Source: https://www.ascecuba.org/asce_proceedings/cat-on-a-hot-tin-roof-the-status-of-current-foreign-investors-in-a-post-transition-cuba/
Timestamp: 2019-04-22 02:58:34+00:00

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Cuba’s efforts to attract foreign investment have resulted in the inflow of substantial amounts of foreign capital by way of FDI. In the event of a political and economic transition in Cuba from a socialist regime to a free-market society, these investments may come under attack by a successor Cuban government as well as from private parties in Cuba and abroad. This paper analyzes the future risks that current investors in Cuba may face under a non-socialist government and the extent to which the provisions of Cuban law (both current and future) may determine the outcome of challenges to the rights of these current investors.
A joint venture is a legal entity consisting of one or more Cuban parties and one or more foreign investors. The contributions of each participant and the breakdown in stock ownership are agreed upon before governmental approval is granted, and are reflected in the joint venture agreement and the decree approving the joint venture. The Cuban party generally supplies real estate and labor, while the foreign investor provides capital, technical resources, and know-how (both technical and managerial). The joint venture is legally independent from the investing entities, and must register with the Cuban Chamber of Commerce to attain official status.7 Profits earned by the joint venture are distributed to the investors according to their respective ownership share.
The formation of international economic associations (“IEAs”) does not require the establishment of a legal entity separate from the contracting investors. IEAs are normally established because the contracting parties can meet a common objective through cooperation. Each party agrees to make specific contributions to the IEA, but no capital is set aside. The parties must, however, agree to a profit sharing arrangement and a tax payment plan. The two most common forms of IEAs are production contracts and management contracts (the two forms of FDI formally sanctioned by the Cuban government in December 2000).
All modalities of foreign investment in Cuba could potentially be subject to adverse action following a political transition in the country. However, joint ventures are the investment mechanisms most exposed to such actions because in joint ventures the foreign investor often develops facilities or otherwise spends money directly in the country and is thus more vulnerable to adverse governmental or private action.
In another effort to provide assurances of legal protection to foreign investors, Cuba has signed over 60 bilateral investment agreements (“BITs”) with other countries.10 The BITs, which are intended to protect and promote foreign investment, address four main topics: (1) conditions for the approval of foreign investments, (2) state treatment of foreign investors, (3) expropriation, and (4) resolution of disputes between the foreign investor and the host country. The BITs that Cuba has negotiated generally follow the international norms and standards for such agreements.
Nobody can predict with certainty how a post-transition Cuban government will treat existing foreign investments on the island. Nevertheless, there are several threats that could be faced by foreign investors. Whether such threats would materialize is in large part a function of the attitudes and policies of a posttransition government.23 The threats that could be faced by current foreign investors can be divided into two broad categories: state actions and private actions. 24 Adverse state actions might go as far as the confiscation of income producing properties in which foreign investors have interests. But even if the post-transition government does not engage in outright confiscation, it could nevertheless issue laws and regulations that increased the cost or difficulty of doing business in Cuba by those currently investing in the island.25 Furthermore, despite existing contractual relationships between enterprises controlled by the Cuban government and foreign investors, a transition government might repudiate those relationships or seek to terminate them. Finally, as the posttransition Cuban government seeks to resolve the outstanding expropriation claims, current foreign investors might become dispossessed of their assets or, if keeping the subject property, be assessed taxes or fees to finance the resolution of outstanding expropriation claims. The post-transition government might also, either to raise more revenue or out of a desire for retribution, increase taxes in a way that would have a direct negative effect on the bottomline of foreign investors.
Current foreign investors may also face threats from private actors who might lodge legal claims and challenges against them based on various legal theories. For example, persons or enterprises whose property was expropriated by the Cuban government and has since been transferred to enterprises involving current foreign investors, might seek compensation directly from investors in the form of rents or damages. In addition, Cuban employees of current foreign investors might seek damages for alleged violations of fair labor standards, and other parties injured by the actions of investors might resort to the courts to seek redress for harms allegedly suffered at the hands of such foreign investors.
Regardless of whether these potential adverse actions by the government or private parties are successfully litigated or otherwise resolved, their assertion would likely result in the imposition of substantial legal and commercial costs upon affected foreign investors.
Expropriation or Confiscation: The potential expropriation or confiscation26 of foreign investor property after a democratic transition in Cuba has been raised in two contexts: first, in connection with claims raised by former property owners for the restitution of their expropriated assets; and second, as a punitive measure in retribution for the perceived collaboration of the investors with the current regime.
Settlement of Property Claims: As discussed above, in the first few years of the Revolution, the Cuban government seized nearly all private property in the country, and provided no compensation for the takings. As a result, there are outstanding claims by former property owners that could compete with the rights of foreign investors who have entered into joint ventures or other forms of investment that use or benefit from the expropriated properties.27 Depending on what approach the Cuban government takes to addressing the pending expropriation claims, foreign investors could see their interests in joint ventures and other investment vehicles subject to expropriation by Cuba. Thus, for example, if the Cuban government decides to grant restitution to the former property owners of the assets taken from them in the 1960s, such a solution would require expropriation of the assets now held by some joint ventures with foreign investors.
There are conflicting views on whether Cuban law and international law principles require the restitution of expropriated assets to their former owners.28 Whichever viewpoint is adopted, however, it is likely that in a number of instances the state will decide to return to the former owners title to a property that is the subject of a joint venture or other investment vehicle involving a foreign investor. In those instances, the state will have to provide adequate compensation to the investor in the manner described below.
Punitive Expropriations: While undeniably the Cuban government has the power (within certain limits) to expropriate the assets of private parties,29 the Cuban Constitutions—both before and after the Revolution—require that any such expropriations be accompanied by the payment of adequate compensation. 30 The same result is dictated by the express provisions of Law 77.31 Therefore, should a transition government in Cuba decide to expropriate the assets of foreign investors, it would have to develop measures to compensate the investors for the taking of their property.
Confiscation: The discussion above suggests that the taking of the property of current foreign investors by a Cuban transition government, if it could be lawfully accomplished, would have to be accompanied (or followed in short order) by the payment of adequate compensation. Another question is whether there is any basis under Cuban or international law for a successor government to confiscate the assets of foreign investors and offer no compensation to them.
