The Secretary of State to the Minister in Costa Rica (Davis)

No. 81

Sir: In its telegram of to-day’s date,24 the Department informed you that it was sending by mail an instruction setting forth fully its views regarding the threatened cancellation by the Government of Costa Rica of the concession of the Costa Rica Oil Corporation.

The Department understands that the Costa Rican Government insists that the transfer of the shares of the Costa Rica Oil Corporation to the Sinclair Central American Oil Corporation constituted a violation of the portion of Article XIII of the concession contract which provides that the contract shall lapse “if it be transferred by sale, lease, mortgage, or in any other manner to one of the syndicates now or hereafter existing for the exploitation of or dealing in petroleum without the prior consent of the Executive”, and rendered the concession subject to cancellation by administrative action. It is understood also from correspondence exchanged between the Government and the corporation that the purpose of the Government in placing that restriction on the transfer of the contract was to prevent the contract reaching the hands of a syndicate which would allow it to lie dormant for an indefinite time and hold it until needed for future uses, thereby preventing the immediate development of the oil resources of the country. As the Costa Rican Government is aware, only the shares of the Costa Rica Oil Corporation, and not the ownership and obligations of the contract, which continues to belong to the corporation, were acquired by the Sinclair company. Inasmuch as the ownership of the contract has not been transferred by the corporation, and since the corporation has been diligent in developing the territory covered by the concession and has spent in the work large sums of money greatly in excess of what it was obligated by the contract to spend, neither the letter nor the spirit of the contract was evaded or violated.

With respect to the declaration of the Government that the corporation has not performed its obligations to exploit, which arise under Clause i of Article I, it is submitted that the examination of [Page 1001] Article I in its entirety reveals that the specific requirements that the contractor expend designated sums within prescribed periods of time in the exploration and exploitation of petroleum represents the maximum that the contractor was obligated to do to accomplish the general results mentioned in Clause i of the first Article. Moreover, it would seem unreasonable to require production of petroleum in commercial quantities, as the Government contends it was intended to require, in an undeveloped field where petroleum was not known to exist and might not be found, even by the exercise of the greatest diligence in prospecting. In any event it is the view of this Government that the version most unfavorable to the corporation which could be adopted on this point would be that the matter is doubtful, and, therefore, if the Costa Rican Government persists in its complaint regarding the failure of the corporation to produce oil in commercial quantities, this point of the controversy should be subjected to the procedure described in Article XIV of the concession contract. As the procedure required by Article XIV contemplates reliance upon experts to adjust such controversies, the reference of the Costa Rican Government communicated in your No. 22 of May 14, 3 p.m.,25 to opinions of experts confirms this Government’s views in this regard.

In further reference to arbitration of the controversy regarding exploitation, it will be observed that Clause k of Article I provides that in order to determine whether the contractor has failed to comply with any of his obligations, the procedure established by Article XIV is to be followed. Article XIV provides that if the Government should be dissatisfied by the progress made by the contractor in drilling wells or in exploitation, certain designated steps are to be taken with the ultimate object of arbitration by three experts, one to be appointed by the Government, one by the corporation, and the third to be selected by the other two. The Government has expressed dissatisfaction regarding the progress made by the corporation in exploiting petroleum deposits, and has declared that the corporation has failed to perform its obligations under the portion of the first Article of the contract (i) relating to exploitation. It is too obvious to require discussion to show that this point of the controversy falls clearly within Clause k of the first Article and Article XIV of the contract.

You may inform the Foreign Office that your Government has sought full information regarding the threatened cancellation of the concession of the corporation, and in the light of the information which has been obtained, it is convinced that for reasons indicated in the foregoing, the complaint regarding the transfer of the shares [Page 1002] to the Sinclair company, even though arbitrable in accordance with the terms of the contract, should not be further pursued, and that if the Costa Rican Government persists in its dissatisfaction with the progress made by the corporation in exploiting petroleum deposits, that point should be subjected to the procedure prescribed by Article XIV in accordance with the clear intention of the concession contract. You may add that a review of the brief career of the Costa Rica Oil Corporation indicates that the company has from the beginning been needlessly harassed by the Costa Rican authorities, which could have no other effect than to retard the progress of the large work which it had undertaken. In conclusion, you may express the hope that the Government of Costa Rica will find means of bringing to an end in a just manner the vexatious controversy which has been in progress between the Government and the corporation; that the Government will accord the company the cooperation contemplated by the concession contract in order that the corporation may enjoy the benefits to which it is entitled under the concession, the validity of which has not been questioned, and that its work may not be further impeded and its enterprise wrecked and investment of several millions of dollars lost, and in order also that the two Governments may be spared the inconvenience which attends measures looking to the recovery of indemnity for losses sustained as a result of unwarranted interference by the authorities of one Government in the enjoyment of legal rights possessed by the citizens of another.

Before taking the action authorized by the foregoing, please confer with the representative in Costa Rica of the Costa Rica Oil Corporation. If the representative of the company does not desire the proposed action taken, you will so inform the Department by telegraph and await further instructions.

I am [etc.]

Charles E. Hughes
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