Written comments of the United States of America on the replies of Italy to the questions put by Judges

1. In its response to the question from Judge Schwebel, the Applicant
states that

'with the requisition in place, there was no opportunity to show the plant
to prospective buyers after 1 April and no ability to negotiate any deals
for the immediate disposition of the plant and assets'.
As exemplifiedhy much of the material contained in the letter from the
Mavor of Palermo to General Mancini of 9 Mav 1968that was filed with
thekourt hy Respondent in response to a from Judge Schwebel,il
was obviouslyquite possible for Raytheon to have explored various alterna-
tives with himand there is no evidence to the oontr&y.
The requisition was issued to avoid the closure of the plant. The plant
was kept open, operations were maintained to a certain extent and the
premisescould have been viewedby anyone showing an interest in doing so.

Moreover, it mus1be remembered that the Mayor had originally appointed
ELSl's own director, MI. Profumo, as manager of the requisitioned plant
(Annex 34 to the Counter-Memonal).

II. In ils resoonses to auestions from President Ruda. Ao.li..nt states
that '~avtheon'and ~achfett were committed 10suonlvin.,,ecessa~ ~funds
~o~~accokplihthe orderly liquidation', and thai 'Rayrhcon mouid h35.e
incrcdsediis fundini:of the liquidation progrüm io takç carc of any shortfaIl'
in reauired severance nav
~c;~ondent's rcpl>'isonce again thai Applicanl here appcar, itsclf IO bc
staiing a qucstion of Pdctlhat is, unhappily. unsupporicd byany contcmpora-
neousrecord or any document."

87. THE REGlSTRAR TO THE AGENT OF ITALY

13 March 1989.

1 have the honour to acknowledge receipt of Your Excellency'sletter of 13
March 1989,setting out the comrnents of Italy on the replies givenby the United
States to questions put by Members of the Chamber during the oral proceedings
in the case concerning ElerironicoSiculoS.P.A. (ELSI).

13March 1989.

Dunng the lasi day of ihc oral procecdings' in the case concernlng Elrrrronrcu
StruloSp.A (ELSI,. the Court offrred cach pan). the opportunity io comment

on the answers given by the other party to questions of the Judges during the
final week.The United States does no1agee with the conclusions of the Respon-
dent in any of its answers, and accordingly suhmits the following comments. To

' See pp. 371 and 383, supro. CORRESPONDENCE 473

avoid repetition, these comments are limited Io points not othenvise addressed
in the oral or written pleadings, including our own answers Io the same questions.

Quesrionsfroni Judge Oda

A. For the reasons stated in our oral statements, the United States fimly
disputes the Respondent's characterization of ELSI as insolvent a1 the time of
the reauisition order. ~P. ~ ~ ~su~ra.)
B.l.'~he Respondent's anSie; caididly admits that the ELSI plant was never
re-opened following t-e requisition and that at hest "production was very
limiied".
9.2. It is clear from the Respondent's answer that the Mayor, the regional
government, and the national Government had no management plan for ELSI

after therequisition. The United States disputes the Respondent's characterization
of the requisition as an "emergency measure . . .triggered by the precipitous
dismissal of 800 workers hy ELSI". The dismissal of the workers was anything
but precipitous. It followed a year-long effort by ELSI and its stockholders to
persuade the Respondent to participate in and back ELSI on a commercial basis
in order ta continue ELSI as an employment base in the Mezzogiorno.

Quesrionsfrom Judge Schwebel

A. The United States stands by its answer Io the same question (pp. 454-455,
supra). We strongly disagree, for the reasons stated in our written and oral
pleadings, with the Respondent's assertions that the damage arising Srom its
actions are limited to 5 per cent of the value of the property per year. See, e.g.,
pp. 115-121, supra.
B.1. The United States disputes the extent ta which ELSI was the recipient of
preferential low-interest loans. First, as the Respondent recognizes, Chase Man-
hattan Bank, a United States bank, extended a loan to ELSI at the rate of 5.5
percent - the same rate as a loan by IRFIS and only slightly above loans from

IRFIS and Banco di Sicilia. Second, the rates presented hy the Respondent
appear to be inappropriate for comparison purposes in view of the different
factors affectine the detemination of resoectiveinterest rates for lone-term loans.
3s conip~rcil t<;interest on current ïcii,;nts irhich are the highrst rites imposcd
b) biinks on horroivers. The loÿns idcntiiicd by the Kespondent were long-tcmi
loans fullv securcd hy CLSl's land and mïchinery, lo'inç which typically carry
lower intirest rates than the commercial rates quoted by the ~espondent. It is
noteworthy that at the time these loans were issued ELSI's plant and machinery
(characterized as virtually worthless by the Respondent) was found to be suffi-
ciently valuable to secure the loans. Similarly, the proceeds realized by the sale
of the land and buildines were sufficientta oav off these loans in full.

