Heathrow Airport User Charges

Facts

The Arbitration arose under The Air Services Agreement (Bermuda II) between the Government of the United Kingdom (HMG) and the Government of the United States (USG) concluded at Bermuda, July 23, 1977.

Article 10 of Bermuda II provides:

(1) Each Contracting Party shall use its best efforts to ensure that user charges imposed or permitted to be imposed by its competent charging authorities on the designated airlines of the other Contracting Party are just and reasonable. Such charges shall be considered just and reasonable if they are determined and imposed in accordance with the principles set forth in paragraphs (2) and (3) of this Article, and if they are equitably apportioned among categories of users.

(2) Neither Contracting Party shall impose or permit to be imposed on the designated airlines of the other Contracting Party user charges higher than those imposed on its own designated airlines operating similar international air services.

(3) User charges may reflect, but shall not exceed, the full cost to the competent charging authorities of providing appropriate airport and air navigation facilities and services, and may provide for a reasonable rate of return on assets, after depreciation. ...

Airport user charges consist of runway (or landing) charges, aircraft parking charges and passenger or terminal charges. Heathrow is one of the airports owned by the British Airports Authority (BAA). In 1980, a large number of international airlines, including TWA and PanAm initiated legal proceedings against BAA, when the latter decided to increase user charges substantially. These proceedings were settled out of court on February 22, 1983. At the same time, the two Governments concluded an intergovernmental Memorandum of Understanding stating that they would not initiate arbitration under Bermuda II with respect to charges during the period up to March 1983. Then, BAA decided to implement certain changes to the structure and level of user charges. However from April 1984, pursuant to the Airports Act 1986, BAA adopted a pricing regime. Under this system, the average user charge expressed per passenger was not allowed to rise by more than the increase in the U.K. Retail Price Index minus X. Every fifth year the value of X would be reviewed. X was set at 1 for the first five-year period. TWA and PanAm disagreed with this pricing regime. On December 16, 1988, USG requested arbitration pursuant to Article 17 of Bermuda II. The Parties agreed on the use of rules of procedure largely based on the Rules of the International Centre for Settlement of Investment Disputes. Furthermore, the Tribunal divided the proceedings into liability and remedial phases.

Questions Submitted to Arbitration

1. Admissibility of USG's claim.

2. Interpretation of the text of Article 10 of Bermuda II.

3. Structure and level of charges at Heathrow Airport.

Decision of the Arbitral Tribunal

Jurisdiction of the Tribunal

HMG argued that USG's claims were inadmissible since PanAm and TWA had not exhausted the remedies available to them under English law. The Tribunal reviewed a number of ICJ decisions and held that the most relevant consideration for the ICJ is whether or not the State's claim before the international adjudicatory body was considered as distinct from and independent of that of its nationals. The Tribunal concluded that the predominant element of USG's claim was the direct interest of the U.S. itself and should be regarded as distinct and independent. Furthermore, the Tribunal stated that, though not strictly required to decide this issue, it considered that there were no effective local remedies which could have been invoked.

Questions of Interpretation

Considering the interpretation of Article 10 of Bermuda II, the Tribunal concluded that the expression best efforts placed the Parties under a continuous duty to do their best to ensure that the goals of the provision were attained. In that light, the Tribunal held that Article 10(2) created obligations of result and Article 10(1) and (3) obligations of conduct. The Tribunal considered that Article 10(1)-(3) contained their own definitions of what constituted justness and reasonableness of user charges. In interpreting the expression equitable apportionment the Tribunal concluded that reading Article 10(1) and (3) together, Article 10(3) prevented charges imposed on international airlines to be characterized as just and reasonable if and in so far as those charges reflected the cost of providing domestic services and, in so doing, involved an inequitable apportionment of charges amongst categories of users, including domestic users.

1. The structure of user charges

The Tribunal emphasized the change in structure during the arbitration period. In light of the undertaking of the Parties in the Settlement Agreement and the Memorandum of Understanding, HMG could not be held in breach for the first two years of the arbitration period. However, for the last four years (1984/1985 and 1985/1986 periods), the U.K. was held in breach. Among other things, the Tribunal found that any rational and consistent relationship between the economic cost and the charges imposed by BAA was absent. In addition, the Tribunal pointed to a number of defects, such as HMG's failure to take steps to monitor whether the operation of the differentiated peak/off-peak parking charging system was, in practice, working equitably.

2. The level of charges

According to the Tribunal, charges could not be characterized as just and reasonable if they gave rise to unreasonably high profitability. This profitability had to be measured by reference to the relationship between profits and capital employed. First, the Tribunal considered that in determining the rate of return on assets, it would look solely at Heathrow, rather than at all London airports as a system. Furthermore it analyzed profitability on a one-till basis, including not only user charges, but also commercial income. For the period 1983/84, the Tribunal found that changes had already been set at the time of the conclusion of the Memorandum of Understanding and therefore, HMG could rightly assume the charging proposals were not challenged by USG for the period 1984/87. The Tribunal compared Heathrow's rate of return with the average rate of return enjoyed by U.K. Industries and concluded that HMG should have taken steps to lower the charges. For the final period at issue, the Tribunal considered HMG was entitled to rely on analyses made in preparation for the privatization, and it concluded that HMG had not breached its obligations to USG.

