Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.2553/1–2653: Telegram

No. 292
The Secretary of State to the Embassy in the United Kingdom¹

top secret
priority

Washington, January 26, 1953—8:06 p.m.

4941. Eyes only Holmes. Representatives of British Embassy yesterday handed Department documents covering their comments on the counter-proposals submitted by Mosadeq and our suggested redrafts of the arbitration and DMPA agreements. These documents include British suggested redraft of arbitration agreement and a statement of their general position in Iranian matter for consideration by new administration. It is assumed that Foreign Office will have furnished copies of these papers to Embassy London. Summary of documents have been transmitted to Tehran separately.

We consider it unfortunate at this stage that British have chosen to transfer US/UK negotiations to Washington. As this will inevitably result in delay in reaching final US/UK agreement, request Embassy London continue direct contact with Foreign Office in effort move things along.

Our only comment at this time on general position of British as outlined in Annex C is our regret that they chose to refer to latest proposals presented to Mosadeq as a “joint” offer along the same lines as the joint approach of 30 August. We think British should understand that we look upon our role in present negotiations in different light. The US, as the result of conversations between Mosadeq and our Ambassador, took the initiative to prepare the essentials of an agreement which we hoped would be acceptable to both sides. We appreciate concessions made by HMG in an effort to reach agreement through us with Mosadeq. We do not consider, however, that the documents prepared in London have a sanctity in themselves. We hope British will continue consider each point of disagreement arising during negotiations to determine whether there is a point of real substance involved or whether further changes can be made to meet Mosadeq’s view and not relinquish points of great importance to them.

Our comments upon British redraft of compensation agreement are as follows:

(1) We reluctant to see introduction of new points in this agreement at this stage unless they are absolutely necessary. In this connection, we hope British could agree to drop phrase at end of second paragraph of Preamble which reads as follows: “The preliminary issue of jurisdiction in which was before the International Court of Justice in June, 1952.” We believe this unnecessarily raises a touchy point. If any mention of the prior case before ICJ is made, it must certainly be done in such way so as to assure Mosadeq that the present case before the Court will not serve to undo Court’s previous decision. For same reasons, we would hope that paragraph 2 of Part 1 could be omitted entirely. While the substance of this paragraph may be entirely logical, we believe it is certain to cause complications and we suggest such matters be left to Court.

(2) Terms of Reference—This is undoubtedly most critical point of disagreement between United Kingdom position and that of Mosadeq. It is an extremely difficult one for us as after exhaustive study of problem and analysis of United Kingdom coal law, our lawyers are honestly unable to share British concern at wording of this paragraph. We would hope British could agree with our view that as British coal law provides for compensation based upon capitalization of future profits it is inconceivable to us that any impartial body of jurists could fail to take into account question of earning power of AIOC property. Even if question of the validity of the concession is disputed before Court, it seems to us that legal case is clearly on side of British.

In presenting documents yesterday, British representative explained that one of their concerns about any change in the wording of Terms of Reference in this regard is that such a change might be used by Iranians before the Court to indicate that British had conceded the point on future profits by accepting alternate wording before agreement had been reached. It does not seem to us that legislative history of this nature would be entertained by Court.

If British cannot agree to our preferred wording on this subject as contained in recent US redraft, we would hope at least they could shift to wording as suggested in Paragraph 3, Deptel 4774 to London, rptd Tehran 1783. They should know, however, that we are not hopeful that this change would be likely to produce agreement.

(3) British may be assured that only reason our suggested redraft reversed order of paragraphs in Part 2 on question of method of payment was for simplicity of presentation. If they prefer order in their present draft we would not object. The point of principle in these paragraphs seems to be question of defining amount which will be placed in escrow. We continue to believe that phrase “25 percent of the net proceeds” defined in some reasonable manner, would be the most acceptable to all concerned. Unless there is a change in Iranian law, Mosadeq must deduct his costs before allocating a percentage of his receipts from oil for payment of compensation. Iranian costs will inevitably be very high and if not defined could be subject of endless altercation. It seems to us much wiser to accept a flat percentage for costs which is not far out of line with reality. For this reason, and because use of the wording “receipts” in light of Iranian law would, in our opinion, carry with it risk that Court might interpret this to mean “net receipts”, we believe such a formula should be preferable from British point of view.

We have always thought that British prefer, as we do, that any future commercial arrangement would be set up so that international company would buy crude and pay a “through-put” charge for products. If this were to eventuate, no problem would exist since compensation payments would be calculated exclusively on Iranian crude sales and costs. In the purchase of products by international company, costs would still be calculated on the same basis for crude plus, say, 50¢ a barrel for refining. If international company prefers to buy products at 35 percent discount, which is almost exactly the same price, namely $1.64 (assuming barrel of products mix to be valued at $2.52), as purchase of crude and plus through-put charge of 50¢, then amount placed in escrow for compensation should equitably be derived by deducting from Iranian proceeds refining expense of say 50¢, and applying to balance same formula as would be used on purchases of crude. In event of sales of products by Iranians to others, we presume that refining charges per barrel are allocable on some standard cost basis and provision can be made in the unlikely event that Iranians receive prices in excess of refining costs plus $1.14 for crude so that 25 percent of such excess is added to the compensation account.

