CHAPTER XXIV

CASE OF THE FRENCH COMPANY OF VENEZUELAN

TH

RAILROADS

HIS case is one of considerable importance, relating to the complete destruction of a railroad property in Venezuela, the construction of which had cost over $3,000,000 gold. Upon a difference of opinion between the Venezuelan Commissioner and the French Commissioner, the claim was referred to the Hon. Frank Plumley, of Northfield, Vermont, for his arbitrament. For the benefit of railroad men throughout the United States and of American capitalists who contemplate making investments in Latin America, a report of Umpire Plumley's opinion follows. The opinion was rendered in 1905.

I. OPINION OF THE UMPIRE

July 25, 1887, the Minister of Public Works of the United States of Venezuela, duly authorized, executed a contract with the Duke of Morny, a French citizen, which contract was duly approved by the Congress of that Republic August 3, 1888. It contained provisions which are summarized by the umpire as follows:

The government of Venezuela conceded to the party above named the right to build a railroad from Merida to the Lake of Maracaibo, canalizing the river Chamas, the Escalante, or any other navigable river whatsoever; the exploitation and the enjoyment of the revenues of the enterprise for a term of ninety-nine years; a strip of 500 metres of land on each side of the railroad track, without payment therefor, to be taken from the lands of the nation; the right to avail himself of the lands belonging to individuals which might become necessary for the construction of the railroad, stations, and the like, in conformity with the laws governing the taking of lands for public use, and subject to compensation therefor; the wood and timber necessary for the construction of the works to be taken from the national forest without compensation therefor; the right to introduce into the country free of import duties the engines, material, instruments, and everything necessary for the construction of the line, subject only to proceeding in reference thereto in conformity with the provisions of Article 177 of the Code of Finances; the right of exemption from assessments at all times by the nation and the State; a right to extension of the time allowed for the beginning and the completion of the works when delay was caused by force majeure, the entire extension not to exceed one year; a guaranty of seven per cent on the capital in shares, bonds, or obligations;

the right to construct such branch lines as he should deem necessary; the privilege of transferring the contract thus executed to any other person or company at his pleasure on notice to the Venezuelan government.

The Duke of Morny obligated himself in said contract, to begin the said railroad and the canalization of the river, in case it be necessary, within one year from the date of the contract and to finish the line in three years therefrom; to yield up to the government of Venezuela at the expiration of the said ninety-nine years, without indemnity therefor, the enterprise with all its annexes and properties; to carry the mail free of charge; to transport for one half the established rates the employés of the government, its soldiers, troops, and elements of war; to the resolution by the competent tribunals of the Republic, in conformity with its laws, of all doubts and controversies which might arise from the contract.

August 13, 1888, certain declarations and amplifications to the foregoing were made by General Cuzman Blanco, Envoy Extraordinary and Minister Plenipotentiary for Venezuela, to and with the said Duke of Morny, which are summarized by the umpire as follows: The government of Venezuela thereby and therein conceded to the other party that the railroad from Merida to Lake Maracaibo was to be divided into two sections; the first section was to start from a point upon the river Escalante, which point the concessionaire was to determine, and to be continued for a length of sixty kilometres in the direction of Merida; the second section was to start from the terminal point of this first section and continue to the city of Merida; an extension of the time fixed in said modification of the contract for the building of the first section equal to the delay suffered, if the delay was caused by force majeure; the guaranty of seven per cent provided for in the original contract to begin when the first section was opened for exploitation; an extension of the time fixed in this modification to the original contract for the building of the second section was to be made equivalent to the delay suffered, if the delay was caused by force majeure; establishing the capital at an estimate of 300,000 Bs. per kilometre for the first section and at 350,000 Bs. per kilometre for the second section, the guaranty of seven per cent to rest upon the amount of this estimate; to pay the said guaranty in three equal parts at equal periods during the year; to add to the material which was to be imported free of duty under the terms of the original contract, the engines, material, and instruments necessary for the running of the railroad; and that during the period of twelve years from the date of the said modification of the original contract the government would not establish a service of navigation to carry on traffic between the terminal point of the railroad, or any points upon the Escalante, and the different ports of the Lake of Maracaibo.

