Odious Debts

Great Britain v. Costa Rica

Sir John Fischer Williams and H. Lauterpacht (editors)
Annual Digest of Public International Law Cases
October 18, 1988

VII.-For Acts and Omissions of Revolutionary or de facto Governments

Responsibility of States-De facto Governments–Responsibility
for Obligations Contracted and Concessions Granted by –Transactions
Extraneous to the Purpose of Government — Concessions Granted in
Disregard of Constitutional Provisions.

GREAT BRITAIN v. COSTA RICA.
18 October, 1923. (TAFT, Sole Arbitrator.)

THE FACTS.-See Case No. 15.

Held: (a) In respect of the Banking Transactions:
That the Costa Rican Law of Nullities, which in effect relieved Costa
Rica of any obligations in respect of these transactions, did not
constitute an international wrong. The transactions in question, which
in themselves did not constitute transactions of an ordinary nature and
which were ” full of irregularities,” were made at a time when the
popularity of the Tinoco Government had disappeared, and when the
political and military movement aiming at the overthrow of that
Government was gaining strength. The payments made by the bank were
either in favour of Frederico Tinoco himself ” for expenses of
representation of the Chief of the State in his approaching trip
abroad,” or to his brother as salary and expenses in respect of a
diplomatic post to which the latter was appointed by Tinoco. ” The case
of the Royal Bank depends not on ” the mere form of the transaction but
upon the good faith ” of the bank in the payment of money for the real
use of the ” Costa Rican Government under the Tinoco r√©gime. It must
make out its case of actual furnishing of money to the It has not done
so. The government for its legitimate use knew that this money -was to
be used by the retiring president, F. Tinoco, for his personal support
after he had taken refuge in a foreign country. It could not hold his
own government for the money paid to him for this purpose.” The
position was essentially the same in respect to the payments made to
Tinoco’s brother. The Royal Bank of Canada cannot be deemed to have
proved that the payments were made for legitimate, governmental use.
Its claim must fail.

(b) In respect
of the Concession: That the operation of the Law of Nullities did not
constitute an international wrong of Which Great Britain could
complain. The-concession was granted by a body without power to grant
it. The vital clause (Article X) of the concession involved exemptions
from taxation and limitations of future taxation. According to the
Constitution obtaining at the time of the Tinoco Government, the power
to grant such exemptions was vested in the Congress (composed of the
Chamber of Deputies and the Senate). But the concession was granted by
the Chamber of Deputies and approved by the President. It is impossible
to reject the clause in question and hold the remainder of the
concession valid. ” That article is too vital an element in its value.
The contract cannot be made over by this tribunal ” for the parties.”
[Reports: A..J., XVIII (1924), pp. 163- 174 ; British and Foreign State
Papers, vol.116 (1922), pp. 438-443.]

NOTE
–The award in respect of the banking transactions was somewhat
modified as the result of the Arbitrator’s finding that the Government
of Costa Rica should assign to the Royal Bank of Canada all its
interest in a mortgage for $100,000 upon two properties of José Joaquin
Tinoco, deceased (brother of Frederico Tinoco), which mortgage was
given by his widow in settlement of an action against his estate based
on the payment to him of this sum by the Royal Bank out of the account
of the Tinoco Government at that bank. The Arbitrator, proceeding in
this matter ex aequo el bono, found that the Government of Costa Rica,
in repudiating any obligation to the Royal Bank in regard to this
payment of the $100,000 to Frederico Tinoco’s brother, deprived itself
of any just claim to the mortgage, which should enure to the benefit of
the Royal Bank.

C. CLAIMS

I.-In General

Claims–Obligation
not to Invoke the Intervention of the Case Home Government–So-called
Calvo Clause-In Case of No.96 Obligations of Restored Government in
respect of Acts and Contracts of Usurping Government.

GREAT BRITAIN v. COSTA RICA.
18 October, 1923.
(TAFT, Sole Arbitrator.)

THE
FACTS.-(See Case No. 15.) Article XIX of the contract relating to the
concession provided : ” The de present contract shall lapse, and the
government may so declare by an Executive Order, in the following cases
only: …

” 6. If the contractor has recourse
to diplomatic action in connection with any dispute or litigation as to
the rights and privileges granted by this con- tract, but the
forfeiture of this concession shall not be pronounced by the government
without having given to the concessionaire the opportunity to defend
himself nor without having submitted the point to arbitration.”

Article
XXI provided: ” Any dispute arising between the parties in respect to
the interpretation or “execution of this contract which cannot be
compromised, shall be submitted to arbitration and decided according to
the laws of Costa Rica. If the parties fail to agree on one arbitrator,
each shall appoint one, and the two arbitrators in case of disagreement
shall choose a third as umpire.”

As to the claim
relating to the banking transaction, Articles 11 and 12 of the Banking
Law of Costa Rica, referred to in the Order of the Costa Rican
Treasury, authorising the establishment of a branch of the Royal Bank
of Canada in Costa Rica, provided: ” Article 11.. Companies organized
abroad for the establishment of banks of any kind within the republic
shall sub- ject themselves for effective organization to the provisions
of this law, and the banks, as well as their shareholders, shall be
impressed with the character of Costa Rica citizenship to the extent of
being denied the power to invoke the laws of any foreign country in
matters relating to the affairs or operations of such banks; such
matters must be decided by the tribunals of Costa Rica and in entire
conformity with the laws of the republic.” ” Article 12. Banks
established in the country as branches of foreign banks shall be
equally subject to the provisions of the preceding article.”

