently to the level of expropriation - as where it resulted in extinguishment of the investment or its removal from the investor's control - could the Tribunal's jurisdiction be engaged.

(2) None of the claims was based on expropriation or other matters consequential upon an act of expropriation, which was the sole basis of Tribunal's jurisdiction.

(3) Telenor misunderstood the concept of expropriation. The fundamental predicate element of the law of expropriation was that there must have been either a government taking of an investment or such substantial regulatory interference with an investment as to render it functionally equivalent to a taking by depriving the investor of control over the investment or depriving the investment of all significant economic value.

(4) The allegations against Hungary of breaches of European Community law were misconceived, because they related to legislation enacted prior to the relevant Community instruments coming into force and, more fundamentally, because non-compliance with EC Directives, even if established, was not within the Tribunal’s jurisdiction.

(5) The Tribunal had no jurisdiction over claims for breach of the "fair and equitable treatment" provisions of Article III, which fell outside Article XI, nor could the rubric of expropriation be expanded to encompass minimum standards under international law, which are not a subset of expropriation but are a feature of fair and equitable treatment.

(6) Telenor has not alleged that the actions by Hungary of which it complains deprived Telenor of control of its investment or deprived that investment of meaningful value. It was in the nature of regulation that it involved some sort of wealth deprivation and Telenor’s contention that any form of interference with the investor's property or diminution of its value constitutes expropriation was completely out of line with expropriation jurisprudence. There had to be interference so substantial as to deprive the investor of all or most of the benefits of its investment, and that had not been alleged. That conclusion was reinforced by Article VI(2), which provided that compensation for expropriation "shall, amount to the market value of the investment immediately before the date of expropriation", which plainly referred to either seizure of the investment or extinction of its market value, not merely diminution in the investor’s profits. This is to be contrasted with the provision for compensation for losses in Article V.

48.
Hungary went on to say that it would, indeed, be impossible for Telenor to establish expropriation in the sense described above because its annual reports showed that Pannon was a vigorous competitor in the- Hungarian mobile telecommunications market, today controlling roughly one-third of the market and enjoying a consistent record of enviable profits. The mobile telecommunications sector in Hungary, in which Pannon has long been and remains the second largest player, has dramatically advanced on recent years, and today enjoys nearly three times the subscriber penetration as the fixed-line sector. Further, the market share of Westel (now branded as T-Mobile), the mobile telecommunication subsidiary of Matav, the hete noire supposedly benefiting from Hungary's actions, has consistently fallen. Both Pannon's rising revenues for the period 1996-2004 and its description of the profitability of its business in its annual reports, in which its 2002 performance was described as "the best financial results in our history" and its 2003 performance as "another year of profitable growth," was incompatible with its assertion of expropriation.
49.

Hungary contended that complaints about the regulatory structure of universal service provision were also unfounded. The funding approach adopted by Hungary was one of the most commonly accepted throughout the world. Complaints as to the failure of ETTA to assess data and ETTA’S collection methods had already been brought before the Hungarian courts, where they belonged, and they were not matters for the Tribunal. The interconnection fee issues and other complaints likewise provided no basis for an expropriation claim. While the relevant measures extended to Pannon, they were not targeted at Pannon but applied equally to other mobile operators, including Pannon's principal competitor, Westel. Three other claims (the competition authority claim, handset subsidies and dial digit fees) were insufficiently particularised and anyway related to transitory phenomena not reached by the public international law of expropriation.

