By Fernando Cabrera Diaz
May 11, 2010
An ad hoc tribunal under UNCTIRAL Rules has awarded German investor Walter Bau AG more than 30 million Euros in its claim against Thailand over a tollway concession gone sour.
The tribunal found that the failure of Thai authorities to approve toll hikes as contemplated in the concession contract amounted to a violation of the 2002 Germany-Thailand BIT.
Walter Bau, a German company currently in liquidation, invested in a joint venture to construct and operate a tollway from Bangkok to the Dong Muang airport. The joint venture was to be operated by Don Muang Tollway Co. Limited (DMT) in which the claimant had a 10% stake.
Under a 1989 concession contract and subsequent 1996 amendment toll rates could only be increased with the approval of Thai authorities.
According to the claimant, Thai authorities refused to approve toll hikes throughout the existence of the project, which prevented it from making a profit in the venture. The government also made several improvements to existing free highways in the area, which the claimant alleges violated the amended concession contract.
Walter Bau filed for arbitration in September of 2005, alleging violations of the 2002 German-Thailand BIT, as well as its 1961 predecessor, claiming expropriation and a violation of fair and equitable treatment.
In its decision dated July 1, 2009, the tribunal limited its inquiry to whether a breach of the 2002 BIT had occurred after that agreement went into force in October of 2004. In doing so the tribunal rejected arguments by the claimant that a previous 1961 BIT between Germany and Thailand applied, holding that claims under that prior treaty could only be made by Germany as the prior treaty lacked an investor-state arbitration clause. It also denied attempts by the claimant to apply the 2002 BIT to breaches prior to October 2004.
The tribunal also rejected Walter Bau’s claim of creeping expropriation on the grounds that none of the respondent’s actions reached the level of creeping expropriation defined by the tribunal in PSEG Global v Turkey as requiring: “…some form of deprivation of the investor in the control of the investment, the management of day-to-day-operations of the company, interfering in the administration, impeding the distribution of dividends, interfering in the appointment of officials and managers, or depriving the company of its property or control in total or in part.”
However, the tribunal ultimately found that Thailand had breached the fair and equitable treatment (FET) provision of the 2002 BIT by violating the claimant’s legitimate expectations.
The tribunal concluded that the claimant had a legitimate expectation to a reasonable return on its investment, considering that the concession was semi-public and thus heavily regulated, that investors would not contemplate such a long-term investment without a legitimate expectation of a reasonable return on their investment, and that the tolls received were the only way in which such a return could be achieved.
Principle among the Thai government’s actions that violated the investor’s legitimate expectations was the continuous refusal to approve a hike in the toll rate.
Though that refusal began prior the 2002 BIT going into force, it was crystallized into a BIT violation on December of 2004 when DMT, then controlled by the Thai government, asked for and obtained a toll reduction which had been announced by the Thai Prime Minister at a pubic rally.
The Thai government’s improvements to the free road networks around the toll road, which went beyond the mere “traffic management” that was allowed under the concession contract, and the short-term closure of the Dong Muang Airport which also affected traffic on the tollway, contributed to violating the investor’s legitimate expectations.
In the end the tribunal awarded the claimant 29.2 million Euros for the FET breach and 1.98 million Euros in partial costs, plus interest.
Walter Bau AG v. Kingdom of Thailand award of 1 July 2009, available from the Investment Treaty Arbitration website at: http://ita.law.uvic.ca/documents/WalterBauThailandAward.pdf
BIT claim against Thailand clears initial jurisdictional hurdles, By Luke Eric Peterson, Investment Treaty News, 17 January 2008: