The Free Trade Agreement between the United States, the Dominican Republic and several Central American states ("DR-CAFTA") creates a new free trade zone in the Americas and aims to encourage investment among ratifying countries by providing substantive and procedural protections to investors.

Signed in 2004 by the US, the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, DR-CAFTA has entered into force in all but one of the signatory countries. Only Costa Rica is still in the process of ratifying DR-CAFTA and is scheduled to hold a binding referendum later this year.

Chapter 10 of DR-CAFTA contains the substantive protections afforded to investors of the member states. These protections are similar to those available in other free trade agreements signed by the US and include national treatment, most-favored nation treatment, minimum standard of treatment in accordance with customary international law (including fair and equitable treatment and full protection and security), and the guarantee of no expropriation without prompt, adequate, and effective compensation. Extensive annexes detail the scope of these protections.

In addition, Chapter 10 establishes a dispute resolution mechanism for investors who consider that one of the state parties has not respected the investment guarantees and protections granted by the treaty. This multi-tiered process begins with a requirement that the state and the investor "seek to resolve the dispute through consultation or negotiation" (Article 10.15). The investor may commence arbitration against the host state after sending a written notice of its intention to submit its claim to arbitration at least 90 days before such submission (Article 10.16(2)). Claims may be submitted to arbitration six months after the events giving rise to the claim, but not more than three years from that date (Articles 10.16(3) and 10.18(1)). An investor may bring claims for breach by the host state of the substantive protections afforded in the treaty itself, breach of an investment authorization, or breach of an investment agreement (Article 10.16(1)).

Under Article 10.16(3), the investor may select from three different sets of arbitration rules to file its claim: (a) the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention"), provided that the investor's home state and the respondent state are both parties to the ICSID Convention; (b) the ICSID Additional Facility Rules, if the investor's home state or the respondent state is not a party to the ICSID Convention; or (c) the UNCITRAL Arbitration Rules. As of today, all DR-CAFTA contracting states, with the sole exception of the Dominican Republic, are parties to the ICSID Convention.

Investors intending to submit a claim to arbitration should pay particular attention to the fork-in-the-road provisions contained in Article 10.18(2) and Annex 10-E. First, the notice of arbitration must be accompanied by written waivers "of any right to initiate or continue before any administrative tribunal or court under the law of any party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach" under the treaty. Second, the claim may not be submitted to arbitration if domestic court proceedings have been initiated by the investor when the claim involves the alleged breach of an investment authorization or an investment agreement (but not when the claim is based on a breach of the substantive guarantees established in Section A of Chapter 10). This provision does not apply to investors of the United States; if they choose to submit claims for breaches of obligations under Section A to domestic courts in Central America or the Dominican Republic, that election shall be definitive (Annex 10-E). Investors may, however, initiate parallel court actions that seek interim injunctive relief and do not involve the payment of monetary damages, without affecting their right to submit to arbitration under CAFTA (Article 10.18(3)).

Chapter 10 also contains detailed rules on the conduct of arbitration proceedings, selection of arbitrators, production of evidence, consolidation of claims, rendering of awards and service of documents. Article 10.20(4) offers the respondent state the opportunity to make preliminary objections on the basis that "as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.26." Article 10.21 contains rules to ensure the transparency of arbitral proceedings, providing that arbitral hearings shall be public and that the respondent state has a duty to make available to the public the submissions filed and decisions rendered in the arbitration. In addition, Article 10.20(3) grants the Tribunal authority to accept and consider amicus curiae submissions from non-disputing parties.

A novel feature of DR-CAFTA's dispute resolution system is the parties' commitment to the creation of an appellate body tasked to review awards rendered by arbitral tribunals under Chapter 10. Annex 10-F provides that within three months from the entry into force of the treaty, the Free Trade Commission created under the treaty shall establish a negotiating group to develop an appellate body or similar mechanism "to provide coherence to the interpretation of investment provisions in the Agreement." This appellate body shall be implemented through an amendment to the agreement. Some free trade agreements and trade promotion agreements recently negotiated by the United States (such as those with Colombia, Singapore, Chile, Peru and Panama) provide that the parties will discuss at a later stage whether to establish an appellate body to review arbitral awards rendered under those treaties, but DR-CAFTA is distinctive in requiring the creation of an appellate body.

At least two disputes have so far arisen under the scope of DR-CAFTA against Guatemala and the Dominican Republic. In the first case, US-based Railroad Development Corporation, Inc. ("RDC") and its Guatemalan subsidiary Compañía Desarrolladora Ferroviaria have registered with ICSID a request for arbitration asserting a number of claims under CAFTA against the Guatemalan government arising from the annulment of a railroad concession contract. In the second case, Spanish-owned Unión Fenosa alleges several breaches by the government of the Dominican Republic of DR-CAFTA's investment protection provisions, which Unión Fenosa claims have adversely affected its investments in the energy sector in that country. According to press reports, a letter of intention to arbitrate has already been filed with the government of the Dominican Republic.

With respect to such disputes, DR-CAFTA includes not only substantive investment protection and guarantees, but also a dispute resolution mechanism that includes certain novel provisions.