Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy) - Judgment of the Chamber

INTZRNATIONALCO OFU JRU STICE
I)eucPalrice,2517KJThe Hague.T-92 44 41). Cables: Intercourt,The Hague.

Telefax(0-6499 28).Telex 32323.
- Communiqué

unofficial
Distributed20-7-89(12.50) for immediate release
ToMembers of theCourtt Staff

P.0. P-----------------(14.30) No. 89/13
20 July 1989

ElettronicSiculaS.D.A.(ELSI)
lUnitedStates ofAmericav. Ital~)

Judamentof the Chamber

The following informatis communicateto the Press bythe
Registryof the International Cof Justice:

Today,20 July 1989,the Chamberof the Court foto dealwith
the case concerning ElettroSiculaS.D.A.(ELSI)deliveredits
Judgment. In the Judgmentit rejectedan Italian objeno the
admissibilitof theApplicatioand found thttalyhad not committed
any of the breaches,legedby theUnitedStates,f the Treatyof
FriendshipCommerceand Navigatibetweenthe Partiesigned atRome on
2 February1989or the Agreement Supplemenngat Treaty.It
accordingly rejected the ctomreparatiomade by the UnitedStates.

The Chamberwas composedas follows: President RudJudnes Oda,
Ago, Schwebeand Sir Robertnnings. The complete textof the operativeclauseof the Judgment is as
follows:

"THE CHAMBER,

(1)Unanimously,

Re-iectsthe objection presentbed the Italian Republi to the
admissibility of the Application filedn this caseby the United States
of Americaon 6 February 1987;

(2) By fourvotesto one,

Findsthat theItalianRepublichas not committed any of the
breaches, allegei dn the saidApplication,of the Treaty ofFriendship,
Commerceand Navigation between the Parties sig ateRdome on
2 February1948, orof the Agreement Supplementing tT hratatysignedby
the Parties atWashingtonon 26 September1951.

1
IN FAVOUR: President Ruda;JudnesOda, Agoand Sir Robert Jennings.

AGAINST: JudaeSchwebel.

(3) By four votesto one,

Relects,accordingly, thc elaimfor reparatiomnade against the
Republicof Italyby the United Stateo sf America.

IN FAVOUR: PresidentRuda; Judnes OdaA,go and Sir Robert Jennings.

AGAINST: JudaeSchwebel."

JudgeOda appendeda separateopinionand JudgeSchwebela
dissenting opinio to the Judgment.

In theseopinions the Judgesconcerned stateand explainthe
positions they adopte in regardto certain points deal with in the
Judgment. A brief summaryof theseopinions may be foundin Annex1
hereto. The printed texof theJudgmentand ofthe separateand dissenting
opinionswill become availablien a fewweeks'time. (Orders and
enquiries shoulbde addressedto theDistributionand Sales section,
Officeof theUnited Nations1 ,211Geneva10; the Sales SectionU ,nited
Nations,New York,N.Y. 10017; or any appropriatelyspecialized
bookshop.)

An analysisof theJudgmentis givenbelow, followeb dy the textof
the operativeparagraph. The analysishas beenprepared bythe Registry
for theuse of the pressand in no way involvesthe responsibility othe

Court. It cannotbe quotedagainst the actua tlextof the Judgment,of
which it doesnot constitutean interpretation. Analysisof the Judgment

Proceedingsand Submissionsof the Parties(paras.1-12)

The Chamberbeginsby recapitulating the variousstagesof the
proceedings, recallin tghat the present case concerns disputein which
the United Stateo sf America claimsthat Italy,by its actionswith
respectto an Italian company, Elettronica SiculaS.P.A. (ELSIL,which
was wholly owned by twoUnited States corporations, the Raytheon Company
("Raytheon") and the Machlett Laboratories Incorpora( tedachlett"),has
violated certain provisioo ns the Treatyof Friendship, Commerca end
Navigation between th tewo Parties, concludeidn Rome on2 February 1948
("theFCN Treaty")and the Supplementary Agreement thereto conclo unded
26 September1951.

Oripinsand developmentof the dispute(paras. 13-45)

In 1967,Raytheon held 99.16%of the sharesin ELSI, the remaining
0.84% beingheld byMachlett,which wasa wholly-owned subsidiaryof
Raytheon. ELSI was establishedin Palermo, Sicily, wheriet had a plant
for the production of electronic componenti s; 1967 it had a workforce
of slightly under 900 employees. Its five major producltineswere
microwave tubes, cathode-raytubes, semiconductor rectifier Xs-ray tubes
and surge arresters.

From 1964 to 1966ELSI made an operating profit, but thw iss
insufficient to offset its debtexpenseor accumulated losses. In
February1967,accordingto the United States, Raytheb ongan taking
steps to endeavourto make ELSI self-sufficient.

At the same time numerous meetingwsere held between February 1967
and March 1968 withItalian officialsand companies, the purposeof which
was statedto be to find for ELSI an Italian partnerwith economic power
and influence and to explore the possibilitieof other governmental
support.

When it became apparentthat thesediscussions were unlikelyto lead

to amutually satisfactory arrangement, Rayth andnMachlett,as
shareholdersin ELSI,began seriously to plan to closeand liquidateELSI
to minimizetheirlosses. An assetanalysiswas preparedby the Chief
Financial Officerof Raytheon showing the expectedpositionon
31 March 1968. This showed the book valuo efELSI'sassetsas
18,640millionlire; as explainedin his affidavit filed in these
proceedings,it also showed"theminimum prospecto sf recoveryof values
which we couldbe sure of, in orderto ensurean orderly liquidation
process",and the total realizable valu oef theassetson this basis(the
"quick-sale value")was calculatedto be 10,838.8millionlire. The
total debtof the companyat 30 September1967 was13,123.9million
lire. The "orderly liquidation" contemplaw ted an operation for the

sale of ELSI'sbusiness or its assets en bloc or separatelya,nd the
dischargeof its debts, fullyor otherwise, ouo tf the proceeds, the
whole operationbeing under the controlof ELSI'sown management. It was
contemplatedthat al1 creditors wouldbe paid in full,or, if only the "quick-salevalue"was realized, the unsecured major creditors would
receive about 50 per centof their claims, and that thiswould be
acceptableas more favourable thanwhat couldbe expectedin a bankruptcy.

