B-124389, JULY 29, 1955, 35 COMP. GEN. 56

B-124389: Jul 29, 1955

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AMENDMENTS TO EXISTING FOREIGN INVESTMENT GUARANTY CONTRACTS WHICH WERE ENTERED INTO PURSUANT TO THE ECONOMIC COOPERATION ACT OF 1948 SHOULD BE EVIDENCED BY FORMAL AGREEMENTS EXECUTED BY THE INVESTOR AND THE ADMINISTRATIVE AGENCY. REQUESTS A DECISION CONCERNING CERTAIN QUESTIONS WHICH HAVE ARISEN IN REGARD TO THE INVESTMENT GUARANTY PROGRAM UNDER WHICH THE INTERNATIONAL COOPERATION ADMINISTRATION OFFERS TO AMERICAN BUSINESSMEN MAKING NEW INVESTMENTS ABROAD PROTECTION AGAINST CURRENCY INCONVERTIBILITY AND EXPROPRIATION. DOLLARS FOR LOSS ON THE INVESTMENT ARISING OUT OF EXPROPRIATION OR CONFISCATION BY THE GOVERNMENT OF THE COUNTRY IN WHICH THE PROJECT IS LOCATED. RATES TO BE CHARGED FOR INVESTMENT INSURANCE WERE IN EFFECT UP TO OCTOBER 15.

B-124389, JULY 29, 1955, 35 COMP. GEN. 56

FOREIGN INVESTMENT GUARANTY CONTRACTS - MODIFICATION - LEGAL CONSIDERATION IN THE ABSENCE OF NEW AND VALUABLE CONSIDERATION MOVING TO THE GOVERNMENT, FOREIGN INVESTMENT GUARANTY CONTRACTS ENTERED INTO PURSUANT TO ECONOMIC COOPERATION ACT OF 1948 MAY NOT BE AMENDED TO GIVE INVESTORS THE BENEFIT OF LOWER INSURANCE RATES AVAILABLE UNDER SUBSEQUENTLY ENACTED AMENDMENTS TO THE ACT; HOWEVER, THE MAKING OF ADDITIONAL INVESTMENTS, CONDITIONED UPON A REDUCTION OF THE RATES IN AN EXISTING GUARANTY CONTRACT, WOULD CONSTITUTE NEW CONSIDERATION WHICH WOULD SUPPORT THE APPLICATION OF THE LOWER RATES TO SUCH EXISTING CONTRACT. AMENDMENTS TO EXISTING FOREIGN INVESTMENT GUARANTY CONTRACTS WHICH WERE ENTERED INTO PURSUANT TO THE ECONOMIC COOPERATION ACT OF 1948 SHOULD BE EVIDENCED BY FORMAL AGREEMENTS EXECUTED BY THE INVESTOR AND THE ADMINISTRATIVE AGENCY. THE PAYMENT OF INSURANCE FEES FOR AN ADDITIONAL NUMBER OF YEARS WOULD CONSTITUTE VALUABLE CONSIDERATION MOVING TO THE GOVERNMENT WHICH WOULD SUPPORT EXECUTION OF AMENDMENTS TO FOREIGN INVESTMENT GUARANTY CONTRACTS TO EXTEND THEIR TERMS FROM FOURTEEN YEARS TO TWENTY YEARS FROM THE DATES OF ORIGINAL ISSUANCE. THE ADDED COVERAGE WHICH WOULD RESULT FROM THE ELIMINATION OF CLAUSES IN FOREIGN INVESTMENT GUARANTY CONTRACTS WHICH PROVIDE THAT THE FACE AMOUNT BE REDUCED BY THE AMOUNT OF EARNINGS TRANSFERRED THROUGH NORMAL EXCHANGE CHANNELS WOULD ALSO INCREASE THE AMOUNT OF FEES PAYABLE TO THE GOVERNMENT, SO THAT THE INCREASE WOULD CONSTITUTE VALUABLE CONSIDERATION TO SUPPORT AN AMENDMENT TO DELETE THE REDUCTION CLAUSES.

