No. 278.
Mr. Phelps to Mr. Frelinghuysen.

No. 58.]

Sir: It has become an unpleasant duty to report acts committed, or proposed to be done, by the Iglesias Government, affecting interests of Americans, of a grave and unusual character, and for the better understanding of the possible reach of these earlier measures of the Government, it is necessary to enter into considerable detail.

It will be known to you that the late Henry Meiggs entered into a series of contracts with the Government of Peru for railway construction upon a gigantic scale, his contracts in hand at one time aggregating $132,000,000, with the result that Americans became largely interested in the railways of the country. The Peruvian Government was unable to meet its contracts, resulting in a number of the chief railways of the country coming into the management of Americans, engineers and others, under contract for the administration and completion of the lines, the roads generally to revert to the exclusive use and benefit of Peru, upon fulfillment by it of specified conditions. The two most important roads of the country are so managed, while others, in the north and elsewhere, are in the control of Americans under contracts with the Government direct, or with the original contractors. The present difficulties have arisen in instances involving both classes of contracts.

General Iglesias arrived here with but little money, and has been since in receipt of small revenues, while the credit of his Government has not been sufficient to secure loans. His officials have been unable to pay transportation bills, and no payments have been made except by sea, so that railway proprietors have been carrying without compensation and with no very flattering prospects for future payment. The exactions, requirements, and requisitions for services have not appeared less urgent or less in amount because of the inability to pay.

The first of the present difficulties to which I refer relates to an American company operating the transandine railway, from Callao and [Page 408] Lima, over the mountains to the Oroya River and to the mines of Cerro del Pasco. The contract with the Government invol ves the completion of the road from Chicla, near the mountain summit, to the Oroya, the road to Cerro del Pasco, and the mining tunnel to drain the mines, of which fabulous accounts have come down to us from the past. The company is known as the “Compania de la Oroya y Minerales de Pasco.” The original company contracted to construct the roads, &c., and provisionally to manage them. It was to have extensive mining rights, and was an association of foreigners organized under Peruvian laws. Its contract with the Government was modified in the year 1880, with power to transfer all its rights to any person or persons, company or companies, foreign or Peruvian, in order to facilitate procuring capital to complete the work, the main road, as before stated, being completed only to Chicla, at an altitude of over 12,000 feet. This right was exercised and the transfer made to an American organization, the new company retaining the old name.

When the dictator, Pierola, was making his strenuous efforts for the defense of Lima, and Callao was blockaded by the Chilians, the dependence of Lima for a time was upon the little port of Ancon, connected with the capital by the Chancay Railroad. The road was without the necessary rolling-stock, and was in bad condition for this unusual requirement. In consequence, Pierola issued a decree directing the Oroya Railroad Company, of which William H. Cilley was then, and is now, the managing director, to manage the Chancay road, and to supply such engines, cars, materials, &c., as might be necessary, for which compensation was to be made, and a considerable sum of money was paid to Mr. Cilley for repair of the road, many thousands of men being put upon the work. Ancon, in time, was blockaded, and the road to the north of that place buried and made useless by shells fired from the blockading vessels. It so remains to the present time.

The Chilian occupation of Lima followed not long after, and the road was under the military control of the enemy until the arrival here of Iglesias. The Chilians contemplated carrying the railway iron and rolling-stock to Chili, as was done in other instances, but surveys did not result in reports favorable to the project as a paying enterprise. The road has not paid expenses, and has fallen into still worse repair than when taken in hand by Mr. Cilley. A system of annoyances and exactions was inaugurated at an early day in the office of the minister of Government respecting both the Oroya and Chancay roads, but especially the latter, Mr. Cilley in consequence requesting the Government to put some other person in charge of the road, as he wished to be relieved of it and of its responsibilities. Correspondence and decrees followed and an attempt was made to put an official on the Oroya road at the cost of the company and in violation of its contract.

These matters were more or less known to me as they occurred, in part through publication of the correspondence, and culminated in the issuance of various decrees, the last in order directing Mr. Cilley to deliver to Mr. Wakulski, appointed administrator of the road, railway materials, cars, engines, &c., property of the Oroya company, or personel by purchase or lease, to make repairs to engines within specified time at the workshops of the Oroya company, all under penalties, and it orders that employés, several being Americans, should continue service in their respective positions until relieved. Proceeding at once to the foreign office I told Mr. Larrabure I desired to see General Iglesias himself concerning the decrees, to whom I said that no government on earth among civilized nations would attempt to seize property in that manner, [Page 409] and that I felt sure he had not intended to authorize anything of the kind; that if the Government needed the property there were proper ways to secure it by purchase, contract, hire, or otherwise.

After examining the decree the general declared it did not call for delivery of property not belonging to the Chancay Railroad and receipted for by Mr. Cilley on inventories. I replied, “Then I am distinctly to understand, and can so inform Mr. Cilley, that the Government will not call upon him under that decree to deliver property belonging to him either by lease or purchase, and not pertaining to the Chancay road?” He replied, “Certainly you are;” adding, “I might as well direct Mr. Cilley to deliver the coat off his back as to deliver cars and material not belonging to the Government.”

