888.2553/12–2952: Telegram

No. 256
The Secretary of State to the Embassy in the United Kingdom1

top secret

4273. Pls communicate fol msg to FonOff and to Eden personally (re Tehran tel 24252 and London tel 35393):

[Page 559]

After long and difficult conversation with Mosadeq Dec 25 Henderson succeeded in obtaining Mosadeq’s tentative agreement to arbitration without his previous restrictions as to terms of reference to arbitration for determining compensation. Henderson did not at any time suggest any other method for settlement compensation. He outlined plans for Phase Two movement of oil, including possible participation Amer companies to lift any quantity necessary to bring total to satis level, which he said we thought wld be in neighborhood 20 million tons. Made clear companies wld be reluctant, since all majors had adequate oil resources and wld face financial and polit problems if they bought oil from Iran, but he believed they wld coop if settlement reached on compensation and satis commercial terms agreed upon. Discussed tentative US plans for advancing funds to meet current Iranian budgetary and development needs provided oil settlement reached, saying US tentatively prepared buy oil and products to value approx $100 million. Payment cld be made immed and oil delivered to US Govt over period years.

Mosadeq suggested US Govt shld buy oil at once without awaiting settlement, saying this wld create atmosphere conducive to settlement. Added with great emotion that if US cld not aid Iran until oil settlement reached Iranian situation was desperate. He did not believe Brit wanted settlement but instead wld find pretext after pretext to postpone it. He thought Brit Govt conspiring to overthrow present Iran Govt. In light Henderson’s exposition he must immed inform Iran people they cld expect help from no western source and must look only to themselves to prevent national bankruptcy and preserve independence.

Henderson replied US Govt cld not possibly buy Iran oil until matter of compensation had been disposed of. US public wld consider that to do so wld be pursuing policy of undermining sanctity intl contracts. Furthermore cld not obtain coop US and intl business community. Dept was convinced Brit Govt as well as Iran Govt desired early settlement. Instead of hesitating because of suspicions of Brit good faith Mosadeq shld concentrate on compensation question.

Mosadeq said he considered it useless search for further formula re terms of reference in matter arbitration. He had already made number suggestions which for one reason or another had not been acceptable to Brit. Referred his past statements offering settle compensation on terms no less liberal to AIOC than those on which compensation had been given owners of property nationalized in other countries. Henderson pointed out those offers all seemed to have strings attached, notably that they referred only to compensation for loss of physical property. As matter principle Brit cld not [Page 560] accept terms reference which limited compensation to loss as result confiscation physical property in Iran. Position Brit on this was backed by virtually entire business world.

Mosadeq insisted he had not intended attach strings. In any case he was still prepared to refer to Intl Court for arbitration the matter of determination of amt of compensation owed by Iran to AIOC due regard being given to Iranian counter claims. Only terms of reference wld be that Intl Court in determining amt of compensation due shld base itself on any law carried out by any country for nationalizing its industries which might be agreed to by AIOC.

Henderson asked if in making this offer Mosadeq realized that Brit Coal Industry Nationalization Act had provided for compensation for loss of future profits. Mosadeq replied that if Brit law provided for compensation for loss of future profits and if Intl Court shld decide to use that law as basis for determining amt of compensation due he wld not object.

He wld agree to such terms reference provided US wld simultaneously make arrangements to purchase Iranian oil to amt of $100 million and wld make this amt at once available to Iran Govt. Purchase cld be made through any company US Govt might designate and wld be FOB Iran port. Price cld be fixed on basis Gulf price less such discounts as US Govt might consider4 (info we have from private source tends confirm this). We hope therefore that Brit Govt will give it immed and favorable consideration.

There are of course certain gaps and possible difficulties. Those which occur to us include:

Mosadeq might change his mind. We believe this danger can be reduced by prompt reply;
While Mosadeq did not definitely agree to negotiate Phase Two commercial agreement with AIOC or consortium after signing of arbitration agreement, he did not comment negatively. We are authorizing Henderson in his discretion attempt clarify this point;
According to Henderson, Mosadeq envisages that arbitration shall be between Iran Govt and AIOC, not Brit Govt. As we interpret it, statute of Intl Court does not permit private company to be party to case before it. Therefore it wld not be legally possible to meet Mosadeq’s exact terms. Difficulty might be met by various means which we wld wish to explore with Brit and Irans. It might also be useful consult Court itself informally. Two alternatives which occur to us are:
Arbitral agreement between Iran Govt and Brit Govt wld make Brit Govt nominally party to case but wld make clear by its text that AIOC was real party at interest;
Arbitral agreement between Iran Govt and AIOC wld provide that Court shld appoint panel of three, five or other mutually agreeable number of arbiters.
Mosadeq insists upon advance of $100 million from US Govt promptly after agreement on arbitration and wld be, we are sure, unwilling have advance contingent on, or await, conclusion longterm commercial sales agreement. We are confident we can make money available promptly. (Although we may find it desirable make payments in installments.) We believe price and other terms can be so arranged as to avoid embarrassment to commercial negots. In any case, we are convinced commitment that there will be prompt advance some substantial amount money is essential “bait” to get Mosadeq agreement to arbitration and that undue delay after date of signing of arbitral agreement wld cause whole opportunity to be lost.

We consider it vital that Brit move promptly on two lines: first, to consider terms of reference for arbitration which wld be satis to them and wld meet difficulty indicated para 3 above, and second, to prepare for early negot of commercial agreement for purchase Iran oil.

Meanwhile we think it most desirable that we be able to convey immed to Mosadeq Brit acceptance in principle of his offer and willingness promptly to begin consideration details. We are authorizing Henderson to say offer being transmitted to Brit and also being carefully studied here.

We can hardly stress too strongly how important we think it is that Brit and we take advantage of change in Mosadeq’s attitude and that there be no unnecessary delay. Also, we wish to emphasize importance of absolute secrecy.

Byroade arriving Dec 30 wld like join Gifford in discussing this whole matter with Brit officials.5

  1. Repeated to Tehran. Drafted by Jernegan; cleared in draft by Nitze, Linder, Metzger, Richards, and Raynor; and approved by Richards.
  2. Telegram 2425, Dec. 26, provided the information transmitted in telegram 4273 to London. (888.2553/12–2952)
  3. In telegram 3539 Ambassador Gifford asked the Department to inform him as quickly as possible regarding the extent to which he or Embassy officials should inform the Foreign Office of the contents of telegram 2425. (888.2553/12–2952)
  4. Due to clerical error, portions of the text were omitted. For the part of the telegram that is missing, see telegram 4291, infra.
  5. Byroade’s principal reason for going to London was to conduct a series of talks with the British to explore ways whereby the British could conclude a satisfactory agreement with Egypt concerning the future use of the Suez Canal base. For documentation regarding U.S. concern about the Anglo-Egyptian controversy with regard to the Suez Canal, see vol. ix, Part 2, pp. 1743 ff.