On 28 March 1968, it was decided that the Companceaseoperations.
Meetingswith Italian officiaishowever continueda,t which the Italian
authority rigorouslp yressedELSI not to close the plantand not to
dismissthe workforce.On 29 March 1968 lettero sf dismissalwere mailed
to the employees of ELSI.

On 1 April 1968the Mayorof Palermo issued an order,effective
immediately, requisitioningELSI'splant and relatedassetsfor a period
of sixmonths.

The Partiesdisagree over whether, immediately prt iothe
requisitionorder,there hadbeen any occupation of ELSI'splantby the
employees,but it is common ground that the plaw nats so occupiedduring

the period immediately following r theuisition.

On 19 April1968 ELSI broughtan administrative appeal against the
requisitionto the Prefectof Palermo.

A bankruptcy petitionwas filed byELSI on 26 April 1968,referring
to the requisition as the reasonwhy the Companyhad lost control of the
plant andcouldnot avail itself of an immediatesourceof liquid funds,
and mentioning payment whichhad becomedue and couldnot bemet. A
decreeof bankruptcywas issued by the Tribunaledi Palermoon 16 May
1968.

The administrative appeaf liledby ELSI against the requisition

orderwas determinedby the Prefectof Palermoby a decisiongiven on
22 August 1969, by whichhe annulled the requisitionorder. The Parties
are at issueon the question whether this peri ofdtimewas or was not
normal foran appealof this character.

In the meantime,on 16 June 1970 the trusteein bankruptcyhad
brought proceedingi sn the Courtof Palermo against the Ministo er the
Interiorof Italyand the Mayorof Palermo for damagesresulting from the
requisition. The Courtof Appealof Palermo awarded damagesfor loss of
use of the plant duringthe periodof the requisition.

The bankruptcy proceedings closi edNovember1985. Of the amount
realized,no surplusremained for distributio to the shareholders,

Raytheonand Machlett.

1. Jurisdiction ofthe Courtand Admissibilitv of the
Application: Rulef Exhaustionof LocalRemedies
(paras48-63)

An objectionto the admissibility of the present casweas enteredby
Italy in its Counter-Memorial ,n the groundof an alleged failureof the
two United States corporations, Rayth aeonMachlett,on whose behalf
the United States claim is brough to,exhaust the local remedies
availableto them in Italy. The Parties agreed that this objecti ben
heard and determinei dn the frameworkof the merits. The United Statesquestionedwhetherthe ruleof the exhaustioo nf
local remediescouldapplyat all,as Article XXVI (thejurisdictional
clause)of the FCN Treatyis categorical in its terms, and unqualifi ed
any referenceto the local remediesrule. It alsoargued that in so far
as its claim is for a declaratorjyudgmentof a directinjuryto the
UnitedStatesby infringement of its rightsunderthe FCN Treaty,
independent of the dispute ovetrhe allegeviolationin respectof
Raytheonand Machlett,the local remedies rule is inapplicable.The
Chamberrejectsthesearguments.The UnitedStatesalso observed tha at

no timeuntil the filingof the Respondent'sCounter-Memoriai ln the
present proceeding did Italy suggestthatRaytheonand Machlett should
sue inthe Italiancourtson the basisof theTreaty,and arguedthat
thisamountsto an estoppel. The Chamberhoweverfound that there are
difficulties in constructingan estoppelfroma mere failure to mention a
matterat a particulap rointin somewhat desultory diplomat eixchanges.

On the questionwhether local remediw esre, or were notexhausted
by Raytheonand Machlett, the Chambernotesthatthe damageclaimedin
this caseto have beencausedto Raytheonand Machlettis said to have
resulted fromthe "lossesincurredby ELSI1sownersas a resultof the
involuntary changi en themannerof disposingof ELSI'sassets": and it
is the requisitionorderthat issaid to have causedthischange,and
which is thereforeat the coreof theUnitedStatescomplaint. It was

therefore rightthatlocal remedieb se pursuedby ELSI itself.

After examiningthe actiontakenby ELSI in its appeal againstthe
requisition orderand, later,by the trusteein bankruptcy,who claimed
damagesfor the requisition, the Chamberconsidersthat themunicipal
courtshad been fully seized of thematterwhich is the substanceof the
Applicant'sclaim before theChamber. Italy however contendt edat it
was possibleto cite the provisionof the treaties themselves befotree
municipal courtsi,n conjunctionwithArticle 2043 of the ItalianCivil
Code, whichwas neverdone.

After examining the jurispruden citedby Italy,the Chamber
concludesthat it is impossibleto deducewhat the attitudeof the
Italiancourts would have beenif such a claim hadbeenbrought. Since
it was for Italyto show the existenceof a localremedy, w
and as Italy
has not beenable to satisfythe Chamberthat there clearly remained some
remedywhich Raytheon and Machlett,independentlyof ELSI,and of ELSI1s
trusteein bankruptcy, ought to have pursued anexhausted, theChamber
rejectsthe objection of non-exhaustionof localremedies.

