The U.S.-UK Arbitration Concerning Heathrow Airport User Charges
Author(s): Samuel M. Witten
Source: The American Journal of International Law , Jan., 1995, Vol. 89, No. 1 (Jan.,
1995), pp. 174-192
Published by: Cambridge University Press
Stable URL: https://www.jstor.org/stable/2203906
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1995]
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I. BACKGROUND OF THE DISPUTE
The Legal Framework
U.S. air carriers are authorized to serve Heathrow Airport and other destinations in the United Kingdom pursuant to the U.S.-UK Air Services Agreement of
1977 (Bermuda 11).2 Until 1991, the two U.S. carriers designated by the United
States under Bermuda II to serve Heathrow were Pan American World Airways,
Inc. (Pan Am) and Trans World Airlines, Inc. (TWA). In 1991 Pan Am and TWA
sold their Heathrow operating authority to United Airlines and American Airlines, respectively, and United and American currently operate between various
cities in the United States and Heathrow Airport.
Bermuda II, like many other bilateral air transport agreements to which the
United States is a party, contains provisions governing user charges imposed by
airports located in the territory of one party upon the airlines of the other party.
These provisions are intended to ensure that the economic benefits of international route authority are not undermined by unfair, arbitrary or discriminatory
airport landing fees and other facility charges.
Many of the user charges provisions in U.S. bilateral air transport agreements
are relatively narrow in scope, e.g., prohibiting discrimination based on national-
ity and requiring charges to be "just and reasonable."3 The original user charg
provisions of Bermuda II,4 by contrast, were much broader in scope, not only
dealing with discrimination and reasonableness, but also requiring the parties to
use their "best efforts" to see that charges were equitably apportioned among
categories of users, that they were based on sound economic principles, and that
they resulted in no more than a reasonable rate of return on assets, after depre-
ciation.5 These provisions were more detailed because by the time they were
negotiated with the United Kingdom in 1976 and 1977, Pan Am and TWA had
brought to the attention of the U.S. Government their growing concerns about
the complex system of user charges imposed at Heathrow Airport. The British
Government insisted that this system was based on advanced concepts of "economic pricing," but the U.S. carriers believed it burdened them with more than a
reasonable share of the charges imposed on users of the airport.6 During the
negotiation of Bermuda II, the U.S. Government therefore insisted that the user
2 Agreement Concerning Air Services, July 23, 1977, U.S.-UK, 28 UST 5367, as amended Apr. 25,
1978, 29 UST 2680, Dec. 27, 1979, 32 UST 524, Dec. 4, 1980, 33 UST 655, Feb. 20, 1985, May 25,
1989, and Mar. 11, 1994.
3 See, e.g., Agreement on Air Transport Services, Apr. 24, 1957, U.S.-Korea, Art. 7(A), 8 UST 549;
Agreement on Air Transport Services, Apr. 16, 1956, U.S.-Ger., Art. 7(a), 7 UST 527. Many of the
more recent U.S. aviation agreements contain broader user charges provisions. See, e.g., Agreement
Relating to Civil Air Transport, Sept. 17, 1980, U.S.-China, Art. 6, 33 UST 4559 (including provisions
on the allocation among users of the cost of facilities and on consultations between airports and
airlines).
4 As discussed infra in section III, the United States and the United Kingdom amended both
Articles 1 and 10 in the Settlement Agreement, supra note 1. Even as amended, the user charges
provisions of Bermuda II are among the most complex of those in U.S. bilateral air services agreements. See infra section III.
See description of Article 10 in text at notes 7-8 infra.
6 By the time Bermuda II was negotiated in 1976-1977, the U.S. Government was well aware of,
and had supported, U.S. carriers' complaints about Heathrow Airport user charges. In 1975 then
Secretary of Transportation William T. Coleman, Jr., had issued a formal finding, pursuant to the
International Aviation Facilities Act, 49 U.S.C. app. ??1 151-1160, that the user charges imposed by
the British Airports Authority at Heathrow Airport discriminated against U.S. air carriers.
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176 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
charges provisions, contained in Article 10, include a legal and regulatory framework that would require the British side to constrain Heathrow's charges and
ensure their fairness to the U.S. airlines serving that airport.
The terms of Article 10 that were in force between 1977 and 1994 covered
both the amount of charges that could be imposed and the process by which
charging authorities were to determine that amount. Most significantly, Article
10(1) required each Government to use its "best efforts" to ensure that user
charges7 imposed on the designated airlines of the other contracting party were
"just and reasonable." Under Article 10(1), charges were considered "just and
reasonable" if they met the requirements set forth in Article 10(2) and (3) and
were "equitably apportioned among categories of users." Article 10(2) adapted
the prohibition of discrimination based on nationality contained in the Convention on International Civil Aviation: "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. "8
Article 10(3) contained key constraints on user charges and stated in its entirety:
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, economic, environmental impact and safety of operation. User charges shall be based on sound
economic principles and on the generally accepted accounting principles
within the territory of the appropriate Contracting Party.
Article 10(4) and (5) governed airport-airline consultations. Article 10(4) required each contracting party to encourage consultations between its competent
charging authorities and the other contracting party's airlines, and also stated that
" [r] easonable 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." Article
10(5) required each party to use its "best efforts" to encourage the competent
charging authorities and 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."
The dispute settlement provisions of Bermuda II are in Articles 16 and 17.9
Article 16 provides that "[e]ither Contracting Party may at any time request
7Article 1(o) of Bermuda II, supra note 2, which was amended as part of the Settlement Agreement, supra note 1, defined "user charge" as "a charge made to airlines for the provision for aircraft,
their crews and passengers of airport or air navigation property or facilities, including related services
and facilities."
8 See Convention on International Civil Aviation, Dec. 7, 1994, Art. 15, 61 Stat. 1180, 15 UNTS
295, which provides in part:
Any charges that may be imposed or permitted to be imposed by a contracting State for the use
of such airports and air navigation facilities by the aircraft of any other contracting State shall not
be higher,
(b) As to aircraft engaged in scheduled international air services, than those that would be paid
by its national aircraft engaged in similar international air services.
Unlike Articles 1(o) and 10 of Bermuda II, supra note 2, Articles 16 and 17 were not amended by
the Heathrow Settlement Agreement.
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1995] CURRENT DEVELOPMENTS 177
consultations on the implementation, interpretation, application or amendment
of this Agreement or compliance with this Agreement." Article 17 provides that
disputes not settled by consultations may be resolved by binding arbitration and
sets forth procedures to govern such arbitrations."
