Confusion about the character of Donne is a common reaction to Palace of the Peacock. Let me see if I can help shed some light on the subject for you. In the midst of these characters from the 1500s, we find a story about a journey down a rushing river in Guyana. Donne is the captain of this postmortem voyage.
First, we must say that yes, you are right to question whether Donne is alive. He is NOT! The story is narrated by Donne's twin brother and relates how Captain Donne was on the river in Guyana for two reasons: to search for Mariella (who eventually murders him) and to find cheap laborers among the native Guyanan population in order to staff his plantation. Captain Donne turns out to be an absolutely ruthless plantation owner and captain. These are his own words:
Life here is tough. One has to be a devil to survive. I’m the last landlord. I tell you, I fight everything in nature – flood, drought, chicken hawk, rat, beast, and woman...
He has absolutely no respect for the natives of Guyana. He shows this by the way he treats his crew, each of whom represent the major races of Guyana in the post colonial time period. They are indigenous, Asian, as well as African. We learn that the voyage is doomed from the start in that all of the characters are either murdered or drowned, all dead.
We learn even more about Donne by listening to the brother's account of his relationship with Mariella. She is a Native American who was originally seduced by Donne (although she originally had no interest in him). Eventually she is both exploited and abused by Donne so much that she finally runs away. Captain Donne is "now" frantically searching for her, only to be murdered by her in retribution later. It is also significant that Captain Donne stops the ship at the territory named Mariella in order to continue their mission.
In conclusion, this story is proof that Harris is rejecting the typical writing of the time period. The dead Captain Donne is brought back (as a ghost of sorts) beside his brother, the narrator, by the end of the story! We learn at the end that it was all "a vision," and that it's possible that none of it happened in the first place!