International Tribunal Awards US$83.8M to Airport Investors

An international arbitral tribunal constituted under the rules of the International Centre for the Settlement of Investment Disputes (ICSID) awarded US$83.8 million on October 2, 2006 to foreign investors in Hungary's Budapest-Ferihegy International Airport: ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. The Republic of Hungary.

The investors are two Cyprus companies, ADC Affiliate Ltd. and ADC & ADMC Management Ltd., whose ultimate beneficial owners are Airport Development Corporation (ADC) and Aéroports de Montreal Capital, Inc. (ADMC). The award, which Hungary has paid in full, included an amount of US$7.6 million in satisfaction of the claimants' claim for the costs and expenses of the arbitration.

In 1994, ADC was awarded contracts by a Hungarian State agency to renovate the airport's existing Terminal 2/A, build a new Terminal 2/B, and participate in the operation of Terminals 2/A and 2/B over a 12-year term through a locally incorporated project company. The final agreements were signed in February 1997. The new terminal was commissioned in December 1998, when the project company began to operate the terminals.

The Cyprus companies were incorporated as part of the investment structure. One held the equity in the project company, and the other collected management fees as terminal manager.

Three years into the successful operation of the airport by the project company, in December 2001, Hungary's Minister of Transport issued a decree that cancelled the project company's operating rights and transferred the operation of the airport to a state-owned company, Budapest Airport Rt. The project company was required to vacate its offices within several days, and its employees were pressured to join the new company or leave. No compensation accompanied the decree, nor was any offer of compensation made in the period following the decree.

In 2003, following an unsuccessful period of negotiation, the expropriated parties commenced an arbitration against Hungary under the bilateral investment treaty between Hungary and Cyprus (BIT), claiming compensation for Hungary's breaches of the treaty.

The ICSID tribunal, consisting of three eminent international arbitrators (Professor Albert Jan van den Berg, The Hon. Charles Brower and Neil Kaplan CBE QC, who was president of the tribunal), ruled in favour of the claimants on each of the issues in the arbitration, namely (i) jurisdiction, (ii) liability, (iii) the applicable standard of compensation and (iv) quantification of damages.

On the issue of jurisdiction, the tribunal rejected Hungary's contention that the investors were Canadian, with no genuine connection with Cyprus. On liability, the tribunal concluded that the decree constituted an unlawful taking of the claimants' investments, and thus a violation of the BIT.

On the standard of compensation, the tribunal accepted the claimants' contention that it should apply the standard under customary international law, and not the standard set out in the BIT. The claimants succeeded with the argument that the BIT does not establish the standard for assessing damages for an unlawful expropriation, but only for an expropriation that meets the treaty's legal requirements.

The tribunal also accepted the claimants' argument that where, as in this case, the value of the expropriated investment has risen very considerably since the expropriation, the appropriate date for the valuation of the investment is the date of the award and not the date of expropriation. This particular aspect of the decision immediately establishes the award as an important precedent in investor/state law, in that it is the first time an international arbitration panel has applied the landmark ruling of the Permanent Court of International Justice in the Chorzów Factory case of 1928.

Finally, the tribunal endorsed the claimants' use of a discounted cash-flow (DCF) model to quantify damages. The tribunal noted that the amount claimed was fully validated by the price that the British Airport Authority (BAA) paid to acquire Budapest Airport Rt. on December 22, 2005, namely US$2.23 billion for 75 per cent minus one share and a 75-year assets management contract plus movable assets.

The claimants were represented by Pierre Bienvenu, Martin J. Valasek and Jacques Demers of Ogilvy Renault LLP, René Cadieux and Daniel Picotte of Fasken Martineau DuMoulin LLP, Prof. Ivan Szasz of Squire Sanders & Dempsey LLP in Budapest, and Prof. James R. Crawford SC of the University of Cambridge and Matrix Chambers.

Hungary was originally represented by John Beechey, Audley Sheppard and Peter Koves of Clifford Chance LLP in London and Budapest, and later by Prof. Laszlo Bodnar of the Bodnar Law Firm, with Jan Burmeister and Szabo Levente Antal of BNT Budapest and Inka Hanefeld of Hamburg as co-counsel.


Martin J. Valasek Jacques Demers Daniel Picotte Pierre Bienvenu René Cadieux


Norton Rose Fulbright Canada LLP Fasken Martineau DuMoulin LLP Squire Sanders Matrix Chambers Clifford Chance Rogers & Wells LLP