INTERNATIONAL COURT OF JUSTICE

REPORTS OF JUDGMENTS,
ADVISORY OPINIONS AND ORDERS

CASE CONCERNING
ELETTRONICA SICULA S.p.A. (ELSI

(UNITED STATES OF AMERICA v. ITALY)

JUDGMENT OF 20 JULY 1989

1989

COUR INTERNATIONALE DE JUSTICE

RECUEIL DES ARRETS,
AVIS CONSULTATIFS ET ORDONNANCES

AFFAIRE
DE L’ELETTRONICA SICULA S.p.A. (ELST)

(ETATS-UNIS D’AMERIQUE c. ITALIE)

ARRET DU 20 JUILLET 1989
Official citation :

Elettronica Sicula S.p.A. (ELSI), Judgment,
C.J. Reports 1989, p. 15.

Mode officiel de citation:

Elettronica Sicula S.p.A. (ELSI), arrêt,
C.J. Recueil 1989, p. 15.

Sales number 5 6 2
N° de vente :

1989
20 July
General List
No. 76

15

INTERNATIONAL COURT OF JUSTICE
YEAR 1989

20 July 1989

CASE CONCERNING
ELETTRONICA SICULA S.p.A. (ELSD

(UNITED STATES OF AMERICA v. ITALY)

Diplomatic protection — Rule of exhaustion of local remedies — Applicability to
claim under treaty which does not mention the rule — Applicability to claim for
declaratory judgment — Allegation that objection barred by estoppel — Conditions
required for the satisfaction of the rule.

Alleged breaches of 1948 Treaty of Friendship, Commerce and Navigation
between Italy and United States, the Protocol and the 1951 Supplementary
Agreement thereto.

Article II of FCN Treaty — Alleged interference with shareholders’ right to
“control and manage” company, by requisition of its plant and equipment —
Meaning of qualifying phrase “in conformity with the applicable laws and regu-
lations” of Party — Relevance of municipal law — Possibility of disturbance of
normal exercise of rights during public emergencies and the like.

Article V, paragraphs 1 and 3, of FCN Treaty — “Constant protection and secu-
rity” of nationals of each Party “for their persons and property” — Standard of
protection required — Identification of “property” to be protected — Complaint of
occupation of property — Treaty provision not equivalent to a warranty that
property shall never in any circumstances be occupied or disturbed — Complaint
of delay in ruling an appeal against requisition.

Article V, paragraph 2, of FCN Treaty — Paragraph 1 of Protocol to FCN Treaty
— “The property of nationals... of either... Party shall not be taken...” —
Difference between English text (“taken”) and Italian text (“espropriati”)
— Disguised expropriation — Relevance of company’s financial situation.

Article I of Supplementary Agreement to FCN Treaty — Prohibition of “arbi-
trary or discriminatory measures .. . resulting particularly in” preventing effective
control and management of enterprises or impairing legally acquired rights —
Effect of word “particularly” — Definition of arbitrariness in international law
— Relevance of finding of municipal court to question whether act was to be classed

4
16 ELETTRONICA SICULA (JUDGMENT)

as arbitrary in international law — Whether order made in context of operating
system of law and remedies may be arbitrary measure.

Article VII of FCN Treaty — Right “to acquire, own and dispose of immovable
property or interests therein” — Difference between English text (“interests”) and
Italian text (“diritti reali”) — Standards of protection laid down by treaty.

JUDGMENT

Present: President Rupa; Judges Opa, AGO, SCHWEBEL, Sir Robert JENNINGS;
Registrar VALENCIA-OSPINA.

In the case concerning Elettronica Sicula S.p.A. (ELSD,
between

the United States of America,
represented by
The Honorable Abraham D. Sofaer, Legal Adviser, Department of State,
Mr. Michael J. Matheson, Deputy Legal Adviser, Department of State,
as Co-Agents;
Mr. Timothy E. Ramish,
as Deputy Agent;
Ms Melinda P. Chandler, Attorney/Adviser, Department of State,
Mr. Sean D. Murphy, Attorney/Adviser, Department of State,
The Honorable Richard N. Gardner, Ambassador to Italy (1977-1981);
Henry L. Moses Professor of Law and International Diplomacy, Colum-
bia University; Counsel to the Law Firm of Coudert Brothers,

as Counsel and Advocates;

Mr. Giuseppe Bisconti, Studio Legale Bisconti, Rome,

Mr. Franco Bonelli, Professor of Law, Genoa University; Partner, Studio
Legale Bonelli,

Mr. Elio Fazzalari, Professor of Civil Procedure, Rome University; Partner,
Studio Legale Fazzalari,

Mr. Shabtai Rosenne, Member of the Israel Bar; Member of the Institute of
International Law; Honorary Member of the American Society of Interna-
tional Law,

as Advisers,
and
the Republic of Italy

represented by

Mr. Luigi Ferrari Bravo, Professor of International Law at the University of
Rome; Head of the Legal Service of the Ministry of Foreign Affairs,

as Agent and Counsel;
17 ELETTRONICA SICULA (JUDGMENT)

Mr. Riccardo Monaco, Professor Emeritus at the University of Rome,
as Co-Agent and Counsel;

Mr. Ignazio Caramazza, State Advocate; Secretary-General of the Avvoca-
tura Generale dello Stato,

as Co-Agent and Advocate;

Mr. Michael Joachim Bonell, Professor of Comparative Law at the Univer-
sity of Rome,

Mr. Francesco Capotorti, Professor of International Law at the University of
Rome,

Mr. Giorgio Gaja, Professor of International Law at the University of Flor-
ence,

Mr. Keith Highet, Member of the Bars of New York and the District of
Columbia,

Mr. Berardino Libonati, Professor of Commercial Law at the University of
Rome,

as Counsel and Advocates;
assisted by

Mr. David Clark, LLB. (Hons), Member of the Law Society of Scotland,

Mr. Alberto Colella, Assistant Legal Adviser to the Ministry of Foreign
Affairs,

Mr. Alan Derek Hayward, Fellow of the Institute of Chartered Accountants
in England and Wales,

