CHAPTER VII

INTERNATIONAL RESPONSIBILITY OF THE STATE-Continued. CONTRACTUAL CLAIMS

§109. Exceptional Position of Claims Arising out of Contracts. Diplomatic protection is often invoked by citizens of one country in cases arising out of contracts entered into with citizens of another, or with a foreign government. Coincident with the constant growth of international intercourse and the exploitation of backward countries by foreign capital, this class of cases has assumed large proportions and has given rise to many perplexing and delicate diplomatic situations. The United States and one or two other important governments have differentiated these claims from tortious claims arising out of direct injuries committed by an authority of the state against the person or property of their citizens, either by declining to interpose in behalf of their contracting citizens or else by exercising more than ordinary scrutiny over a cause of action having its origin in contract. Fundamentally, it is the denial of justice which is the necessary condition for the interposition of a government on behalf of its citizen prejudiced by breach of contract. As a general rule, before a claim originating in a contract can come within the category of a denial of justice it must have been submitted to the courts for such judicial determination as is provided by the local law or in the contract. Until such submission, the government's right of interposition has not yet accrued. The qualifications of this principle will be considered hereafter.

§ 110. Three Classes of Contractual Claims. Distinctions.

There are three important classes of contract claims: first, those arising out of contracts concluded between individuals who are citizens of different countries; second, those arising out of contracts between the citizen and a foreign government; and third, claims arising out of the unpaid bonds of a government held by the citizen of another. The

failure of some publicists to distinguish these classes clearly in their discussion of the subject especially the failure to distinguish the second from the third class, has brought about some confusion. When they state, as many of them do, that on principle there can be no intervention in claims arising out of contract, they really mean to confine their assertion to the case of claims arising out of unpaid bonds and not contracts in general. This distinction, as will be observed hereafter, is important, inasmuch as there is far less reason for governmental intervention to secure the payment of defaulted bonds of a foreign government than there is in the case of breaches of concession and similar contracts.

Hall fails properly to note the distinction between contract and other claims. He recognizes that there is a difference in the practice of governments in supporting claims arising out of a default of a foreign state in paying the interest or principal of loans made to it, and the complaints of persons sustaining injury in other ways. He admits that in the former case governments generally decline interposition, whereas in the latter it is a matter of expediency whether in the particular case their right of interposition shall be exercised. After giving the reasons why public loans should not become a cause of international intervention, he states that, fundamentally,

"there is no difference in principle between wrongs inflicted by breach. of a monetary agreement and other wrongs for which the state, as itself the wrongdoer, is immediately responsible." 1

While the statement is technically correct, it is apt to be misleading, inasmuch as it treats ordinary contract claims and those arising out of tort as forming one class, whereas there is an essential difference between them. This consists in the fact that in the case of contractual claims the active notice taken by the state of the wrong done its citizen is deferred until he has exhausted his local judicial remedies and a denial of justice is established, whereas in claims arising out of tort, if chargeable to a government authority, interposition is generally im

1 Hall, 6th ed., 275-276. See also Findlay, commissioner, U. S.-Venezuelan commission of Dec. 5, 1885, who considered the difference one in degree only. He believed that a contractual claim for building a public work and one founded on nonpayment of a public debt are the same, both being voluntary engagements. Opinions of the commission (Washington, 1890), 335, Moore's Arb. 3650.

mediate; and in the further fact that wider discretion is usually exercised by the protecting state in the enforcement of contractual claims than of those purely tortious in origin.

Westlake is one of the few writers who properly distinguish the case of ordinary contract claims-for example, those arising out of supplies furnished the government or out of concession contracts concluded between a citizen and a foreign government-and the case of unpaid bonds which constitute part of a public loan.

In the case of ordinary contract claims, he says,

"there is a petition of right, a court of claims, or an appropriate administrative tribunal before which to go. The case is not essentially different from any other arising between man and man. The foreigner who has contracted with the government has not elected to place himself at its mercy, and the rule of equal treatment with nationals requires that he shall have the full benefit of the established procedure, while if in a rare instance there is no such established procedure, or it proves to be a mockery, the other rule of protecting subjects against a flagrant denial of justice also comes in. But public loans are contracted by acts of a legislative nature, and when their terms are afterwards modified to the disadvantage of the bondholders this is done by other acts of a legislative nature, which are not questionable by any proceeding in the country. If therefore the rule of equal treatment with nationals be looked to, the foreign bondholder has no case unless he is discriminated against. And if the rule of protecting subjects against a flagrant denial of justice be looked to, the reduction of interest or capital is always put on the ground of the inability of the country to pay morea foreign government is scarcely able to determine whether or how far that plea is true supposing it to be true, the provisions which all legislations contain for the relief of insolvent debtors prove that honest inability to pay is regarded as a title to consideration-and the holder of a bond enforceable only through the intervention of his government is trying, when he seeks that intervention, to exercise a different right from that of a person whose complaint is the gross defect of a remedial process which by general understanding ought to exist and be effective."

