United States v United Kingdom Arbitration concerning Heathrow Airport User Charges (1992) Award of 30 November 1992, UN Vol 14 p 1-359

International Arbitration


1.1. The Agreement between the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of the United States
concerning Air Services was signed at Bermuda on July 23, 1977. It replaced
the Final Act of the Civil Aviation Conference held at Bermuda from January
15 to February 11, 1946 and the annexed agreement between HMG and USG
relating to Air Services between their respective Territories. The 1946
Agreement is commonly called “Bermuda 1” and the 1977 Agreement,
pursuant to which the present Arbitration is held, is commonly called
“Bermuda 2”.

1.2. Bermuda 1 was signed against the background of the Convention on
International Civil Aviation, opened for signature at Chicago on December 7,
1944, commonly called “the Chicago Convention”, which was ratified by both
the United States and the United Kingdom. Article 15 of the Chicago
Convention prohibits inter alia discrimination by a contracting State against
aircraft of other contracting States through their being charged more for the
use of airports in the first State than national aircraft of the same class
engaged in similar operations or, as to aircraft engaged in scheduled international air services, than national aircraft engaged in similar
international air services.


[3.1] […] In November 1979, two-and-a-half years after the making of
Bermuda 2, BAA announced very large increases in user charges for the
charging year 1980/81, i.e. the year that commenced on April 1, 1980, which
had the effect of raising charges to the U.S. carriers at Heathrow, namely
PanAm and TWA, by some 60 per cent. – 70 per cent. The announcement of
the increases led to inquiries and expressions of concern by USG to HMG.
The charges for the following charging year were increased by a further 12
per cent. overall. At some point in 1980 (apparently before November of that
year), 18 international airlines, including TWA, commenced proceedings in
the High Court of Justice in London against the Secretary of State for Trade
(who was at that time the Secretary of State responsible for civil aviation) and
BAA; PanAm, with whom TWA subsequently joined, commenced parallel
proceedings against the Secretary of State for Trade and BAA. The
proceedings concerned only user charges at Heathrow.

3.2. By common points of claim served on May 1, 1981, which were
amended on 5 February 1982 and re-served on May 6, 1982, the plaintiffs
sought a number of declarations and damages against the Secretary of State
and BAA; injunctions against BAA; and repayment by BAA of “excess user
charges”. In reliance on English statutory provisions, European Community
law and common law, the plaintiffs contended that any charges imposed by
BAA should be fair, just and reasonable; reasonably calculated to facilitate the
discharge of BAA’s duties under the Airports Authorities Act 1975; and nondiscriminatory. The plaintiffs also contended that BAA was bound to make
Heathrow available to all operators (or all aircraft of other States party to the
Chicago Convention) on equal terms and conditions; PanAm and TWA
further relied on a duty deriving from Bermuda 2 to impose airport charges
that were just and reasonable, reflecting but not exceeding the full cost to
BAA of providing appropriate facilities and providing for a reasonable rate of
return on assets after depreciation.

3.3. The principal group of plaintiff airlines contended that a reasonable
rate of return at Heathrow would and should have been no greater than 6 per
cent. (on a Current Cost Accounting – or CCA – basis); PanAm contended that such reasonable rate of return would and should have been no greater than 4
per cent. CCA.

3.4. Although the actions gave rise to interlocutory proceedings in the
High Court, the Court of Appeal and the House of Lords between April 1982
and March 1983, they never came on for trial since they were settled. The
settlement was embodied in a Memorandum of Understanding and Settlement
Agreement, made between the Secretary of State for Trade and BAA, on the
one hand, and the airline plaintiffs, on the other hand, entered into on
February 22, 1983.


4.7. Against that background USG, in a paper provided to HMG on
January 13, 1987 and entitled “Talking Points”, expressed its concern that, in
particular at Heathrow, the existing level of charges bore little relation to
actual costs, with allowance for a reasonable rate of return. As to structure,
USG stated that existing practices at Heathrow did not meet the requirements
of either Article 10 of Bermuda 2 or the intergovernmental MoU, including
the allocation of costs and revenues between international and domestic
services. Furthermore, the peak charges did not reflect objective costs
obtained by generally accepted accounting principles.

