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The Marcona Settlement: New Forms of Negotiation and Compensation for Nationalized Property

Published online by Cambridge University Press:  27 February 2017

David A. Gantz
David A. Gantz*
Affiliation:
Assistant Legal Adviser, U.S. Department of State
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Extract

On September 22, 1976, the United States and the Government of Peru signed an agreement resolving the nationalization of the Marcona Mining Company’s Peruvian branch. The settlement, the intergovernmental negotiations leading up to it, and the expropriation itself are of more than passing interest. The settlement has been characterized by the U.S. Government as providing, when fully implemented, prompt, adequate, and effective compensation through a package—a combination of cash and long term sales relationship—which represents a relatively beneficial arrangement economically and politically for the Government of Peru. These arrangements were the more remarkable for having been concluded with a leading Third World country that has a long history of nationalization of foreign investment. In light of the frequency of expropriations of American-owned property abroad, and of the fact that in one or more ways such expropriations involve issues of the public interest as well as those of private U.S. companies, the Marcona settlement has implications for the handling of other investment disputes.

Type
Three Perspectives on Sovereign Immunity
Information
American Journal of International Law , Volume 71 , Issue 3 , July 1977 , pp. 474 - 493
Copyright
Copyright © The American Society of International Law 1977

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References

1 Agreement between the United States and Peru Resolving the Marcona Mining Company Expropriation; entered into force Oct. 22, 1976. TIAS No. 8417, 15 ILM 1100 (1976).

2 An unclassified research study prepared by the Bureau of Intelligence and Research of the Department of State reports that in the period July 1, 1971-July 31, 1973, “there were at least 87 instances of expropriation or nationalization, intervention, requisition, contract, or concession cancellation or renegotiation, and coerced sale.” (Feb. 28, 1974).

3 Contract of Feb. 1, 1952, between Corporation Peruana del Santa and the Utah Construction Company, authorized by Law No. 11,664, Dec. 10, 1951. For a history of the discovery of the Marcona deposits, See D. Garcia-Sayan, E L Caso Marcona: Analysis Historico-Juridico De Los Contrayos 13-20 (1975).

4 Contracts of Nov. 7, 1952; May 2, 1953; May 13, 1953; Feb. 26, 1960; Dec. 9, 1966; and Dec. 21, 1970.

5 While Marcona's rights to the principal deposits were to expire in 1982, the company had a separate, much smaller concession area, La lusta, which probably could have supplied sufficient ore for two additional years’ production. See A. D. Little, An Evaluation Of Marcona's La Justa Mine In The San Nicholas Region Of Peru, (Dec. 1972). Peruvian authorities, however, argued in the course of the negotiations that the La Justa deposits could not have provided sufficient ore for two years’ full production.

6 Marcona Company figures, exclusive of depreciation. See Marcona Corporation, Nationalization Of Marcona Mining Company Peruvian Branch 8 (1975).

7 Id. at 16 (table). For total tonnage (1953-1970), see Garcia-Sayan, supra note 3, at 186 (table 2 ) .

8 Garcia-Sayan, supra note 3, at 185 (table 1).

9 In the iron ore business the freight cost is a significant portion of the delivered price (25% to 50% depending on ore and freight prices). Thus, a company's ability to minimize freight costs through efficient use of vessels, obtaining of cargo (usually oil) for-the backhaul, etc., correspondingly increases its ability to deliver ore to major markets at competitive prices (and, of course, to generate profits). (The distance between Peru and Japan is more than twice that between Australia and Japan.) According to the company, Marcona's shipping entity was consistently able to carry Peruvian ore at “area rates” below, and in some cases well below, current spot rates. Thus, in 1973 and 1974, a period of astronomical freight rates, the market rates averaged $14.25 and $16.25 per ton, respectively, while Marcona's area rates remained relatively constant, $5.00 and $6.50, respectively. Marcona Corporation, supra note 6, at 20 (table).

