Transparency of the Regulatory System
Though CAFTA-DR requires host governments publish proposed regulations that could affect businesses or investments, the Honduran government does not routinely post proposed regulations. The lack of a formal notification process prevents nongovernmental groups, foreign companies, and other entities from commenting on proposed regulations. The government of Honduras publishes approved regulations in the official government Gazette. Honduras lacks an indexed legal code so lawyers and judges must maintain the publication of laws on their own. Procedural red tape to obtain government approval for investment activities is common.
Some U.S. investors experience long waiting periods for environmental permits and other regulatory and legislative approvals. Sectors in which U.S. companies frequently encounter problems include infrastructure, telecoms, mining, and energy. Generally, regulatory requirements are complex and lengthy, and may be influenced by political factors. Regulatory approvals require congressional intervention if the time exceeds a presidential term of four years. Current regulations are available at the Honduran government’s eRegulations website (http://honduras.eregulations.org/). While the majority of regulations are at the national level, municipal level regulations also exist. No significant regulatory changes of relevance to foreign investors were announced since the last report. Public comments received by regulators are not published. Honduras has made strides, in part with technical assistance from the U.S. Department of Treasury, to make public finances and debt obligations more transparent.
International Regulatory Considerations
As a member of the WTO, Honduras notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
Legal System and Judicial Independence
Honduras has a civil law system. The Honduran Commercial Code, enacted in 1950, regulates business operations and falls under the jurisdiction of the Honduran civil court system. The Civil Procedures Code, which entered into force in 2010, introduced the use of open, oral arguments for adversarial procedures. The Civil Procedures Code provides improved protection of commercial transactions, property rights, and land tenure. It also offered a more efficient process for the enforcement of rulings issued by foreign courts. Despite these codes, U.S. claimants have complain about the lack of transparency and the slow administration of justice in the courts. U.S. firms report favoritism, external pressure, and bribes within the judicial system. They also complain about the poor quality of legal representation from Honduran attorneys.
Resolving an investment or commercial dispute in the local Honduran courts is often a lengthy process. Foreign investors report dispute resolution typically involves multiple appeals and decisions at different levels of the Honduran judicial system. Each decision can take months or years, and it is usually not possible for the parties to predict the time required to obtain a decision. Final decisions from Honduran courts or from arbitration panels often require subsequent enforcement from lower courts to take effect, requiring additional time. Foreign investors sometimes prefer to resolve disputes with suppliers, customers, or partners out of court when possible.
Laws and Regulations on Foreign Direct Investment
Honduras’ Investment Law requires all local and foreign direct investment be registered with the Investment Office in the Secretariat of Industry and Commerce. Upon registration, the Investment Office issues certificates to guarantee international arbitration rights under CAFTA-DR. An investor who believes the government has not honored a substantive obligation under CAFTA-DR may pursue CAFTA-DR’s dispute settlement mechanism, as detailed in the Investment Chapter. The claim’s proceedings and documents are generally open to the public.
The Government of Honduras requires authorization for both foreign and domestic investments in the following areas:
- Basic health services
- Generation, transmission, and distribution of electricity
- Air transport
- Fishing, hunting, and aquaculture
- Exploitation of forestry resources
- Agricultural and agro-industrial activities exceeding land tenancy limits established by the Agricultural Modernization Law of 1992 and the Land Reform Law of 1974
- Insurance and financial services
- Private education services
- Investigation, exploration, and exploitation of mines, quarries, petroleum and related substances.
In 2015, the Honduran government implemented the online National Investment Register as a starting point for creating a one-stop foreign and domestic investment facility (www.prohonduras.hn). Formalizing a business, however, still requires visiting a municipal chamber of commerce window for registration and permits.
Competition and Anti-Trust Laws
The Commission for the Defense and Promotion of Competition (CDPC) is the Honduran government agency that reviews proposed transactions for competition-related concerns. Honduras’ Competition Law established the CDPC in 2005 as part of the effort to implement CAFTA-DR. The Honduran Congress appoints the members of the CDPC, which functions an independent regulatory commission.