The Substantive Disagreement between the Parties
Although methods of determining user charges vary from airport to airport,
U.S. airports frequently base their charges on an allocation among users of the
overall accounting costs of operating the airfield and the terminals.11 Under this
type of system, often called "average-cost pricing," charges for runway use might
be based on a fixed fee per ton of aircraft weight, regardless of where the traffic
originates or the time of day the aircraft lands. This prototypical system of user
charges at U.S. airports does not purport to take into account all of the economic
costs imposed by categories of traffic at the airport, or to manage demand for
airport facilities at certain times. of the day.12
By contrast, throughout the period covered by the Heathrow dispute and to the
present day, Heathrow Airport imposes user charges based on a complex system
of economic pricing, which ostensibly uses price as a tool to manage demand and
to impose additional costs on users during busy periods of the day.13 Heathrow's
10 Under Article 17, after arbitration is demanded by either contracting party, each contracting
party names one arbitrator, and the two party-appointed arbitrators appoint a third arbitrator to act
as president of the arbitral tribunal. If either contracting party fails to name an arbitrator, or if the
two party-appointed arbitrators cannot agree on a president, either contracting party may ask the
president of the International Court of Justice to appoint the necessary arbitrator(s) within 30 days.
Article 17 contemplates that, unless otherwise agreed by the parties, arbitrations under Bermuda II
will be completed in as little as nine months (including the issuance of a final award) under a rapid
timetable of simultaneous pleadings followed by an oral hearing. Article 17(7) provides that the
decision of the arbitral panel shall be binding on the contracting parties. The Article 17 procedures
may be modified by agreement of the parties, and were in fact modified by the United States and the
United Kingdom in the Heathrow arbitration. See, e.g., infra note 34.
11 The U.S. Supreme Court recently discussed a typical system of user charges in the United States
in rejecting a challenge, brought by Northwest Airlines and other commercial airlines, to the user
charges imposed at Kent County International Airport in Grand Rapids, Michigan. See Northwest
Airlines v. County of Kent, 114 S.Ct. 855, 859 (1994):
Under its accounting system, the [Kent County] Airport first determines the costs of operating
the airfield and the passenger terminal, and allocates these costs among the users of the facilities.
Costs associated with airfield operations (e.g., maintaining the runways and navigational facilities)
are allocated to the Airlines and general aviation in proportion to their use of the airfield. No
portion of these costs is allocated to the concessions. Costs associated with maintaining the
airport terminal are allocated among the terminal tenants-the Airlines and the concessions-in
proportion to each tenant's square footage.
Kent County maintained separate systems of user charges for commercial aviation and "general
aviation," i.e., corporate and privately owned aircraft not used for commercial, passenger, cargo or
military service; general aviation aircraft were charged lower rates than commercial airlines. The
Court held that the commercial airlines had not shown the disparities to be unreasonable or discriminatory in violation of the Anti-Head Tax Act (49 U.S.C. app. ?1513 (1988)) or the Commerce Clause
of the U.S. Constitution. 114 S.Ct. at 863-66.
12 A detailed review of airport user charges in the United States is beyond the scope of this
sion and is unnecessary to understand the Heathrow dispute. Some U.S. airports have introduced or
have attempted to introduce variations on average-cost pricing to reflect or manage patterns of
demand. See, e.g., New Eng. Legal Found. v. Massachussetts Port Auth., 883 F.2d 157 (1st Cir. 1989).
1 Such structural pricing is used in the United States in other transportation sectors, such as the
railroad industry. See ALFRED E. KAHN, THE ECONOMICS OF REGULATION: PRINCIPLES AND INSTITU-
TIONS 55 (1988).
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178 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
charging structure can be summarized as follows: Charges are imposed for the use
of three categories of airport facilities: (1) runways (based on aircraft landings),
(2)- terminals (based on the number of departing passengers), and (3) aircraft
parking space (based on factors including the weight of the aircraft and the
amount of time it remains on the ground at the airport). Heathrow authorities
determine that certain periods of the day are "peak" periods for each of its
facilities. Carriers are charged more to use airport facilities during these peak
periods than during "off-peak" periods. Charges are generally higher for international than for domestic service, and different fee structures are imposed in
winter and summer, with charges typically higher during the summer. Charges are
revised annually, and new ones take effect each April 1. Before finalizing charges,
the Heathrow authorities give users of the airport an opportunity to comment on
the proposed rates for the coming year.
Heathrow Airport was operated until 1986 by the British Airports Authority
(BAA), an instrumentality of the British Government. In 1986 the British Government formed a new company, called BAA plc, to operate the three major London
airports (Heathrow, Gatwick and Stansted) and four smaller Scottish airports. On
July 1, 1987, the Government privatized BAA plc in a very successful public
offering. One of BAA plc's wholly owned subsidiaries, Heathrow Airport Ltd,
now operates Heathrow Airport.
Since privatization, user charges imposed by BAA plc and Heathrow Airport
Ltd have been regulated by the UK Government pursuant to the Airports Act
1986.14 Annual increases in the overall level of user charges at Heathrow are
limited by a price-cap formula, recalculated at the beginning of each five-year
period beginning on April 1, 1987. The specific mechanics of the price-cap formula have varied to some extent since privatization. Under the formula, as ap-
plied during the period relevant to the arbitration, the average yield per passenger from user charges was not allowed to rise by more than the increase in
retail prices in the United Kingdom (as determined under a formula developed by
BAA), minus a whole number denominated X. X was set at 1 for the five-year
period beginning April 1, 1987, for a price cap during this period of RPI - 1.15
The principal objections of the U.S. Government and its carriers (collectively, the
"U.S. side") to Heathrow's user charges were not to economic pricing per se but to
its application at Heathrow. Most importantly, the U.S. side believed that the charges
were imposed in ways that were unjustified, economically unsound and at times
tantamount to a subterfuge for assessing U.S. carriers disproportionately, e.g., by
deliberately weighting charges toward long-haul carriers with longer stays at the
airport. The dispute involved three general categories of allegations regarding the
structure of charges, the level of charges and consultations with users.16
Structure of charges. The U.S. side argued that Heathrow's charges were im-
posed arbitrarily and were neither "just and reasonable" nor based on "sound
14 Airports Act, 1986, ch. 31.
15 Thus, if in a given year retail prices were projected to increase by 5%, the maximum
increase permitted for that year, at the three London airports together and for each separately, would
be 4%. This type of overall price-cap regulation of annual price increases is used to some extent by
utilities in the United States. See, e.g., Revisions to Oil Pipeline Regulations Pursuant to Energy Policy
Act (Order No. 561), 65 Fed. Energy Reg. Comm'n Rep. (CCH) 161,109 (1993).
16 This description of the economic and accounting issues raised in the dispute is simplified for our
purposes here. The U.S. side's arguments, as summarized below, are those presented during the
arbitration, between 1989 and 1994. These or related allegations were made throughout the lengthy
history of the dispute.
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1995]
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economic principles," as required by Article 10 of Bermuda II. The following are
representative of U.S. complaints on structural issues.
1. There was no nexus between the economic-cost pricing principles that
Heathrow professed to apply and the user charges that it actually imposed. Users
could not ascertain the connection between the ostensibly sophisticated analyses
invoked by Heathrow's management and the charges they were asked to pay, since
there was no way for users to recreate the calculation of peak charges, peak prices
did not correspond to actual peaks, and peak prices were not uniformly imposed
on high-demand facilities during high-demand times.
Specific U.S. allegations included:
* The precise formula used to allocate charges among the three types of
facilities or among peak and off-peak users was never explained. For example, although the exact proportion of charges varied over the years, approximately 60 percent of Heathrow's user charges were generally derived from
terminal charges, some 20 percent from landing fees, and another 20 percent
from parking charges. The U.S. side argued that this allocation of expenses
was economically unsound, since the congestion at Heathrow's runways
should have led the authorities to weight charges more toward the landing
fees and less toward terminal fees.
