International Judicial Monitor
Published by the International Judicial Academy, Washington, D.C., with assistance from the
American Society of International Law

Winter 2014 Issue

Historic Moments in International Law


The Perils of Silesian Lending

Stephen C. NeffBy: Stephen  C.  Neff, Reader in Law – Public International Law, University of Edinburgh Law School

It might be wondered – even if only in very idle moments – when states began to make legal claims against one another in something like the modern sense, through either diplomatic channels or third-party adjudication. There may be any number of candidates for this honor.  But certainly high in the list of contenders would be the so-called “Silesian loan” dispute that erupted between Prussia and Great Britain in the middle of the 18th century.  It had many elements that would be instantly recognisable to a lawyer today – so much so, that one might be led to wonder if the day-to-day practice of international law has undergone any important changes in the last two and a half centuries or so.

It all began in 1735, when Holy Roman Emperor Charles VI, beset by the heavy military expenses of the War of the Polish Succession, borrowed £250,000 from a group of private lenders in Britain, at 7 percent interest.  The loan was secured on tax revenues flowing from the province of Silesia (located in what is now the western portion of Poland).  Payments of interest were to commence six months after the loan was made, with payments of principal to begin in 1741, and the whole of the repayments to end in 1746.

Things began to go wrong from the beginning.  For one thing, Charles failed to make the required interest payments.  Moreover, before the time came for the payments of principal to begin, the province of Silesia underwent an abrupt change of political status.  King Frederick II of Prussia, in one of the century’s more audacious acts of blitzkrieg, conquered and annexed the province.  The Emperor acquiesced in this act in the Treaty of Berlin in July 1742 – though with the crucial proviso that, along with its new possession, Prussia was to assume the obligation of repaying the “Silesian loan” (i.e., the 1735 loan whose repayment had been secured on the revenues from Silesia).

Things now seemed to back on keel.  Frederick duly paid £84,700 (interest and principal) in 1743 – the first repayment actually made.  His assumption of the loan obligation was renewed in the Peace of Dresden of December 1745, and yet again the following year – this time, alongside a guarantee by the British government of the cession of Silesia to Prussia.  The repayment obligation was, however, an onerous one; and Frederick appears to have been constantly vigilant for some kind of legal justification for halting the payments.

His opportunity arose when a dispute erupted with Britain over some niceties of the law of neutrality.  This arose out of a war which broke out in 1744 between Britain and France, in which Prussia was neutral.  British naval vessels and privateers captured a number of Prussian merchant ships and, pursuant to proceedings in British prize courts, made a number of confiscations on two key grounds:  first, that some of the goods were contraband of war (i.e., war-related goods) being carried to France; and second, that some of the goods were enemy-owned.  Prussia contested both of these grounds.  Regarding contraband, the objection was that British prize courts treated naval stores as contraband, contrary to international law.  Regarding enemy-owned goods, Prussia asserted the existence of a general principle that “free ships make free goods” – meaning that enemy-owned cargoes were not subject to capture if they were being carried on neutral (e.g., Prussian) vessels.

The last of the ships were released by the British by the end of 1748, but the Prussian government insisted on a payment of damages for the goods confiscated, as well as for the delays suffered by the Prussian carriers.  A commission established by the Prussian government quantified these losses at 189,000 reichsthalers.  When the British government obstinately refused to pay, Frederick decided to resort to self-help, in the form of set-off.  Specifically, he ordered that the Silesian loan repayments be redirected from the British creditors to the injured Prussian carriers.  At this point (it was 1752 by now), about £45,000 remained outstanding on the loan.ably do good service with surprisingly little alteration. 

