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Honduras Exits ICSID: Implication for Foreign Investors
The Castro administration's decision to denounce the ICSID Convention has been much criticized.
LATINVEX SPECIAL
White & Case
The International Centre for Settlement of Investment Disputes (ICSID) has announced that the World Bank received a written notice of denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) from the Republic of Honduras on February 24, 2024, and that the denunciation will take effect on August 25, 2024.
The ICSID Convention is a multilateral treaty that entered into force in 1965. It establishes ICSID, an institution that is part of the World Bank Group and provides specialized facilities for the resolution of investment disputes through conciliation and arbitration. As of the end of 2023, the ICSID Convention had 165 signatories, of which 158 are Contracting States to the Convention.
In accordance with the ICSID Convention, a Contracting State may denounce ICSID Convention by written notice, and the denunciation shall take effect six months thereafter but shall not affect the rights or obligation of the Contracting State arising out of prior consent to ICSID jurisdiction. Investors that have not perfected their consent to ICSID arbitration – which in most circumstances entails filing a Request for Arbitration – before the denunciation takes effect may no longer have access to arbitration under the ICSID Convention. While in some instances, they may have access to arbitration under the ICSID’s Additional Facility Rules or other arbitration rules, they would not benefit from the self-contained nature of arbitration under the ICSID Convention, which precludes ICSID awards being set aside by competent local courts, among other advantages.
Honduras ratified the ICSID Convention in 1989 and would become only the fourth State to withdraw from the ICSID Convention. The three other States that previously withdrew were Bolivia, Ecuador and Venezuela in 2007, 2009 and 2012 respectively. As is the case with Honduras presently, ICSID denunciation occurred in the context of other State policies against private investment and attempts to avoid international liability. Those States have continued to face international arbitration proceedings before ICSID, and under other rules and before other institutions. To illustrate, since its denunciation in January 2012, Venezuela has been named as Respondent State in at least 37 proceedings, Bolivia in at least 205 and Ecuador in at least 16.
President Xiomara Castro was elected in January 2022 and her rise to power has brought about the return to anti-private investment politics in Honduras. These policy shifts have created uncertainty and erosion of value for investments. Since Castro took office, investors have filed nine international arbitrations against Honduras (in many of which White & Case represents the investor). The Castro administration’s decision to denounce the ICSID Convention has been much criticized, and questions have been raised as to whether the withdrawal from ICSID absent legislative authorization complied with Honduran internal requirements.
Honduras’s Consent to Arbitrate Investment Disputes before ICSID
- International Investment Treaties. International investment treaties are agreements made between States that provide protections regarding a state’s treatment of investments made by investors from the other State. Honduras has entered bilateral investment treaties with the Netherlands, France, Chile, Germany, Spain, the United Kingdom, and Switzerland. Honduras is also a party to several Free Trade Agreements (FTA), including the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) and the Canada-Honduras FTA. These Treaties remain in force notwithstanding Honduras’s denunciation of the ICSID Convention and provide alternative forums for international dispute resolution.
- Investment Law. Honduras also implemented the Law for the Promotion and Protection of Investments (the “Investment Law”), which entered into force on July 15, 2011, and provides qualifying investors with resort to ICSID arbitration to resolve disputes.
- Contracts. Honduras has also consented to ICSID arbitration in numerous contracts with private investors. In particular, many of the contracts entered by Coalianza, Honduras’ Public-Private partnership promotion agency, with private investors contain dispute settlement clauses consenting to ICSID arbitration.
Provisions under the ICSID Convention Related to Denunciation and Tribunal Interpretations
Article 71 of the ICSID Convention expressly provides for denunciation and provides that “[a]ny Contracting State may denounce this Convention by written notice to the depositary thereof.” It further provides that “[t]he denunciation shall take effect six months after receipt of such notice.” In turn, Article 72 of the Convention excludes from denunciation those instances when consent to arbitration was perfected prior to the denunciation:
- Notice by a Contracting State pursuant to Articles 70 or 71 shall not affect the rights or obligations under this Convention of that State or of any of its constituent subdivisions or agencies or of any national of that State arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary. (Emphasis added)
Article 25 of the ICSID Convention, for its part, provides that ICSID jurisdiction extends to:
- any legal dispute arising directly out of an investment, between a Contracting State . . . and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally. (Emphasis added).