TO THE DIRECTOR, INTERNATIONAL COOPERATION ADMINISTRATION, JULY 29, 1955:

YOUR LETTER OF JUNE 22, 1955, REQUESTS A DECISION CONCERNING CERTAIN QUESTIONS WHICH HAVE ARISEN IN REGARD TO THE INVESTMENT GUARANTY PROGRAM UNDER WHICH THE INTERNATIONAL COOPERATION ADMINISTRATION OFFERS TO AMERICAN BUSINESSMEN MAKING NEW INVESTMENTS ABROAD PROTECTION AGAINST CURRENCY INCONVERTIBILITY AND EXPROPRIATION.

IN YOUR LETTER YOU STATE THAT SECTION 413 (B) (4) OF THE MUTUAL SECURITY ACT OF 1954, 68 STAT. 832, 847, 22 U.S.C. 1933, AUTHORIZES THE PRESIDENT TO ISSUE INVESTMENT GUARANTIES TO CITIZENS OF THE UNITED STATES WHO MAKE INVESTMENTS IN PROJECTS LOCATED IN COUNTRIES WITH WHICH THE UNITED STATES HAS AGREED TO INSTITUTE THE GUARANTY PROGRAM. GUARANTIES MAY BE WRITTEN TO INSURE THE INVESTOR OF (1) THE TRANSFER INTO U.S. DOLLARS OF OTHER CURRENCIES RECEIVED AS EARNINGS OR PROFITS FROM THE APPROVED PROJECT, AS REPAYMENT OR RETURN OF THE INVESTMENT OR AS COMPENSATION FOR THE SALE OR DISPOSITION OF THE INVESTMENT, AND (2) COMPENSATION IN U.S. DOLLARS FOR LOSS ON THE INVESTMENT ARISING OUT OF EXPROPRIATION OR CONFISCATION BY THE GOVERNMENT OF THE COUNTRY IN WHICH THE PROJECT IS LOCATED. SECTION 413 (B) (4) (E) PROVIDES THAT THE FEE TO BE CHARGED FOR THE CONVERTIBILITY GUARANTIES SHALL NOT EXCEED 1 PERCENT PER ANNUM OF THE AMOUNT OF THE GUARANTY. IT ALSO PROVIDES THAT THE FEE TO BE CHARGED FOR THE EXPROPRIATION GUARANTIES SHALL NOT EXCEED 4 PERCENT PER ANNUM OF THE AMOUNT OF THE GUARANTY.

IT APPEARS THAT CERTAIN RULES, PROCEDURES, AND RATES TO BE CHARGED FOR INVESTMENT INSURANCE WERE IN EFFECT UP TO OCTOBER 15, 1954. ON THAT DATE, FOA REGULATION 4 WAS ISSUED WHICH ESTABLISHED NEW RULES GOVERNING THE ISSUANCE OF INVESTMENT GUARANTIES. ON THE SAME DATE THE INVESTMENT GUARANTIES DIVISION OF YOUR AGENCY PUBLISHED A NEW INVESTMENT INSURANCE MANUAL WHICH ESTABLISHED NEW RATES TO BE CHARGED FOR INVESTMENT INSURANCE AND SET OUT A NUMBER OF CHANGES IN THE PROCEDURE TO BE FOLLOWED IN ISSUING INVESTMENT GUARANTIES AND THE NATURE OF THE GUARANTIES THEMSELVES. THESE NEW REGULATIONS ARE MORE LIBERAL AND THE RATES CHARGED ARE CONSIDERABLY LOWER THAN THOSE IN EFFECT PRIOR TO OCTOBER 15, 1954. A NUMBER OF INVESTORS WHOSE CONTRACTS WERE ISSUED UNDER THE RULES EXISTING BEFORE OCTOBER 15, 1954, HAVE REQUESTED THAT THE NEW FEE PROVISIONS BE APPLIED TO THEIR CONTRACTS. YOU ANTICIPATE THAT INVESTORS WILL ALSO REQUEST THAT OTHER PROVISIONS OF THEIR GUARANTY CONTRACTS BE AMENDED SO AS TO CONFORM TO THE NEW RULES AND REGULATIONS. IT IS YOUR BELIEF THAT COMPLIANCE WITH THESE REQUESTS WOULD NOT ONLY FACILITATE ADMINISTRATION OF THE PROGRAM THROUGH THE APPLICATION OF UNIFORM PROCEDURES BUT WOULD ALSO CREATE A CONFIDENCE IN THE BUSINESS COMMUNITY THAT ALL INVESTORS WILL BE TREATED ALIKE AND THAT AN INVESTOR WHO OBTAINS A GUARANTY AT THE PRESENT TIME MAY BE ABLE TO TAKE ADVANTAGE OF FUTURE CHANGES IN THE PROGRAM. SINCE YOU ARE IN DOUBT AS TO WHETHER THERE IS ANY LEGAL BASIS FOR APPLYING NEW FEE PROVISIONS TO EXISTING CONTRACTS, YOU PRESENT THE FOLLOWING QUESTIONS:

(1) CAN THE NEW FEE PROVISIONS BE APPLIED TO GUARANTY CONTRACTS ISSUED BEFORE OCTOBER 15, 954?

(2) IF SO, MUST THE CHANGE BE EFFECTED THROUGH FORMAL AMENDMENTS TO THE GUARANTY CONTRACTS OR, IN THIS CASE WHERE IT IS POSSIBLE, CAN IT BE DONE BY UNILATERAL ACTION OF THE EXPORT-IMPORT BANK, ACTING AS AGENT FOR THE FOA, IN THE ADMINISTRATION OF THESE GUARANTIES?

(3) CAN THE OLD CONTRACTS BE FURTHER AMENDED SO AS TO INCORPORATE NEW FEATURES OF THE PROGRAM NOT RELATED TO FEES?

THE GUARANTY CONTRACTS ISSUED PRIOR TO OCTOBER 15, 1954, WERE ENTERED INTO UNDER THE REGULATIONS ESTABLISHED PURSUANT TO STATUTORY AUTHORITY. UNDER THOSE CONTRACTS THE RIGHTS AND LIABILITIES OF THE UNITED STATES AND THE INVESTORS BECAME FIXED. IT IS FUNDAMENTAL THAT OFFICIALS OF THE GOVERNMENT MAY NOT LEGALLY AMEND OR MODIFY EXISTING GOVERNMENT CONTRACTS EXCEPT IN THE INTEREST OF THE UNITED STATES. THE APPLICATION OF THE NEW RATES TO THE OLD CONTRACTS WOULD RESULT IN THE CONTRACTORS PAYING A LESSER AMOUNT FOR INSURANCE THAN THEY OTHERWISE WOULD BE REQUIRED TO PAY. OBVIOUSLY, ANY REDUCTION OF THE FEES WOULD OPERATE TO THE DETRIMENT OF THE UNITED STATES RATHER THAN TO ITS BENEFIT. IF THE NEW REGULATIONS HAD INCREASED THE RATES FOR INSURANCE THERE WOULD BE NO LEGAL BASIS FOR CHARGING THE CONTRACTORS WITH THE INCREASE, AND NO SOUND REASON IS PERCEIVED WHY A DIFFERENT RULE SHOULD APPLY WHERE THE RATES ARE SUBSEQUENTLY DECREASED.

IN THE LEGAL MEMORANDUM PREPARED IN THE OFFICE OF YOUR GENERAL COUNSEL IT IS URGED THAT WE ARE NOT CONCERNED WITH RIGHTS WHICH HAVE ACCRUED TO THE GOVERNMENT BUT ONLY WITH FEE PAYMENTS WHICH WILL BE DUE IN THE FUTURE FOR GUARANTY PROTECTION TO BE AFFORDED IN THE FUTURE. WE CANNOT AGREE WITH THIS CONCLUSION. UNDER THE CONTRACTS THE GOVERNMENT ACQUIRED THE RIGHT TO CERTAIN FEES FOR CERTAIN INSURANCE TO BE FURNISHED BY IT. IF THOSE FEES ARE REDUCED FOR THAT INSURANCE THERE OBVIOUSLY IS A DIMINUTION OF THE RIGHTS OF THE GOVERNMENT.