* Heathrow's runways suffered from excess demand throughout the operational day and were heavily "congested" in the economic sense. As a result,
users could not readily switch the times of day they landed or took off from
the airport. The Heathrow charging authorities, however, selected only certain times of the operational day as peak periods, charging more for runway
use during those times. The United States argued that Heathrow's selection
of peak periods was economically unsound.
* While Heathrow's terminals were frequently busy, they were not frequently congested. Nonetheless, lengthy peak periods were assigned for ter-
minal use, and peak charges for international traffic were particularly high.17
The United States argued in the alternative that either there should have
been no peak periods at all for the terminals, or if there were such peaks, they
should have been narrowed.
2. The United States contended that Heathrow charges were structured so as
to discriminate against long-haul U.S. carriers and in favor of domestic or other
short-haul carriers. For example, peak charges were not imposed in periods of
peak use by domestic carriers.
3. Though Heathrow's charges were ostensibly based on principles of economic theory purporting that the price imposed for the use of facilities would
alter the demand for their use, the United States argued that Heathrow users
frequently could not respond to such price signals because some facilities were
continuously congested.
Level of charges. As noted above, Article 10(3) of Bermuda II states in part that
"[u]ser charges may reflect, but shall not exceed, the full cost" of providing the
appropriate facilities and services, and "may provide for a reasonable rate of
return on assets, after depreciation." The reasonableness of the total level of
17 Heathrow's system of high international peak terminal charges, which were based on pa
counts, particularly burdened international carriers, which usually carried more passengers per flight.
The heavier burden on international carriers that resulted from high terminal fees was viewed by
many on the U.S. side as ironic and somewhat unfair, since Heathrow's runways were its most highly
congested facilities, and international carriers were among the most efficient users of the runways.
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180 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
charges was also governed by British commitments in a 1983 U.S.-UK memorandum of understanding on user charges, which provided that returns on assets
should be judged on the basis of revenue and costs from both traffic and commercial sources.'8
The United States argued that Heathrow's charges resulted in more than a
reasonable rate of return on assets. Among other things, the United States
claimed that this return was excessive when judged by reference to the combined
total of Heathrow's user charges and commercial revenues, which included substantial revenue from duty-free shops, parking lots and other sources, and that
profits, measured in economic, not accounting, terms, should not exceed
Heathrow's cost of capital. The United States also contended that the relevant
standard of profitability for purposes of Article 10 applied to the revenues and
assets of Heathrow Airport alone, excluding therefore the returns from the two
other major London airports operated by BAA, Gatwick and Stansted.19
Consultations with users. Article 10(4) required each of the contracting parties
to encourage airport-airline consultations and to use its best efforts to encourage
its competent charging authorities and user airlines to exchange such information
as might be necessary to permit an accurate review of the reasonableness of the
charges in accordance with the principles set out in Article 10.
Consultations were held annually between Heathrow and its users, and a voluminous amount of information was typically provided to the airlines. The United
States complained, however, that, notwithstanding their ostensibly sophisticated
basis, charges were presented in a conclusory manner by Heathrow authorities
and never adequately explained to users. For example, the peak charges for parking sometimes exceeded off-peak charges by a factor of three or four, with no
clear basis for the differential. According to the United States, users were not
given sufficient information to determine whether the charges were reasonable in
light of the United Kingdom's Article 10 obligations.
The 1983 Settlement and the Initiation of the Arbitration
While Heathrow's user charges had long been of concern to the United States,
they became a particularly serious bilateral issue after the announcement in late
1979 of a large increase in user charges, to become effective on April 1, 1980.
The fees of Pan Am and TWA alone were increased by some 60-70 percent.
Challenges to the new charges proceeded on two fronts during the next three
years. Pan Am, TWA and other Heathrow carriers brought civil lawsuits in the
High Court of Justice in London in 1981 against BAA and the British Secretary of
State for Transport. On the intergovernmental level, formal consultations were
held at the U.S. Government's request, during which the United States questioned
and protested the new charges.
Two agreements were reached in early 1983. The carriers agreed to settle their
lawsuits on February 22.20 Six weeks later, on April 6, the United States and the
18 See Memorandum of Understanding on Airport User Charges, Apr. 6, 1983, UK-U.S. (on file in
the Office of the Legal Adviser, Department of State) [hereinafter MOU]. The MOU, which is discussed infra in text following note 21, is included as Appendix IV of the Award on the First Question,
U.S./UK Arbitration concerning Heathrow Airport User Charges (Nov. 30, 1992) (also on file in the
Office of the Legal Adviser) [hereinafter Award].
19 The latter point was important because Heathrow's return on assets, when analyzed alone, wa
considerably higher than the cumulated returns on assets at Heathrow, Gatwick and Stansted.
20 In the private settlement agreement, BAA agreed to seek to make the charges at Heathrow reflec
its costs more closely and to implement changes in a gradual manner. The parties reserved their
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United Kingdom entered into a memorandum of understanding, which the parties hoped would resolve the dispute.21
The United Kingdom made a series of undertakings in the MOU regarding
future user charges at Heathrow. For example, it agreed to adopt a "one-till"
method of analyzing Heathrow's rate of return on assets; in determining the
airport's profitability, British authorities would consider both traffic and commercial costs and revenue.22 The United Kingdom also represented in the MOU
that the British Secretary of State for Transport
expects the competent charging authorities to ensure that the charges more
closely reflect actual differences in the full costs of supplying airport services
and facilities, are based on sound economic principles and on the generally
accepted accounting practices within the United Kingdom, and are reasonably related to and do not exceed the full costs, including depreciation and
reasonable rate of return, of supplying the services and facilities concerned.23
Finally, the British Government confirmed in the MOU that it "saw force" in
three propositions supported by the U.S. Government in the negotiations leading
up to the MOU: (1) all traffic should bear its share of operating costs; (2) peak
periods, whenever established at any airport, should encompass all periods of
comparable activity at that airport; and (3) no peak charge should be assessed with
respect to any service or facility unless a charge is also assessed for that service or
facility during off-peak periods.24 The United Kingdom refused to concur in a
fourth proposition supported by the United States during the negotiations, i.e.,
that all traffic should bear at least some capital costs.25
Both agreements included waivers by the United States or its airlines of certain
claims: the airlines' settlement agreement effectively waived the carriers' direct
claims against BAA and the UK Secretary of State for Transport through March
31, 1984; and in the U.S.-UK MOU, the U.S. Government expressly "set aside"
claims against the United Kingdom regarding user charges through March
31, 1983.
Despite these accommodations, the two 1983 agreements failed to resolve the
dispute, which simmered and occasionally boiled for the next five years. During
this period, Pan Am and TWA and their economic consultants participated actively in Heathrow's annual consultations with users, frequently submitting challenges to proposed charges. Among other things, the U.S. airlines argued to both
the U.S. and UK Governments that Heathrow's complex structure of charges
burdened them unfairly with a tremendous share of the airport's capital expenses.
