Introduction

A new era of relations has begun between the United States, the Dominican Republic, and the countries of Central America. The adoption of a new multilateral free trade agreement, the U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA), marks its beginning.[1] CAFTA's adoption also marks another forward step in the U.S. strategy of promoting greater trade liberalization and democratization in Latin America.[2] The United States entered into this Agreement on May 28, 2004. On that day, President Bush and trade ministers from the Dominican Republic and the Central American nations of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed the pact.[3]

On July 26, 2005, the House of Representatives passed CAFTA by a two vote margin.[4] Since that time, signatory countries have implemented CAFTA on a "'rolling basis' as those countries 'make sufficient progress to complete their commitments' under the terms of the trade [A]greement."[5] As of October 2007, CAFTA had entered into force in the United States, the Dominican Republic, El Salvador, Honduras, and Nicaragua, which constitute five of the six CAFTA signatory nations.[6] While implementation of CAFTA has not been uniform, all signatory countries have made progress in implementing the Agreement. Thus, the CAFTA free trade zone will become a reality in the foreseeable future.

While the CAFTA free trade zone will likely soon be a reality, debate continues on the Agreement's merit. According to its proponents, CAFTA establishes a free trade zone between the United States and Central America that "will eliminate tariffs, open markets, promote transparency, and establish state-of-the-art rules for 21st Century commerce."[7] These supporters envision the implementation of the Agreement as the next step (after the establishment of the North American Free Trade Agreement (NAFTA))[8] toward achieving a hemispheric free trade agreement[9] embodied in the proposed agreement on a Free Trade Area of the Americas (FTAA).[10] However, they have not completely persuaded opponents that CAFTA will benefit all signatory countries. Additionally, CAFTA proponents have not established that the Central American signatories are economically and politically well-suited for inclusion in this new free trade zone.

Critics have questioned the advisability of adopting another free trade agreement in light of U.S. experiences under NAFTA.[11] Concerns range from potential negative effects on the economic competitiveness of Central American farmers[12] to threats of further job losses faced by American manufacturing workers.[13] Given these publicly expressed concerns, there is no uniform support for CAFTA's implementation and the development of the resultant free trade zone. Furthermore, there are equally significant concerns about CAFTA's nature and structure, going to the heart of not only the Agreement's potentially negative economic effects, but also its legal effects.

Possible negative legal effects stem from the drafting and construction of several of the Agreement's chapters. According to some critics, the application of certain CAFTA provisions may actually threaten the ability of participating governments to enact public health and welfare regulations, labor regulations, and, particularly, environmental regulations.[14] Opponents argue that this possible inhibition constitutes a threat to the national sovereignty of the signatory nations.[15] They assert that this danger stems from one particular feature of CAFTA: the investor-state dispute settlement mechanism incorporated in Chapter 10 of the Agreement.[16] They theorize foreign investors could use this settlement mechanism to recover millions of dollars in damages merely by showing that passage of environmental laws caused a loss in the economic value of their investment.[17] Thus, CAFTA governments might reconsider the passage of particular environmental laws because they may deem the threat of investor suits as outweighing any benefits from the enactment of such public welfare regulations.

The investor-state dispute settlement mechanism incorporated in Chapter 10 of CAFTA in large part mirrors a similar mechanism outlined in Chapter 11 of NAFTA. CAFTA drafters used NAFTA as a basis for drafting CAFTA's provisions, including the Chapter 10 investor-state dispute settlement mechanism.[18] Under NAFTA, investors may utilize ad hoc arbitral tribunals to settle disputes with NAFTA participating governments arising from alleged breaches of those governments' obligations under NAFTA.[19] Similarly, the CAFTA investor-state dispute settlement mechanism uses ad hoc arbitral tribunals governed by selective arbitration rules. Parties agree to settle investor-state disputes arising under CAFTA using the arbitration rules.[20] Though commentators criticize the use of tribunals to settle disputes between investors and participating governments, the investor-state dispute mechanism's continued use in U.S.-supported free trade agreements appears likely to continue.[21] As such, it appears that binding arbitration between investors and CAFTA participating governments will be one of the most likely methods of dispute settlement under the Agreement.

This Article addresses potential threats to participating governments' environmental regulations that may arise from the CAFTA investor-state dispute settlement mechanism. Specifically, this Article is concerned with how the implementation of the CAFTA investor-state dispute settlement mechanism, and arbitration proceedings convened thereunder, will balance investor rights with participating governments' ability to protect the environment. However, rather than arguing elusively for the abandonment of the investor-state dispute settlement mechanism as other critics have,[22] this Article accepts that this dispute settlement mechanism will be an integral part of the new free trade zone created under CAFTA. Thus, this Article highlights positive measures enacted in the CAFTA Investment Chapter. This includes adoption of a presumption in favor of non-discriminatory environmental regulations not being "expropriations" and the commitment to adopt some form of an appellate body to review arbitral awards rendered under CAFTA. These provisions go a long way toward insulating legitimate environmental regulations from improper challenges by foreign investors.

This Article then proposes additional methods for achieving proper balance between investor rights and environmental protection within the framework of the CAFTA investor-state dispute settlement mechanism. This includes mandating the acceptance by arbitral tribunals of amicus curiae briefs from non-disputant third parties. This Article premises these suggestions on the notion that greater openness in CAFTA arbitration proceedings, combined with other positive reforms such as the commitment to the implementation of an appellate body to review CAFTA arbitral awards, are the means to promote the appropriate balance between investor protection and preservation of a government's power to enact legitimate environmental regulations.

