Abridgement and notes by Kurt Taylor Gaubatz and Kathleen Kane
Arbitration Between Great Britain and Costa Rica
William H. Taft, Arbitrator
Decided October 18, 1923
"...taking into consideration existing agreements [and] the principles of public and international law ...The arbitrator shall have the necessary jurisdiction to establish procedure and to dictate without any restriction whatsoever other resolutions which may arise as a consequence of the question formulated and ... he shall determine what one party may owe the other for the expenses of the claim."
"In January 1917, the Government of Costa Rica, under President Alfredo Gonzalez, was overthrown by Frederico Tinoco. Tinoco assumed power, called an election, and established a new constitution in June, 1917. His government continued until August, 1919, when Tinoco retired, and left the country. His government fell in September following. ... the old constitution was restored and elections held under it. The restored government is a signatory to this treaty of arbitration.
On the 22nd of August, 1922, the Constitutional Congress of the restored Costa Rican Government passed a law known as Law of Nullities NO.41. It invalidated all contracts between the executive power and private persons, made with or without approval of the legislative power between January 27, 1917 and September 2, 1919, covering the period of the Tinoco government. It also nullified the legislative decree No.12 of the Tinoco government, dated June 28, 1919, authorizing the issue of the fifteen million colones currency notes ... [and] the legislative decree of the Tinoco government of July 8, 1919, authorizing the circulation of notes of the nomination of 1000 colones, and annulled all transactions with such colones bills between holders and the state."
"The claim of Great Britain is that the Royal Bank of Canada and the Central Costa Rica Petroleum Company are British corporations whose shares are owned by British subjects; that the Banco Internacional of Costa Rica and the Government of Costa Rica are both indebted to the Royal Bank in the sum of 998,000 colones, evidenced by 998 on thousand colones bills held by the Bank; that the Central Costa Rica Petroleum Company owns, by due assignment, a grant by the Tinoco government in 1918, of the right to explore for and exploit deposits in Costa Rica, and that both the indebtedness and the concession have been annulled without right by the Law of Nullities and would be excepted from its operation. She asks ... to have the claim of the bank paid, and the concession recognized and given effect by the Costa Rican Government.
The Government of Costa Rica denies its liability for the acts or obligations of the Tinoco government and maintains that the Law of Nullities was a legitimate exercise of its legislative governing power. It further denies the validity of such claims on the merits, unaffected by the Law of Nullities...
Coming now to the general issues applicable to both claims, Great Britain contends, first, that the Tinoco government was the only government of Costa Rica de facto and de jure for two years and nine months; that during that time there is no other government disputing its sovereignty, that it was in peaceful administration of the whole country, with the acquiescence of its people.
Second, that the succeeding government could not by legislative decree avoid responsibility for acts of that government affecting British subjects, or appropriate or confiscate rights and property ... except in violation of international law ... the contracts validly made with the Tinoco government must be performed by the present Costa Rican Government, and that the property which has been invaded or the rights nullified must be restored.
... the Costa Rican Government answers: First, that the Tinoco government was not a de facto or de jure government according to the rules of international law. This raises an issue of fact.
Second, that the contracts and obligations of the Tinoco government, set up by Great Britain on behalf of its subjects, are void ... because the government of Tinoco and its acts were in violation of the constitution of Costa Rica of 1871.
Third, that Great Britain is stopped by the fact that it did not recognize the Tinoco government during its incumbency ...
Fourth, that the subjects of Great Britain whose claims are here in controversy, were either by contract or the law of Costa Rica bound to pursue their remedies before the courts of Costa Rica and not to seek diplomatic interference on the part of their home government.
[Taft goes on to quote J.B. Moore, a member of the Permanent Court of International Justice, on the principles of law relevant here]:
"Changes in the government or the internal policy of a state do not as a rule affect its position in international law ... though the government changes, the nation remains, with rights and obligations unimpaired.
[Under] the principle of the continuity of states, the state is bound by engagements entered into by governments that have ceased to exist; the restored government is generally liable for the acts of the usurper ...
Foreign powers deal with the existing de facto government, when sufficiently established to give reasonable assurance of its permanence, and of the acquiescence of those who constitute the state in its ability to maintain itself and discharge its ... external obligations ..."