Current33 and pre-Revolutionary34 Cuban law prohibit confiscation of property except as punishment for illegal behavior. Indeed, a number of laws were enacted by the Cuban Revolutionary Government since its advent to power in 1959 confiscating the property of whole classes of people for alleged criminal activities.35 However, the Cuban government has not ordered the outright confiscation, under color of law, of the assets of individuals not charged with a crime against the state.
Another theory that has been propounded is that underlying the Helms-Burton Act.39 Section 4(13) of that statute states that a person “traffics” in confiscated property if “that person knowingly and intentionally—.
These definitions are used in Title III of the Helms- Burton Act to impose sanctions on third country nationals (i.e., foreign investors in Cuba) who do business that involve properties expropriated from U.S. nationals. Thus, in Section 301,42 Congress finds that “it is in the interest of the Cuban people that the Cuban Government respect equally the property rights of Cuban nationals and nationals of other countries.”43 The Congress also makes the following additional findings in Section 301 of the Act:.
Based on these findings, Section 302 makes any person that “traffics” in property confiscated by the Cuban Government on or after January 1, 1959, liable for money damages to any U.S. national who owns the claims to such property and grants U.S. district courts jurisdiction over such actions where the amount in controversy exceeds $50,000.50 Thus, subject to certain limitations,51 the Helms Burton Act imposes strict liability on third parties held to be trafficking in confiscated properties in Cuba against which a U.S. national holds a certified claim. Assuming jurisdiction can be asserted over the defendant under the rules of United States courts, all that the plaintiff needs to establish to prove liability is that the defendant was “trafficking” in the properties at issue after plaintiff’s right of action accrued under the statute, and that the last act of trafficking occurred two years or less before the initiation of the action.
It is interesting, however, that in defining “trafficking” in “confiscated property” and establishing judicial remedies in the United States against third-country investors doing business that involves expropriated properties in Cuba, the Helms-Burton Act does not cite to any Cuban domestic law, or to any international law principle that proscribes the conduct of such third parties; to the contrary, the above cited finding 8 in Section 301 recognizes that “the international judicial system, as currently structured, lacks fully effective remedies for . . . for unjust enrichment from the use of wrongfully confiscated property by governments and private entities at the expense of the rightful owners of the property.” Whereas, as discussed below, unjust enrichment could arguably be raised in Cuba as a cause of action for damages against third country investors by the state or former owners of the property involved in the investment, there appears to be no basis in international or Cuban domestic law for confiscating the assets of such investors.
Indeed, the activities of most foreign investors in Cuba (e.g., participating in the building and operation of hotels) will be shown to be common business acts, sanctioned by the Cuban laws and encouraged by the Cuban government. Such commercial acts may not be easily associated directly with oppression, human rights abuses or other political crimes by the host government. For that reason, confiscation of the investors’ property just for having participated in economic activities in the country would appear to be a punitive confiscation contrary to Cuban law as well as international practice.
Thus, the existence of these BITs provides some assurance to investors from the countries that signed the BITs with Cuba that a transition Cuban government will not take measures that adversely affect the investment without providing adequate compensation and giving serious consideration to the consequences of such a step.
Civil or Criminal Actions by the State: In addition to (or instead of) actions against the foreign investors directed at terminating its business activities, the state could bring a tort action against foreign investors for unjust enrichment or for damages (such as environmental harm) caused by their activities in Cuba. Alternatively, the state could bring criminal prosecution against the investor on some theory that links its activities with unlawful acts of the current government or constitutes criminal behavior under Cuban law.
Civil Actions: Chapter V of Title I of the Civil Code provides for recovery of damages for unjust enrichment, which occurs when “value is conveyed from one party to another without legitimate cause.”62 The party who is guilty of unjust enrichment must provide restitution to the other party, including returning any property taken, providing indemnification for the property’s value if such return is not feasible, providing compensation for the benefits or gains achieved from the misappropriation of the property, and paying damages as appropriate.63 The party guilty of unjust enrichment must also account for the loss or damage of the property from the moment he became aware that he had no right to the property.64 The Code makes no distinction whether a cause of action for unjust enrichment would be available to the state as well as to private parties, and there is no reason to believe it would not be available to both.
If the state sought to pursue an unjust enrichment action against a foreign investor it would have to establish, however, that the benefits reaped by the foreign investor through its activities in the island were attained “without legitimate cause.” Given that such benefits were obtained through activities undertaken in partnership with the state and pursuant to explicit governmental approval, it might be difficult for the transition government to establish that there was an inherent illegality to the acts of the investor without enacting ex-post facto laws declaring such agreements and approval null and void after the fact. As discussed above, the state’s ability to issue such ex-post facto laws to the detriment of a former (or current) business partner is doubtful.
The prospect of bringing criminal prosecution against current foreign investors might satisfy an urge to seek retribution for moral wrongs against the Cuban worker.71 However, pursuing such a course of action would require the government to repudiate, after the fact, the legal and business framework under which current foreign investments were made and find the actions of the investors to be not only morally reprehensible but indeed criminal. Apart from the legal difficulties pointed out above, criminalization of conduct that was sanctioned by the laws at the time it was undertaken might seriously undercut the transition government’s efforts to create a stable political and legal environment for foreign investment, with clear legal rules, robust protection of property rights, and a firm commitment to and respect of the rule of law, necessary ingredients for a welcoming business climate.
Increased Taxation: A transition Cuban government will likely re-evaluate Cuba’s current tax policies72 and modify them to remove their rigidity and better align them with the government’s policy objectives. 73 At the time this is done, the government may decide to subject all foreign investors (both current and those who start doing business in Cuba after the transition) to the same tax treatment.