Part I begins this discussion by explaining how the fear of investor-state arbitration arose from the design of the NAFTA dispute settlement mechanism and early arbitral awards rendered under its auspices. Part II analyzes several key differences between the NAFTA investor-state dispute settlement mechanism and the version of the mechanism contained in CAFTA. Part II proposes that these key differences will likely lead to a more even-handed application of CAFTA by arbitral panels than has been the case under NAFTA. This will in turn better protect participating governments' ability to enact legitimate environmental regulations.

Part III suggests additional devices to supplement arbitration rules utilized in investor-state arbitration under CAFTA. Specifically, this Article proposes a combination of procedural tools to assist in the necessary implementation of substantive reforms embodied in the CAFTA dispute settlement mechanism. In turn, adoption of these proposed procedural devices should more readily ensure a correct balance between investor rights and participating governments' regulatory rights under CAFTA.

As a first step, these proposed procedural reforms would make the existing ability of third parties to submit amici briefs mandatory rather than discretionary. This should ensure that interested non-disputants have the opportunity to protect their interests during arbitration proceedings. In addition, these proposed reforms advocate the explicit adoption of a shifting burden-of-proof standard in evaluating environmental regulations, a standard that is implicit in certain interpretive presumptions incorporated into CAFTA's Chapter 10.

Part IV offers a brief discussion of how these proposed reforms to the CAFTA investor-state dispute settlement mechanism fit within prevailing theoretical models of dispute settlement emerging in the international trade and investment communities. Finally, this Article concludes that substantive and procedural reforms incorporated into the CAFTA investor-state arbitration scheme, combined with the recommended mandatory procedural reforms described in this Article, should promote greater consistency, correctness, and transparency in CAFTA investor-state arbitration proceedings. This should influence arbitral tribunals to adhere to arbitral precedents and to consider the public interest implicated in an investor-state dispute involving environmental regulations, thereby achieving balance between investor protection and environmental regulation for the public benefit. It is important to remember, however, that these reforms will remain untested until CAFTA is fully implemented and a body of CAFTA Chapter 10 arbitration case law emerges.

[23] Previously, international law had normally limited standing to bring claims against a government to other nation-states.[24] Individuals sought redress for harms to their property or investments in other countries either by resorting to domestic courts[25] or by lobbying their own governments to act on their behalf.[26] NAFTA, however, introduced a method where free trade agreements began to provide investors with alternative dispute resolution mechanisms.

[27] Specifically, NAFTA provides for binding arbitration between an investor-claimant and a government-respondent for settlement of disputes.[28] Within the NAFTA framework, such claims usually arise when a participating government enacts legislation that negatively impacts, or is perceived to negatively impact, the value of a foreign investment in a manner that allegedly violates NAFTA.[29] The formulation of the investor-state dispute settlement mechanism under NAFTA's Chapter 11, and the resulting claims brought by investors, have caused fear among some NAFTA critics. In particular, they are concerned that investors now have the power to limit the ability of participating governments to enact legitimate regulations, such as environmental protection laws.[30]

This fear has resulted from two particular aspects of the NAFTA dispute settlement mechanism. First, foreign investors may bring a claim under Chapter 11 asserting that a regulation of, or legislation by, a participating government has violated that government's NAFTA obligations and harmed the investor's property or investment. Under Chapter 11, these investors are eligible to receive monetary damages if they meet an evidentiary burden. Investors may overcome this burden by proving both that the government has violated NAFTA and that the harm to the investment arose from that violation.[31] While NAFTA specifies that investors receive compensation equivalent to the "fair market value" of the investment,[32] the arbitral tribunal has complete discretion to determine what constitutes fair market value. Actual awards rendered under the NAFTA dispute settlement scheme have measured in the millions of dollars.[33]

Second, an investor may theoretically pursue a NAFTA Chapter 11 claim even when the alleged harm to that investor's property or investment stems from that investor's inability to utilize the investment in that investor's economically desired manner, or where the enactment of an environmental regulation significantly reduces the value of that investor's property.[34] Under Article 1110 of NAFTA, an investor is eligible for compensation if a participating government "directly or indirectly nationalize[s] or expropriate[s] an investment of an investor of another [participating country] in its territory or take[s] a measure tantamount to nationalization or expropriation of such an investment."[35] For example, in the arbitration Metalclad Corp. v. United Mexican States,[36] the claimant Metalclad obtained an award finding that the Mexican state of San Luis Potosi had "indirectly expropriated" Metalclad's investment in violation of NAFTA Article 1110. San Luis Potosi had designated land on which Metalclad's pre-existing landfill was to commence operations as an "ecological preserve."[37] The award, while much smaller than the damages Metalclad had originally sought, established a precedent where an arbitral tribunal held a participating government liable under Article 1110 for "indirect expropriation" of a foreign investment following the enactment of an environmental policy.

[38] This decision sparked an immediate reaction among environmentalists and other public interest groups. These groups were concerned with the deterrent effect, or "regulatory chill," this and similar decisions might have on future lawmaking.[39] According to concerned environmentalist groups, the ultimate result of the award in Metalclad would be a chilling effect, discouraging participating governments and their political subdivisions from enacting protective environmental laws, regulations, and policies.[40] Participating governments would now face potential damage awards under NAFTA totaling millions of dollars, thereby discouraging these governments from enacting environmental protection regulations in the future.[41] Governments might have to conduct a cost analysis every time they contemplated the enactment of an environmental law or regulation. This effort alone might discourage these participating governments from enacting such measures.