4.8. Two days later, on January 15, 1987, PanAm and TWA publicly
expressed their great dissatisfaction with the pricing régime at Heathrow and
announced that, unless they were able to obtain speedy and satisfactory relief,
they would feel compelled to seek “appropriate remedies”. It was said that
these could include resumption of litigation in the U.K. courts or a direct
request to USG to seek consultation with HMG, leading to arbitration, as
provided for in Bermuda 2.

4.9. It seems that representatives of the two Governments evidently met
on February 17, 1987, and that the U.K. delegation then handed to the U.S.
delegation a paper in which HMG gave its reasons for maintaining that BAA’s
user charges at the South East airports were not unreasonably high and that
privatization and price regulation should ensure further increases in efficiency
in the future. More specifically it argued that the RPI-1 formula would ensure
that airlines would not only retain the benefits of the real reduction in average charges that had taken place over the previous 5 years, but that, on average,
they would enjoy further real reductions over the next 5 years.

4.10. As to allegations that had been made by PanAm and TWA, HMG
stated that BAA’s charges were low compared with other international
airports, that its return on capital (on a CCA basis) was below the U.K.
average, and that the charging level was necessary to allow new investment.
HMG stated that in establishing the RPI-1 formula, future revenues and costs
had been taken into account. Finally, HMG noted that if, in the out-turn,
charges exceeded the limit, e.g. because inflation in the coming year had been
overestimated, an obligation to make repayments, coupled with a penal rate of
interest, would make up for this.

4.20. Nevertheless efforts to find a negotiated solution continued,
including debates between economists appointed by each of the Governments,
but to no avail. The charges actually introduced by BAA for the charging year
1988/89 differed from those proposed by further reducing the parking charge
and further increasing the peak runway charge. Those changes, together with
the action taken on the various issues that the Parties had agreed BAA should
review during 1987, represented, in the view of HMG communicated to USG
on March 21, 1988, substantial changes to the benefit of U.S. airlines.
4.21. USG did not agree with that view; and under cover of a letter dated
June 28, 1988 the U.S. Secretary of Transportation sent to the U.S. Secretary
of State, as required by Section 11 of the U.S. International Aviation Facilities
Act, a report in which the Secretary of Transportation had determined that
charges imposed by BAA on U.S. airlines at Heathrow unreasonably exceeded
comparable charges for furnishing airport property in the United States and
were otherwise discriminatory in that they violated the requirements of Article
10 of Bermuda 2. Pursuant to the statute, the letter continued, the next step
was for the Department of State, through negotiations to urge HMG to
eliminate the inconsistencies between the requirements of HMG’s bilateral
obligations and the structure and level of charges at Heathrow. Failing a
satisfactory response from HMG, the Secretary of Transportation indicated his
intention to impose an “offsetting charge” of $1550 on British airlines for
each scheduled roundtrip transatlantic combination flight that they operated to
the United States.
4.22. The report that accompanied the Secretary of Transportation’s letter
maintained that –

– the per passenger trading profit at Heathrow exceeded net costs per
passenger by 100 per cent. and had increased by over 20 per cent.
from 1982 to 1986;

– BAA’s accounting rate of return overall and at Heathrow was
excessive in that it exceeded specified U.K. industrial averages
notwithstanding the relatively low risk attached to BAA’s operations;

– the differential between domestic and international terminal charges
was greater than could be justified and was, in effect, discriminatory;

– the RPI-1 price-cap régime left BAA free to increase the average
user charge per passenger even if the average cost per passenger, net
of commercial income, had increased by a lesser amount or not at all;

– peak periods were wrongly and inconsistently defined;

– the use of average revenue yield from user charges rather than of user
charges themselves for the purposes of applying the RPI-1 price-cap
régime was inconsistent with sound economic principles since it
prevented users from benefiting to the full extent if they shifted from
peak to non-peak periods;

– use by BAA of Current Cost Accounting standards was inappropriate
in assessing BAA’s rates of return;

– Current Cost Accounting standards could not now be considered to
accord with generally accepted accounting practices in the U.K. and
their use was therefore impermissible for the purposes of Bermuda 2;

– user charges at Heathrow for typical operations of a relevant kind
significantly exceeded the corresponding charges at U.S. airports
currently serving British airlines and the disparity, when considered
in conjunction with the analysis of the relationship of Heathrow
charges, revenues and costs, was prima facie evidence of charges
exceeding costs at Heathrow.


