No. 135.
Mr. Seibert to Mr. Bayard.

No. 180.]

Sir: I have the honor to inclose herewith copies of the notes exchanged between the British minister here and the Chilian minister of foreign relations, relating to Chili’s liability for a portion of the Peruvian foreign debt, and the Grace-Aranibar contract, as published in the Diario Oficial, and also a translation of the same.

I am, etc.,

C. M. Seibert.
[Inclosure 1 in No. 180.—From the Diario Official, February 3, 1888.—Retranslation.]

Mr. Fraser to Señor Amunategui.

Mr. Minister: In the conversation I had the honor to have with you this morning, you asked me to send in writing a memorandum of the two communications relating to the subject of the Peruvian creditors and their claims on the revenue of Tarapaca, which Her Majesty’s secretary of state for foreign affairs had expressed to me the desire that I should place to the knowledge of the Government of Chili.

I now take pleasure in so doing, in as nearly as possible the same terms as my instructions.

In view of the willingness of the Peruvian Government to take its proportional share in the arrangement of the Peruvian debt, Lord Salisbury indicated to me the desire that by means of friendly representation I should try to induce the Chilian Government to make some proposition for the discharge of its responsibility respecting the hypothecate claims on the Province of Tarapaca, and in this manner to put an end to the constant complaints of British creditors.
The bond-holder’s committee having called the attention of Her Majesty’s Government to the fact that Peru has been compelled to abandon an agreement already concluded, for the liquidation of the Peruvian foreign debt, simply because the Government of Chili did not approve of that agreement, the Marquis of Salisbury has instructed me by telegraph to ask that the Chilian Government be good enough, to explain exactly in what its objection to the Grace-Aranibar contract consists, in order that this contract may be modified in reasonable terms, according to the meaning of these objections.

Improving, etc.,

Hugh Fraser.
[Inclosure 2 in No. 180.—From the Diario Official, February 3, 1888.—Translation.]

Señor Cuadra to Mr. Fraser.

Sir: I have received your note dated December 28, 1887, in which you were pleased to send me a written memorandum on the instructions you received from Her Majesty’s secretary of state, and which have for their object:

To induce the Chilian Government by means of friendly representation to formulate some proposition in discharge of its responsibility to the hypothecate claims that may affect the Province of Tarapaca, thus putting an end to the losses of British creditors; and
To point out the precise objections which the Grace-Aranibar contract suggests to the Government of Chili, adjusted in the past year by the representatives of Peru and the Peruvian bond-holders referred to by you.

The simple exposition of the facts will be sufficient to satisfy your wishes, and to form a correct opinion of the antecedents relating to the two points mentioned.

From the official documents of Peru, dated immediately before the declaration of the war, it is shown that the total foreign debt of that country at that time was £32,960,706, of which sum £11,141,580 pertained to the loan of 1870, and £21,546,740 to the loan of 1872, and £272,386 to the bonds of the Pisco and lea Railway and those called New [Page 183] Granada and Ecuador. Dr. Consequently the bonds from the loans of 1870 and 1872 form the foreign debt of Peru. The said loans had for their object the construction of railroads, irrigation of public lands, and other national works.

It may be of interest to know the origin, development, and legal consequences of the referred-to loans, in order that the controversy raised by the creditors of Peru can be judged with correctness.

By the act of January 15, 1869, the Government of Peru was authorized to issue bonds to pay for the construction of the railroads “from Arequipa, Puno and Cuzco from Chimbote to Santa and Huarez; from Trujillo to Pacasmayo and Cajamarca; from Lima to Jauja, and such others as the Republic may need.” The said act did not authorize the Government to mortgage the guano deposits of the territory.

On January 19, 1870, the representative of Peru contracted with Dreyfus Bros. & Co., for the placing of the loan for the sum of £11,920,000, and in article 4 of said contract it was agreed as follows:

“As security for the payment of the interest and principal of such loan, the Government affects (afecta) all the revenue of the nation, and especially the receipts of the custom-houses of the Republic and the proceeds of the sale of guano in Europe, America, etc.” In the bonds emitted in compliance with the said contract, it is said in article 6 “that the Government of Peru under the faith of the nation affects (afecta) the fiscal receipts of the Republic, and especially the net proceeds of guano, etc., the railroad from Arequipa, etc., and the customs revenue of the country.”

There is nothing in the law (act) authorizing the loan of 1870, nor in the contract with Dreyfus, which was its result, nor in the text itself of the bonds, that provides for the mortgage of the guano deposits of Peru, neither in the informal way in which later on the bonds of the loan of 1872 were issued.

The Government of Peru affected (afectó) the property of the nation in general declarations and in terms current in that kind of contracts, as promises of honor, but it does not constitute a real mortgage.

