Magyar Farming Company Ltd, Kintyre Kft and Inicia Zrt v. Hungary

Case summary

At a glance

Parties: Magyar Farming Company Ltd (UK), Kintyre Kft and Inícia Zrt (Hungary) v. Hungary
Case no.: ICSID Case No. ARB/17/27
Forum and rules: ICSID Convention arbitration; ICSID Arbitration Rules 2006; place of proceedings Washington, D.C. (hearing held in Paris)
Treaty: UK–Hungary BIT of 9 March 1987 (Article 6, expropriation; Article 8, ICSID consent)
Tribunal: Prof. Gabrielle Kaufmann-Kohler (President), Dr. Stanimir A. Alexandrov, Dr. Inka Hanefeld
Annulment Committee: Prof. Geneviève Bastid Burdeau (President), Mr. Manuel Conthe, Mr. Michael Nolan
Sector: Agriculture; State-owned farmland leases
Outcome: Award of 13 November 2019: jurisdiction upheld; Hungary held to have expropriated Inícia's statutory pre-lease right without compensation. Hungary's application for annulment dismissed in full on 16 November 2021.
Amount: Claimed: EUR 17.9 million plus HUF 57,222,236 in costs of the Hungarian court cases. Awarded: EUR 7,148,824 plus interest at 6-month EURIBOR +2%, compounded semi-annually, from 1 August 2015. Costs: USD 282,224.40 (ICSID and Tribunal costs), USD 25,000 (lodging fee), and GBP 296,456, EUR 19,473 and HUF 26,495,585.5 (legal costs). Annulment costs: Hungary bears all costs of the proceeding and pays the claimants GBP 210,000 and EUR 95,250.

The dispute

British farmers set up Magyar Farming Company Ltd in the UK and, through its Hungarian subsidiary Kintyre Kft, bought 95.13% of Inícia Zrt in 1998. Inícia held a lease of 760 hectares of State-owned land at Ikrény, which ran until 25 July 2014. In 2011 the Hungarian Parliament amended the 2010 Act on the National Land Fund so that statutory pre-lease rights could not be exercised when the National Land Agency (NLA) leased State land by tender. The land was split into 16 plots and tendered in 2013. Inícia lost all 16 tenders, and in July 2015 it was evicted with the help of private security guards. The claimants argued that this was an expropriation contrary to Article 6 of the BIT. Hungary objected that, after the Achmea judgment, it had not validly consented to intra-EU arbitration, and that the claimants held no rights capable of being expropriated. It also argued that the 2011 Amendment was a lawful exercise of police powers, and that the claimants had failed to mitigate their loss.

Key holdings

The intra-EU objection fails. The Tribunal is not bound by the Achmea judgment or by the 2019 Member State Declarations, which cannot retroactively withdraw consent already given. The BIT and the EU Treaties do not relate to the same subject matter, so Article 30 VCLT does not apply. In any event, Article 8 of the BIT does not conflict with Articles 267 and 344 TFEU. Award ¶¶ 207–248
Subject-matter jurisdiction is upheld. The farm is an undisputed investment, judged as a whole. The disagreement over whether expropriable rights existed is itself a legal dispute arising under Article 6. Award ¶¶ 271–281
The 2011 Amendment expropriated the vested statutory pre-lease right that Inícia had acquired under Section 21 of the 1994 Arable Land Act when it entered into the Lease. The Amendment had no transitional arrangements for incumbent lessees. The Tribunal did not decide the claims on the contractual pre-lease right or the tender manipulation. Award ¶¶ 340–363
The police powers defence fails. The Amendment implemented a change in land-holding policy; it was neither a sanction against wrongdoing by the investor nor a measure against threats to health, the environment or public order. The expropriation was unlawful for lack of compensation. Award ¶¶ 364–372
Damages of EUR 7,148,824. The Tribunal started from Mr Gilbey's secondary ex ante valuation as of July 2015 (EUR 9,937,495). It reduced the liquidity discount to 5%, adopted a 9.65% discount rate and treated potato energy costs as variable. The mitigation argument and the amended requests for relief were rejected because events after the valuation date are irrelevant. Interest runs at 6-month EURIBOR +2%, compounded semi-annually. Award ¶¶ 402–432
Costs: Hungary reimburses the claimants' share of the arbitration costs, the lodging fee and 50% of their legal costs. The costs of the Hungarian court proceedings are not recoverable. Award ¶¶ 434–441
Annulment dismissed. On Achmea, there was no manifest excess of powers. The Tribunal did not need to address Article 351 TFEU, because it found no conflict between the treaties. It implicitly rejected the 'investment as a whole' argument. Its handling of the potato profits and of mitigation is at most an alleged error of law, which is not a ground for annulment. Decision on Annulment ¶¶ 101–134, 142

Procedural history

14 July 2017ICSID receives the Request for Arbitration dated 4 July 2017. It is registered on 1 August 2017.
4 January 2018Tribunal constituted, after Prof. Klaus Sachs declined appointment as president.
5 September 2018The European Commission is granted leave to file an amicus brief limited to the Achmea issue. It files the brief on 20 January 2019.
27–30 May 2019Hearing on jurisdiction, liability and quantum in Paris.
13 November 2019Award: jurisdiction upheld; expropriation found; EUR 7,148,824 awarded plus interest and costs.
4 March 2020The claimants petition the US District Court for the District of Columbia to enforce the Award (Civil Action 1:20-cv-00637).
12 March 2020Hungary applies for annulment and a stay of enforcement. The application is registered on 19 March 2020 and the stay applies provisionally.
11 September 2020The ad hoc Committee, constituted on 1 June 2020, continues the stay of enforcement without conditions.
16 November 2021Decision on Annulment: the application is dismissed in full, the stay is lifted, and Hungary pays the costs.