1%7-1. In drtermining the purpitscs ol'th<requirition. the Rcspundent extracts
Iwo gcncral clïu,e, irom the se\.enth pïragraph of the Masur', requisition order
(1, Memorial, Annex 33) relating ta ihe need to protect the "general economic
public interest" and the "public order". This language obviously is simply a
repetition of the requirements necessary ta allow use of the ltalian laws cited in
paragraphs 8 and 9. In fact, the stated purposes of the requisition are quite clear
from the nrecedine oaraeraohs. The Mavor essentiallv wanted to aooease "a wide
and geneial movznt of Solidarity of a11public oprnion", inclu&& press criti-
cism and lahor unrest, by avoidinl: a shut-down of the plant and further "unfore-
seeahle" nuhlic disturbances
~otwichstandin~ the Respondent's answer to the Court that these purposes

were achieved, the Respondent's own administrative review of the requisition474 ELETTRONICA SICULA

shows that these purposes were not achieved. Certainly the purpose of avoiding
a shut-down of the plant as of April 1968 was no1 achieved; the Prefect of
Palermo concluded that "This is proved by the fact that the activity of the
Companywas neither resumed, neither mightit be resumed." (Memorial, Annex
76, 1, p. 362.) Further, the Prefect found that labor unrest continued since
"employees werestaying [in the plant] to protest for the nonresumption of the
activity and for dismissal of the whole personnel". (Memorial, Annex 76, 1,
p. 363.)As for the unforeseeable publicdisturbances, the Prefect found that "the
events subsequent to the requisition have clearly demonstrated the inefficacyof
the measure; this is proved by the fact that the parades and demonstrations of

protest followed one another, creating also a situation of perturbation of the
public order . . ."(Memonal, Annex 76, 1, p. 363.) Further, the welfare of the
ELSl workforce was not enhanced by the requisition. After the requisition,
production was virtually non-existent and the workers remained unemployed.
The sale of ELSl or its product lines as live businesses, by contrast, could have
secured long-term employment for the workforce.
With regard to the desire to mitigate criticism by the public or local press,the
Resoondent aovarentlv admits in its answer that if this werethe ~ ~ ~ ~ason for
the ;equisitioi,'then Le requisition would be arbitrary. Yet in considering the
pressure created by the local press, the Prefect ruled that the Mayor "issued the
order of reauisition as a meaiure mainlv directed 10emohasize his intent to face

the prohlrm in somr w;iy". (~rniori3l:~nnex 76, 1, p' 363) the United Sriitcs
h3s shown thsi ihis moiii,aiion isarhiirnry under ihc Tre~ty(Memorial. 1,pp. 76-
80). Furihsr. unlawful eo\crnnicni action undcrtakcn uiihoui rcrard to individual
rightsmainly 10mute Gblic criticism(whetherin the form of newspapereditorials
or public demonstrations) is unjustifiable and arhitrary, and must he considered
the antithesis and not the necessary consequence of a CreeSociety.
B.4. The Respondent states that the United States has provided an inaccurate
and misleading translation of a significant phrase of the Prefect's ruling. The
Respondent would translate "la causa giundica" as "the proper motivation"
rather than as "juridical cause". There can be no question that "la causa
giuridica" translates as "jundical cause". Further, ii is completely unacceptable
for the Respondent to challenge at this late date the translation of a decision

that was filed by the United States in its very first pleading. Not only did the
Respondent never challenge this translation through two rounds of written
pleadings, but the Respondent specifically discussed thisphrase in English
without an assertion that it was inaccurate. (Memorial, 1, p. 88.) The Court
should not accept the Respondent's sudden efforts a1 the close of these
nroceedin~sto cast asnersions on the translations ~rovided bv the United States
ip. 463, &ro) when'the Respondent was fully 'capable OF challenging these
documents throughout the lengthy-co~rse of the written and oral proceedings,
but failed todo so.
Moreover, whether the accurate translation of this phrase or the inaccurate
translation proposed by the Respondent is used, it is a complete distortion of the
obvious ruling by the Prefect to state that the Prefect simply found that the