Pan Am and TWA successfully urged U.S. aviation negotiators to keep Heathrow
charges a high priority on the U.S.-UK bilateral aviation agenda.
Vigorous diplomatic consultations ensued when the British Government
formed BAA plc in 1986 and prepared to privatize the ownership and operation
of Heathrow, Gatwick and Stansted the following year. In early 1987, the United
positions on a variety of other issues relating to the setting of charges at Heathrow but committed
themselves to increasing communication between the airport and the airlines regarding the setting of
charges in the future. The private settlement agreement is described and quoted at length in Award,
supra note 18, ch. 2, at 37-46.
21 MOU, note 18 supra. 22 See id., para. 4(c).
23 See id., para. 4(d). 24 See id., para. 5.
25 Id.
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182 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
States considered initiating consultations under Bermuda II that would likely have
led to a formal demand for arbitration under Article 17. In April 1987, however,
the United States acquiesced in the British Government's request to refrain from
initiating an arbitration because of the likely adverse effect of a pending arbitra-
tion on BAA's privatization.26
In June 1988, then U.S. Secretary of Transportation James Burnley deter-
mined, pursuant to section 11 of the U.S. International Aviation Facilities Act,27
that charges imposed by BAA on U.S. airlines unreasonably exceeded comparable
charges for furnishing airport property in the United States and were otherwise
discriminatory. Secretary Burnley indicated in a letter to then Secretary of State
Shultz that if the United Kingdom did not address the situation satisfactorily
following further intergovernmental negotiations, the U.S. Transportation De-
partment would impose an offsetting fee of $1,550 on British airlines for each
scheduled round-trip transatlantic flight operated to the United States.28
Immediately after Secretary Burnley's findings were issued, inconclusive con-
sultations between U.S. and UK negotiators were held in London. At the end of
these talks, in July 1988, both parties acknowledged that the dispute might have to
be resolved through international arbitration under Article 17 of Bermuda II.29
Finally, on December 16, 1988, the United States formally made such a request
for arbitration under Bermuda II. The United Kingdom accepted the request for
arbitration on December 22, 1988, and the parties began what turned out to be
five years of difficult and contentious litigation over whether the British Govern-
ment had breached its obligations to the U.S. Government under the Agreement.
The decision to resort to arbitration took the dispute out of diplomatic channels,
where it had festered for over ten years, and into a new and even more complex
legal world.
II. THE LIABILITY PHASE OF THE ARBITRATION
Procedural Aspects of the Liability Phase
The parties established a three-member arbitral panel in January 1989. The two
party-appointed arbitrators selected the third arbitrator, who served as the tribunal's president.30 This ad hoc tribunal used the facilities of the Permanent
Court of Arbitration in The Hague.
In early 1989, the parties negotiated and the tribunal adopted Rules of Proce-
dure adapted from those of the International Centre for Settlement of Invest-
26 See Award, supra note 18, ch. 2, at 50, para. 4.14.
27 49 U.S.C. app. ?1 159a.
28 Secretary Burnley's letter is summarized in Award, supra note 18, ch. 2, at 52-53. Such retali
tory offsets are permitted under the Act. See 49 U.S.C. app. ?1 159a (1988). Under the law, money
collected would likely have been paid by the U.S. Government to the two U.S. carriers, Pan Am and
TWA, that were being overcharged at Heathrow. See id. (providing for payment by the Government to
the carriers that had been subjected to excessive or discriminatory charges).
29 See Award, supra note 18, ch. 2, at 53-54.
30 The United States appointed Fred Fielding, a Washington lawyer and former White House coun-
sel to President Reagan. The United Kingdom appointed Jeremy Lever, Q.C., a barrister with extensive experience in British and European Community law. The third arbitrator and president of the
tribunal was Professor Isi Foighel, a judge on the European Court of Human Rights and former
Finance Minister of Denmark. F. W. Maas Geesteranus, a' former legal adviser of the Netherlands
Ministry of Foreign Affairs, served as registrar.
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ment Disputes.3' On June 29, 1989, the tribunal bifurcated the proceedings into
liability and remedial phases and decided upon the following terms of reference
for the two phases:
1. The Tribunal is requested to decide whether, in relation to the charges
imposed for the use of London Heathrow Airport upon airlines designated
by the Government of the United States of America under Article 3 of the Air
Services Agreement, done at Bermuda on 23 July 1977, the Government
the United Kingdom have failed to fulfil their obligations under Article 10 of
the said Air Services Agreement, interpreted having regard to inter alia the
Memorandum of Understanding between the two Governments on Airport
User Charges of April 6, 1983, in any of the charging periods beginning on
or after 1 April 1983.
2. If the answer to the foregoing question is in the affirmative, the Tribunal is further requested to decide what, if any, remedy or relief should be
awarded.32
The tribunal held a total of eight sessions with the parties in The Hague during
the liability phase, beginning in June 1989 and ending in October 1993. The first
six sessions were concerned with procedural matters, including reciprocal requests for documents and information, the schedule for written submissions and
expert statements, and plans for the oral hearing in the liability phase.
Perhaps the most significant development during the prehearing period of the
remedial phase was the extensive discovery of documents called for by the tribunal. The United States persuaded the tribunal to direct the United Kingdom to
produce hundreds of pages of British government and BAA documents and in-
formation regarding Heathrow's charges.33 These U.S. requests and British compliance were very roughly analogous to pretrial discovery in domestic civil litiga-
tion, and, to the author's knowledge, were more extensive than such document
production in other government-to-government dispute settlement proceedings
to which the United States has been a party. A smaller amount of documents were
produced by the United States in response to UK questions about user charges in
the United States and the responses of Pan Am and TWA to Heathrow Airport's
periodic changes in user charges.
Four major pleadings were filed by the parties during the liability phase, beginning with a U.S. pleading in November 1989 and ending with a UK pleading in
March 1991.34 After the final British memorandum was filed and before the oral
3' See Rules of Procedure for Arbitration Proceedings, ICSID Basic Documents, Doc. ICSID/15
(1985). The tribunal's Rules of Procedure are reprinted as Appendix III of Award, supra note 18.
32 The tribunal's Decision No. 1 (June 29, 1989), which established these terms of reference, is
included as Appendix II of Award, supra note 18.
3 The tribunal ruled early in the liability phase that it "had power if necessary at any stage of the
proceedings, inter alia, to call upon the Parties to produce documents." See Tribunal Decision No. 4
(Nov. 14, 1989), excerpted in Award, supra note 18, ch. 1, at 12, para. 3.29. The tribunal based its
authority in this respect largely on Rule of Procedure 18 (based on ICSID Rule 33(2)), which stated
that "[t]the Tribunal may, if it deems it necessary at any stage in the proceeding . . . call upon the
Parties to produce documents, witnesses and experts." See Award, supra, ch. 1, at 4-5, para. 3.7. Rule
18 also provides that "[t]he Tribunal shall take formal note of the failure of a party to comply with its
obligations under this paragraph and of any reasons given for such failure." Id. at 5.
