2
said line will be given to Messrs. Pauling and Co. (Limited) at a price to be mutually arranged.
It is hereby agreed that this arrangement shall be kept strictly private, and that no publicity shall be given to it in any manner or form.
September 26, 1908.
(Signed)
TONG SHOA-YI.
On behalf of Messrs. Pauling and Co. (Limited):
(Signed) FFRENCH.
JAMES GINNELL,
Tien-tsin, September 26, 1908.
This Document is the Property of His Britannic Majesty's Government,
C.O.
44174 377
[November 14 DEC 08.
CHINA RAILWAYS.
CONFIDENTIAL.
[39776]
No. 1.
SECTION 4.
Copy of Wire dispatched to Hong Kong, November 13.—(Communicated by British and Chinese Corporation, November 14, 1908.)
RE your wire of 6th, counsel's opinion is Hong Kong and Shanghae Banking Corporation is not a party to the Agreement, and it cannot refuse payment of orders on loan funds drawn in terms of Article 14, except under an injunction which British and Chinese Corporation might possibly be able to obtain, but even this is very doubtful. British and Chinese Corporation are communicating with Foreign Office.
Opinion
1. I am of opinion that, although the bank are in a fiduciary position towards the bondholders not to part with the loan proceeds except under the conditions of Article 14 of the Loan Agreement, they are not under any obligation to see that this Agreement is performed, except in respect of those conditions. Moreover, the Agreement vests in the Chinese Government the construction and control of the railway, and in face of this general authority the bank would not, I think, be entitled to object on the ground that the Chinese Government had not allowed the British Chief Engineer to do his work, a fact into which a bank could not be expected to inquire. I am of opinion that the bank are bound to honour the orders of the Yu-chuan Pu if duly signed and accompanied by duly signed certificates of works, unless they have reliable evidence that such certificates are bogus or fraudulent, and I do not think that they would be justified in refusing to honour any orders until the appointment of the Chief Engineer has been made effective.
I wish to point out, however, that in my opinion the British and Chinese Corporation are in a stronger position than the bank with regard to this question, because they are parties to the Loan Agreement and entitled to the benefit of all its provisions, so far as, being made with a foreign Government, they are capable of being in force. They may contend that the superintendence of a British Chief Engineer is an essential part of that construction of the railway to which, under the Agreement, the loan proceeds are to be solely devoted, and (on the authority of Gladstone v. Musurus Bey (1 H and M., 493)), that the fund is still in medio, and that the bank ought not to part with it except in payment for the railway constructed under such superintendence. If this contention is right, the Corporation could obtain an injunction, and probably an interim injunction, in an action against the bank without joining the Chinese Government. But the action would be of a speculative character, for the Court is very averse to make any order which may in any way adversely affect a foreign Government, and the Corporation should also take into consideration the risk of embittering their relations with the Chinese Government, and the liability to which they might be exposed by an undertaking in damages as a condition of the interim injunction. If the action is brought, it would be well to join a bondholder as co-plaintiff.
2. Upon a careful perusal of Articles 14 and 15, I think that throughout these two Articles the accrued interest is to go with the loan proceeds, and is included in the expression "loan funds," which are to remain on deposit and used for purposes of construction, &c. Under Article 15 the accrued interest is expressly applicable for construction, and I cannot see anything which would imply a power in the Yu-chuan Pu to sever it from the loan proceeds for any purpose.
It is true that in Article 3 the guarantee applies only in terms to capital, but the same Article goes on to say that the payment of interest during construction is not to be met out of loan funds but from other sources, and in Article 4 this interest is made payable out of "Chinese sources." In my opinion "other" or "Chinese sources" would not include the interest accruing on loan proceeds in England.
The proviso at the end of the 1st paragraph of Article 7 does not, in my opinion,
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2
said line will be given to Messrs. Pauling and Co. (Limited) at a price to be mutually arranged.
It is hereby agreed that this arrangement shall be kept strictly private, and that no publicity shall be given to it in any manner of form.
September 26, 1908.
(Signed)
TONG SHOA-YI.
On behalf of Messrs. Pauling and Co. (Limited):
(Signed) FFRENCH.
JAMES GINNELL,
Tien-tsin, September 26, 1908.
This Document is the Property of His Britannic Majesty's Govermipept,
C.O.
44174 377
[November 14 DEC 08.
CHINA RAILWAYS.
CONFIDENTIAL.
[39776)
No. 1.
SECTION 4.
Copy of Wire dispatched to Hong Kong, November 13.-(Communicated by British and Chinese Corporation, November 14, 1908.)
RE your wire of 6th, counsel's opinion is Hong Kong and Shanghae Banking Corporation is not a party to the Agreement, and it cannot refuse payment of orders on loan funds drawn in terms of Article 14, except under an injunction which British and Chinese Corporation might possibly be able to obtain, but even this is very doubtful. British and Chinese Corporation are communicating with Foreign Office.
Opinion
1. I am of opinion that, although the bank are in a fiduciary position towards the bondholders not to part with the loan proceeds except under the conditions of Article 14 of the Loan Agreement, they are not under any obligation to see that this Agreement is performed, except in respect of those conditions. Moreover, the Agree- ment vests in the Chinese Government the construction and control of the railway, and in face of this general authority the bank would not, I think, be entitled to object on the ground that the Chinese Government had not allowed the British Chief Engineer to do his work, a fact into which a bank could not be expected to inquire. I am of opinion that the bank are bound to honour the orders of the Yu-chuan Pu if duly signed and accompanied by daly signed certificates of works, unless they have reliable evidence that such certificates are bogus or fraudulent, and I do not think that they would be justified in refusing to honour any orders until the appointment of the Chief Engineer has been made effective.
I wish to point out, however, that in my opiniou the British and Chinese Corporation are in a stronger position than the bank with regard to this question, because they are parties to the Loan Agreement and entitled to the benefit of all its provisions, so far as, being made with a foreign Government, they are capable of being in force. They may contend that the superintendence of a British Chief Engineer is an essential part of that construction of the railway to which, under the Agreement, the loan proceeds are to be solely devoted, and (on the authority of Gladstone v. Musurus Bey (1 H and M., 493)), that the fund is still in medio, and that the bank ought not to part with it except in payment for the railway constructed under such superin- tendence. If this contention is right, the Corporation could obtain an injunction, and probably an interim injunction, in an action against the bank without joining the Chinese Government. But the action would be of a speculative character, for the Court is very averse to make any order which may in any way adversely affect a foreign Government, and the Corporation should also take into consideration the risk of embittering their relations with the Chinese Government, and the liability to which they might be exposed by an undertaking in damages as a condition of the interim injunction. If the action is brought, it would be well to join a bondholder as co-plaintiff.
2. Upon a careful perusal of Articles 14 and 15, I think that throughout these two Articles the accrued interest is to go with the loan proceeds, and is included in the expression "loan funds," which are to remain on deposit and used for purposes of construction, &c. Under Article 15 the accrued interest is expressly applicable for construction, and I cannot see anything which would imply a power in the Yu-chuan Pu to sever it from the loan proceeds for any purpose.
It is true that in Article 3 the guarantee applies only in terms to capital, but the same Article goes on to say that the payment of interest during construction is not to be met out of loan funds but from other sources, and in Article 4 this interest is made payable out of "Chinese sources." In my opinion "other" or "Chinese sources would not include the interest accruing on loan proceeds in England.
";
The proviso at the end of the 1st paragraph of Article 7 does not, in my opinion,
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