Foreign Relations of the United States Diplomatic Papers, 1940, The American Republics, Volume V

812.6363/6503½

The British Embassy to the Department of State

His Majesty’s Ambassador duly informed His Majesty’s Principal Secretary of State for Foreign Affairs of the substance of his conversation on February 5th with the Under Secretary of State when the latter stated that the United States Government had decided to propose to the Mexican Government that the claims of the American oil companies against the Mexican Government should be submitted to arbitration and that they felt unable to agree with the views of His Majesty’s Government as set out in His Majesty’s Embassy’s aide-mémoire of February 5th regarding the desirability of the claims of the American and British companies being dealt with together before the same arbitral tribunal. Lord Lothian also informed the Foreign Office of the suggested terms of reference to the arbitral tribunal communicated to him by Mr. Sumner Welles and which ran as follows:—

(1) What rights have been denied and what rights and properties have been expropriated, taken over or otherwise interfered with by Mexico.

(2) What losses and damages have been sustained by reason of such acts.

(3) In what manner shall the losses and damages awarded by the tribunal be paid or what other appropriate action shall be taken in order to assure prompt and faithful compliance with the award.

His Majesty’s Ambassador has now been informed by His Majesty’s Government that they feel bound, in view of the very close connexion between the cases of the American and British companies and of the inevitable reaction on the position of the British companies of any decision concerning the American companies, to place on record their grave concern at the proposal of the United States Government.

For the reasons explained in His Majesty’s Embassy’s aide-mémoire of February 5th, His Majesty’s Government think it most important that the claims of the American and the British and the Dutch companies should be considered together by the same tribunal. The fundamental issue in all cases is the same, namely whether the Mexican Government was entitled to expropriate the properties without prompt, adequate and effective compensation and if not what the effective remedy should be. To divide the cases can only weaken the collective resistance both of all the oil companies and of all the governments concerned to manifest injustice, and it would certainly be taken as a victory for the Mexican policy of spoliation—a policy which has by no one been more formidably arraigned than by the United States Government itself.

Moreover His Majesty’s Government cannot but feel that to deal with the two sets of claims separately will seriously impair that friendly cooperation which has now existed for so many years between the various oil interests, and may well have serious repercussions not only within the different groups of companies concerned but also in foreign countries where governments are often prone to take advantage of such dissensions. In particular to propose that the case of the American companies should be disposed of separately might well encourage the Mexican Government to endeavour to deal separately and in their own way with the various parties, to the prejudice of all concerned, while it involves the risk of disclosing such a weakness on the part of the oil companies that the Mexican Government may be encouraged to disregard a settlement of any kind. The prospects of any of the companies obtaining adequate redress would seem to be seriously prejudiced by this proposal and there is furthermore the danger that other governments may be encouraged to embark on a similar process of expropriation. His Majesty’s Government are sure that the United States Government has no thought of initiating a process which might secure some compensation for the American companies at the expense of the British and the Dutch companies.

Finally, in a case such as this where the main issue is perfectly plain and, apart from the extent of the interests involved, virtually identical for all companies concerned, it would in the opinion of His Majesty’s Government be contrary to good sense and justice to settle the same dispute twice over merely because two sets of claimants were involved. An analogous case in municipal law involving two sets of companies would undoubtedly at the instance of either plaintiffs or defendants, and even if the other party opposed application, be consolidated and tried together as one. Moreover it is perhaps relevant to point out that from the point of view of expense and convenience much time and money might be saved in reaching a final settlement if the costs of the hearing of the dispute were borne equally between companies according to amounts of their respective interests. The United States Government themselves would, His Majesty’s Government believe, be far more likely to obtain a satisfactory settlement from arbitration by the road of a common hearing since if that principle were abandoned the tribunal, whilst engaged in settling the dispute with one set of companies, would inevitably be thinking constantly of what another tribunal might do in a subsequent case involving other companies’ interests. Nor does His Majesty’s Government believe that if the, Mexican Government is really prepared to arbitrate that it will be deterred because the tribunal is appointed by the Hague Court and not under the Pan-American arbitration agreement.