4.25. On December 16, USG duly made a formal request that the dispute
be submitted to arbitration in accordance with those procedures. On December
22, 1988, HMG formally accepted the request for arbitration.

Article 10 of Bermuda 2 is headed “User Charges” and provides as follows:

(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. In the provision of facilities and services, the competent authorities shall have regard to such factors as efficiency, economy, environmental impact and safety of operation. User charges shall be based on sound economic principles and on the generally accepted accounting practices within the territory of the appropriate Contracting Party.

(4) Each Contracting Party shall encourage consultations between its
competent charging authorities and airlines using the services and
facilities, where practicable through the airlines’ representative
organizations. Reasonable notice should be given to users of any
proposals for changes in user charges to enable them to express their
views before changes are made.

(5) For the purposes of paragraph (4) of this Article, each Contracting
Party shall use its best efforts to encourage the competent charging
authorities and the airlines to exchange such information as may be
necessary to permit an accurate review of the reasonableness of the
charges in accordance with the principles set out in this Article.

(6) In the event that agreement is reached between the Contracting
Parties that an existing user charge should be revised, the appropriate
Contracting Party shall use its best efforts to put the revision into
effect promptly.


There were a number of issues posed by the arbitration:

1. Was the United States, or its airlines as nationals of the United States, required to exhaust all local remedies before commencing arbitration proceedings?

2. What was the nature of the treaty obligations as they applied to the United Kingdom – were they obligations “of conduct” or of a specific “result”?

3. What were the relevant treaty obligations, expressed in Bermuda 2, with regard to (a) discriminatory user charges and (b) “just and reasonable user charges”, and were these breached by the United Kingdom?


With respect to 1, and the exhaustion of local remedies:

1.1 HMG pleaded that USG’s claims were inadmissible since PanAm and
TWA had not exhausted the remedies available to them under English law for
the redress of their grievances. The following points were made in support of
that contention.

1.2 A distinction was to be drawn between, on the one hand, cases of
direct injury to another State and, on the other hand, cases of diplomatic
protection, in which the interests of a national of the claimant State were
affected and the legal interest of the claimant State was derivative. In cases of
the latter kind, the long-established rule requiring the exhaustion of domestic
remedies applied. The International Court of Justice had explained the
rationale for the rule as follows:

“before resort may be had to an international court in such a situation, it has been considered necessary that the State where the violation occurred should have an opportunity to redress it by its own means, within the framework of its own legal system”
Switzerland v. United States of America (preliminary objections), 1959 I.C.J.
Rep. 6, 27 [hereinafter referred to as “Interhandel”].


[At page 58:]

6.5 The rule of exhaustion of domestic remedies is generally
acknowledged as a customary rule of international law, has been codified in
conventions such as the European Convention on Human Rights (Article 26)
and has been recognized by international courts and tribunals: see, for
example, the Interhandel case, where the International Court of Justice held that a plea of non-exhaustion went not to the jurisdiction of the tribunal but to
the admissibility of the claim.

6.6 There is wide support for the view that a distinction is to be drawn
between cases of diplomatic protection, on the one hand, and cases of direct
injury where the State is protecting its own interests, on the other hand, and
that the applicability of the rule of exhaustion is excluded in cases in the
second category: see, for example, the Opinion of Judge Read in the
Norwegian Loans case, 1957 I.C.J. Rep. at 9; the Opinion of Judge Armand-Ugon in the Interhandel case, 1959 I.C.J. Rep. at 87-89; the Change-of-Gauge
case, 54 I.L.R. at 324; and Amerasinghe at 112-113 (citing numerous
authorities in support).