On the other hand, the transition government might decide that it would be unfair to have those who profited economically from the exploitation of the Cuban people during the previous regime to be placed on an equal footing with post-transition investors. 74 Under such “worst-case” scenario (from the current investors’ standpoint), current investors would be taxed more heavily than post-transition investors in an effort to recapture some of the unjust gains derived by pre-transition investors. Adverse tax treatment could take, for example, the form of higher tax rates, lower tax credits, denial of deductions and exemptions or, conversely, failure to grant current investors tax benefits for which post-transition investors could qualify, such as tax deferrals, lower applicable tax rates, higher tax credits, greater deductions, and tax holidays.75 However, a survey of the literature turned up no documented instances in which a successor government chose to discriminate economically between pre-transition and post-transition foreign investors. Of course, the transition Cuban government could nevertheless decide to set such a precedent. But such an arguably backward-looking76 action by the transition Cuban government is not likely to go unchallenged by the affected foreign investors who might charge the Cuban government with violating its commitments against discriminatory treatment of foreign investors under its various contractual agreements and BITs.
On the granting of investment tax incentives, some Eastern European countries such as Hungary, Poland, and the Czech Republic initially opted, during their transitions, to grant tax incentives for foreign investors in the hopes of stimulating foreign investment. 77 Those tax incentives, however, turned out to be rather short-lived.78 In fact, many have argued that the granting of preferential tax treatment to foreign investors actually has a negligible impact on attracting foreign investment79 in addition to depriving the successor government of much-needed revenues to finance post-transition projects. Therefore, it is possible that a transition Cuban government will determine that its short-term need to raise the necessary tax revenues to finance a variety of post-transition projects—such as the resolution of expropriation claims—outweighs any potential negative economic effect on current foreign investors.
Obviously, current foreign investors would advocate for a tax policy that subjects them to the same treatment as other investors. And if the authors had to make a policy recommendation, it would be that equitable tax treatment (whether or not the government’s tax policy involves tax incentives) for all investors is the approach that reflects the soundest economic development policy and the one most consistent with the obligations that Cuba has assumed by entering into BITs with a large number of foreign countries.
Claims by Former Property Owners: Former property owners whose assets were expropriated by the Cuban government without compensation could in principle assert a number of claims against foreign investors who have conducted business utilizing or otherwise involving the expropriated assets. Such claims could include, among others, tort claims for damage or diminution of value of the property and unjust enrichment. 80 Both of these causes of action are recognized by the current Cuban Civil Code.
A former property owner who seeks to bring a tort claim against a foreign investor who has made use of the investor’s property would have to overcome several obstacles. First, if the expropriation by the Cuban government was effective in passing title to the state,84 the former property owner would be limited to whatever compensation is granted by the transition government under its program for the resolution of outstanding property claims. Since one of the main objectives of a claims resolution program is to end as quickly as possible all litigation relating to the expropriated property, the program may well bar actions by the former owners against third parties such as foreign investors. Second, even if the expropriation by the state was unlawful and legally ineffective, the property owner may not have a claim against the foreign investor, since the investor may have acquired his interest in the property in good faith (an open legal and factual issue) and his conduct may have been lawful under Law 77 and other laws and decrees in effect at the time of the investment. Third, the former property owner would need to prove as a matter of fact what damages he suffered as a result of deterioration or other impairment of his property, and establish that those damages were caused by the acts or omissions of the investor—potentially a difficult task, since most foreign investments have occurred in the last decade, and the expropriations occurred over forty years ago, so the properties in questions had been under the sole control of the state for at least three decades prior to the initiation of the foreign investor’s activities.
For these reasons, it appears that a tort action by a former property owner against a foreign investor for damage or diminution in value of his property would encounter serious difficulties.
Unjust Enrichment: A cause of action for unjust enrichment by a former property owner against a foreign investor who has used the property is based on the assumption that such use was without legitimate cause, i.e., unlawful. Therefore, the first obstacle that a former property owner would have to overcome as a matter of law would be a determination whether the investment activity, in all cases sanctioned by the current Cuban government and in most cases undertaken under an agreement with a government enterprise or instrumentality, was unlawful. In addition, as discussed above, suits by former property owners against third parties may be barred by the claims resolution law. Finally, the former owner would have to overcome evidentiary obstacles such as proving the amount and basis of his damages, including the amount of “rent” he would be owed for the use of the property.
From the foregoing, it appears that suits by former property owners against foreign investors arising out of the investors’ use of the property would have a number of legal and factual obstacles to overcome. Current foreign investors should however be aware that such suits are possible and, unless barred by law, likely in the event of a transition to a government that permitted such suits to be prosecuted.
For example, Cuba has recently signed contracts with over a dozen foreign companies to prospect, explore, and if significant oil deposits are discovered, drill for oil off Cuba’s waters.86 Although this form of foreign investment is potentially very profitable, it is also quite risky from a liability perspective.
While, for the reasons discussed above, such suits by the Cuban Government or individual employees against current foreign investors may fail for legal and factual reasons, the fact that they are being proposed should give some pause to current foreign investors. The mere filing of lawsuits relying on the above theories of liability is likely to result in the imposition of significant legal costs to foreign investors in defending such lawsuits. Furthermore, the lawsuits may be filed (as is likely to be the case) during the early stages of the transition when the Cuban judiciary might still be highly politicized and not yet a truly independent arbiter of the rule of law. Such timing might result in the fate of these lawsuits being determined, not by enduring legal principles, but by the prevailing political winds at that particular moment in the transition.
Effects of Existing Legislation Despite the inherent business risks with which current foreign investors are faced vis-à-vis their investments in Cuba, foreign investors could take some solace in knowing that there are several legal regimes in place with fairly well-defined rules that provide protection to their economic interests against state action.
Secondly, current foreign investors are protected at the statutory level. Law 77 provides foreign investors with additional guarantees against uncompensated takings. Attempts to scale back the protections afforded by Law 77 are likely to run into roadblocks, not the least of which is Cuba’s historical prohibition against ex post facto laws. Furthermore, even if a successor Cuban government were to claim, as a reason for prematurely terminating a contractual relationship with a foreign investor, that the foreign investor is in default of its contract with the Cuban government, Cuba’s Civil Code contains an implicit provision for partial compensation in the event of a declared breach of contract.