Mr. Pier Giusto Jaeger, Professor of Commercial Law at the University of
Milan,

Mr. Attila Tanzi, Assistant Legal Adviser to the Ministry of Foreign Affairs,

Mr. Eric Wyler, Maitre assistant of Public International Law at the Faculty of
Law of the University of Lausanne,
f

as Advisers,

THE CHAMBER OF THE INTERNATIONAL COURT OF JUSTICE formed to deal with
the case above mentioned,

composed as above,
after deliberation,
delivers the following Judgment:

1. By a letter dated 6 February 1987, filed in the Registry of the Court the
same day, the Secretary of State of the United States of America transmitted to
the Court an Application instituting proceedings against the Republic of Italy
in respect of a dispute arising out of the requisition by the Government of Italy
of the plant and related assets of Raytheon-Elsi S.p.A., previously known as
Elettronica Sicula S.p.A. (ELSI), an Italian company which was stated to have
been 100 per cent owned by two United States corporations. By the same letter,
the Secretary of State informed the Court that the Government of the
United States requested, pursuant to Article 26 of the Statute of the Court, that
the dispute be resolved by a Chamber of the Court.

6
18 ELETTRONICA SICULA (JUDGMENT)

2. Pursuant to Article 40, paragraph 2, of the Statute, the Application was at
once communicated to the Government of the Republic of Italy. In accordance
with paragraph 3 of that Article, all other States entitled to appear before the
Court were notified of the Application.

3. By a telegram dated 13 February 1987 the Minister for Foreign Affairs of
Italy informed the Court that his Government accepted the proposal put for-
ward by the Government of the United States that the case be heard by a Cham-
ber composed in accordance with Article 26 of the Statute; this acceptance was
confirmed by a letter dated 13 February 1987 from the Agent of Italy.

4. By an Order dated 2 March 1987, the Court, after recalling the request for
a Chamber and reciting that the Parties had been duly consulted as to the com-
position of the proposed Chamber in accordance with Article 26, paragraph 2,
of the Statute and Article 17, paragraph 2, of the Rules of Court, decided to
accede to the request of the Governments of the United States of America and
Italy to form a special Chamber of five judges to deal with the case, declared
that at an election held on that day President Nagendra Singh and Judges Oda,
Ago, Schwebel and Sir Robert Jennings had been elected to the Chamber, and
declared a Chamber to deal with the case to have been duly constituted by the
Order, with the composition indicated.

5. The Court further fixed time-limits, by the said Order, for the filing of a
Memorial by the United States of America and a Counter-Memorial by Italy,
which were duly filed within the time-limits. In its Counter-Memorial, Italy
presented an objection to the admissibility of the Application; by letters ad-
dressed to the Registrar on 16 November 1987, the Parties agreed, with refer-
ence to Article 79, paragraph 8, of the Rules of Court, that the objection should
“be heard and determined within the framework of the merits”. By an Order
dated 17 November 1987, the Chamber took note of that agreement, found that
the filing of further pleadings by the Parties was necessary, authorized the
filing of a Reply by the United States of America and a Rejoinder by Italy,
and fixed time-limits for these; the Reply and Rejoinder were duly filed
within those time-limits.

6. On 11 December 1988 Judge Nagendra Singh, President of the Chamber,
died. Following further consultations with the Parties with regard to the com-
position of the Chamber in accordance with Article 17, paragraph 2, of the
Rules of Court, the Court, by Order dated 20 December 1988, declared that
Judge Ruda, President of the Court, had that day been elected a Member of
the Chamber to fill the vacancy left by the death of Judge Nagendra Singh. In
accordance with Article 18, paragraph 2, of the Rules of Court, President
Ruda became President of the Chamber.

7. At 12 public sittings held between 13 February and 2 March 1989, the
Chamber was addressed by the following representatives of the Parties:

For the United States of America: The Honorable A. D. Sofaer
Mr. M. J. Matheson
Mr. T. E. Ramish
Ms M. P. Chandler
Mr. S. D. Murphy
The Honorable R. N. Gardner
Mr. G. Bisconti
Professor F. Bonelli
Professor E. Fazzalari
19 ELETTRONICA SICULA (JUDGMENT)

For Italy: Professor L. Ferrari Bravo
Professor R. Monaco
Mr. I. Caramazza
Professor M. J. Bonell
Professor F. Capotorti
Professor G. Gaja
Mr. K. Highet
Professor B. Libonati

8. The United States called as witnesses Mr. Charles Francis Adams (who
was examined by Mr. Sofaer and cross-examined by Mr. Highet) and Mr. John
Dickens Clare (who was examined by Ms Chandler and cross-examined by
Mr. Highet). The United States called as expert Mr. Timothy Lawrence (who
was cross-examined by Professor Bonell). Mr. Giuseppe Bisconti also ad-
dressed the Court on behalf of the United States; since he had occasion to refer
to matters of fact within his knowledge as a lawyer acting for Raytheon Com-
pany, the President of the Chamber acceded to a request by the Agent of Italy
that Mr. Bisconti be treated pro tanto as a witness. Mr. Bisconti, who informed
the Chamber that both Raytheon Company and Mr. Bisconti himself waived
any relevant privilege, was cross-examined by Mr. Highet. Italy called as expert
Mr. Alan Derek Hayward.

9. During the hearings questions were put to the Parties, and to the witnesses
and experts, by the President and Members of the Chamber; replies were given
orally or in writing prior to the close of the oral proceedings, with documents
in support. The Chamber decided further that each Party might comment in
writing on the replies of the other Party to a series of questions, put at a late
stage of the oral proceedings, and a time-limit was fixed for that purpose; written
comments were duly filed within that time-limit. A further question was put
to one Party after the close of the hearings and answered in writing; the other
Party was given an opportunity to comment on the answer.

