Honduras Próspera Inc., St. John’s Bay Development Company LLC, and Próspera Arbitration Center LLC v. Republic of Honduras, ICSID Case No. ARB/23/2, Decision on Preliminary Objections Under Article 10.20.5 of CAFTA-DR (February 26, 2026)

Introduction

The decision in Honduras Próspera Inc., St. John’s Bay Development Company LLC, and Próspera Arbitration Center LLC v. Republic of Honduras (ICSID Case No. ARB/23/2), Decision on Preliminary Objections Pursuant to Article 10.20.5 of the Domician Republic-Central American-United States Free Trade Agreement (CAFTA-DR), dated February 26, 2025, addresses the exhaustion of local remedies requirement under Article 26 of the ICSID Convention. The ICSID tribunal rejected the Republic of Honduras’ (“Honduras”) preliminary objection (para. 140) that the claimants’ failure to exhaust domestic remedies deprived the tribunal of competence. The tribunal held, on two independent grounds, that the claimants were not obliged to exhaust local remedies before commencing ICSID arbitration.

Background to the dispute

The claimants, Honduras Próspera Inc., St. John’s Bay Development Company LLC, and Próspera Arbitration Center LLC, are incorporated under the laws of the State of Delaware. These entities were incorporated in connection with the development of Próspera ZEDE, a Zone for Employment and Economic Development (Zona de Empleo y Desarrollo Económico, or ZEDE), a form of special economic zone, established on the island of Roatán, Honduras under Honduras’ ZEDE Legal Framework.

The ZEDE Legal Framework was established in 2013, and among other things, it stipulated that the Technical Secretary may enter into legal stability agreements with investors, and expressly provided that if the ZEDE law was repealed, it would remain in effect for the term of any such agreement, which could not be shorter than 10 years.

In 2017, Honduras Próspera incorporated and applied to establish Próspera ZEDE. On March 9, 2021, Honduras Próspera and the Technical Secretary entered into an Agreement for Legal Stability and Investor Protection, which was later amended on November 18, 2021, pursuant to which Honduras allegedly agreed to provide investment protections, including stabilization of non-discrimination rights, treaty rights, and general law until January 15, 2064, or 10 years after the ZEDE law were repealed.

Following a change of government, the Honduran National Congress passed two decrees in April 2022: Decreto 32-2022, seeking to remove the ZEDE constitutional provisions from the Constitution of Honduras, and Decreto 33-2022, which repealed the ZEDE law with immediate effect.

The claimants took no action against these measures before local courts. However, on September 20, 2024, the Honduran Supreme Court, in its decision emanating from an action originally filed by the rector of the Universidad Nacional Autónoma de Honduras in July 2021, confirmed the constitutionality of Decreto 33 and additionally declared the entire ZEDE Legal Framework unconstitutional with retroactive effect.

The claimants submitted a Request for Consultations under CAFTA-DR on June 3, 2022, followed by a Notice of Intent to Arbitrate on September 16, 2022. Both went unanswered. The tribunal also recorded that Honduras notified its denunciation of the ICSID Convention on February 24, 2024, taking effect on August 25, 2024 under Article 71 of the Convention (para. 59). By Article 72, a denunciation does not affect consent given before it takes effect. On December 20, 2022, the claimants filed their Request for Arbitration before ICSID under CAFTA-DR and the Agreement for Legal Stability and Investor Protection, advancing claims for breach of the MFN, minimum standard of treatment, and expropriation provisions.

The exhaustion of local remedies question

The central issue in this preliminary phase concerned whether the claimants were required to exhaust local remedies in Honduras before commencing ICSID arbitration. Honduras grounded its preliminary objection in a declaration inserted into Decreto 41-88, by which Honduras approved and ratified the ICSID Convention. The decree provided that investors must exhaust all administrative and judicial channels of Honduras as a precondition to activating ICSID dispute settlement mechanisms (paras. 49 and 93). Honduras asserted that this constituted a valid exercise of its right under Article 26 of the ICSID Convention, which permits contracting states to condition their consent to arbitration on prior exhaustion of local remedies.

The tribunal addressed the question on two grounds.