[42] Drafters of the CAFTA Investment Chapter largely mirrored the provisions of NAFTA's Investment Chapter in defining what actions by participating countries constitute "national treatment," "most favored nation treatment," and measures equivalent to prohibited "expropriations."[43] Commonalities in the language used in both treaties carry the potential for identical interpretation by different arbitral tribunals convened under either pact, indicating that NAFTA arbitral jurisprudence may set precedents for future CAFTA arbitral decisions. Given the similarities between the two agreements, the current development of investor-state dispute jurisprudence under NAFTA provides a model for demonstrating how the dispute settlement mechanism may develop under CAFTA.[44]

However, in spite of CAFTA's duplicate language (from NAFTA), the question remains whether countries' experiences with the investor-state dispute settlement mechanism under NAFTA have led to reforms in the CAFTA mechanism. In making this determination, one should compare provisions establishing the investor-state dispute settlement mechanism under NAFTA with those establishing CAFTA's mechanism in order to discern any substantive differences in the CAFTA version. Finally, when considering the criticisms leveled against NAFTA regarding potential dangers to national environmental regulations, one should look to substantive differences between the NAFTA and CAFTA "expropriation" articles to see how the CAFTA drafters have responded to protect environmental regulations.

One critical difference between the NAFTA and CAFTA Investment Chapters is how the distinct provisions of the two agreements define the scope of the prohibition on "expropriation" and how that term itself is construed under the different pacts. Both the NAFTA and CAFTA "expropriation" articles contain similarly worded definitions of the term as used in the free trade agreements. Article 1110 of NAFTA defines "expropriations" as actions that "directly or indirectly nationalize or expropriate an investment of an investor of another [signatory country] in its territory or take a measure tantamount to nationalization or expropriation of such an investment." However, those "nationalization actions" undertaken "(a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation . . . " are excluded from the definition of "expropriation."[45] Similarly, Article 10.7 of CAFTA defines "expropriations" as actions that "expropriate or nationalize a covered instrument either directly or indirectly through measures equivalent to nationalization or expropriation," except for actions that meet the same four conditions specified in NAFTA's Article 1110.[46]

The key difference between the two provisions is that under CAFTA, the Article 10.7 definition of "expropriation" is interpreted in accordance with Annexes 10-B and 10-C of CAFTA's Investment Chapter. Conversely, NAFTA's Article 1110 contains no such interpretive addenda.[47] Annex 10-B expresses the signatory countries' commitment to using customary international law to interpret the standards contained in Chapter 10, including Article 10.7.[48] Annex 10-C lays out interpretive rules for how arbitral panels are to determine what actions qualify as "indirect expropriations."[49] As NAFTA does not contain any similar interpretive addenda, and absent any formal guidance from the NAFTA Free Trade Commission (the administrative body that oversees NAFTA),[50] the manner in which the arbitral tribunals define the term "expropriation" is largely discretionary.[51] As such, under NAFTA, arbitral tribunals have not uniformly interpreted the term "expropriation." Arguably, tribunals have interpreted the term in an overly broad manner, such that even the application of legitimate public welfare regulations have been challenged as "expropriations" in investor-state disputes.[52] Thus, these interpretive rules under CAFTA account for the key difference between NAFTA's broad definition of "expropriation" and the construction given the term under CAFTA.

Another key difference between the NAFTA and CAFTA versions of the investor-state arbitration framework is the varying degrees of transparency the two pacts require in arbitral proceedings.[53] Finally, CAFTA provides for the future possibility of an appellate review mechanism for reviewing arbitral awards.[54] This is another critical variation from the NAFTA version of the investor-state dispute settlement mechanism.

As a result of these substantive differences between the two versions of the investor-state dispute settlement mechanisms, the CAFTA mechanism will provide greater protection for legitimate environmental regulations. The rules governing the CAFTA dispute settlement mechanism limit arbitral tribunals' discretion in construing acts that qualify as "indirect expropriations" requiring compensation to foreign investors.[55] Moreover, CAFTA may soon provide an additional level of substantive review of an investor suit's merits.[56] This, in turn, would provide another check on tribunals' potentially wayward interpretations and applications of the Agreement. It is necessary to discuss each CAFTA reform in more detail to understand how CAFTA can afford greater protection to legitimate environmental regulations while still preserving investors' against pretextual protectionist measures.

[57] Environmental groups are concerned that because of variations in the term's construction, a panel might hold that a generally applicable environmental regulation that incidentally harms foreign investors qualifies as an "expropriation" in breach of the Agreement.[58] There is clear evidence that tribunals convened under the NAFTA mechanism apply different interpretations of the scope of the "tantamount to expropriation" language such that legal uncertainty and inconsistency in arbitral findings are a constant danger. This is an ongoing danger because, thus far, NAFTA participating countries have not taken any affirmative steps to correct negative consequences stemming from arbitral tribunals' construction of the term "expropriation."[59]

In contrast, in negotiating CAFTA, the participating countries have proactively addressed dangers posed by an overly broad definition of expropriation, as well as other criticisms and concerns expressed by environmental groups.[60] For instance, in drafting CAFTA, these countries included an Annex imposing certain limitations on arbitral tribunals' discretion to construe the CAFTA Investment Chapter's "expropriation" provision.[61] Annex 10-C of the Agreement is concerned with two forms of expropriation: 1) "direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure," and 2) "indirect expropriation, where an action or series of actions by a [participating country] has an effect equivalent to direct expropriation without formal transfer of title or outright seizure."[62] Regarding environmentalists' primary concern with "indirect expropriations," the Annex establishes a presumption that "nondiscriminatory regulatory actions [intended] to protect legitimate public welfare objectives, such as . . . the environment, do not constitute indirect expropriations."[63] Only in "rare circumstances" is this presumption rebuttable.[64]

