Honduras Denounces the ICSID Convention

On February 24, 2024, the Republic of Honduras (“Honduras”) sent a written notice to the World Bank denouncing the ICSID Convention.  Honduras’s decision follows its threat on May 31, 2023 to withdraw from the ICSID Convention due to alleged procedural mismanagement by ICSID in the of the multi-billion Honduras Próspera case, the commencement of nine ICSID arbitrations against Honduras since the election of the left-wing candidate Xiomara Castro as President in January 2022 (bringing the total to ten pending ICSID arbitrations), and additional notices of dispute served on Honduras that have not yet led to arbitration proceedings.

Honduras has followed the path of other countries in Latin America, becoming the fourth country to denounce the ICSID Convention after Bolivia in 2007, Ecuador in 2009 (although re-joining in 2021), and Venezuela in 2012.  Countries in other regions have also expressed their intention to leave the ICSID system. Last year, the Prime Minister of Albania announced that the state was contemplating denouncing the ICSID Convention after a tribunal rejected Albania’s application for revision of an award under Article 51 of the Convention ordering it to pay €110 million over the expropriation of a television station.

Ongoing proceedings against Honduras

Although Honduras gave notice of its withdrawal from the ICSID Convention in February 2024, according to Article 71 of the ICSID Convention, this decision “shall take effect six months after receipt of such notice” by the World Bank – i.e., on August 25, 2024.  Pursuant to Article 72 of the ICSID Convention, claimants involved in ongoing ICSID arbitrations against Honduras will not be impacted.

Potential new ICSID claims against Honduras

Honduras is a party to eight bilateral investment treaties (“BITs”) and nine free trade agreements (“FTAs”) that are currently in force and provide for ICSID arbitration.  Similar to the aftermath of other countries’ denunciation of the ICSID Convention, Honduras’s decision might prompt protected investors under these treaties to file notices of dispute against Honduras within the ensuing six-month period.   At the time of Venezuela’s denunciation of the ICSID Convention, the framework applicable to a state’s denunciation was unclear.  Commentators had varying interpretations of when a state’s consent to ICSID arbitration had effectively been withdrawn, and there was no ICSID-specific caselaw to provide guidance on the issue (see our prior analysis here). This left some investors skeptical about the chances of successfully pursuing claims against a State that had exited the ICSID system.  Since then, arbitration tribunals have addressed the issue as discussed below.

Most tribunals who heard claims against Venezuela agreed that investors could initiate arbitration during the six-month window following the notice of denunciation. In Valores Mundiales, although the request for arbitration came after the denunciation, the notice of dispute was filed beforehand.  The tribunal noted that the investor’s consent to arbitration was given in the notice of dispute rather than in the request for arbitration. It observed that a different interpretation would allow states to denounce the ICSID Convention after receiving an unwanted notice of dispute in order to escape jurisdiction (Award, July 25, 2017, ¶ 261).  A similar decision was issued by the tribunal in Tenaris & Talta Trading (Award, December 12, 2016, ¶¶ 860-868).

In other cases, tribunals found there to be no jurisdictional issue even when investors consented to arbitration only after Venezuela’s January 2012 denunciation. In Venoklim, although the tribunal dismissed the case for unrelated grounds, it concluded that the investor had the right to submit its claim to ICSID during the six-month period following denunciation (Award, April 3, 2015, ¶¶ 61-68).  The award does not reference any prior notice of dispute, suggesting that the investor’s consent was given after the denunciation, i.e., with the request for arbitration.  The same decision was taken in Rusoro (Award, August 22, 2016, ¶¶ 260, 267, 887), Transban (Award, November 22, 2017, ¶¶ 84, 93), and Blue Bank (Award, April 26, 2017, ¶¶ 119-120).  Specifically, in Rusoro, the investor submitted its request for arbitration before Venezuela’s denunciation took effect, but the ICSID Secretariat registered the case only after the denunciation was in effect.  Although this case took place under the ICSID Additional Facility Rules, the question was similarly whether Venezuela was a party to the ICSID Convention at the relevant time.  The tribunal held that the relevant time was when the request for arbitration was filed and not the date of registration (¶ 266).

In contrast, in Fabrica de Vidrios, the tribunal found that Venezuela’s consent to ICSID arbitration was effectively withdrawn when the denunciation notice was submitted to the World Bank in January 2012 (Award, November 13, 2017, ¶ 282).  In that case, the investors filed their claim a few days before the end of the six-month period following the denunciation. Venezuela had also unilaterally terminated the applicable BIT, but the treaty included a sunset clause providing for the termination to take effect only after November 2018 (¶ 182). The tribunal held that ICSID arbitration was only available if the conditions to access ICSID arbitration in both the investment treaty and the ICSID Convention were satisfied (id. ¶ 261).   It concluded that it would only have had jurisdiction over the dispute if Venezuela had entered into an agreement with the investors to submit disputes to ICSID arbitration prior to the notice of denunciation. Given that this was not the case, and Venezuela had withdrawn from the ICSID Convention before the investors submitted the case, perfected consent did not exist. Consequently, the tribunal ruled it lacked jurisdiction over the dispute (id. ¶ 261).

Based on the majority of the decisions issued following Venezuela’s denunciation of the ICSID Convention, there might be a pathway for prospective investors to bring claims against Honduras by August 25, 2024 – the expiration of the applicable six-month period – but this will likely be analyzed on a case-by-case basis.

Potential non-ICSID claims

Even if arbitration under the ICSID Convention is not an option due to denunciation having been effective, this may not prevent an investor from commencing arbitration proceedings against Honduras under a specific BIT or FTA.  These treaties may well provide for alternative options to ICSID for resolving any dispute, such as ad hoc arbitration under the UNCITRAL Arbitration Rules (see e.g. Honduras-United States of America BIT (1995), Article IX) or institutional arbitration under the auspices of the International Chamber of Commerce (see e.g. Honduras-United Kingdom BIT (1993), Article 8(2)(a)).  Furthermore, once the denunciation takes full effect, Honduras could still consent to arbitration under ICSID’s Additional Facility Rules with nationals of states that remain signatories to the ICSID Convention.

Conclusion

Entities with disputed interests in Honduras should begin considering how best to protect their investments following this development. Given the varying interpretations discussed above, as well as the potential different fora under the applicable investment treaties, prospective claimants should evaluate their position as soon as possible.  This may allow them to ensure all potential recourses are considered early on and reduce – to the extent possible – any potential challenges to the jurisdiction of an ICSID arbitral tribunal.

For more information, please contact Hannah Ambrose, Partner, Lucila Marchini, Senior Associate, Daniela Paez, Senior Associate, Carlos Hafemann, Associate, or your usual Herbert Smith Freehills contact.

Hannah Ambrose
Hannah Ambrose
Partner
+44 20 7466 7585
Lucila Marchini
Lucila Marchini
Senior Associate
+1 917 542 7850
Daniela Paez
Daniela Paez
Senior Associate
+1 917 542 7829
Carlos Hafemann
Carlos Hafemann
Associate
+1 917 542 7835