First ground—waiver through CAFTA-DR

The tribunal accepted, in principle, that Honduras validly incorporated the Exhaustion Requirement (paras. 102 and 107) into Decreto 41-88 pursuant to Article 26 of the ICSID Convention. However, the tribunal held that the Exhaustion Requirement had been implicitly waived by Honduras when it subsequently ratified CAFTA-DR through Decreto 10-2005 (paras. 110 and 126).

The provision in issue was the waiver requirement in Article 10.18.2(b) of CAFTA-DR, commonly described as a “no-U-turn” clause, which requires investors to waive, as a precondition to submitting a claim to arbitration, any right to initiate or continue proceedings before any administrative tribunal or court of any party. The tribunal found that these two obligations are fundamentally incompatible (paras. 119 and 120). Honduras cannot, on the one hand, require investors to exhaust local remedies and, on the other, compel them to waive all domestic proceedings as a condition of accessing arbitration. Since CAFTA-DR was later in time and, under the Honduran Constitution, international treaties prevail over domestic law in cases of conflict (para. 120, citing Article 18 of the Constitution), the Exhaustion Requirement did not apply to claims brought under CAFTA-DR.

Second ground—futility

Independently, the tribunal held that even if the Exhaustion Requirement applied, the claimants were exempt from complying with it because any recourse to Honduran courts would have been obviously futile (paras. 133 and 139).

The proceeding that would have been available to the claimants, specifically, a constitutional challenge culminating before the Supreme Court, had already been exhausted. The Supreme Court had not only confirmed the constitutionality of Decreto 33 but had gone further, declaring the entire ZEDE Legal Framework unconstitutional (para. 134). Thus, given the binding effect of such constitutional decisions, any action by the claimants before the same court would have yielded the identical outcome.

The tribunal rejected Honduras’ argument that futility should be assessed solely at the time of filing the Request for Arbitration in December 2022, holding instead that the analysis must account for all facts known at the time of the decision (paras. 136 to 138). In the operative part, the tribunal rejected the preliminary objection, postponed its decision on the costs of the preliminary phase, and ordered the continuation of the proceedings (para. 140).

Conclusion

The Honduras Próspera decision is a significant contribution to the jurisprudence on exhaustion of local remedies in investor–state arbitration. The tribunal’s finding and analysis of the legal effect of the no-U-turn clause vis-a-vis an exhaustion requirement reflects a purposive and coherent reading of treaty obligations, one which prevents ambiguity and ensures investor access to treaty-based dispute resolution.

The tribunal’s alternative holding, that recourse to the Honduran courts would have been futile, further reinforces the principle that investors cannot be compelled to pursue domestic remedies that will not remedy the international wrong, as in this case, where the highest court in the host state has already conclusively determined the question against their interests.

For Honduras, the decision has immediate consequences for the several pending ICSID cases in which it has raised the same exhaustion objection. The tribunal’s reasoning in the case under review, particularly on the incompatibility between the no-U-turn clause and the Exhaustion Requirement under CAFTA-DR, is likely to carry persuasive weight in those cases where the same treaty framework applies.

Taken together, the decision carries significant implications for other states that have included or introduced exhaustion conditions under Article 26 of the ICSID Convention. It signals that such conditions may be rendered inoperative where subsequent treaty instruments contain clauses, such as the no-U-turn or equivalent waiver clauses, which are incompatible with the exhaustion requirement. States seeking to preserve such conditions must therefore exercise diligence in maintaining consistency and compatibility between exhaustion conditions and waiver clauses contained in subsequent investment treaties and domestic legislation providing for ICSID arbitration.

Note

The arbitral tribunal was presided over by Professor Dr. Juan Fernández-Armesto (a Spanish national appointed by the Secretary-General) and comprised David W. Rivkin (a United States national appointed by the claimants) and Professor Raúl E. Vinuesa (an Argentine and Spanish national appointed by the Secretary-General).

Author

Ifeoluwa Oyemade is a Nigerian-qualified lawyer and holds a Master of Laws (LL.M) in International Commercial Arbitration from Queen’s University, Kingston, Ontario, Canada.