Mayor was "mistaken in his forecast as to the eiï'ectof his order". The Prefect
clearly found that ihe order was without proper basis because the stated purpose
of continuing operation of the plant was completely inapposite to the Mayor's
suhsequent action.
lronically the Respondent argues that the requisition by itself was "in confor-
mity with the applicable laws and regulations" because the Respondent could
subsequently appeal to the Prefect, who, of course, eventually found that the
requisition was unlawful. This argument is spurious. The requisition violated CORRESPONDENCE 475

ltalian law the day it occurred, whether or not the Prefect so recognized 16

months later. Therefore the requisition was not "in conformity with applicable
laws and regulations" of Italy. No provision within Article III (2) states that
Article III (2) isonly violated once the conduct of the Contracting Party ispassed
upon by that Party's administrative and judicial organs. A violation of Article
II1 (2)takes effect(or "bites") immediately, and the fact that local administrative
and judicial organs suhsequently determine that the conduct was wrongful con-
finns the existence of - not avoids - a Treaty violation.
8.5. The Respondent asserts that il is "reasonable to assume" the public
prosecutor did not cnminally prosecute ELSi's management because the prosecu-
tor had "wholly incomplete knowledge". This assumption is hoth wrong and
irrelevant to the basic dispute hefore the Court. By filing a petition in
bankruptcy ELSl submitted its books and its activities to the scrutiny of the

court. Moreover, an excerpt of the hankruptcy judgment must be sent by the
court to the public prosecutor to enable the prosecutor to undertake a criminal
action, if appropriate, under Articles 17 and 238 of the Bankruptcy Law. In
addition, under Article 33 of the Bankruptcy Law, the curator is required to
submit to the court a report covering the responsibility of the dehtor in the
bankruptcy under criminal laws. If the court had any doubt about possible
breaches of criminal law by ELSI's directors, these would have been reflected
in criminal charges. (Pp. 302-303,supra.)
B.6. The Respondent's statement that the dismissal letter sent to the workers
violated applicable laws and regulations is wrong. First, any laws and regula-
tions that relate to the "collective dismissal" to which the Respondent refers
are not applicable to a company in liquidation. A company in liquidation

issues "individual dismissals" uiider ltalian law to al1 emolovees. ELSI rave
the notice required by law when it sent out letters to al1affecied employeës ai
the end of March.
The collective labor agreement to which the Respondent refers did not have
the effectof law. SeeDecree No. 8of the Italian Constitutional Court (8 Februarv
19661(ruling thiit a predecessor I~bor agrcenicnt did no1 hd\e the fircc of la)!',
le.. \\as noi ergu ot~~~icrI). ~dditiun io its \irist siimpliiincr wiih Iirlirn law
governin,: di\mi\sxl ~iicmpl<i~ec~E , LSI xlsii iultillrd the inieni <ihs i~illcctive
agreement. In the year preceding the requisition, ELSI management met periodi-
cally with the unions to infonn them as to ELSI's future. (See Affidavit of Rico
Merluzzzo, 1, Memorial, Annex 21, paras. 15-16.) Union management and the
workforce were specificallyaware that if the Respondent did not participate in
and back ELSI that Raytheon and Machlett liquidate ELSl's assets and discharge

its employees. Thus, the workforce had a full year's notice ofthe liquidation of
ELSI's assets.
Ravtheon and Macblett out offthe orderlv liauidationand dismissal ofworkers
for ;i;long 3s possible 10'~ite the Kespondeni ctery opportunity to iiseri the
orderl) Iiquid~tion. In the dismisial notice, tlic uorkcrs ucre proniised sutlicient
severance-o.. eaui.alent to the amount thev would have received had thev
rccei\ed longer noticc of their disniirs~ls ~s\ie haie prcviousl) shoun, thes;
promises uere noi "illusory" and wcre barked hy tirm iommitmrni\ irom R3)-
thcon. (P. 306..iirpro.ln ans etent, the quesiion of iioiiccoidismissal isirrclevant
to the basic disnute before ihe Court
H 7. ~either'~a~lheon nor M;içhlett \vas au,üre of 3n) ionliniiation of uork
in the ELSI plant following the requisition The Prefcst of P.ilernio foiind thai

the ;iciiviivof the conivdny wiisno1resunied thlemorial. Annex 76, 1, 31D 36? )
However,ëven assuming the Respondent iscorrect that "very limited
continued on the Nato Hawk line, this cannot be equated with resumption offun production in the plant, employment of the dismissed workers, or any

continuation of work on the other lines. Thus, the requisition did not reault in
keeping the plant open as the Respondent had earlier suggested. Following the
requisition, the plant and machinery fell into disuse and deteriorated rapidly in
value.
However, the letter suhmitted by the Respondent to support its position is
noteworthy on several points. First, it belies the Respondent's pnor assertions
that the plant was valueless:
"mhe Raytheon-Elsi plant represents a concret6 reality in the economic
life of Ourprovince and of the entire Sicilian Region. This reality consists in
equipment, facilities, highly skilled labour, a management staiï, domestic
and foreign commercial relationships, al1witnessing a social and economic
potential of substantial beanng . . .(P. 469, supra.)