The interaction of these and other rules regulating the interpretation of CAFTA's "expropriation" Article limits tribunals' discretion in construing the term as it applies to investor claims. To begin with, these tribunals are bound to interpret CAFTA's provisions as directed by the terms of the Agreement.[65] The terms of the Agreement include Annex 10-C, which outlines the rules governing interpretation of government actions qualifying as prohibited "indirect expropriations." Specifically, footnote 3 to Article 10.7, the "expropriation" provision, mandates that Article 10.7 be "interpreted in accordance with Annexes 10-B and 10-C."[66] In turn, Annex 10-C creates a presumption that general, non-discriminatory regulatory measures are outside the class of prohibited indirect expropriations, "rare circumstances" excepted.[67] Ultimately, the Annex 10-C presumption limits tribunals' interpretive discretion when evaluating "nondiscriminatory regulatory actions" designed to protect the environment.

As an illustration of how the outcome of an investor suit under CAFTA might differ from the outcome of a suit under NAFTA, it is helpful to reconsider the Metalclad arbitration award in light of CAFTA Article 10.7 and Annex 10-C. To measure any potential differences in the reasoning or outcome had the CAFTA Investment Chapter governed the dispute, one must again review the facts and findings from the NAFTA Metalclad arbitration. As previously mentioned, the San Luis Potosi state government had declared property upon which Metalclad intended to build its hazardous waste landfill an "ecological preserve." The local municipality of Guadalcazar subsequently denied Metalclad a construction permit without providing the company notice or an opportunity to present its case.[68] Metalclad brought an investor suit under NAFTA Article 1110. The corporation claimed the Mexican government, through the acts of its political subdivisions, had "interfered with [Metalclad's] development and operation of a hazardous waste landfill" in violation of the provisions of NAFTA.[69]

In rendering its award, the tribunal found the Guadalcazar municipal government had exceeded its authority by refusing a construction permit without providing Metalclad notice or opportunity to respond.[70] In addition, the tribunal held that by declaring the property an ecological preserve, the San Luis Potosi state government had acted to permanently deprive Metalclad of any use of the property.[71] The tribunal further held that these actions constituted "means tantamount to expropriation" in violation of NAFTA Article 1110. The tribunal reasoned the state government had permanently deprived Metalclad of the potential economic returns from the operation of the hazardous waste landfill.[72] In rendering the award, the tribunal interpreted "expropriation" to include "covert or incidental interference" by a government, even if beneficial to the public, with an investor's use or reasonably expected economic benefit from a property.[73] Perhaps most critically, the tribunal reasoned that in determining whether an "indirect expropriation" has occurred, it "need not decide the motivation or intent of the adoption of the [challenged environmental regulation]."[74]

Now assume the Metalclad dispute arose in El Salvador, a CAFTA participating country, rather than in Mexico. Once Metalclad sought arbitration, an arbitral tribunal would convene under Chapter 10.[75] The tribunal would need to determine whether the denial of a construction permit or the designation of Metalclad's landfill property as an "ecological preserve" constituted "indirect expropriation." Here, the arbitral tribunal would not simply construe the term according to its own interpretation of customary international law. Nor would it apply its own construction of elements necessary to establish an "indirect expropriation." Rather, the tribunal would apply the definition of "indirect expropriation," under Article 10.7 and Annex 10-C of CAFTA, to the facts of Metalclad's case.[76] Further, the tribunal would apply the presumption that general, non-discriminatory regulations enacted for environmental protection are not "indirect expropriations." Thus, the initial burden of persuasion would be on the Salvadoran government to show that the regulation was neutral and non-discriminatory.

To meet this burden, the Salvadoran government would make several arguments. First, the Salvadoran government would argue that the municipality denied the construction permit through its general land use decision-making powers. It did so in part because of "ecological concerns regarding the environmental effect and impact on the site and surrounding communities."[77] Second, it would argue that the state government's conversion of 188,758 hectares (of which the landfill was only a small portion) into an "ecological preserve," was done in part "for the protection of rare cact[i]."[78] Further, the Salvadoran government would argue that because the state intended to protect a threatened species, the state properly exercised its environmental regulatory powers in a non-discriminatory fashion. Finally, the Salvadoran government would assert that the tribunal could not classify such a non-discriminatory regulation as a prohibited "indirect expropriation" under the Annex 10-C presumption. Legitimate environmental considerations motivated both actions rather than any direct or indirect desire to seize title.

These arguments would necessitate the tribunal's review of the character and purpose of both the state and municipal governments' actions. It would be necessary to review the regulatory purpose to determine whether the regulatory acts qualified as non-discriminatory. If the tribunal determined the acts to be non-discriminatory in nature, they would then apply the Annex 10-C presumption in favor of excluding those regulations from the class of prohibited "indirect expropriations."[79]

To rebut the Annex 10-C presumption, Metalclad would have to show the regulation's application caused such serious harm to the investment that the action would still be deemed an "indirect expropriation," or that the Salvadoran government's justifications were pretextual.[80] In this hypothetical arbitration, the tribunal might still render an award in favor of the investor if it believed the Salvadoran government's justifications were pretextual and that the real intent was to prevent Metalclad from fully exploiting its investment.[81] The tribunal in the original NAFTA arbitration reasoned it did not have to consider the regulatory intent behind the Mexican action.[82] However, this hypothetical CAFTA tribunal would have to consider El Salvador's regulatory intent to determine whether Metalclad had successfully rebutted the applicable Annex 10-C presumption. Alternatively, the tribunal could find a prohibited "indirect expropriation" if it found the deprivation of the property's expected use qualified as "rare circumstances" where application of a non-discriminatory environmental regulation still amounted to an "indirect expropriation."