When Bolivia, Ecuador and Venezuela denounced the ICSID Convention, numerous investors filed ICSID cases against the States during the six-month window before the denunciation became effective. Most ICSID tribunals analyzing those cases concluded that ICSID jurisdiction existed if consent was perfected before denunciation took effect.
In most arbitration cases pursuant to international treaties and investment laws, consent is perfected when the investors file the Request for Arbitration. The principle is that States offer their consent in the Treaty, and investors accept the offer to arbitrate by instituting arbitration proceedings. In some cases, tribunals took the position that consent had already been perfected when the investor had only filed a notice of dispute under the investment treaty (as opposed to a Request for Arbitration) before the denunciation. In contrast, one tribunal held that consent had to be perfected before the denunciation itself (not when it took effect six months later).
In the case of contracts with Honduras providing for ICSID arbitration, consent to ICSID arbitration arguably has already been perfected. Article 25 of the ICSID Convention refers to “consent in writing,” which may not be “withdraw[n] . . . unilaterally.” The contract thus may be deemed to be consent by Honduras and the specific investor, in writing, which Honduras cannot withdraw unilaterally. The contract may also provide for an alternative venue in case ICSID arbitration is not available.
Alternatives to ICSID Arbitration
Most treaties available to investors provide alternative forums when ICSID Arbitration is not available, typically UNCITRAL arbitration.
ICSID is often a favorable dispute resolution mechanism for foreign investors for the following reasons:
- Honduran courts lack jurisdiction over an ICSID proceeding;
- ICSID is the only self-contained forum, that is, ICSID awards are final and binding, subject only to an annulment request to an ICSID ad hoc committee based on specific, narrow grounds for annulment; and
- States must recognize and enforce ICSID awards as if they were final judgements from their local courts.
By contrast, arbitrations under other rules, such as the UNCITRAL Arbitration Rules, are subject to the jurisdiction of the competent national courts at the seat of arbitration and awards rendered in such proceedings cannot be directly enforced as a national judgment. Awards (i) may be subject to annulment proceedings before the competent courts at the seat of arbitration, and (ii) must be recognized and enforced by local courts, where enforcement may be challenged. Grounds for annulment and challenge to enforcement are narrow, but include challenges to jurisdiction and public policy grounds, which may be led to local courts imposing their own judgment.
How Can Foreign Investors with Disputes Against Honduras Navigate the Impact of Honduras’s Denunciation of ICSID?
The denunciation of the ICSID Convention has no legal effect on cases already underway against Honduras. For investors who may have a dispute against Honduras, but have not yet commenced arbitration, the following should be considered:
- Perfecting Consent. Perfecting consent to ICSID arbitration by filing a Request for Arbitration before the six-month period under the ICSID Convention expires may assist in solidifying investment protections for private investors. Investors may be able to suspend the proceedings shortly after their initiation and continue to negotiate after filing the Request.
- Settlement Negotiations. If the parties settle while an arbitration is pending and after the tribunal has been constituted, they may enter the settlement as an award, thereby gaining the enforceability effects of an ICSID award described above.
Ultimately, the specific actions that a particular investor should take depend on the particular facts and available rights in each situation. Investors affected by Honduras’s conduct and policies should take active steps to assess and protect both their legal and commercial interests.
This article was written by White & Case arbitration partners Silvia Marchili, Ank Santens, Francisco Jijón and Estefanía San Juan.
The authors thank Natalia Jaramillo (Law Clerk, Washington, DC) for her research and writing assistance.
Republished with permission from White & Case.
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