Six international claims against the Honduran State were submitted to arbitration at the International Centre for Settlement of Investment Disputes (ICSID), an institution that is part of the World Bank and based in Washington D.C. Some of these claims were brought forward by the investment firm Zede Próspera, and two Norwegian renewable energy firms, Scatec and Norfund. While international arbitration experts are concerned about the defense of the Honduran State, the government questions the legality of the disputes since it doesn’t recognize ICSID’s jurisdiction.
Text: Célia Pousset Photography: Jorge Cabrera y Fernando Destephen
Translated by: José Rivera
What do a US-American construction company, a group of investors from ZEDE Próspera, two Norwegian clean energy firms, a company that builds highways and a Mexican financial firm, have in common? They all sued the Honduran State at an international arbitration tribunal located in the United States. These claims were registered by the International Center for Settlement of Investment Disputes between February 2022 and May 2023.
ICSID is part of the World Bank and acts as a tribunal to settle disputes between States and international investors. During arbitration, all parties submit documentation on two instances and participate in a hearing. Then, every country that signed the agreement must abide by the tribunal’s ruling as if it were a ruling from their highest State court. Honduras is, since 1986, among the 150-plus countries that signed the agreement.
Millions of dollars are at stake. Just two of the claims, those brought forward by investors at Próspera and the Mexican company, JLL Capital, amount to more than 390 million dollars. These numbers are cause for concern, more so in the second poorest country in Latin America.
To face such a threat, the government established the Commission for Territorial Defense and National Sovereignty (Comisión para la Defensa del Territorio y Soberanía Nacional) formed by Finance Minister, Rixi Moncada, Chancellor Enrique Reina García and Commissioner Fernando García. Along with the Attorney General’s office – whose duty is to protect the interests of the State – they will define a strategy for defense.
Strategic defense or lack of defense?
In the case of the claim by Próspera for investment damages after the repeal of the Ley ZEDE (Law regarding private cities in Honduran territory), the government considered the claim illegal and decided not to participate in the process. They refused to appoint an arbitrator in defense of the Honduran State. Fernando García, presidential commissioner opposing the ZEDEs and member of the Commission for Territorial Defense and National Sovereignty, explained to Contracorriente the reasons for such refusal.
«ICSID registered a claim by Próspera incorrectly. Article 26 of the agreement states the possibility of Member States to agree to join the ICSID and their right to not submit disputes to its jurisdiction. The Vienna Convention on the Law of Treaties also affirms that prerogative bestowed on States to not submit disputes to the Centre’s jurisdiction. The Honduran government states in a decree that it’s not possible to turn to the ICSID if all domestic legal proceedings have not been pursued. So, we don’t have to appoint an arbitrator because we don’t recognize ICSID’s jurisdiction», Fernando explained.
He’s referring to Decree 41-88, published in La Gaceta (the Congressional newspaper of the Honduran government) in 1988 and recognized by ICSID as a legal framework. However, an official document that lists cases in which States did not submit disputes to the Centre’s jurisdiction doesn’t include the references García mentioned. That document states, for instance, that Guatemala «does not accept submitting to the Centre’s jurisdiction any dispute which arises from a compensation claim against the State for damages due to armed conflicts or civil disturbances», or Indonesia, a State that does not acknowledge disputes «arising from the administrative decision issued by the Regency Governments within the Republic».
It’s worth pointing out that most of the claims against Honduras can be traced back to policies implemented by the administration of Juan Orlando Hernández that have been repealed by the current administration.
This is the case of the claims by Scatec and Norfund, two Norwegian companies involved in projects to generate photovoltaic energy in the department of Choluteca (Agua Fría and Los Prados). Those companies brought forward claims against Honduras in April 2023, one year after Congress ratified the Ley Especial (Special Law) to provide energy to Hondurans as a public good under which energy companies have an obligation to renegotiate their contracts with the State energy company (Empresa Nacional de Energía Eléctrica – ENEE). The goal is to lower the purchase price and remove the financial privileges the previous administration had granted to clean energy companies.
That financial incentive to «promote» the production of renewable energy was approved in 2013. A law states under Article 6 that solar power plants will receive an additional bonus for every kWh produced. That policy was repealed by Xiomara Castro’s administration.
We contacted Scatec and Norfund by email to know the details of failed negotiations with ENEE and the exact reason for the claim, but we didn’t get a response.