The act of January 24, 1871, authorized the Peruvian Government to construct the railroads of Cuzco, Cajamarca, and Ancachs, of Puira and Trujillo to Huamachuco, and the prolongation of the Oroya railroad to the city of Ayacucha; and for this it was authorized to contract a loan of £15,000,000, of which sum £2,000,000 were to be applied to irrigation works on the coast of the Republic. The said law does not authorize the Government to hypothecate the guano.

On January 7, 1871, the Peruvian Government contracted with Dreyfus Brothers & Co. for the placing of this loan. Article 4 of said contract says: “As security for the payment of the interest and sinking-fund of this loan, the Government affects (afecto) all the income of the nation, now created or to be created, and especially (1) the proceeds of the sale of guano, etc., (2) the railroads and works of irrigation, and (3) the receipts of the customs revenue, etc.”

At the issuing of this loan an attempt was made to raise it to £36,000,000, excess over the £15,000,000 to be applied to the payment of the Peruvian loans of 1865 in England, of 1866 in the United States of America, and of 170 in Europe. This procedure was publicly objected to, and the stock exchange reminded that the text of the law authorized a loan of £15,000,000 only, and not one of £36,000,000, declared the excess of the issue illegal, and the contractors at that time obtained the placing of only a relatively small amount.

In the issuing of this loan, which was attempted to exceed in the sum of £21,000,000 and which at the end was exceeded by £6,546,740, neither the formula of the act, in the printing of the bonds, nor the clear and precise terms of the contract of July 7, 1871, emanating from the said act, were observed. The following was printed on the bonds: “The Government of Peru, under the faith of the nation, mortgages all the existing guano beds of the Republic, and especially all the guano deposits,” etc.

The procedure which inspired the attempt of an illegal issue was applied to the test of the bonds, printing on them a mortgage which did not exist, neither in the contract nor in the respective act, and which was established by the issuers of the loan, who were at one and the same time the consignees of guano and the providers of funds of Peru.

The Peruvian Government could not mortgage the guano existing in the Republic, because the acts of 1869 and 1871 did not confer that authority, and because the contracts entered into by said Government for the placing of both loans did not stipulate any mortgage lien whatever on the properties of Peru.

The imposition of the mortgage lien on the bonds of 1872 was a procedure unauthorized in its origin, irregular in its form, and completely null and void in its results.

It is hardly necessary for me to observe that a mortgage of a State in favor of private parties does not and can not exist. International law does not recognize the formula accepted, nor tolerates any other for the constituting of this kind of liens. Neither can it be said that there exists a civil mortgage to which the rules of private international law are applicable, because in the issue of the bonds of 1872 all the legal conditions are wanting to establish a real mortgage.

[Page 184]

And this is a doctrine founded on fact, and on authorities which it is opportune to state (to recall to mind).

On July 1, 1875, the Peruvian Government suspended absolutely the service of its foreign debt, and the creditors of Peru, in presence of such situation, agreed to reduce to one-half the rate of interest first stipulated, agreeing, moreover, that the Peruvian Government might take from the proceeds of the guano £700,000 yearly to attend to its own proper expenses. In this manner the creditors of Peru, who claimed to have preferred rights and liens, acknowledged the primary right of Peru to attend before all else to the expenses of its own existence.

Notwithstanding the obligations imputed to the Peruvian Government in the text (drafting) of the bonds of 1872, and the agreement of 1875, which explained the extent of the guaranty stipulated on said bonds, the Government freely disposed of the guano and in the form that it believed most advantageous to the interests of the State. It was for this reason that the bondholders repaired to the courts of London, Paris, and Brussels against the consignees who sold the guano for their own account and benefit and of the Peruvian Government.

The supreme court of London declared “that the bonds issued by the Peruvian Government did not contain any hypothecate responsibility, but simply promises of honor which did not constitute obligatory contracts before any tribunal of a foreign country, not even before the common courts of the country that issued them without the consent of that country.” The court of appeals of Paris declared that “from the repeated expressions of compromiso, garantia, assignacion hsipoteca jeneral and especial, showed that the Peruvian Government had only pledged in a general manner like an ordinary debtor to the service of one of its loans the resources and faculties, designating without including on the other hand those of another nature which might pertain to it, and that the movable character of the things offered as guaranty excludes all hypothecate right, etc.,” and concluding by condemning the claimants to pay all costs of appeal as well as the costs of the first instance. The court of justice of Brussels gave a like decision and for analogous reasons.

The conflict of interests produced by the Peruvian bondholders with the consignees engaged by Peru for the sale of guano resulted, as is seen by judicial action, that the pretended hypothecate rights of the bondholders was universally disauthorized, and that, too, by the highest judicial authority of the nations where the referred-to bonds circulated.

