On 13 December 1961, Thailand and the Federal Republic of Germany signed a treaty (the 1961 Treaty) which, among other things, gave protection to investors against expropriation, but did not impose an obligation on the host state to provide fair and equitable treatment (FET). Further, it did not provide for investor-state claims.

Germany and Thailand signed a further investment treaty on 24 June 2002, which came into force on 20 October 2004 (the 2002 Treaty). The 2002 Treaty contained various investor protections, including provisions addressing expropriation and requiring investors to be afforded FET. Article 8 also provided that the treaty applied to approved investments made before its entry into force. Article 10 provided that disputes should be resolved amicably if possible, but failing that, they should be referred to arbitration.

For detailed discussion on expropriation and the FET obligation, see Practice notes, Expropriation in international investment law and Fair and equitable treatment, respectively, and for information on host states' obligations under investment treaties generally, see Practice note, Investment treaty arbitration: legal issues.

The Vienna Convention on the Law of Treaties 1969 (the Vienna Convention) sets out the principles governing the construction and interpretation of treaties. Under Article 28, a treaty will not have retroactive effect "unless a different intention appears from the treaty or is otherwise established".

The starting point was that the claimant was bound by the waiver of claims contained in MoA2, so it could not make a claim based on any conduct before the signing of that agreement.

The tribunal then considered whether it had jurisdiction ratione temporis to consider disputes which arose after that date, but before the 2002 Treaty came into force. It concluded that it did not have such jurisdiction. While Article 8 made it clear that the 2002 Treaty applied to investments made before its entry into force, that did not mean that investors could claim damages retrospectively for disputes that had arisen before that date. There was nothing in the 2002 Treaty which indicated that it applied retrospectively to disputes which arose pre-treaty.

While the tribunal had no jurisdiction over disputes which arose before the entry into force of the 2002 Treaty, it considered that conduct which preceded that date but which continued and crystallised into a treaty breach after that date, could be relied on by the claimant. In doing so, it endorsed the view of the tribunal in Société Générale v Dominican Republic (UNCITRAL, Decision on Jurisdiction, 18 September 2008).

Further, as in Société Générale, the tribunal took the view that there might be situations where individual acts considered in isolation would not result in a breach of a treaty obligation, but could do so, once the treaty obligation had come into force, if considered as part of a series of acts leading in the same direction.

As such, a distinction had to be drawn between breaches which crystallised before October 2004 (and were therefore covered by the 1961 Treaty) and ongoing conduct before that date which crystallised into a dispute after that date.

After considering previous decisions on what constitutes creeping or indirect expropriation, the tribunal concluded that the claimant had not proved any such expropriation in this case. Its reasons included the following:

The tribunal proceeded on the basis that a key component of the FET standard was the protection of legitimate expectations. In this case, the claimant's legitimate expectations had to be viewed in the context of the concession agreement and MoA2, which amended the concession agreement. Part of the claimant's legitimate expectations was a rate of return that was reasonable in the circumstances. The failure to fulfil that expectation was a breach of Thailand's FET obligations. The tribunal's conclusion was based on the "total factual matrix", including the inherent unlikelihood that an investor would contemplate entering into such a long-term investment without a legitimate expectation of reasonable return.

Although MoA2 changed the claimant's legitimate expectations significantly, the claimant was entitled to expect that MoA2 would be implemented by Thailand. Thailand had been obliged to increase tolls under MoA2. It had failed to do so, and although that failure had originated long before October 2004, when the 2002 Treaty came into force, it continued in existence after that date. The forced toll reduction in December 2004 could be seen as an addition to the composite acts which had started before, but continued after, the entry into force of the bilateral investment treaty, and as a trigger for a dispute.

Even though Société Générale concerned a claim of expropriation, the same reasoning must apply to breaches of the FET requirement.

The tribunal held that the first of the events which constituted breaches of the FET obligation had effect the minute the 2002 Treaty came into force, namely, on 20 October 2004. Therefore, damages should be calculated from that date.

The tribunal then considered the appropriate method for assessing the damages. Rejecting the methods proposed by the claimant (internal rate of return on equity) and the respondent (amount invested approach), it concluded that the only method that could accurately track value through time was the discounted cash flow (DCF) method. At any given time, the investor might have expected to hold the present value (PV) of remaining cash flows (the price received if it were to sell its interest), plus the compounded value (at the cost of equity) of dividends already received.

In the tribunal's view, the best way to assess damages was to:

The appropriate discount rate to be used was DMT's cost of equity in December 2006.

Applying that approach, the tribunal concluded that the net damages due to the claimant, after subtracting the discounted value of the claimant's shares sold on 3 December 2006, was EUR29.21 million.

Taking into account the parties' submissions and given the claimant's partial success overall, the tribunal concluded that it should order the claimant to pay half of Thailand's costs and Thailand to pay half of the claimant's costs.