Direct foreign investment has grown in importance for many economies, for their foreign exchange, gross national product, jobs, and global influence. At the same time, there are increasingly complex international and national laws, which can trigger monetary claims. An outsider may be skeptical of a national legal system to fairly adjudicate and therefore will look to a trusted institution to resolve such claims.
The International Centre for Settlement of Investment Disputes (ISCID)
One of the few multilateral avenues available for low- and middle-income countries is to bring investment disputes to the International Centre for Settlement of Investment Disputes (ISCID). Established in 1966, this institution of the World Bank Group was created to provide facilities for conciliation and arbitration of international investment disputes.
Its primary objective is to encourage international investment, especially in developing countries where potential investors may be more likely to be dissuaded by what are perceived as legal uncertainties and risks. It is a formal treaty that requires contracting States to recognize and enforce arbitral awards made under its auspices. There are currently over 160 countries which have ratified the Convention.
Relations between a private company, “Prospera,” and the Honduran Government
What follows is not unique in the sense that there are others where a private entity obtains extraterritoriality and a government changes.
On an island within the territory of Honduras, a special technological area (“Prospera”) was established over a decade ago. This extraterritorial location, with its own rules, resulted in huge investments by some of the richest and biggest individuals and companies in the world. When the current government sought to negate this grant of authority, the private investors brought the issue to the ICSID.
Prospera v. Honduras was an ICSID claim brought by a United States corporation against the Honduran Government for its failure to adhere to an agreement that created Prospera Inc. This investment vehicle was founded in 2012, basically operating outside Honduran trade and security jurisdiction.
In 2013, Prospera was modified to be called a “Zone of Economic Development and Employment” (ZEDE). In its ICSID petition, the U.S. claim was for more than $10 billion based on an initial investment of $500 million multiplied over fifty years. This sum is equal to roughly one-third of the Honduran GDP.
Before adjudication began, Honduras denounced its participation in the ICSID Convention by written notice on February 24, 2024, effective August 25, 2024. This was in accordance with the ICSID Convention Article 71, namely, “Any Contracting State may denounce this Convention by written notice to the depositary of this Convention. The denunciation shall take effect six months after receipt of such notice.”
Honduras joined three other Western Hemisphere countries that had already withdrawn from the Convention, namely Bolivia (2007), Ecuador ( 2009), and Venezuela (2012).
The reason for Honduran actions, according to a Honduran government spokesperson, was that “ICSID incorrectly registered Próspera’s claim. Article 26 of the Convention stipulates that Member States have the possibility of joining ICSID and formulating reservations, a prerogative similarly established by the Vienna Convention on the Law of Treaties. The Honduran government decreed that it’s not possible to turn to ICSID if all domestic legal proceedings have not been pursued.”
(Article 26 states, “A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.”)
Their position was based on “Exhaustion of local remedies” (ELRs), a customary international law concept designed to safeguard state sovereignty by requiring the seeking of redress for any harm allegedly caused by a state within its domestic legal system before pursuing international proceedings against that state. However, ELR is not generally applied in most investment treaty arbitrations other than under ICSID.
An exception, while not explicitly stated in the ICSID Convention, is the concept of “futility,” which has been applied by ICSID tribunals. Briefly stated it is ELR noncompliance could be excused on the grounds that adherence to local remedies rules would be “futile.”
Had Honduras remained in the ICSID, Prospera investors might have successfully argued that pursuing local remedies in Honduras would have been “futile,” and that the judiciary was not independent and would not have had a fair hearing of the claims.
Honduras had had a prior engagement with ICSID tribunals. In Telecomunicaciones de Mexico, S.A.B. de C.V. (Telmex) v. Honduras, Temex initiated an arbitration action after the government revoked its telecommunications license, arguing that Honduras violated investment protection standards. Telmex claimed damages for the loss of future profits and sought to establish whether the state’s actions constituted indirect expropriation. The ICSID tribunal ruled in favor of Telmex, ordering Honduras to pay compensation, emphasizing the need for a transparent legal framework and the state’s obligation to respect its commitments to investors.
Instances Where “Futility” Was Applied in an ICSID Arbitration
There have been cases in which ICSID tribunals have made judgments overriding the ELR \concept, including:
- Maffezini v. Spain (2000): This case is famous for how it dealt with the exhaustion of local remedies. The tribunal ruled that the claimant was not required to exhaust local remedies because it would have been futile or ineffective due to the nature of the Spanish legal system.
- Suez, Sociedad General de Aguas de Barcelona S.A. and InterAguas Servicios Integrales del Agua S.A. v. Argentina (2010): Argentina argued for ELR, but the tribunal determined that adequate and effective remedies were not available within the local system.
- Clooney v. Kosovo (2013): The ICSID tribunal found that the claimant did not need to exhaust local remedies because the local courts did not provide an effective remedy for the alleged violations.
Other ICSID Case Examples
In recent times, the basis for investor claims has broadened:
- Methanex Corporation v. United States: In 1999 Methanex, a Canadian methanol producer, filed a claim against the U.S. under the North American Free Trade Agreement (NAFTA) Chapter 11 provisions, alleging discrimination following California’s ban on a certain additive used in gasoline. The ICSID tribunal ruled in favor of the United States, emphasizing that regulatory measures aimed at protecting health and the environment fall within the state’s right to govern.
- Philip Morris v. Uruguay: In 2010, the tobacco company claimed that Uruguay’s stringent anti-smoking laws, including graphic health warnings and restrictions on tobacco advertising, violated a Bilateral Investment Treaty. The ICSID tribunal sided with Uruguay, underscoring the importance of public health regulations in international law and the limited scope of investors’ claims against state measures aimed at protecting public interest.
ICSID Now and in the Future
In the last 25 years, arbitral disputes have increased, dealing with environmental regulations, health measures, and human rights, reflecting changing global priorities. ICSID tribunals have recognized States’ rights to legislate in a broader notion of the public interest while also ensuring investors’ rights are protected. With the expansion of global trade and investment, at the same time, international investment law has been evolving. For example, in determining appropriate parameters of corporate social responsibility, ICSID could be pivotal in finding equitable solutions that respect both investors and broader societal interests. To do so, it will need to find ways to navigate such complexities in a manner that ensures its arbitration processes remain fair, transparent, and efficient.
This includes greater clarity in spelling out when and when not “Exhaustion of Local Remedies” applies when an investor could justify its claim because it would be futile for it to seek a fair outcome in local courts.
Another area to be assessed is how long it takes to complete an ICSID adjudication and whether it might be streamlined. The average time between ICSID hearing on the merits and award at 1. 2 years (425 days). A process does exist by which parties can agree to expedite the arbitration, but both must expressly consent, and this is more likely desired by a claimant than a respondent who will see it as prejudicial. (Chapter XII (Arbitration Rule 75(1)).
What’s Next?
We are in a new phase in relationships between States and deep-pocket investors, with political and economic events quickly affecting outcomes. At the same time, the global investment climate is dramatically changing, trust in institutions is waning, and reliance on international rules and institutions is declining. Clearly, there is a need for an institution such as ICSID as long as it reliably offers fair, timely, and unbiased investment adjudication both for countries and external investors.
Even then, what if an ICSID arbitration is not to the liking of the United States? Will it follow Hondura? No reason — as of now to worry but given the tone and tenor of its actions in the last two weeks…
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — Cover Photo Credit: Wikimedia Commons.