It is interesting to note that Frederick’s own legal advisers – who included the renowned natural-law scholar Samuel Cocceji – counselled against taking this action.  Not surprisingly, the British government also took a dim view of Frederick’s acts.  More to the point, it put the case before a panel of eminent legal advisers, one of whom was William Murray, a Scottish lawyer who would later attain a high degree of legal renown


as Lord Mansfield (chiefly in the area of commercial law).  One of the objects of this consultation process was to place the British case onto as strong a footing as possible in the eyes of third parties – the reason being that it was envisaged that the matter might be placed before the king of France for arbitration.

In all events, the British legal team, reporting in January 1753, carefully considered both the merits of the Prussian case on the neutrality issues and the lawfulness of Frederick’s reprisal measure – or countermeasure, as we call it in modern parlance.  Regarding the Prussian contention that “free ships make free goods,” the advisers held that “[t]he Contrary is too Clear to admit of being disputed.”  There were, admittedly, many bilateral treaties containing such a provision.  But there was no such treaty between Britain and Prussia – with the result that the general “default” rule applied, which permitted enemy goods to be taken from neutral vessels.  Similarly regarding contraband, many bilateral treaties provided for narrow definitions, excluding naval stores.  But again, there was no such treaty with Prussia, so that the general law of nations must apply; and that (ruled the advisers) permitted naval stores to be treated as contraband.  In both cases, no significant consideration was given to the question of whether a network of bilateral treaties, if sufficiently widespread, could give rise to a general rule of customary law.

Perhaps more interesting yet was the panel’s treatment of the countermeasure question.  Even if it were conceded that Prussia had a valid legal claim regarding the ship captures, the withholding of the loan repayments was held to constitute an independent wrong on Prussia’s part.  The reason, it was explained, was that the loan was owed not to the British government as such, but rather to private lenders.  It was asserted – somewhat vaguely – that there was a general “Confidence” that sovereign debts owed to private parties were not subject to seizure by way of reprisal.

Fortified by this legal advice, the British government inclined to hold fast to its positions.  In the event, though, the dispute was eventually settled by way of bilateral negotiation, when, as a result of the “Diplomatic Revolution” of the 1750s, Britain and Prussia found themselves entering into an alliance in opposition to France and Austria (which had traditionally been enemies).  In the course of the negotiations over the alliance arrangement, a separate treaty was concluded putting an end to the Silesian loan imbroglio.  Britain agreed to pay £20,000 to Prussia in full and final settlement of the neutrality claims – without any admission of liability.  In return, Prussia agreed to make the remainder of the loan repayments.

A few words about the merits of the dispute might be in order.  Britain was probably correct to hold that the “free ships make free goods” principle was not a rule of general international law.  Modern lawyers might add that, even if it were, Britain could possibly qualify as a persistent objector and thereby take itself outside the reach of such a rule.  Eventually, in 1856, Britain finally did accept the principle, which then came to be regarded as a rule of customary international law.

Regarding the countermeasures issue, the International Law Commission’s Articles on State Responsibility would seem to lend support the British contention.  Article 49 allows countermeasures against “a State which is responsible for an internationally wrongful act.”  The Prussian repayment embargo, however, was not directed against the state of Great Britain but instead against private third parties.  It may also be noted that, under the generally prevailing restrictive theory of sovereign immunity, the aggrieved creditors could institute a civil action against a defaulting sovereign borrower in their own courts – something that was not possible at the time.

In short, this legal story has a bit of everything to it – formal claims made through diplomatic channels on the basis of rules of international law, wrangles over important questions of the law of neutrality, the application of countermeasures, issues of sovereign engagement in commercial arrangements, even potential third-party adjudication.  A century after the fact, Henry Maine admiringly called the British law officers’ report “a most excellent example of reasoning of which International Law admits.”  For those who wish to have the full story – very full, to be sure -- the definitive treatment of the affair is in a book published in 1915 by Ernest Satow, entitled The Silesian Loan and Frederick the Great.  It contains not only a detailed narrative of the dispute, but also reprints the primary documents (albeit with many in French, not translated).  For those who are tasked with drafting mooting problems for students, this affair could prob

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