10. In the course of the written proceedings the following submissions were
presented by the Parties:

On behalf of the United States of America,
in the Application:

“while reserving the right to supplement and amend this submission as
appropriate in the course of further proceedings, the United States
requests the Court to adjudge and declare as follows:

(a) that the Government of Italy has violated the Treaty of Friendship,
Commerce and Navigation between the United States of America and
the Italian Republic of 1948, in particular, Articles II, III, V and VII of
the Treaty, and Articles I and V of the 1951 Supplement; and

(b) that the Government of Italy is responsible to pay compensation to the
United States, in an amount to be determined by the Court, as
measured by the injuries suffered by United States nationals as a result
of these violations, including the additional financial losses which
Raytheon suffered in repaying the guaranteed loans and in not
20

ELETTRONICA SICULA (JUDGMENT)

recovering amounts due on open accounts, as well as expenses
incurred in defending against Italian bank lawsuits, in mitigating
the damage to its reputation and credit, and in pursuing its claim for
redress”;

inthe Memorial:

“the United States submits to the Court that it is entitled to a declaration
and judgment that:

(a) Italy — by engaging in the acts and omissions described above, which

(b)

(c)

prevented Raytheon and Machlett, United States corporations, from
liquidating the assets of their wholly-owned Italian corporation
ELSI and caused the latter’s bankruptcy, and by its subsequent actions
and omissions — violated the international legal obligations which it
undertook by the Treaty of Friendship, Commerce and Navigation
between the two countries, and the Supplement thereto, and in par-
ticular, violated:

- Article III (2), in that Italy’s actions and omissions prevented
Raytheon and Machlett from exercising their right to manage and
control an Italian corporation;

— Article V (1) and (3), in that Italy’s actions and omissions constituted

. a failure to provide the full protection and security as required by the
Treaty and by international law;

— Article V (2), in that Italy’s actions and omissions constituted a
taking of Raytheon’s and Machlett’s interests in property without
just compensation and due process of law;

- Article VII, in that these actions and omissions denied Raytheon
and Machlett the right to dispose of their interests in immovable
property on terms no less favorable than an Italian corporation
would enjoy on a reciprocal basis;

— Article I of the Supplement, in that the treatment afforded Raytheon
and Machlett was both arbitrary and discriminatory, prevented their
effective control and management of ELSI, and also impaired their
other legally acquired rights and interests ;

that, owing to these violations of the Treaty and Supplement, singly
and in combination, the United States is entitled to compensation in an
amount equal to the full amount of the damage suffered by Raytheon
and Machlett as a consequence, including their losses on investment,
guaranteed loans, and open accounts, the legal expenses incurred by
Raytheon in connection with the bankruptcy, in defending against re-
lated litigation and in pursuing its claim, and interest on such amounts
computed at the United States prime rate from the date of loss to the
date of payment of the award, compounded on an annual basis; and

that Italy accordingly should pay to the United States the amount of
US$12,679,000, plus interest, computed as described above”;
21

ELETTRONICA SICULA (JUDGMENT)

in the Reply:

“the United States submits to the Court that it is entitled to a declaration
and judgment that:

(a) the claims brought by the United States are admissible before the

Court since all reasonable local remedies have been exhausted;

(b) Italy — by engaging in the acts and omissions described above and in

(c)

the Memorial, which prevented Raytheon and Machlett, United States
corporations, from liquidating the assets of their wholly-owned Italian
corporation ELSI and caused the latter’s bankruptcy, and by its subse-
quent actions and omissions — violated the international legal obliga-
tions which it undertook by the Treaty of Friendship, Commerce and
Navigation between the two countries, and the Supplement thereto,
and in particular, violated:

~ Article III (2), in that Italy's actions and omissions prevented
Raytheon and Machlett from exercising their right to manage and
control an Italian corporation;

— Article V (1) and (3), in that Italy’s actions and omissions constituted
a failure to provide the full protection and security as required by the
Treaty and by international law;

— Article V (2), in that Italy’s actions and omissions constituted a
taking of Raytheon’s and Machlett’s interests in property without
just compensation and due process of law;

- Article VII, in that these actions and omissions denied Raytheon
and Machlett the right to dispose of their interests in immovable
property on terms no less favorable than an Italian corporation
would enjoy on a reciprocal basis;

— Article I of the Supplement, in that the treatment afforded Raytheon
and Machlett was both arbitrary and discriminatory, prevented their
effective control and management of ELSI, and also impaired their
other legally acquired rights and interests;

that, owing to these violations of the Treaty and Supplement, singly
and in combination, the United States is entitled to compensation in an
amount equal to the full amount of the damage suffered by Raytheon
and Machiett as a consequence, including their losses on investment,
guaranteed loans, and open accounts, the legal expenses incurred by
Raytheon in connection with the bankruptcy, in defending against re-
lated litigation and in pursuing its claim, and interest on such amounts
computed at the United States prime rate from the date of loss to the
date of payment of the award, compounded on an annual basis; and

(d) that Italy accordingly should pay to the United States the amount of

US$12,679,000, plus interest, computed as described above and in the
Memorial.”

On behalf of the Republic of Italy,

in the Counter-Memorial and in the Rejoinder:

10
22

ELETTRONICA SICULA (JUDGMENT)

“May it please the Court,

To adjudge and declare that the Application filed on 6 February 1987 by
the United States Government is inadmissible because local remedies have
not been exhausted.

If not, to adjudge and declare:

(1) that Article ITI (2) of the Treaty of Friendship, Commerce and Naviga-
tion of 2 February 1948 has not been violated;

(2) that Article V (1) and (3) of the Treaty has not been violated;

(3) that Article V (2) of the Treaty has not been violated;

(4) that Article VII of the Treaty has not been violated;

(5) that Article J of the Supplementary Agreement of 26 September 1951
has not been violated;

and, accordingly, to dismiss the claim.”