[At page 62:]

6.18 Although examination of the nature of USG’s claims and of the
airlines’ potential claims reveals that they overlap to a certain extent, at the
same time they present significant differences; and taking the case as a whole
and undivided into its constituent parts, the Tribunal is of the opinion that the
predominant element is the direct interest of the U.S. itself. Thus, examination
of the subject matter of the dispute as a whole indicates that, notwithstanding
section 30(3) of the Airports Act 1986, USG’s claim is properly to be
regarded as distinct and independent.

6.19 Accordingly, application of the general principles of international
law underlying the local remedies rule leads to the conclusion that it does not
preclude the Tribunal from answering the […] questions referred to it […]

With regard to 2, the Tribunal concluded that the relevant obligations were of conduct on the part of the United Kingdom, and not obligations of result. This was essentially due to the “best efforts” language used in Article 10. However, the Tribunal did find that Article 10(2) created an independent obligation of result.

[At page 71]:

2.1.1 In the submission of USG, an obligation to “use best efforts”
represented a substantial commitment, amounting in some circumstances
virtually to an obligation to ensure that an act was performed. Both U.S. and
English case-law showed that this phrase (and its corresponding English
equivalent, “to use best endeavours”) required all reasonable steps to be taken.
In the present case it required HMG to do its best to achieve Article 10’s
stated goals.

2.1.2 Furthermore, USG maintained that a “best efforts” obligation was
not satisfied, as HMG suggested, merely by establishing domestic
administrative machinery by which those goals could be achieved. The issue
here was not what domestic machinery existed, but what HMG did or did not
do when USG complained of BAA’s practices. Thus, if USG’s complaints
were justified, HMG could not be taken to have exercised its “best efforts” if
it could have taken corrective action but, as had happened, did not.

[At page 72:]

2.2.1 It is clear to the Tribunal that the “best efforts” obligation
incumbent on HMG under Article 10(1) of Bermuda 2 cannot be regarded as a
promise or guarantee on HMG’s part that user charges will in fact be “just and
reasonable”. Had that been the intention, the words “use its best efforts to”
would simply have been superfluous.

2.2.2 On the other hand, the Tribunal cannot subscribe to HMG’s view
that the “best efforts” obligation is satisfied solely by the existence of a
statutory power to take steps to regulate charges and of machinery to prompt
the taking of such steps. Such an interpretation, with its overtones of passivity,
would not be consistent with the continuous duty to take active steps which
the Tribunal sees as flowing from the words “use” and “ensure”. Nor is the
Tribunal persuaded by HMG’s contention, advanced in the context of the
“threshold issue”, that HMG’s obligation to exercise its “best efforts” arose
only in the event of receipt of a complaint and did not arise even if complaints had been made but, as HMG claims, those complaints had been formulated in
an unsustainable manner. In the view of the Tribunal, there is nothing in the
actual text of Article 10(1) to support HMG’s contention to that effect.

[At page 73:]

2.2.3 Thus, in the judgment of the Tribunal, Article 10(1) and (3) of
Bermuda 2 imposes an obligation on the Parties that goes further than
requiring them to use their best efforts to have user charges revoked if and to
the extent that they are unjust and unreasonable to the designated airlines of
the other Party; even more so, it goes further than merely requiring them to
ensure that well-founded complaints to that effect are duly remedied: Article
10(1) and (3), on its plain words, creates an obligation that operates even prior
to such a situation arising in that it requires the Parties to use their best efforts
to ensure that such a situation shall not arise.

2.2.6 With regard to the conduct required by the obligation, in the view of
the Tribunal a Party is entitled to recognise the normal margin of appreciation
enjoyed by charging authorities in relation to the complex economic situation
that is relevant to the establishment of charges. But, subject thereto, the Party
is obliged to use as much effort as it would if it had an unconditional interest
of its own in ensuring that relevant user charges did not exceed what was just
and reasonable (e.g. because the Party itself was going to have to meet the
cost of the charges): if a Party uses less effort than it would then have used, it
cannot claim to have used its best efforts.

