Foreign Relations of the United States Diplomatic Papers, 1939, The American Republics, Volume V

812.6363/6001

The President of the Standard Oil Company of New Jersey (W. S. Parish) to the Secretary of State

New York, August 10, 1939.

Dear Mr. Secretary: I am addressing you in behalf of American interests represented by Mr. Donald E. Richberg in recent negotiations with the Mexican Government.

Ever since the forcible seizure of foreign owned oil properties by the Mexican Government on March 18, 1938, the owners of these properties have protested the illegality of this seizure. The American, British and Dutch Governments have all made clear to the Mexican Government in separate but harmonious protests that such a taking of private property without making prompt, assured and adequate compensation to the owner is simply confiscation and cannot be justified as a legal expropriation, under established principles of international law, or indeed, even under Mexican law.

More than sixteen months have passed during which the Mexican Government has furnished ample and convincing evidence not only of its inability, but also of its unwillingness to make any genuine compensation for the properties taken. Even its intermittent assertions of an intention eventually to offer long deferred, inadequate and uncertain payments, have been coupled with qualifications and counterclaims so absurd as to make the assertions a mockery instead of a promise of justice.

The oil companies, on the other hand, have faced the realities of the situation and have recognized the political and economic difficulties embarrassing the Mexican Government. Without waiving their legal rights they have sought to find a method of amicable settlement through which the Mexican Government might achieve honorably its aims in regard to the oil industry and might advance the welfare of its people in the effective development of Mexican oil resources.

A practical program was developed late in the year 1938. The objectives of negotiations were stated, and were accepted by the companies and the Mexican Government, with the full knowledge and approval of the Department of State of the United States. The five stated objectives read as follows:

“An arrangement under which there will be:

(1) Provision through the medium of a long term contract for the operation by the respective companies of properties taken, in accordance with the terms of the contract free from restrictions, claims or obligations not embodied therein.

(2) A fixed schedule of rates definitely determining all taxes and similar payments to be made during the life of the contract.

(3) A reciprocal guarantee, for the life of the contract, of reasonable and workable labor conditions.

(4) An appropriate measure and means of reimbursement for losses sustained by the companies to date of contract by reason of seizure of properties on March 18, 1938.

(5) Upon expiration of the long term contract all claims and interests of companies in producing properties in Mexico to be released and transferred to the Mexican Government without payment of any further consideration.”

Through conferences between President Cárdenas and Donald R. Richberg, representing the companies, in Mexico City in March and in Saltillo in May, a thorough understanding was established regarding the basic principles which must underlie the proposed long term contracts in conformity with the foregoing objectives. But when it appeared that a substantial agreement upon major principles had been reached tentatively in Saltillo on May 3, and that an expert negotiation of the detailed provisions of contracts would be next in order and should be undertaken at an early date, a sudden change took place in the attitude of the Mexican Government.

After a long and unexplained delay, and then a patient resumption of discussions with the Mexican Ambassador in Washington, a letter was received by Mr. Richberg on July 11 (dated July 5) setting forth the position of the Mexican Government in such a way as to nullify the results of the previous negotiations. Whereupon Mr. Richberg wrote to the Mexican Ambassador on July 17 stating his conclusion that since the efforts previously made to arrive at an understanding had been abandoned, further negotiations appeared to be useless. A copy of this letter, which is hereto attached, was transmitted promptly to the Department of State of the United States as an explanation of the breakdown of negotiations.

As the result of subsequent discussions between the State Department and the Mexican Ambassador Mr. Richberg was advised that the Mexican Government had under consideration a new proposition which the companies would be asked to consider in the near future. While courteously waiting this development the oil companies and Mr. Richberg have been surprised to read articles in the newspapers purporting to reveal proposals supposedly proceeding in part from Mr. Richberg, which neither he nor his clients have ever made or would consider making.

It seems therefore necessary to state quite plainly that the oil companies have not authorized, nor has Mr. Richberg undertaken, the discussion in their behalf of any proposal which does not conform to the objectives originally written as the basis for the discussions between Mr. Richberg and the Mexican Government. Nor has anything happened since the letter of Mr. Richberg, dated July 17, which would change the conclusion stated therein.

It becomes necessary accordingly, to report to the Department of State of the United States that the companies have found it impossible to arrive at an agreement with the Mexican Government for adjusting equitably the controversy arising out of the forcible seizure of these properties. Obviously it would not be appropriate for the Government of the United States to undertake—and it is not being asked to undertake—negotiations to determine the amount or method of paying a compensation which the Mexican Government confessedly is both unable and unwilling to pay. It is appropriate, however, in the present situation again to request the Government of the United States to call upon the Mexican Government to return to the possession and control of American citizens their properties which have been unlawfully seized and held by the Mexican Government, and to call upon the Mexican Government to recompense the owners of these properties for all damages and losses resulting from that unlawful seizure and from the subsequent exploitation of these properties by the Mexican Government.

We think it would be also appropriate for the Government of the United States to remind the Mexican Government that the companies are not to be regarded as suitors for favor but as associations of injured American citizens who have been despoiled of rights acknowledged wherever civilized people are engaged in peaceful commerce among nations.

We believe that we have kept the Department so fully informed of the progress of these negotiations that the Department now understands how patiently and conscientiously we have striven to find an early and just solution of this controversy.