10 Information based on Marcona's Peruvian tax returns and financial statements for years 1972-75. The partial returns for 1975, when the expropriation occurred, indicated that operations for 1975 probably would have shown a profit.

11 Decree Law 18350 of July 1970, 9 ILM 1224 (1970), Arts. 21, 22. See F. Armstrong, Political Components and Practical Effects of the Andean Foreign Investment Code, 27 STAN. L. REV. 1597, 1604, 1616 (1976).

12 Marcona Mining Company, Inc., was a U.S. (California) corporation with a Peruvian branch. The shipping company, Marcona Carriers, was chartered in Liberia, Marcona Sales, in Panama. All were wholly owned subsidiaries of Marcona Corporation, San Francisco, California.

13 Gobiebno Revolucionario De La Fuerza Armada, La Revolucion Nacional Peruana; Manifesto, Estatuto, Plan 60-61 (Lima, 1974).

14 Decree Law No. 21228 of July 22, 1975, El Comercio (Lima), July 25, 1975.

15 In his message to the Republic, President Juan Velasco Alvarado noted that while … we never attack anyone, neither will we accept open or concealed aggression which produces a lessening of the rights of the Republic by powerful transnational consortiums which by doing so take on unacceptable and imperialistic attitudes which this government will never tolerate … because we respect profoundly the rights of foreigners and have an honest vocation of peace and justice, we demand identical conduct from those … who think and act in the dark past which we are eradicating in our country. El Peruano, July 25, 1975; see American Embassy Lima's Airgram A-155, Aug. 1, 1975, encl. 2 (Unclassified). The Minister of Mines, Jorge Fernandez Maldonado, carried the attack on Marcona and on multinational enterprises in general even further: Once more our revolutionary process finds itself engaged in the battle being bravely fought by Third World countries to salvage their natural resources, since it is their soil from which those resources are extracted, processed, shipped, marketed, and put to industrial use in ways seriously detrimental to those countries, the raw materials, producers, which are the legitimate owners of their own wealth but must stand silently by while being cheated out of the fair returns their wealth should bring them. The case of Marcona Mining Company is a typical illustration of the immoral conduct engaged in by the big transnational consortia when they are not challenged by a genuine revolution that safeguards its people's interests. The stealth, the underhanded manner in which they conduct business, and the relentless efficiency with which they use the weakness of governments that act behind their peoples’ backs are pursued to unscrupulous advantage by the transnational enterprises which simultaneously create and encourage that weakness, incessantly manipulating the so-called “public opinion” which they themselves bring into being through a certain press, written and spoken, and, most fundamentally, by advertising. This vast universe of economic, political, and cultural aggressive action is what we call imperialism. El Peruano, July 24, 1975; see Airgram A-155, supra, encl. 2.

16 See Peru Seizes Iron-Ore Firm Largely Held by Cyprus Mines and Utah International, Wall Street J” July 28, 1975.

17 Lima telegram 6027, July 25, 1975 (Unclassified).

18 On August 4, the Peruvian Foreign Ministry and the Peruvian Ambassador in Washington received identical aides memoire, expressing United States Government concern- that Despite the fact that negotiations were in progress between representatives of Marcona and the Government of Peru, your Government abruptly expropriated Marcona without express provision for the payment of prompt, adequate and effective compensation for Marcona's rights and assets in Peru. My Government assumes, however, that the Government of Peru, which has amicable and beneficial relations with the United States and which in recent years has displayed a spirit of cooperation in settling other issues involving U.S. investments in Peru, intends to establish procedures immediately in order to arrive at the amount of compensation that Marcona is to be paid. State Department telegram 182371, August 1, 1975, para. 2 (Unclassified).

19 The negotiations indicated a widespread belief on the part of Peruvian officials that Marcona's contract prices for ore were unnecessarily low, and that, if new contracts were concluded between the Peruvian entities and Japanese (or other) purchasers, materially higher prices would result.