"Fe] company [has] . . . an economic value composed not solely of
corporate investments but also of the skilland CO-operationof the personnel
and relating human element . . ."(Ibid.)
The letter belies the Respondent's prior assertionsabout the undesirability of
the plant's location in Sicily:

". . an area naturally preferable to any other industrial area because of the
presence on the spot of a complete plant and skilledengineering and labour
forces" (ibid.).
The letter heliesthe Respondent's prior assertions that no one would invest in
or purchase ELSI:

"As a rnatter of fact, there are definite indications that foreign groups,
with which negotiations are well under way, will very likely participate in
this new company." (P. 468, supra.)

The letter underscores the substantial value of the Nato Hawk line:
"The Hawk Department of the Palermo plant . . .has already acquired
the highest degree of specialization in this field." (Ibid.)

Questions/rom PresidenrRuda

1. The United States stands by its answer to the same question (p. 455, supra)
and offers the following comments on the Respondent's answer.
The United States strongly disputes the Respondent's assertion that "the
company's books were no1 in order". The books were maintained through
24 Aonl 1968when the records were turned over 10 the trustee in bankm~tcv.
The Gookswerepropcrly closcd and complete management report, wereprcpîred
Tor the months of October. November. and December 1967 Thc management
rrDort for Jdnuarv 1968hdd been ~re~aredindrafi form inMarch 1968.con~i~ient
wi'ththe normal pattern of closi& tke books 30 1060 days after the end of each
operating period.
The United States has demonstrated that ELSl had no obligation to file a
petition in bankmptcy under articles 5 or 6 of the Bankruptcy Law (a point
conceded by the Respondent, II, Rejoinder, Annex 32). Further, ELSl's capital
never fellbelow the statutory minimum established by article 2447 of the ltalian
Civil Code. Finally, ELSI's management was at no point in the situation con-
templated by article 217 of the bankruptcy law. See pages 65-71,supra.
Bycontrast, ELSI'sshareholders did have an entitlement as a matter of ltalian
law to liquidate ELSl's assets and pay ELSl's creditors. Proceeds from the sale CORRESPONDENCE 477

of ELSI's assets would have heen sufficient to pay al1creditors in full. Even if
ELSI's liabilitieshad at any point exceeded its assets (a point wedo not concede),
ELSI's shareholders were entitled to proceed witb the orderly liquidation under
one of several alternatives identified bv Professor Bonelli. (The Court should he
a.ri,arcihai ihc Kcspondent'i dexripi;on of the ro~in~rduro prei,t,nrivo3viiiliiblc
under Iialiiin13ulISInct)rr~vl;page467, Iine7, supro. should read "or" no1'and".)
2. The Cnitcd Siairs stands bv its îniwer io rhe siimcaucsti~~nin. 456. buoral
'- ..,
and oîïers the following comments on the Respondent's answer.
The United States strongly disputes the Respondent's implications that ELSI's
books were not kept in accordance with principles of "tmth" and "prudence".
ELSI's books were in strict adherence with both Italian and US accounting
principles. Thus, it is wrong for the Respondent to refer to the Column 3 values
as "actual" and to imply that the Column 1values were not.

From the earliest days of its control of ELSI, Raytheon instructed Fidital, its
Italian auditors, to prepare its audit reports reflecting three columns:

Per Iralian Books Adjusrments AmericanAccountingBasis

"Per Italian Books" represented the balances in conformance with Italian ac-
counting regulations; US accounting principles are not mandatory or necessarily
even acceptable in Italy. "Amencan Accounting Basis" reflected Raytheon's
reporting practices to its shareholders in conformance with US accounting prin-
ciples.
The major adjustment annually to the Italian books was the write-off of al1
deferred charges. The deferred charges had been consistently camed on the Italian
books without challenge hy the auditors or others for many years. The only

reason these charges were written off was that Amencan accounting standards
require al1 research, development and improvement costs to be wntten off as
incurred. Their write-or for American accountine standards in no wav sueeesAs~ ""~~~~
that the charges themselves are somehow suspect Zr not in accord with the actual
value of ELSI's assets.
In complying with Italian Bankruptcy Law, ELSI's management was entitled
to rely on the Italian books kept in accordance with ltalian accounting regu-
.-. .. ... .

As a separate matter, Mr. Timothy Lawrence of Coopers & Lybrand has
oresented his analvsis of the value that ELSl's assets would have realized had ~ ~~ ~ ~ ~ ~
ihe stockholders &en permitted to proceed with the orderly liquidation: that is,
ELSI's tangible and intangible assets were worth at least 17,132.7 million lire.
(Pp. 122-129, supra.)

14 March 1989

1 have the honour to acknowledge receipt of your letter of 13 March 1989,
setting out the comments of the United States on the written replies by Italy to
questions put by Members of the Cbamber during the oral proceedings in the
case concerning EleitronicaSiculaS.P.A. (ELSI). 1have the honour further to

transmit to you herewith a copy of the comments of ltaly on the written replies
of the United States to such questions.