2.2.7 A corollary of the foregoing is that the “best efforts” obligation does
not require the taking of steps which a reasonable government in the position
of the Party would reasonably have believed to be unnecessary in order to
ensure that the user charges imposed on the designated airlines of the other
Party did not exceed just and reasonable charges. So, for example, HMG
could not justifiably be reproached for having failed to use its best efforts to
ensure that user charges at Heathrow were just and reasonable, if and to the
extent that any unreasonableness of the charges was dependent on facts which

[At page 73:]

a person with a personal financial interest could not reasonably have been
expected to know or to find out.

2.2.8 Similarly, the nature of airport operation is such that the review and
modification of user charges may take time. Accordingly, the expression “best
efforts” must be read as allowing a Party a reasonable amount of time in
which to bring into effect any necessary corrections or adjustments to user

2.2.9 On the other hand, a Party could not excuse a failure on its part to
use its best efforts as required by Article 10 of Bermuda 2 on the ground that
it was inexpedient to take the required steps or that normal political
considerations made it inadvisable for it to do so. In this sense, Bermuda 2
constitutes a significant relinquishment by the two Parties of their right to
exercise their normal sovereign powers within their own territory, without
reference to the other, so far as the relevant conduct of operators of relevant
airports is concerned.

[At page 75:]

3.5 In light of the foregoing, the Tribunal rejects any interpretation that
would treat both paragraphs (2) and (3) of Article 10 as creating obligations of

3.6 Although paragraph (1) of Article 10 appears to assimilate the status
of paragraph (2) and the status of paragraph (3) in the scheme of Article 10 as
a whole, the Tribunal has found itself ineluctably driven to the conclusion that
paragraphs (2) and (3) are different in their juridical character. For reasons
given in Chapter 8 below, the Tribunal has concluded that paragraph (2), as
well as being relevant to the characterization of charges as just and reasonable
for the purposes of paragraph (1), also imposes an independent mandatory
obligation and is in that respect an obligation of result.

With regard to 3(a) (whether HMG had allowed discriminatory user charges),  the Tribunal found that the United Kingdom had not breached its treaty obligations. See page 264:

1. Article 10(2) of Bermuda 2 provides:

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.

The provision is based on and derived from Article 15 of the Chicago Convention (see paragraph 1.2 of Chapter 2, above), which, itself, imposes an independent affirmative duty on the Parties to take necessary actions.

2. There is no real dispute between the Parties that Article 10(2) imposes an independent, mandatory obligation on each to take corrective measures to prevent discriminatory user charges; and that obligation is over and above the best efforts obligation imposed by Article 10(1).

3. While the Parties are in agreement that the obligation to act in Article
10(2) is mandatory, they disagree on the nature of the discriminatory conduct
that triggers their need to act.

4. As to these matters, HMG takes the position that Article 10(2) should be read literally. It therefore sees no need for a Party’s intervention unless the schedule of applicable charging rates is higher for the other Party’s designated airlines. Other considerations, such as the actual operational flexibility available to the other Party’s airlines to offset or reduce the impact of charges through taking advantage of such measures as off-peak scheduling, free overnight parking of aircraft, and so forth, should not be taken into account. HMG would also compare the schedule of charging rates applicable to the other Party’s designated airlines only with those applicable to its own airlines offering similar international air services, to determine discrimination. Charges paid by and related rules affecting its own airlines offering other types of air services would not be relevant in that assessment.

5. By contrast, USG reads Article 10(2) more broadly. It contends that the evaluation of whether user charges are being imposed discriminatorily should take into account both the charges paid by, and the rules affecting, a Party’s own airlines generally, and not only those airlines offering “similar international air services”. USG also contends that Article 10(2) requires more than a simple comparison of the schedule of charging rates to determine whether discrimination is, in fact, occurring. Thus, USG finds an obligation imposed on the Parties to look beyond such “overt” or obvious discriminatory conduct. Rather, the Parties have a duty to inquire whether — in the light of all the relevant circumstances affecting “similar” air services — the charges and related rules operate to produce lower total user charges for the charging Party’s designated airlines.

6. The Tribunal is in agreement with some aspects of the positions taken
by both Parties on these issues. The Tribunal does not agree with USG’s
contention that charges and rules applicable to a Party’s own airlines generally,
without regard to the nature of their operations, are required by Article 10(2)
to be taken into account in determining whether discrimination is occurring. To consider charges to national operators “generally”, as USG urges, simply
departs too far from the plain language which confines the comparison to
“charges … imposed on … designated airlines operating similar international
air services”. Thus, the Tribunal finds no basis in either the Treaty language or
in logic to expand the scope to include dissimilar air services as USG suggests.