But to these declarations, as well founded as irrevocable, there are also added explicit declarations of the English Government with regard to the line of conduct which it had laid out in view of the special claims of the bondholders.

On February 26, 1878, Mr. James Croyle, president of the committee on Peruvian bonds, sent a note to Her Majesty’s secretary of state, Lord Derby, saying that the committee proposed to send an agent to Peru, to act near that Government at the time Congress was in session, for the purpose of coining to an equitable arrangement for the bondholders, whom he represented, asking for this purpose the protection and official support of Her Majesty’s Government. He asked, moreover, if, in case the bondholders could not obtain justice from the Peruvian Government, and if it had resolved to extract the guano directly and on its own account, they could count on the assistance and protection of Her Majesty’s Government.

The reply given to this petition is as follows:

Ministry of Foreign Affairs,
March 9, 1878.

Sir: With reference to your letter of the 26th ultimo, I am authorized by Lord Derby to say to you that Her Majesty’s Government can not give any official support to the Peruvian bondholders, because such procedure would be contrary to rules established in analogous cases, but Lord Derby will be pleased to instruct, if you so desire, Her Majesty’s minister in Lima to give such extra-official aid as he may deem best to the agent your committee may send there. With regard to the last paragraph of your letter I must say to you that Her Majesty’s Government can not take upon itself to counsel the bondholders, and still less a portion of the bondholders, as to their legal rights in view of the bonds and the decree of November 14, 1873, and if the bondholders adopt a procedure in violation of Peruvian laws, or of the country, they can not count upon the aid of Her Majesty’s Government.

Julian Pauncefote.

“To Mr. J. Croyle.

A few months later the Marquis of Salisbury was called to the ministry of foreign affairs, and the committee resolved to make another attempt before the new minister, and here is the reply:

Ministry of Foreign Affairs,
May 12, 1878.

Sir: I am authorized by the Marquis of Salisbury to acknowledge the receipt of your letter of the 30th ultimo, in which you urge upon Her Majesty’s Government to [Page 185] adopt certain measures in protection of the Peruvian bondholders, and to say to you that Lord Salisbury feels sorry that Her Majesty’s Government does not permit him to render more assistance to the bondholders than that which it has already given them.

“I am, sir, your obedient and humble servant,

Julian Pauncefote.

“To Mr. Croyle.

Such was the status quo at the breaking out of the war between Chili and Peru.

After the war was undertaken, and the territory of Tarapaca was occupied by our forces, the Chilian Government granted to the Peruvian creditors the extracting and selling of guano by paying a royalty of £1.10s. sterling per ton. This was the first money the said creditors received for many years in payment of their credits, and as was natural they gave their full consent to this concession.

By the decree of February 9, 1882, the preceding decree terminated, and 50 per cent, of the net proceeds from the sale of 1,000,000 tons of guano was ceded to the-Peruvian creditors whose titles were sustained by the guaranty. Mr. John Proctor, sufficiently empowered by the committee of Peruvian bondholders, accepted the dispositions of the decree alluded to, in the name of the creditors representing £25,838,370.,

This voluntary concession from the military occupant of Tarapaca was ratified at the signing of the treaty of peace by Chili and Peru, which ended the war.

The two States that executed this compact were free and sovereign, and these agreed that the Peruvian creditors should only have the option of 50 per cent, of the profits from the deposits known and actually worked, for “the products of deposits to be discovered in the future in the eeded territories shall exclusively belong to Chili.” The Government of the Republic covenanted with the Government of Peru and not with its private creditors; therefore it is not permitted to any individual creditor of that Republic to address the Chilian Government soliciting modifications of a solemn international treaty.

There is not a leading consideration of an includible character in the controversy raised. Chili obtained Tarapaca in payment of her war expenses and in compensation due the sacrifices which that imposed. If Peru agreed to bases of concession in form affecting its private creditors, to it belongs the obligation with third parties. All other understanding of the exercise of the sovereignty of a state would be irreconcilable with the laws and independence of nations: The power of a State to terminate war and to make peace, the faculty, in conformity to international law, to cede a part of its territory, although this may affect individual creditors, and although for them its solvency may diminish or compromise private property. It is true that the cession of territory may produce detriment, but the detriment of a State caused by war or a disorderly or unscrupulous administration, or by internal revolutions, or by economical mistakes, necessarily affects its creditors, no matter what may have been the condition when the debts were contracted or the special liens which these affected.

