The Federation signed the Treaty of Armens with the Sheliak in 2255. An extensive document, the treaty ceded several worlds to the Sheliak including Tau Cygna V. In 2366 the Sheliak transmitted a message to the Federation indicating that they were about to colonize the planet, and that the Human population would be eradicated if it were not removed. This came as something of a surprise to the Federation, who were not aware of any colony on the planet.
The Enterprise-D was dispatched to deal with the problem, and discovered a colony of many thousands of people on Tau Cygna V. Leaving Lieutenant Commander Data on the planet the ship went to intercept the Sheliak vessel. The Sheliak who spoke to Captain Picard called himself the "Director". He claimed his ship carried "The Membership", part of the Sheliak Corporate. He declined all requests for further time to evacuate the planet, instead threatening to exterminate the Humans on arrival. The Sheliak were determined to stick precisely to the letter of the treaty, claiming the document as an absolute description of the relationship between themselves and the Federation.
Picard was eventually able to find a loophole in the treaty, naming the Grisellas as arbiters of the dispute as allowed one of its articles. Since the Grisellas were at the time in a hibernation period, this gave the Federation all the time needed to evacuate the colony.
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