"... In January, 1917, Frederico A. Tinoco was Secretary of War under Alfredo Gonzalez, the then President of Costa Rica. On the ground that Gonzalez was seeking reelection as President in violation of a constitutional limitation, Tinoco used the army and navy to seize the Government, [and] assumed the provisional headship of the Republic ... Tinoco constituted a provisional government at once ... a new constitution was adopted June 8, 1917, supplanting the constitution of 1871. [An election was held which Tinoco won by a margin of 61,000 votes to 259 votes.] For a full two years Tinoco and the legislative assembly under him peaceably administered the affairs of the Government of Costa Rica, and there was no disorder of a revolutionary character during that interval. No other government of any kind asserted power in the country ... The people seemed to have accepted Tinoco's government with great good will ... there is no substantial evidence that Tinoco was not in actual and peaceable administration without resistance or conflict or contest by anyone until a few months before the time when he retired and resigned... I must hold that ... the Tinoco government was an actual sovereign government.
But it is urged that many leading Powers refused to recognize the Tinoco government ... Undoubtedly recognition by other Powers is an important evidential factor in establishing proof of the existence of a government in the society of nations.
[Here Taft reviews in detail the inconclusive history of recognition of the Tinoco government; 20 nations from all around the world extended recognition between April and December 1917, while the U.S. and the other Allies (including Great Britain) refused official recognition on the grounds that Tinoco's actions threatened regional political stability and defied accepted norms of legitimacy].
The non-recognition by other nations of a government claiming to be a national personality, is usually appropriate evidence that it has not attained the independence and control entitling it by international law to be classed as such. But when recognition of a government is by such nations determined by inquiry, not into its de facto sovereignty and complete governmental control, but into its illegitimacy or irregularity of origin, their non-recognition loses something of evidential weight ... [it] cannot outweigh the evidence disclosed by this record before me as to the de facto character of Tinoco's government ...
Second. It is ... argued on behalf of Costa Rica that the Tinoco government cannot be considered a de facto government, because it was not established and maintained in accord with the constitution of Costa Rica of 1871. To hold that a government ... does not become a de facto government unless it conforms to a previous constitution would be to hold that within the rules of international law a revolution contrary to the fundamental law of the existing government cannot establish a new government. This cannot be, and is not, true..."
"Third. It is further objected by Costa Rica that Great Britain by her failure to recognize the Tinoco government is estopped now to urge claims of her subjects dependent upon the acts and contracts of the Tinoco government ... [The U.S. cases cited in support] have no bearing on the point before us. Here the executive of Great Britain takes the position that the Tinoco government which it did not recognize, was nevertheless a de facto government that could create rights in British subjects which it now seeks to protect. Non-recognition may have aided the succeeding government to come into power; but subsequent presentation of claims based on the de facto existence of the previous government ... does not work an injury to the succeeding government in the nature of a fraud or breach of good faith."
"The fourth point made on behalf of Costa Rica ... is that both claimants are bound either by their own contractual obligation entered into with the Government of Costa Rica, or by the laws of Costa Rica, to which they subscribed, no to present their claims by way of diplomatic intervention of their home government, but to submit their claims to the courts of Costa Rica. This is in effect a plea in abatement to the jurisdiction of the arbitrator, which, under the terms of the arbitration, Costa Rica has the right to advance ...
[Taft cites the oil concession terms and Costa Rican banking law regarding branches of foreign banks (and the order establishing a branch of the Royal Bank in Costa Rica). These sources state that certain kinds of disputes must be settled by domestic tribunals.]
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 ... However this may be, these restrictions upon each claimant would seem to be inapplicable to a case like the present where is involved the obligation of a restored government for the acts or contracts of a usurping government. The courts of the restored government are bound to administer the law of the restored government under its constitution and their decisions are necessarily affected by the limitations of that instrument. This may prevent the courts from giving full effect to international law that may be at variance with the municipal law ... other nations may object to a tribunal which must give consideration to legislation enacted after the fact, in reaching its decision ... The Law of Nullities was a legislative decree without any hearing declaring invalid the rights which the bank claimed to have against the Banco Internacional and against the government ... The same views must apply in favor of the concessionaire under the Amory [oil] concession ..."
"A consideration of the issues before us, therefore, recurs to the merits of the two claims ...