3 Article 17 of Bermuda II contemplates that, except as otherwise agreed by the parties or prescribed by the tribunal, two rounds of simultaneous substantive pleadings will be filed by the parties
on the merits of their respective cases. The parties agreed instead to four staggered principal plead-
ings: a U.S. memorandum on December 15, 1989; a UK submission on May 31, 1990; a U.S. reply on
No,ember 9, 1990; and a UK rejoinder memorandum on March 15, 1991. The staggered pleadings
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184 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
hearing began, the parties filed three rounds of detailed written statements by
expert economic, regulatory, accounting and fact witnesses in support of their
respective positions.35
The tribunal held a five-week hearing on liability in The Hague from July 2 to
August 2, 1991, at which each side presented extensive testimony on whether the
United Kingdom had breached its obligations to the United States under Bermuda II regarding the six charging years 1983/1984 through 1988/1989. The
hearing was difficult and contentious, with eminent economists and accountants
appearing for both sides.36 All told, six witnesses appeared for the United States,
and twelve for the United Kingdom.37
the Tribunal's Award on Liability
On November 30, 1992, nearly sixteen months after the hearing on liability, the
tribunal issued a 369-page decision.38 Most significantly, the tribunal ruled that
the UK Government had breached its obligations to the United States with respect
to both the structure and the level of charges during four of the six years at issue
(although not the same four years for the two issues). The tribunal also ruled that
the United Kingdom had breached its obligations to use its best efforts to encourage the Heathrow authorities to provide users with the information necessary to
permit an accurate review of the reasonableness of the charges in accordance with
the principles set out in Article 10. Important highlights of the decision are
summarized below.
Exhaustion of local remedies. The tribunal rejected British arguments that the
U.S. claim was inadmissible for failure of the U.S. airlines to exhaust available
local remedies in the United Kingdom. The tribunal noted, inter alia, that the
predominant element of the claim was that of the United States itself, and that the
United States had sought arbitration after extensive consultations under Bermuda
II and at the express suggestion of the British Government.39
Best efforts. UK obligations to the United States in Article 10 were couched in
terms of "best efforts." Most significantly, Article 10(1) required each contracting
party to "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
allowed the parties to respond sequentially to one another's pleadings and were therefore a significant
change from the procedures contemplated in Bermuda II.
3 By the time the oral hearing began, each side had presented thousands of pages of evidence and
argumentation to the tribunal, including hundreds of annexes and exhibits, ranging from charts of
landing patterns at Heathrow, to prospectuses regarding BAA's privatization, to esoteric economic
analyses by renowned experts of when peak charging is economically valid.
36 Despite the complexity of the oral hearing, the tribunal denied the U.S. request for post-hearing
submissions. The United Kingdom had vigorously opposed such filings, citing UK and selected other
practice and arguing that they were not provided for in Bermuda II and therefore required the
consent of both parties. Instead, the tribunal permitted the parties to submit annotated versions of
their closing arguments. The United States filed such an annotation, citing both the written and oral
evidence presented to the tribunal.
37 The U.S. witnesses included Professor Richard A. Brealey of the London Business School and
Michael Levine, former Dean of the Yale School of Management. British witnesses included Professor
Alfred E. Kahn of Cornell University and Professor Julian R. Franks of the London Business School.
38 The tribunal's decision was unanimous, except with respect to the majority's finding of UK
liability for the level of charges during three charging years, 1984/1985 through 1986/1987. See
infra note 50.
3 See Award, supra note 18, ch. 3, at 64-76.
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other Contracting Party are just and reasonable." The tribunal determined that
the "best efforts" requirement could be met solely by continuous monitoring of
the charges at Heathrow (rather than only when the British Government was
presented with complaints about Heathrow's charges), and that a contracting
party's obligations to monitor such charges could be met only if it acted as if its
own financial interests were at stake.40 As a related matter, the tribunal ruled that
the obligations of the parties under Article 10(1) and (3) were obligations of
conduct, rather than result.4'
Structure of charges. The tribunal found that the United Kingdom had breached
its "best efforts" obligations to the United States with respect to the structure of
charges at Heathrow for four of the six charging years at issue in the arbitration,
i.e., 1985/1986 through 1988/1989.42 Among other things, the tribunal found
that during these years the British Government had failed to investigate the relationship between Heathrow's "economic costs," as identified by BAA, and the
user charges imposed by BAA on carriers.43 The tribunal also ruled that the
British Government had failed to question BAA's general assertions and specific
conclusions about terminal charges as vigorously as it should have done,44 and had
failed in other ways to analyze adequately the charges imposed at Heathrow for
parking and runway use.45 In its rulings on structure, the tribunal found numerous defects in the compliance of the United Kingdom with its obligations under
Bermuda II but generally stopped short of prescribing exactly how the charging
structure should have been modified.46
Level of charges. As to the level of charges at Heathrow, the tribunal made two
important threshold rulings requested by the United States. It decided to consider
the rate of return on assets solely at Heathrow, rather than the rate of return for
all three London airports as a system.47 It also analyzed Heathrow's overall profit-
40 See id., ch. 5, at 82-85. This surprisingly expansive reading of "best efforts" went well beyond
the constructions of that expression urged by either of the parties. The United Kingdom argued that
the establishment of adequate UK regulatory mechanisms met the requirements of Bermuda II; the
United States argued, inter alia, that in this case the UK "best efforts" obligations were triggered by
complaints by the U.S. side about Heathrow's charges. Id.
41 Thus, under the award, a party could generally satisfy its "best efforts" obligations through its
conduct vis-a-vis the imposition of user charges, even if the actual results of the charges turned out to
be inconsistent with Article 10. See id. at 85-87. The tribunal ruled, however, that each party's
obligation not to discriminate on the basis of nationality under Article 10(2) was an obligation of
result, not merely of conduct. Id. at 86-87.
42 The tribunal declined to find the United Kingdom liable for its conduct with respect to BAA's
alleged charging irregularities for 1983/1984 and 1984/1985. For these years, it found that the
British Government was allowed a reasonable period after conclusion of the 1983 MOU to implement
the corrections to Heathrow's charging structure that were promised in that agreement. See Award,
supra note 18, ch. 6, at 168-70.
4 The tribunal's detailed analysis of the 12 principal U.S. criticisms of BAA's charging structure at
Heathrow is in id., at 178-270. The tribunal's findings on the United Kingdom's breaches of its
obligation to the United States on structural issues are briefly summarized in Award, supra, ch. 10, at
367-68.
44Id., ch. 6, at 234, para. 11.6.21.
45 For example, as to parking charges, the tribunal found that the United Kingdom had breached its
obligations to the United States by failing to procure comparisons of parking charges for typical
aircraft turnaround times at peak and off-peak times and to compare those charges with the economic
costs by reference to which the charges were said to have been established. See id. at 260-61, para.
11.8.28.