IT IS FURTHER URGED THAT, EVEN CONCEDING THAT THE GOVERNMENT HAS ACQUIRED CERTAIN RIGHTS UNDER THE CONTRACTS, THE GOVERNMENT WOULD RECEIVE THE FOLLOWING BENEFITS WHICH WOULD SUPPORT THE APPLICATION OF THE NEW RATES. FIRST, THE ADMINISTRATION OF THE PROGRAM WOULD BE SIMPLIFIED. SECONDLY, PROSPECTIVE INVESTORS WOULD BE ENCOURAGED TO MAKE INVESTMENTS BECAUSE OF THE BELIEF THAT THEY WOULD RECEIVE THE BENEFIT OF SIMILAR FUTURE REDUCTIONS IN THEIR CONTRACT RATES. AND THIRDLY, CANCELLATION OF EXISTING CONTRACTS WOULD BE DISCOURAGED.

ALL OF THESE BENEFITS APPEAR TO BE RATHER INTANGIBLE AND SPECULATIVE AND INSUFFICIENT TO JUSTIFY A REDUCTION IN THE RATES. IT SEEMS APPARENT THAT THERE COULD BE NO ASSURANCE THAT THE ADMINISTRATION OF THE PROGRAM WOULD BE SIMPLIFIED TO AN EXTENT THAT WOULD JUSTIFY THE PROPOSED DECREASE IN THE RATES OF EXISTING CONTRACTS. ALSO, IT APPEARS TO BE EXTREMELY DOUBTFUL THAT THE POSSIBILITY OF FUTURE RATE REDUCTIONS WOULD CONSTITUTE A MATERIAL INDUCEMENT TO PROSPECTIVE INVESTORS, SINCE GENERALLY THE RATES EFFECTIVE AT THE TIME OF THE INVESTMENT WOULD BE CONSIDERED REASONABLE AT THAT TIME AND THERE WOULD BE NO ASSURANCE THAT THOSE RATES WOULD BE REDUCED DURING THE LIFE OF THE CONTRACT. WITH REGARD TO THE DISCOURAGEMENT OF THE CANCELLATION OF EXISTING CONTRACTS, ALTHOUGH IT IS ARGUED THAT AN INVESTOR'S FORBEARANCE TO EXERCISE HIS RIGHT OF CANCELLATION UNDER AN EXISTING CONTRACT WOULD CONSTITUTE LEGAL CONSIDERATION FOR REDUCING THE CONTRACT RATES, IT IS NOT PERCEIVED HOW SUCH FORBEARANCE COULD BE VIEWED EITHER AS A DETRIMENT TO THE INVESTOR OR AS A BENEFIT TO THE GOVERNMENT UNDER THIS PARTICULAR PROGRAM. AS WE SEE IT, CANCELLATION WOULD RESULT IN LOSS OF PROTECTION TO THE INVESTOR AND FAILURE TO CANCEL WOULD NOT AFFECT THE STATUS OF THE EXISTING INVESTMENT.

IN ADDITION, IT IS CONTENDED IN THE LEGAL MEMORANDUM THAT THE SPECIFIC PROVISION IN THE CONTRACTS FOR THEIR MODIFICATION BY MUTUAL AGREEMENT IS SUFFICIENT TO JUSTIFY THE ACTION PROPOSED. WE CANNOT AGREE, HOWEVER, THAT THIS GENERAL PROVISION OVERCOMES THE REQUIREMENT THAT MODIFICATIONS OF GOVERNMENT CONTRACTS BE SUPPORTED BY A VALUABLE CONSIDERATION MOVING TO THE GOVERNMENT. THE PROVISION MUST, THEREFORE, BE REGARDED AS HAVING REFERENCE TO MODIFICATIONS BENEFITING BOTH PARTIES.

IT IS ALSO URGED THAT, SINCE PRIVATE INSURANCE COMPANIES CAN LOWER PREMIUMS OR MAKE REFUNDS TO POLICY HOLDERS, THE GOVERNMENT SHOULD BE ABLE TO DO THE SAME, BU THIS ARGUMENT OVERLOOKS THE FACT THAT PRIVATE PARTIES CAN GIVE AWAY THEIR PROPERTY AND CONTRACTUAL RIGHTS WHEREAS AN AGENT OF THE GOVERNMENT HAS NO SUCH AUTHORITY.