Coming now to the merits of the Royal Bank claim ... The Banco Internacional de Costa Rica was established as a bank to be conducted by private persons under the immediate supervision of the executive power ... [During Tinoco's rule, the government deposited funds in American currency in the Banco Internacional] to be operated in the form of a revolving credit, to be used exclusively by the bank to sell bills of exchange to merchants and private persons ... On July 16, 1919, there was deposited in the royal Bank of Canada, to the credit of the Costa Rican Government, a check drawn ... against the Banco Internacional for 1,000,000 colones [Costa Rican currency, with an exchange rate of greater than eighty colones to the 1919 dollar]. On the stub of the check was a memorandum that it was payable in provisional bills of 1,000 colones. [Taft cites supporting correspondence from the Minister of Finance, indicating that the Costa Rican government would both pay interest and replace the provisional notes with actual currency at a later date]. It is alleged on behalf of Great Britain that the Government of Costa Rica then drew against this account for governmental purposes, and that the bank honored the checks, some twenty in number, which exhausted the deposit ... Upon these facts rests the claim that the Costa Rican Government and the Banco Internacional must recognize the validity of the thousand colones bank notes still held by the Royal Bank, and make them good ...
In its counter case the Government of Costa Rica does present additional accounts between the Royal Bank of Canada and the government, taken from the books of the government entered during the Tinoco regime...
[Taft notes that Great Britain does not present conflicting evidence, and then proceeds to cite at great length the ledgers and supporting correspondence offered by the Costa Rican government. The ledgers establish that the amount finally at issue is $200,000 in exchange notes, drawn in two equal checks by the Tinoco government in August 1919. The stated purpose of the checks was to fund the "representation of the Chief of the State in his approaching trip abroad" and four years of salary for Frederico Tinoco's brother as the newly-appointed ambassador to Italy]...
It is evident from the exhibits that in the spring of 1919 the popularity of the Tinoco regime had disappeared, and that the political and military movement to end that regime was gaining strength ... The sinking credit of the Tinoco government and the expenses of the maintenance of the army raised in its defense, had produced a stress in its finances which led to the legislation authorizing the issue of the fifteen millions of colones. The emergency was illustrated in the use of the very irregular form of the notes of issue by the Banco Internacional ... It became perfectly clear from the mob violence and disturbances in June, and the evidences of the unpopularity of the Tinoco regime, that it was in a critical condition ...
...The present claim of the Bank rests on its payment of $200,000 to the Tinocos, $100,000 to Frederico Tinoco, "for expenses of representation of the Chief of State in his approaching trip abroad," and $100,000 to Jose Joaquin Tinoco, as Minister of Costa Rica to Italy for four years' salary and expenses of the Legation ... in Italy, to which post the latter had been appointed by his brother. The Royal Bank cannot here claim the benefit of the presumptions which might obtain in favor of a bank receiving a deposit in regular course of business and paying it out in the usual way ... The whole transaction here was full of irregularities. There was no authority of law, in the first place for making the Royal Bank the depository of a revolving credit fund. ... The thousand dollar colones bills were most informal and did not comply with the requirements of law as to their form, their signature, or their registration ... The bank 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 case of the money paid to the brother ... is much the same ... To pay salaries for four years in advance is a most unusual and absurd course of business. All the circumstances should have advised the Royal Bank that this second draft, too, was for personal and not for legitimate government purposes.
[Taft points out that the current Costa Rican government's actions have voided its rights to $100,000 of the money claimed by the Royal Bank. The current government prosecuted a suit against the Tinoco estate for $100,000, based on the money paid him by the Royal Bank. By thus legitimizing the Royal Bank's claim, the Costa Rican government must transfer the award from its suit (the mortgage on the estate) to the Royal Bank. He then moves on to the oil company's claim] ...
The [oil] concession is now owned by the Central Costa Rica Petroleum Company of Canada, and all its stock is owned by the British Controlled Oil Fields, Ltd. ... The concessionaire was granted the exclusive right during fifty years to develop and exploit the deposits located by him ... The grant was made on [certain conditions, including provision of oil to the government and local investment] ... It seems to me that substantially everything was done by the concessionaires or their assignee required by the contract ...
The most serious objection to the concession is that it was granted by a body without power to grant it. Its validity is, as I have already said, to be determined by the law in existence at the time of its granting ... [After a discussion of the 1917 constitution]... the government of Tinoco itself could have defeated this concession on the ground of a lack of power in the Chamber of Deputies [the granting institution] to approve it."
"My award, therefore, is that the Law of Nullities ... will work no injury of which Great Britain can complain, if Costa Rica assigns all her interest in the mortgage for $100,000 upon Tinoco's estate ... My award further is that the Law of Nullities in decreeing the invalidity of the Amory concession worked no injury to the Central Costa Rica Petroleum Company ... of which Great Britain can complain, because the concession was in fact invalid under the Constitution of 1917."