20 The Peruvian Government, in response to the August 4 U.S. note, affirmed its willingness to meet with Marcona “to clarify such issues as may arise from the expropriation.” Note of August 8, 1975; Lima telegram 6423, August 8, 1975 (Unclassified).

21 Agreement between the United States and Peru of Feb. 19, 1974, TIAS No. 7792, 25 UST 227.

22 These legislative provisions are the “Hickenlooper Amendment,” Section 620(e) (1) of the Foreign Assistance Act of 1961, as amended; (suspension of bilateral assistance); the “Gonzalez Amendment,” Section 12 of the International Development Association Act/Section 21 of the Inter-American Development Bank Act (opposition to lending by international financial institutions); and Section 502(b)(4) of the Trade Act of 1974 (loss of eligibility for trade preferences). The U.S. view as to what constitutes prompt, adequate, and effective compensation is discussed in 8 Whiteman, Digest Of International Law 1143 et seq. See also R. Lillich, The Valuation of Nationalized Property by the Foreign Claims Settlement Commission, in 1 The Valuation Of Nationalized Property In International Law, 95 (R. B. Lillich ed. 1972); Furnish, Days of Revindication and National Dignity: Petroleum Expropriations in Peru and Bolivia, 2 id. 55 (1973); Lillich, International Law and the Chilean Nationalization: The Valuation of the Copper Companies, 2 id. 120.

23 These included Marcona's 4% commission on C&F sales based on the 1966 contract; the applicability of a freight tax to Marcona vessels; excess demurrage charges; purchasing commissions; bonuses paid to foreign hire employees; and excess depletion. (The depletion claim was mentioned in the President's July 24, 1975, address, supra note 15.)

24 Article 8 canceled the contracts and provided that “the installations of San Nicholas [Marcona's principal assets] shall be adjudicated free of charge to Hierro-Peru in representation of the Government.” Subsequent clarification indicated that the portion of assets purportedly excluded from compensation by the decree was substantially smaller.

25 The procedures used were those applicable to contract research undertaken by the State and Treasury Departments with funds available for external research, after it was determined by the Treasury Department that the funds could properly be used for this purpose.

26 Memorandum of Understanding, Dec. 11, 1975, TIAS No. 8173. .

27 Contract of Affreightment between Marcona Carriers, Ltd. and Compania Peruana de Vapores, Dec. 11, 1975, para. 1.

28 The understanding did not become public until it was included in Article 1(c) of the September 22, 1975, settlement agreement, supra note 1. The basic freight contract extended through December 31, 1976, although carriage of iron ore in slurry form was to continue through March 31, 1977. Contract of Affreightment, supra note 27, para. 17.

29 While the U.S. negotiators recognized that the issues were essentially ones of Peruvian tax and mining law, they felt it incumbent to point out to their Peruvian counterparts areas where the positions being taken by Peruvian authorities were in conflict with the Marcona contract or in potential conflict with Peruvian or international law. They also encouraged the Marcona Corporation to provide the local authorities with additional information substantiating Marcona's position that all valid taxes and claims had been paid.

30 The Special Representative approach had been used successfully by the United States in its efforts to negotiate a lump sum settlement agreement with Peru several years earlier. Then Vice President of Manufacturer's Hanover, James R. Greene, had been made President Nixon's Special Representative to seek a settlement of pending expropriation claims. See D. A. Gantz, The United States-Peruvian Claims Agreement of February 19, 1974, 10 INT'L. LAWYER 389, 391 (1976). There was some evidence to indicate that the Peruvian cabinet ministers were conscious of the difference in rank between the head U.S. and Peruvian negotiators.

31 Letter from President Ford to President Francisco Morales Bermudez, March 31, 1976. This action had the concurrence of the CIEP Interagency Staff Coordinating Group on Expropriation, which had been monitoring the negotiations since October 1975. The CIEP organized under the auspices of the White House Committee on International Economic Policy, with representatives from CIEP, State, Treasury, Commerce, the Agency for International Development, Overseas Private Investment Corporation, Export-Import Bank, and other agencies when their participation would be appropriate. The CIEP, representing as it did all affected government agencies, helped to keep the pieces of the puzzle in focus on the U.S. side and to assure that those agencies followed a consistent policy.