Finally, current foreign investors are protected at the international agreement level as intended third party beneficiaries of the BITs that Cuba has negotiated with over sixty (60) different countries. Not only do these BITs generally provide foreign investors (whose home countries have entered into BITs with Cuba) with protections against outright expropriation of their productive assets, but they also provide international dispute resolution mechanisms for conflicts between foreign investors and the Cuban government—usually involving a neutral third party as the ultimate arbiter of the dispute.
Therefore, from a strictly legal standpoint, the rights of current foreign investors are reasonably well defined and protected under current Cuban law, and thus a successor Cuban government attempting to undermine these legal protections will be facing an uphill battle.
There is no doubt that negative sentiment exists, at least among some members of the Cuban American community and the U.S. Government, against foreign investors who do business in Cuba and thereby provide “badly needed financial benefit, including hard currency, oil and productive investment and expertise to the current Cuban Government.”106 On the other hand, it is undeniable that foreign investors have made a significant contribution to the Cuban economy and, barring unexpected developments, are likely to do so up to and beyond the country’s transition to a free-market society.107 Thus there is a substantial policy question whether the prosecution of potential government and private claims against the investors and the taking of other adverse actions is prudent against the possibility that such actions may quickly drive the investors out of the country.
Another policy question is whether taking actions against foreign investors will be consistent with Cuba’s anticipated need during the transition to stimulate foreign investment from the United States and other countries. Policies to create a positive foreign investment climate108 may be frustrated if a perception develops that Cuba does not provide reliable protection to investors.
There is also the issue of respect for the rule of law and the extent to which activities which are lawful at the time undertaken can leave the actor open to reprisals later on if there is a change in law or policy. Foreign investors currently in Cuba have come into the country under the auspices of Law 77 and, in most cases, also under the protection of the BITs that Cuba has negotiated with their respective countries. Governmental action against these investors would arguably violate the BITs and might involve ex post facto punitive laws—an undesirable precedent for a country seeking to move towards democracy and respect for the rule of law.
The ethics of investing in Cuba under current conditions and arguably lending support to the Castro regime are open to debate and such debate is likely to continue after Cuba makes a transition to a free-market society. From the legal and economic viewpoints, however, it appears that no solid bases exist for a transition government to take adverse action against current investors and doing so might be detrimental to the country’s economy and against public policy.
Individuals (former property owners, enterprise employees, and others) may have colorable grounds for taking legal action against current investors. Investors should be aware that they run the risk of multiple private lawsuits during the transition period. The outcome of such lawsuits is uncertain and may be dictated, not only by the laws in effect at the time, but by the political situation at the time the actions are brought. Investors need to take these risks into consideration when formulating strategies for business activities in Cuba under the current regime and after the transition.
1. Cuba’s need to attract FDI is a direct consequence of the disappearance of Socialism in Eastern Europe. Prior to 1990, Cuba depended on the Socialist bloc (mainly the Soviet Union) for over 80% of exports and imports, and for the financing of the economy through loans and subsidies. The demise of the Socialist bloc had a catastrophic impact on Cuba, which suddenly lost is markets, its sources of supply, and its credit and financing mechanisms. Banco Central de Cuba, Cuban Economy in the Special Period 1990-2000 (hereinafter “Special Period”) at 7-8.
2. The history of the expropriation process is described in detail in Michael W. Gordon, The Cuban Nationalizations: The Demise of Property Rights in Cuba 69-108 (1975) (hereinafter “The Cuban Nationalizations”). For a more detailed discussion of the expropriation claims issue, see Matias Travieso-Diaz, The Laws and Legal System of a Free-Market Cuba (hereinafter “Laws and Legal System”), Quorum Books, 1997, Chapter 4. The expropriations led to the submittal of claims by the affected parties before their respective governments. In the United States, a federal agency known as the Federal Claims Settlement Commission (“FCSC”) received evidence of, and assessed claims by, thousands of U.S. nationals whose properties in Cuba were confiscated. The FCSC certified 5,911 claims with a total value of $1.8 billion in 1960 dollars. Investments by nationals of other countries amounted to $350 million by Spanish nationals and approximately $10 million each for nationals of France, Canada and Switzerland. Michael W. Gordon, The Settlement of Claims for Expropriated Foreign Private Property Between Cuba and Foreign Nations other than the United States, 5 Law. Am. 457 (1973).
4. Ley Número 77 de la Inversión Extranjera, Gaceta Oficial, September 6, 1995. For an online English translation of Law 77, see http:/ /www.latintrade.com/newsite/content/cprofiles/data-ext.cfm?d=2001&c=9.
5. Law 77, Art. 12.
6. Acuerdo No. 3827 (December 6, 2000), Executive Committee, Cuban Council of Ministers, Foreign Trade No. 4/2001 (Havana, April 2001): Cuba (hereinafter “Foreign Trade”) at 43-44. These forms of “investment” are not altogether new, since a number of joint ventures have in the past included this type of activity. (For example, in the tourism sector, many of the “joint ventures” have been in fact management contracts in which the foreign participant has provided mainly management know-how and has become responsible for managing the operations of the tourist facility.) See Joan Marsan, Cuba Now or Later, Hotels (November 1999), available online at http//www.hotelsmag.com/1199/ 1199cuba.html. According to the degree that legitimized these forms of investment, they were officially endorsed because they were shown in practice to provide “favorable economic results for each of the contracting parties,” thus meriting legal recognition.” Foreign Trade at 43.
7. Resolution No. 26 of the Cuban Chamber of Commerce, issued on December 5, 1995, created a Registry of enterprises with foreign participation. Being listed in that Registry is a prerequisite to doing business in Cuba. Resolución No. 26—Reglamento del Registro de Inversiones Extranjeras, Cámara de Comercio de la República de Cuba, Gaceta Oficial (Dec. 15, 1995), p. 504-506.