While the outcome of the Metalclad arbitration might still be the same if CAFTA governed the dispute, the tribunal's method of analysis would be markedly different. As the above discussion demonstrates, the tribunal would have to consider the regulatory intent behind the challenged regulation as proof of a prohibited "indirect expropriation." This inquiry allows a tribunal to review the rationale for the enactment or application of an environmental regulation. If the tribunal finds a non-discriminatory purpose, the Annex 10-C presumption in favor of that regulation applies. Through this analytical shift, CAFTA provides a mechanism for distinguishing between legitimate non-discriminatory environmental protection measures and pretextual protectionist rules. Because the mechanism turns on regulatory intent and the regulation's character, this reform goes a long way toward ensuring CAFTA does not pose a threat to legitimate environmental regulation as some argue the NAFTA arbitration mechanism does.

[83] Many critics of the NAFTA arbitration mechanism object to the "secretive nature" of NAFTA arbitral proceedings.[84] They argue NAFTA arbitral proceedings are flawed because they limit the right of intervention and participation to actual parties to the dispute. However, investor challenges implicate larger interests such as participating governments' powers to regulate industry for the public good, and the associated interests of the public in such protective regulations.[85] According to critics, the confidentiality of international commercial arbitration denies third parties like non-governmental organizations (NGOs), parties that are by definition non-participants, a mechanism for presenting their interests and views to the tribunal.[86] In short, the NAFTA mechanism denies these groups the opportunity to present their views to the tribunal even though they have a significant interest in the arbitration's outcome.[87]

As the express language in Chapter 11 of NAFTA does not promote transparency in arbitral proceedings, there is some merit to these criticisms. No article or annex of NAFTA grants explicit authority to arbitral tribunals to accept amicus curiae submissions from non-participant third parties, nor does NAFTA mandate publication of pleadings and documents submitted in an investor-state dispute.[88] Instead, the NAFTA Free Trade Commission has recognized that NAFTA tribunals have discretion to open proceedings to public participation.[89] Often, specific arbitration rules determine whether such proceedings are open to public participation.[90] Despite lacking explicit authority, some NAFTA tribunals have accepted amicus briefs from third parties and have held hearings in public, thus promoting greater transparency.[91]

In contrast, the text of CAFTA's Investment Chapter explicitly promotes greater openness in arbitral proceedings in its text. First, Article 10.20 of CAFTA expressly grants tribunals "the authority to accept and consider amicus curiae submissions from a person or entity who is not a disputing party."[92] Second, Article 10.21 provides for public access to documents submitted by the parties, permitting non-disputants to view parties' pleadings and evidence.[93] Third, Article 10.21 also mandates that arbitral tribunals conduct hearings in public.[94]

Article 10.21 balances the public interest in transparency with the interest of investors in ensuring confidentiality of protected information. Subsection (4) protects investors' rights by ensuring confidentiality of "protected information" so long as an investor marks that information as such.[95] Subsection (2) requires that tribunals make arrangements with the parties to prevent disclosure in public hearings when the parties intend to use "protected information" in their arguments.[96] By operation of these three provisions, CAFTA makes transparency compulsory whereas NAFTA makes it merely permissive and subject to the discretion of different arbitral tribunals.[97]

Admittedly, CAFTA's commitment to transparency is not as comprehensive as it could be. Article 10.20(3) does not compel arbitral tribunals to accept amicus curiae briefs from non-disputing parties, but instead merely authorizes a tribunal to determine whether it will accept such submissions.[98] Nevertheless, CAFTA's compulsory requirements for public hearings and public access to documents go a long way toward "lifting the veil" normally covering international commercial arbitrations. Such openness is positive because it affords interest groups access to the proceedings, the arguments of the parties, and questioning and interim decisions by members of the tribunal.[99] This information could prove invaluable to such groups by increasing their understanding of the ways in which arbitral tribunals respond to investor challenges based on the types of environmental regulations at issue. For example, access to this information would assist environmental groups in advocating for change in the methods used to enact environmental regulations to better insulate those regulations from investor challenges.

In this manner, CAFTA's investor-state dispute settlement mechanism responds directly to the criticism of the lack of transparency associated with NAFTA arbitral proceedings by providing desired public access to proceedings. Greater openness, combined with other positive reforms like the commitment to the implementation of an appellate body, promotes a more appropriate balance between investor protection and preservation of a government's power to enact legitimate environmental regulations. This balance results because CAFTA subjects arbitral awards to public scrutiny while preserving investors' interest in maintaining confidential business information. Investors may prevent public disclosure by simply submitting requests for confidential treatment of information in advance of any public arbitration hearings.

[100] This body is responsible for reviewing arbitral awards rendered in arbitrations brought under CAFTA Chapter 10B.[101] Specifically, Annex 10-F commits the CAFTA signatory countries to the following mission: "[w]ithin three months of the date of entry into force of [CAFTA], the [signatory countries] shall establish a Negotiating Group to develop an appellate body or similar mechanism to review awards rendered by tribunals."[102] This Negotiating Group is to consider the following six factors in designing the appellate body:

(a) the nature and composition of an appellate body or similar mechanism; (b) the applicable scope and standard of review; (c) transparency of proceedings of an appellate body or similar mechanism; (d) the effect of decisions by an appellate body or similar mechanism; (e) the relationship of review by an appellate body or similar mechanism to the arbitral rules that may be selected under Articles 10.16 and 10.25; [and] (f) the relationship of review by an appellate body or similar mechanism to existing domestic laws and international law on the enforcement of arbitral awards.[103]

Thus, the Annex is quite particular in specifying the elements the Negotiating Group must consider in determining the appropriate structure of the appellate body.

