ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary
ICSID · Investment (ICSID and treaty) · Hungary · 2 Oct 2006
Why it matters
This case is a landmark in investment treaty arbitration for its detailed analysis of the 'sole effects' doctrine on expropriation, holding that a State's regulatory purpose does not preclude a finding of expropriation if the effect is to deprive the investor of the value of its investment. It also clarified that the fair and equitable treatment standard requires stability and predictability, and that compensation for expropriation must be full and prompt, rejecting the 'police powers' defense. The award is frequently cited for its robust approach to damages, using DCF valuation and full cost recovery.
Summary
The case arose from Hungary's 2002 decree that effectively terminated a 1995 agreement under which the Claimants, Cypriot companies, had invested in the Budapest-Ferihegy International Airport. The Claimants had entered into a long-term lease and management agreement with the state-owned airport authority (ATAA) to operate Terminal 2/B and related facilities. In 2001, Hungary restructured the airport authority, and in 2002 issued a decree that transferred the operation of the airport to a new state company, effectively expropriating the Claimants' investment without compensation. The Claimants initiated ICSID arbitration under the Cyprus-Hungary BIT. The tribunal found that Hungary's actions constituted an unlawful expropriation in violation of Article 4 of the BIT, and also breached the fair and equitable treatment standard. The tribunal rejected Hungary's defenses that the measures were a legitimate exercise of police powers or that the Claimants' investment was invalid under Hungarian law. On quantum, the tribunal applied the standard of full reparation under international law, using a discounted cash flow (DCF) method to calculate the fair market value of the investment as of the date of expropriation. It awarded US$55.4 million to ADC Affiliate and US$20.8 million to ADC & ADMC Management, plus full costs of US$7.6 million. The award is notable for its detailed reasoning on expropriation, the rejection of the 'police powers' doctrine in the context of a long-term contract, and the emphasis on the investor's legitimate expectations.
The detail
Parties: ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary
Case number: ICSID Case No. ARB/03/16
Outcome: Claimants won; Hungary ordered to pay US$55,426,973 to ADC Affiliate and US$20,773,027 to ADC & ADMC Management, plus US$7,623,693 in costs, with interest.
Quantum: US$76,200,000
Applicable law: Cyprus-Hungary BIT (1989), ICSID Convention, international law
Issues in play: The BIT's expropriation clause (Art. 4) and fair and equitable treatment standard collided with Hungary's sovereign right to regulate its airport operations. The tribunal assessed whether Hungary's decree terminating the lease and management agreements was a lawful regulatory measure or an unlawful expropriation.
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