8. Law 77, Art. 3, 5.
9. Law 77, Art. 3.
10. Foreign Investment in Cuba, Centro de Promocion de Inversiones, MINVEC, January 2002, available at http://www.wdsweb.com/ cuba2002/ppt/senti_Fri.ppt (hereinafter “Foreign Investment”); see also, Cuban Embassy in Syria, La Inversion Extranjera, available online at http://www.embacubasiria.com/a000031s.html. For a detailed discussion of Cuba’s BITs, see Matias F. Travieso-Diaz and Jorge Pérez-López, The Contribution of BITs to Cuba’s Foreign Investment Program, 32 Georgetown L. & Pol. Int’l Bus. J. 529 (2001) (“Cuba’s BITs”). Capital-exporting countries negotiate BITs to protect the economic interests of their nationals and create mechanisms for the resolution of investment disputes, so as to reduce the possibility of arbitrary action by the host country. United Nations Conference on Trade and Development, Bilateral Investment Treaties in the mid-1990s (Geneva: UNCTAD, 1998), p. 10.
11. For a detailed discussion of the current status and outlook of foreign investment in Cuba, see Matias F. Travieso-Diaz and Charles P. Trumbull IV, Foreign Investment In Cuba: Prospects and Perils, 35 Geo. W. Univ. Int’l L.R. 903 (2003) (hereinafter “Prospects and Perils”).
13. FDI in Cuba was reported as dropping to $38.9 million in 2001 from over $400 million the year before. Foreign Investment in Cuba falls, EU Wants Reform, Reuters, July 8, 2002.
14. As of 2002, Cuba reported that there were slightly over four hundred foreign business concerns operating in the country. Paolo Spadoni, “Foreign Investment in Cuba: Recent Developments and the Role in the Economy,” in Cuba in Transition—Volume 12 (2002) (hereinafter “Spadoni”), available online at http://lanic.utexas.edu/project/asce/pdfs/volume12/spadoni.pdf. However, by the end of 2003 the total number had dropped to 342. Number of foreign concerns doing business in Cuba down for 2003, CUBANET (March 19, 2004), available online at http://www.cubanet.org/CNews/y04/mar04/23e5.htm.
17. Robert David Cruz, Foreign Direct Investment in Post-Castro Cuba: Problems, Opportunities and Recommendations, Institute for Cuban and Cuban-American Studies, University of Miami (2003) at 4.
18. Oficina Nacional de Estadísticas, Anuario Estadístico de Cuba, August 2001 (hereinafter “Anuario Estadístico”). Foreign investment figures vary widely, in part because many estimates include projected or proposed investments in addition to those in place. Carmelo Mesa-Lago, “The Cuban Economy in 1999-2001: Evaluation of Performance and Debate on the Future” in Cuba in Transition—Volume 11 (Aug. 2001), 4 (hereinafter “Mesa-Lago 2001”).
19. Everleny Pérez Villanueva, Cuba: An Overview of Foreign Investment (February 2002), available online at http://www.carleton.ca/ economics/cep/cep02-04.pdf (hereinafter “Pérez 2002”) at 9.
22. See, e.g., Matias F. Travieso-Diaz and Steven R. Escobar, Cuba’s Transition to a Free-Market Democracy: A Survey of Required Changes to Laws and Legal Institutions, 5 DUKE J. COMP. & INT’L L. 379 (1995) (“Law Changes”) for a discussion of the key legal reforms that will need to be implemented during the early phases of Cuba’s transition.
23. The nature of the threats to foreign investors and the extent to which investors can protect themselves from adverse governmental action will depend in good measure on the type of transition that Cuba experiences. If the transition is gradual and takes place over a period of many months or years, the investors might be able to take defensive measures such as discontinuing further investments and seeking (if feasible) to liquidate their investment. 24. This article addresses only those actions taken by the state or private parties within the confines of the law. In a turbulent transition environment, there could be unlawful acts of individuals against the economic assets or the persons of foreign investors. Protection against such unlawful acts can only be expected if the transition government ensures that the rule of law prevails in the country. See Law Changes at 393-94, 408-09.
25. This practice is often referred to in the literature as “creeping expropriation” and was engaged in by the Cuban government in the 1959-60 period as a prelude to the actual expropriations that followed shortly thereafter. See The Cuban Nationalizations.
26. Confiscation is the seizure of private property by the state without compensation, usually to punish the person whose property is seized for who he is or for what he has done. Confiscations are ordered for political, religious, legal or other reasons relating to the person subjected to the taking, and not to the property itself. For example, forfeiture is confiscation of specific property or deprivation of rights as punishment for a breach of contract or a crime. BLACK’S LAW DICTIONARY 778 (Rev. 4th Ed. 1968). Expropriation, on the other hand, is the taking by the state, subject to compensation, of specified property for some public purpose, with the taking being independent of the acts or identity of the owner. The state, may for instance, reclaim private land for public use by eminent domain and thereby expropriate the land from its owners. Id. at 616.
27. For a discussion of potential approaches to resolving the expropriation claims by U.S. nationals and others, see Matias F. Travieso- Diaz, Some Legal and Practical Issues in the Resolution of Cuban Nationals’ Expropriation Claims Against Cuba, 16 U. PA. J. INT’L BUS. L. 217 (1995); Matias F. Travieso-Diaz, Alternative Remedies In A Negotiated Settlement Of The U.S. Nationals’ Expropriation Claims Against Cuba, 17 U. Pa. J. Int’l. Bus. L.659 (1996).
29. Art. 25 of the current (1992) Cuban Constitution states: “Se autoriza la expropiación de bienes, por razones de utilidad publica o interés social y con la debida indemnización.” (Expropriation of assets is authorized, for reasons of public utility or social interest, and subject to proper indemnification.) A transition government would therefore have to make some public interest showing in order to justify the expropriation of the assets of foreign investors.
