Senator MCGEE. As you anticipate wisely in your written testimony, sometimes that is a very fine line.

Mr. NESS. Yes.

Senator MCGEE. And we have had some experience in various cases in which there was some abuse and the good guys often get penalized by the handful of bad guys who do abuse, and this results in a restrictive clause being included. I am simply stating the case on the other side of this coin also. So it is a tough question, but the committee will have a very close look at this language in the interests of protecting the proper area for guarantees and at the same time not jeopardizing the intent.

Mr. NESS. I think protecting and encouraging private investment. Senator McGEE. Yes.

Mr. NESS. I think if the protection is there then encouragements will be automatic.

Senator MCGEE. Very good. I have no further questions.

Mr. NESS. Thank you very much.

Senator MCGEE. Thank you, Mr. Ness.

(The memorandum previously referred to follows:)

MEMORANDUM ON S. 2347 SUBMITTED BY GORDON L. NESS, PRESIDENT AND CHAIRMAN OF THE BOARD OF NESS INDUSTRIES, INC., JULY 22, 1969

Ever since the original enactment of the Foreign Assistance Act of 1961, its provisions dealing with expropriation guaranties have made it clear that Congress intended a breach of an investor's contract by a host government to be included within the term "expropriation."

Sec. 223 (b) of the Act defines that term thus:

"(b) the term 'expropriation' includes but is not limited to any abrogation, repudiation, or impairment by a foreign government of its own contract with an investor, where such abrogation, repudiation, or impairment is not caused by the investor's own fault or misconduct, and materially adversely affects the continued operation of the project;"

Sec. 328 (b) of S. 2347 would change this definition to read as follows: "(b) the term 'expropriation' may include, but is not limited to, any abrogation, repudiation, or impairment by a foreign government of its own contract with an investor with respect to a project, where such abrogation, repudiation, or impariment is not caused by the investor's own fault or misconduct, and materially adversely affects the continued operation of the project;" [Language added by S. 2347 in italics.]

This memorandum will attempt to show why, in the light of the current administration of the guaranties program, the change from the simple statement that expropriation includes certain breaches of contract to the somewhat ambivalent statement that expropriation may include such breaches would constitute an undesirable weakening of the guaranty provisions of the Act. It will discuss the reasons why this change in that Section should not be made, and why language incorporating a standard definition of expropriation under international law should be added. This memorandum does not discuss the reasons why a political risk investment guaranty program as an incentive for private investment in poor countries is in the public interest, since the Congress has been on record in favor of that proposition since 1948.

Contractual rights are property, in morals, law and fact. Interference with contractual rights is treated as a tort by our courts; contractual rights can be bought, sold and left to one's heirs. Indeed, it can be argued that in a modern economy, which is based on credit, i.e., on contractual arrangements about the use and repayment of other peoples' money, contractual rights are the most important form of property.

In general AID has recognized this obvious fact. If a government confiscates an investor's portfolio of bonds, i.e., a portfolio of contracts, the confiscation is clearly an expropriatory action. It is therefore difficult to understand why the equivalent action of a government, that is refusing to honor its covenants, covenants that might just as well have been given in such bonds, should not be

deemed equally confiscatory as a matter of course. An investor is no less hurt by the latter than the former.

Rather ironically AID's predecessor agencies gave political risk insurance coverage for breaches of contract by the host government before the 1961 Act gave specific legislative approval to that practice,' whereas more recently AID has refused such coverage, as a matter of policy, in the teeth of the statutory definition. This refusal is only one illustration of the caution of the administrators of the aid program "who have usually been more intent upon protecting the U.S. Treasury than on using private enterprise as a foreign aid tool."" It is that caution, and the reflection of that caution in the Standard Terms and Conditions for investment guaranty contracts, that makes the statutory definition of expropriation important; without that caution no statutory definition would be necessary at all. As I will discuss later, to be critical of that caution does not mean that it is unjustified or unreasonable, but only that better ways of protecting the interests of the U.S. taxpayer than narrow insurance coverage should be considered.