II. Alleaed Breacheosf the Treatyof Friendshi~.Commerceand
Navigationand its Su~~lementarAvpreement(paras.64-67)

Paragraph1 of theUnitedStates Final Submissionsclaimsthat:

"(1)The Respondent violate dhe internationallegal
obligationswhich it undertookby the Treatyof Friendship,
Commerceand Navigation between th two countries,and the

Supplementthereto,and in particular, violate Articles III,
V, VI1 of the TreatyandArticle1 of the Supplement ..." The acts of the Respondentwhich are allegedto violateits treaty
obligations were describedby the Applicant's counse in termswhich it
is convenientto citehere:

"First,the Respondent violated its legal obligatw ionns
it unlawfully requisitioned tE heSI plant on 1 April 1968
which denied theELSI stockholders their direct rig ht
liquidate theELSI assetsin an orderlyfashion. Second, the
Respondent violated its obligatiw onesnit allowedELSI
workersto occupy theplant. Third,the Respondent violated
its obligationswhen it unreasonably delayed rulio ng the
lawfulnessof the requisition fo1 r6 months untilimrnediately
after theELSI plant, equipment and work-in-proceshad al1
been acquiredby ELTEL. Fourthand finally, the Respondent
violated its obligation when it interferedwith theELSI
bankruptcy proceedings which allowed the Responden to realize
its previously expressed intenti ofnacquiring ELSI for a
price far lessthan its fair marketvalue."

The most importantof theseacts of the Respondentwhich the
Applicant claims to have been inviolationof the FCN Treatyis the
requisitionof the ELSI plant bythe Mayorof Palermoon 1 April 1968,
which is claimedto have frustrated theplan for what the Applicant terms
an "orderly liquidation of the Company. It is fairto describethe
other impugned acto sf the Respondenas ancillaryto this core claim
based on the requisition and it effects.

A. Article IIIof FCN Treat~(paras.68-101)

The allegationby the United Stateosf a violationof ArticleIII of
the FCN Treaty byItaly relates to the first sentencoef the second
paragraph,which provides:

"Thenationals, corporation and associations of either
High ContractingParty shall bepermitted,in conformitywith
the applicable lawasnd regulationswithin the territoriesof
the otherHigh Contracting Party,to organize, control and
manage corporationsand associationsof such otherHigh
Contracting Party for engagii ngcommercial, manufacturing,
processing, mining, educational,hilanthropic, religiousand
scientificactivities."

In termsof the present case, the effeo ct this sentenceis that
Raytheonand Machlett are to be permitted,in conformitywith the
applicablelaws and regulations withinthe territory of Italy,to

organize, controalnd manage ELSI. The claimof the UnitedStates
focusseson the rightto "control and manage". The Chamberconsiders
whether there is a violationof this Articleif, as the United States
alleges, the requisition had t effectof depriving ELSI of both the
rightand practical possibilit yf sellingoff its plant andassets for
satisfaction of its liabilitiesto its creditorsand satisfactionof its
shareholders. A requisitionof thiskindmust normally amountto a deprivation,at
leastin importantpart,of the rightto controland manage.The
referencein ArticleIII to conformitywith "theapplicable lawsand
regulations" cannotmean that,if an act is inconformitywith the
municipal lawand regulation(sas,accordingto Italy,the requisition
was), thatwouldof itselfexcludeany possibility thai tt was an act in
breachof the FCN Treaty. Cornpliancweithmunicipallaw and compliance
with the provisionsof a treaty aredifferentquestions.

The treaty rightto be permittedto controland managecannotbe

interpretedas a warrantythat thenormalexerciseof controland
managementshall neverbe disturbed; everysystemof lawmust provide,
for example,for interference with thenormalexerciseof rightsduring
public emergencie snd the like.

The requisitionwas foundbothby the Prefect andby the Courtof
Appealof Palermo notto have beenjustifiedin the applicable local
law; iftherefore,as seemsto be the case,it deprived Raytheoannd
Machlettof what wereat the moment theirmost crucialrightsto control w
and manage,it might appear prima facie a violat ofonrticleIII,
paragraph 2.

Accordingto the Respondent,however,Raytheonand Machlett were,
becauseof ELSI'sfinancial position, alrea naked ofthosevery rights

of control and managemenotf whichtheyclaimto have been deprived. The
Chamberhas therefore to considerwhat effect,if any, the financial
positionof ELSImay havehad in thatrespect,firstas a practical
matter,and thenalsoas a question of Italianlaw.

The essenceof theApplicant's claimhas been throughoutthat
Raytheonand Machlett, whichcontrolledELSI,were by the requisition
deprivedof the right, and of the practical possibilitof conductingan
orderlyliquidation of ELSI'sassets, theplan for whichliquidationwas
howeververy much boundup with the financialstateof ELSI.

Afternotingthatthe orderly liquidatiw ons an alternativto the
aim of keepingthe place goinga,nd thatit was hopedthat the threaotf
closuremightbring pressure to bear on the Italianauthoritiesand that *
the Italianauthorities did not cometo the rescueon acceptable terms,

the Chamberobservesthatthe crucial questio is whether Raytheono,n
the eve of the requisitiona,nd afterthe closureof the plant anthe
dismissal,on 29 March 1968, ofthemajorityof the employees,was ina
positionto carry out its orderly liquidation pl evnenapart from its
allegedfrustration by the requisition.

The successfulimplementatioonf a plan of orderly liquidatiwould
have dependedupon a numberof factorsnot underthe controlof ELSI's
management. Evidenchas beenproducedby theApplicantthatRaytheon
was preparedto supplycash flowand other assistancneecessaryto effect
the orderlyliquidation,and the Chamberseesno reasonto questionthat
Raytheonhad entered orwas readyto enter into such a comrnitmentbut
otherfactorsgive riseto somedoubt. After consideringtheseother factors governing t matter- the
preparedness of creditorsto CO-operatein an orderly liquidation,

especiallyin caseof inequality among them, the likelih ofodhe sale
of the assetsrealizingenoughto payal1 creditorsin full,the claims
of the dismissedemployees, the difficultyof obtaining the best price
for assetssold witha minimum delayi ,n view of the trouble likely at
the plantwhen the closure plans becameknown,and the attitudo ef the
Sicilianadministration - the Chamberconcludesthatal1 thesefactors
pointtoward a conclusio nhatthe feasibilita yt 31 March 1968of a plan
of orderly liquidation an essentiallink in the chainof reasoningupon
which the UnitedStatesclaim rests, has not beensufficiently
established.

