The International Centre for Settlement of Investment Disputes (ICSID) has recently rendered a decision in a dispute between the Portuguese investor Dan Cake and Hungary. The dispute was based on a bilateral investment agreement between Portugal and Hungary concluded in 1992. In its decision, the Tribunal declared Hungary liable for the breach of the investment agreement. The Tribunal will decide on the amount of damages at a later date.

Dan Cake versus Hungary

The case at hand revolves around the liquidation of Danesita, Dan Cake's Hungarian subsidiary, whose business consisted in supplying biscuits to European markets. During its course of business Danesita incurred a debt towards one of its suppliers, therefore the supplier submitted a request for liquidation against Danesita in August 2006. The bankruptcy court ordered Danesita’s liquidation in a final court order in November 2007.

In April 2008, while Danesita’s liquidation was going on, Dan Cake tried to save its subsidiary by requesting the bankruptcy court to convene a composition hearing where it hoped to reach a settlement with all of Danesita's creditors. Instead of convening the composition hearing right away, the bankruptcy court asked Dan Cake to submit some additional documents it deemed necessary for the adjudication of the request. The court also expressed its view that the liquidation cannot be stayed with regard to the composition hearing. The court's reaction discouraged Dan Cake from pursuing its plan to reach a settlement with the creditors and it decided not to submit the requested documents to the bankruptcy court. Accordingly, the court did not convene the composition hearing and Danesita was liquidated.

In the arbitration proceedings, Dan Cake argued that the bankruptcy court’s order constituted a breach of Hungary’s obligation under the investment treaty to ensure fair and equitable treatment of investments. Dan Cake had a right to a composition hearing. By demanding additional documents – not explicitly prescribed by law – as a condition of convening it while refusing to stay the liquidation, the bankruptcy court frustrated Dan Cake's efforts to save its investment in an unfair manner.

Hungary denied its liability throughout the procedure. It argued that according to Hungarian law the goal of the liquidation procedure is to protect the interests of the creditors and not to reorganize the debtor company. Therefore, the bankruptcy court’s decision to ask for additional documents – deemed necessary by the judge for the protection of creditors – was in accordance with relevant Hungarian legislation and cannot be deemed unfair.

The Tribunal came to agree with Dan Cake. According to the decision, the seven additional documents required by the bankruptcy court were either unnecessary or impossible to submit within reasonable time. As the bankruptcy court is an agency of Hungary, the Tribunal found that Hungary breached its duty under the investment agreement to ensure fair and equitable treatment of investments to Dan Cake.

The Takeaway

Our experience shows that foreign investors often face such frustrating decisions by Hungarian courts and authorities, many times being unable  to  effectively question their lawfulness before domestic courts. However foreign investors are oftentimes provided with a last-resort chance to redemption in the guise of international investment arbitration.

There are of course procedural obstacles – sometimes in the form of the requirement to exhaust domestic remedies, sometimes in certain restrictions on the subject matter of the dispute – that may prevent international investment arbitration from becoming a standard way of challenging an official decision. The Hungarian-Portuguese investment agreement, for example, required that cases not arising from expropriation, nationalization and similar measures shall be submitted to the competent domestic courts before an arbitration procedure can be initiated. In the Dan Cake case this procedural obstacle was avoided by Hungary’s decision not to object to the Tribunal’s jurisdiction.

Nonetheless, as there are currently more than 50 investment agreements in force in relation to Hungary – including countries such as Germany, Austria, France, Belgium, the United Kingdom, the United States, China and Russia – it is worth remembering that international investment arbitration is a viable option not only in the most obvious cases of nationalization and other such blatantly discriminatory acts on behalf of the state. These agreements can provide protection for a business even in such ostensibly mundane situations as a domestic court’s decision to request supplementary filings in a liquidation procedure.

The Tribunal’s decision to declare Hungary liable for the breach of the investment agreement in question shows that foreign investors have more wiggle room than usually assumed when it comes to the presumably final judgment of a domestic court or authority, and that international investment arbitration is a tool worth considering when facing such challenges.