32 Serious balance of payments difficulties brought on by increased oil prices, falling copper prices, the absence of significant iron ore exports, and other factors convinced the Peruvian authorities that interim external financing from private foreign banks was the only means of avoiding possible default on outstanding international debt. Discussions with prospective lending banks in the United States and Europe apparently began in April 1976 and continued until agreement in principle was reached in late August. The loan agreements were signed the week of November 30-December 3, 1976. See p. 487, infra.

33 The U.S. negotiators were advised that under Peruvian law and practice no settlement could be effectuated until a final audit had been completed. The Price Waterhouse affiliate in Lima, which had been responsible for Marcona's books prior to July 1975, was hired by the Peruvian authorities to complete the company's financial statements, which then had to be reconciled with the various tax and other charges that were not reduced, adjusted, or eliminated as a result of the additional information provided by the U.S. negotiators and Marcona in the course of the year.

34 These included a series of belt-tightening measures—increasing private sector productivity, control of public sector expenditures, rationalization of imports—as well as a 30.8% devaluation on June 28, 1976, designed to reduce imports and to improve Peru's balance of payments position. (El Peruano, June 28, 1976.) The Peruvian Government also settled an outstanding tax claim against the Southern Peru Copper Corporation which cleared the way for the completion of the latter's billion dollar Cuajone project in Peru,

35 Article 1(B) of the intergovernmental agreement; Peruvian Iron Ore Pellets Sales Agreement signed September 30, 1976, by Marcona, Inc., and Minero Peru Comercial.

36 Marcona received $37 million in cash. This amount, along with the $3.6 million in direct remittances and the proceeds realized from the freight contract, constituted immediate payment. However, the gains from the ore sales contract will be realized over a period of four years. The present value of that portion of the settlement is, of course, less than the total sums ultimately realized, depending on the discount factor used in the calculations. These figures also disregard the fact that Marcona had to wait for more than a year after the expropriation before it received any substantial portion of the settlement or interest thereon.

37 Agreement, supra note 1, Article IV, para. 2. The ore sales contract provides, however, for arbitration of disputes. See note 41, infra.

38 Letter of Sept. 22, 1976, from Marcona Mining Company President Gordon Furth to Under Secretary Carlyle E. Maw; Agreement, Article VI.

39 Promissory Note dated Oct. 1, 1976, para. 2.

40 Decree Law 21644 of Sept. 28, 1976, El Peruano, Oct. 1, 1976. The law specifically approved the settlement agreement (Art. 1), the ore sales contract (Art. 2), and the issuance of a promissory note for $37 million plus interest (Art. 3).

41 Article 17 of the Peruvian Constitution makes all commercial companies, without restriction, subject to the laws of Peru. However, Marcona insisted on the inclusion in the ore sales contract of a clause providing for arbitration of disputes under the rules of the International Chamber of Commerce, Paris (Clause XVI). Peruvian Government counsel determined that signature of a contract with such a provision would be proper only if the contract were signed outside the territorial jurisdiction of Peru. Panama was chosen because of its convenience and because of its well-developed commercial law. On Article 17, see also Gantz, supra note 30, at 390.

42 See note 22 supra.

43 The official Peruvian Government Communique on the settlement indicated that Marcona's assets had been appraised at $98,392,151 (including $28,540,000 attributed to the assets excluded from compensation under Article 8 of Decree Law 21228, supra note 14). Official Communique No. 03-OCI; Sept. 30, 1976.

44 Estimated in 1972 at $191,480,000. Abthur D. Little, Inc., An Evaluation Of Miscellaneous Assets At Marcona's San Juan-San Nicholas Operations In Peru (Report C-74993, Dec. 1972).