Finallytherewas, besidethe practicalities, th positionin
Italianbankruptcylaw. If ELSIwas ina state of legal insolvencyat
31 March 1968,and if, as contended byItaly,a stateof insolvency

entailedan obligation on the Companyto petitionfor its own bankruptcy,
then the relevant rightosf control and managemenwould not haveexisted
to be protected by thFeCN Treaty. Whilenot essentialto the Chamber's
conclusion stateadbove,an assessment of ELSI'ssolvencyas a matterof
Italianlaw is thushighlymaterial.

After consideringthe decisionof the Prefectand the judgmentsof
the courtsof Palermo,the Chamberobservesthatwhethertheir findings
are to be regardedas determinationass a matterof Italian lawthatELSI
was insolventon 31 March 1968, oras findingsthat thefinancial
positionof ELSI on thatdatewas sodesperatethat it was past saving,
makesno difference; theyreinforcethe conclusionthat thefeasibility
of an orderly liquidationis not sufficientlestablished.

If, therefore, the managemeont ELSI,at thematerialtime,had no

practical possibilit of carrying out successfully scahemeof orderly
liquidationunder its own management, and maiyndeedalreadyhave
forfeited any righ to do so underItalianlaw, it cannot be said that it
was the requisitionthatdeprivedit of thisfacultyof controland
management. There wereseveralcauses acting togethe that led to the
disasterto ELSI,of whichthe effects of the requisitionmightno doubt
have beenone. The possibility of orderly liquidationis purely amatter
of speculation.The Chamberis therefore unableto see here anything
which can be said to amountto a violation bItalyof Article III,
paragraph2, of the FCN Treaty.

B. ArticleV. ~aragra~hs 1 and 3. of FCN Treaty(paras. 102-112)

The Applicant'sclaimunderparagraphs 1 and o 3f ArticleV of the
FCN Treatyis concerned with protectionand securityof nationalsand
their property. Paragraph1 of ArticleV providesfor "themost constant protection
and security" for nationa lseachHigh Contracting Party both "for
their persons and property" and also that,in relationto property,the
term "nationalss "hallbe construedto "includecorporations and
associations";and in defining the nature ofthe protection, the
required standardis establishedby areferenceto "thefull protection
and security require dy internationallaw". Paragraph3 elaborates this
notionof protection and security furth berrequiring no less thanthe
standard accordet do the nationals, corporatioand associationsof the
otherHigh Contracting Party; and no less thanthataccordedto the

nationals, corporatioa nsd associationsof any third country.There
are, accordingly, three different stando arprotection,al1 of which
have to be satisfied.

A breachof theseprovisionsis seenby the Applicant to have been
committed when the Responden"allowed ELSIworkersto occupy the
plant". Whilenoting the contentio of Italy that the relevant
"property", the plantin Palermo belongendot to Raytheonand Machlett
but to the Italiancompany ELSI,the Chamberexamines thematteron the W
basisof the United States argument that "t property"to be protected
was ELSI itself.

The referencein ArticleV to the provisionof "constantprotection

and security" canno be construedas the givingof a warrantythat
propertyshallnever in any circumstance bse occupiedor disturbed. In
any event, considerit ngat it is not established that any deterioration
in the plant and machinew rys due to the presencof the workers,and
that the authoritie were ablenot merelyto protect the plant but even
in somemeasureto continue production, the protection prov bydede
authorities coul not be regardedas falling below"the full protection
and security requirb ed internationallaw"; or indeedas lessthanthe
national orthird-State standards .he mere fact that the occupatw ion
referredto bythe Courtof Appealof Palermoas unlawful doesnot, in
the Chamber'sview, necessarilymean thatthe protection afforded fell
shortof thenationalstandardto whichthe FCN Treatyrefers. The
essential question is whether the local law, e inther termsor its
application,has treatedUnited States nationals le wellthanItalian

nationals. This, inthe opinion of the Chamber,has notbeen shown. The
Chambermust, thereforer ,ejectthe chargeof any violationof ArticleV,
paragraphs1 and 3.

The Applicantsees a further breachof ArticleV, paragraphs1
and 3, of the FCN Treaty, inthe timetaken- 16 months- before the
Prefect ruledon ELSI'sadministrative appeal against M ayeor's
requisitionorder. For the reasons already explain indconnection with
Article III, theChamberrejectsthe contention that, had thb eren a
speedydecisionby thePrefect,thebankruptcy mighh tave beenavoided.

With regardto the alternative contention that Iw talyobligedto
protectELSI from the deleterious effec otfsthe requisition, inter alia
by providingan adequate methoodf overturningit, theChamberobserves
that underArticleV the "full protectio annd security" must confotrm

the minimum international standard, supplem entthe criteriaof
nationaltreatmentand most-favoured-nation treatmeI nt.must be
doubted whetherin al1 the circumstances, the del inythe Prefect's rulingcan be regardedas fallingbelowtheminimum international

standard. As regardsthe contention of failureto accord anational
standardof protection,the Chamber,thoughnot entirely convinced b the
Respondent'scontentionthatsucha lengthy delay as in ELSI'scasewas
quiteusual,is nevertheless not satisfiedthata "national standard of
more rapiddeterminationof administrativaeppealshas been shownto have
existed. It is thereforeunableto see inthisdelaya violationof
paragraphs 1 and3 of Article Vof the FCN Treaty.