The concessionaire was obligated therein: to begin the work of building the first section of said railroad within six months from August 13, 1888, and to complete the same within two years therefrom; to complete the construction of the second section within four years from the date named; and to introduce the material, which was to come in duty free in conformity with the provisions of the Law of Finances provided for in such matters.

April 16, 1891, further modifications of the contract were made by the Congress of the United States of Venezuela by and with the representative of the French Company of Venezuelan Railroads, which latter had succeeded to the rights of the original concessionaire, which modifications are summarized by the umpire as follows: The Republic ratified in behalf of said company

the contract of August 13, 1888, and confirmed the original contracts except where they were contrary to the conditions named in that modification. The company renounced and declared null and void Article X of the contract of August 13, 1888, which gave exclusive navigation privileges on the river Escalante and the different parts of the Lake of Maracaibo. It was mutually stipulated that the concession was to be limited to the first section, which was to extend from Santa Barbara to Camino Real, a point one kilometre distant from La Vigia; the guaranty of seven per cent was to be reduced by the amount of the net benefits received by the company, these being composed of the net product of the receipts of every nature made by the exploitation of the railroad after deducting the general expenses of the company and of its management; the sums paid on account of said guaranty to be treated as advances only, to be returned as and when the benefits received by the company exceeded seven per cent on the guaranteed capital by applying one half of such excess in liquidation of said advances until all was reimbursed; that after said advances had been fully reimbursed the government was to continue to share in said benefits to the extent of twenty per cent thereof. There was added to the provision in regard to the resolution of all doubts and controversies by the Tribunals of the Republic, the further agreement that in no case were these doubts and controversies to give place to international claims.

It will be observed that by the modification of the original contract made August 13, 1888, the capital of the company, for the purpose of reckoning the guaranty, was estimated at Frs. 18,000,000.

Following this arrangement a French company was formed, September 28, 1888, taking the name of French Company of Venezuelan Railroads, with headquarters at Paris and its duration limited to ninety-nine years. The concessions obtained by the Duke of Morny were taken over by this company. . . . The building of the road was in progress from 1889 to 1892.

...

It is complained by the company that on April 16, 1891, the government, by the rule of the stronger, compelled in the agreement of that date, the provisions of which have already been stated, the introduction of the clause into the original contract that there was to be deducted from the amount of the guaranty the actual net profits of the company.

September 29, 1891, the first section was nearly completed and about ready for use, when there occurred a very serious inundation, causing a considerable delay and the expenditure of a large sum of money to reconstruct the parts destroyed. It was April 1, 1892, when the company considered the work of construction completed and demanded of the government its acceptance. But the State of Andes was then in revolt, while that of Zulia was loyal to the titular government. A portion of the railroad was in each State. To whom should it apply? Which was its government?

August 5, 1892, the company made publication in the local papers of the fact of the completion of the railroad and that it had begun business.

The company suffered badly from the insurrection, in requisitions from both sides, in the dispersions of its workmen, in the disappearance of its traffic, while the government in the midst of this intestine war paid neither requisitions, damages, nor guaranties. The line was repaired from the resources of the company, but it thereby exhausted its capital, and, November 1, 1892, judicial liquidation resulted. The creditors accepted the proposition made by the company to pay them pro rata and permitted it to continue its enterprise.

February 23, 1893, the engineer of the government examined the line and declared it to be well constructed and advised that by April 1, 1893, it would be in a situation to be accepted by the government. March 23, 1893, the decree of inauguration was published, and on May 10, 1893, the record was made of its definite acceptance by the Venezuelan government, dated back to April 1 of that year. As a matter of fact the line had been in operation since 1892, with receipts for that year aggregating Frs. 149, 241.21; for 1893 the receipts being Frs. 570,061.37; and in 1894 they were Frs. 458,525.24.