[page 268]

15. In the judgment of the Tribunal, in the present case the relevant
inquiry to determine the existence of a discriminatory practice is not a simple
comparison of the schedule of charging rates on a “flight by flight” basis, such
as a comparison simply of the peak hour charges for flights operated by each
side’s designated airlines. Rather, the inquiry must be in greater depth and
must include an evaluation of the factors that USG raised in its arguments. For
example, if scarcity of facilities and runways exists for a far longer period
than the designated “peak hours”, peak pricing would lack a rational basis and
could well work to discriminate against airlines that could not adjust their
flights to the less costly operating hours. In such circumstances, so far as
Article 10(2) is concerned, there would be no material difference between the
international air services offered by the U.S.-designated airlines in “peak
hours” and those offered by British airlines in “non-peak” hours and the
higher charges imposed on the former than on the latter could not be excused
under Article 10(2) on the basis that the services offered at the different times
were not “similar international services”.

16. Finally, it remains to be considered whether Article 10(2) imposes
only an ex post facto review obligation on the Parties. The Tribunal concludes
that the Parties have undertaken by this provision (as also by the underlying
Article 15 of the Chicago Convention), to conduct both an ex ante and an ex
post facto review. The Parties here are clearly among the most sophisticated
aviation nations in the world. User charges applied at this stage in their
histories will not be developed without reference to that extensive aviation
experience. Each Party is thus capable of appraising and predicting quite
closely, ex ante, the full cost burden of user charges on the likely patterns of
operations to be performed by the designated airlines of the other Party and,
by comparison, on their own airlines “operating similar international air
services”. Discrimination can thus be avoided at the start. Thereafter, the
Parties are similarly well-equipped, by their experience and by the
documentation on charges actually paid, to assess, ex post facto, whether
impermissible discrimination is occurring and to take the corrective steps
which both sides concede are mandated by Article 10(2).

17. With the foregoing as background, the Tribunal is of the opinion that
in order to find a violation of Article 10(2), the record must contain clear and
sufficient evidence to support such a serious charge. After careful evaluation,
the Tribunal concludes that the record before it does not contain evidence
sufficient for it to make such a finding and to sustain such a charge. However,
the allegations and indicia of conduct, as delineated above and referenced
elsewhere in this Award, which give rise to USG’s claims of a violation of
Article 10(2), are troublesome to the Tribunal. This is particularly so as to the
allegations and evidence regarding the inability of U.S. airlines to schedule
outside of the peak. It is for that reason that the Tribunal has felt it desirable to
provide the interpretative rulings contained herein, for the guidance of the
Parties in their future conduct pursuant to the Treaty.

With regard to 3(b), at page 221:

1.3 In paragraphs 4.2.1 et seq. of Chapter 5 above the Tribunal has
concluded that Article 10(3) prescribes necessary conditions that must be
fulfilled if charges are to be characterized as just and reasonable. It follows
that charges cannot be characterized as just and reasonable if they give rise to
unreasonably high profitability.

1.4 Therefore, one of the things that Article 10(1) and (3) requires the
Parties to do is to use their best efforts to ensure that user charges do not give
rise to unreasonably high profitability. The question is not whether user
charges gave rise to such profitability; even if they did not do so, HMG may
have failed to use its best efforts as required; and even if the charges gave rise
to unreasonably high profitability, that in itself does not show that HMG
failed to use its best efforts as required.

1.5 Pursuant to the words of the first sentence of Article 10(3),
profitability must be measured by reference to the relationship between profits
and capital employed (“rate of return on assets” or, simply “rate”): not only is
that the yardstick used in Article 10(3); in a case such as this it is, in the
judgment of the Tribunal, the only economically justifiable way to measure
the reasonableness of profitability.