C. ArticleV. varanravh2. of FCN Treaty(paras113-119)

The firstsentenceof ArticleV, paragraph2, of the FCN Treaty
providesas follows:

"2. The propertyof nationals, corporation and
associations of eitherHigh ContractingParty shall notbe
takenwithinthe territories of the otherHigh Contracting
Party without duperocessof law and withoutthe prompt payment
of just and effectivecompensation."

The Chambernotesa difference in terminologybetweenthe two
authentictexts(English and Italian); theword "taking"is widerand
looserthan "expropriazione".

In the contention ofthe United States, firsb t,th the Respondent's
act ofrequisitioning the ELSI plant andits subsequentacts in acquiring
the plant, assets,and work-in-progresss,ingly andin combination,

constitute takingosf property withoudtue processof law and just
compensation.Secondly,the UnitedStatesclaims that, by interference
with the bankruptcy proceedingt s,e Respondent proceeded through the
ELTEL Companyto acquire theELSI plant andassetsfor lessthan fair
market value.

The Chamberobservesthatthe charge baseo dn the combinationof the
requisitionand subsequent actsis reallythatthe requisition was the
beginningof a processthatled to the acquisition of the bulk of the
assetsof ELSI for farless thanmarketvalue. What is thusalleged by
the Applicant, if noan overtexpropriationm ,ight beregardedas a
disguised expropriation; because,at theend of the process, it is
indeedtitleto property itselt fhat is at stake. The United States had,
however,duringthe oralproceedings, disavowed aa nylegationthatthe

Italianauthoritieswere partiesto a conspiracy to bring aboutthe
changeof ownership.

Assuming, though withou deciding,that "expropriazionem "ightbe
wide enoughto include a disguised expropriation, acch ounfurtherto
be takenof the Protocolappendedto the FCN Treaty,extending ArticleV,
paragraph2, to "interests held directo lry indirectly bnationals"of
the Parties.

The Chamberfindsthat it is not possiblein this connection to
ignoreELSI'sfinancialsituationand theconsequent decisionto close
the plant andput an end tothe company's activitiesI .t cannotregard
any of the acts complainedof whichoccurred subsequen to the bankruptcy
'ias breachesof ArticleV, paragraph2, in the absenceof any evidence of
collusion, which is now no longer evealleged. Even if it were possible
to see the requisition as having be designedto bringabout bankruptcy,
as a step towards disguise expropriation,then,if ELSIwas already
underan obligation to filea petitionof bankruptcy, or in such a
financial statethatsucha petitioncouldnot belongdelayed, the

requisitionwas an act of supererogation.Furthermore thisrequisition,
independently of themotives which allegedlyinspiredit, beingby its
terms fora limited period, and liabt loebe overturnedby administrative
appeal,couldnot, in the Chamber's view, amountto a "taking"contrary
to Article V unlessit constituted asignificant deprivatio on Raytheon
and Machlett's interestin ELSI1splant; as mighthave beenthe case if,
whileELSI remainedsolvent,the requisition had been extended and the
hearing ofthe administrative apped allayed. In factthe bankruptcy of
ELSI transformed the situation le thana monthafterthe requisition.
The requisitioncould therefore onl be regardedas significant fot rhis
purposeif it causedor triggered the bankruptcy This is precisely the
proposition whichis irreconcilablweith the findingsof themunicipal
\Y
courts,and with the Chamber's conclusionsabove.

D. Article 1 of Su~~lementarAv~reementto FCN Treatv(paras.120-130)

Article 1 of the Supplementarygreementto the FCN Treaty, which
confersrightsnot qualifiedby national or most-favoured-nation
standards, providesas follows:

"Thenationals,corporations ana dssociationsof either
High Contracting Party shanllt be subjectedto arbitrary or
discriminatory measures with the territorieo sf the other

High Contracting Partryesulting particularily:
preventingtheir effective contra old managementof
enterprises whicthheyhave beenpermittedto establish or
acquiretherein; or, (b) impairing theiorther legally
acquired rightasnd interestsin such enterprisesor in the
investments whicthheyhave made, whether i the formof funds
(loans,shares orotherwise), materials, equipment, services,
processes,patents, technique or otherwise.Each High
Contracting Party undertakes n totdiscriminate against
nationals, corporatioa nsd associationsof the otherHigh
Contracting Partays to their obtainingundernormal terms the
capital,manufacturing processes, skillasnd technologwyhich

may be needed foreconomicdevelopment."

The answerto theApplicant's claimthatthe requisitiow nas an
arbitrary or discriminatory a whichviolatedboth the "(a)" and the
"(b)" clausesof the Articleis the absence ofa sufficiently palpable
connection betweetnhe effectsof the requisitionand the failure ofELSI
to carryout its planned orderly liquidatioH n.wever,the Charnber
considersthatthe effectof theword "particularly", introducing the
clauses"(a)" and "(b)",suggeststhatthe prohibition of arbitrary(and
discriminatorya)cts is not confinedto thoseresultingin the situations
describedin "(a)"and "(b)",but is in effect aprohibition of suchacts
whether ornot theyproducesuch results. It is necessary,therefore, to
examine whetherthe requisition was, or wa not, an arbitrary or

discriminatory acotf itself. The UnitedStatesclaimsthat therewas "discriminationi "n favour
of IRI, an entity controlled b ytaly; there is,however,no sufficient
evidencebeforethe Chamberto support the suggestionthat there wasa

plan to favourIR1 at theexpenseof ELSI,and the claimof
"discriminatorm yeasures"in the senseof the Supplementary Agreement
must thereforebe rejected.

In orderto show that therequisition orderwas an "arbitrary" act
in the senseof the Supplementary Agreemen t,eApplicanthas relied
(inter alialupon the status ofthatorderin Italianlaw. It contends
that the requisition"waspreciselythe sort ofarbitraryaction which
was prohibited"by Article1 of the SupplementaryAgreement,in that
"Underboth the Treatyand Italianlaw, therequisition was unreasonable
and improperly motivated"i ;t was"foundto be illegalunderItalian
domesticlaw for precisely thir season".

