PUBLIC BONDS

[§ 307 The Special Agreement between the United States and Great Britain of August 18, 1910, for the submission to arbitration of outstanding pecuniary claims, made provision in Class IV of the schedule of claims appended thereto, for the reference of "claims based on contracts between the authorities of either government and the nationals of the other government."1

From the language of the foregoing agreements of the United States, it must be apparent that it is disposed both to seek and permit the adjustment by arbitration of contractual claims of American citizens against foreign governments, as well as those of citizens of foreign States against itself. Arbitrators have, moreover, not hesitated to interpret broadly the scope of the jurisdiction conferred upon them. When jurisdiction has been accepted in a contractual case, the issue has usually been deemed to be whether a contractual obligation was violated by the respondent, and also whether, on the merits of the case, the contracting citizen was entitled to compensation. Thus commissions and umpires have rarely deemed the issue to be whether a breach of contract constituted a denial of justice. Apart from any question as to the correctness of the interpretation placed by Sir Edward Thornton upon the claims convention with Mexico of July 4, 1868, the unwillingness of that umpire to award compensation in contractual cases except upon evidence of "flagrant injustice" is indicative of an opinion entitled to respect, that the mere breach of a contractual duty was not necessarily decisive of the commission of internationally illegal conduct.

$307. Public Bonds.

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A State which validly issues a bond formally agrees to pay a fixed sum in the shape of principal and interest at specified times to whatsoever person comes within the tenor of the contract. An alien may come therein by the purchase of such an instrument.2

1 Charles' Treaties, 50, 55. According to paragraph III of the "Terms of Submission" it was provided that: "The Arbitral Tribunal shall take into account as one of the equities of a claim to such extent as it shall consider just in allowing or disallowing a claim, in whole or in part, any failure on the part of the claimants to obtain satisfaction through legal remedies which are open to him or placed at his disposal, but no claim shall be disallowed or rejected by application of the general principle of international law that the legal remedies must be exhausted as a condition precedent to the validity of the claim."

2 If the principles of private law applied by American Courts in the cases respecting bonds of municipal corporations afford guidance when the obligor is a State and the obligee an alien, the agreement signifies also that the obligor

The formality of the undertaking, the precision of its terms, the absence of any duty on the part of the obligee to take any steps to secure payment other than to present the bond itself or its coupons, appear to place the obligee in a unique position with respect to the contracting State.

Dr. Luis M. Drago of the Argentine Republic, the distinguished author of the doctrine that bears his name,1 has urged that bonds constitute an exceptional class of obligations; first, because they are issued by the sovereign power of the State pursuant to legislation; secondly, because they are made payable to bearer; thirdly, because the purchaser buying the bonds in the open market acquires his rights as obligee without other formality or relation with the debtor government; and fourthly, because when payment is for any reason suspended, there is no means of appeal by judicial action or otherwise to the debtor State, inasmuch as the suspension of payment occurs by virtue of the sovereign authority of the State manifested jure imperii.2

It is not perceived how the process by which a State validly issues a bond, or the functions of government exercised in order to accomplish that end, affect the rights of the obligee or of his State in case of default. Nor does the broad tenor of the agreement, or the method whereby an alien lawfully enters into the contractual relationship with the obligor, offer a solid basis of distinction.

§308. The Same.

On principle, the failure of a debtor State to perform its promise with respect to a bond-holder-the bare nonfeasance - differs nowise from the failure to observe an agreement with a promisee expressed in any other form or concluded by any other process. If a mere contractual delinquency is not regarded as internationally illegal conduct, the propriety of interposition would in such case appear to depend solely upon whether, apart from the breach of contract, the obligor has committed a denial of justice manifest in an act generally regarded as such. When, therefore, the de

will set up no equitable defense against a purchaser for value and without notice, prior to any default in payment of the instrument. See John F. Dillon, Municipal Corporations, 5 ed., §§ 871 and 931, and authorities there cited, especially Mercer County v. Hackett, 1 Wall. 82.

1 The so-called Drago Doctrine was expressed in a note of Dr. Drago, Minister of Foreign Relations of the Argentine Republic, to Señor Mérou, Argentine Minister at Washington, Dec. 29, 1902, For. Rel. 1903, 1–5.