The idea of a single arbitration has thus, His Majesty’s Government are convinced, everything to commend itself on grounds of procedure both from the legal and commercial points of view and on grounds of justice, expense and convenience. As His Majesty’s Government see it there is an identity of interests so far as all the companies are concerned, and the companies themselves are known to be anxious to ensure a settlement of the whole dispute at one arbitration. His Majesty’s Government are still hopeful that in the light of the foregoing the United States Government will be prepared to give further consideration of His Majesty’s Government’s representations that both sets of claims should be dealt with before the same arbitral tribunal.

Apart however from this aspect of the matter His Majesty’s Government feel obliged to express their serious concern in regard to the terms of reference which Mr. Sumner Welles indicated to His Majesty’s Ambassador on February 5th would be proposed to the Mexican Government in connexion with the suggested submission of the American companies’ claims to arbitration. In view of the identity of interest between the American and British companies His Majesty’s Government feel entitled to call the attention of the United States Government to the following considerations concerning these terms of reference.

In the first place the proposed terms of reference do not appear to cover the “five objectives”⁴⁶ put forward by Mr. Richberg, with, it is understood, the approval of the United States Government, in his negotiations with the Mexican authorities in March, 1939. Nor do they seem reconcilable with the view of His Majesty’s Government that the submission to arbitration must make it possible for the tribunal to order the restitution of the properties to the companies—a view which His Majesty’s Ambassador had understood from his conversation with the Secretary of State on January 30th⁴⁷ was shared by the United States Government. Taken as a whole, the proposed terms of reference seem to His Majesty’s Government to amount to an invitation to the tribunal to award compensation in terms of money damages, while the whole stress is laid upon the question of the assessment of such damages and the manner in which they are to be paid.

In particular His Majesty’s Government feel that the words in Question (2) “losses and damages” are peculiarly appropriate to an award made on the basis of money compensation. In their view it would be preferable for the question to be framed not so much with the object of assessing the amount of such losses and damages (which must in any case be very difficult to ascertain) but with the object that the tribunal should decide whether the actual appropriation and interference by the Mexican Government with regard to the properties of the companies are such as to entitle them to claim redress for damage caused to their interests.

Question (3) appears to His Majesty’s Government as at present framed to deal not with the redress or compensation to be made to the companies but with the manner in which the award is to be carried out. It seems to presuppose that the tribunal shall make an award assessing the losses and damages in terms of money and the question dealt with is the manner in which payment of these damages is to be made. From the point of view of His Majesty’s Government this is open to serious criticism.

Furthermore the remaining words of Question (3) “or what other appropriate action should be taken in order to assure prompt and faithful compliance with the award” seem also to be concerned with the means to be employed for carrying out the award and not with the terms of the award itself.

Finally, if the words “other appropriate action” are meant to cover the possibility of the restitution of the properties to the ownership or to the management of the companies on the basis of the “five objectives”, they seem to His Majesty’s Government to be inadequate for the purpose. Indeed His Majesty’s Government feel that it is doubtful whether as a matter of law the words are sufficiently wide to empower the tribunal to order the restitution of either the ownership or the management to the companies on the basis of some or all of the “five objectives”.

It has not been possible for His Majesty’s Government in the time at their disposal to formulate any definite alternative suggestions on this subject, but their purely tentative view is that the questions to be referred to the tribunal might be: whether the companies are by reason of the action of the Mexican Government in regard to the expropriation of the properties entitled to any redress; if the answer to this question is in the affirmative, whether such redress should be granted to the companies by restoring the properties to the ownership, the management, or the control of the companies and if so on what conditions; and if the answer to the first question is in the affirmative and to the second in the negative, whether there is any other means by which the companies can be granted effective redress.

The foregoing suggestions as to the terms of reference are purely tentative and should not be regarded as the final views of His Majesty’s Government. They however make it possible for the tribunal to order the restoration of the properties to the companies on suitable terms and it is the firm conviction of His Majesty’s Government—a conviction which is known to be shared by all the oil companies concerned and which from the conversation between the Secretary of State and His Majesty’s Ambassador on January 30th it was understood was also held by the United States Government—that it is only on such a basis that a satisfactory and effective settlement of the dispute can be reached.

Washington , February 8, 1940.

46. For the “five objectives” see letter of August 10, 1939, from the President of the Standard Oil Company of New Jersey, Foreign Relations, 1939, vol. v, p. 690.
47. No record of conversation found in Department files.