Publish in Perspectives - Wednesday, December 9, 2015
Foreign arbitral awards are enforceable as Cuba has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Here the old Capitolio building in Havana. (Photo: Michael Oswald)
Hunton & Williams Partner Gustavo Membiela and Associate Román Ortega-Cowan. (Photos: Hunton & Williams)
Cuba has continued to incorporate an acceptance of international arbitration.
BY GUSTAVO J. MEMBIELA
AND ROMÁN ORTEGA-COWAN
Cuba’s stated goal of attracting billions of dollars in foreign investment combined with the United States’ effort to re-establish diplomatic ties with Cuba have sparked intensified interest amongst potential investors seeking to enter the Cuban market.
As with any emerging market, potential investors must balance the potential risks faced in doing business with the potential return on their investment. Cuba has sought to address potential sources of investor risk within Cuba through its enactments of various laws, including the 2013 Mariel Special Development Zone Law and the 2014 Foreign Investment Law.
Within these legal reforms, Cuba has continued to incorporate an acceptance of international arbitration, which many investors rely on in order to resolve disputes and thereby mitigate risk. Notably, in 2007 the Cuban Court of International Commercial Arbitration (CCICA) was formed in Havana and the 2014 Foreign Investment Law provides for the selection of arbitration as a mechanism for resolving disputes. These re-affirmances are in line with the approximately sixty bilateral investment treaties (“BITs”) which Cuba entered into between 1993 and 2003, and which generally provide for arbitration of investor disputes.
BITs are government-to-government agreements which are intended to encourage investment between the nationals of the two countries by creating enforceable rights for foreign investors such as fair and equitable treatment, non-expropriation, free transfer of means, and full protection and security. BITs generally offer an Investor-State dispute settlement (“ISDS”) mechanism that allows foreign investors to enforce their rights in an international arbitral forum rather than in the host State’s own courts. Under the Cuban BITs, International Centre for Settlement of Investment Disputes (“ICSID”) arbitration, which is often a preferred forum provided by BITs, is not an option because Cuba is not a signatory to the ICSID Convention. Instead, Cuban BITs generally feature a choice of ISDS options including International Chamber of Commerce (“ICC”) arbitration or ad hoc arbitration.
Consistent with the BITs, the Foreign Investment Law provides certain guarantees including non-expropriation, repatriation of profits and dividends, proceeds from liquidation at the end of the investment term, and the right to sell shares to the State or to third parties. It requires disputes involving “management inactivity”; the winding up, dissolution or termination of entities involved in the investment; and conflicts in ventures authorized by the government to carry out activities involving natural resources, public services and public works, to be heard by the Economic Chamber of the local Cuban Provincial Court. Parties to agreements entered into under the Foreign Investment Law may designate arbitration to settle any other disputes.
Foreign arbitral awards are enforceable as Cuba has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Cuba has also ratified the European Convention on International Commercial Arbitration, which is not as extensive as the New York Convention but may serve as a supplement to it in cases involving challenges of the award to be enforced.
CUBAN INVESTMENT ARBITRATIONS
In 2011, Cuba was named as a party in an ICC Investor-State Arbitration pursuant to the Chile-Cuba BIT. In 2010, the Cuban government brought criminal corruption charges against Max Marambio, a Chilean national and partner in Alimentos Rio Zaza, S.A., a 50/50 joint venture with the Cuban government and a leading producer of packaged citrus fruit juices and milk. In 2011 after Marambio was sentenced in absentia to a 20-year prison sentence, Rio Zaza was “intervened” by the Cuban government. Marambio then brought an ICC claim. On 17 July 2013, the three-member panel found that the Cuban government had breached the Rio Zaza Joint Venture Agreement and ordered the liquidation of Marambio’s stake in Rio Zaza. As for damages, the panel awarded Marambio $143 million for future loss of earnings as well as $10 million for moral pain and suffering. According to the Brookings Institution, it is unlikely that Marambio will be able to collect on this judgment.
Cuba was also a party to an Ad Hoc Inter-State Arbitration in May 2003 when Italy brought claims against Cuba under the Italy-Cuba BIT to obtain compensation on behalf of sixteen corporate investors. A 2005 jurisdictional ruling led to Italy’s withdrawal of ten corporate investor claims for lack of jurisdiction. Of the six remaining corporate investor claims, four were also dismissed on jurisdictional grounds. The tribunal found that the two remaining claims satisfied the threshold jurisdictional BIT definition of investment, and therefore considered their merits.
The first remaining claim involved Caribe and Figuerella Project s.r.l., which operated an aesthetic beauty center in partnership with a Cuban hotel and lost its ability to operate when the hotel was closed by the Cuban government due to a licensing violation unrelated to its business. The tribunal found that the cancellation of the hotel license could not be characterized as an internationally wrongful act of Cuba, and that the Italian entity was not covered by the cancellation because it was directed to the hotel. Further, the tribunal found that the hotel could not be considered a Cuban State entity and that its acts or omissions could not be imputed to the government and thereby give rise to an Inter-State diplomatic protection claim. Finally, the tribunal found that the entity failed to resort to an agreed-upon competent arbitral on its own behalf prior to Italy bringing this Inter-State action, and thereby rejected Italy’s claim for diplomatic protection.
The second remaining claim involved Finmed Ltd., which established a joint company with a Cuban entity to construct and manage a tourist resort in Cuba. A 1998 transfer of ownership occurred after the Cuban entity erroneously stated that government approval was not required. When the government later invalidated the transfer, Italy claimed that Cuba denied the new owner its rightful investment. The tribunal found that neither the erroneous statement nor any other action of the Cuban entity or the Cuban government could give rise to the injury claimed by Italy. Accordingly, Italy’s claim was denied.