Dissent

Mr. J. Lever, the Arbitrator appointed by the British Government, dissented from the majority opinion concerning the level of charges. According to Mr. Lever, it was not perfectly clear that BAA's rate of return was likely to approach an unreasonable level. Almost all airlines had accepted that an accounting rate of return would not be considered to be excessive. USG's calculations demonstrated that event at BAA's most profitable airport, Heathrow, the economic rate of return in the relevant year fell substantially short of BAA's costs of capital for the relevant year. Furthermore, Mr. Lever stated that the Tribunal should have looked at the rates as a whole and not only for Heathrow. Finally, Mr. Lever stated that BAA's cost of capital exceeded its economic rate of return even regarding Heathrow in isolation. In his opinion, it had not been established that HMG failed to discharge its obligation under Article 10(1) and 10(3).

The Tribunal issued its Award on November 30, 1992 concluding that the Government of the United Kingdom had failed to meet certain of its obligations under the Air Services Agreement between the U.K. and the U.S.

Revision

After the award on liability was issued, USG submitted a request for a supplemental decision. USG based its request on the allegation that the Tribunal Award contained an inconsistency by approving the use of the rates for the years 1984/1987. Furthermore, it argued that the Tribunal had not yet taken a conclusive decision as to the setting of the initial level for 1987/1988. HMG argued that an international tribunal had no power to modify or interpret its own award. The Tribunal rejected USG's allegation that the Tribunal had omitted to decide all questions. It also considered the issue of a tribunal's inherent power to revise. The Tribunal held that these powers were extremely limited and concluded in light of the Parties's presumably conscious decision not to include a relevant provision in the rules of procedure, it was doubtful whether this Tribunal's inherent power included the power to revisit its awards. In March 1994, the Parties agreed to a settlement concerning the quantum of damages.


Case information

Name(s) of Claimant(s) United States of America (State)
Name(s) of Respondent(s) United Kingdom of Great Britain and Northern Ireland (State)
Names of Parties -
Case number 1988-01
Administering institution Permanent Court of Arbitration (PCA)
Case status Concluded
Type of case Contract-based arbitration
Subject matter or economic sector Transportation and storage
Procedural rules - Other -
Treaty or contract under which proceedings were commenced

Contract

Language of Proceeding English
Seat of Arbitration (by Country) -
Arbitrator(s), Conciliator(s), Other Neutral(s)

Professor Isi Foighel, Dr. jur., President;

Fred F. Fielding Esquire; and

Mr. Jeremy Lever Q.C.

Representatives of the Claimant(s)

The Honorable Edwin D. Williamson, Agent;

The Honorable Abraham D. Sofaer, Former Agent;

Professor Michael K. Young, Co-Agent;

Ms. Catherine W. Brown, Deputy-Agent;

Mr. Hays Gorey, Jr., Former Deputy-Agent;

Mr. John R. Crook, Former Deputy-Agent;

Mr. Donald A. Kaplan, Of Counsel;

Mr. Richard K. Lahne, Counsel;

Mr. Thomas F. Mahoney, Counsel;

Mr. Barry F. Molar, Counsel;

Ms. Patricia N. Snyder, Counsel;

Mr. Christopher Bellamy, QC Counsel; and

Mr. W.N. Guppy, Counsel.

Representatives of the Respondent(s)

Sir Arthur Watts, KCMG, QC, Legal Adviser, Foreign & Commonwealth Office, Agent;

Mr. David Anderson, CMG, Second Legal Adviser, Foreign & Commonwealth Office, First Deputy Agent;

Mr. Alan Jones, Assistant Treasury Solicitor, Department of Transport, Deputy-Agent;

Mr. Christopher Whomersley, Legal Counsellor, Foreign & Commonwealth Office, Deputy-Agent;

Sir Ian Sinclair, KCMG, QC Counsel;

Mr. Timothy Walker, QC Counsel;

Mr. Andrew Smith, QC Counsel;

Mr. David Moss, Head of International Aviation Directorate, Department of Transport, Adviser;

Mr. Malcolm MacDonald, International Aviation Directorate, Adviser;

Mr. Robin Williams, McKenna & Co. (Solicitors), Adviser;

Ms. Victoria Cochrane, McKenna & Co. (Solicitors), Adviser;

Mr. Michael Toms, BAA plc, Adviser; and

Mr. John Brett, BAA plc, Adviser.

Representatives of the Parties
Number of Arbitrators in case 3
Date of commencement of proceeding 16 December 1988
Date of issue of final award 30 November 1992
Length of Proceedings More than 4 years
Additional notes -