11. In the course of the oral proceedings the following submissions were

presented by the Parties:

On behalf of the United States of America,
at the hearing of 16 February 1989:

At

“The United States requests that the objection of the Respondent be
dismissed and submits to the Court that it is entitled to a declaration and
judgment that:

(1) the Respondent violated the international legal obligations which it
undertook by the Treaty of Friendship, Commerce and Navigation
between the two countries, and the Supplement thereto, and in par-
ticular, violated Articles III, V, and VII of the Treaty and Article I
of the Supplement; and

(2) that, owing to these violations of the Treaty and Supplement, singly
and in combination, the United States is entitled to reparation in an
amount equal to the full amount of the damage suffered by Raytheon
and Machlett as a consequence, including their losses on investment,
guaranteed loans, and open accounts, the legal expenses incurred by
Raytheon in connection with the bankruptcy, in defending against re-
lated litigation and in pursuing its claim, and interest on such amounts
computed at the United States prime rate from the date of loss to the
date of payment of the award, compounded on an annual basis; and

(3) that Italy accordingly should pay to the United States the amount of
$12,679,000 plus interest.”

the hearing of 27 February 1989 (afternoon) the Agent of the United States

confirmed that these were the final submissions of the United States.

On behalf of the Republic of Italy,
at the hearing of 23 February 1989, repeated as final submissions at the hearing

of

li

2 March 1989 (afternoon):

“May it please the Court,
A. To adjudge and declare that the Application filed on 6 February
23 ELETTRONICA SICULA (JUDGMENT)

1987 by the United States Government is inadmissible because local
remedies have not been exhausted.

B. If not, to adjudge and declare:

(1) that Article III of the Treaty of Friendship, Commerce and Navigation
of 2 February 1948 has not been violated;

(2) that Article V, paragraphs 1 and 3, of the Treaty has not been violated;

(3) that Article V, paragraph 2, of the Treaty, and the related provisions of
the Protocol to the Treaty, have not been violated;

(4) that Article VIT of the Treaty has not been violated;

(5) that Article I of the Supplementary Agreement of 26 September 1951
has not been violated; and

(6) that no other Article of the Treaty or the Supplementary Agreement
has been violated.

C. On a subsidiary and alternative basis only: to adjudge and declare
that, even if there had been a violation of obligations under the Treaty or
the Supplementary Agreement, such violation caused no injury for which
the payment of any indemnity would be justified.

And, accordingly, to dismiss the claim.”

CRE

12. The claim of the United States in the present case is that Italy has
violated the international legal obligations which it undertook by the
Treaty of Friendship, Commerce and Navigation between the two coun-
tries concluded on 2 February 1948 (“the FCN Treaty”) and the Supple-
mentary Agreement thereto concluded on 26 September 1951, by reason
of its acts and omissions in relation to, and its treatment of, two
United States corporations, the Raytheon Company (“Raytheon”) and
The Machlett Laboratories Incorporated (“Machlett”), in relation to the
Italian corporation Raytheon-Elsi S.p.A. (previously Elettronica Sicula
S.p.A. (ELSI), which was wholly owned by the two United States cor-
porations. Italy contests certain of the facts alleged by the United States,
denies that there has been any violation of the FCN Treaty, and contends,
on a subsidiary and alternative basis, that if there was any such violation,
no injury was caused for which payment of any indemnity would be justi-
fied.

13. In 1955, Raytheon (then known as Raytheon Manufacturing Com-
pany) agreed to subscribe for 14 per cent of the shares in Elettronica Sic-
ula S.p.A. Over the period 1956-1967, Raytheon successively increased its
holding of ELSI shares (as well as investing capital in the company in
other ways) to a total holding of 99.16 per cent of its shares. In April 1963
the name of the company was changed from Elettronica Sicula S.p.A. to
“Raytheon-Elsi S.p.A.”; it will however be referred to hereafter as
“ELSI”. The remaining shares (0.84 per cent) in ELSI were acquired in
April 1967 by Machlett, which was a wholly-owned subsidiary of Raytheon.
ELSI was established in Palermo, Sicily, where it had a plant for the
production of electronic components; in 1967 it had a workforce of

12
24 ELETTRONICA SICULA (JUDGMENT)

slightly under 900 employees. Its five major product lines were microwave
tubes, cathode-ray tubes, semiconductor rectifiers, X-ray tubes and surge
arresters.

14, During the fiscal years 1964 to 1966 inclusive, ELSI made an op-
erating profit, but this profit was insufficient to offset its debt expense or
accumulated losses, and no dividends were ever paid to its shareholders.
In June 1964, the accumulated losses exceeded one-third of the com-
pany’s share capital, and ELSI was thus required by Article 2446 of the
Italian Civil Code to reduce its equity from 4,300 million lire to 2,000 mil-
lion lire. The capital stock was therefore devalued by 2,300 million lire and
recapitalized by an equal amount subscribed by Raytheon. A similar
operation was necessary in March 1967. In February 1967, according
to the United States, Raytheon began taking steps to endeavour to make
ELSI self-sufficient. Raytheon and Machlett designated a number of
highly-qualified personnel to provide financial, managerial and technical
expertise, and Raytheon provided a total of over 4,000 million lire in re-
capitalization and guaranteed credit. By December 1967, according to
the United States, major steps had been taken to upgrade plant facilities
and operations.

15. Atthe same time, however, the Chairman of ELSI, and other senior
Raytheon officials, held numerous meetings, between February 1967 and
March 1968, with cabinet-level officials of the Italian Government and of
the Sicilian region, as well as representatives of the Istituto per la Ricostru-
zione Industriale (“IRI”), the Ente Siciliano per la Produzione Industriale
(“ESPI”), and the private sector. IRI was a holding company controlled
by Italy with extensive commercial interests, and dominated at this time
the telecommunications, electronics and engineering markets. ESPI was
the Sicilian Government industrial organization responsible for the
promotion of local development. The purpose of these meetings was
stated to be to find for ELSI an Italian partner with economic power and
influence and to explore the possibilities of other governmental support.
The management of Raytheon had formed the view that, “without a part-
nership with IRI or other equivalent Italian Governmental entity, ELSI
would continue to be an outsider to the Italian industrial community”;
such a partnership would, it was thought, “positively influence govern-
ment decision-making in economic planning”, and enable ELSI also to
secure benefits and incentives under Italian legislation designed to favour
industrial development in the southern region, the Mezzogiorno. Evi-
dence has been given that the management of ELSI was advised that the
company was entitled to such Mezzogiorno benefits, but the Chamber has
been told by Italy that it was not so entitled. The support of the national
and regional governments was regarded as particularly important
because in numerous markets crucial to ELSI’s operations and success

13
25 ELETTRONICA SICULA (JUDGMENT)

the Italian Government, through IRI or otherwise, played a dominant role
as a customer. A detailed “Project for the Financing and Reorganization
of the Company” was prepared and submitted to ESPI in May 1967.

