1911 Chinese bonds draw heated diplomatic interest

When minor problems are not taken care of promptly, they often balloon up into major problems. This homely principle is as true about relations between nations as of those between individuals.

Few Americans have ever heard of the Huguang railway, let alone the bonds that were sold to finance its construction. But a dispute over whether China can be sued over these bonds has become a major irritant in Chinese-American relations.

The facts are as follows: In May 1911 the imperial Ching government of China issued bonds to build the Huguang railway in central south China. At the end of that year, the imperial Ching Dynasty was overthrown and China became a republic. The republican government did not repudiate the debt but continued to pay interest on the bonds until 1939, when it had to retreat deep into the interior of China because of the Japanese invasion.

The story then jumps to November 1979, when Russell Jackson and eight other Americans holding the bonds went to court to get repayment of the principal and interest. They filed suit in the federal district court for northern Alabama. The defendant was the People's Republic of China.

Peking indignantly refused to defend the suit, saying that as a sovereign government it was immune from prosecution in a foreign court and that in any case the bonds represented an ''odious debt'' incurred by a corrupt government, not to build a railway, but to oppress its own people. (It has been charged that a portion of the loan was used to buy weapons.)

Peking said that if anybody was to take action on its behalf it should be the US State Department. Governments deal officially with other governments, and in Peking's view the State Department should have told the court that China was immune from prosecution.

The State Department maintained, however, that Peking should send its own lawyer to Alabama to defend itself. Most other countries faced with similar situations do so, it said. And, as an arm of the executive branch of government, the department said it could not intervene in decisions of the judiciary branch.

Meanwhile, the court case continued, and last September the federal judge hearing it awarded a judgment of $41.3 million to the plaintiffs. If Peking refused to pay, the plaintiffs could ask to have its property in the United States attached.

When Secretary of State George Shultz visited Peking in February, Chinese Foreign Minister Wu Xueqian gave him an aide-memoirem, or diplomatic note, in which the Chinese restated their contention that ''in accordance with international law China enjoys sovereign immunity from the jurisdiction of any foreign court, that the Chinese government recognizes no debts incurred by the past reactionary governments of China, and has no obligation to repay them.''

Should ''the US side, in defiance of international law, execute the above-mentioned judgment and attach China's property in the United States,'' the note said, ''the Chinese government reserves the right to take measures accordingly.''

The dispute ''is a lawyer's dream,'' says international lawyer Jerome Cohen. During a recent interview with foreign journalists in this city, Mr. Cohen's eyes danced with excitement as he went into all the ramifications that make legal disputes such as this the subject of fat casebooks for generations of law school students.

Mr. Cohen, who taught for many years at Harvard Law School and who is an expert in Chinese law, thinks the principle of sovereign immunity is a perfectly valid argument for Peking to raise. But extending this principle to a commercial activity goes beyond the current legal practice of the world's major trading nations, he says.

After World War II, Mr. Cohen said, nations realized that their modern activities extend beyond those of the 19th century. When disputes over commercial activities arise, nations may bring suit. It is not considered reasonable for them to refuse private citizens the right to sue them.

Peking, Mr. Cohen points out, distinguishes between the government, as a sovereign entity, and various state corporations, which are government-owned but not legally part of the government. All the commercial activities that China carries on with foreign countries are conducted by state corporations, which sue and can be sued, in Chinese or foreign courts.

In Mr. Cohen's view, the railway bond case has arisen precisely because it concerns the acts of a previous government which did not make this distinction.

Had China defended the case, Mr. Cohen believes, most courts would have agreed that the plaintiffs' claim was stale. They did not come forward until 1979, he notes, 40 years after the previous government had stopped paying interest, and 18 years after the bonds matured.

A better time to make a claim, he believes, would have been 1966, when the US government, preparing for the possibility of normalizing diplomatic relations with China, asked US citizens who had property claims against the Chinese government to register these claims in Washington.

Given the potential political repercussions of the railway bonds case, the State Department could have persuaded China not to plead, but just to make a ''special appearance'' before the court in which it would have claimed sovereign immunity.

Mr. Cohen believes that even if this did not work, it would have been within the discretion of the US government to act as a friend of the court and to advise the court why, in its opinion, the case was not legally justifiable and should be set aside.

Mr. Cohen thinks it is still possible to reopen the case, either through a special appearance by the Chinese or an appearance by an arm of the US government acting as a friend of the court. The purpose of the appearance would be to ask that the previous judgment be set aside. All the more so, because the judge who made the original judgment has since retired.

If neither course is taken, the plaintiffs might ask the court to attach Chinese property; but that would not be easy, he says.

First, diplomatic property such as the Chinese Embassy in Washington or United Nations Mission would be immune, as would consular property, Mr. Cohen says.

Could a Chinese airplane landing in the US be impounded? The law says property to be attached must relate to the activity named in the original complaint. China has no railways to the US, but might a ship or plane be considered a related activity?

These ships and planes do not belong directly to the Chinese government, but to specific corporations that are government-owned. There could be oceans of legal arguments over this point. If a plane or a ship was attached and the plaintiffs subsequently lost the legal argument, there would be huge damages for them to pay.

China is believed to have a good case, in theory and in practice, but somehow it must be presented. Perhaps, it is noted here, all this could have been settled by diplomats before things got this far.