{"id":5861,"date":"2018-12-21T08:36:19","date_gmt":"2018-12-21T14:36:19","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=5861"},"modified":"2024-08-09T18:29:16","modified_gmt":"2024-08-09T16:29:16","slug":"icsid-tribunal-finds-hungary-in-breach-of-expropriation-clause-in-france-hungary-bit-sarthak-malhotra","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2018\/12\/21\/icsid-tribunal-finds-hungary-in-breach-of-expropriation-clause-in-france-hungary-bit-sarthak-malhotra\/","title":{"rendered":"ICSID tribunal finds Hungary in breach of expropriation clause in France\u2013Hungary BIT"},"content":{"rendered":"

UP and C.D. Holding Internationale v. Hungary, ICSID<\/span> Case No. ARB\/13\/35<\/h2>\n

In an award dated October 9, 2018, an ICSID tribunal considered claims brought against Hungary by two French companies: UP (formerly known as Le Ch\u00e8que D\u00e9jeuner, a cooperative company) and C.D. Holding Internationale, a wholly owned subsidiary of UP. The tribunal upheld the indirect expropriation claim under the France\u2013Hungary BIT<\/span>, awarding the claimants roughly EUR 23 million in compensation.<\/p>\n

Background and claims<\/h3>\n

The dispute related to certain legal and tax reforms that impacted the claimants\u2019 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.<\/p>\n

The investors entered the Hungarian market through their wholly owned subsidiary Le Ch\u00e8que D\u00e9jeuner Kft (CD Hungary) in 1996 and were primarily active in the food voucher business, including both \u201ccold food\u201d vouchers for use at supermarkets and grocery stores and \u201chot food\u201d vouchers for use at restaurants.<\/p>\n

In 2011, Hungary created two types of fringe benefits vouchers: (1) SZ\u00c9P cards, a dematerialized alternative to paper vouchers, which could be used for various goods, including \u201chot food,\u201d and (2) Erzs\u00e9bet vouchers, which could be used to pay for \u201ccold food\u201d (and eventually also \u201chot food\u201d). The investors did not meet the legal conditions to issue SZ\u00c9P cards. The Erzs\u00e9bet vouchers could only be issued by Magyar Nemzeti \u00dcd\u00fcl\u00e9si Alapitvany (MNUA), a government entity.<\/p>\n

According to the claimants, SZ\u00c9P cards and Erzs\u00e9bet vouchers benefited from lower tax rates vis-\u00e0-vis the vouchers issued by the investors, which made their vouchers unattractive for employers. CD Hungary\u2019s 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\u2019s FET<\/span> obligation under the France\u2013Hungary BIT.<\/p>\n

CJEU<\/span>\u2019s Achmea decision not applicable to ICSID cases<\/h3>\n

The Court of Justice of the European Union\u2019s (CJEU) decision in the Achmea case<\/a> of March 6, 2018 held that an international agreement concluded between the EU<\/span> 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<\/em> 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<\/span> because the ruling in Achmea<\/em> rendered the ICSID dispute resolution regime inconsistent with the EU law.<\/p>\n

The tribunal rejected Hungary\u2019s argument and held that the Achmea<\/em> decision was different from the present case in many aspects and therefore did not affect the tribunal\u2019s jurisdiction.<\/p>\n

First, the tribunal\u2019s 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.<\/p>\n

Second, the tribunal pointed out that the Achmea<\/em> decision relied on certain aspects that were not present in this case. German law applied to the arbitration proceedings in the Achmea<\/em> decision, while the ICSID Convention and Arbitration Rules were applicable to these proceedings. In addition, the judicial review of the Achmea<\/em> 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<\/em> decision was a result of the German Federal Court of Justice submitting preliminary questions to the CJEU.<\/p>\n

The tribunal also observed that the Achmea<\/em> 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\u2019s 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\u2019s consent to the arbitration.<\/p>\n

Hungary indirectly expropriated the claimants\u2019 investment<\/h3>\n

The tribunal rejected Hungary\u2019s argument that the investors\u2019 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\u2019s economic value. It further observed that the loss of shares\u2019 economic value due to a state\u2019s measures can be considered an indirect expropriation.<\/p>\n

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\u2019s reforms.<\/p>\n

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 SZ\u00c9P cards. It further concluded that Hungary created a tax differential in favour of SZ\u00c9P cards and Erzs\u00e9bet vouchers, which disadvantaged CD Hungary. The tribunal found it to be unnecessary to examine whether only this tax treatment caused dispossession of claimants\u2019 investment, because the dispossession was a consequence of the package of measures by Hungary (the SZ\u00c9P card, the Erzs\u00e9bet voucher and the tax advantages).<\/p>\n

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\u2019s meal vouchers.<\/p>\n

The tribunal ultimately concluded that Hungary had dispossessed the claimants of their investments, because the reforms led to a substantial loss of CD Hungary\u2019s economic value.<\/p>\n

Next, the tribunal examined whether the dispossession of claimants\u2019 investment was done for a lawful purpose. The BIT provides that a dispossession may be permitted for \u201creasons of public necessity.\u201d 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\u2019 investment and that, therefore, the dispossession of the claimants\u2019 investment was not for a public purpose.<\/p>\n

The tribunal held that Hungary breached its indirect expropriation obligations. It declined to examine the FET claim, citing procedural efficiency.<\/p>\n

Damages<\/h3>\n

The tribunal rejected Hungary\u2019s 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.<\/p>\n

Having found that Hungary indirectly expropriated the claimants\u2019 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\u2019 legal and other costs and interest at a rate of Euribor rates plus 6.01 per cent, compounded annually on the two amounts.<\/p>\n

Notes<\/em>: The tribunal was composed of Karl-Heinz B\u00f6ckstiegel (president appointed by the parties, German national), L. Yves Fortier (claimants\u2019 appointee, Canadian national) and Daniel Bethlehem (respondent\u2019s appointee, British national). The award is available at\u00a0https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10075.pdf<\/a><\/p>\n

Sarthak Malhotra<\/strong>\u00a0is an Indian attorney based in New Delhi, India.<\/p>\n