Telenor's Answer to Hungary's Objections to Jurisdiction

50.
This was filed on 9th November 2005 and was supported by four further bundles consisting of an additional 23 exhibits. Part of Telenor's Answer seems to have been based on a misunderstanding of Hungary's arguments. For example, the first eight pages were devoted to establishing the fulfilment of various conditions of ICSID jurisdiction which Hungary had not sought to dispute in its jurisdictional objections. Again, contrary to the position taken in Telenor's Answer, Hungary had never contended that a claim otherwise falling within the Tribunal's jurisdiction under the BIT would be barred if it was a claim under a contract. Hungary's position had always been that a contract claim as such was a matter for the Hungarian courts applying Hungarian law but that if the facts on which that claim was based also constituted expropriation it fell within the Tribunal's jurisdiction. Similarly, the reference in Hungary’s Objections to the fact that some of the complaints had been raised before the Hungarian courts, where they belonged, was not intended to suggest that this by itself excluded them from consideration by the Tribunal, merely that they were claims based on administrative missteps not giving rise to violations of the international law of expropriation. Telenor also said that its argument on EU law had been misunderstood, but the Tribunal remains unclear as to why the duty on Hungary to secure compatibility with EU legislation is relevant to the present case.
51.
Telenor also contended that, the BIT having prescribed certain, minimum standards of protection, including fair and equitable treatment, it would be unfair and inequitable and contrary to reasonable expectations and good faith to construe the BIT in such a way as to prevent a Norwegian investor from bringing a claim against the Government of Hungary for violation of that substantive standard.
52.
Telenor further argued that the effect of the MFN clause in Article IV of the BIT was to entitle Telenor to the benefit not only of any wider substantive investment rights conferred by other BITs entered into by Hungary with other States but also of any wider dispute resolution clauses contained in such other BITs. Hungary had entered into BITs with numerous other States, and some of these, in contrast to the BIT between Hungary and Norway, were not confined to expropriation but extended to the resolution of all disputes relating to the investment. The effect was to extend the Tribunal's jurisdiction to encompass claims under Article III for breach of the obligation to provide fair and equitable treatment. This argument was entirely new-; it had not featured either in the Request for Arbitration or in Telenor's Memorial.

Hungary's Reply in further support of its Objections to Jurisdiction

54.
In its Reply Hungary stated that its objections to jurisdiction posed two core jurisdictional questions: whether under Article XI the Tribunal had to dismiss all claims that were not on their face framed as claims concerning an expropriation, and whether Telenor had presented any claims of expropriation as defined by Article VI. Further,. Hungary’s objections noted that several of Telenor's claims, which in the Request for Arbitration were pleaded in single paragraphs or in some cases were not mentioned at alt, and were never amplified in Telenor's Memorial, did not satisfy the Tribunal's clear direction to plead claims with particularity.
55.
Hungary contended that Telenor had refused to engage on any of these issues. Its Answer was devoid of analysis of the specific terms of Article XI and it suggested that the Tribunal's jurisdiction could be divined solely from Article 25 of the Washington Convention. Instead it devoted much of its attention to jurisdictional arguments Hungary had not raised.
56.
A further point made by Hungary was that the invocation of the MFN clause to expand the scope of the Tribunal's jurisdiction was new and even if it was open to Telenor to raise it at that late juncture - which Hungary contested - the argument was one that had been rejected in a majority of ICSID awards. Article XI, which confined the Tribunal's jurisdiction to questions of expropriation, was clear, but this limitation had been omitted entirely from Telenor's summary of the jurisdictional requirements of the BIT. "Expropriation only" clauses had been embodied in numerous other BITs entered into by Hungary, and the same approach was widely followed by other countries of Eastern Europe and former communist countries. An MFN provision did not incorporate by reference dispute settlement provisions in other treaties unless the MFN clause in the basic treaty left no doubt that such incorporation was intended. Failing this, the MFN undertaking was purely contractual in nature and disputes had to be settled in accordance with the agreed dispute resolution mechanism.
57.
Telenor's contention that it would be unfair and inequitable and contrary to reasonable expectations and good faith to preclude it from presenting claims other than for expropriation was untenable. Equally untenable was the suggestion that Article 25 of the Washington Convention contained all the limitations on jurisdiction. In fact it was the first part of a two-step jurisdictional analysis, the second step involving the scope of a consent given otherwise than in the Convention itself. Such consent was to be found in the BIT but was limited to expropriation.
58.
Hungary also addressed various matters on which its arguments had been mischaracterised. The Tribunal has already drawn attention to these in paragraph 50.

VIII THE ISSUES

59.
Three issues arise in connection with Hungary's challenge to the Tribunal's jurisdiction:

(1) What is the investment alleged to have been expropriated?

(2) Has Telenor asserted facts showing a prima facie case of expropriation within the meaning of Article VI of the BIT?

(3) Does the Tribunal have jurisdiction over claims under Article III of the BIT?

First issue; what is the investment alleged to have been expropriated?

60.
While Hungary has quite fairly said that the investor in this case is Telenor, not Pannon, so that strictly Telenor's investment is in Pannon itself rather than directly in the underlying concession, the distinction is not one on which either party has relied and is not an issue in this case, neither is it of any practical significance, given that Pannon is Telenor's wholly owned subsidiary, and acts which cause loss to Pannon deprive Pannon itself of equivalent value as an investment.
61.

At the hearing on jurisdiction Telenor described Pannon as the vehicle for Telenor’s investment, which consisted of four elements:

(1) The radiotelephone network

(2) Pannon's customers

(3) The concession granted by the concession agreement, carrying with it legitimate expectations on the part of Telenor, including fair and equitable treatment and conformity with laws, including EU law

(4) Pannon's income expectations.