32. The current Cuban Constitution states in Art. 61 that “Las leyes penales tienen efecto retroactivo cuando sean favorables al encausado o sancionado. Las demás leyes no tienen efecto retroactivo a menos que en las mismas se disponga lo contrario por razón de interés social o utilidad publica.” (Penal laws can be given retroactive effect if they are favorable to an indicted or convicted person. All other laws may not have retroactive effect unless the laws stipulate otherwise for reason of social interest or public utility.) Art. 22 of the 1940 Constitution had an even stronger prohibition against ex-post facto laws: “No other laws [other than penal laws favorable to the offender] shall have retroactive effect unless the law itself so provides for reasons of public order, social utility, or national necessity, as may be expressly stipulated in that law by a vote of two-thirds of the total number of members of each legislative body. If the basis of the retroactivity should be impugned as unconstitutional, it shall be within the jurisdiction of the tribunal of constitutional and social guarantees to decide upon the same, without the power of refusing to render decision because of form or for any other reason. Art. 22 goes on to state that “In every case the same law shall concurrently establish the degree, manner, and form of indemnification for injuries, if any, and of retroactivity affecting rights legitimately acquired under the protection of prior legislation.” Moreover, “[t]he law giving the protection afforded by this article shall not be valid if it produces effects contrary to the provisions of Article 24 of this Constitution [which prohibits uncompensated expropriations].
35. Law 78 of February 13, 1959, published in Gaceta Oficial, February 19, 1959; Law 438 of July 7, 1959, published in Gaceta Oficial, July 7, 1959; Constitutional Reform Law of December 22, 1959, published in Gaceta Oficial, December 22, 1959; see generally, Agustin de Goytisolo, On the Continued Good Standing of Pre-Castro Legal Entities: Ubi Lex Non Disinguit, . . . Nec Nos Distinguere Debemus, paper presented at the 6th Annual Meeting of the Association for the Study of the Cuban Economy, August 8-10, 1996, available online at http://lanic.utexas.edu/la/cb/cuba/asce/cuba6/59Goytisolo.fm.pdf.
36. Sophia von Rundstedt, The Restitution of Property After Communism: Germany, the Czech Republic and Poland, 4 Parker Sch. J. of Eastern Eur. Law 261, 269 (1997).
37. Pat K. Chew, Political Risk and U.S. Investments in China: Chimera of Protection and Predictability, 34 Va. J. Int’l L. 615, 626-27 (1994).
38. von Rundstedt, at 281-82. It has been held by U.S. courts that Cuba’s de facto confiscations of the assets of U.S. companies operating in Cuba violated international law because Cuba carried the expropriations for purposes of retaliation against the U.S. government. Banco Nacional de Cuba v. Sabbatino, 193 F.Supp. 375, 384 (S.D.N.Y. 1961), aff’d, 307 F.2d 845 (2d Cir. 1962), rev’d on other grounds, 376 U.S. 398 (1964); Banco Nacional de Cuba v. Farr, 272 F.Supp. 836, 838 (S.D.N.Y. 1965), aff’d, 383 F.2d 166, 184-85 (2d Cir. 1967), cert. denied, 390 U.S. 956 (1968).
40. Id., Section 4 (13)(A).
42. 22 U.S.C. §§ 6081-6085.
43. 22 U.S.C. § 6081, finding number 5.
44. Id., finding number 6.
45. Id., finding number 7.
46. Id., finding number 8.
47. Id., finding number 9.
48. Id., finding number 10.
49. Id., finding number 11.
50. 22 U.S.C. § 6082.
51. Suits by certified claimants against third parties are subject to a $50,000 floor on the amount in controversy; that floor is computed on the principal value of the claim “exclusive of interest, costs, and attorneys’ fees.” Section 302(b), 22 U.S.C. § 6082(b). Another limitation on the ability of certified claimants to sue is a two-year statute of limitations. Suits under Title III of the Helms Burton Act are currently being held in abeyance under authority granted to the President by Section 306(b)(1), which allows the President to suspend the right to bring an action under Title III for discrete periods of six months by determining and reporting in writing to the appropriate congressional committees that such suspension is necessary to the national interests of the United States and will expedite a transition to democracy in Cuba.
54. As noted earlier, both Art. 25 of the current Cuban Constitution and Law No. 77 recognize the right of the State to expropriate foreign investments, but only “for reasons of public utility or social interest” and subject to the payment of compensation for “the commercial value” of the property being expropriated.
55. The various BITs include different descriptions of the compensation formula, but they all have in common the requirements that the payment must be prompt and adequate and based on the fair market value of the investment at the time of the taking.
56. This does not necessarily mean that the investor would prevail in the dispute or that Cuba would be required to pay damages for the taking of the investor’s property. The question whether foreign investors in Cuba have acquired good title to their assets is one that will need to be decided in the Cuban courts; the answer to that question would in part dictate the ultimate outcome of any investor-initiated arbitration.
57. Prospects and Perils at 923-25.
58. Law 77, Art. 24(1). According to Art. 2(b) of Law 77, authorization by the Executive Committee of the Council of Ministers that allows an enterprise with foreign capital to operate in Cuba does so for “a specified period of time.” Art. 4(1) allows the extension of such authorization, provided an application is properly made. Extension of the authorization is discretionary with the Cuban government; if not granted, Art. 4(2) directs that the enterprise be liquidated and the foreign investor receive its share of the liquidation proceeds.
60. José de Cordoba and Carlta Vitzthum, For Jilted Engineers From Canada, Cuba Wasn’t a Cheap Date, The Wall Street Journal (June 28,1999), p. A1, A21; Fábregas I Guillén, La ley de la inversión extranjera, p. 36; José Fernández González, Cuba: Del socialismo al Fascismo—Un español dentro de la revolución cubana 1980-1996 (Puerto Rico, 1996), p. 75-81; Islands of Capitalism, p. 199; Juan O. Tamayo, Crackdowns, Restrictions Sour Investors on Cuba, The Miami Herald (June 10, 1999), p. 22A.
61. There are no express provisions in Cuba’s Civil Code to cover a termination for default situation. However, Art. 269 of the Civil Code provides that, where a contract provides for the imposition of liquidated damages if there is a default by one of the parties, such damages may be equitably reduced if the contractual obligation has been performed partially or with defects. Ley No. 59, Codigo Civil (July 16, 1987), Gaceta Oficial (Oct. 15, 1987) (hereinafter “Civil Code”), Art. 269. Therefore, the concept of partial compensation in the event of default is implicitly recognized by Cuban law.