45 Contract, supra note 35, Clause IV ( 7 ) .

46 In Venezuela, the nationalizations of both the iron ore and petroleum industries resulted in settlement consisting of payment of adjusted book value (in cash or bonds) plus a longer term sales arrangement/service contract with the former owners. See N.Y. Times, Aug. 30, 1975, at 27, col. 1 for details of arrangements on oil. With respect to steel, U.S. Steel was to receive $95 million and Bethlehem $21 million in 7 percent, ten-year Venezuelan Government bonds characterized as compensation for the concessions, installations, and equipment. Both companies were to continue to manage and operate the properties under a two-year technical services contract, with their role after that time limited to trader, intermediary, and (on a limited basis) provider of technical services. Ore sales agreements provided for continued ore sales (7 years for U.S. Steel, 5 for Bethlehem). Information from company sources; see also N.Y. Times, Dec. 8, 1974, at 17, col. 1. and Sec. IV, at 4, col. 2; id., Dec. 9, 1975, at 66, col. 1.

47 The only significant variable cost is diesel fuel for the pelletizing process; for political and legal reasons Peruvian workers cannot be laid off even when the facility is shut down See generally Pasa&Santistevan, Industrial Communities and Trade Unions in Peru: A Preliminary Analysis, 108 Int'l. Lab. Rev. 127 (1973).

48 See note 22 supra.

49 See note 30 supra.

50 Stanford Research Institute, Evaluation- Of The Marcona Mininc Company's Peruvian Assets (March 1976).

51 For example under Sec. 1212(a) of the Internal Revenue Code of 1954, as amended, a corporation has a ten-year period in which to carry forward a foreign expropriation capital loss as a charge against tax liability. CCH, U.S. Master Tax Guide 328 (1976).

52 Since 1973 the provisions of the Hickenlooper Amendment have been made subject to waiver when the President determines and certifies “that such a waiver is important to the national interests of the United States” and reports the certification immediately to the Congress. (Sec. 15, Foreign Assistance Act of 1973; P.L. 93-189; 87 Stat. 714).

53 Latin American governments consider such legislative provisions and their application to be “coercive measures,” the use of which is prohibited under Article 19 of the Charter of the Organization of American States (April 30, 1948, 2 UST 2394, TIAS No. 2.361, 119 UNTS 3; amended February 27, 1967, 21 UST 607, TIAS No. 6847). A “Draft Instrument on Violations of the Principle of Non-intervention,” prepared in 1959 by the Inter-American Juridical Committee (over the dissent of the U.S. member, James Murdock), included among specified acts constituting intervention “the use of coercive measures of an economic or political nature to impose the sovereign will of another state and obtain advantages of any kind.” Doc. OEA/Ser. PAG doc. 198; 24 February 1972. (As of 1976 no action had been taken by the OAS to approve the work of the Committee.) In early 1972 the Government of Ecuador protested amendments to the Fisherman's Protective Act of 1967, which had the effect of suspending or reducing U.S. assistance to a country which seized and fined U.S. fishing vessels, on grounds that the legislation was in violation of the international obligation of the United States, specifically Article 19 of the OAS Charter. In its reply the U.S. note of March 14, 1972 stated, inter alia, My Government wishes to note, however, that the application of United States law to the granting or withholding of foreign assistance does not come within the terms of the international obligation to which your note referred. Assistance between nations depends upon a high degree of mutuality and such assistance is provided on terms that are acceptable to all parties concerned. An aid relationship is a function of many factors that can and do change, and nothing in international law or practice implies that either the furnishing or the acceptance of assistance is obligatory. See also David A. Gantz, “Legal Aspects of Expropriation” (Background paper, Jan. 16, 1973), quoted in [1973] Digest Of United States Practice In International Law 334 (A. Rovine, ed.). For a more general discussion of economic coercion, see Lillich, Economic Coercion and the International Legal Order in Economic Coercion And The N Ew International Economic Order 73 (R. Lillich, ed. 1976).