888.2553/1–2853: Telegram

No. 294
The Acting Secretary of State to the Embassy in the United Kingdom 1

top secret

5076. Eyes only Ambassador. Preliminary reaction to Tehran tel 2934 to Dept rpt London 9702 was one of disappointment that Mosadeq at this stage would again attempt to alter the basis upon which we have all worked in an effort to secure agreement. Further study, however, leads us to believe that we should not accept this change in a spirit of defeat but should continue under same compulsions as before to attempt to reach agreement. There is at least a possibility that the changes proposed by Mosadeq might turn out to be blessing in disguise. As we now understand his position he might accept phraseology for terms of reference which would meet British position on question of future profits if he could be assured in some way that any judgment against Iran would not be so excessive as to be beyond the capacity of the economy of that country or stretch indefinitely into future.

This thought has led us to search for some type of assurance that could be placed in the documents to meet Mosadeq’s concern. It is obviously unwise to place a ceiling on amount of compensation which Court could award, as this would in effect destroy principle of impartial international arbitration. Any formula, therefore, would have to be along lines of insuring that method of payment be handled in such a way as not to impose undue strain upon Iranian economy and to provide for some terminal date. Latter point could be handled by specifying a fixed number of years beyond which Iran would not be expected to pay compensation. For purposes of illustration, we assume in this message that such figure would be twenty years, although exact number could be subject of further consideration or negotiation. Formula could specify that Iran would set aside 25 percent of gross proceeds for period not exceeding twenty years to be used in meeting arbitration award. It could further be specified that if funds set aside pursuant to the above formula were in any year less than one-twentieth of total arbitration award, company would receive certain amount of free crude.

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Such formula would have effect of giving Iran degree of protection against having to pay more than its national economy could support. It is assumed that delivery of free crude, if that should be necessary in any given year, would not be a significant drain upon its economy.

If such a formula should prove acceptable to Mosadeq, wording of terms of reference should be such as to meet British position on question of future profits. There are of course number of alternatives as to exact phraseology that could be used. One method would be to leave terms of reference as they were in British draft submitted to Department on January 25. Combination of word “enterprise” and “principles of a specified British law” is one method of specifying future profits. There may be simpler method which could be worked out by British.

It would then be necessary to alter section in compensation agreement concerning method of payment. We have produced here following tentative wording which might be used to give effect to formula set forth above. This would substitute for Part Two, para 4, Deptel to Tehran 1852.3

“4. Any balance due in consequence of the decision of the International Court of Justice shall be paid as follows:

If a balance is due to the company, the method of payment in installments shall be as follows:
Out of funds that have accumulated prior to the date of the decision as the result of the deposit in a bank designated by the company of 25 percent of the gross receipts from all sales of oil and oil products exported from Iran;
Out of funds similarly deposited subsequent to the decision of the Court of 25 percent of the gross receipts from all sales of oil and oil products exported from Iran for such period as may be necessary to liquidate the balance due the company after deducting payments made pursuant to (a) above, but not exceeding twenty years;
If in any year the amounts deposited pursuant to (b) above less than one-twentieth of the balance due the company after the deduction of payments under (a) above, the company shall be entitled to receive and Iran shall deliver free crude oil equal to 25 percent of the amount, if any, by which Iran’s exports of oil and oil products in that year fall short of 20 million tons.
If a balance is due to the Iranian Government, it shall be discharged by payments in cash in sterling to the credit of the Iranian Government with a bank designated by the latter of such amounts over such periods of years as shall be agreed between the Iranian Government and the Company; or, in default of such agreement, in [Page 658] such amounts over such periods of years, as shall be determined by an umpire appointed by the Vice President of the Court.”

Effect of para 1 (c) above is as follows. If after receipt by Company of payments under para (a), payments under para (b) were insufficient to meet one-twentieth of balance of award, para (c) would come into effect. If Iran were exporting 10 million tons of oil and products, 25 percent of gross proceeds from sale of these 10 million tons would go into escrow account pursuant to para (b) and in addition Anglo-Iranian would be entitled to receive 2½ million tons of crude oil free of charge. If Iran’s exports were zero, AIOC would be entitled to receive 5 million tons of crude oil free. If Iran’s exports were 30 million tons, 25 percent of the proceeds would be deposited in escrow pursuant to para (b) and nothing would accrue under para (c). The effect of the provision therefore is not to set a limit upon amount of effective award which Court could make, but to protect Iran from having to pay more in any one year than her economy should be well able to bear.

Para 4 of the Annex of the Aide-Mèmoire handed to the Department on December 19, 1952 by Burrows 4 reads as follows:

“4. Thirdly, if in the end an award for the payment of compensation by Persia is made by the Court, it would clearly be disadvantageous to press for payment in any manner which could not be borne by Persia, and the Court could be asked to determine the manner in which, and the period over which, compensation should be paid. The implementation of the Court’s award must depend upon Persia’s ability to pay and thus upon Persia deriving substantial benefits from a prosperous oil industry.”

It seems to us that above formula is within the spirit of this paragraph.

Furthermore, we feel that if Compensation Agreement clearly spells out in its provisions concerning method of payment a limitation which should be consistent with Iran’s capacity to pay, the International Court would feel itself to be in a freer position to judge compensation question purely on its merits.

We are, however, concerned that Mosadeq may try to trade down period of years or percentage of gross receipts to figure which would impinge upon effectiveness of International Court’s award. We think that would be less likely to happen if Henderson were authorized to explore with Mosadeq the above formula as being his idea without any prior commitment on part of either London or Washington.

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Your prompt comments are requested.5

  1. Repeated to Tehran eyes only for the Ambassador. Drafted by Byroade and Nitze and signed by Nitze.
  2. Supra .
  3. Not printed. (888.2553/1–2653)
  4. For the complete text of the aide-mémoire and attached annex, see Document 252.
  5. The Embassy in London responded on Feb. 2 that it had conveyed the contents of telegram 5076 to the British Foreign Office that morning with the request that the Foreign Office give it urgent and sympathetic consideration. The Foreign Office representative felt the Department’s formula was “ingenious”, but he could not commit himself on the substance pending further study by the interested departments of the British Government.

    As requested, the Embassy provided comments of its own, among them the prediction that the British would undoubtedly be hesitant to agree to proceed with a formula which initially would open up wide possibilities for bargaining over the period of years, the percentage of gross receipts, and the valuation of the crude. (Telegram 4259; 888.2553/2–253)

    On Feb. 1 Ambassador Henderson responded that he also considered the suggestions to be ingenious and was optimistic that if the British would agree to a suggestion of this kind, the Western partners would probably be able to find an exit from what threatened to be a deadlock. (Telegram 2978; 888.2553/2–153)