[Continuing at page 253:]

10.1 In relation to the level of charges, the Tribunal is mindful of the
necessity to bear in mind the specific issue with which the Tribunal is here
concerned, namely whether HMG used its “best efforts” as required by Article
10 of Bermuda 2 – in the present context its best efforts to ensure that user
charges should not provide for more than a reasonable rate of return on assets
after depreciation.

10.2 The first question is whether that obligation required HMG to put in
place a regulatory system that would have ensured that the economic rate of
return on assets should not exceed BAA’s cost of capital. If HMG’s obligation
under Article 10 did impose such a requirement, there can be no doubt that
HMG failed to fulfil it.

10.3 The Tribunal here concludes that the obligation under Article 10 fell
far short of imposing any such requirement. When Bermuda 2 was negotiated
such regulatory systems were only beginning to be used in the United States;
even by the date of the hearing in the present proceedings, they were still not
used at all in the United Kingdom where only one regulator even made an
explicit comparison of the economic rate of return of the regulated
undertaking in question, British Telecom, with its cost of capital as a relevant
process in establishing the value of X for the purposes of operating an RPI-X

[At page 254:]

10.4 If the Parties had intended to require the general adoption of rate of
return regulation by reference to the economic rates of return at Bermuda 2
airports compared with the cost of capital at those airports, it seems
inconceivable that USG would not have referred to that intention at the time
of the 1980-83 airlines’ litigation, the 1983 Airlines Settlement Agreement
and the 1983 inter-governmental Memorandum of Understanding. But USG
did not in fact raise the use of a comparison of economic rates of return and
cost of capital for any purposes connected with the implementation of
Bermuda 2 until the present proceedings themselves.

10.5 Moreover the wording of Article 10(1) and (3) of Bermuda 2 is
scarcely capable of bearing the required interpretation to impose such an
obligation on HMG. The interpretation would in effect impose on HMG an
obligation to ensure that user charges did not provide a more than reasonable
rate of return on assets, after depreciation rather than to use its best efforts to
ensure that user charges should not provide for such an unreasonable rate of
return. Early drafts of Article 10 of Bermuda 2 did in fact allow for user
charges to be based on, to reflect or to provide for (according to the draft) an
“economic rate of return” but the word “economic” was then dropped from
the text.
10.6 It follows that, in the view of the Tribunal, HMG did not go beyond
the legal limits imposed by Article 10(1) and (3) of Bermuda 2 in omitting to
establish a system of regulating BAA’s charges directly by reference to the
relationship between BAA’s economic rate of return and its cost of capital.
10.7 Related to, but separate from, the question just discussed is the point
that, contrary to what was implicit in some of the debate before, and evidence
given to, the Tribunal, the Tribunal is not concerned whether BAA’s return on
assets at the relevant airport(s) was more than reasonable; the question that the
Tribunal has to decide is whether HMG used its best efforts to prevent charges
being set at a level that could be expected to give rise to such a return. In the
present context, the distinction is very important not only because of the
prospectivity of the exercise which, given the use of the expression “provide
for”, HMG was required to undertake. Of even greater importance here is the
fact that the appraisal of level of profitability is capable of raising, and in the
present case raised, a host of more or less technical accounting and economic

[At page 256]:

10.13 In the judgment of the Tribunal HMG’s evidence establishes that
throughout the Arbitration period HMG did make efforts to ensure that user
charges at Heathrow would not provide for profitability at a level that was
more than reasonable. In the first four years of the Arbitration period those
efforts consisted of reviewing and approving the charges before they came
into force. USG has contended that since BAA was wholly owned by HMG at
that period, such control could scarcely be considered regulatory scrutiny
since BAA and HMG were not independent actors at that time. That is true,
but the relationship does not present a prima facie case of HMG’s failure to
meet its Treaty obligations. However, Bermuda 2 put the burden onto HMG to
use its best efforts to ensure the required results regardless of that relationship.

10.14 Thus, the remaining question regarding level of charges that the
Tribunal must determine in dealing with Question 1 is whether the efforts
made by HMG in this regard may be characterized as HMG’s best efforts.
Again, as discussed elsewhere in this Award, Article 10 imposes obligations
of conduct, and regardless of many other issues which might be relevant to a
determination of damages, it is the task of the Tribunal at this stage in the
proceedings to consider and analyze the factual behaviour of the Parties to
ascertain whether their conduct was consistent with the mandates of Article 10.