Thoughexaminingthe decisionsof the Prefectof Palermoand the
Courtof Appealof Palermo,the Chamberobservesthat thefactthatan

act of a public authorit yay have beenunlawfulin municipal lawdoes
not necessarilymean that thatact was unlawfulin international law. By
itself,and without more, unlawfulness canno be said to amountto
arbitrariness.The qualification givento an act by amunicipal
authority (e.g.,as unjustified,or unreasonableor arbitrary) may be a
valuableindication, but it doesnot follow that the act is necessarily
to be classedas arbitraryin international law.

Neitherthe groundsgivenby the Prefectfor annulling the
requisition, nor the analysisby the Courtof Appealof Palermoof the
Prefect's decisionas a findingthat the Mayor'r sequisitionwas an
excessof power, withthe resultthat theorderwas subjectto a defect
of lawfulness, signifyi,n the Chamber'sview, necessarilaynd in itself
any view by thePrefect,or by the Courtof Appealof Palermo,that the

Mayor'sact was unreasonable or arbitrary.Arbitrariness is a wilful
disregardof due processof law,an act which shocks,or at least
surprises, a senseof juridicalpropriety. Nothingin the decisionof
the Prefect, orin the judgmentof the Courtof Appealof Palermo,
conveys any indicationthat therequisition orderof the Mayorwas to be
regardedin that light. Independently of the findingsof the Prefector
of the localcourts,the Chamberconsidersthat it cannotbe said to have
been unreasonable or merel capricious fortheMayor to seek to use his
powersin an attemptto do something about the situation in Palermaot
the momentof the requisition. The Mayor'sorderwas consciously made in
the contextof an operating systeomf law and of appropriate remedieof
appeal,and treated as suchby the superioradministrative authoria tyd
the localcourts. Theseare not at al1 themarks of an "arbitrary" act.

Accordingly,therewas no violationof Article 1 of the Supplementary
Agreement.

E. ArticleVI1 of FCN Treatv(paras131-135)

ArticleVI1 of the FCN Treaty, infour paragraphsi,s principally
concernedwith ensuringthe right"to acquire,own and disposeof
immovablepropertyor intereststherein[inthe Italian text, "beni
immobili O ...altridirittireali"]withinthe territories of the other
High ContractingParty". The Chambernotesthe controversb yetweenthe Partiesturningon the
difference in meaningbetweenthe English,"interests" and the Italian,
"dirittireali",and the problems arising ou of the qualification, by
theTreaty,of the groupof rightsconferred by this Article, layingdown
alternativestandards, and subjectto aproviso. The Chamberconsiders,
however, that,for the applicationof this Article, there remains
precisely thesamedifficulty as intryingto applyArticleIII,
paragraph2, of the FCN Treaty: what really deprived Raytheaonnd
Machlett,as shareholderso,f theirrightto disposeof ELSI'sreal
property,was not the requisition bu the precarious financiastateof
ELSI,ultimately leadin inescapablyto bankruptcy.In bankruptcy the
rightto disposeof the propertyof a corporation no longer belongs even
to the Company,but to the trustee acting for it; athe Chamberhas

already decidetdhatELSIwas on a courseto bankruptcy evenbeforethe
requisition.The Chambertherefore doesnot find thatArticleVI1 of the
FCN Treatyhas beenviolated.

Havingfound that thR eespondenthas not violatedthe FCN Treatyin
the mannerassertedby theApplicant, it follot wsatthe Chamberrejects
also the claim for reparation maidethe Submissions of theApplicant. Annex toPressCommuniaué 89/13

Summarvof Opinionsappendedto the Jud~mentof the Court

SeparateOpinion ofJud~eOda

JudgeODA, in his separateopinion, agreewsith the operative
findingsof the Judgment.He notes,however, that, in initiatingthe
proceedings, the United States espoused the o faitsnationals
(Raytheonand Machlett) as shareholdersin an Italiancompany(ELSI),

whereas,as the Court itself determin indthe BarcelonaTraction
Judgmentof 1970,the rights of shareholdersas such lie beyond the reach
of diplomatic protectionundergeneral internationa law.

In JudgeOda'sview, the1948FCN Treatywas intendedneitherto
alter the shareholders' stan tus to augment the shareholders' rigihts
any way. The provisionsin the FCN Treatyupon whichthe Applicant
relied, and which areextensively addresse in the Judgment, wernot
intendedto protect the right osf Raytheon and Machletas shareholders
of ELSI.

The 1948FCN Treaty,likesimilarFCN treatiesto which the United
Statesis a party,enablesone State partt yo espousethe causeof a

companyof the otherStatepartyin an action against the latt when the
companyin questionis controlled by nationalsof the party bringing the
action. The United States couldthushave broughtan action for breach
of certainprovisions of the 1948Treatywhich entitled it to defendan
Italiancompany(ELSI)in which its nationals (Raythea ond Machlett)
possesseda controlling interest.

Yet the Applicant handot reliedon thoseprovisions, and the
Chamberin its Judgment had made scarcely any refert encthem. Even if
the proceedings ha been broughtas an espousalof ELSI'scause, the
Applicant,in JudgeOda'sview,wouldstillhave had to provea denialof
justice. This it had failedto do.

DissentinpOpinionof JudpeSchwebel

Judge Schwebel agreewdith the Judgmenin what he termed two
paramountrespectswhichhave important implications for the vitaa lity
growthof international law.

