Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.2553/1–853: Telegram

No. 270
The Ambassador in the United Kingdom (Gifford) to the Department of State¹

top secret
niact

London, January 8, 1953—11 p.m.

3738. From Byroade. We had another meeting on Iran this afternoon with Eden and other officers mentioned Embtel 3696 repeated Tehran 129. Most important subject discussed was question of terms of reference for Court which will be dealt with in terms cable. Other matters discussed will be dealt with in separate message.²

We informed British that we considered question raised in paragraph 2, Tehran’s 2569 repeated London 816³ as most important issue yet unresolved and one which is most likely cause failure in reaching final agreement with Mosadeq. We supported Henderson’s views we did not believe Mosadeq could accept terms of reference which made it clear on their face that Mosadeq had agreed that Court can ask Iran to pay compensation for loss of future profits.

British produced draft terms reference which are based on coal nationalization tribunal’s terms and have been fully agreed in UK Government. Text follows: “The terms of reference of the tribunal shall be:

• “(1) To determine the sum required to provide fair compensation to the company for the loss of the property, rights and interests in Iran held by the company immediately prior to the passing of the Iranian Oil Nationalization Laws of March and May, 1951, and for that purpose the tribunal shall ascertain the amount which such property, rights and interests might have been expected to realize if sold as one unit in the open market as property, rights and interests of a going concern by a willing seller to a willing buyer on the basis of
  • “(a) The net annual maintainable revenue, that is to say, the net annual revenue which the company reasonably have been expected to earn in the future from its operations in Iran if the Iranian laws in question had not been passed;
  • “(b) The number of years purchase to be applied to such net annual maintainable revenue
• “(2) To determine the validity of any counter claims which the Iranian Government may have against the AIOC and the sum required to meet them”.

There was considerable discussion as to why such an unattractive formula was necessary to protect British position. Point seems to be that while Coal Nationalization Law clearly refers to future earning capacity aspect, this is on basis of assets of the Mining Association. In the case of coal, there was, of course, no concession involved. It seems, therefore, that under this law question would arise as to whether concession agreement was included among assets of AIOC. Iranian position has been, of course, that concession agreement invalid and British fear they will take position before court that compensation should be determined solely upon basis of “property” involved. They, therefore, wish have terms of reference which indicates that company would be compensated for loss of “property, rights and interests” in Iran.

There was inconclusive discussion whether British could accept simple terms of reference merely referring to Coal Nationalization Law and have a private agreement with Mosadeq that in presentation before court Iranians would not contest claim for future profits resulting from cancellation of concession contract.

We suggested that while we did not know whether the words “rights and interests” could be publicly accepted by Mosadeq, it seemed their point could be met just as well by reducing their text to following:

“To determine the sum required to provide fair compensation to the company for the loss of the property, rights and interests Iran held by the company immediately prior to the passing of the Iranian Oil Nationalization Law of March and May, 1951, and for that purpose the tribunal shall use as a basis the terms of the Coal Industry Nationalization Act 1946 of the United Kingdom”.

The British then produced following text which they stated had not been cleared with AIOC:

• “(1) To determine the sum required to provide fair compensation to the company for the loss of the property, rights and interests in Iran held by the company immediately prior to the passing of the Iranian Oil Nationalization Laws of March and May, 1951, on the basis that those laws had not been passed and that the property rights and interests of the company in Iran had been sold immediately before the passing of those laws in the open market as a going concern by a willing seller to a willing buyer, this being the basis adopted for the purposes of the compensation awarded under the Coal Industry Nationalization Act 1946 of the UK.
• “(2) To determine the validity of any counter claims which the Iranian Government may have against the AIOC and the sum required to meet them”.

Eden asked if I would transmit text above which is their first reference to Henderson for comment. I stated that I would do so but as this text clearly spelled out question of future profits, I feel they need be under no illusion that we would find text quite unsatisfactory. After some hesitation, British agreed that I could transmit other two texts given above for comment by Department and Henderson, but with understanding they have not been approved here.

In my own view the British preferred text is quite unacceptable. I believe, however, from a legal point of view they may run certain risks under Coal Nationalization Law unless it is clear that “rights and interests” can be added to word “property”. Urgently request advice as to whether Henderson believes Mosadeq could accept addition of those two words.

Also request advice as to whether you see any possibility of a secret commitment being used on this point. I believe it would be out of question for two governments to reach a secret agreement which could be referred to court for its guidance. Only other possibility in this field would seem to be secret agreement that Iranians would not contest before court a claim for future profits based upon concession agreement which are over and above future earning power of physical property.

Gifford

1. Repeated to Tehran eyes only for Ambassador Henderson.
2. Telegram 3737, Jan. 8, supra.
3. In telegram 2569, Jan. 6, Ambassador Henderson warned that Mosadeq would not accept British terms of reference governing compensation which clearly indicated that he had agreed with the British that the ICJ could ask Iran to pay compensation to the AIOC for the loss of future profits. (888.2553/1–652)