Through these two cases, one can see the difficulties inherent to establishing and maintaining an ISDS claim. Foreign investors must qualify under jurisdictional and other grounds in order to benefit from BIT protections, in addition to showing the BIT was breached. Sometimes, even if a foreign investor may succeed in establishing that the BIT is breached, there may be issues in collecting on an award when you have parallel domestic proceedings brought by the State. Despite these hurdles, ISDS remains a strong option for foreign investors to obtain relief. Further, Cuba’s participation in these proceedings is a positive step in terms of providing foreign investors with an alternative forum for resolving their claims.
CUBAN COMMERCIAL ARBITRATION
Cuba, in line with many other Latin American and Caribbean jurisdictions, also appears accepting of a system of commercial arbitration. The CCICA is an independent arbitral body seated in Havana that conducts proceedings in Spanish. It supports Cuban foreign trade and investment, and does not rely on the Cuban state for administration. Moreover, the Cuban Arbitration Law (Law No. 250) “attempts to further isolate the CCICA from political influence or the appearance of political influence by (1) stating that it is bound only by the law, (2) repeatedly affirming that arbitrators and mediators are independent and impartial, and (3) including comparatively extensive codes of ethics for arbitrators and mediators.”
The Cuba Chamber of Commerce President nominates 21 arbitrators to serve two-year CCICA terms, and panels generally consist of one to three arbitrators. There is no express requirement that arbitrators be Cuban nationals. The CCICA is empowered to hear foreign investment disputes that will likely arise under the Foreign Investment Law. It recognizes the UNCITRAL Model Law principle of Kompetenz-Kompetenz in that arbitrators are empowered to determine their own jurisdiction, and it observes the separability of arbitration clauses with the caveat that local Cuban courts may hear actions challenging their validity. Notably, the CCICA honors choice of law contract provisions for local disputes but will likely apply Cuban law to Foreign Investment Law disputes regardless of the agreement. Parties may utilize the local courts to assist with procedural matters, and such concurrent actions will not affect or stay the resolution of the arbitration. The CCICA provides a model arbitration clause that includes an express good faith requirement:
The parties shall abide by this contract in good faith. Any discrepancy in its interpretation or enforcement, or any agreements arising or in connection therewith, shall be resolved through amicable negotiations or mediation if necessary.
Should the parties fail to reach an agreement, they hereby agree to submit the dispute to the Cuban Court of International Commercial Arbitration, by arbitration, subject to its Rules of Procedure.
There are several reported examples of claims which have been handled under the CCICA. In Empresa Italiana X v. Empresa Mixta Y, filed in April 2014, an Italian entity initiated arbitration against a Cuban Joint Venture and the Republic of Cuba. The complaint alleged nonpayment of EUR 242,953.84 in principal plus interest, under an agreement for the sale of materials to be used in the production of concrete. The Cuban Joint Venture attributed the nonpayment to liquidity issues based on recent changes to the Cuban governmental approval regime. The tribunal noted that Cuba is a signatory to the United Nations Convention on the International Sale of Goods (“CISG”), and that the CISG was therefore to be considered part of the Cuban legal system and applicable to the dispute. On 12 December 2014 it awarded the full principal amount of EUR 242,953.84 to the Italian entity, but denied the claim for default interest due to its punitive nature in light of language in the underlying agreement that waived any such payments.
In C.I. Dental X Ray S.A.S. (Colombia) v. Medicuba, a Colombian entity initiated arbitration against a Cuban entity under an agreement for the sale of medical products. The complaint alleged nonpayment of USD 215,027.08, and also requested the levy of interest and punitive fines. Medicuba attributed the nonpayment to a generally difficult economic situation, but did not raise allegations of extraordinary circumstances or force majeure. The CCICA found jurisdiction based on the subject agreement’s arbitration clause, which stated that should amicable negotiations fail:
[T]he parties shall abide by the findings of the Court of Arbitration for Foreign Trade, part of the Chamber of Commerce of the Republic of Cuba, in accordance with its rules.
The tribunal noted that the arbitration clause also called for the application of Cuban law, but did not quote the relevant language. The tribunal first applied Cuban substantive commercial law, and looked to the CISG, the UNIDROIT Principles of International Commercial Contracts, and the Vienna Convention for direction on points where the Cuban law was not clear or instructive.
These Awards show that the CCICA may apply an international treaty as Cuban law in cases where Cuba has ratified the treaty, and may also consider principles of international commercial law to interpret ambiguous provisions of Cuban substantive law. Moreover, the first tribunal quickly issued an award approximately eight months after the Italian entity initiated the arbitration. This openness to legal principles regarded as authoritative internationally, as well as a demonstrated ability to provide a result within a short timeframe, are hallmarks of a promising arbitration system that can streamline the dispute resolution process and thereby encourage foreign investment.
Investors that seek counsel to best understand the dispute resolution mechanisms in place prior to entering into joint ventures and other agreements with Cuba will be in the strongest position to reap the benefits of this untapped market. It is critical that investors ensure that their agreements are drafted to take advantage of the best possible protections to be heard in the most favorable fora, and that they retain advocates to navigate the courts and arbitral systems to provide the best possible defense should a dispute arise.
Gustavo Membiela, a partner at Hunton & Williams, handles a wide variety of commercial matters, focusing on cross-border disputes and transnational arbitrations, including class action litigation. Associate Román Ortega-Cowan’s practice focuses on complex transnational commercial litigation and international arbitration.