CASE CONCERNING ELETTRONICA SICULA S.P.A.

(ELSI) power” and to explore possibilities of Italian governmental

(UNITED STATES OF AMERICA v. ITALY) support.
20 July 1989  However, when it became less likely to reach an agreement with these
RELATIONSHIP BETWEEN INTERNATIONAL AND parties, Raytheon and Machlett as ESLI shareholders, began to plan to
NATIONAL/MUNICIPAL LAW close and liquidate ELSI to minimize their losses.
o After an asset analysis prepared by the CFO, the total debt of
SUMMARY: The United States instituted proceedings against Italy in ESLI amounted to 13,123.9 million lire. The balance sheet for the
respect of a dispute arising out of the requisition by the Government of end of September 1967 showed that under Italian law and
Italy of the plant and related assets of Raytheon-Elsi S.p.A., an Italian accounting principles, the book value of ELSI's assets still
company producing electronic components and previously known as exceeded its liabilities. However, internal accounting
Elettronica Sicula S.p.A. (ELSI), which was stated to have been 100 per cent adjustments in accordance with Rayhteon's accounting policy
owned by two United States corporations. After a detailed consideration of showed ELSI insolvent.
the facts alleged and the relevant conventional provisions, the Chamber o The “orderly liquidation” that was being contemplated was the
found that the Respondent had not breached the 1948 Treaty of Friendship, sale of ELSI’s business or its assets, and the discharge of its debts
Commerce and Navigation and the Agreement supplementing that Treaty out of the proceeds of the said sale. This sale was going to be
in the manner claimed by the Applicant, and rejected the claim for under the control of ELSI’s own management.
reparation made by the United States. o All creditors were to be paid in full, or, if only the “quick-sale”
value (i.e. the total realizable value of the assets) was realized.
DOCTRINE: The reference in Article III to conformity with "the applicable The unsecured major creditors would receive 50% of their
laws and regulations" cannot mean that, if an act is in conformity with the claims.
municipal law and regulations (as, according to Italy, the requisition was),  March 1968: It was decided that ELSI would cease operations.
that would of itself exclude any possibility that it was an act in breach of o Still, meetings with Italian officials continued, wherein they
the FCN Treaty. Compliance with municipal law and compliance with the pressed ELSI not to close and not to dismiss the workforce.
provisions of a treaty are different questions. The fact that an act of a public Nonetheless, letters of dismissal were sent to its employees.
authority may have been unlawful in municipal law does not necessarily  April 1968: Mayor of Palermo issued an order effective immediately,
mean that that act was unlawful in international law. requisitioning ELSI’s plant and other related assets for a 6-month period.
The ESLI plant was still occupied by employees after the requisition.
FACTS: o ELSI brought an administrative appeal against the requisition to
the Prefect of Palermo.
 1967: Raytheon Company, a US Corporation, held 99.16% of the shares in o A bankruptcy petition was also filed by ELSI, referring to the
Electronica Sicula S.p.A (ELSI), with the remaining 0.84% held by requistion as why the company had lost control of the plant and
Machlett Laboratories Inc, another US Corp. coult not avail itself of an immediate source of liquid funds, and
o ELSI was established in Palermo, Sicily where it has a plant for mentioning payments which had become due and could not be
production of electronic parts (microwave tubes, cathode-ray met.
tubes, semiconductor rectifiers, x-ray tubes, surge arresters) and  May 1968: A decree of bankruptcy was issued by the Tribunale di
had a workforce of 900 employees. Palermo.
 From 1964-66, ELSI had been in economic trouble. ELSI made an  August 1969: The administrative appeal filed by ELSI was eventually
operating profit, but was not enough to offset its debt expense and resolved, wherein the requisition order by the Mayor was annulled by
accumulated losses. So, Raytheon began taking steps to make ELSI more the Prefect of Palermo. It had been 16 months since the appeal was filed.
self-sufficient.  June 1970: The trustee in bankruptcy brought proceedings in the Court of
o Numerous meetings were also held with Italian companies to Palermo against the Minister of the Interior of Italy and the Mayor of
find ELSI an Italian partner with “economic influence and Palermo for damages resulting from the requisition. The CA of Palermo
awarded damages.
 1974: The US transmitted a note to Italy enclosing a claim on behalf of  For the procedural aspect, Italy entered an objection to the admissibility
Raytheon, based on several alleged violations of the Treaty of of the present case on the ground of an alleged failure of the two United
Friendship, Commerce and Navigation concluded between Italy and the States corporations to exhaust local remedies.
