¹ The exchange of notes [hereinafter Settlement Agreement] is on file in the Legal Adviser’s Office, Department of State. The details of the Settlement Agreement are discussed in section III infra.

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.

⁵ 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. §§1151–1160, that the user charges imposed by the British Airports Authority at Heathrow Airport discriminated against U.S. air carriers.

⁷ Article 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 frnposed 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.

⁹ Unlike Articles 1(o) and 10 of Bermuda II, supra note 2, Articles 16 and 17 were not amended by the Heathrow Settlement Agreement.

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 discussion 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).

¹³ 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 Institutions 55 (1988).

¹⁴ Airports Act, 1986, ch. 31.

¹⁵ Thus, if in a given year retail prices were projected to increase by 5%, the maximum price 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) 1161,109 (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.

¹⁷ Heathrow’s system of high international peak terminal charges, which were based on passenger 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.

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, was 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 reflect its costs more closely and to implement changes in a gradual manner. The parties reserved their 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.

²⁶ See Award, supra note 18, ch. 2, at 50, para. 4.14.

²⁷ 49 U.S.C. app. §1159a.

²⁸ Secretary Burnley’s letter is summarized in Award, supra note 18, ch. 2, at 52–53. Such retaliatory offsets are permitted under the Act. See 49 U.S.C. app. §1159a (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 counsel 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.

³¹ 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.

³³ 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.

³⁴ 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 pleadings: a U.S. memorandum on December 15, 1989; a UK submission on May 31, 1990; a U.S. reply on November 9, 1990; and a UK rejoinder memorandum on March 15, 1991. The staggered pleadings allowed the parties to respond sequentially to one another’s pleadings and were therefore a significant change from the procedures contemplated in Bermuda II.

³⁶ 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.

³⁹ See Award, supra note 18, ch. 3, at 64–76.

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.

⁴³ 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.

⁴⁴ Id., 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.

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.

⁴⁹ Id. 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.

⁵¹ 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.

⁵² Award, supra note 18, ch. 7, at 322, para. 10.42.

⁵³ See id., ch. 8, at 323–28, esp. para. 17, at 328.

⁵⁴ Id., ch. 6, at 207, para. 11.2.37.

⁵⁵ 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.

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.

⁵⁹ 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.

⁶³ The Settlement Agreement, on file in the Department of State’s Treaty Office, will be published 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 weight-related 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.

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.

⁷⁵ 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. Department of Transportation on June 1, 1994.

⁷⁷ See id., para. (k).

⁷⁸ See id., para. (l). 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.