Similar to the other investor-state dispute settlement mechanism reforms evident in CAFTA, this agreement came about partly in response to criticism of NAFTA's arbitration mechanism by public interest groups.[104] These groups argued the NAFTA system often permitted tribunals to have the "final word" on government regulations thereby undermining the legitimacy of NAFTA's Investment Chapter.[105] This criticism has some merit because international conventions and customary law actually determine the method for obtaining review of an arbitral award under NAFTA. The international conventions and customary international law only require judicial review by courts sitting in the country where the place (or "situs") of the arbitration is located.[106] Judicial review of an award by a court in the situs country may permit broader challenges to arbitral awards, based on the availability of a greater number of grounds for vacating the arbitral award under national law, than would otherwise exist if international treaties were the only applicable law.[107] Nevertheless, such courts employ a highly deferential standard of review to arbitral tribunals[108] and most losing parties' challenges are unsuccessful as a result.[109]

CAFTA's drafters were also concerned that adopting a judicial review process similar to NAFTA's would lead to inconsistent interpretations of the CAFTA provisions. This risk of inconsistent interpretations stems from the fact that domestic law and public policy concerns influencing national courts' interpretations of treaties vary from one country to another.[110] In essence, because grounds for challenging the arbitral awards in a national court could vary based on different national laws, the interpretation of the trade pact provisions could also vary from country to country.[111]

To illustrate this possibility, imagine an investor has a cross-border investment in two different CAFTA countries, subject to a bi-national environmental protection treaty between those same two countries. If the application of that bi-national environmental treaty later negatively affects that investment, then the investor may file suit alleging breach of the same CAFTA provisions by two different signatory countries based on the same facts and causes of action.[112] The investor may decide to locate the first arbitration in one situs country, but then may choose a different situs country for the second arbitration. The investor may cite concerns that the national court that may eventually review the arbitral award is a branch of the very same national government being sued in that second arbitration.

Assuming both arbitrations render final awards, then either of the participating countries could challenge the awards. A court in the situs country of the first arbitration would review the first award, while a court in the situs country of the second arbitration would review the second award. The two courts, reviewing nearly identical arbitral awards with similar interpretations of CAFTA provisions, may arrive at vastly dissimilar results based on different legal grounds available for vacating the award under different national laws. As a result, participating countries could be subject to completely different liability under two separate interpretations of the same CAFTA provisions stemming from otherwise identical facts and circumstances. Such possible inconsistencies highlight the need for greater uniformity in the interpretation and application of the CAFTA investment provisions.

The development of a CAFTA arbitration appellate body is aimed at correcting these perceived flaws in the judicial review scheme by providing for greater scrutiny of arbitral awards. The appellate body also provides greater uniformity in the arbitral tribunals' interpretation of the CAFTA provisions.[113] The appellate body could accomplish these twin goals in two ways. First, the appellate panel could do so by adopting a stricter standard of review of arbitral awards.[114] Second, if the appellate body is empowered to create binding interpretations of the CAFTA Investment Chapter provisions, then arbitral tribunals would be required to adhere to such interpretive precedents.[115] Moreover, this appellate forum would have specialized expertise in interpretation of CAFTA provisions at issue because such interpretation would be its main focus in reviewing arbitral awards.[116]

In this manner, the appellate body would be able to protect environmental regulations from improper investor challenges. It could guarantee a signatory country the chance to seek review in a forum specializing in construction and interpretation of the CAFTA investment provisions.[117] This would insulate particular environmental regulations from future challenges where the harm to the investor is determined to be insufficient as a matter of law under the trade pact to sustain investor suits. The appellate body could dismiss future suits by different investors alleging similar harm from application of the same environmental regulation rather than re-arbitrating the same issue merely because a new arbitral tribunal is considering the matter. Thus, once implemented, the proposed CAFTA appellate body could provide consistency and efficiency in the pact's investor-state dispute settlement processes.

[118] Second, public access to participating party documents and arbitral hearings under CAFTA ensures greater transparency in proceedings by allowing non-participating groups (e.g., public advocacy groups) to observe the parties' arguments and the arbitral tribunal's questions.[119] This in turn, facilitates interest groups' ability to advocate for pro-environmental positions in arbitral proceedings if and when arbitral tribunals accept amicus curiae submissions.[120] Lastly, the CAFTA signatory countries' commitment to establishing an appellate body may eventually ensure greater consistency in the adjudication of investor challenges to environmental regulations. The appellate body would do so by setting binding precedents interpreting the CAFTA Investment Chapter provisions, which might otherwise vary based on differences in views of arbitral tribunals and the national laws under which they operate.[121] Taken together, these reforms will more appropriately balance investor protection with governments' interests in protecting the environment.

The reforms incorporated into CAFTA will achieve this balance by providing definitive criteria for distinguishing environmental regulations from pretextual trade protection. Additionally, these reforms will ensure environmental groups access to the proceedings, providing them with knowledge of the arbitral process, and perhaps even some limited form of advocacy in challenges to environmental regulations.

[122] Because the Agreement fails to specify the methods for implementing the use of amici submissions and the Annex 10-C interpretive maxims governing review of "expropriation" challenges, CAFTA opens the door once again to discretionary implementation by tribunals. Abuse of this discretion is exactly what the CAFTA countries sought to avoid by adopting the substantive and transparency reforms in the investor-state dispute settlement mechanism.[123] Therefore, it is necessary to suggest specific procedural mechanisms likely to encourage consistent adherence by arbitral tribunals to the CAFTA transparency and textual interpretation reforms.