As the Tribunal has pointed out in paragraph 2.3.3 of Chapter 5,
above, Article 10 of Bermuda 2, on its plain words, obliges the Parties to
use their best efforts to ensure that a situation in which unjust and
unreasonable charges are imposed on the designated airlines shall not arise.
This suggests that, as regards the rate-of-return limitation contained in
Article 10(3), a Party is not entitled to abstain from acting until such time as
the rate of return provided for by user charges approaches or attains the
unreasonable; on the contrary, if there are factors which would lead a
reasonable Party to anticipate any excess profit, it follows that a Party is
required to take preventive action calculated to ensure that the limitation in
question will not be surpassed. What is more, taking preventive action
before the event will in principle avoid the problem of determining how the
situation should be remedied if an excessive rate of return is produced. In
this connection, an obvious preventive action would be the imposition of
some form of maximum, if not on the rate of return itself, at least on the
quantum of user charges. HMG did not take any such step prior to April 1,


It is the Tribunal’s conclusion that if HMG’s own pocket had been
adversely affected by a more than reasonable level of profitability for BAA,
upon reviewing the evidence/factors set forth above, it would have taken
steps to lower the level of charges prior to April 1, 1987. It follows that the
Tribunal finds that HMG failed to use its best efforts as required by Article
10, for that period, exclusive of the charging year 1983/84. Having reached
this conclusion, by viewing the situation through the eyes of HMG in the
performance of its obligations during the period of time in question, it is
unnecessary at this point for the Tribunal to inquire further as to whether
BAA should have used other methods to calculate and determine its levels
of charges or to calculate its rate of return during the period.

10.37 Accordingly, having reviewed the circumstances surrounding the
introduction of the RPI-X régime and the details of that régime, including the
adoption of 1 as the value of X, the Tribunal concludes that HMG’s efforts in
relation to level of charges were not in themselves insufficient to satisfy the
requirements of Article 10(1) and (3) of Bermuda 2.
10.38 The third and last criticism made by USG of HMG’s efforts in
respect of the level of charges at Heathrow was that it was insufficient for
HMG in relation to the charges imposed in the last two years of the
Arbitration period simply to have put in place the RPI-1 price-cap régime and
retained a statutory power to reduce charges if international obligations so
required; USG’s contention was that a best efforts obligation required ongoing
active scrutiny by HMG and intervention by it of its own motion if such
scrutiny disclosed that, for whatever reason, the level of charges proposed by
BAA would provide for an excessive return on assets.
10.39 The Tribunal has already pointed out that Article 10(1) and (3)
creates an obligation of conduct and not an obligation of result and that the
conduct required involves active effort and not merely the retention of reserve
powers. The very fact that HMG retained a statutory power to reduce charges
below those permitted by the RPI-X price-cap régime if HMG’s international
obligations so required, shows that it recognized that that régime could not be
guaranteed to keep charges at no more than the level permitted by Bermuda 2;
and it is, in the view of the Tribunal, self-evident that that must be so since
circumstances such as unexpected traffic growth within a quinquennium may
result in excessive profitability if charges are set at the highest level permitted
by the price-cap régime.
10.40 In the judgment of the Tribunal it was therefore incumbent on
HMG under Bermuda 2 to establish a mechanism whereby it could continue to
review the level of Heathrow’s profitability after the introduction of the RPI-1
price-cap régime, as part of its obligation to use its best efforts on an ongoing
basis to ensure that the level of charges was no more than reasonable. It was
necessary that such a mechanism should also have imposed a positive
obligation on BAA to consult with HMG before taking any measure that could
be expected to affect the rate of return at Heathrow and thus HMG’s
performance of its obligations under Bermuda 2.

Useful for

Discrimination in airport user charges need not be overt

User charges not just and reasonable if they give rise to unreasonably high profitability

Treaty provisions considered

Article 15 CC44

Chicago Convention 1944

Legislation considered

None identified.

Key subjects or concepts

Airport User Charges/ User Charges/