46 See, e.g., id. at 234, para. 11.6.21.
47 Award, supra note 18, ch. 7, at 311, para. 10.11.
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186 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
ability on a "one-till" basis, not only including user charges revenues, but also
taking into account Heathrow's extensive commercial revenues.48
The tribunal ruled that the United Kingdom had breached its obligations to the
United States with respect to Heathrow's profitability for charging years 1984/
1985, 1985/1986, 1986/1987, and 1988/1989. Its analysis for the period 19831989 was as follows:
Charging year 198311984. The tribunal found that charges for the firs
year of the arbitral period were already set at the time the 1983 U.S.-UK
MOU was concluded, and that the United Kingdom "could rightly assume
that these charging proposals were not challenged by the USG [U.S. Government] in view of HMG's [Her Majesty's Government's] undertaking to re-
solve the issue in the future."49
Charging years 198411985, 198511986 and 198611987. For these three
years, the tribunal compared Heathrow's high rate of return on assets with
the relatively lower returns enjoyed by other UK industries, excluding the
North Sea oil industry (which had incomparably higher rates of return) and
ruled that the United Kingdom should have taken steps to lower the charges
during these final three years before privatization.50
Charging year 198711988. BAA plc was privatized on July 1, 1987, three
months after the beginning of this charging year and immediately after the
British Government and its consultants performed studies of Heathrow's
profitability for purposes of the private stock offering. The tribunal found
that the Government was entitled to rely on analyses of Heathrow's projected
profitability it had performed in connection with the formation of BAA plc
and privatization. As a result, the tribunal held that the United Kingdom had
not breached its obligations to the United States for this charging year.5'
48 Id., ch. 6, at 141-45, paras. 4.1-4.7. The tribunal also ruled that Heathrow's investment properties, in addition to its aviation service facilities, would be included in its asset base. Id., ch. 7, at 311,
para. 10.10.
49Id. at 312-13, para. 10.16.
50 Id. at 318, para. 10.28. The tribunal relied on accounting comparisons to evaluate Heathrow's
profitability. It declined to rule, as the United States had requested, that economic returns-which
would have considered the substantial increase in the valuation of the property of Heathrow, in
addition to its income stream, in evaluating its "returns" -were the appropriate means of evaluating
the airport's profitability. Id. at 308-10. Jeremy Lever, the UK-appointed arbitrator, dissented from
the paragraphs ruling in favor of the United States for these three charging years, and issued a
separate opinion setting forth his views. See Award, supra note 18, Dissenting Opinion of Mr. Jeremy
Lever, Q.C.
5 After the award was issued in November 1992, the United States attempted unsuccessfully to
persuade the tribunal to reopen this issue. The United States argued that there was an inconsistency
in the tribunal's findings for charging years 1986/1987 and 1987/1988, as follows: In the 1992
award, the tribunal ruled that the United Kingdom should have taken steps to lower Heathrow
Airport's user charges for 1986/1987, the last year before privatization. However, the tribunal found
no breach of obligation for the immediately following charging year, 1987/1988, despite the fact that
the limitations on those charges were built on a mathematical formula (RPI - 1) using 1986/1987's
charges as its base, and that the British Government and BAA had taken no steps to lower Heathrow's
charges in 1987 and thereby correct the problem of excessive returns. The United States argued that
the tribunal's findings on the two years were inconsistent, since under the circumstances a finding of
breach of obligation for 1986/1987 should have led to a similar finding for 1987/1988. The United
States asked the tribunal to issue a correction, clarification or supplemental decision finding that
there was also a breach of best efforts for charging year 1987/1988. The United Kingdom argued that
the tribunal's ruling with respect to 1987/1988 was legally correct and that the tribunal's earlier
decision was final. Following an oral hearing on these issues in October 1993, the tribunal ruled that
its decision on the profitability of the 1987/1988 charges was final and could not be reopened. See
Tribunal Decision No. 23 (Nov. 1, 1993), annex to Award, supra note 18.
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187
198811989.
As
tribunal found that the RPI - 1 price-cap mechanism put in place by the
United Kingdom upon BAA plc's privatization in 1987 was inadequate in
itself to ensure that Heathrow's charges would not result in an excessive rate
of return during the five-year period. The tribunal ruled that, regardless of
the result in charging year 1988/1989, the British Government had "failed to
fulfil its obligation of conduct since it simply and passively relied on the
maintenance in place of the RPI - 1 [price-cap] formula without reference
to the level of profitability to which its application might be expected to give
rise.'"52
Discrimination based on nationality. The tribunal found that it lacked "clear and
sufficient evidence" to sustain a finding of express discrimination against U.S.
carriers based on nationality under Article 10(2) of Bermuda II.53 It did find,
however, that the United Kingdom had breached its general obligations under
Bermuda II to monitor the fairness to U.S. airlines of Heathrow's peak and offpeak charges:
HMG's specific duty under Article 10(2) of Bermuda 2 and its duty to use
its best efforts to ensure that user charges conformed to the principles contained in Article 10(1) and (3) of the Treaty required that, especially against
such a background of complaint, [the British Government] ought to have
taken steps to monitor whether the operation of the sharply differentiated
peak/off-peak charging system was in practice working inequitably, to the
detriment of the U.S. airlines, by reason of British Airways having some
advantage, that was denied to Pan Am/TWA, in relation to re-scheduling
flights out of terminal peak hours.54
Consultations and exchanges of information between BAA and users. Article 10(4)
and (5) required the contracting parties to encourage consultations between the
competent charging authorities and users, and to use their best efforts to encourage the charging authorities and users to exchange such information as might be
necessary to permit an accurate review of the charges under Article 10. The
tribunal found that, even though the British Government had encouraged consultations between Heathrow and its users, the Government had failed in various
important respects to encourage BAA to fulfill its obligations to provide information to enable U.S. carriers to assess the reasonableness of proposed charges.55
Additional significant rulings in the award or in decisions taken by the tribunal
immediately afterward included:
Margins of appreciation. The tribunal stated in the award that the UK side was
entitled to a "margin of appreciation" (in essence, a zone of reasonableness) with
respect to the charges at Heathrow.56 Over the objections of the United States,
the tribunal ruled in an interpretive decision after the award was issued that both
the British Government and BAA could enjoy such margins of appreciation.57
52 Award, supra note 18, ch. 7, at 322, para. 10.42.
5 See id., ch. 8, at 323-28, esp. para. 17, at 328.
54 Id., ch. 6, at 207, para. 11.2.37. 5 See generally id., ch. 9.
56 See, e.g., id., ch. 5, at 84, para. 2.2.6.
57 See Tribunal Decision No. 21 (June 18, 1993) (on file in the Office of the Legal Adviser, Department of State). Because the case was settled before damages were litigated, the impact of these dual
zones of reasonableness was never clear. At a minimum, it appeared that, if the dispute had not been
settled, the tribunal would have analyzed the charges actually imposed at Heathrow through two
filters of administrative discretion.