For the investor, the kind of expropriation for which he can obtain AID insurance is defined not in the Act but in his contract of guaranty with AID. In its current version the General Terms and Conditions of those contracts' contain a two-page definition of the term "Expropriatory Action." The first half of that definition, though more detailed, is as broad as the statutory definition. It reads as follows:

"The term 'Expropriatory Action' means any action which is taken, authorized, ratified or condoned by the Government of the Project Country, commencing during the Guaranty Period, with or without compensation therefor, and which for a period of one year directly results in preventing: "(a) the Investor from receiving payment when due in the currency specified of the principal amounts of or the interest on debt Securities, or amounts, if any, which the Foreign Enterprise owes the Investor in connection with the Securities; or

"(b) the Investor from effectively exercising its fundamental rights with respect to the Foreign Enterprise either as shareholder or as creditor, as the case may be acquired as a result of the Investment; or

"(c) the Investor from disposing of the Securities or any rights accruing therefrom; or

"(d) the Foreign Enterprise from exercising effective control over the use or disposition of a substantial portion of its property or from constructing the Project or operating the same; or

"(e) the Investor from repatriating amounts received in respect of the Securities as Investment Earnings or Return of Capital, which action commences within the eighteen (18) months immediately succeeding such receipt;"

If this positive portion of the definition told the whole story, no investor would need to feel any anxiety about his insurance coverage, nor would he need any special protection against breaches of his contract with the host government. The kind of breach he is afraid of and seeks insurance against would inevitably constitute an "action taken . . . by the Government of the Project Country . . which . . . results in preventing the Investor from receiving payment when due," or "the Investor from disposing of the Securities or any rights accruing therefrom," or, most important of all, "the Foreign Enterprise from. . . operating [the Project]." For instance, if a project is dependent on imports of raw materials and spare parts, the host government's breach of its promise to permit these imports, would be an action preventing the operation of a project, and, in the fullness of time, an action preventing the Investor from receiving payment when due from his investment and from disposing of the shares in his investment.

It is the second and negative portion of AID's two page definition that embodies the agency's caution and puts the value of the investor's insurance cov

1 Clubb, Vance: Incentives to Private U.S. Investment Abroad Under the Foreign Assistance Program, 72 Yale Law J. 475, 493 (1963). The House Report explained that the Act's definition was "in accordance with existing practice" and did not purport to state fully the meaning of expropriation, but does attempt to make clear that the term includes unexcused breach by a host government of the contractual arrangement it enters into with an investor to induce him to make his investment." H.R. Rep. No. 851, 87th Cong., 1st Sess. 38 (1961) (Emphasis added.)

2 Ibid., p. 490.

221 K GT 11-65 Revised. "These provisions are standard for all investors and will be altered only to meet unusual circumstances.' AID, Specific Risk Investment Guaranty Handbook (rev. Oct. 1966), p. 31.

erage into jeopardy. This portion takes the form of a proviso that limits the immediately preceding general definition of Expropriatory Action by excluding from it certain specific governmental actions which without that proviso would clearly fall within the definition of insured types of Expropriatory Action. In material part this proviso reads as follows:

"Notwithstanding the foregoing, no such action shall be deemed an Expropriatory Action if it occurs, or continues in effect during the aforesaid period, as a result of:

"(1) any law, decree, regulation, or administrative action of the Government of the Project Country which is not by its express terms for the purpose of nationalization, confiscation, or expropriation (including but not limited to intervention, condemnation, or other taking), is reasonably related to constitutionally sanctioned governmental objectives, is not arbitrary, is based upon a reasonable classification of entities to which it applies and does not violate generally accepted international law principles; or . .

"(6) bona fide exchange control actions by the Government of the Project Country." (Emphasis supplied.)

From the prudent investor's point of view the quoted parts of this proviso are a veritable Pandora's box. The very first criterion of exclusion is also the worst. It excludes from coverage expropriation that is the result of any law, regulation or administrative action which is not by its express terms for the purpose of nationalization, confiscation or expropriation. Thus a malevolent government need only hang a worthy imaginative label other than nationalization on its confiscatory legislation to minimize the risk of the unpleasant conversations with the U.S. Department of State that would result from more flamboyant legislative language. A regulation prohibiting the import of essential raw materials or spare parts can be issued "by its express terms" for the purpose of saving foreign exchange, a discriminatory minimum wage law for the electronics industry can be styled an "Industrial Relations Act," an administrative action requiring one hot shower and fifteen square feet of recreational space per worker may be announced for the specific purpose of public health.

