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World Court Digest

Summaries of the Decisions

Elettronica Sicula S.p.A. (ELSI) case

(United States of America v. Italy)

Judgment of 20 July 1989

On July 20, 1989, the International Court of Justice delivered its judgment in the case concerning Elettronica Sicula S.p.A. (ELSI) between the United States of America and Italy.

Raytheon-ELSI S.p.A. (ELSI), an Italian corporation wholly owned by the United States corporations Raytheon Company (Raytheon), which held 99.16 per cent of the shares, and its subsidiary The Machlett Laboratories (Machlett), which held the remaining 0.83 per cent, was established in Palermo, Italy, where it produced electronic components.

ELSI had been in economic trouble since the 1960s. In 1967, representatives of ELSI and Raytheon held numerous meetings with officials of the Italian Government and of the Sicilian region in an attempt to secure governmental support for ELSI. When it became apparent that these discussions were unlikely to be successful, Raytheon prepared to close the plant. The balance sheet for the end of September 1967 showed that under Italian law and accounting principles the book value of ELSI's assets still exceeded its liabilities. However, internal accounting adjustments in accordance with Rayhteon's accounting policy showed ELSI insolvent. Raytheon therefore formally declared that it would not subscribe to any additional loans made to ELSI. It was, however, ready to financially support an orderly liquidation. The Italian authorities pressed ELSI not to close the plant and promised help. The final decision to close the plant was taken in March 1968.

On April 1, 1968, the Mayor of Palermo issued an order, effective immediately, requisitioning ELSI's plant and related assets for six months. An administrative appeal brought against the order was not decided by the Prefect of Palermo until August 22, 1969. It was then held that the Mayor had exceeded his powers and that the requisition had been unlawful. In the meantime, the plant had been occupied and production had ceased. On April 26, 1968, ELSI filed petition in bankruptcy. A trustee was appointed. In July 1969, ELSI was purchased for far less than book value by a subsidiary of the State-controlled IRI. An action for damages resulting from the requisition was dismissed by the Court of Palermo. On appeal, the Court of Appeal of Palermo granted a small portion of the claims. This decision was upheld by the Court of Cassation in 1975. In 1974, the United States transmitted a note to Italy enclosing a claim on behalf of Raytheon, based on several alleged violations of the Treaty of Friendship, Commerce and Navigation concluded between Italy and the United States (FCN Treaty).

The United States application before the International Court of Justice was filed in 1987. According to the wishes of the parties, the case was submitted to and decided by a Chamber of the Court under Article 26(2) of the Statute of the Court.

Italy entered an objection to the admissibility of the present case on the ground of an alleged failure of the two United States corporations to exhaust local remedies. The United States questioned whether the rule of the exhaustion of local remedies could apply at all, as Article XXVI of the FCN Treaty was unqualified by any reference to the local remedies rule. The United States further argued that the local remedies rule was inapplicable in so far as its claim was for a declaratory judgment of a direct injury to the United States by infringement of its rights under the FCN Treaty. The Chamber rejected these arguments. The United States also observed that Italy, until the filing of the Counter-Memorial, had at no time suggested that Raytheon should sue in the Italian courts on the basis of the Treaty, and argued that this amounted to an estoppel. The Chamber, however, found that an estoppel cannot be derived from a mere failure to mention a matter at a particular point in diplomatic exchanges.

After examining the actions taken against the requisition order, the Chamber considered that the municipal courts had been fully seized of the matter which was the substance of the Applicant's claim before the Chamber. Furthermore, since it was for Italy to show the existence of a local remedy, and since Italy had not been able to satisfy the Chamber that there clearly remained some remedy which Raytheon, independently of ELSI, ought to have pursued and exhausted, the Chamber rejected the objection of non-exhaustion of local remedies.

As to the merits, the majority found that it had not been sufficiently established that an orderly liquidation of ELSI's assets would still have been feasible at the time of the requisition. The Chamber first observed that Article III of the Treaty, the right "to control and manage corporations", had not been violated, since it had not been established that the creditors would have given the company enough time for an orderly liquidation, or that the price obtainable on a quick sale would have been sufficient. The Chamber felt that since the feasibility of an orderly liquidation had not been sufficiently established, the requisition order could not interfere with control and management in any real sense. Thus the requisition, while unlawful, was not the cause of ELSI's bankruptcy.

The Chamber also dismissed the claim that Article V, paragraphs 1 and 3, of the FCN Treaty, which were concerned with the protection and security of nationals and their property, had been violated. According to the Chamber the toleration of the occupation of the plant by the workers did not cause any material harm to ELSI. The delay in the administrative appeal was not regarded as a denial of justice, since, under the Italian Law, there had been a means of requesting a quick decision.

The judgment further found that no taking without a due process of law had occurred contrary to Article V, paragraph 2, of the Treaty. The Chamber left the question open, whether the Italian term "espropriazione" should be interpreted in a stricter sense than the English term "taking". In that respect, the Chamber found that although a requisition could be an expropriation, it was not in the present case, since ELSI was already under an obligation to file for bankruptcy.

The Chamber also concluded that the requisition order had not violated Article I of the Supplementary Agreement to the FCN Treaty, which prohibited "arbitrary or discriminatory measures". According to the Chamber arbitrariness would require more than mere unlawfulness. But since the order was "consciously made in the context of an operating system of law and of appropriate remedies of appeal", it could hardly be an arbitrary act. Finally, the Chamber stated that the right to dispose of property and interests, guaranteed by Article VII of the FCN Treaty, had not been violated, since what really deprived the United States shareholders of their right to dispose of ELSI's real property was the precarious financial state of ELSI, which ultimately led to bankruptcy and thus prevented the shareholders from disposing of the company's property.

Having thus found that the Respondent, Italy, had not violated the FCN Treaty in the manner asserted by the Applicant, it follows that the Chamber rejected the claim for reparation made by the Applicant.