On Friday, September 20th, the Honduran Supreme Court declared that ZEDEs are unconstitutional. Notably, this decision applies retroactively, which is an exceptionally odd outcome. ZEDEs or Zones for Employment and Economic Development were a type of special jurisdiction that devolved substantial autonomy to municipalities created under the ZEDE law. These special jurisdictions were first able to be created in Honduras after the 2013 passage of several constitutional amendments and some legislation. The ZEDE law was widely regarded as the world’s first charter city law, though no zone was established until Próspera was founded in 2017. However, the zones have been a political football in Honduras ever since. In 2022, Xiomara Castro, a member of the far-left Liberty and Refoundation party, was inaugurated as President of Honduras, after winning the 2021 election in part on a platform to eliminate the ZEDEs. The Honduran left’s disdain for the ZEDEs is effectively entirely ideological, as Próspera has brought in over $120 million in investment into Honduras, and Ciudad Morázan is home to over 140 Hondurans in the safest conditions that are available to working-class Hondurans.
In particular, the Honduran Supreme Court’s decision raises some serious questions as to Honduras’s overall suitability for foreign investment. In particular, the issue of the retroactivity of the Court’s ruling and the issue around international treaties. Próspera’s Technical Secretary, Jorge Colindres, a licensed Honduran attorney, highlighted these issues around the strangeness of the Court’s ruling. In terms of the issue of retroactivity, Jorge said “Under the Honduran Constitution (Articles 96, 185, 316) and the Law of Constitutional Justice (Article 94), the Supreme Court does not have the power to declare a law unconstitutional with retroactive effect. This is the first time in Honduran history that this happened.” He went on to highlight that Honduras has “41 previous Supreme Court rulings in which the Court has confirmed that an unconstitutionality ruling is not retroactive and cannot affect the rights that have been acquired under a law that is later deemed unconstitutional.”
In terms of the issues around international treaties, Honduras is a party to the Dominican Republic-Central America Free Trade Agreement or CAFTA-DR. According to Jorge, this treaty, as well as a bilateral investment treaty with Kuwait, binds Honduras “to preserve and guarantee the maintenance of the ZEDE special economic zones for a 50-year period.” Jorge went on to highlight that the above treaties are a part of Honduran law and that if the Court’s ruling were applied retroactively, then it “would be a gross violation of constitutional and international law, and would effectively confiscate over $150 million dollars in foreign direct investment deployed in Honduras through Próspera ZEDE, because these investments and projects are entirely dependent on the unique features of the ZEDE regime.”
Overall, Jorge believes that “The Supreme Court’s decision to declare ZEDE unconstitutional with retroactive effect is null, void, and inapplicable under Honduran law.”
Massimo Mazzone, the entrepreneur behind Ciudad Morázan also provided comment on the Court’s ruling highlighting the same issues that Jorge brought up, namely that the Honduran “ Constitution itself states that the Supreme Court can only decide ex-nunc.” Meaning that rulings cannot be applied retroactively. Massimo went on to express his concerns that the rule of law in Honduras is weak and that “the political party in charge does whatever it wants with zero respect to separation of powers.”
However, Massimo also expressed that he is confident that the ZEDEs will win any case that goes to arbitration, and he was hopeful that once the government saw the size of the arbitral award that the ZEDEs would be granted, they would be willing to come to the table to reach a compromise. As Honduras is a contracting state to the New York Convention, a United Nations agreement that facilitates the recognition and enforcement of foreign arbitration awards, any business disputes decided by suitable arbitration must be recognized by Honduran courts.
Massimo wrapped his comment on the Court’s decision by highlighting the impact that it would have on many ordinary Hondurans, saying “The real destructive impact to the country is of course not even the arbitration awards, but the loss of the opportunities that the [ZEDEs] gave to the country. But the ‘unseen,’ to use the phrase of Bastiat, rarely matters, when politicians and the mob are involved.”
As an attorney, your author must agree with both Jorge and Massimo, it is exceptional to have a judicial decision apply retroactively, and any time this happens, it is an indication of weak rule of law, at best, in the jurisdiction where it happens. Additionally, I believe that any cases that go to international arbitration are likely to be won by the ZEDEs, assuming that the contracts and other relevant agreements that the ZEDEs have with the government were properly written by the ZEDE’s attorneys, which is highly likely. I don’t believe that this dispute is over, and I do think that eventually the ZEDEs will prevail, at least in recouping their investments. However, in the nearterm, I must echo what Massimo said about the real impact of the decision. It is the regular Hondurans who were benefiting from the opportunities presented by ZEDEs who will be most directly harmed by the decision of the Honduran Supreme Court.