62. Civil Code, Art. 100.
63. Id., Art. 101.1 through 101.5.
65. Ley 81 del Medio Ambiente, arts. 67-75, in Gaceta Oficial, July 11, 1997 (“Ley del Medio Ambiente”); see also, Matias F. Travieso- Diaz, Key Environmental Legislation for Cuba’s Transition Period, 21 U. Pa. J. Int’l Bus. L. 331, 345-46 (2000) (“Key Environmental Legislation”). While the law provides no enforcement details, it establishes a principle for imposing liability upon foreign investors for environmental damages caused by their activities.
66. Key Environmental Legislation at 370.
67. Some of the provisions of the Ley del Medio Ambiente are vague enough to be perhaps unenforceable. Id. at 345. However, arts. 81-88 and 95-96 of the Civil Code provide a potential independent basis for establishing liability of foreign investor under a tort theory of action for the damages caused by its business activities. See discussion, infra. 68. Alberto Luzárraga, Socialist Cuba—The Nullity of the Foreign Investment Contracts Due to an Illicit Cause: To Defraud the Cuban Worker, page 254, 11th Annual Proceedings of the Association for the Study of the Cuban Economy (hereinafter “Luzárraga”).
69. The term “parens patriae” means “parent of the country” in Latin. The legal doctrine of parens patriae conceives of the state “in its capacity as provider of protection to those unable to care for themselves”. . . as a “doctrine by which a government has standing to prosecute a lawsuit on behalf of a citizen, esp. on behalf of someone who is under a legal disability to prosecute the suit.” Black’s Law Dictionary (8th Ed. 2004).
70. Luzárraga states that the “worker retains his civil action to demand damages from the party that employed him subject to abusive conditions. He may demand his back wages plus legal interest, at the rate applied by the international market for the type of work performed, plus any other punitive damages that are deemed appropriate. And the Cuban nation is also a party that can claim damages inasmuch as the system described perpetuated a tyranny and instituted an unfair system of employment that subjected its citizens to a demeaning work relationship.” 71. At least some Cuban workers who are employed by foreign ventures manifest not feeling exploited by the arrangement between their employer and the Cuban government. See Prospects and Perils at 935-38.
72. Cuba’s basic taxation framework consists of Law 73—The Tax Systems Law, Gaceta Official (August 1994), and Decree-Law 169 (January 1997). Decree-Law 169 granted primary taxation authority to the Ministry of Finance, and created the National Office of Tax Administration (ONAT).
73. An example of the rigidity of the current Cuban tax system is the “10% maximum cost deductibility rule.” In determining taxable income, the current tax regime allows for the deduction of only 10% of purchased inputs. For example, if a micro-enterprise owner incurs a $1,000 expense on purchased inputs and has gross receipts of $2,000, he/she is allowed a deduction of only $100 in computing taxable income, thereby imposing a tax on 95% of gross receipts. In contrast, with respect to business activities, U.S. tax code § 162 allows for full deduction, with some exceptions, of all “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.“) See generally Archibald R. M. Ritter & J.A. Turvey, The Tax Regime for Micro-Enterprise in Cuba, Carleton University’s Department of Economics’ Carleton Paper Series number 99-04, February 2000, available online at http://www.carleton. ca/economics/cep/cep99-04.pdf (visited on February 12, 2004) (hereinafter “Tax Regime”).
74. This assumes that a transition Cuban government will decide to grant preferential tax treatment to post-transition investors as a means of attracting foreign investment to Cuba. However, granting tax incentives as a means to attract foreign investment has been questioned as being of dubious efficacy and wasteful of the state’s economic resources. See discussion infra.
75. The ultimate “worst case scenario” would be one in which a transition government terminates the contracts of current investors and forces them out of the country. However, assuming that a successor Cuban government harbors ill will towards pre-transition foreign investors, such ill will could arguably be more productively manifested by means of higher taxation (thereby generating additional revenue for the Cuban government) than by contract termination, asset expropriation or other punitive measures discussed earlier.
76. Eric A. Posner and Adrian Vermeule, Transitional Justice as Ordinary Justice, 117 Harv. L. Rev. 761, 766 (January 2004) (hereinafter “Transitional Justice”) (arguing that although many writers in the literature conceive of transitional justice as “backward-looking”, it could (and should) be understood in “forward-looking” terms).
77. Matias F. Travieso-Diaz and Stephan M Bleisteiner, Some Lessons for Cuba from the Legal Changes in Eastern Europe, 3 U. Miami Y.B. Int’l L. 173, 205-209 (1995) (hereinafter “Some Lessons”). For instance, with respect to certain key industries identified by Hungary, the successor government went so far as to grant a 100% tax exemption on income earned by foreign investors during the first five (5) years, and reduction of the exemption to 60% for the next five years. However, such tax incentives have been criticized, among other reasons, for being virtually meaningless in most cases because it usually takes several years before a foreign investor is able to turn a profit and thus benefit from the tax holiday. See Cheryl W. Gray and William W. Jarosz, Law and the Regulation of Foreign Direct Investment: The Experience From Central and Eastern Europe, 33 Colum. J. Transnat’l L. 1, 36-40 (1995) (hereinafter “Law and Regulation”).
78. Matias F. Travieso-Diaz and Alejandro Ferrate, Recommended Features of a Foreign Investment Code for Cuba’s Free Market Transition, 21 N.C.J. Int’l L. & Com. Reg. 511, 545-46 (Summer 1996) (hereinafter “Recommended Features”).
79. Jeffrey M. Padwa, Joint Venturing in Hungary: Negotiating Certainty in an Era of Reform, 15 Suffolk Transnat’l L.J. 222 (Fall 1991) (hereinafter, “Padwa”); Yitzhak Hadari, The Role of Tax Incentives in Attracting Foreign Investments in Selected Developing Countries and the Desirable Policy, 24 Int’l Law. 121, 123 (1990); Kojo Yelpaala, In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax Incentive Policies, 7 Nw. J. Int’l. L. & Bus. 208, 212 (1985).
80. Since there is no contractual relationship between the foreign investors and the previous property owners, those claims based on contract theories such as unpaid rents would probably not be applicable.