First,the Judgment applie asruleof reasonin its interpretation
of the reachof the requiremenotf the exhaustioonf local remedies.It
holdsnot that every possible local remedy m have been exhaustedto
satisfy the localremediesrulebut that, where insubstance local
remedieshave been exhausted, thatsufficesto meet the requirementosf
the rule even ifit may be that avariationon the pursuitof local

remedieswas notplayedout. Thisholding thus confines certain prior
constructionsof the rule to a sensiblelimit. Second,the Judgmentlargely construet she FCN Treatyin ways which
sustainratherthanconstrainit as an instrument for the protectionof
the rightsof nationalsand corporationsof theUnitedStatesand Italy.
The Chamberdeclinedto accept a varieto yf argumentspressedupon it
which, if accepted,wouldhave deprivedtheTreatyof much of its value.
In particular, theChamberdeclinedto hold thatELSI,an Italian
corporation whose shares wereownedby UnitedStatescorporationsw ,as
outsidethe scope ofprotection affordedby the Treaty.The claimsof
the United Stateisn the case were notsustained,but thatwas not

becausethe ChamberfoundagainsttheUnitedStateson the law ofthe
Treaty; it foundagainsttheUnitedStateson the practicaland legal
significance to be attachedto the factsof the case.

The Treatyand its Supplementary Agreemewntre to be interpretedas
a unit, sincethe Agreement was specifiedto be "anintegralpart"of the
Treaty. BecausetheUnitedStatesand Italyadvancedconflicting
interpretationo sf the Treaty whicdemonstratedthatcertainof its
provisions were ambiguous, thisas a casein whichrecourseto the
preparatory work and circumstanceof the Treaty'sconclusion werein
order. It was the factthatItaly hadrequested negotiationof the
Supplementary Agreemen to meet the ascertaineneedsof U.S. investors
for investment in Italy. Italianparliamentary proceedini gs
ratification of the Treatyand Supplement demonstratthat it was the
intentof the Partiesto give investors "guarantees against political

risks"and "freedom to managethe companies"which investorsestablished
or procuredin implementatioo nf "theprinciplesof equitabletreatment"
which arestatedto be set forthin the Treaty. In the entire,detailed
recordof ratification, there is no traceof support for the
interpretation that themanifold treaty rights granted invesw teors
conditioned upon investment being madin a corporationof the investor's
nationality.

The reauisitionde~rivedRavtheonof itsTreatyriahtto controland
manapeand hence liquidateELSI

The Chamber'scardinal conclusio in the cas? is that,becauseof
the practicalitiesof ELSI'sfinancial situationand the legalitieosf
Italianbankruptcy practice, Raythe was no longerable,as of the date

of the requisitiont,o controland manage- and henceliquidate - ELSI
and thus couldnot have beendeprivedby the requisition of itsTreaty
rightto do so. In JudgeSchwebel's view,thatconclusion was incorrect
for the followingreasons.

First,ELSIhad been advisedin March 1968, on financialand legal
grounds, that it was entitledto liquidateits assets,in a process tobe
managedby ELSI.

Second, asof the day of the requisitionno legalor practical
steps had beentakenin any quarterto placeELSI in, or forceELSI into,
bankruptcy.

Third,in theweeks and dayspreceding, and following, the

requisition,themost senior officialsof Sicilyand theItalian
Government,whilegraphically informedof ELSI'sprecarious financial
condition,pressed ELSInot to close the plantn,ot to dismissthe
workforce,and most particularlynot to go intobankruptcy,but rather to take measuresin concertwith the Italianpublic andprivatesectorsto
keep open orre-openthe plantand carry out liquidation ovear periodof
time. The PrimeMinisterof Italyand the Presidentof Sicilyand their
associates presumablyacted,andmustbe presumedto have acted, in
accordance with the law of Italy. Thuswhetherin thiscase Italianor
UnitedStatescounsel are correc in their differiag interpretati ofns
Italianbankruptcy law,it is clearthat the "living lao wf" Italyas of
the timeof the requisitionwas inconsistenwtith Italy'scurrentplea
and the Chamber' acceptanceof it. Italyin 1989shouldnot beheardto
maintainthe opposite of what it maintainedin 1968.

Fourth,the Chamber'scardinal conclusio is not fully consistent
with the holdinogf the Courtof Appealof Palermoon whichtheJudgment
relies. That Court concludetdhatELSI'sbankruptcy was causednot by

the requisition butby itspriorstateof insolvency.But it neither
concluded nor implied thasuch insolvency dissolved existing rio ghts
management and controlofELSI. It rather awarded damages"derivable
from the operational unavailabilo ity"he plantas the resultof what
it foundto be an "unlawful"requisitionorder. Thus the Courtimported
that ELSI continuedas of the date ofthe requisitioannd thereafteto
have possessory right snELSI eventhoughit had been insolvent before
thatdate.

Fifth,Italy'sexperts differed among themsel aseso whetherELSI
was insolventas of the timeof the requisition.

Sixth,and most important the questionof whetherELSIwas
insolvent as of 1 April 196essentially depende on the policyof

Raytheon,whoseresources were ample. The Chamberacceptsthat Raytheon
had transferredfreshcapitalto pay small creditors; that Raythweon
ready to purchas eLSI'slarge accounts receivable1a 0t0 per centof
value; and thatRaytheonwas preparedto advancesufficient cash-flow
fundsto enableELSI to engagein an orderlyliquidation.Why thendoes
it acceptthe inconsistent conclusion th astof the timeof the
requisition,ELSIwas insolvent or, if not,was in any event fast
slippinginto bankruptcy? If the requisitiohnad notintervened,and if
ELSI's imrnediatceash-flow requiremenhtsd beenmet byRaytheon,thus
buying time in orderto sel1assets,can it reallybe held thatELSI
would have beenforcedintobankruptcy, at any ratewhen it was? Even if
bankruptcyhad eventuallycome,sucha laterdatewouldhave enabled
Raytheonmateriallyto reduceits lossesrelativeto thosewhichactually
were incurred. Moreover,if the requisitiohnad notintervened, it would

have beenin the interestof the Italianbanksto have settled their
claimsagainstELSI for40 or 50 per centof value.