Notwithstanding, a few days later, notice was addressed to Mr. Cilley, by the prefect of Lima, that he should proceed to seize a certain number of engines and material, not property of the Government. Immediately I went, to see Mr. Larrabure, and, not finding him, wrote an informal note, and inclosed copies of the prefect’s notice. Mr. Larrabure subsequently informed me the order to the prefect had been modified. With this assurance I rested content until some days later, when, upon receipt of a note from Mr. Larrabure, I went to the foreign office. Mr. Zaldivar, minister of the Government, was called in. A conversation began as to details of the road management, &c., but I told Mr. Zaldivar “such details did not concern me; that it was the seizure of property I felt anxious about, and that I was greatly interested in settling the matter in some satisfactory manner, securing the Government the service it desired to Ancon and saving it from greater difficulties that I saw must arise from persistence in the orders in question while protecting Mr. Cilley’s rights.”

That gentleman was called in, and, I saw, completely won Mr. Larrabure’s confidence, but Mr. Zaldivar insisted that “a decree once issued was irrevocable. A Government could never recall or annull, and that while he asked Mr. Cilley to deliver the next morning two locomotives for service on the Chancay road, he should send soldiers to seize them if not peaceably delivered.” In other words, there was no question of contracting for, hiring, or even borrowing, but a demand to deliver at discretion. The minister remarked that “the Government had a right to appropriate private property to its necessities.” I replied, “The necessity must first exist, and then the condemnation and payment be made in accordance with law.” In this instance the road is usable to Ancon, a place to which some families of Lima resort at this season for bathing, Mr. Zaldivar’s family being one. The railway otherwise is now of little importance and no public interest would suffer through its discontinuance.

The following day I saw Mr. Larrabure, and told him “I had hoped to be able to bring about an amicable adjustment, perhaps by some new contract have the road put into effective and satisfactory operation, thus removing one of the difficulties seemingly so needlessly thrust upon the Government, but that I was informed a force had been ordered at 2 p.m. to proceed to seize the engines and to collect fines for non-obeyance of decrees, and I felt such a course to be so arbitrary and inexcusable that I should feel it necessary to cable you should the Government persist; that he might be assured it was a very unpleasant matter for me; that he had observed that I limited myself to objecting to the seizure of American property without process of law; that there were courts of law to which I thought questions of administration or of accounts should [Page 410] be submitted.” They proposed to seize the safe of the Oroya Company in payment of a fine of 500 silver soles imposed by decree of Zaldivar.

As before remarked these events have been known to me during their occurrence, and while I have been careful to keep aloof in the hope of a settlement, and because I think diplomatic intervention should be resorted to only as an extremity in the difficulties our countrymen encounter in their self-imposed business pursuits in these countries, I have been aware of Mr. Cilley’s good faith and of his original good-will to the Government of General Iglesias, and I have viewed the official proceedings as in entire disregard of individual rights as well as of common sense in public procedure. I feel sure it did not receive Mr. Larrabure’s approval. At all events the order to the prefect was recalled and an arrangement made with Mr. Cilley so far as regards the two locomotives. The fine was rescinded and criminal proceedings instituted against him recalled. * * * The other instance is that of a railway and pier at Salaverry and Trujillo.

When General Iglesias first claimed to exercise power by virtue of the local assembly of Caxamarca, a delegate, in the person of a membe of his family, was sent to represent him at Trujillo. This officer interfered in the contracts for the construction of the pier and railway, from which has arisen grand difficulties, involving the interest of foreigners.

Briefly the facts are these: In 1872 the Government of Peru entered into a contract with St. Larrañaga for the construction of the railway of Trujillo and the pier at Salaverry, but being unable to fulfill its part of the contract, in 1875 modified the contract; bonds, to be given to him in proportion to the completed work, were issued to his order, which bonds were to have been paid from the net proceeds of the works, and a small amount was so paid. Floods in 1878 caused heavy damages to the road, and war supervened in 1879. The works are in consequence incomplete. As to the validity of the contracts there is no question, but Larrañaga fell into financial difficulties.

The pier had been bargained for, as had locomotives and cars, but although imported for delivery were not given over to Larrañaga from his inability to make payment.

In 1881 the Chilian army seized the railway and took possession of the locomotives and cars, still in the original cases in which they had been imported, and applied them to use on the railway, their owners, Grace Brothers & Co., protesting against the right of seizure.

At the solicitation of Larrañaga the railway Was subsequently delivered to him by the commander of the Chilian force in occupation, upon express stipulation of payment to Grace Brothers & Co. for the rolling stock referred to.

In 1876 Grace Brothers & Co. had purchased of the bonds issued on account of these constructions an amount equal to 80,000 soles.