16. The management of ELSI took the view that one of the reasons for
its lack of success was that it had trained and was employing an exces-
sively large labour force. In June 1967 it was decided to dismiss some 300
employees; under an Italian union agreement this involved a procedure of
notifications and negotiations. On the intervention of ESPI, an alternative
plan was agreed to whereby 168 workers would be suspended from 10 July
1967, with limited pay by ELSI for a period not exceeding six weeks. After
a training programme during which the workers were paid by the Sicilian
Government, it was contemplated that ELSI would endeavour to re-
employ the suspended employees. The necessary additional business to
make this possible was not forthcoming, and the suspended employees
were dismissed early in March 1968. A number of random strikes had
occurred in early 1968, and as a result of the dismissals a complete strike
of the plant occurred on 4 March 1968. According to the Government of
Italy, this strike also involved an occupation of the plant by the workforce,
which occupation was still continuing when the plant was requisitioned
on | April 1968 (paragraph 30 below). The United States claims however
that strikes and “sit-ins” prior to the requisition were only sporadic and
that only after the filing of a petition in bankruptcy on 26 April 1968 (para-
graph 36 below) did the workers actually occupy the plant for a sustained
period.

17. When it became apparent that the discussions with Italian officials
and companies were unlikely to lead to a mutually satisfactory arrange-
ment to resolve ELSI’s difficulties, Raytheon and Machlett, as share-
holders in ELSI, began seriously to plan to close and liquidate ELSI to
minimize their losses. General planning for the potential liquidation of
ELSI began in the latter part of 1967, and in early 1968 detailed plans were
made for a shut-down and liquidation at any time after 16 March 1968.
On 2 March 1968, the company’s books and accounting records, and,
according to a witness at the hearings, “quite a lot of inventory”, were
transferred from its offices in Palermo to a regional office in Milan. On
7 March 1968, Raytheon formally notified ELSI that, notwithstanding
ELSI’s need for further capital, Raytheon would not “subscribe to any
further stock which might be issued by Raytheon-Elsi or to guarantee
any additional loans which might be made by others to Raytheon-Elsi”.

14
26 ELETTRONICA SICULA (JUDGMENT)

18. This decision was stated to have been taken, inter alia, on review of
the proposed balance sheet showing the position on 30 September 1967;
that balance sheet showed the book value of the assets of ELSI as
17,956.3 million lire, its total debt as 13,123.9 million lire; the accumulated
losses of 2,681.3 million lire had reduced the value of the equity (capital
stock and capital subscription account) from 4,000 million lire to
1,318.7 million lire. The total debt included a number of liabilities to one
United States bank and several Italian banks, some (but not all) of which
were guaranteed by Raytheon. For the purposes of a possible liquidation,
an asset analysis was prepared by the Chief Financial Officer of Raytheon
showing the expected position on 31 March 1968. This showed the book
value of ELSI’s assets as 18,640 million lire; as explained in his affidavit
filed in these proceedings, it also showed “the minimum prospects of re-
covery of values which we could be sure of, in order to ensure an orderly
liquidation process”, and the total realizable value of the assets on this
basis (the “quick-sale value”) was calculated to be 10,838.8 million lire. A
balance sheet subsequently prepared to show the position at 31 March
1968, extrapolated from the balance sheet at 30 September 1967, showed
the book value of total assets as 17,053.5 million lire and total debt of
12,970.6 million lire.

19. During the hearings, at the request of the Agent of Italy, the Cham-
ber asked the Government of the United States to produce the financial
report showing ELSI’s financial position at 30 September 1967, from
which the figures for the book value of its assets had been derived. The
report, prepared by Raytheon’s Italian auditors, and dated 22 March
1968, was produced in evidence. The balance sheet attached thereto
showed two sets of figures; the first of these, corresponding to the figures
for assets and liabilities set out in paragraph 18 above, gave the figures as
recorded in the company’s books of account. The second set of figures
was based on the first set, but a number of adjustments had been made
in accordance with the financial accounting policy of Raytheon “In
order to assure comparability of the financial information reported from
abroad” by its subsidiary companies. According to the Co-Agent of
the United States, the major difference between the accounts on the
Italian basis and the Raytheon basis was

“the item of Deferred Charges, which for the most part represented
the cost of developing new lines and improving product quality. This
asset is carried on the Italian books but is routinely written off by
Raytheon Company.”

The adjustment of the item for “Deferred Charges” reduced the total
assets figure by 1,653 million lire. Taking all adjustments into account,

15
27 ELETTRONICA SICULA (JUDGMENT)

the second set of figures gave a value of 14,893.9 million lire for the assets,
and 15,775.2 million lire for the liabilities. The auditors stated in their
covering letter to Raytheon accountants that

“The adjustments made by the company in preparing the above
mentioned balance sheet and statement of income and accumulated
losses have not, at the date of this report, been recorded in the books,
essentially for tax reasons. Accordingly, the accompanying financial
statements are not in agreement with the company’s books of
account.”

Among the “Notes on Financial Statements” attached to the accounts by
the auditors was the following:

“10. The adjusted accumulated losses at September 30, 1967
exceeded the total of the paid up capital stock, capital reserve and
Stockholders subscription account by an amount of 881.3 million
lire. Should this become ‘officially’ the case (e.g. should the adjust-
ments made in arriving at this total of accumulated losses be entered
in the company’s books of account), under Articles 2447 and 2448 of
the Italian Civil Code the directors would be obliged to convene a
Stockholders’ Meeting forthwith to take measures either to cover the
losses by providing new capital or to put the company into liquida-
tion.”

