ICSID tribunal finds Hungary in breach of expropriation clause in France–Hungary BIT

UP and C.D. Holding Internationale v. Hungary, ICSID Case No. ARB/13/35

In an award dated October 9, 2018, an ICSID tribunal considered claims brought against Hungary by two French companies: UP (formerly known as Le Chèque Déjeuner, a cooperative company) and C.D. Holding Internationale, a wholly owned subsidiary of UP. The tribunal upheld the indirect expropriation claim under the France–Hungary BIT, awarding the claimants roughly EUR 23 million in compensation.

Background and claims

The dispute related to certain legal and tax reforms that impacted the claimants’ fringe voucher business in Hungary. The business consists of selling vouchers to employers who grant them to employees as part of their compensation. The employees are entitled to use the vouchers at various affiliates to purchase goods and services.

The investors entered the Hungarian market through their wholly owned subsidiary Le Chèque Déjeuner Kft (CD Hungary) in 1996 and were primarily active in the food voucher business, including both “cold food” vouchers for use at supermarkets and grocery stores and “hot food” vouchers for use at restaurants.

In 2011, Hungary created two types of fringe benefits vouchers: (1) SZÉP cards, a dematerialized alternative to paper vouchers, which could be used for various goods, including “hot food,” and (2) Erzsébet vouchers, which could be used to pay for “cold food” (and eventually also “hot food”). The investors did not meet the legal conditions to issue SZÉP cards. The Erzsébet vouchers could only be issued by Magyar Nemzeti Üdülési Alapitvany (MNUA), a government entity.

According to the claimants, SZÉP cards and Erzsébet vouchers benefited from lower tax rates vis-à-vis the vouchers issued by the investors, which made their vouchers unattractive for employers. CD Hungary’s market share and revenues fell, and it had to cease its operations in 2013. The claimants argued that these reforms resulted in the expropriation of their investment and breached Hungary’s FET obligation under the France–Hungary BIT.

CJEU’s Achmea decision not applicable to ICSID cases

The Court of Justice of the European Union’s (CJEU) decision in the Achmea case of March 6, 2018 held that an international agreement concluded between the EU member states that allowed an investor of a member state to bring a claim against another member state was inconsistent with EU law. Hungary relied on the Achmea decision to assert that the tribunal did not have jurisdiction over the case. It argued that Hungary was no longer bound by the ICSID Convention because the ruling in Achmea rendered the ICSID dispute resolution regime inconsistent with the EU law.

The tribunal rejected Hungary’s argument and held that the Achmea decision was different from the present case in many aspects and therefore did not affect the tribunal’s jurisdiction.

First, the tribunal’s jurisdiction was based on the ICSID Convention, that is, a multilateral public international law treaty. As such, it was placed in a public international law context and not in a national or regional context.

Second, the tribunal pointed out that the Achmea decision relied on certain aspects that were not present in this case. German law applied to the arbitration proceedings in the Achmea decision, while the ICSID Convention and Arbitration Rules were applicable to these proceedings. In addition, the judicial review of the Achmea award was within the competence of the German courts and was exercised by them, whereas the judicial review of the award in the present case was only subject to the annulment procedure under the ICSID Convention. Furthermore, the Achmea decision was a result of the German Federal Court of Justice submitting preliminary questions to the CJEU.

The tribunal also observed that the Achmea decision contained no reference to the ICSID Convention or to ICSID arbitration. It then observed that there was no rule in EU law providing that the obligations under the ICSID Convention were inconsistent with EU law or that they had been terminated or replaced by Hungary’s accession to the EU. The tribunal also held that Hungary failed to establish its case of implied withdrawal from the ICSID Convention and that, in any event, any denunciation from the ICSID Convention could not have the effect of retroactively withdrawing Hungary’s consent to the arbitration.

Hungary indirectly expropriated the claimants’ investment

The tribunal rejected Hungary’s argument that the investors’ entire claim was based on the loss of economic profitability. Instead, it concluded that their case was based on indirect expropriation of their shareholding in CD Hungary by dispossession of the shareholding’s economic value. It further observed that the loss of shares’ economic value due to a state’s measures can be considered an indirect expropriation.

According to the tribunal, it was required to examine whether the disputed measures together had the effect of dispossessing the claimants of their investment. It compared the economic value of their shareholding before the reforms to the value after such measures to determine whether they were substantially dispossessed of economic value by Hungary’s reforms.

In its analysis, the tribunal concluded that Hungary knew and intended that no company other than three Hungarian banks could fulfil the eligibility criteria for issuing SZÉP cards. It further concluded that Hungary created a tax differential in favour of SZÉP cards and Erzsébet vouchers, which disadvantaged CD Hungary. The tribunal found it to be unnecessary to examine whether only this tax treatment caused dispossession of claimants’ investment, because the dispossession was a consequence of the package of measures by Hungary (the SZÉP card, the Erzsébet voucher and the tax advantages).

Taking note of the statements made in the Hungarian Parliament, the tribunal concluded that Hungary intended to create a state monopoly and evict CD Hungary from the meal voucher market or at least knew that the effect of its reforms would be that no one would continue to buy CD Hungary’s meal vouchers.

The tribunal ultimately concluded that Hungary had dispossessed the claimants of their investments, because the reforms led to a substantial loss of CD Hungary’s economic value.

Next, the tribunal examined whether the dispossession of claimants’ investment was done for a lawful purpose. The BIT provides that a dispossession may be permitted for “reasons of public necessity.” However, the tribunal concluded that the goal of the reforms was aimed at keeping non-Hungarian issuers out of the Hungarian voucher market and deliberately targeted the claimants’ investment and that, therefore, the dispossession of the claimants’ investment was not for a public purpose.

The tribunal held that Hungary breached its indirect expropriation obligations. It declined to examine the FET claim, citing procedural efficiency.


The tribunal rejected Hungary’s argument that the rule of compensation for expropriation provided in BIT Article 5(2) applied both to lawful and unlawful expropriation. It held that the compensation rule provided in the BIT applied only to lawful measures and that customary international law governed the valuation of damages for unlawful expropriation.

Having found that Hungary indirectly expropriated the claimants’ shareholding in CD Hungary, in breach of BIT Article 5(2), the tribunal awarded claimants damages amounting to EUR 23,196,000. Hungary was also ordered to pay 75 per cent of the claimants’ legal and other costs and interest at a rate of Euribor rates plus 6.01 per cent, compounded annually on the two amounts.

Notes: The tribunal was composed of Karl-Heinz Böckstiegel (president appointed by the parties, German national), L. Yves Fortier (claimants’ appointee, Canadian national) and Daniel Bethlehem (respondent’s appointee, British national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10075.pdf

Sarthak Malhotra is an Indian attorney based in New Delhi, India.