An orderlyliquidation,Judge Schwebelacknowledged, woulhdave been
beset by uncertainties, b theygo notso much to ELSI'sability and
entitlementto liquidateits assetsas to the calculabilityof damages
which maybe foundto flowfromdenialof thatright.

The conclusionthatby impositionof the requisition Italvyiolated
a viablerightof Raytheonto control andmanageELSI is themore
compellingin the lightof themeaningof the Treaty which thp erocesses
of its ratificatioenlucidate.It was notconsistent with investors'

"unobstructedcontrol"of companies they "procured"with theTreaty's
"guarantyagainst politica risks",andwith the "principles of equitable
treatment"whichthe Treatywas designedto ensure.The reauisitionwas an arbitrarv measurwehichviolated theTreatv

The Chamber's conclusio thatthe requisitioonf ELSI'splantand
equipment was notan arbitrary measurien breachof the Treaty is based
on three holdingsw,hich JudgeSchwebelsaw as unfounded: first, that
the Palermo Prefec and Courtof Appealdid not findthe requisitiot no
be arbitrary; second,that in international law the requisitionas
neitherunreasonable nor capricious;and thirdthat in any eventthe
Italianprocessesof appealand redressto whichthe requisition order
was subject ultimateleynsuredthat theorderwas notarbitrary.

(i) The rulinnsof the Prefectand Courtof Avveal

The Prefect heldthatthe Mayor,in issuingthe requisition order,
reliedon provisions of lawwhich, in conditionsof grave public
necessity and unforeseen urgency, entitle thetM oarequisition
privateproperty; buin thiscase,thePrefect foundt ,heseconditions
were present"fromthe purely theoretical standpoin atfindingwhich
appearsto mean that they were not actuallpyresent. The Prefect's W
decisionindicates that in factthoseconditions were notpresentsince
the Prefect'sdecisionconcludesthat (a) the orderof requisitioncould
not restoreELSI'splantto operation or solve thecompany'sproblems;
(b) the orderin factdid not; Ici the plantremained closea dnd
occupiedby former employeea snd(d) publicorderwas in any event
disturbedby the plant's closure: in short,thatthe requisition order

proved unjustifie odn al1 counts. The Prefect's holding thati,ncethe
requisition orderwas incapableof achieving its purported purposi es,
lackedthe juridical causw ehichmight justify iti ,s not far from
stating that the requisiti wans ill-motivated anhenceunreasonable or
even capricious.

Moreover, the Prefect het ldatthe orderby its terms showetdhat
the Mayor issued theorderto showhis intentto intervene "in one way or
another",as a step "aimedmore thananythingelseat bringing out his
intentionto tackle the problem just thesame". The Prefect there
referredto the provision of theMayor'sorderstating that "thelocal
press is takinga greatinterestin the situation ... being verycritical
toward the authoritia esd is accusingthemof indifference to this Wv
seriouscivic problem ...". The Courtof Appealof Palermo characterized
thatholding ofthe Prefect as "severe"and as "showinga typical caseof

excessof power"on the partof the Mayor- i.e.,a classicarbitrary
act. Moreover, the Court of Appealtaxedthe Mayorwith compounding the
"unlawful" requisitionby failingto pay the indemnity for requisition
for which the orderitself provide-d a failure whichis at oddswith
the due processwhich is antitheticatlo an arbitraryact.

(ii)The unreasonable and capriciousnature ofthe reauisition

What isunreasonable or capricio unsinternationallaw, while
havinga sensein customary internationl alw,has no invariable, plain
meaning, butcan be appreciated onliyn the particular conteoxt the
factsof a case. In this case, the orderof requisition as motivated,
issued and implementw eds arbitrarysince:

- the legal baseosn whichtheMayor'sorderreliedwere justifiedonly
in theory;- the orderwas incapableof achieving, and didnot achieve,its
purported purposes;

- the order"also"was issued"mainly"to appeasepublic criticisr mather
thanon itsmerits,a "typicalcaseof excessof power";

- the orderviolated its own terms by failintgo pay an indemnity fothe
requisition;

- a paramountpurposeof the requisition orderwas to preventELSI's
liquidationand possible dispersao1f its assets,a purposepursued
withoutregardto Treaty obligation sf contrary tenor(despiteItaly's
contentionthat theseobligations were bindinginternally).

(iii)The processof a~pealdid not renderthe measure non-arbitrary

Italy'sobjective processe of administrative andjudicialreviewof
the requisitionordermightbe arguedto have ensured, by their existence
and application,that therequisition, evei nf initially arbitrary,
ultimatelywas not, thusabsolving Italo yf any consummatebdreach of
internationalresponsibility.

However,as the DraftArticleson State Responsibilit oyf the United

NationsInternational Law Commissionput it:

"Thereis a breachby a Stateof an international
obligationrequiringit to achieve,by meansof its own choice,
a specifiedresult,if,by the conductadopted,the State does
not achieve the result requir ofdit by thatobligation."

That fits this casef,or Italydid not provideELSI or its representative
with "fulland complete compensatio n"s the ILC requires)forwhat
otherwisewas the arbitrary actof requisition.The requisition order
was annulled by thPerefect,but 16 monthsafterit waspromulgated, by
which timeELSI had suffered irreparabd lemageas a resultof it. The
Courtof Palermoawardedminimal damagesfor the requisition, which,
however, tookno accountof principal element of ELSI'sactuallosses.
It accordingly follow thatELSIwas notplacedin the positionit would

have beenin had therebeenno requisition, or in an equivalent
position. For thatreason, Italian administrativaend judicial
processes,howeverestimable, did not absolveItaly of havingcommitted
an arbitrary actwithinthemeaningof the Treaty.