It is true that the drafters of this definition have attempted to anticipate such abuses: the criterion of exclusion based on "by its express terms" is only one of a series of other criteria each one of which must be met in order to bring the exclusion into play. The trouble is that these other criteria are so vague and ambiguous that they cannot give an investor any sense of security either. Who can tell what kind of outrages may not be held "reasonably related to constitutionally sanctioned governmental objectives" of the kind of governments an investor needs protection from? The word "arbitrary" is likewise wide open to frivolous interpretations, and so, alas, is the phrase a "law. . . based upon a reasonable classification of entities to which it [the law or action] applies." And the last criterion to the effect that the law or decree must "not violate generally accepted international law principles" provides the best reason why an investor's fear of frivolous interpretations is not paranoid. This last criterion would make the quoted definition entirely unobjectionable, if we could be as certain today as we were twenty years ago that American courts would hold an expropriation to violate generally accepted international law principles if it is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation. But since the Sabbatino case, the worst aspects of which had to be corrected by Congressional action," there can no longer be any such certainty. In Sabbatino the United States Supreme Court said:

4

"There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a State's power to expropriate the property of aliens. There is, of course, authority, in international judicial and arbitral decisions, in the expressions of national governments, and among commentators for the view that a taking is improper under international law if it is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation. However, Communist countries, although they have in fact provided a degree of compensation after diplomatic efforts, commonly recognize no obligation on the part of the taking country. Certain representatives of the newly independent and underdeveloped coutries have questioned whether rules of state responsibility toward aliens can bind nations that have not consented to them and it is argued that the traditionally articulated Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964).

Sec. 301 (d) (4) of the Foreign Assistance Act of 1964, 22 U.S.C. § 2370 (e) (2).

standards governing expropriation of property reflect 'imperialist' interests and are inappropriate to the circumstances of emergent states.

"The disagreement as to relevant international law standards reflects an even more basic divergence between the national interests of capital importing and capital exporting nations and between the social ideologies of those countries that favor state control of a considerable portion of the means of production and those that adhere to a free enterprise system. It is difficult to imagine the courts of this country embarking on adjudication in an area which touches more sensitively the practical and ideological goals of the various members of the community of nations." [Footnotes omitted]

In short, the Supreme Court said that with regard to expropriation there are no "generally accepted international law principles." Hence the inescapable conclusion that the current language of AID's guaranty contracts does not protect an insured investor against the taking of his property without compensation if the confiscating government is careful to clothe its actions with the proper semantics. Only a clear-cut addition to the contract stipulating expressly that a violation by the host government of its contract with the investor will be deemed an "expropriatory action" could give an investor who, by way of illustration, has constructed a phosphate plant at the invitation of a government which thereafter prevents him from importing phosphorus, the protection he must seek under an insurance contract against expropriation. But, if the change in statutory language embodied in S. 2347 should become law, the management of the proposed Overseas Private Investment Corporation would be justified in thinking that by the change in statutory language Congress had ratified AID's policy of excluding breaches of contract by a host government from expropriation insurance coverage.

As mentioned earlier, AID's caution exemplified by the provisos limiting its definition of expropriation is justified for many general reasons. First, unprincipled investors do exist, and they might very well attempt to take undue advantage from a broadly worded insurance contract. They might, for example, deliberately provoke the nationalization of an enterprise that is about to fail for purely commercial reasons. Second, broad insurance coverage could embarrass the United States in political controversies arising out of concession contracts in the making of which it had no part, and the merits of which are sometimes difficult to determine. In such cases the position of the United States government is often difficult enough without the added complication of finding itself the successor in title of the expropriated corporation. Finally, AID has been particularly vulnerable to public (including Congressional) criticism, and that vulnerability is increased when the possibility of undue enrichment of private interests may become the object of criticism.