2 Luis M. Drago, "State Loans in Their Relation to International Policy", Am. J., I, 692.

PUBLIC BONDS

[$ 308 fault is not the result of an act depriving the obligee of an adequate remedy in the local courts, the opportunity for an adjudication before a domestic tribunal to which the obligor, as in any other contractual controversy, is amenable, should serve to retard interposition until after the exhaustion of local remedies. In the United States the alien obligee is, in such cases, not necessarily without a remedy in the Court of Claims.1

Oftentimes, however, the default of the obligor is accomplished through the exercise of sovereign power expressed by legislation, which serves to suspend payment or to modify the agreement with the bondholder, and also operates directly as a repudiation of the contract. The act of repudiation appears to differ sharply from the mere non-performance of the obligor's promise, as it places the State beyond the jurisdiction of its own courts, inasmuch as the sovereign acting as such does not permit the propriety of its conduct to be questioned by any domestic authority or according to any test. This fact renders any issue raised by an

1 "The fact is that the right to sue on the bonds issued by States is generally allowed. Action in contract to recover principal or interest, due and unpaid, may be brought on the United States bonds in the Court of Claims, or a mandamus may issue to the Secretary of the Treasury, under existing law, to compel him to pay the interest on United States bonds due and unpaid." G. W. Scott, Am. J., II, 78, 91.

See § 145 of the Judicial Code, 36 Stat. 1136, U. S. Comp. Stat. 1918, § 1136, indicating the scope of the jurisdiction of the Court of Claims.

2 That this power is exercised more frequently to lighten the burden undertaken with respect to alien bondholders than with respect to alien promisees under private contracts with the State is common knowledge. Nevertheless, whenever the power is exercised, the alien promisee, whatsoever be the form of the obligation, finds himself impotent to obtain an adjudication against the State on the merits of the claim. The United States Court of Claims is committed to the doctrine that in a suit on a contract against the United States, the court cannot pass upon the lawfulness of sovereign acts tending to change the contractual duty towards the promisee. Deming v. United States, 1 Ct. Cl. 190; Jones v. United States, 1 Ct. Cl. 383; Wilson v. United States, 11 Ct. Cl. 513. See, also, concerning these cases, G. W. Scott in Am. J., II, 78, 91-92; also Edwin M. Borchard, "International Contractual Claims and Their Settlement", Baltimore, 1913, 52.

3 Dr. Drago asserts that where the obligor State by virtue of its sovereign authority suspends payment or modifies its agreement "there is not and cannot be any 'denial of justice' because not only does there not exist a tribunal competent to bring action against the debtor State, but it is impossible even hypothetically to conceive of such a tribunal." Am. J., I, 692, 697. If the distinguished statesman intends to convey the idea that a denial of justice must be confined to the acts of the judicial department he fails to recognize the practice that commonly regards a State as capable of committing internationally illegal conduct through any agency of government. If in a particular case the exercise of sovereign power causing the repudiation of a contract is not to be regarded as a denial of justice, it is not because the judicial department of the obligor State is freed from the possibility of itself committing an internationally illegal act.

The substance of Dr. Drago's argument is that the repudiation of the contract of the obligor (although it is not said that the contract is repudiated) VOL. V-36

. 561

alien obligee or by his State, justiciable solely before an international court.1 Under such circumstances interposition does not lack justification, because the alien obligee, or his State in his behalf, has the right to demand an adjudication of the controversy before a competent tribunal, and hence the right also to challenge the propriety of any act whereby the obligor attempts to place itself beyond the reach of any court.2 This must be true irrespective of the contention that the commission of the act of sovereignty is not in bad faith. However influential may be the honesty of the obligor with respect to the policy of the State of the obligee, it has no bearing upon the existence or scope of the right of interposition possessed by the latter.3

The treatment accorded the obligee by the obligor may amount to a denial of justice. It is doubtless of such a kind when, by any process, the debtor State injures or destroys or appropriates property sought to be mortgaged as security for the payment of the debt. Such impairment of the value of the right acquired

by the exercise of sovereign power removes from the State of the obligee the right to take steps that it might reasonably take if the obligor had not seen fit to make use of its sovereign power. It ought to be clear that the rights of the obligee and of his State depend upon the consequences of the conduct of the obligor, rather than upon the method which it employs to rid itself of the burdens of its undertaking, and that the very exercise of sovereign power, by reason of the consequences which it entails, necessarily produces an international issue, the solution of which the State of the obligee is entitled to demand.

