Transparency of the Regulatory System
The GOH had made progress towards developing digital single windows to consolidate the application and approval process, for example, for firms registering in a free trade zone. These steps have allowed for greater transparency in the regulatory system. Both U.S. and Honduran firms, however, cite concerns regarding transparent policies and effective laws to foster market-based competition. In many cases the “rules of the game” are not clear to outside investors. This can be due to do overly complex and sometime overlapping authorities given to multiple GOH entities to approve permits for foreign investors. Ongoing issues relating to corruption also hinder transparent investment opportunities. Honduras lacks an indexed legal code so lawyers and judges must maintain their own libraries of law publications. While the majority of regulations are at the national level, municipal level regulations also exist and vary considerably in terms of responding to foreign investment permitting requirements.
Foreign investments in the mining, energy, healthcare, telecommunications, air transportation, agriculture, forestry, and education sectors generally require approval from the GOH via permits. Some U.S. investors have reported 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, companies report that regulatory requirements are complex and lengthy and vulnerable to rent-seeking and [perceived] corruption due to weak institutions. 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/ ).
There is no legal requirement for the government to solicit public comment on proposed regulatory changes or legal reforms. It is generally understood that a legal or regulatory change does not take effect until the GOH publishes approved regulations in the official government Gazette, which represents the centralized location for legislative and regulatory actions. Public comments received by regulators are not published. The government does not promote or require companies’ environmental, social, and governance (ESG) disclosure to facilitate transparency and/or help investors and consumers distinguish between high- and low-quality investments. In general, Honduras does have a system that allows for a systematic approach to developing government regulations. Regulations, however, are not always developed transparently and with input from the private sector or civil society groups.
CAFTA-DR requires that host governments publish proposed regulations that could affect businesses or investments. Honduras made significant progress in 2019 and 2020 in relation to the publication and availability of information under CAFTA-DR. Honduras notified Article 1 technical provisions, per CAFTA-DR requirements, and the Customs Administration (ADUANAS) and Sanitary Regulatory Agency (ARSA) have improved publication of regulations through their official online portals.
International Regulatory Considerations
Honduras is a member of the Central American System of Integration (SICA in Spanish), along with Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Belize, and the Dominican Republic. Under SICA’s Secretariat for Economic Integration (SIECA in Spanish), Honduras and Guatemala negotiated a customs union in 2017. SIECA is also supporting the expansion of this customs union to include El Salvador. Article 335 of the Honduran Constitution states that “The State shall order its external economic relations on the basis of fair international cooperation, Central American economic integration, and respect for the treaties and agreements it signs, insofar as they are not opposed to the national interest.” 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 for protection of commercial transactions, property rights, and land tenure. It also established a process for the enforcement of rulings issued by foreign courts.
Commercial law and contractual law are regulated through the 1950 Commercial Code and the 1909 Civil Code. There are civil courts where commercial cases are tried. There are also arbitration chambers where issues regarding contracts with an arbitration clause may be resolved.
In theory, the judicial system operates independently of the executive branch. However, the Honduran National Congress recently elected 15 new Supreme Court Justices to seven-year terms, naming a relative of President Castro as the new President of the Supreme Court. President Castro’s party, the Liberty and Refoundation Party (LIBRE), selected six of the new judges, while the National Party chose five magistrates and the Liberal Party picked four. There are frequent reports of corruption within the judicial branch, especially in local courts. U.S. firms report favoritism, external pressure, and the solicitation of bribes within the judicial system. 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. An electronic case management system has recently been introduced with US Government support to increase transparency and reduce corruption. This system is gradually being rolled out to the different courts. 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. Investors report a very high-quality mechanism for alternate dispute resolution. Legislative decree (N°51-2011) Law for Promotion and Protection of Investments promotes solving disputes between investors through mediation, conciliation, and arbitration prior to using the judicial system.
Laws and Regulations on Foreign Direct Investment
Honduras’ Investment Law requires all local and foreign direct investment be registered with the National Investment Council. 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
- Investigation, exploration, and exploitation of mines, quarries, petroleum, and related substances.
The Government of Honduras offers one-stop business set-up at its My Business Online website, which helps domestic and international investors submit initial business registry information and provides step-by-step instructions. ( https://www.miempresaenlinea.org/ ) However, formalizing a business still requires visiting a municipal chamber of commerce window for registration and permits, a process vulnerable to rent-seeking and corruption.
Competition and Antitrust 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 as an independent regulatory commission.
Laws that grant sole companies exclusive distribution rights for imported goods have created artificial monopolies in Honduras, hindering the availability and raising the price of imported goods in the Honduran market.
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.
The May 2022 energy law contains provisions (articles 4 through 6) that authorize the GOH to terminate contracts or acquire power plants for an undefined “fair price” either when the GOH and the power plant owner are unable to agree on a renegotiated Power Purchase Agreement in certain sectors or when the GOH determines, among other factors, that doing so will be in the public interest “for reasons of national security.” Honduran legal experts and energy producers are concerned that this law could give the GOH broad authority to expropriate private power plants.
Government expropriation of land owned by U.S. companies is rare. 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 $1,000 if the expropriated land has at least one building and it cannot exceed $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.
Land invasions by squatters on both Honduran and foreign-owned land are increasingly common, especially in agricultural areas. These invasions have grown more frequent and severe in 2023, frequently leading to violent confrontations. Owners of disputed land have found pursuing legal avenues costly, time consuming, and ineffective at enforcing property rights.
Honduras is a member state to the International Centre for the Settlement of Investment Disputes (ICSID) Convention. Honduras has also ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the Inter-American Convention on International Commercial Arbitration (the Panama Convention).
Investor-State Dispute Settlement
CAFTA-DR provides dispute settlement procedures between the United States and Honduras. The agreement’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 non-discriminatory 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.
Over the past 10 years, there have also been a number of commercial disputes brought by U.S. persons or firms that remain unresolved. While many of these cases remain in litigation, others are pending final agreements between the Honduran government (GOH) and U.S. parties. The GOH office of the Procurador General of Honduras (Solicitor General) has been willing to meet with U.S. persons and firms to negotiate a resolution to these outstanding cases, but the negotiations are often slow and delayed, or even unilaterally terminated by GOH authorities.
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 organizations provide more localized information:
- Tegucigalpa Chamber of Industry and Commerce – Center for Conciliation and Arbitration
- Cortes Chamber of Industry and Commerce – Center for Conciliation and Arbitration
- The Atlantida Chamber of Industry and Commerce – Center for Conciliation and Arbitration
- The Honduran Bar Association – Center for Conciliation and Arbitration
Numerous U.S. and other international investors say they strongly prefer taking advantage of international or local alternative dispute resolution mechanisms because the Honduran judicial system can be inefficient, lacks transparency, and is subject to political influence and/or corruption. International donors have been working with the Honduran judiciary and prosecutors to try to improve the capabilities, effectiveness, and transparency of the justice system.
Companies that default in payment of their obligations in Honduras can declare bankruptcy. A Honduran court must ratify a bankruptcy for it to take effect. These cases are regulated by the country’s Commercial 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 may exercise to prevent bankruptcy is to request a suspension of payments from the judge. If approved by the judge and the creditors, the company may be 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.