IT WAS CONTENDED therefore on behalf of Costa Rica that the Arbitrator
had no jurisdiction to entertain the claims in question, on the ground
that the claimants were bound either by their contracts made with the
Government of Costa Rica or by the laws of that country, by which in
the contracts they undertook to abide, not to present their claims
through the intervention of their own State, but to submit them to the
courts of Costa Rica.

Held: That the
objection to the jurisdiction cannot be admitted. ” It has been held in
a number of important arbitrations, and by several foreign secretaries,
that such restrictions are not binding upon a home government and will
not prevent it from exercising its diplomatic functions to protect its
nationals against the annulment of the rights secured to them by the
laws of the country in force when the obligations arose.”

There
was in the present case an additional reason why it was impossible to
admit restrictions upon the claimants’ right to invoke the assistance
of their Governments. This reason was that the claims involved
obligations of a restored Government for the acts or contracts of an
overthrown revolutionary Government. The courts of the restored
Government are bound to administer the laws and Constitution as laid
down by that Government; this means that they are bound by new legal
provisions which did not exist at the time when the obligations in
question arose, and which may be at variance with international law.

It
was not sufficient to answer that the Costa Rican courts would construe
the newly enacted laws and Constitution so as to give effect to
international law. This consideration could not materially alter the
fact that the new Constitution, enacted after the original obligations
had arisen, would be the controlling factor in the exercise of
jurisdiction by Costa Rican courts. An international tribunal is in a
position to uphold an international obligation affected by a
conflicting municipal statute. But a municipal court is bound to give
effect to a statute in conflict with international law. There is in
this respect an essential difference between the scope and effect of a
decision by the highest tribunal of a country and of an international
tribunal.” [Reports: A..J., XVIII (1924), pp. 157-160; British and
Foreign State Papers, vol. 116 (1922), pp. 438-443.]

It
would, therefore, the Court said, be contrary to principles of
international law to interpret Article 304 (b) so as to allow actions
against the German Reich or the States. See, however, on this point the
various decisions of Mixed Arbitral Tribunals as digested in Annual
Digest,1925-1926, Cases Nos. 12 and 13, and 1927-1928, Case No. 14.

(b) There are a number of decisions of the German Reichsgericht in the
matter of the jurisdiction of the Mixed Arbitral Tribunals. Some of
these decisions, which do not raise points of general interest, may be
mentioned : the decisions of 28 March, 1923, E.R.Z., vol. 106, p. 417;
of 15 June, 1923, E.R.Z., vol. I07, p. 76; and of 28 June, 1923, Fontes
Juris Gentium, Decisions of the German Supreme Court, p. 698.

Arbitration-Competence-Examination of-How far Dependent upon the Attitude of the Parties.

See Case No. 98 (In re Rio Grande Irrigation and Land Co. Ltd.).

Arbitration-Compulsory-Reservations-Reservation
as to Past Disputes-Necessity for Explicit Limitation of Jurisdiction
of Tribunals ratione temporis
.

See Case No. 217 (The Mavrommatis Palestine Concessions).

International Tribunals – Jurisdiction of – Imposition of Penalties upon States-Whether a Justiciable Question.

See Case No.113 (The Lusitania).

vi.-Costs

Arbitration-Costs-Expenses of Arbitration-Remuneration of the Arbitrator.

GREAT BRITAIN v. COSTA RICA.

18 October, 1923.
(TAFT, Sole Arbitrator.)

THE
FACTS.-(See Case No. 15.) The special arbitration agreement of 17
March, 1923, provided that ” the arbitrator shall determine what one
party may owe the other for the expenses of the claim, and decide with
regard to the payment of the expenses of the arbitration.”

Held :
(a) That as the award was partly in favour of one party and partly in
favour of the other, each party should pay its own expenses.

(b)
In regard to the remuneration of the arbitrator the concluding passage
of the award may be quoted: ” So far as the payment of the expenses of
the arbitration is concerned, I know of none for me to fix. Personally,
it gives me pleasure to contribute my service in the consideration,
discussion and decision of the questions presented. I am glad to have
the opportunity of manifesting my intense interest in the promotion of
the judicial settlement of international disputes, and accept as full
reward for any service I may have rendered, the honour of being chosen
to decide these important issues between the high contracting parties.”
[Reports: A..J., XVIII (1924), p. 174; British and Foreign State Papers, vol. 116 (1922), p. 438.]

II.-Rules of Evidence. Burden of Proof

[As
to Consideration of Preparatory Work in the Interpretation of Treaties,
see Part VIII, TREATIES: Interpretation of Treaties.]

Arbitration-Evidence and Procedure-Admission-Failure to Raise Objection in the Written Case.

GREAT BRITAIN v. COSTA RICA.
18 October, 1923.
TAFT, Sole Arbitrator.)

THE FACTS.-(See Case No. 15.) It was maintained on behalf of Costa Rica
that Great Britain was not entitled to put forward a claim acquired
from a national of the United States by British subjects after it had
become the object of controversy. The British contention was that
British capital was engaged in the concession from the very beginning,
and that the nationals of the United States who acquired the concession
were the agents of a British company which furnished the capital. The
Arbitrator found no formal evidence supporting the latter contention. A
letter of the Secretary of State of Costa Rica to the British
Government was produced in which it was admitted that a part at least
of the capital was British. No reference was made by Costa Rica to this
objection to the jurisdiction of the Arbitrator either in the
diplomatic correspondence or in the written Case.

Held:
That in view of the above admission and the lack of a distinct
challenge previous to the Counter-Case, the objection on the ground of
the nationality of the claim must be overruled. [Reports : A..J., XVIII
(1924), p. 171 ; British and Foreign State Papers, vol, 116 (1922), pp. 438-443.]

Longman, Green and Co.
London 1933

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