United States (FCN Treaty). o The United States questioned whether the rule of the exhaustion
 November 1985: Bankruptcy proceedings closed. No surplus remained of local remedies could apply at all, as Article XXVI of the FCN
of the amount realized, for distribution to the shareholders Raytheon Treaty was unqualified by any reference to the local remedies
and Machlett. rule.
 1987: The US filed an application before the International Court of o The United States further argued that the local remedies rule
Justice. was inapplicable in so far as its claim was for a declaratory
o According to the wishes of the parties, the case was submitted to judgment of a direct injury to the United States by infringement
and decided by a Chamber of the Court under Article 26(2) of of its rights under the FCN Treaty.
the Statute of the Court.
o The United States principally reproached the Respondent (a)
with having effected an unlawful requisition of the ELSI plant, ISSUE/S & RATIO:
thus depriving the shareholders of their direct right to proceed
to the liquidation of the company’s assets under normal 1. W/N Italy’s objection to the admissibility of the case on the ground of
conditions ; (b) with having been incapable of preventing the failure to exhaust local remedies should be sustained. – NO.
occupation of the plant by the employees ; (c) with having failed HELD: The municipal courts in Italy had been fully seized of the matter
to reach any decision as to the legality of the requisition during a which was the substance of the Applicant's claim before the Chamber.
period of sixteen months ; and (d) with having intervened in the Furthermore, since it was for Italy to show the existence of a local
bankruptcy proceedings, with the result that it had purchased remedy, and since Italy had not been able to satisfy the Chamber that
ELSI at a price well below its true market value. there clearly remained some remedy which Raytheon, independently of
 Regarding the FCN treaty, US claims the respondent has violated it in ELSI, ought to have pursued and exhausted, the Chamber rejected the
the following manner: objection
o For violating Article III of the Treaty, the right "to control and
manage corporations", since the unlawful requisition interfered  The Chamber rejected these arguments from the US:
with the control and management of ELSI and its orderly o That the local remedies rule is inapplicable because the US’
liquidation, leading to its bankruptcy; claim was for a declaratory judgment of a direct injury to the
o For violating Article V, paragraphs 1 and 3, of the FCN Treaty, US by infringement of its rights under the FCN Treaty,
which were concerned with the protection and security of which was independent of the dispute over the alleged
nationals and their property, since the administrative appeal was violation in respect of Raytheon and Machlett;
delayed; o That Italy was in estoppel since it did not mention in its
o For violating Article V, paragraph 2, of the Treaty, taking Counter-Memorial that Raytheon and Machlett should have
without due process of law, since the requisition amounted to an sued in the Italian courts;
expropriation.;  The Chamber here found that there are difficulties in
o For violating Article I of the Supplementary Agreement to the constructing an estoppel argument based merely on
FCN Treaty, which prohibited "arbitrary or discriminatory the failure to mention a matter at a particular point.
measures", since the requisition order was an arbitrary act; and  The Chamber ruled that it is ELSI that should have pursued local
o For violating the right to dispose of property and interests, remedies, which it did by filing the administrative appeal.
guaranteed by Article VII of the FCN Treaty, since the US o The damage claimed by Raytheon and Machlett were said to
shareholders were deprived of their right to dispose of ELSI’s have resulted from the “losses incurred by ELSI’s owners as
real property. a result of the involuntary change (i.e. the requisition order)
in the manner of disposing ELSI’s assets.” This is therefore at
the core of the US complaint.
 o Both he appeal taken by ELSI against the requisition order position to carry out its liquidation plan, even without the
and the bankruptcy proceedings filed by the trustee were requisition order.
enough to fully let the municipal courts aware of the matter  The successful implementation of a plan of orderly liquidation
which is the substance of the US’ claim before the Chamber. would have depended upon a number of factors not under the
control of ELSI's management.
2. W/N the respondent violated Article III of the FCN Treaty regarding the o After considering these other factors—the preparedness of
“right to control and manage corporations", due to rhe requisition of the creditors to cooperate in an orderly liquidation, especially in
ELSI plant, frustrating its “orderly liquidation” – NO. case of inequality among them, the likelihood of the sale of
the assets realizing enough to pay all creditors in full, the
 Par. 2, Art. III FCN Treaty: "The nationals, corporations and claims of the dismissed employees, the difficulty of
associations of either High Contracting Party shall be permitted, in obtaining the best price for assets sold with a minimum
conformity with the applicable laws and regulations within the delay, in view of the trouble likely at the plant when the
territories of the other High Contracting Party, to organize, control closure plans became known, and the attitude of the Sicilian
and manage corporations and associations of such other High administration—the Chamber concludes that all these
Contracting Party for engaging in commercial, manufacturing, factors point toward a conclusion that the feasibility of a
processing, mining, educational, philanthropic, religious and plan of orderly liquidation, an essential link in the chain of
scientific activities." reasoning upon which the United States claim rests, has not
 The US is mainly claiming on its right to control and manage, been sufficiently established.