Respectfully yours,

W. S. Farish

[Enclosure]

Mr. Donald Richberg to the Mexican Ambassador (Castillo Nájera)

[Washington,] July 17, 1939.

Dear Mr. Ambassador: I have received and given careful consideration to your letter from Mexicali dated July 5, 1939, in which you state the position of the Mexican Government and propose a settlement of the oil question based in part upon the Modified Memorandum of June 18 which you submitted to President Cárdenas.

Before receiving your letter I had felt that, through discussions with President Cárdenas in Mexico City and in Saltillo and subsequent discussions with you in Washington, we had reached a fairly clear understanding of the essentials of any agreement which could be acceptable to the oil companies and the Mexican Government. The propositions advanced in your letter of July 5 depart so far from such an understanding that in reviewing them briefly I find it necessary to restate the essential positions taken by the oil companies in the efforts made to reach an agreement.

We have heretofore agreed upon the desirability of long-term contracts between the Mexican Government and each of the groups of companies in which would be consolidated the interests of each specified group of investors, but it was certainly understood that the Corporation being formed by investors would represent their interests and be a private industrial enterprise. Obviously, it would not be a Government corporation since it would enter into a contract with the government for the development of oil properties created, and to be expanded, by investors of private capital. Therefore, the proposal that a majority of the Board of Directors and the President of the Company should be Mexicans appointed by the Mexican Government (which is made in your letter of July 5) is wholly inconsistent with the entire theory and purpose of our discussions. Such a corporation as you propose would be essentially a Government corporation to which private investors would be expected to contribute money and property without any such control as would justify such private investment.

The suggestion made in the Memorandum of June 18 that a majority of the Board of Directors should be Mexicans raised the immediate question, when this Memorandum was subsequently presented to my clients, that such a Board might be assumed to be under the control of the Mexican Government instead of under the control of the stockholders who elected it. The reasonableness of this criticism is now borne out by the proposition bluntly presented in your letter of July 5 that the President and a majority of the Board should be appointed by and under the control of the Mexican Government. I have repeatedly pointed out to you and to President Cárdenas that private investors would not think of contributing their money and property to a Government-controlled corporation since this would mean simply lending money to the Government.

I am compelled to call your attention again to the basic principle under which these negotiations were undertaken which was stated in the memorandum of objectives which were adopted as the foundation for the negotiations which began on March 8 in Mexico City. This first principle read as follows:

“Provision through the medium of a long term contract for the operation by the respective companies of properties taken, in accordance with the terms of the contract free from restrictions, claims or obligations not embodied therein.”

We have agreed heretofore that through the medium of a long-term contract and supervision of operations under that contract the Mexican Government would be vested with appropriate and adequate means to secure contract performance so that all National and Governmental interests would be thoroughly protected. But it has been made clear over and over again that the essential basis for inducing contributions of private money and capital necessary for the development of these oil properties was the control of operations by the chosen representatives of the investors.

In your letter of July 5 you bring forward a new proposition for the distribution of the revenues of the new oil corporations which discards all the progress made in our previous discussions of this question. It is now proposed that after operating expenses and taxes have been deducted, “the remaining proceeds will be divided between the two partners (Government and Companies) in the proportion determined in each contract.” However, until receiving your letter of July 5 I had thought it was practically agreed that Government revenues would be fixed in the contract, probably through a fixed percentage of the oil produced. Thereby the Government would be absolutely assured of substantial and appropriate revenues and there would be no controversies in the future over Government taxation or over the rights of the investors to the proceeds of operations remaining after the payment of adequate wages, the payment of taxes and the payment of other operating costs. Through the methods previously discussed we would avoid the difficulties which are now presented anew in seeking to determine what proportion of the net proceeds would go to the private investors. The private investors would take the risk of recompensing themselves during the period of the contract for their contributions and of amortizing their investments, and the Government would be assured of definite revenues.

Moreover, in making the proposition contained in your letter of July 5 the uninviting prospect is held forth that there may be no remaining proceeds, because it is proposed that the expenses shall include “all wages and services to the workers as granted to them by the decision of the Arbitration and Conciliation Board.” One of the matters most extensively discussed as to which we appeared to be heretofore in agreement was the need expressed in the Memorandum of June 18 as “a reciprocal guarantee of reasonable and workable labor conditions and the means for establishing and maintaining such conditions.” We have hitherto discussed and apparently agreed upon three principles to effectuate this “reciprocal guarantee.”

1. That a schedule would be written in the contract,

2. That standards for revision of the schedule would be stated in the contract, and

3. That a method of applying such standards impartially would be provided in the contract.

It is evident that if wages and working conditions are to be determined at the uncontrolled will of the Arbitration and Conciliation Board, there may be little or no proceeds left to provide the Government with revenues or the investors with any recompense for their contributions. Consequently, under the proposal contained in your letter of July 5 insurmountable obstacles are presented to the making of any contract.

You will readily see from the foregoing observations that it would be useless to undertake the negotiations suggested in Mexico City. Indeed, the proposals made in your letter, which are completely unacceptable to my clients, are so entirely incompatible with the tenor of our previous conversations that I am regretfully forced to conclude that the efforts heretofore made to arrive at an understanding of basic principles have now been abandoned; and, without such an understanding, further negotiations would be useless.

Sincerely yours,

Donald R. Richberg