Fifty years ago Cuba celebrated the expulsion of foreign investment as both an ideological accomplishment and symbol of economic sovereignty. As the short history of the Habana Hilton Hotel illustrates, what briefly stood as the tallest hotel in Latin America when it opened its doors in 1958 soon became Fidel Castro’s temporary headquarters at the beginning of the Revolution. In 1960, the hotel was nationalized by the Cuban government and renamed the Habana Libre Hotel.
Today, Cuban laws and policies reflect a different reality, and Cuba is seeking foreign investment to bring its economy into the 21st century. Cuba’s close proximity to the United States and its miles of undeveloped and pristine beaches make the island particularly attractive for the U.S. hospitality industry. With the resumption of diplomatic relations between the United States and Cuba, U.S.-based hospitality companies increasingly are considering investing in Cuba to attract the steady stream of tourists away from competing Caribbean destinations such as Jamaica, Puerto Rico and Mexico. Starwood Hotels & Resorts, in fact, recently signed three management deals in Cuba, making it the first U.S. hospitality company to reenter the Cuban market.
Hospitality companies investing abroad, however, often face unique challenges. For example, in 2009, Venezuelan President Hugo Chavez ordered the expropriation of a Hilton-run hotel on the resort island of Margarita to help develop tourism projects within a socialist framework. Similarly, the Sri Lankan government declared ownership of a Hilton-run hotel in Colombo following a rent-related dispute with the foreign investor. U.S. hospitality companies considering investing in Cuba thus should be aware of the tools that may be available to protect their international investments.
Protecting international investments
In 2014, Cuba enacted the Foreign Investment Act (FIA), which updated the legal framework governing investments to offer greater incentives to foreign investors and provide substantive protections to foreign investments. The FIA recognizes three distinct forms of foreign investments: (i) joint venture companies with Cuban partners; (ii) international economic association contracts, which include management and professional services contracts; and (iii) 100% foreign owned companies.
Cuba also has entered into several international investment agreements (IIAs), which are international treaties between two or more countries that protect international investments. For example, Cuba has concluded 40 bilateral investment treaties (BITs), including with countries in Europe (France, Germany, The Netherlands, Switzerland, the UK), Asia (Indonesia, Vietnam), Africa (Mozambique, South Africa), and Latin America (Argentina, Chile, Panama). Notably Cuba does not have a BIT with the United States.
While the protections offered depend on the language of the specific treaty, IIAs generally protect investors against nationalization without compensation and prohibit the government from treating investors unfairly or in an arbitrary or discriminatory manner.
IIAs typically protect “investments” by “investors” of one country that are made in another country. Most IIAs broadly define “investments” as “every kind of asset,” including shares, licenses, leases, management contracts and land. An “investment” generally will cover international investments often made by hospitality companies, including hotel ownership, lease and management contracts, and franchise agreements.
A hospitality company also must qualify as an “investor” under the IIA. Most IIAs define an “investor” as a corporation that is incorporated in one of the countries that is party to the IIA.
In the event that a dispute arises with respect to a hospitality company’s international investment, most IIAs provide that the company may commence international arbitration against the foreign government. As opposed to litigating in domestic courts (which a foreign investor may perceive as biased in favor of the government), international arbitration offers a neutral forum, provides parties with more flexible procedures and may be faster. In addition, international arbitration awards may be overturned only on limited grounds and are easier to enforce abroad than domestic court judgments.
There are several examples of hospitality companies that have recovered significant sums in international arbitrations brought against governments pursuant to IIAs.
In Siag v. Egypt, Italian investors purchased a 161-acre parcel of oceanfront land from the Egyptian Ministry of Tourism for the purpose of developing the property into a tourist resort. After Egypt later seized the parcel, the investors commenced international arbitration pursuant to the Italy-Egypt BIT. The tribunal found that Egypt had violated the BIT and awarded US$127 million.
In Wena Hotels v. Egypt, a British company entered into two lease and development agreements with the Egyptian Hotels Company (EHC), a state-owned entity, to operate and manage the El Nile Hotel in Cairo and the Luxor Hotel in Luxor, Egypt. After rent-related disputes arose between the parties, the EHC took possession of both hotels by force. The claimant commenced international arbitration pursuant to the UK-Egypt BIT. The tribunal ruled that Egypt had violated the BIT and awarded US$20.6 million
Structuring, negotiating investments
In the absence of a U.S.-Cuba BIT, U.S. hospitality companies considering investing in Cuba should consider structuring their investments through foreign subsidiaries to potentially gain access to IIA protections. For example, a U.S. hospitality company may be entitled to access the protections in Cuba’s BITs with Germany, the Netherlands or Switzerland by structuring its investment through an existing European subsidiary.
Alternatively, U.S. hospitality companies should consider negotiating arbitration clauses in their contracts and joint venture agreements with the Cuban government. Cuban courts are required to give effect to agreements to arbitrate.
Conclusion
Cuba is an untapped market and a particularly attractive one for U.S. hospitality companies. However, Cuba’s complicated political and economic history may make investing in Cuba a risky proposition.
IIAs are one important tool for U.S. hospitality companies doing business abroad to mitigate risk. IIAs provide protection from political uncertainty and even counterparty risk when dealing with local partners. Moreover, if something goes wrong with an international investment due to actions by the government, IIAs may provide leverage in negotiations with government officials and ultimately recourse to international arbitration to resolve disputes. U.S. hospitality companies doing business abroad thus should consider IIAs and their ability to shift the risk-reward paradigm.
Contributed by Charles Rosenberg and Raquel Martinez Sloan, White & Case LLP, Washington, D.C.