81. Civil Code, Art. 81-83.
84. It is open to debate whether the expropriations carried out by Cuba were effective in transferring title to the properties in question to the state. See n. 30, supra. For a discussion of the legal issues involved with the Cuban Government takings of private property, including the validity and legal effectiveness of the expropriations, see Matias Travieso-Diaz, Some Legal and Practical Issues in the Resolution of Cuban Nationals’ Expropriation Claims Against Cuba, 16 U. Pa. J. Int’l Bus. L. 217 (1995).
85. See, e.g., Amy Discoll, Club Med Sued In Miami Over Use of Land in Cuba, The Miami Herald (July 9, 2004), involving a family who brought suit against the Paris-based Club Med in U.S. District Court for “unjust enrichment” and on several other grounds in connection with Club Med’s investment in expropriated property in Cuba. The theory relied upon by the plaintiffs for filing suit in South Florida is that Club Med has substantial business contacts with Florida, and therefore general jurisdiction in Florida is appropriate.
86. Simon Romero, Spanish Seek Oil Off Cuba, as Americans Watch Silently, The New York Times (July 6, 2004); Larry Luxner, Drilling for Black Gold, Spain’s Repsol-YPF Helps Cuba Search the Waters Off its Coast for Oil, The Miami Herald (June 28, 2004).
87. A’an Suryana, Mining Operations Put Environment at Risk, Jakarta Post (June 5, 2002), available online at http://www.ecologyasia. com/NewsArchives/Jun_2002/thejakartapost.com_20020605.G02.htm (last visited on July 10, 2004).
88. Sergio Díaz-Briquets & Jorge Pérez-López, Conquering Nature: The Environmental Legacy of Socialism in Cuba (University of Pittsburgh Press (2000); José R. Oro, The Poisoning of Paradise: The Environmental Crisis in Cuba (1992); Carlos Wotzkow, Natumaleza Cubana (1998); Agencia Ambiental Entorno Cubano (AAMEC), Informe Anual de la AAMEC: Situación Ambiental de Cuba, 1997(1997); República de Cuba, Ministerio de Ciencia, Tecnología y Medio Ambiente, Consulta Nacional Rio +5, Taller “Medio Ambiente y Desarrollo” (1997); María D. Espino, Environmental Deterioration and Protection in Socialist Cuba, in Cuba in Transition— Volume 2 (1992).
89. See, e.g., A U.S. federal judge has ordered Exxon Mobil Corp. to pay $4.5 billion in punitive damages plus $2.25 billion in interest because of the 1989 Exxon Valdez oil tanker spill, the lead plaintiff’s attorney says, Reuters (January 28, 2004), available online at http:// www.cnn.com/2004/BUSINESS/01/28/exxon.valdez.reut/ (last visited on July 10, 2004).
90. The universe of potential plaintiffs could range from public interest NGOs and fishermen and other commercial enterprises seeking damages for the harm caused to their trade to landowners seeking redress for harm to their properties.
91. Although the authors have chosen to highlight potential high-stakes suits against investors in major industries such as mining and oil exploration, potential lawsuits are by no means limited to these two industries. See, e.g., Alejandro González Raga, Shut-Down of Joint Venture Feared (July 5, 2002), available online at http://www.cubanet.org/CNews/y02/jul02/09e2.htm (last visited on July 10, 2004) (referring to the Diesel-International Economic Association, a joint venture with Canadian capital that runs an engine repair facility that neighbors consider to be a nuisance). Private parties in Cuba could go to court seeking damages or equitable relief from operations by others, including foreign investors, whose activities cause substantial and unreasonable interference with the use and enjoyment of plaintiffs’ property.
92. Art. 71(c) of Cuba’s Environmental Law gives a right of action for damages to anyone who is adversely impacted by an action or omission that affects the environment, but provides no mechanism for exercising that right and leaves it unclear who would have standing to bring any such suit. Ley del Medio Ambiente, art. 71(c); see also, Key Environmental Legislation at 346. On the other hand, the Civil Code provides general authority for a private party to seek damages from a tortfeasor whose actions have caused him harm. Civil Code, Art. 81-88 and 95-96. Thus, for example, Art. 82 states that he who unlawfully causes damages to another has the obligation to provide remedy for such damage. Art. 83 specifies that such remedy includes (a) restitution of property taken, (b) compensation for property damages, (c) indemnification for losses sustained, and (d) reparations for moral damages.
93. Similar arguments could be raised by U.S.-based plaintiffs to bring action in U.S. courts against current foreign investors for causes of action relating to environmental damage caused to their property in Cuba.
94. Prospects and Perils at 926.
99. See, e.g., Confederación Obrera Nacional Independiente de Cuba, “Report of the Violations of the International Labor Organization’s Standards and Conventions by the Government of Cuba (June 2001).
100. ILO Convention 87, Art. 2, declaring that “[w]orkers and employers, without distinction whatsoever, shall have the right to establish and, subject only to the rules of the organization concerned, to join organizations of their own choosing without previous authorization, ” available online at http://www.ilo.org/ilolex/english/convdisp2.htm.
101. ILO Convention 95, Art. 9, prohibiting any “deduction from wages with a view to insuring a direct or indirect payment for the purpose of obtaining employment, made by a worker to an employer or his representative or to any intermediary,” id.
105. Although there is some debate as to which of Cuba’s Constitutions (the 1940 or the 1992) will be considered to be legally in effect during a transition, the outcome of such debate is largely of little consequence on the issues of concern to current foreign investors given that both Constitutions provide protections against uncompensated takings.
106. Helms-Burton Act, Section 301, Finding 7.
107. Prospects and Perils at 917-18; see also Perez 2002.
108. See Prospects and Perils at 938-44.

References: Art. 12
 Art. 3
 Art. 3
 Art. 25
 Art. 61
 Art. 22
 Art. 22
 v. 
 v. 
 § 6081
 § 6082
 § 6082
 Art. 25
 Art. 24
 Art. 2
 Art. 4
 Art. 4
 Art. 269
 Art. 269
 Art. 100
 Art. 101
 § 162
 Art. 81
 Art. 71
 art. 71
 Art. 81
 Art. 82
 Art. 83
 Art. 2
 Art. 9