An earthquake in 1894 did great damage to the roadbed and to the bridges, which required large expenditures to restore. The receipts through its traffic were insufficient to meet these expenditures, and the national government, though repeatedly urged so to do, paid neither guaranties, nor indemnities, nor requisitions. At the general meeting of the shareholders of the company held June 30, 1894, its reports showed a claim against the Venezuelan government amounting to Frs. 2,205,000. In fact, the repairs which were required by the earthquake had been made only by the issue of bonds of the denomination of 500 francs drawing interest at six per cent to be reimbursed by the sums to be received from the respondent government. On June 20, 1895, the report to the general meeting of the shareholders showed a claim against this government of Frs. 5,820,785.47. In 1894 the company issued eight hundred of the bonds, and in 1895 it made a further issue of four hundred. In the month of December of this last-named year requisitions by the national government began again; the financial condition of the company became more strenuous. It sought diplomatic aid through its own government, but obtained no results. December 31, 1895, it claimed of the government of Venezuela as follows:

For guaranty to December 31, 1895

Damage to the exploitation

Damage for recruiting its workmen
Requisitions

Damage resulting from the non-payment of the guaranty for the issue

of bonds.

Total

Bs. 4,725,000.00

326,924.75

525,509.57

96,320.00

1,308,000.00

Bs. 7,051,751.32

The years 1892 to 1894, both inclusive, were involved more or less in the successful Crespo revolution. It was on February 20, 1894, that General Crespo became Constitutional President of the Republic for a term of four years. But it was not until the year 1895 that his authority was everywhere recognized, and up to that time there were occasional revolutionary outbreaks entailing large expense upon the government and lessening and interrupting its

sources and means of revenue.

The answer of the national government to the repeated and urgent requests of the company for the recognition and payment of its credits was always a lack of funds, of which fact there could be no real denial. The respondent government had not, however, agreed to the sums demanded of it by the company.

By 1896, the financial condition of the national government had greatly improved, and in April of that year, together with Mr. Charles Weber, the duly constituted representative of the French Company of Venezuelan Railroads, it took up the claims of that company. Substantially the same figures were presented to the respondent government as have been here produced of VOL. II- -22

date December 31, 1895. The consideration and discussion of these affairs resulted in a formal convention made April 18, 1896, when was brought in first a rehearsal of the salient matters of the previous contracts and then the statement of the claim of the company against the respondent government.

In June, 1898, there was a new revolutionary movement affecting especially the States of Zulia and Andes. The general in charge of the Federal forces drafted the workmen; the director, Mr. Brun, was shot at Santa Barbara in the midst of a conflict, and died of his wounds; there were requisitions of material, of trains for the transfer of troops, of war material, etc. The passenger and freight service was paralyzed; the claims of the railroad received no attention from the government; there was no payment for the services and sacrifices required of and imposed upon the company, and its very existence was seriously threatened. It appealed to its own government, it rehearsed its wrongs and grievances, but it obtained no relief. Just as the exploitation began again to yield some income and the revenues of the national government began to quicken, the successful revolution of General Castro broke out. Requisitions were again in evidence, and more than ever before. Destruction was manifest on all sides; grave losses were caused to the boats; while the revolutions took from it its traffic the government made requisitions, and neither paid anything.

This successful revolution of General Castro, which began in the spring of 1899, brought serious disaster to the railroad in many ways. A letter of date October 12, 1899, to the French Minister of Foreign Affairs by Mr. Reynaud of the Administrative Board, vividly portrays the situation. Selections therefrom are quoted:

"The political and revolutionary crisis which exists in Venezuela has not diminished in intensity since the last communication which we had the honor of addressing to you August 23, last.

"Our property and all our possessions, our railroad material, and our boats have not ceased for several months to be arbitrarily seized or sequestered by the authorities, now said to be legal, now revolutionary. The future of the exploitation of our railroad and boats is grievously compromised in the source of its receipts.

"The harvests are destroyed, abandoned, or lost; the workmen are pursued and tracked in the forests; the owners and merchants in flight or ruin! "Finally our resources are exhausted.

"We have been obliged then to suspend our exploitation!"

It was two days anterior to the date of the above letter that Mr. Simon, general manager of the railroad, informed the citizen President of Zulia in writing that "because of force majeure" all operations of the steamers, and of the railroad from Santa Barbara to La Vigia, were suspended. In this communication the force majeure referred to is thus explained:

"1. All the resources which the company had, whether at Paris or at Maracaibo, have been completely exhausted in paying the expenses of this railroad and its steamer, Santa Barbara, during all of the revolutions, and then the Venezuelan government and the insurgents used these means of transfer until little by little they became masters of them.

"2. Since September 27, 1899, the revolutionists have again taken possession of the line, and, consequently, we can have no receipts except from our steamers, and of these the government is constantly taking possession.