Solar power plants create social and environmental issues in the Dry Corridor and, in addition, the Civic Council of Popular and Indigenous Organizations of Honduras (COPINH) denounced that those Norwegian companies are linked to David Castillo, former military and president of DESA found guilty for the murder of Berta Cáceres.
According to a source from civil society in Norway who investigated the issue, the Honduran government paid 593 million dollars to Scatec and still owes 189 million. Payments were made in December 2022, March and April 2023. However, the government has not paid bonuses and this is what Scatec is demanding despite the fact that other energy companies have accepted the cancellation of financial benefits and renegotiation of the contracts.
For that reason, Norwegian civil society is pushing for the withdrawal of the lawsuit against Honduras. Klassekampen, a media outlet, published an opinion piece that states that «it’s unacceptable that Norfund, a company funded by the State, takes legal action to impede a democratically elected government to decide about its own energy policy».
After the coup in 2009, corrupt elite groups and transnationals profited from the energy sector, at the expense of the Honduran population.
According to Fernando García, the flood of claims is a result of «decisions and policy by the previous administration linked to drug trafficking and organized crime».
«It’s a mistake» not to appoint an arbitrator
Salvadoran lawyer Luis Parada was in charge of El Salvador’s defense against four claims submitted to ICSID, two of which were brought forward by mining transnationals. He has extensive experience advising states on international arbitration. He is doubtful about the Honduran government’s defense plan: «Some states are reluctant to hire expert lawyers because it’s expensive, but the cost of not defending their case or proceeding on their own is much higher. What you’re telling me about Próspera is a mistake by the government. Any objection Honduras may have about a dispute or irregularity must be addressed in the arbitration because it will take place with or without Honduras’ participation. If representatives of the Honduran State refuse to be present, the tribunal will issue a ruling that must be abided by. The State should not be absent. That’s the worst thing that can happen to a country».
Parada gave an example: «In an arbitration initiated by the US-American mining company, Commerce Group, it was clear that ICSID shouldn’t have registered that claim, but we appointed an arbitrator and addressed our objection to the tribunal. It ruled in our favor».
There are three arbitrators: one appointed by the claimant, another by the respondent, and a third jointly appointed by both parties or by ICSID. The procedural timetable establishes a 90-day deadline after the date the claim is registered to appoint arbitrators.
If Honduras doesn’t appoint arbitrators, it’s up to ICSID to appoint them. According to Luis Parada, that’s a serious sign of weakness since «any foreign investor can take advantage of that weakness. I think that’s the reason Honduras is up against so many claims … They should’ve shown strength when the first claim was registered».
In fact, on 20 April 2023, US-American lawyer David W. Rivkin accepted his appointment by Próspera as arbitrator, while Honduras still hasn’t appointed one.
«The argument that all legal proceedings in the country should be pursued before submitting a dispute to ICSID is the result of the State not seeking qualified legal advice. CAFTA-DR establishes the process by which controversial disputes between investors and States should be resolved. The initial stage consists of consultations and negotiations which were initiated by Próspera in June 2022, but the Honduran State didn’t participate. Once this stage is completed, we bring forward the international claim», Jorge Colindres, Technical Secretary at ZEDE Próspera, explained.
CAFTA-DR is a free-trade agreement between the United States, Dominican Republic and Central American countries, and Próspera investors’ legal recourse. It doesn’t mention that affected companies should pursue all domestic legal proceedings before resorting to international arbitration. Chapter 10 of the agreement states that disputes may be submitted directly to ICSID without seeking any domestic legal action.
But according to Fernando García, «a multilateral agreement such as the ICSID Convention has legal precedence over a bilateral agreement such as CAFTA-DR, so States are allowed to refuse submitting their disputes to ICSID».
«As a matter of fact, Honduras is already part of the process as a respondent and cannot decide if it will participate or not because it’s part of CAFTA-DR. The only choice the Honduran government has is to defend its case or not to do it, either with or without specialized legal advice», Colindres concluded.
In the meantime, the community of Crawfish Rock, in Roatan, is still concerned about the construction of the Duna towers by Próspera. Luisa Connor, president of the council in Crawfish, told Contracorriente: «we expect the government to shut down the ZEDE while arbitration is underway. They should cancel the project in accordance with the repeal of the ZEDE law».
But the repeal has not come into effect because it hasn’t been ratified in the second legislation. The process usually takes three and a half years, according to a source at ICSID.