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188 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
Long-run marginal cost pricing. The U.S. side complained about the heavy
reliance of the United Kingdom and BAA on long-run marginal cost (LRMC)
pricing to justify the high user charges at Heathrow. Specifically, the U.S. side
argued that LRMC pricing, as opposed to short-run marginal cost (SRMC) pricing, was economically flawed in these circumstances and was used by the
Heathrow authorities to require foreign long-haul carriers, such as Pan Am and
TWA, to shoulder a substantial responsibility for future capital expenditures at
the airport.58 Determining that it was not in a position to second-guess the British
Government's reliance on expert advice that LRMC pricing was a legitimate tool
at Heathrow, the tribunal did not find a failure of "best efforts" by the United
Kingdom on this issue.59
One-way charging. Heathrow's runway charges were imposed on the basis of
landings but not takeoffs, and its terminal charges were based on departing but
not arriving passengers. The tribunal ruled that Article 10's "best efforts" requirement obliged the United Kingdom to investigate whether such one-way charges
were consistent with the "sound economic principles" mandated by Bermuda II.60
Legal status of 1983 MOU. The United States maintained that the 1983 U.S.UK MOU, which was intended to settle the dispute that had arisen in the early
1980s, was a binding international agreement. During the arbitration, the United
Kingdom argued that the MOU merely interpreted Bermuda II and did not create
new international legal obligations. The tribunal ruled for the United Kingdom on
this point, finding that the MOU was an interpretive document, rather than a
free-standing, binding international agreement.6'
III. THE SETTLEMENT OF THE ARBITRATION
As noted above, the award on liability was issued on November 30, 1992. The
parties submitted requests for clarifications, corrections, and/or supplementary
rulings on May 17, 1993. The last of the tribunal's decisions on these matters was
issued on November 1, 1993, and with it the liability phase of the arbitration
ended. On the same day, the tribunal set a schedule for the remedial phase,
beginning with reciprocal requests for documents and information in early
December 1993, and a principal pleading by the United States to be filed in
April 1994.
Beginning in mid-September 1993, the United States and the United Kingdom began to discuss the possible settlement of the dispute. Negotiations over
the next five months involved eleven rounds of discussions, including several
transatlantic conference calls.62 The two sides agreed early in the negotiations
that a settlement on mutually acceptable terms would be preferable to further
arbitration.
58 Ultimately, the testimony offered by experts on both sides appeared to converge to a certain
extent on these issues, as the United Kingdom's experts agreed that correctly employed LRMC pricing would have to take into account SRMC considerations.
5 See Award, supra note 18, ch. 6, at 160-62.
60 Id. at 264-66. The tribunal did not rule that two-way charging was required.
61 Id. at 154-59. The 1994 Settlement Agreement was entered into by way of an exchange of notes
rather than a memorandum of understanding. See further text at note 63 infra. For a more extensive
discussion of the issue of the binding nature of memorandums of understanding concluded by the
United Kingdom, see John H. McNeill, International Agreements: Recent U.S. -UK Practice Concerning
the Memorandum of Understanding, 88 AJIL 821 (1994).
62 The U.S. negotiating team was headed by Mark Steinberg, Counselor to the Legal Adviser of the
Department of State, and the British team by Antony Goldman, Head of the International Aviation
Directorate of the Department of Transport.
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On February 4, 1994, the negotiators initialed a settlement agreement that
was brought into force through an exchange of notes in Washington on March
11, 1994. The settlement is an international agreement, legally binding on the
two countries.63 The key terms are summarized below.
Monetary Payment
The British Government paid a lump sum of $29.5 million to the U.S. Government on March 11, 1994. During the arbitration, the United States had claimed
direct damages for itself under Bermuda II as the result of numerous alleged
breaches of the Agreement by the United Kingdom. The United States measured
its damages by the financial losses incurred by its designated carriers, Pan Am and
TWA, which served Heathrow Airport and suffered the consequences of the excessive charges. On April 26, 1994, the Department of State disbursed over $28
million of the funds received in settlement to these airlines,64 paying nearly $
million to Pan Am's estate in bankruptcy and over $11 million to TWA.65
Future Charges at Heathrow
During BAA plc's consultations with Heathrow users for the 1994/1995
charges, it proposed to phase out the current system of peak international passenger charges at Heathrow's terminals. Approximately 60 percent of Heathrow's
user charges are derived from these charges, which are based on numbers of
passengers; the high peak international passenger charges have long been a major
source of contention for U.S. and other carriers operating at Heathrow.66 As part
of the settlement, the United Kingdom agreed to take any actions necessary under
its domestic laws to ensure that BAA plc phased out the differential between peak
and off-peak international passenger charges in four substantially proportionate
installments over the period April 1, 1995, to April 1, 1998, so that the differential is entirely eliminated by April 1, 1998.67
Termination of Heathrow Arbitration
The United States agreed to abandon the Heathrow arbitration and the two
Governments agreed to regard as fully and finally settled all U.S. government
63 The Settlement Agreement, on file in the Department of State's Treaty Office, will be publis
in the treaties series of the Department of State and will be listed in the 1995 edition of Treaties in
Force.
64 The payments were made pursuant to 22 U.S.C. ?2668a (1988) as funds received in trust from
the British Government.
65 Smaller sums went to United Airlines and American Airlines, which took over Pan Am's and
TWA's operating authority in 1991, and to the State and Transportation Departments, as reimbursement from Pan Am and TWA for certain extraordinary expenses incurred during the arbitration.
66 See note 17 supra.
67 The components of the Settlement Agreement, supra note 1, governing future charges at
Heathrow are set forth in paragraphs (f) and (g). Among other things, the United Kingdom also
agreed to ensure (1) that a peak international passenger charge would not be introduced before April
1, 2003, or later under certain circumstances (referred to herein as the "lock-in period"); and (2) that
the overall balance of charges among terminal, runway and parking charges would remain the same
while the international terminal peak periods were being phased out. It also committed itself to
ensuring (1) that the level of charges for parking would not be increased relative to the level of total
user charges during the lock-in period; and (2) that at least through the lock-in period, a weightrelated element in peak period landing charges would not be reintroduced, and that the part of
off-peak landing charges attributable to aircraft weight would not be raised relative to the overall level
of off-peak landing charges.
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190 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
claims relating to Heathrow user charges in the period up to and including March
31, 1994.68
Termination of UK-Initiated Arbitration
The Heathrow arbitration solely concerned the U.S. Government's complaints
about excessive and arbitrary charges on U.S. carriers at Heathrow Airport. On
October 13, 1993, after the settlement negotiations on the Heathrow dispute
began, the British Government invoked Article 17 of Bermuda II to initiate a
separate arbitration against the United States questioning U.S. observance of
Article 10 of Bermuda II regarding charges on UK-designated airlines serving
airports in the United States. The UK-initiated arbitration was settled simulta-
neously with the Heathrow arbitration.69 As in the latter settlement, the two Governments agreed to regard as fully and finally settled all claims of the United
Kingdom relating to U.S. government compliance with Article 10 in the period up
to and including March 31, 1994.7?
Information to Be Supplied to Heathrow Users
The British Government undertook to supply to U.S. airlines designated under
Bermuda II (or any successor air services agreement) a wide variety of information regarding Heathrow Airport, including financial matters, traffic, service qual-
ity, planning and forecasting.71
Revision of Bermuda II
The parties agreed to amendments of Article 10 of Bermuda II, effective on the
exchange of notes on March 11, 1994. The Agreement retains the requirement
that user charges be "just and reasonable," "equitably apportioned among catego
ries of users" and not discriminatory.72 Changes from the old Article 10 include
explicit recognition by the parties of "the benefits of reducing undue intervention
and detailed supervision of the setting and monitoring of user charges at individ-
ual airports."73 The parties also made modest changes in the definition of user
charges.74
68 See id., para. (d).
69 In November 1993, the British and United States Governments selected party arbitrators. However, the matter was settled before the tribunal was fully constituted or the issues were developed that
would have been the subject of the UK-initiated arbitration.