In July, 1883, Larrañaga made a contract of assignment for the benefit of certain creditors named in the contract, and Grace Brothers & Co., and B. Valdeavellano were made receivers in behalf of themselves and other creditors,

Larrañaga’s contract of 1875 made him the administrator of the road and pier, under certain requirements as to the disposition of the proceeds for a period of twenty years. At the expiration of this term the Government might take possession upon condition of paying par for the bonds still unredeemed from the portion of the road and pier earnings to be applied to their payment, failing in which the works were still to remain in the management of Larrañaga. The proceeds of the works were to be applied to the payment of expenses, improvement, [Page 411] and repairs, and the interest and sinking fund for the bonds. The net proceeds were to be divided, two-thirds for the Government and one third for Larrañaga. Larrañaga’s assignment embraced his rights as administrator and those he had acquired as contractor and manager. The parties were substituted, as temporary administrators, as security to his creditors, and the contract is terminated at any moment when Larrañaga can satisfy their claims. They are under obligation to carefully fulfill the contract with the Government, and to diligently prosecute the works.

Under this assignment, which it will be noted is in no sense a transfer of the contract of Larrañaga with the Government, the pier has been in part erected, the road improved and material purchased, now en route to Peru for the extension of the road.

In the month of August or about one month after the contract of assignment had been made with Larrañaga, the delegate before referred to intervened in the affairs of the road, and besides demanding immediate payment by the receivers of 10,000 silver soles, and thenceforward of 3,000 soles per month, undertook to modify Larrañaga’s contracts. These demands were paid under protest.

On the 17th January last a decree was issued, followed by one dated the 23d of the same month.

The first assumes that there is an attempt to hypothecate the road and impose claims upon it injurious to the interests of the Government in the road and pier, and that the contract between Larrañaga and his creditors required the approval of the Government.

There is no foundation for either of these assumptions. The contract of assignment in careful terms requires the exact fulfillment of the conditions of his contract with the Government, and using the terms applied in the contract, “to assign particularly and temporarily the interests and rights I have acquired as contractor and manager.” There is not the least appearance of an attempt to hypothecate the property in any form. This part of the decree is therefore founded in error.

The right to transfer the contract of 1875 was reserved to Larrañaga, conditioned upon its approval by the Government.

If there was any Government in Peru to approve or disapprove in July and August last it was that of Montero at Arequipa.

But Larrañaga in his assignment to his creditors has not pretended to transfer his contract, but has expressly provided that the temporary assignment shall terminate at any time upon payment of his creditors. In further proof of the nature of the contract it is noted that no provision is made for the payment to Larrañaga of anything whatever for the interest accruing to him through large investments made by him prior to the assignment; only the portion of the net receipts falling to him is to be applied by the receivers in liquidation of his debts and of the outlay by his creditors in the completion of the pier and road.

The purpose of the contract was the completion of the pier and road with the rolling stock and appliances necessary to their profitable employment. It was therefore a contract in the interests of the Government, contractor, and creditors.

The assumption of power on the part of the Government to intervene in the assignment is certainly not warranted by any condition found in the contracts of Larrañaga with the state or with his creditors.

The pier partially completed, and the cars and engines have never been delivered to Larrañaga, but have been placed in use or construction upon the faith of the contracts and the assignment. The Government has no right of ownership, since it could acquire such only through [Page 412] its contractors, who was to acquire it through the fulfillment of the assignment.

The further assertion in the decrees that the contract with Larrañaga’s creditors is evidence of his inability to meet his responsibility for the construction of the works is disproved by the very fact that the assignment secured the prompt commencement of work upon the pier and the improvement of the railway bed, the supply of needed rolling stock and the purchase of materials for the prosecution of the construction and completion of the road.

It will be observed that no provision is made in the decrees for the refundment of the 10,000 soles paid to the delegate by the receivers or for the material and rolling stock supplied, not property of Larrañaga or of the Government, and never again into the possession of either.

The seizure of the road by the Government is in violation of the terms of the contract with Larrañaga, it not having paid off the bonds as a preliminary to any right of possession.

But its treatment only concerns the United States in so far as it injuriously and wrongfully affects the interests of Americans believed to have been acting in entire good faith.

The act of seizure and appointment of a manager in behalf of the Government is an arbitrary exercise of power, illegal and unjustifiable, and one not called for by any exigency of public welfare or safety.

* * * * * * *

I have, &c.,


P. S.—I have overlooked a portion of the last of the decrees and the third article of the decree of the 17th of January.

It is quite apparent that a formal assignment by contract is a much more complete and formal authorization to act in place of another than a power of attorney, and that Grace and Valdeavellano have not proposed or pretended to act as agents of Larrañga, but in their own right by virtue of their contract with him, a contract not calling for the recognition of the Government. The recognition or non-recognition cannot effect its validity; and the terms of the contract do impose upon the receivers all the responsibilities in the observance of the contract during their continuance in the management which Larrañaga was under. That they were supplied with funds is proven by the measures taken to complete pier and roads.

S. L. P.