Memorandum by Miss Anna A. O’Neill, Assistant to the Legal Adviser (Hackworth), to the Assistant Chief of the Division of the American Republics (Cabot)

Mr. Cabot: I have studied the decision of the First Appellate Section of the Supreme Court at San José of March 23, 1943 in the so-called “gold clause” cases and find briefly the decision to cover the following points:

A. Two suits were instituted, one against the United Fruit Company of New Jersey and the other against the Compañía Bananera de Costa Rica, of Wilmington, Delaware. Both suits were for the collection of a sum of money due as the difference in the price of bananas received by said companies which difference is caused by the devalorization of the dollar.

The first suit against the United Fruit Company was for (estimated) the sum of six hundred thousand colones. ($85,770.82 with interest in the amount of $28,799.93.)

The second suit against the Compañía Bananera de Costa Rica “was estimated to be the same as that of the United Fruit” case. The Compañía Bananera de Costa Rica “acquired by purchase all of the properties of the United Fruit Company in Costa Rica and took charge of the business of purchasing and exporting bananas, which it did as amply as its predecessor had done”. (Page 5 Decision.)

The decision dismisses both suits in so far as the United Fruit Company is concerned on the ground that after January 31, 1934 the Company did not receive bananas from the plaintiff and that, [Page 130] therefore, it is not liable for deliveries made to “a separate concern” (the Compañía Bananera de Costa Rica, its successor in interest).

B. In the suit against the Compañía Bananera de Costa Rica the Court held first that:

In the execution of the contract of May 17, 1939 the Company Iby its terms provided that “all of the contracts prior to that date “which the parties may have executed were cancelled by virtue of the fact-of executing the new contract” did not ipso facto exonerate the contracting parties from the responsibilities which they may have incurred during its existence “in as much as it was not a clear and definite remission with respect to the matter”. (Page 11.)
The Court held that Article 9 of the contract besides fixing the price in American gold cents permitted the purchaser to pay in drafts on New York or in money of the country at the rate of exchange at which the Bank of Costa Rica might purchase drafts of the same kind, thus instituting a “gold value clause”. The Court held that the use of the word “gold” revealed the intention of the parties to establish a special guaranty clause and that its ordinary interpretation has called for computation by reference to the value of the gold contained in the money of the contract. The Court further stated that the gold clause “does not involve a rigid obligation to deliver coined money of a single monetary regime; it admits perfectly the alternative of paying in another money, but taking into account the value of the latter in relation to gold; and when this happens it is converted into a gold value clause, whether by agreement of the parties—as in this case—or by order of the judges in the event of impossibility of obtaining the metallic specie contemplated.” …54 In other words in accordance with the terms of the contract the purchaser could pay the value of the fruits in American gold colones, or its gold value in colones.
The company’s contention that it made good payment of the price for fruit purchased after the reduction of the gold content of the American dollar with checks for the circulating money of the United States or with their equivalent in colones at the official exchange rate for such checks and invoked the joint resolution of 193455 and the laws passed in Costa Rica governing exchange control was not admitted. The Court held that the contract, which was executed and completed in Costa Rica, was governed by Costa Rican law “which in this case was the only one normally competent to fix the element of payment of the contract.”
The agreement concerning foreign money in the contract on which the suit was based was valid in the Republic “when it was made, during the execution of the contract and now that its faithful fulfillment is demanded.” It was further held that Costa Rican laws which provided for other regulation for the control of exchange and export of gold and foreign bills and drafts did not do away with the principle of the validity of stipulation in foreign money in contracts of this nature. The Court stated: “Consequently in demanding of the purchaser the payment of the price in the foreign money agreed upon, taking into account the gold [Page 131] standard indicated beforehand by the contracting parties there is no violation of local public order because this does not go against the spirit of our monetary system which is, undoubtedly, that of maintaining the unit and identity of the colón in relation to itself, in any eventuality, through the diverse monetary types it may experience.”
That when payment is made in a different money from that stipulated, Article 771 of the Costa Rican Civil Code orders that the former money be computed according to the commercial and real value which it may have at the moment of payment, in relation to the money owed. In this relation the Court stated: “Now, when the contracting parties choose gold as the standard of value by their express will, the comparison between the money of the contract and that of payment must be made necessarily by reference to the value of gold contained in the one and the other of said moneys. If the debtor finds himself in the physical impossibility of paying the money agreed upon, because the latter is not in circulation, as happens here, and the gold agreement contracted is legally demandable here, the clause really operates as a gold value clause and the payment is made by means of the delivery of a number of units of the new system whose price corresponds to that of the gold units which are owed. To determine the depreciation of a money in relation to a gold base, it is necessary to refer to the premium of the metal, not only because of dealing with a gold value which is perfectly determinable, but because the implicit will of the parties is that the money of payment shall be equivalent to an amount of precious metal equal to that contained in the money of the contract. This criterion of parity of coinage performs a very important office in North American decisions, where it is warmly praised. Consequently, to establish the difference between two metallic systems, although one may be so in theory only, as in the present case, recourse is had to par of exchange ‘which consists of putting into proper relation the precious metal content of the units, as shown by melting down the coins, and establishing the relation between the values of the moneys to that of the quantities of precious metal contained in them.’ (Nussbaum op. cit. p. 111).”
The company was held to have failed to comply with its contractual obligations and “by way of damages” was ordered to pay interest at the rate of 6% per annum “from the date on which this judgment becomes final.”

In conclusion the Court decreed

“That the Compañía Bananera de Costa Rica as successor in the business and properties of the United Fruit Company in this republic is obligated in the terms of the purchase-sale contract which serves as a basis for this suit, executed by the United Fruit Company the 21 of February, 1929; that the price of the bunches of bananas is fixed in this contract in ‘cents American gold’ and, consequently, the letters of exchange or the colones between which the purchaser might elect as means or form of payment, must be the commercial and real equivalent of the money of American gold expressed in the contract and contemplated on contracting; that after January 31, 1934 the weight of the American gold dollar was reduced and the Compañía Bananera de Costa Rica received from the plaintiffs the sum of 243,339¼ ‘count’ bunches, for which the former owes the latter the sum of [Page 132] $84,317.05, or its equivalent in colones at the official rate of exchange on the day on which payment is made, that is in relation to the weight of the money of gold stipulated and that of the money in which payment was made, the difference between the agreed price of the fruit delivered and the amount paid by the purchaser; that this same company owes plaintiffs, also, legal interest at six per cent per annum from the date this judgment becomes final and, besides the procedural costs of the suit which is declared to be proper. In all other respects the sentence appealed from is confirmed.”

The litigation before the Supreme Court covering the so-called “gold case” was discussed in some detail in my memorandum of June 2, 1942,58 a copy of which was made available to you.

In view of the importance of the litigation pending in Costa Rica, I suggest that consideration be given as a matter of policy to transmitting a copy of the Costa Rican decision to the appropriate officials of both the Department of Justice and the Treasury Department for their information and comment.

It is possible that after the fruit company has exhausted its remedies in Costa Rica, the matter will again be referred to the Department in the form of a diplomatic claim, at which time the Department should have the benefit of the Government’s experts on this technical question.

  1. Omission indicated in the original memorandum.
  2. Presumably House Joint Resolution 192, approved June 5, 1933; 48 Stat. 112.
  3. Not printed.