(4) We note that British have re-inserted in several places the provision that Vice President of Court would act as an umpire. While this undoubtedly is logical method of proceeding, it does not seem to us to be a matter of real substance. If Mosadeq, due to the popularity of Court in Iran, insists that whole Court should act on such matters, we hope British would agree that Henderson could be given leeway to make this change.

(5) Henderson reports that matter of Iran being obliged to pay interest is an extremely difficult point for Mosadeq, as it relates to matters of religion and the suspicion of future foreign domination. We would hope therefore that British could agree to change substance of Paragraph 6, Part 2, to something along following lines: “It is understood by both parties that if as a result of the decision of the Tribunal, one party should be found to be indebted to the other, the amount of indebtedness shall not bear interest and the Court in fixing the amount of compensation should take this understanding into consideration.”

(6) It will be noted from Henderson’s cables that manner of referring to the AIOC may be a difficulty in Iran. It would be helpful in our opinion if British could agree that first reference to AIOC would be along the following lines: “Anglo-Iranian Oil Company, Ltd., a British company which formerly operated in Iran, hereinafter to be referred to as the Company.” The same change should be made in US agreement for purchase of oil.

End of comments on compensation agreement.

Analysis of the British paper would seem to indicate that their concern over Mosadeq’s redraft of our DMPA agreement is quite similar to our own. As we pointed out in Deptel 4774 to London rptd Tehran 1783,² we are not inclined to alter matters of principle in that agreement which have a bearing upon Iranian intentions to follow through upon a long term commercial arrangement. We therefore propose that next approach to Mosadeq be on basis of US draft incorporated in Deptel 4776 to London rptd Tehran 1785,³ with exception of reference to AIOC as referred to above. While we do not fully share British concern at reducing amount of our advance to $50,000,000, if we retain the essential points of principle in the contract, we will agree that next approach to Mosadeq be limited to text which includes advance of $100,000,000, partially in installments. If Mosadeq should clearly prefer an advance of $50,000,000, which we think most unlikely, we should be in difficult position but would in any event discuss this matter with British prior to any other change in the present text.

With regard to Para B (4) of British paper, we consider it unwise to have Henderson reopen question of relation between terms of a commercial contract and short term purchase of oil envisaged in US contract. We believe the long term sales arrangements should be settled by commercial negotiation, and that any effort prior to these negotiations to tie down matters of price for long term arrangements by reference to the short term US purchase would be a self-defeating exercise.

The UK may be assured with reference to its Para B (5) that the US will coordinate its schedule of deliveries, including types of products desired, with UK. We do not believe this will be a future problem.

End of comments on DMPA agreement.

As there is no mention in British documents of the proposed exchange of letters on the subject of freedom of seizure of British tankers, etc., we hope they have accepted our view that such an exchange in the context of the documents to be agreed to is, in fact, unnecessary.

If the British can agree substantially to our position as set forth above, we would hope for an early resumption of talks between Henderson and Mosadeq. We feel that the next conversations should clarify one way or the other many of the doubts that have been raised in our minds, as well as with British, and that these further conversations are quite necessary before we can decide what our ultimate course should be.

Substance of above points will be presented British Embassy representatives here tomorrow.⁴

In this morning’s meeting the Secretary told Makins he had not had opportunity to go fully into details of Iranian negotiations. We have, however, had number of meetings on this subject and after round up with Gen. Smith and others Secretary instructed the Department to proceed on above lines.⁵

Dulles

1. Repeated to Tehran eyes only for Ambassador Henderson. Drafted and signed by Byroade.
2. Document 288.
3. Not printed. (888.2553/1–1853)
4. According to the memorandum of a conversation held by Nitze, Byroade, and Richards with representatives of the British Embassy on Jan. 27, a memorandum was handed to the British officials which encompassed the substance of telegram 4941 to London. The British reaction was that U.S. views had changed little with the change in administration, and that the United States and United Kingdom were sliding down “a slippery slope” in regard to concessions to Mosadeq. Byroade assured the British that the United States recognized the dangers, and realized that the point had almost been reached beyond which the Anglo-Americans could not go in making substantive concessions to Mosadeq. (888.2553/1–2753)
5. On Jan. 28 the Embassy reported that it conveyed a memorandum based on telegram 4941, minus the first two paragraphs, to the Foreign Office. In making the presentation, the Embassy officer stressed the desirability of having the United States and United Kingdom reconcile their differences to permit an early resumption of talks between Henderson and Mosadeq. The preliminary British response to the American memorandum was that the United Kingdom considered the proposals put to Mosadeq on Jan. 15, as “joint” in the sense that they were worked out between the two governments, that they constituted a package, and involved simultaneous commitments by both governments with respect to various elements of the package. The Foreign Office representative implied that the United Kingdom did not attach great importance to retaining the phrase at the end of the second paragraph of the preamble of the British redraft of the compensation agreement. He doubted very much that the British Government could agree to changes in the terms of reference because it did not believe that Mosadeq was prepared to have the International Court of Justice take into consideration the loss that the AIOC had suffered as a result of the cancellation of the concession agreement. The British were concerned about the matter of escrow and the Department’s suggestion that the payment of interest should be dropped from the compensation agreement. (Telegram 4152; 888.2553/1–2853)