The auditors also expressed reservations on two other items totalling
1,168.5 million lire.

20. The officials of Raytheon and ELSI were nevertheless advised by
their Italian counsel in March 1968 that “ELSI’s capital, after taking into
account losses to date at that time, was well in excess of the minimum
statutory requirement” (1 million lire) under Articles 2447 and 2448 of the
Italian Civil Code, which provide that if action is not taken to restore the
capital to the required minimum, the company is dissolved as a matter of
law. In the view of ELSI’s counsel, “it was therefore possible under Italian
law for ELSI’s shareholders to plan an orderly liquidation of the com-
pany”.

21. Throughout this Judgment this phrase “orderly liquidation” is used
solely in the sense in which it was employed by the officers of ELSI and by
the representatives of the United States, i.c., to denote the operation
planned in 1967-1968 by ELSI’s management for the sale of the business
or of its assets, en bloc or separately, and the discharge of ELSI’s debts,
fully or otherwise, out of the proceeds, the whole operation being under
the control of ELSI’s own management.

22. According to the United States, the chief objectives in the planned
orderly liquidation were to conserve the assets and preserve as many of the

16
28 ELETTRONICA SICULA (JUDGMENT)

characteristics of a going concern as possible in order to attract and inter-
est prospective buyers; it was planned to advertise ELSI’s assets widely,
offering them both as a total package and as separate items — the distinct
manufacturing lines of the plant. The intention was, if the sums realized
by the sale of the assets were sufficient, to pay all creditors in full. Plan-
ning had however also proceeded on the basis of the “quick-sale” valua-
tion of the assets (paragraph 18 above), which, it was recognized, was less
than the total liabilities of the company. It was not considered possible to
continue normal production; the personnel was to be dismissed, with the
exception of some 120 key employees needed for the wind-up operation
and for continuing limited production for a time to meet (in particular)
military contracts and maintain customer contact.

23. The intended treatment of creditors in the planned liquidation, in
the event of only the “quick-sale” value being realized, was stated by the
Financial Controller of Raytheon to have been as follows:

“Tdeally, we would settle first with the small creditors, subject, of
course, to the agreement of the major creditors, in order to minimize
the administrative effort during liquidation. Secured and preferred
creditors would take priority and would be paid when the assets used
for collateral were sold. Major unsecured creditors were to be paid
on a pro rata basis from within the funds realized from the sale of
assets. Then Raytheon would be called upon to satisfy any guaran-
teed creditor to the extent not already paid from asset sale proceeds.
We calculated that the secured and preferred creditors would receive
100 per cent of their outstanding claims, while the unsecured major
creditors who were not covered by Raytheon guarantees would
realize about 50 per cent of their claims. The latter creditors were
certain banks and Raytheon and its subsidiaries. We were confident
that an orderly liquidation of this type would be acceptable to the
creditors as it was much more favorable than could be expected
through bankruptcy.”

According to the United States, settlement with all the smaller creditors
was regarded as a priority

“to reduce the creditors to a manageable number and also to elimi-
nate the risk that a small irresponsible creditor would take preci-
pitous action which would raise formidable obstacles in the way of
orderly liquidation”.

Appended to one of the affidavits by officers of Raytheon and ELSI an-
nexed to the United States Memorial were detailed calculations showing
(inter alia) various valuations of ELSI’s assets, analysis of the company’s

17
29 ELETTRONICA SICULA (JUDGMENT)

liabilities and their priority in liquidation, and estimated distribution
of the proceeds of disposal of assets calculated both on book value and
alternatively on a “minimum liquidation value”.

24. It is contended by the United States that notwithstanding
Raytheon’s formal notification on 7 March 1968 that it would not sub-
scribe to any further stock or guarantee any additional loans (para-
graph 17 above, in fine), Raytheon was ready to give certain financial
support and guarantees to enable the orderly liquidation to proceed, as
distinct from making more funds available to ELSI for continued opera-
tions. According to officials of ELSI, if Raytheon had handled the liqui-
dation as planned, it would have guaranteed the settlements outlined in
the previous paragraph; they stated that

“Demonstrating its support of the liquidation plan, Raytheon
organized to provide funds to ELSI in advance of the sale of its assets
so that disbursements could easily be made to the small creditors and,
as a first step, transferred 150 million lire to the First National
City Bank branch in Milan specifically for that purpose.”

Evidence was given at the hearing that payment of small creditors out of
these funds was begun, but then stopped by the creditor banks because
this was “showing preference”. It was contemplated that Raytheon would
take over ELSI’s accounts receivable (subsequently valued at some
2,879 million lire) at face value, thus supplying immediate cash resources.

25. Inthe view of ELSI’s legal counsel at the time (paragraph 20 above)
and of Italian lawyers consulted by the United States, ELSI was in March
1968 entitled to engage in orderly liquidation of its assets, was under no
obligation to file a petition in bankruptcy, and was never in jeopardy of
compulsory dissolution under Article 2447 of the Italian Civil Code, and
was at all times in compliance with Article 2446 of the Code. It has how-
ever been contended by Italy that ELSI was in March 1968 unable to pay
its debts, and its capital of 4,000 million lire was completely lost; accord-
ingly, an orderly liquidation was not available to it, but as an insolvent
debtor it was under an obligation to file a petition in bankruptcy. The dis-
agreement turns on the value of ELSI’s assets for this purpose at 31 March
1968: the Parties have made conflicting statements of what is correct
accounting practice for the purposes of compliance with the relevant
requirements of Italian law. It has also been observed by Italy that, whether
or not ELSI was insolvent, the procedure contemplated did not corre-
spond to a voluntary liquidation as provided for in Article 2450 of the
Italian Civil Code; under that procedure a liquidator has to be appointed
by the shareholders, or if they fail to do so, by the Tribunal. According to
one expert appearing on behalf of Italy, ELSI being insolvent the only

18
30 ELETTRONICA SICULA (JUDGMENT)

course open to it in order to avoid the duty of filing a petition in bank-
ruptcy was to request to the tribunal to be admitted to the procedure of
judicial settlement (“concordato preventivo”) under Articles 160 et seq. of
the Italian Bankruptcy Act; this would have required proof that at least
40 per cent of the unsecured claims would be met. The expert appearing
on behalf of the United States however stated that apparent inability to
pay all creditors at 100 per cent is not fatal to voluntary and orderly liqui-
dation. In this context he mentioned in particular the practice of “private
settlement” (“concordato stragiudiziale”).