FINALLY, IT IS CONTENDED THAT A REDUCTION IN FUTURE FEE PAYMENTS WOULD APPEAR TO BE PERMISSIBLE WHEN AN ADDITIONAL INVESTMENT IN A RELATED PROJECT IS TO BE COVERED BY A GUARANTY WHICH WILL APPLY THE NEW RATES. THIS ARGUMENT CONTEMPLATES THE SITUATION WHERE THE MAKING OF AN ADDITIONAL INVESTMENT IS CONDITIONED UPON A REDUCTION OF THE RATES IN AN EXISTING GUARANTY CONTRACT, WE WOULD AGREE THAT THE NEW INVESTMENT WOULD CONSTITUTE A NEW CONSIDERATION WHICH WOULD SUPPORT THE APPLICATION OF THE NEW RATES TO THE OLD CONTRACT.

YOUR FIRST QUESTION IS ANSWERED ACCORDINGLY.

REGARDING YOUR SECOND QUESTION, IT WOULD SEEM DESIRABLE THAT ANY AMENDMENTS TO EXISTING CONTRACTS BE EVIDENCED BY FORMAL AGREEMENTS EXECUTED BETWEEN YOUR AGENCY AND THE INVESTORS.

YOUR THIRD QUESTION IS UNDERSTOOD TO INVOLVE PROPOSED CHANGES CONCERNING TWO PROBLEMS. THE FIRST PROBLEM INVOLVES THE QUESTION OF WHETHER THE CONTRACTS MAY BE AMENDED TO EXTEND THE TERMS OF THE CONTRACTS TO TWENTY YEARS FROM THE DATES OF ISSUANCE AS NOW PERMITTED BY LAW. THE SECOND INVOLVES THE QUESTION OF WHETHER THE OLD CONTRACTS, WHICH REQUIRE THE FACE AMOUNT OF THE CONTRACT TO BE REDUCED BY TRANSFERS OF EARNINGS THROUGH NORMAL EXCHANGE CHANNELS, CAN BE AMENDED TO DELETE THE REQUIREMENT FOR THIS REDUCTION. THIS CHANGE IS STATED TO BE MADE POSSIBLE THROUGH NEW ADMINISTRATIVE POLICIES AND PROCEDURES.

SECTION 111 (B) (3) OF THE ECONOMIC COOPERATION ACT OF 1948, 62 STAT. 137, 22 U.S.C. 1509 (B) (3), PROVIDED THAT "GUARANTEES SHALL TERMINATE NOT LATER THAN FOURTEEN YEARS FROM THE DATE OF ENACTMENT OF THIS ACT.' SECTION 708 (A) OF THE MUTUAL SECURITY ACT OF 1953, 67 STAT. 152, 22 U.S. CODE 1509, AMENDED THIS PROVISION TO READ "WHICH GUARANTIES SHALL BE LIMITED TO TERMS NOT EXCEEDING TWENTY YEARS FROM THE DATE OF ISSUANCE.' THIS PROVISION HAS BEEN RETAINED IN SECTION 413 (B) (4) (D) OF THE MUTUAL SECURITY ACT OF 1954, 68 STAT. 832, 22 U.S.C. 1933. CONSIDERING THE FACT THAT THE PURPOSE OF THE AMENDMENT WAS TO STIMULATE GREATER INVESTMENT PARTICIPATION AND SINCE THE GOVERNMENT WOULD RECEIVE THE FEE FOR THE ADDITIONAL NUMBER OF YEARS THE GUARANTY WOULD BE EFFECTIVE, WE PERCEIVE NO OBJECTION TO THE CONTRACTS BEING AMENDED TO EXTEND THEIR TERMS TO TWENTY YEARS FROM DATES OF ORIGINAL ISSUANCE.

IN REGARD TO THE ELIMINATION OF THE REQUIREMENT THAT THE COVERAGE BE REDUCED BY THE AMOUNT OF THE TRANSFER OF EARNINGS THROUGH NORMAL EXCHANGE CHANNELS, SINCE IT APPEARS THAT THE ADDED COVERAGE WOULD INCREASE THE AMOUNT OF THE FEES PAYABLE TO THE GOVERNMENT, THERE WOULD APPEAR TO BE SUFFICIENT CONSIDERATION FOR THIS PROPOSED AMENDMENT TO THE CONTRACTS. YOUR THIRD QUESTION IS, THEREFORE, ANSWERED IN THE AFFIRMATIVE.