More specifically, AID does face problems in defining expropriation with respect to breaches of contract by a host government. AID is right in believing that not every impairment of contractual rights or restriction on the use of property should be deemed an insurable expropriation, since it is quite possible that such an impairment or restriction is the result of legitimate and nondiscriminatory governmental action. Therefore a definition that will accurately characterize a specific action as expropriatory or not is not easy to draft. Given the reality of these dangers it is hardly surprising that AID has sought protection in increasingly hedged language of its contracts."

But the problem AID has sought to solve by technical drafting is not susceptible to such a solution. A better way of coping with it lies in a change of approach in AID's evaluation of guaranty applications. Whereas AID analyzes applications for loans in depth, evaluating all aspects of the project as well as the experience and responsibility of the would-be borrower, AID's examination of a project for which guaranties are sought is relatively cursory. In order to obtain a loan from AID an investor must provide more information than most commercial bankers would ask for. I have often been awed by the thoroughness of cross examination I had to face when applying for a Cooley loan. Pro-forma financial statements, cash flow projections, resumes of management, etc. are

* Before 1965 the General Terms and Conditions did not contain the language in the definition of expropriatory action criticized in this memorandum. See General Terms and Conditions, 221 K T 3-64 in which the proviso here discussed read as follows: “(1) enforcement by the Government of the Project Country of any law, decree, regulation or administrative deter nination violated by the Investor or the Foreign Enterprise, which law, decree, regulation o administrative determination is not arbitrary or discriminatory, but is reasonably related to constitutionally sanctioned governmental objectives (other than expropriation, confiscation or nationalization) which do not violate international law principles;" (Emphasis supplied).

the order of the day. By contrast, probably in response to Congressional admoni. tions to administer the guaranty program on broad criteria of eligibility, little information about a project or the investor needs to be submitted in a guaranty application. The sample application form appended to AID's Specific Risk Investment Guaranty Handbook (Revised, October 1966) devotes no more than a line and a half to an illustration of a description of the project: "Proposed investment will be made for the purpose of constructing and operating a synthetic resins plant in 'X' country."

I believe that the legitimate interests of AID, the Government and the taxpayer would be protected best, if guaranty applications were examined as thoroughly as loan applications. Character banking is, it is submitted, a must in development financing. Doubtful projects, investments to be made on the basis of unconscionable contracts with governments of less developed countries, investors with anything less than spotless records should all be rejected for investment guaranties. After such a screening the need for contracts in which the incentive of the guaranty is obscured by a cloud of conditions would disappear. Yet the interests of the government would be protected better.

CONCLUSION

Some of the observations made in this memorandum can be translated into administrative policy only by action of the proposed Overseas Private Investment Corporation. However, I believe that such action would be more likely if Sec. 328 (b) of S. 2347 were amended to read as follows: "the term 'expropriation' means any expropriatory action that is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation, and includes, but is not limited to, any aborgation, repudiation, or impairment by a foreign government of its own contract with an investor, where such aborgation, repudiation, or impairment is not caused by the investor's own fault or misconduct, and materially adversely affects the continued operation of the project." Senator MCGEE. Mr. Maynard Catchings.

STATEMENT OF REV. L. MAYNARD CATCHINGS, COUNCIL FOR CHRISTIAN SOCIAL ACTION OF THE UNITED CHURCH OF CHRIST, WASHINGTON, D.C., ACCOMPANIED BY HELEN OWEN Mr. CATCHINGS. Thank you very much. I would like to introduce to the committee my colleague, Mrs. Helen Owen.

In order to summarize some of the content of my statement, I would like first to ask if it is possible for us to circulate to the absent members of the committee the testimony or will that be done by the committee itself?

Senator MCGEE. If you would care to deliver extra copies of your prepared text the members of the committee can be circularized by the members of the staff. But the real point of it is that the record of these hearings will be studied carefully by each member of the committee, so that you will get them that way for sure.

Mr. CATCHINGS. Thank you very much.

My name is Maynard Catchings and I appear here on behalf of the Council for Christian Social Action of the United Church of Christ. If you desire further information I think it will be found in the text of the statement.

I should like to move on especially to the introductory statement before we summarize some of the points in the text.

Senator PELL (presiding). Excuse me for interrupting, I have taken over the chairmanship for the moment. I am going to have to leave at

7 P. 36.