26. The management of ELSI was conscious that a financial crisis was
imminent, and during the period from September 1967, the responsible
officers of the company were keeping a close watch on the declining funds
to ensure that the company did not reach a point where continued opera-
tion would be contrary to Italian law. At 4 meeting held on 21 February
1968 between representatives of Raytheon and ELSI and the President of
the Sicilian region, the Chairman of ELSI “drew a precise time chart
showing: (a) February 23 — Board Meeting; (b) February 26 to 29 —
inevitable bank crisis; (c) March 8 — we run out of money and shut
the plant”; the hand-written minutes of that meeting record also that
“the date of March 8 was stressed repeatedly as the absolute limit for the
shut-down due to a total financial crisis”.

27. On 16 March 1968, the Board of Directors of ELSI met to consider
areport on the financial situation, and concluded “that there is no alterna-
tive to the discontinuation of the company’s activities”; the Board

“decided the cessation of the company’s operations, to be carried out

as follows:

(1) production will be discontinued immediately;

(2) commercial activities and employment contracts will be termi-
nated on March 29, 1968”.

This decision was notified to the employees of ELSI by a letter of
16 March 1968. On 28 March 1968, a meeting of shareholders of ELSI was
held, at which it was decided (inter alia) “to ratify the resolutions adopted
by the Board of Directors at the meeting of March 16, 1968, and hence to
agree that the Company cease operations”. Meetings with Italian officials
however continued up to 29 March 1968; the Italian authorities continued
to give broad assurances of an intervention by ESPI, and vigorously
pressed ELSI not to close the plant and not to dismiss the workforce, but
the officials of the company insisted that this was inevitable unless more
capital was forthcoming. On 29 March 1968 letters of dismissal were
mailed to the employees of ELSI.

19
31 ELETTRONICA SICULA (JUDGMENT)

28. The Managing Director of ELSI had a meeting early on the morn-
ing of 31 March 1968 with the President of the Sicilian region, Mr. Carollo,
at which the latter stated that the Italian Prime Minister had said that a
company would be formed by ESPI and IMI (Istituto Mobiliare Italiano)
to deal with the acquisition of ELSI’s assets, and that a holding company
would be formed which would eventually own ELSI. Mr. Carollo con-
tinued by saying that “to keep the people in Palermo and avoid an exodus
to other jobs, and to protect the plant and machinery, the plant would be
requisitioned ...”. On 1 April 1968 representatives of the company met
representatives of the bank creditors of ELSI to discuss the company’s
plans for an orderly liquidation. According to the United States, ELSI’s
representatives stated that Raytheon was not prepared to provide any
further financial support to ELSI either by way of capital, loans, advances,
or guarantees, but also informed the banks of the arrangement (referred
to in paragraph 24 above) which would provide for ELSI’s immediate
cash needs in such an orderly liquidation through the sale to Raytheon
of ELSI’s accounts receivable at 100 per cent of face value, the proceeds
being used to pay off the small creditors and to meet payroll and sever-
ance pay claims as well as other pressing priority obligations.

29. No agreement was reached at that meeting; certain of the banks
requested more information, and another meeting was to be held later
with an agreed agenda. Subsequently ELSI’s representatives learnt that
the plant had been requisitioned. According to the United States, and in
the view of the officers of Raytheon and ELSI, there was reason to believe
that in a liquidation the creditor banks would have accepted a settlement
of their claims on payment of 40 to 50 per cent of each, but no independent
evidence is available that such was the banks’ attitude at that time. It does
not appear from the evidence that the banks were asked specifically at the
meeting of 1 April 1968 whether they would co-operate on the basis of a
guaranteed 50 per cent of their claims; on the contrary, it was contended
on behalf of the United States by ELSI’s then legal adviser that

“There is no evidence of bank negotiations at the time of the requi-
sition because at the time the stockholders were fully confident that
ELSI’s assets would have recovered book value, and there was no
need at the time to start any such negotiations. What the stockholders
and ELSI’s Board were seeking at the time was an understanding
with the banks on the manner and timing of an orderly liquidation.”

20
32 ELETTRONICA SICULA (JUDGMENT)

According to the same legal adviser, the banks were ready, during negotia-
tions in September-October 1968, after ELSI had been declared bankrupt,
to accept settlement on the basis of 40 per cent or 50 per cent payment (see
paragraph 37 below).

30. On 1 April 1968 the Mayor of Palermo issued an order, effective
immediately, requisitioning ELSI’s plant and related assets for a period
of six months. The text of this order, in the translation supplied by the
United States, was as follows:

“The Mayor of the Municipality of Palermo,

Taking into consideration that Raytheon-Elsi of Palermo has
decided to close its plant located in this city at Via Villagrazia, 79,
because of market difficulties and lack of orders:

That the company has furthermore decided to send dismissal
letters to the personnel consisting of about 1,000 persons;

Taking notice that ELSI’s actions, beside provoking the reaction of
the workers and of the unions giving rise to strikes (both general and
sectional) has caused a wide and general movement of solidarity of
all public opinion which has strongly stigmatized the action taken
considering that about 1,000 families are suddenly destituted;

That, considering the fact that ELSI is the second firm in order of
importance in the District, because of the shutdown of the plant
a serious damage will be caused to the District, which has been so
severely tried by the earthquakes had during the month of January
1968;

Considering also that the local press is taking a great interest in the
situation and that the press is being very critical toward the authori-
ties and is accusing them of indifference to this serious civic prob-
lem;