because the requisition allegedly had the effect of depriving ESLI of  If, therefore, the management of ELSI, at the material time, had no
both the right and practical possibility of selling off its plant and practical possibility of carrying out successfully a scheme of orderly
assets for satisfaction of its liabilities. liquidation under its own management, and may indeed already
 The reference in Article III to conformity with "the applicable laws have forfeited any right to do so under Italian law, it cannot be said
and regulations" cannot mean that, if an act is in conformity with the that it was the requisition that deprived it of this faculty of control
municipal law and regulations (as, according to Italy, the requisition and management.
was), that would of itself exclude any possibility that it was an act in o There were several causes acting together that led to the
breach of the FCN Treaty. disaster to ELSI, of which the effects of the requisition might
o Compliance with municipal law and compliance with the no doubt have been one. The possibility of orderly
provisions of a treaty are different questions. liquidation is purely a matter of speculation.
o The treaty right to be permitted to control and manage
cannot be interpreted as a warranty that the normal exercise 3. W/N the respondent violated Article V, Par. 1 and 3 of the FCN treaty
of control and management shall never be disturbed; every concerning the “protection and security of nationals and their property”
system of law must provide, for example, for interferences when it allowed ELSI workers to occupy the plant belonging to Raytheon
with the normal exercise of rights during public emergencies and Machlett– NO.
and the like.
 The requisition was found both by the Prefect and by the Court of  Paragraph 1 of Article V provides for "the most constant protection
Appeals of Palermo not to have been justified in the applicable local and security" for nationals of each High Contracting Party, both "for
law; if therefore, as seems to be the case, it deprived Raytheon and their persons and property"; and also that, in relation to property,
Machlett of what were at the moment their most crucial rights to the term “nationals” shall be construed to "include corporations and
control and manage, it might appear prima facie a violation of associations"; and in defining the nature of the protection, the
Article III. required standard is established by a reference to "the full protection
 However, Italy was claiming that Raytheon and Machlett were, and security required by international law". Paragraph 3 elaborates
because of ELSI's financial position, already naked of those very this notion of protection and security further, by requiring no less
rights of control and management of which they claim to have been than the standard accorded to the nationals, corporations and
deprived. They claim that Raytheon and Machlett was not in a associations of the other High Contracting Party; and no less than
 that accorded to nationals, corporations, and associations of any obligation to file a petition of bankruptcy, the requisition was an act
third country. done beyond the call of duty. In other words, ELSI was already
 The reference in Article V to the provision of "constant protection under an obligation to file for bankruptcy, so why should Italy still
and security cannot be construed as the giving of a warranty that have ordered requisition to start this “process of disguised
property shall never in any circumstances be occupied or disturbed. expropriation?”
o In any event, considering that it is not established that any  Furthermore this requisition could not amount to a "taking" contrary
deterioration in the plant and machinery was due to the to Article V unless it constituted a significant deprivation of
presence of the workers, and the authorities were able not Raytheon and Machlett's interest in ELSI's plant; as might have been
merely to protect the plant but even in some measure to the case if, while ELSI remained solvent, the requisition had been
continue production, the protection provided by the extended and the hearing of the administrative appeal delayed.
authorities could not be regarded as falling below “the full o But that was not the case here because ELSI was insolvent.
protection and security required by international law.” The requisition could therefore only be regarded as
 The mere fact that the occupation was referred to by the CA of significant for this purpose if it caused or triggered the
Palermo as unlawful does not necessarily mean that the protection bankruptcy. As said before, the requisition did not trigger
afforded fell short of the national standard to which the FCN Treaty the bankruptcy because ELSI was already insolvent even
refers. before the requisition was ordered.
o The essential question is, whether the local law, either in its  The Chamber left the question open, whether the Italian term
terms or in its application, has treated United States "espropriazione" should be interpreted in a stricter sense than the
nationals less well than Italian nationals. This has not been English term "taking". The term espropriazione was found in the
shown. Italian texts, while taking was found in the English texts.