[124] As a result, there is more at stake in investor-state arbitrations than simple adjudication of the contractual dispute between the parties. Rather, there is a judgment by a private tribunal regarding the validity of a public policy or law.[125] Given this dynamic, it is necessary to facilitate participation by non-disputing groups in the form of amicus curiae submissions. Input and participation by public interest groups is necessary because arbitral tribunals tend to focus solely on the disputing parties' interests, which do not represent the full spectrum of interests implicated in such investor suits.[126] These investor suits involve environmental regulations, which implicate the interests of the public as much as they implicate the interests of the disputants. Submission of amici briefs is the only method readily available to ensure that tribunals consider the viewpoints of interested non-disputants.[127]

As discussed previously, CAFTA expressly authorizes arbitral tribunals to accept amicus curiae submissions, but this authorization is discretionary.[128] Clearly, allowing interested non-disputant groups or individuals to submit amici briefs promotes transparency by providing avenues in which interest groups can present their views prior to a tribunal rendering an award.[129] By making the acceptance of amici briefs permissive rather than compulsory, however, CAFTA allows tribunals discretion to accept or reject the input of interested non-disputants at their whim. To prevent tribunals from admitting or denying submissions in an arbitrary and capricious manner, CAFTA signatory countries should make acceptance of amici submissions compulsory.

The CAFTA countries could implement compulsory acceptance of amici submissions relatively easily by amending Article 10.20(3). The Article could be amended to state, "[T]ribunal[s] shall exercise the authority to accept and consider amicus curiae submissions." By substituting the word "exercise" in place of the word "have," CAFTA countries could clearly denote both the tribunals' authority and obligation to accept amici submissions. However, given that negotiations between the CAFTA participating countries were somewhat difficult,[130] it may not be practical to expect agreement on subsequent amendments. Moreover, this proposed amendment may be too broad because it would require acceptance of amici submissions even in disputes more reminiscent of traditional commercial disputes that do not involve challenges to public welfare regulations.

In lieu of actually amending Article 10.20(3), CAFTA participating countries could accomplish the same result by issuing an interpretive statement through the Free Trade Commission that will oversee implementation of the pact once it comes into effect.[131] For example, the Free Trade Commission may interpret the phrase "have the authority to accept and consider amicus curiae submissions" to imply that arbitral tribunals must exercise that authority in cases involving challenges to public welfare regulations like environmental policies. An interpretive statement of this nature would have the effect of binding arbitral tribunals to the stated interpretation of Article 10.20(3).[132] This binding interpretive statement would require acceptance of amici submissions in the cases where it is most needed: investor challenges to public welfare regulations. At the same time, it would avoid potential problems with the scope of the mandatory acceptance rule that could result from amending the actual language of Article 10.20(3).

Mandating acceptance of amici submissions by arbitral tribunals under CAFTA ensures environmental groups and other public advocacy organizations that their voices will be heard. For instance, while the interests of a disputing government and public advocacy groups, or even their own citizenry, may coincide as to the desired preservation of the challenged regulation, they may not have similar reasons for that desired preservation. Therefore, it cannot be said that the disputing government automatically represents and accounts for the views of the public. Some critics might respond that making the acceptance of amicus curiae submissions compulsory infringes on the interest of the parties in achieving speedy, final resolution of their dispute.[133] When investor challenges implicate the public interest, however, then the interests of the disputing parties are not the only ones that matter. Making the acceptance of amici submissions by arbitral tribunals compulsory would allow affected groups whose interests do not clearly coincide with the disputing government to present statements on both their preferred result and the public policy rationale justifying that result.

[134] However, the Agreement provides no express guidance to arbitral tribunals for implementing or applying this presumption to the varying facts underlying different investor suits.[135] Thus, the means of applying this presumption is left to the discretion of the arbitral tribunals and may vary from one arbitral proceeding to another. Further, one tribunal's decision does not carry precedential weight for subsequent or different tribunals.[136] To provide consistency and predictability, it is necessary for CAFTA countries to design some uniform procedural mechanism for implementing the Annex 10-C presumption.

A shifting burden-of-proof mechanism would be the most appropriate procedural mechanism.[137] Such a mechanism would first require participating governments to demonstrate that the regulation in question qualifies as a "non-discriminatory environmental regulation." This would in turn trigger the Annex 10-C presumption that the regulation is not an expropriation. At that point, the burden would shift to the challenging investor to rebut the Annex 10-C presumption by showing that the environmental regulation was in fact pretextual. Alternatively, the investor could rebut the Annex 10-C presumption by demonstrating that the harm to its investment is of such a serious nature that it qualifies as the "rare circumstances" where application of an environmental regulation qualifies as an "expropriation." If the investor fails to rebut the presumption, then the tribunal should declare the regulation non-expropriatory and dismiss the investor's "expropriation" suit.[138] This will ensure protection for truly non-discriminatory environmental regulations against improper challenge while still permitting challenges to trade protectionist measures disguised as environmental rules.

