Article 10.1 of the Dominican Republic Central American Free Trade Agreement (DR-CAFTA) provides:

"1. This Chapter applies to measures adopted or maintained by a Party relating to:

(a) investors of another Party;

(b) covered investments; and

(c) with respect to Articles 10.9 and 10.11, all investments in the territory of the Party...

3. For greater certainty, this Chapter does not bind any Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Agreement."

Article 10.28(g) provides a non-exhaustive definition of investment and includes "licences, authorizations, permits and similar rights conferred pursuant to domestic law".

As part of the same list, Article 10.28(e) provides for "turnkey, construction, management, production, concession, revenue-sharing and other similar contracts"

The DR-CAFTA entered into force between Guatemala and the US on 1 July 2006.

The Vienna Convention on the Law of Treaties (Vienna Convention) sets out the principles governing the construction and interpretation of treaties. Under Article 28, a treaty will not have retroactive effect "unless a different intention appears from the treaty or is otherwise established".

In 1997, the claimant (RDC), a privately owned railway investment and management company incorporated in the US, won a bid (as one of only two bidders) to use the Guatemalan railway infrastructure to provide railway services in Guatemala (Usufruct Contract). It planned to rebuild the rail system with an investment programme of about US$10 million. FVG, a company majority owned by RDC, subsequently signed a contract with FEGUA, a Guatemalan state-owned company, which granted it rights of way over the railways (Contract 402). Both the Usufruct Contract and Contract 402 were ratified by the relevant Guatemalan government department and therefore, were lawfully concluded. In return, RDC (through FVG) made certain payments to FEGUA. FVG and FEGUA also entered into a trust fund agreement (Contract 820) which provided for certain payments to be made by FEGUA into a trust fund, which in turn provided for the modernisation of the railway system.

FVG subsequently won a further bid (as the only bidder) to use FEGUA's rail equipment and signed a further contract (Contract 41). However, this contract was never approved by the relevant authority. A further contract (Contract 143) was signed by the parties in August 2003 and subsequently modified by Contract 158. Contract 143 allowed a period of three years for the government to declare it lesivo (harmful) and therefore, void.

In 2005, FVG commenced domestic arbitration against FEGUA for breach of Contracts 402 and 820, alleging that FEGUA had failed to remove squatters from the railway and failed to make payments from the trust fund. FVG also claimed that, as a result of the request for arbitration, FEGUA had asked the Attorney General to issue an opinion on the validity of the Usufruct Contract, Contract 143 and Contract 158.

The Attorney General issued an opinion in August 2005 (the Lesividad Opinion) in which he recommended that Guatemala (G) declare the relevant contracts void as not in the interest of the country. FEGUA issued an opinion in January 2006 agreeing with the Attorney General and claiming that the contracts had not been awarded as a result of a public bid.

Just before the expiry of the three-year period referred to in Contract 143, on 25 August 2006, a resolution was published, declaring the contracts lesivo, that is, harmful to the interests of the state, and therefore void (the Lesivo Resolution). It was signed by the President on 11 August 2006. The parties disputed when RDC had learned of the Lesividad. G argued that the process had started in late April 2006.

RDC commenced ICSID arbitration under the DR-CAFTA against G on its own behalf and on behalf of FVG. In an earlier decision on jurisdiction, the tribunal had concluded that claims in the domestic arbitration were excluded from its jurisdiction. However, it had concluded that there might be other claims other than those at issue in the domestic proceedings.

G raised three jurisdictional objections.

G argued that the tribunal did not have jurisdiction because the claims related to a dispute and acts or facts that pre-dated the DR-CAFTA's coming into force (1 July 2006) and that RDC's claim was a continuation of a dispute that arose before that date. Relying on Article 10.1.3 of the DR-CAFTA and Article 28 of the Vienna Convention, G contended that the general rules apply unless there is a special clause for retroactive application. The phrase "for greater certainty" at the beginning of Article 10.1.3 indicated that an explicit non-retroactive clause was included. The key test was whether facts or considerations which gave rise to the earlier dispute continued to be central to the later dispute. Here, G argued this was a pre-DR-CAFTA dispute because the facts which gave rise to the decision of lesividad had existed since 2004, when G claimed it had questioned the legality of the contracts. The Lesivo Resolution came into effect when the parties were unable to reach a settlement to cure the underlying illegalities. However, the dispute did not come to an end then or crystallise into a new dispute.

RDC-FVG claimed that it had not been informed of any defects in the contracts in 2004. It claimed that it had heard a rumour about the contracts being declared lesivo in May 2006, but this had not been confirmed until August 2006. It argued that the customary international law provided that, apart from expressly stated intent to the contrary, an investment treaty applies to any dispute existing between the parties at the time of the treaty's entry into force.

G argued that the contracts here did not fall within the definition of "investment" in Article 10.28(g) in the DR-CAFTA . Any licence, authorisation, or permit (among others) had to be conferred following domestic law if they were to constitute an investment; if they do not create rights protected under domestic law, they do not have the characteristics of an investment. G argued that there were grave legal defects in the contracts and that they had not been conferred in accordance with Guatemalan law. RDC argued that its investment was not limited to the contracts (although there was a broad definition of investment in the DR-CAFTA). Its investment also included its controlling interest in FVG.

Despite the tribunal's previous jurisdictional order relating to the local proceedings, G claimed that RDG had included claims relating to the removal of squatters and payments to the trust fund which were the subject of local arbitration proceedings. RDG claimed that its claim of breach of fair and equitable treatment was based on the Lesivo Resolution and not part of the earlier excluded claims.

Three issues were to be addressed:

G had argued that RDC's investment was not a covered investment under the DR-CAFTA or the ICSID Convention because the investment was illegal and did not create rights protected under domestic law. Its arguments were based on Article 10.28(g) of the DR-CAFTA and the fact that the contracts were not obtained as a result of a public bidding and did not receive Presidential and Congressional approval. RDC argued that the contracts were in the nature of a concession under Article 10.28(e), which does not refer to domestic law. The tribunal concluded that, while the reference to domestic law was limited to Article 10.28(g), it was not right to infer that other forms of investment may be contrary to Guatemalan law. Therefore, it was immaterial whether the contracts qualified as an investment under Article 28.10(e) or (g). "Conferred pursuant to domestic law" was not a characteristic of the investment to qualify as such but a condition of its validity under domestic law.

Having considered the facts, the tribunal concluded that both parties to Contract 41 conducted themselves as if the contract had been in effect, as they had done in respect of Contract 402. The contracts were declared lesivo because of a lack of approval by the relevant authorities or because of a need to follow procedures for public contracting which they had not been able to do due to the approvals being entirely under government control. Principles of fairness should prevent the government from raising violations of its own law as a jurisdictional defence when it had overlooked them and already endorsed an investment which did not comply with its own laws. Therefore, G was precluded from raising any objection to the tribunal's jurisdiction on this ground.

Having considered the facts, the tribunal concluded that RDC had continued to press claims in relation to the trust fund which were excluded from these proceedings by reason of the earlier decision on jurisdiction. In relation to the squatters, the tribunal concluded that to the extent that RDC could prove that there was a difference between the breach of contract claim in the domestic arbitration proceedings and a failure by law enforcement authorities to provide full security after the Lesivo Resolution has been passed then, prima facie, the tribunal would have jurisdiction to consider measures which were part of the conduct subsequent to the Lesivo Resolution.