CONTRACTS BETWEEN INDIVIDUALS

$111. Absence of Governmental Interest.

The first class of cases, contracts between individuals, can give rise only to an action in the courts for breach of contract. The government of the foreigner is in no wise concerned unless the local courts deny or

1 Westlake, I, 2nd ed., 332-333.

unduly delay justice, in which event the government's right of interposition rests on the denial of justice alone and disregards the fact that the claim had its origin in a contract. This rule has generally been followed by the governments of contracting citizens, and has been applied by international commissions.1

CONTRACTS BETWEEN CITIZEN AND FOREIGN GOVERNMENT

§ 112. Formal Interposition not Customary.

A more doubtful case arises where the contract has been concluded between the citizen and the foreign government. It is not proposed here to discuss the question of unpaid bonds, for this is a distinct branch of the subject, although some writers do not observe it as such. The contracts now in question are such as are made with the foreign government for the supply of material, for the execution of public works, or for the exercise of concessions of various kinds. Here again the general rule followed by the United States, although not by all other governments, is that a contract claim cannot give rise to the diplomatic interposition of the government unless, after an exhaustion of local remedies, there has been a denial of justice, or some flagrant violation of international law. The use of good offices is, however, usually sanctioned. While the rule is fairly clear, its application and its exceptions are vague, due principally to the fact that the intervening government interprets for itself what is a denial of justice and frequently concludes that harsh treatment of its contracting citizen by the foreign government constitutes a tortious act which takes the case out of the ordinary rule. Broadly speaking, we might state the rule as follows: Diplomatic interposition will not lie for the natural or anticipated consequences of the contractual relation, but only for arbitrary incidents or results, such as a denial of justice or flagrant violation of local or international law.2

1 Smith (U. S.) v. Mexico, Act of Congress, Mar. 3, 1849, Moore's Arb. 3456; Rowland (U.S.) v. Mexico, Mar. 3, 1849, Moore's Arb. 3458; Hayes (U. S.) v. Mexico, Mar. 3, 1849, Moore's Arb. 3456; Chase (U. S.) v. Mexico, Moore's Arb. 3469–70; La Guaira Light & Power Co. (U. S.) v. Venezuela, Feb. 17, 1903, Ralston, 182.

2 F. de Martens, in his essay "Par la justice vers la paix" (pp. 30-31), supports the rule of non-interference by the government until the claimant has appealed to the local courts and justice has been denied. Even then he suggests a preliminary judicial examination into the justice of the claim by the government of the claimant.

There are several reasons why governments are and should be less zealous in pressing the claims of their citizens arising out of breach of contract than those arising out of some tortious act. The first reason is that the citizen entering into a contract does so voluntarily and takes into account the probabilities and possibilities of performance by the foreign government. He has in contemplation all the ordinary risks which attend the execution of the contract. In the second place, by going abroad, he submits impliedly to the local law and the local judicial system. The contract or the law provides remedies for breach of contract. These he must pursue before his own government can become interested in his case. In the third place, practically every civilized state may be sued for breach of contract. Even the United States, which renders itself less amenable to suit at the hands of injured individuals than perhaps any other country, recognizes its liability for illegal breaches of contract.1 In England, a petition of right is rarely refused; in the United States, the Court of Claims, or a similar body in most of the states, has jurisdiction; in France and some other countries, the Council of State or some administrative body is the proper forum for suits against the state; in Latin-America, the Supreme Court is generally given jurisdiction.

The exceptions to this requirement of exhausting local remedies occur first, where the local judicial organization is so corrupt, or the possibility of local remedy so remote, that it would be folly to compel a citizen to submit his cause of action to local courts. The fact that the protecting government determines for itself the existence of these. qualifying conditions renders the application of the rule uncertain. Secondly, where the breach is one not within the contemplation of the contracting parties, but partakes of the nature of an arbitrary tort, the protecting government will relieve its citizen from the ordinary rule of submission to local courts. The position of the injured individual and the protecting government is the same as in cases of ordinary tortious acts of the defendant government and justifies interposition. See also Martens' Traité de droit international, vol. I, 446-447. See also Fiore, P., Nouveau droit int. public (Paris, 1885, Antoine's trans.), § 651; Lomonaco, Diritto internazionale pubblico (Napoli, 1905), 218-219.

1 Revised Statutes, § 1059, par. 1; § 1060; § 1068; Act of March 3, 1887 (Tucker Act), 24 Stat. L., 505, § 1.