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26. In regard to the present contract, which came into operation in 1898, certain differences as to the method in which the cost should be apportioned arose between the Imperial and Indian Post Offices. The Indian point of view was to some extent shared by the Eastern Colonies, and the points at issue were submitted in 1891 to the arbitration of the Earl of Morley.

The Imperial Post Office proposed a division of the subsidy based on the principles settled by the award of Lord Halifax in 1876, to be applied as fol- lows:

(A.) Divide the Service into the following sections, corresponding to the principal points of call :—

Brindisi and Port Said.

Port Said and Aden. Aden and Bombay. Aden and Colombo. Colombo and Singapore. Singapore and Hongkong.

Hongkong and Shanghai.

(B.) Ascertain the number of miles traversed annually upon each section of the Service by multiplying the length of each section by the number of voyages performed annually.

(C.) Ascertain the cost of each section by dividing the subsidy in proportion to the annual mileage of the section.

(D.) Charge one half the cost of each section to the United Kingdom,

(E.) Divide the other half of the cost of each section proportionately, charg- ing India, Ceylon, Straits Settlements, and Hongkong according to the number of letters sent and received by them, and charging the United Kingdom with the letters which it sends to and receives from other places-such as Egypt, Dutch East Indies, Siam, Japan, Zanzibar, East Coast of Africa, &c. The number of letters being ascertained from the latest weights procurable, and the average num- ber per pound weight being ascertained by means of special returns agreed upon by each office, as on previous occasions.

[It is because India is provided with a weekly mail service, and Ceylon, &c. only with a fortnightly mail service, that the sections, Brindisi-Port Said, and Port Said-Aden, over which the Indian Mails are annually conveyed 104 times and the Ceylon, &c. mails 52 times, have to be subdivided in order to ascertain the respective charges assignable. One moiety (a) of the cost of each of these sections is and would still be apportioned to the 52 sailings provided exclusively for Indian correspondence, and the other moiety (b) is and would still be apportioned to the 52 sailings provided for the combined services.]

(F.) Divide incidental expenses, which are chiefly incurred in connection with the conveyance of the mails between the United Kingdom and Brindisi, in. the same proportions as the cost of the Service.

(G.) Deduct the extra receipts of the Service (ie., sums received for sea conveyance of foreign closed mails) sharing the amount between the contributing parties in the porportion which each bears of the cost of the Service.

27. The Imperial Post Office further proposed :—

(1) That each administration contributing its full share of the cost assessed as above indicated should make no further payment in respect of mails despatched by it over the Service, and should be credited with a proportionate share of the amount of any penalties inflicted upon the Packet Company in respect of the Eastern Mail Service; and

(2) That when the principles had been decided by the arbitrator, an account, subject to audit, should be prepared by the Imperial Post Office, and that the amounts thus ascertained should be payable to the end of the present contract.