 With regard to the alternative contention that Italy was obliged to
protect ELSI from the deleterious effects of the requisition by 5. W/N the respondents violated Article I of the Supplementary
providing an adequate method of overturning it, under Article V, Agreement to the FCN Treaty, which prohibited "arbitrary or
the "full protection and security must conform to the minimum discriminatory measures", when it ordered the requisition, leading to a
international standards, supplemented by the criteria of national failure of ELSI to carry out its planned liquidation – NO.
treatment and most-favoured-nation treatment.”
o It cannot be said that the delay in the ruling of the validity of  Article I, which confers rights not qualified by national or most
the requisition fell bellow minimum international standard. favoured-nation standards, provides as follows: "The nationals,
There was a means of requesting a quick decisionTherefore, corporations and associations nsof either High Contracting Party
such delay is not violative of Article V. shall not be subjected to, arbitrary or discriminatory measures;
within the territories of the other High Contracting Party resulting
4. W/N the respondent violated Article V, Par. 2 of the FCN treaty particularly in: (a) preventing their effective control and
concerning the taking of property without due process of law because management of enterprises which they have been permitted to
Italy’s act of requisitioning the plant was equivalent to a taking and the establish or acquire therein; or, (b) impairing their other legally
subsequent acquisition of ELSI at less than market value was caused by acquired rights and interests in such enteqprises or in the
this interference – NO. investments'which they have made, whether in tlne form of funds
(loans, shares or otherwise), materials, equipment, services,
 The US was alleging here that there was a disguised expropriation, processes, patents, techniques or otherwise. Each High Contracting
because the requisition was the beginning of a process that ends with Party undertakes not to discriminate against nationals, corporations
the acquisition of ELSI for far less than market value, and ultimately, and associations of the other High Contracting Party as to their
the title to the property is at stake. obtaining under normal terms the capital, manufacturing processes,
 The Chamber held that even if it were possible to see the requisition skills and technology which may be needed for economic
as having been designed to bring about bankruptcy as a step development."
towards disguised expropriation, then, if ELSI was already under an
  The United States claims that there was "discrimination" in favour of (1) UNANIMOUSLY,
IRI, an entity controlled by Italy (the ones who eventually bought REJECTS the objection presented by the Italian Republic to to
ELSI); there is, however, no sufficient evidence to support the admissibility of the Application filed in tis case by the United States;
suggestion that there was a plan to favour IRI at the expense of ELSI,
and the claim of "discriminatory measures" in the sense of the (2) BY FOUR VOTES TO ONE
Supplementary Agreement must thereforebe rejected. Finds that the Italian Republic has not committed any of the breaches
 In order to show that the requisition order was an "arbitrary" act in alleged in the said Application, of the Treaty of Friendship, Commerce and
the sense of the Supplementary Agreement, the US has relied upon Navigation between the Parties signed at Rome on 2 February 1948, or of
the status of that order in Italian law. the Agreement Supplementing that Treaty signed by the Parties at
o US contends that the requisition "was precisely the sort of Washington on 26 September 1951.
arbitrary action which was prohibited" by Article I of the (In favor: President Ruda, Judges Oda, Ago and Jennings. Against: Judge
SupplementaryAgreement, in that "Under both the Treaty Schwebel)
and Italian law, the requisition was unreasonable and
improperly motivated"; it was "found to be illegal under (3) BY FOUR VOTES TO ONE
Italian domestic law for precisely this reason". Rejects, accordingly, the claim for reparation made against the Republic of
 Though examining the decisions of the Prefect of Palermo and the Italy by the United States.
Court of Appeal of Palermo, the Chamber observes that the fact that (In favor: President Ruda, Judges Oda, Ago and Jennings. Against: Judge
an act of a public authority may have been unlawful in municipal Schwebel)
law does not necessarily mean that that act was unlawful in
international law. Done in English and in French, the English text being authoritative, at
o By itself, unlawfulness cannnot besaid to amount to arbi- the Peace Palace, The Hague, this twentieth day of July, one thousand
trariness. The qualification given to an act by a municipal nine hundred and eighty-nine, in three copies, one of which will be placed
authority (e.g., as unjustified, or unreasonable or arbitrary) in the archives of the Court and the others transmitted to the Government
may be a valuable indication, but it does not follow that the of the United States of America and the Government of the Republic of
act is necessarily to be classed as arbitrary in international Italy, respectively.
law.
 Nonetheless, there was no arbitrary act to speak of. Arbitrariness is a
willful disregard of due process of law , an act which shocks, or at
least surprises, a sense of juridical propriety.
o Nothing in the decision of the Prefect, or in the judgment of
the Court of Appeal of Palermo, conveys any indication that
the requisition order of the Mayor was to be regarded in that
light.
o Independentlly of the findings of the Prefect or of the local
courts, the Chamber considers that it cannot be said to have
been unreasonable or merely capricious for the Mayor to
seek to use his powers in an attempt to do something about
the situation in Palermo at the moment of requisition.

Ruling/Dispositive:

For these reasons,

THE CHAMBER