I consider myself excused to invoke examples and indisputable authorities that confirm the right of the victor to become unconditional owner of a part of the enemy’s territory that may be required to recompense the expenses of the war and to guard its future security. But it will be well to remember that the loans of 1870 and 1872 had for their object the building of railroads and other national works which absorbed the sum of 82,000,000 silver soles, employed in benefiting territory only which Peru conserved, without ever spending a single pound sterling in Tarapaca. This weighty circumstance united to the general form and mere promise of honor which the bonds of the Peruvian debt carry makes all reasonable discussion with the bondholders unsustainable.

The Government should have desired, however, to grant to the Peruvian creditors the right to extract and sell for its account the guano of Tarapaca, in which they participated, by the paying of a royalty on each ton. This was a mere internal administrative measure, having for its object to takeoff the Government’s hands the necessarily discretional administration of the extracting, loading, freighting, and consigning of the guano. But by announcing this idea to those interested they imagine perhaps that there was an implicit acknowledgment of pretended hypothecate rights, and that the hour had arrived to formulate exactions completely unfounded.

Not meeting the expected acquiescence in the Chilian agents, the bondholders applied to the committee of the stock exchange of London, and under pressure obtained the postponement for three months of the official quotation of the bonds emitted in payment of the saltpeter certificates which Chili acknowledged to English and French citizens and other European nationalities. To the committee of the stock exchange belongs the announcing of the grounds of justice, or even equity, which induced it to favor the English creditors of Peru by such unusual procedure, to the damage of English creditors of Chili, which always has paid all its public obligations.

Without desiring to do so perhaps, it has adopted a resolution which mainly interests [Page 186] Englishmen, who in the past honored Peru and who to-day honor Chili with their confidence, but which does not compromise Chili’s credit, for this does not depend upon the directory of the London stock exchange, nor on the Peruvian creditors, but upon the stability of her institutions, the administration of her resources, and the punctuality with which it has always fulfilled its promises.

Your suggestion for the Chilian Government to formulate a proposal in favor of the Peruvian creditors has come at the very moment when these employ aggressive proceedings against the creditors of Chili, and as much for this circumstance as for the foregoing considerations my Government believes that it should limit itself, in that which may concern the Peruvian creditors, to the faithful compliance with the treaty of peace of October 20, 1883.

It remains for me to announce the opinion of the Chilian Government on the Grace-Aranibar contract.

Article XV of the contract says, concerning guano, that the committee shall respect the conditions of the treaty of peace between Peru and Chili in reference to the extracting (esplotacion), whilst the treaty of peace speaks of extracting and sale (esplotacion i venta). Attention is drawn to the omission of the words “and sale,” in order to avoid mistakes and to establish the truth of the matter.

In Article XIX of the same contract the committee declares that it will cancel the one-half of the Peruvian foreign debt, and will retain the other half, without responsibility as to Peru to recover the same from others interested, thus giving to understand that this last half would be recovered from Chili, as already suggested in the prospectus of the business. It was necessary to observe that in all agreements between the Peruvian Government and the holders of its foreign debt it should be clearly established that no more responsibilities be imputed to Chili than expressly mentioned in articles 4, 7, and 8 of the treaty of peace.

The Peruvian Government had to acknowledge these formulated observations made before it, as nothing less could follow their justice and origin.

Other observations have likewise been made to the Peruvian Government, but in official form and good friendship.

By the Grace-Aranibar contract Peru delivers to the committee all its railroad property for the term of sixty-six years, cedes the mines of a vast region, adjudicates to it the ownership of 1,800,000 hectares of land in the most fertile provinces of the Republic; the lands to be selected by the committee. It gives, moreover, 180 hectares of land for each family that emigrates to its territory; concedes all the guano it may have in its dominions; makes it the direct collector of the receipts of the most important custom-houses; authorizes it to establish a bank of issue, with privilege to emit bills, for twenty-five years, the bank to receive directly all national taxes from the treasurers and collectors of the State. Peru covenants, in fact, concessions which import the diminution of her sovereignty and the economic absorption by its creditors.

The especial and delicate international condition of Chili and Peru after the late war, and our sincere desire for the reconstruction and progress of the Peruvian Republic, induced my Government to express its opinion on the Grace-Aranibar contract, affirming its conviction that no contract between Peru and its creditors will be reasonable if that country does not conserve the full exercise of its autonomy for the administration of the State and the preferred right to the revenue necessary for the maintenance and services of the Republic.

I cherish the hope that Her Majesty’s Government, so respectful to the laws of nations, and always animated by a rectitude which has won for it such special considerations in this austriai region of the continent, will find that my Government has done as much for the Peruvian creditors as counseled by its spirit of equity and the compromises contracted during the war and after in its legitimate closing.

I have, etc.,

P. L. Cuadra.