331
i
6
As a result of the steps taken in Peking on behalf of the British group, the cable which is sent herewith from the Hong Kong and Shanghac Bank in Peking to the London branch of the same bank has been obtained. In this cable it is suggested that instead of the words "countersigned by the Chief Engineer," there should be substituted the words "accompanied by the auditor's statement particularizing the expenditure drawn for copies of indents and [or] vouchers being furnished to himn for that purpose by the department concerned.”
As above stated, the auditor is, under the Tien-tsiu-Pukow Agreement, to he appointed and paid by the lenders. He is naturally not of the same standing as the Chief Engineer would be nor has he, of course, much, if any, expert knowledge of the matters which would be contained in indents and vouchers for the construction of a railway. He is, however, a European in the employ of the lenders, and would presumably feel himself bound to carry out their instructions. It is true that he might be easily deceived once or twice, and it is also true that it might be impossible even for an expert to detect anything wrong with an indent or voucher which might in reality be a perfectly fraudulent document and used to obtain money which was never employed in the construction of the railway.
It seems to us, however, that if any systematic misapplication of the loan funds was being attempted the auditor would be justified and bound to refuse his certificate to any further payments until satisfied that the construction would be honestly proceeded with.
The bank in their cable ask us to obtain counsel's opinion as to whether the bank could withhold payment in the event of the auditor refusing to furnish a certificate. We scarcely think that this is the point on which they really require advice, as it seems to us that if the loan funds were paid to and received by the bank on the terms that they should only be parted with upon receipt of certain certificates including that of the auditor, they would be perfectly justified in refusing to honour any requisition for payment which was not accompanied by the certificates stipulated for. We should, however, be glad to have counsel's view on this point.
A more difficult question appears to us to arise in connection with the auditor's right to refuse a certificate if he had been furnished with indents and [or] vouchers which appear on the face of them to be in order.
We can scarcely assume that the Chinese would allow the Agreement to go through in the bald terms stated in the cable sent herewith. They are perfectly well able to take care of themselves, and they will almost certainly introduce some words to provide that the auditor's certificate is not to be unreasonably withheld.
It can scarcely he supposed that if they object to the Engineer-in-chief countersigning the orders for payment they would allow the auditor to have a free hand in blocking payments. The Engineer-in-chief (see Article 17 of the Tien-tsiu- Pukow Loan Agreement) although be is a European is their paid servant and is appointed and dismissed by them, whereas the auditor is appointed and paid by the lenders.
The British group are naturally anxious to participate in the proposed loan provided they and the British Government are satisfied that the terms accepted are such as to confer a reasonable security on the bondholders, and counsel is requested to advise on the point raised in the bank's cable, and also generally on the position.
Inclosure 5 in No. 1.
Counsel's Opinion in re the Hankow--Canton Railway.
I AM clearly of opinion that if the words proposed are added to Article 14 so that provision is made that every requisition on the loan funds must be accompanied by a statement of the auditor as therein referred to, the bank will be entitled to refuse payment in the event of the auditor's statement or certificate not being forthcoming. Under Article 14, it seems that the requisition on the loan funds is to be made in respect of expenditure thereafter to be made, and not in respect of past expenditure, and it has been explained to me in conference that the statement of the auditor which is proposed to be given is also to relate to expenditure to he made, and not as would ordinarily be implied to expenditure already made which had been duly vouched by production of vouchers. Looked at in this light, I am of opinion that the auditor would be entitled to be reasonably satisfied that the expenditure in respect of which the requisition was made was expenditure which, in a business sense, was bond fide
7
required for the purposes of the undertaking, and that he only ought to give his statement or certificate upon being so satisfied. I think a stipulation should be made that the originals of the indents and vouchers should be produced to the auditor, but that he should also be supplied with copies to enable him to check the expenditure subsequently under the latter part of Article 14, and if he found that the indents and Vouchers so produced to him did not relate to genuine and bond fide expenditure subsequently made, he would, in my opinion, be entitled to refuse to certify for any further expenditure until the amount so wrongly withdrawn had been made good; and in that case it could not, in my opinion, be said that his certificate would be unreasonably withheld. I think it is clear that the intention of the last clause of Article 14 is to enable the auditor to satisfy the Syndicate that the loan funds are being duly expended in accordance with the Agreement, and from this I think necessarily follows that if he finds that moneys requisitioned and drawn out on his certificate had been misapplied, there is such a breach of the essential conditions of the Agreement as to justify the withholding of further payments of the loan, as otherwise the provision of machinery by which the loan is to be kept in medio, and only paid over by instalments would be without any meaning. Under the last Article of the Agreement, the interpretation of the contract is to be governed by the English text, but there is no express provision as to the Tribunal to decide questions, nor as to the law which is to govern the carrying out of the contract; but I cannot conceive that any Court could hold that the auditor should be bound to give a certificate in a case where the whole object of requiring the certificate was being defeated, or could hold that in that case the certificate would be unreasonably withheld.
F. WHINNEY. Lincoln's Inn, April 21, 1909.
(Signed)
re
0