The rationale for adopting this shifting burden-of-proof mechanism is based on three grounds. First, the initial burden of proof on the government can be inferred from the language of Annex 10-C, which calls for the application of the presumption only when a regulation qualifies as a "public welfare regulation." Since the government engaged in the deliberative processes for formulating and promulgating that rule, it is better suited to bear the burden of demonstrating that the regulation relates to public welfare.[139] Second, once the government meets that burden, then the regulation in question is recognized as being for the public welfare and benefit. The private investor should still be able to defeat that finding if it can clearly demonstrate that the public rule is really for the private benefit of government officials or their affiliates rather than for the benefit of the country's citizenry.[140] Third, the establishment of this shifting burden-of-proof will preserve the intent of the CAFTA countries to afford investors protection through private suits. Simultaneously, this ensures procedural efficiency by preventing baseless challenges to non-discriminatory environmental regulations from proceeding beyond the initial inquiry stages.[141]

In light of these rationales, the shifting burden-of-proof mechanism achieves the desired balance between investor protection and insulation of legitimate environmental regulations from improper challenges. The mechanism does so because it appropriately places the evidentiary burden on each party that is best able to bear that burden during each stage of the proceedings.[142] Moreover, it achieves a balance between the promotion of worthwhile investor suits to combat trade protectionism, and the protection of legitimate police powers like environmental regulation from improper challenges by investors. The shifting burden-of-proof mechanism helps to balance these interests by providing compulsory criteria, e.g. mandatory consideration of a government's "regulatory intent" to distinguish between legitimate regulation and disguised trade protectionism.

[143] CAFTA's reforms promote the participation of non-disputant groups like environmental organizations through the endorsement of public access to the proceedings and the authority of arbitral tribunals to accept amicus curiae submissions.[144] In fact, the procedural and substantive reforms enacted in the CAFTA investor-state dispute settlement may represent the triumph of the "Trade Stakeholder Model."[145] The Trade Stakeholder Model "seeks broad participation as an end in itself, not as a means to another goal, such as economic efficiency for global markets."[146] CAFTA's attempt to guarantee wider access to and participation in the investor-state dispute settlement process by groups other than the disputing parties accomplishes one of the main goals of this model of dispute settlement.

The emerging form of dispute settlement under CAFTA is evidence of the continuing evolution of international investment dispute settlement along lines set forth in the Trade Stakeholder Model. Thus, this form of dispute settlement is no longer merely concerned with states and sovereignty, but has evolved to take into account the interests of vastly different sectors of the "global trading society," which includes governments, private corporations, and public advocacy organizations.[147] This truly represents the emergence of a system concerned with the interests of stakeholders rather than one concerned merely with reinforcing a bargain among nation-states.

[148] The experiences of countries operating under NAFTA provide guidance for how CAFTA participating countries can promote trade while still exercising their legitimate police powers under the new free trade framework the Agreement creates. Analysis of the bases for criticisms of the NAFTA investor-state dispute settlement mechanism are equally helpful in the implementation of CAFTA as the CAFTA Investment Chapter adopts many of the features of NAFTA's investor-state arbitration scheme. For instance, one negative result of the arbitral jurisprudence under NAFTA is the fear that investor challenges against non-discriminatory environmental regulations enacted by participating governments may lead to a "regulatory chill." Critics of NAFTA warn that arbitral awards like that rendered in Metalclad v. United Mexican States might inhibit protection of the public and the environment for fear of potential liability in excess of millions of dollars under NAFTA arbitrations.

CAFTA participating countries have responded to fear and criticisms by public advocacy organizations by implementing reforms to the CAFTA investor-state dispute settlement mechanism. First, they have promoted greater transparency by expanding public access to arbitral proceedings and documents. Second, they have provided greater protection of legitimate environmental regulations by using an interpretive presumption that such regulations are not "expropriations." Finally, they have encouraged greater consistency in arbitral awards by committing to the establishment of a permanent appellate mechanism for review of CAFTA arbitral awards.

These reforms go a long way toward achieving the necessary balance between protection of investor rights and preservation of the integrity of legitimate environmental regulations. However, the potential for unfair imposition of liability on participating governments based on the mere application of non-discriminatory environmental regulations still exists because CAFTA does not provide explicit rules for implementing these procedural and substantive reforms. Rather, the Agreement leaves the implementation of these reforms in the hands of arbitral tribunals that have the discretion to determine how best to apply them. Given the lack of explicit rules guiding implementation of these reforms, the CAFTA countries should enact supplemental procedural reforms that mandate transparency by compulsory acceptance of amicus curiae submissions, and preserve correct judgments in awards by applying a shifting burden-of-proof standard that requires the party with the greater knowledge to meet the required evidentiary showing. Following these recommendations would ensure consistency and uniformity in CAFTA arbitrations involving challenges to environmental rules because tribunals would be unable to deviate from these compulsory procedural rules.

The question remains, of course, whether the substantive and procedural reforms contained in the CAFTA investor-state dispute settlement mechanism will successfully cure the ills associated with prior NAFTA arbitrations. As of this date, no arbitration has yet tested these reforms in part because CAFTA itself has not yet been fully implemented in all signatory countries.[149] Moreover, the first arbitration brought under the CAFTA Investment Chapter was only filed in March 2007 and does not involve a challenge to the application of environmental laws to a foreign investor.[150] Thus, the potential remains for CAFTA to answer the critics of investor-state arbitration by promoting greater consistency, correctness, and transparency. However, the ability of the CAFTA reforms to make such a difference in the investor-state arbitration setting shall remain theoretical until final awards in environmental-related arbitrations test the application of these presumptions and procedural reforms.

The fact that the drafters of CAFTA have included these procedural and substantive reforms indicates they are clearly responsive to some of the perceived flaws in NAFTA Chapter 11 investor-state arbitral jurisprudence emerging in the last ten years. In essence, CAFTA may represent the evolutionary advancement of the investor-state dispute settlement mechanism based upon the lessons learned from NAFTA's legitimacy crisis. Nevertheless, this proposition will only be verifiable once a body of arbitral case law develops under CAFTA in the coming years.