Telenor contended that all these elements had to be taken together and not dealt with in isolation from each other. On this basis it would be wrong to focus on the fact that Pannon was a profitable company. The kernel of Telenor's complaint was that because of the improper actions of Hungary, Telenor had been deprived of market share and its network was being used by others without proper payment. So Telenor's loss was not simply the money taken from it, for example through the ETTA levy, but future income of which it had legitimate expectations.

62.
Hungary did not take issue with the formulation of the four elements of the investment put forward by Telenor, which are consistent with the definition of "investment" in Article I of the BIT, and the Tribunal accepts that these elements together constitute the investment made by Telenor through Pannon.

Second issue: has Telenor asserted facts showing a prima facie case of expropriation within the meaning of Article VI of the BIT?

The concept of expropriation

The onus of showing a prima facie case

Third issue: does the Tribunal have jurisdiction over claims under Article III of the bit?

(1) The pleading aspects

(2) Telenor's reliance on Article IV to invoke dispute resolution clauses in other BITs

(3) Two cases cited in support of Telenor’s position

(4) Cases adopting a narrower construction of the MFN clause

(5) Conclusions on the MFN clause

IX CONCLUSIONS

Jurisdiction

Costs

103.
At the invitation of the Tribunal the parties made brief oral submissions on costs and later filed more detailed written submissions.
104.
In its oral and written submissions Hungary argued that if the Tribunal were to decide it had no jurisdiction over any part of the claim Hungary should be awarded costs, partly because of the widely accepted "loser pays" principle and partly because of what it called "behavioural components", that is, the fact that in the view of Hungary, Telenor's claims were misconceived from the outset, it initiated the arbitral proceedings without any examination of the jurisdictional basis of its claims, and its pleadings were lackadaisical and failed entirely to address the question how its investment was expropriated.
105.
Telenor, having at the oral hearing indicated its acceptance of the principle that "the winner takes all" (a concession made at the end of a day's hearing and one to which the Tribunal would not wish to hold Telenor), did not directly address the issue in its written submission, but (1) attacked Hungary for failing to file any pleadings on the merits, contrary, said Telenor, to the Tribunal's directions, and for Hungary's "notorious attempts to divert attention from" this failure and (2) said that "as the Tribunal will apparently hold it does have prima facie jurisdiction over Claimant's claims" its jurisdiction costs were separated out "from the costs related to the merits in order to enable the tribunal to resolve on the forum costs separately."
106.
As stated earlier, the allegation that Hungary ignored a direction from the Tribunal to file pleadings on the merits is a misconception. The directions given for pleadings on the merits were conditional on there being at least some aspects of Telenor's claim in respect of which there was no challenge to the jurisdiction. In the event, jurisdiction was challenged across the board, so that the question of filing pleadings on the merits did not arise, all proceedings on the merits being suspended pending the Tribunal’s ruling on jurisdiction. It is therefore quite unfair of Telenor to criticise Hungary for failing to plead to the merits and to assert that this was in breach of the Tribunal's direction, and even more unfair to suggest that Hungary had deliberately sought to deflect attention from the want of such pleading. It is not clear on what basis Telenor assumed the Tribunal would rule in its favour on the question of jurisdiction and the assumption has proved to be unfounded. Telenor has made no submission on what order should be made as to costs in that event.

The Award

108.
Accordingly:

(1) Telenor’s claims are dismissed on the ground that the Tribunal has no jurisdiction over them;

(2) Telenor is ordered to reimburse to Hungary its contributions to the fees and expenses of ICSID, including the fees and expenses of the Tribunal, and the costs incurred by Hungary as set out in the annexed Schedule of Costs. Telenor is ordered to pay these costs within 30 days from the notification by ICSID to the parties of its fees and expenses.

SCHEDULE OF COSTS 
1, Counsel for Hungary: fees and expenses US$
(i) Arnold & Porter LLP (15th May 2006): 979,785.61
(ii) Arnold & Porter LLP (23rd May 2006): 31,615.72
(ii) Law offices of Tamas Kende, Budapest 237,938.96
  = 1,249,340.29
2. Hungary’s travel costs for attending hearings  3,552.48
  = 1,252,892.77

3. ICSID costs, including the fees and expenses of this Tribunal: Amount to be advised to the parties

 
(i) paid by Hungary: 150,000.00
(ii) paid by Telenor: 150,000.00
(iii) to be reimbursed by Telenor to Hungary: Half of ICSID costs
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