Expropriation and Compensation
The Honduran government has the authority to expropriate property for purposes of land reform or public use. The National Agrarian Reform Law provides that idle land fit for farming can be expropriated and awarded to indigent and landless persons via the Honduran National Agrarian Institute. In 2013, the Honduran government passed legislation regarding recovery and reassignment of concessions on underutilized assets. Both local and foreign firms have expressed concerns that the law does not specify what the government considers “underutilized.” The government has not published implementing regulations for the law nor indicated plans to use the law against any private sector firm.
Government expropriation of land owned by U.S. companies is rare. Seizure actions by squatters on both Honduran and non-U.S. foreign landowners are most common in agricultural areas. Some occupations turn violent, especially in the Bajo Aguan region in the department of Colon. Owners of disputed land have found pursuing legal avenues costly, time consuming, and legally inconclusive. CAFTA-DR’s Investment Chapter Section 10.7 states no party may expropriate or nationalize a covered investment either directly or indirectly, with limited public purpose exceptions that require prompt and adequate compensation.
Under the Agrarian Reform Law, the Honduran government must compensate expropriated land partly in cash and partly in 15-, 20-, or 25-year government bonds. The portion to be paid in cash cannot exceed USD 1,000 if the expropriated land has at least one building and it cannot exceed USD 500 if the land is in use but has no buildings. If the land is not in use, the government will compensate entirely in 25-year government bonds.
ICSID Convention and New York Convention
Honduras is a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention). Honduras has ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention)
Investor-State Dispute Settlement
CAFTA-DR provides dispute settlement procedures between the United States and Honduras. CAFTA-DR’s Investment Chapter dispute settlement mechanism allows an investor who believes the government has not honored a substantive obligation under CAFTA-DR to request a binding international arbitration. Proceedings and documents submitted to substantiate the claim are generally open to the public. The agreement provides basic protections, such as nondiscriminatory treatment, limits on performance requirements, the free transfer of funds related to an investment, protection from expropriation other than in conformity with customary international law, a minimum standard of treatment, and the ability to hire key managerial personnel regardless of nationality.
International Commercial Arbitration and Foreign Courts
Honduras’ Conciliation and Arbitration Law, established in 2000, outlines procedures for arbitration and defines the procedures under which they take place. The Investment Law permits investors to request arbitration directly, a swifter and more cost-effective means of resolving disputes between commercial entities. Arbitrators and mediators may have specialized expertise in technical areas involved in specific disputes. Local courts recognize and enforce foreign arbitral awards issues against the government. Judgements from foreign courts are recognized and enforceable under local courts.
The following links provide more localized information:
Tegucigalpa Chamber of Industry and Commerce – Center for Conciliation and Arbitration: https://www.ccit.hn/cca/
San Pedro Sula Chamber of Industry and Commerce – Center for Conciliation and Arbitration: http://www.ccichonduras.org/es/?p=1571
Numerous U.S. investors who have been involved with the local judicial system complain it can be inefficient, lacks transparency, and is subject to domestic influence and/or corruption.
Companies that default in payment of their obligations in Honduras can declare bankruptcy. A Honduran court must ratify a bankruptcy in order for it to take effect. These cases are regulated by the Commerce Code.
The judicial ruling that declares the bankruptcy of the company establishes the value of the assets, the recognition and classification of the credits, the procedure for the sale of assets and the schedule for the payment of the obligations, in the case that it is not possible for the company to continue its operations. The ruling must be published in The Gazette. The liquidation of companies is always a judicial matter, except in the case of banking institutions which are liquidated by the National Banking and Insurance Commission.
Any creditor or a company itself may initiate the liquidation procedure, which is generally a civil matter. The Judge appoints a liquidator to execute the procedure. A mechanism that a company has to prevent bankruptcy is to request a suspension of payments from the judge. If approved by the judge and the creditors, the company is able to reach an agreement with its creditors that allows the same administrative board to maintain control of the company.
A company may be prosecuted for fraudulently declaring bankruptcy in the case that the administrative board or shareholders withdraw their assets before the declaration, alter accounting books making it impossible to determine the real situation of the company, or favor certain creditors granting them benefits that they would not be entitled to otherwise.