We asked Fernando García if the Honduran government has adopted the same stance on the rest of the claims, but he didn’t give a direct answer: «I rather not answer because it’s part of Honduras’ strategy to make decisions with regard to its sovereignty and under criteria that benefit the population. But if there’s no validity in one case, then the same applies for other cases if all domestic legal proceedings have not been pursued».
International arbitration, an instrument to loot countries?
The issue of State «sovereignty» is brought up the most by the Honduran government to justify its position. According to Fernando García, it’s not about «being sovereign in a capricious manner» and affirms that «our stance is founded on international law and the sovereignty of the State against special interests is at stake».
Manuel Pérez Rocha, an analyst at the Institute for Policy Studies, has been working on international agreements and arbitration for many years. He’s also part of an international solidarity group that «analyzes the situation to understand Honduras’ plan to defend its case in order to provide assistance». However, he admits that the Honduran government’s stance is not the right one: «The State has the right to regulate in favor of public interest and the environment and it’s mentioned in many free trade agreements, but chapters pertaining to investments explain that companies should receive fair and equal treatment from the State without any direct or indirect expropriation».
According to Pérez Rocha, the argument to preserve sovereignty is not valid because ICSID will not analyze government policy, but how it deals with companies, «for instance if a State decides to expropriate, ICSID will analyze how the company was dealt with and if its profits were affected. What matters is the treatment the companies receive and not if a country is sovereign or not».
After many years analyzing international arbitration claims, Pérez Rocha has come to the conclusion that ICSID is part of a «mechanism of control in favor of capital designed to evade the argument of defending a country’s sovereignty». He gives an example, the fact that mining companies automatically resort to international arbitration against Latin American countries. The report Casino del Extractivismo denounces that «companies have access to an international legal system without any precedent allowing them to bring forward abusive and expensive claims and to operate with much impunity despite many prejudices related to their operations throughout the hemisphere».
The report points out that the arbitration center such as that of the World Bank is nothing more than the illusion of justice since it cannot be compared to real courts: «Claims are brought to a tribunal composed of three well-paid corporate lawyers who often have meetings in secret and without any witnesses. This system allows foreign investors to sue sovereign States for millions and even billions of dollars».
Honduras against specialized law firms
The law firms advising the companies that are suing Honduras are among the most successful in international arbitration cases concerning investments. US-American firm White and Case advises Próspera as well as Scatec and Norfund. JLL Capital consulted the Mexican law firm García Barragán and the international law firm Clifford Chance. Contracorriente tried to get in touch with these law firms by email but they didn’t reply.
The Honduran government, on the other hand, did not confirm having consulted a law firm and, according to Fernando García, the Commission for Territorial Defense and National Sovereignty «identifies and sorts documents, and engages in international lobbying regarding foreign investment with hidden interest fees.
«I think it’s very risky and reckless that they’re defending their own case. Since lawyers at PGR don’t have any experience in arbitration cases related to investments, they will make silly mistakes», Luis Párada said and added, «Here’s an example, the first ICSID case I worked on was a claim against Argentina. They ruled in our favor, but the French water company that brought forward the claim for 300 million dollars appealed the ruling. Argentina decided to represent itself in the appeal because it wanted to save money, but the water company successfully appealed the ruling. They ended up paying 105 million dollars».
Manuel Pérez Rocha is also concerned about the Honduran government acting on its own and disregarding any help. He affirmed that it was the international solidarity network that pushed for the letter written by 33 US-American Congress representatives in favor of the Honduran government and against ICSID’s legal system. The letter highlights the abuse when corporations submit international arbitration disputes to ICSID and the power imbalance between the Honduran State and international corporations. «Instead of going through domestic courts, these complaints, handled by private arbitration tribunals made up of corporate lawyers, give corporations a disproportionate advantage», the letter states.
«As for El Salvador, it was the international solidarity network that helped the State win the mining case. We know that the claim brought forward by Próspera is a clear example of the chilling effect, a claim that halts any policy or efforts by Congress to repeal the ZEDE law. That’s why international pressure is so important. We can protest in front of the World Bank, but the government has to accept help. We tried to get in touch to offer legal advice, but they didn’t respond», Peréz Rocha said with regret.
We sent messages to Manuel Díaz, Honduras’ Attorney General, and Enrique Reina, Honduran Chancellor, to know about the Honduran State’s defense and why they rejected legal advice but they didn’t respond.