1 The following were bond claims against Venezuela which were submitted to mixed commissions under conventions of 1902 and 1903: Compagnie Générale des Eaux de Caracas (where jurisdiction accepted), Belgian-Venezuelan Commission, 1903, Ralston's Report, 271; Ballistini Case (where claim disallowed for want of proof of ownership of bonds), French-Venezuelan Commission, 1902, id., 503; Jarvis Case (where claim disallowed, because the bonds were issued in compensation of services in support of an unsuccessful revolution against the constituted government with which the United States was at peace), American-Venezuelan Commission, 1903, id., 145. In a note attached to the Ballistini Case, id., 505, the compiler says: "In the Italian Commission [Boccardo Case, not reported] judgment was given on internal bonds on authority of Aspinwall Case, Moore, p. 3610." Concerning the foregoing cases, see G. W. Scott, in Am. J., II, 83-84.

In this connection see address of Mr. Ruy Barbosa, a Delegate of Brazil, before the First Sub-Commission of the First Commission at the Second Hague Peace Conference, July 23, 1907, La Deuxième Conférence Internationale de la Paix, II, 276–285. An abstract is contained in J. B. Scott, Hague Peace Conferences, I, 411-412.

Mr. Sherman, Secy. of State, to Mr. Powell, Minister to Haiti, No. 43, Oct. 26, 1897, MS. Inst. Haiti, III, 582, Moore, Dig., VI, 729.

3 As the defaulting State is generally ready to aver that, for reasons beyond its control, it has become insolvent, or at least unable to pay its indebtedness, any yielding to the plea that even the policy of the State of the obligee should depend upon the good faith of the obligor, offers opportunity and temptation to the dishonest debtor to escape the reasonable burden of its contract through false representations, the true nature of which it may become impossible to establish.

PUBLIC DEBTS COLLECTED BY FORCE [§ 309

by the obligee in the thing hypothecated for his benefit is essentially wrongful and may be justly regarded as internationally illegal.' Where the security for payment is the mere agreement or pledge of the obligor that revenues to be thereafter derived from certain specified sources shall be employed for that purpose, it may be doubted whether the diversion of those revenues in violation of the agreement should be regarded as other than a further contractual delinquency, as such conduct would not affect any vested right of the obligee in any asset sought to be placed beyond the control of the obligor for the benefit of the former. The breach of the agreement would not differ essentially from any other, and hence could not itself with reason be regarded as a denial of justice. If, however, the diversion of revenues were effected by an act of sovereignty serving also as a repudiation of the contract, grounds of interposition would be as apparent as in any other situation where the obligor by similar conduct produced an issue solely justiciable before an international court.

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The Collection of Public Debts by Force

§ 309. The Hague Convention of 1907 Respecting the Limitation of the Employment of Force.

The propriety of the use of force for the purpose of collecting contractual claims has of late years been widely discussed.

In December, 1902, Great Britain, Germany and Italy resorted to force against Venezuela by blockading certain ports of that country in order to secure recognition and the means of payment of pending claims, contractual as well as tortious. By protocols signed in May, 1903, there was submitted to the Hague Tribunal the issue whether the blockading Powers were entitled to preferential treatment in the payment of their claims against Venezuela, over the so-called non-blockading claimant Powers, among which was the United States. The Tribunal decided the issue

1 Marquis of Salisbury, British Foreign Secretary, to Señor Pividal, Peruvian Minister, Nov. 26, 1879, Parl. Pap. Peru, No. 1 (1882), 16-17, Moore, Dig., VI, 724; Opinion of Cushing, Atty.-Gen., 6 Ops. Attys.-Gen., 130.

2 Memorandum of American Peace Commission, Paris, Nov. 21, 1898, respecting the Cuban Debt, S. Doc. 62, 55 Cong., 3 Sess., II, 198-201, Moore, Dig., I, 381, 384.

3 Concerning the claims of Germany, see Promemoria of the Imperial German Embassy, Dec. 11, 1901, For. Rel. 1901, 192, Moore, Dig., VI, 586; also For. Rel. 1903. 429-431, Moore, Dig., VI, 589. Relative to the blockade, see id., 424, 457-458, 801.