70 See Settlement Agreement, supra note 1, para. (e).
71 See id., para. (f)(ix) and Attachment 2.
72 See id., Attachment 1, revised Article 10(1)-(3).
73 See id., revised Article 10(4). The new version of Article 10 reflects in several ways the parties'
agreement to defer heavily to airport-airline consultations. The new article eliminates the "best efforts" requirement and replaces it with a complaint-driven system in paragraph 4, under which a
contracting party may now be held in breach of the Agreement only when, following a complaint from
the other contracting party, it fails to review the charging practice that is the subject of the complaint,
or, after such a review, it fails to take all steps within its power to remedy any charge or practice
inconsistent with the article. Revised Article 10 also eliminates the requirement that user charges be
based on "sound economic principles."
74 "User charge" is now defined in Article 1 (o) of Bermuda II as "a charge imposed by a competent
charging authority on airlines for airport or air navigation property or facilities, including related
services and facilities." Id.
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Encouragement of Airport-Airline Consultations in the United States
A section of the Settlement Agreement recited UK observations about U.S.
federal oversight of user charges on British carriers serving the United States
under Bermuda II.75 The United States made two new undertakings in this section: it agreed to issue a statement to all U.S. airports served by UK airlines
encouraging airport-airline consultations76 and to inform the United Kingdom of
any material changes made by the United States within three years of the Settle-
ment Agreement in the policies noted by the United Kingdom in the Agreement.77
Dispute Settlement
Disputes arising under the Settlement Agreement are to be resolved under the
mechanisms provided for in Articles 16 and 17 of Bermuda II, or the consultation
and arbitration provisions of any successor air services agreement between the
United States and the United Kingdom.78
CONCLUSION
The settlement of the Heathrow arbitration ended a long and difficult chapter
in U.S.-UK economic and diplomatic relations. When the two Governments de-
cided to resolve their differences through binding arbitration, the dispute moved
from diplomatic channels, where it had reached an impasse, into unusual proceed-
ings involving novel economic, regulatory and accounting issues. It is safe to say
that in December 1988, when the arbitration began, neither party fully anticipated how difficult the road ahead would be.
Many of the problems stemmed from the general language of Article 10 of
Bermuda II-terms like "just and reasonable," "equitably apportioned," "reasonable rate of return on assets, after depreciation," and "sound economic princi-
ples," all derived from domestic utility regulation. Issues like these are not typically adjudicated on a government-to-government basis and, except for some specific issues of international law and state-to-state remedies, there was little
international law on which the parties or the tribunal could draw for definitive
guidance. In addition, the economic, accounting and regulatory issues underlying
economic pricing are complex and subject to extensive debate. The arbitral panel
was often forced to base its judgments about intricate and conflicting theories of
utility regulation on limited or conflicting evidence and arguments. Because of
the unique and complex economic issues underlying the charges, and the long
and unusual history of the dispute, most aspects of the 1992 award on liability
(which in places defies comprehension even by those familiar with the dispute)
are unlikely to serve as a significant precedent for future intergovernmental
disputes.79
7 See Settlement Agreement, supra note 1, para. (j).
76 See id., para. (j)(vi) and Attachment 4. That statement was issued by the U.S. Departmen
Transportation on June 1, 1994.
77 See id., para. (k).
78 See id., para. (1). These consultation and arbitration mechanisms were incorporated by reference
by the parties solely for convenience and will be available for dispute settlement regardless of the
future viability of Bermuda II.
79 As noted in note 36 supra, immediately before the oral hearing, the tribunal denied the U.S.
request for post-hearing filings. Given the complexity of the issues presented to the tribunal, post-
hearing submissions would have helped clarify the issues and could have helped guide the tribunal in
its development of some aspects of the award.
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192 THE AMERICAN JOURNAL OF INTERNATIONAL LAW [Vol. 89
Some of the most interesting features of the arbitration involved procedural
matters. The Governments directly adapted the procedural arbitral rules of the
International Centre for Settlement of Investment Disputes-rules typically used
in international commercial arbitration. In addition, the parties took the liberty of
replacing the presumption under Bermuda II of two rounds of concurrent principal pleadings with four staggered pleadings, which are generally more useful in
enabling the parties to respond to one another's arguments and to crystallize the
issues presented to the tribunal. The parties engaged in an extraordinary amount
of discovery for an intergovernmental arbitration, and documents produced by
the United Kingdom proved important to the development of the U.S. case.
The amicable settlement of the Heathrow arbitration at the conclusion of its
liability phase ended an unfortunate chapter of discord in U.S.-UK aviation relations. Had the parties not settled this dispute in March 1994, the arbitration
would likely have proceeded for at least two or three more years of contentious
proceedings. While the United States would have presented a persuasive case for
substantial monetary and other relief in the remedial phase, it is obviously impossible to predict how the tribunal would have ruled. Most importantly, perhaps,
neither party knew for certain at the time of the settlement whether the tribunal's
holdings that the British Government had breached its Bermuda II obligations of
"best efforts" would have formed the basis of further broad relief for the United
States in subsequent proceedings. Settlement on mutually acceptable terms was
an ideal resolution to the dispute.
SAMUEL M. WITTEN*
THE SAN REMO MANUAL ON INTERNATIONAL LAW APPLICABLE
TO ARMED CONFLICTS AT SEA
BACKGROUND TO THE DEVELOPMENT OF THE MANUAL
In June 1994, a group of scholars and naval practitioners' completed a "Manual" on international law currently applicable to armed conflicts at sea. The
seven-year project2 on the "modernization" of the law of armed conflict at sea,
which began in 1987,3 resulted in a document of 183 paragraphs4 and an accom* Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State. The author was Director
of the U.S. Government's Heathrow Arbitration Team and Deputy Agent for the United States to the
Heathrow Arbitral Tribunal in 1993-1994. In 1988 the author was legal adviser to U.S. delegations in
two negotiations with the United Kingdom over Heathrow Airport user charges. Much of the infor-
mation in this essay is drawn from the author's personal knowledge of the Heathrow dispute. The
views expressed herein are the author's and are not necessarily those of the United States Government.
l The participants, who came from many countries, were both specialists in international law and
naval experts, the latter including operational and nonoperational personnel. About one-third of the
participants were academic personnel and the others were government officials. All the participants
attended in their personal capacity.
2 The meetings were convened by the San Remo International Institute of Humanitarian Law. The
undersigned acted as coordinator of the drafting work and general editor.
3 The first meeting, in 1987, was co-organized by the University of Pisa, Syracuse University (New
York) and the San Remo Institute. A full report of the first meeting is reproduced in 14 SYRACUSE J.
INT'L L. & CoM. 553 (1988) (special issue).
4 The decision to work on a manual was made at the second meeting, in 1988.
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