That, furthermore, the present situation is particularly touchy and
unforeseeable disturbances of public order could take place;

Taking into consideration that in this particular instance there is
sufficient ground for holding that there is a grave public necessity
and urgency to protect the general economic public interest (already
seriously compromised) and public order, and that these reasons jus-
tify requisitioning the plant and all equipment owned by Raytheon-
Elsi located here at Via Villagrazia 79;

Having noted Article 7 of the law of 20 March 1865 No. 2248 enclo-
sure €;
Having noted Article 69 of the Basic Regional Law EE.LL.,

21
33 ELETTRONICA SICULA (JUDGMENT)

ORDERS

the requisition, with immediate effect and for the duration of six
months, except as may be necessary to extend such period, and with-
out prejudice for the rights of the parties and of third parties, of the
plant and relative equipment owned by Raytheon-Elsi of Palermo.

With a subsequent decree, the indemnification to be paid to said
company for the requisition will be established.”

The order was served on the company on 2 April 1968.

31. On 6 April 1968 the Mayor issued an order entrusting the manage-
ment of the requisitioned plant to Mr. Aldo Profumo, the Managing Di-
rector of ELSI, for the purpose, inter alia, of “avoiding any damage to the
equipment and machinery due to the abandoning of all activity, including
maintenance”. Mr. Profumo declined to accept this appointment, and on
16 April 1968 the Mayor wrote to Mr. Silvio Laurin, the senior director,
appointing him temporarily to replace Mr. Profumo “in the same capa-
city, with the same powers, functions and limitations”, and Mr. Laurin
accepted this appointment. The company management requested another
of its directors, Mr. Rico Merluzzo, to stay at the plant night and day
“to preclude local authorities from somehow asserting that the plant
had been ‘abandoned’ by ELSI”.

32. On 9 April 1968 ELSI addressed a telegram to the Mayor of Pal-
ermo, with copies to other Government authorities, claiming (inter alia)
that the requisition was illegal and expressing the company’s intention to
take all legal steps to have it revoked and to claim damages. On 12 April
1968 the company served on the Mayor a formal document dated 11 April
1968 inviting him to revoke the requisition order. The Mayor did not re-
spond and the order was not revoked, and on 19 April 1968 ELSI brought
an administrative appeal against it to the Prefect of Palermo, who was
empowered to hear appeals against decisions by local governmental
officials. The decision on that appeal was not given until 22 August 1969
(paragraph 41 below); in the meantime however the requisition was
not formally prolonged, and therefore ceased to have legal effect
after six months, more than four months after the bankruptcy of ELSI
had been declared (paragraph 36 below).

33. As noted above (paragraph 16) the Parties disagree over whether,
immediately prior to the requisition order, there had been any occupation
of ELSI’s plant by the employees, but it is common ground that the plant
was so occupied during the period immediately following the requisition.
On 19 April 1968 the representatives of the company stated, in an appeal
against the requisition addressed to the Prefect of Palermo, that there had
at that time been no occupation of the plant as a consequence of the dis-
missal of the employees on 29 March 1968, but that on 30 March 1968 a
group of representatives of the personnel went to the plant to talk to the

22
34 ELETTRONICA SICULA (JUDGMENT)

company executives and “peacefully remained thereafter all day on the
premises”, and on subsequent days a small group of employees wandered
about on the premises. The Mayor of Palermo, in an affidavit, has stated
that

“The occupation of the plant by the employees (which started well
before the requisition) turned out to be of a ‘cooperative’ nature after
the requisition and was no obstacle to the continuation of those acti-
vities which were possible under the circumstances”,

and an official of the Municipality of Palermo has stated, in an affidavit,
that “there were no problems such as ‘hard’ picketing” and that one of the
production lines was re-activated and “we proceeded regularly with the
contracts in hand”. According to an affidavit filed by the United States
“the plant sat idle for the remainder of 1968”, but Italy has produced evi-
dence showing that some work in progress was continued and completed
in the months following the requisition, in particular for the Nato Hawk
programme.

34. On 19 and 20 April 1968 meetings were held between officials of
Raytheon and the President of the Sicilian region, Mr. Carollo, who stated
that “the Regional and Central Governments had reached agreement to
form a management company with IRI participation to operate ELSI”
and invited Raytheon to join the management company. The proposal
would have entailed the contribution by ELSI of new capital and its as-
suming complete responsibility for past debts; in the discussion Mr. Car-
ollo stated that “the Region now has a single goal, to keep the workers
employed”. At the request of Raytheon, Mr. Carollo, on 20 April 1968
supplied Raytheon with a memorandum to provide the company with
“some fundamental elements of judgment”. In that memorandum he
explained that it was impossible for the time being for Raytheon to liqui-
date ELSI, for the following reasons:

“1. Nobody in Italy will purchase /Nessuno in Italia comprera],
that is to say IRI will not purchase, neither for a low nor for a high
price, the Region will not purchase, private enterprise will not
‘purchase. Let me add that the Region and IRI and anybody else who
has any possibility to influence the market will refuse in the most
absolute manner to favor any sale while the plant is closed.

2. The Banks, which have outstanding credits for approximately
16 billion Lire, cannot and will not accept any settlement even at the
cost of dragging the Company into litigation on an international
level. I mean to refer to Raytheon and not to ELSI because the dis-
tinction between ELSI and Raytheon is not found to be admissible,
since any and all financing was granted to ELSI based on the moral

23
35 ELETTRONICA SICULA (JUDGMENT)

guarantee of Raytheon, whose executives have always negotiated
said financing.

3. Anyway, it is known in Italy that one can enforce the claims
directly against Raytheon because it has interests and revenues in our
country also outside ELSI.

It is obvious that every attempt will be made (even at the cost of
long litigation) to obtain from Raytheon what is owed by ELSI.

4. Inthe event that the plant will be kept closed, waiting for Italian
buyers who will never materialize, the requisition will be maintained
at least until the courts will have resolved the case. Months will go
by...”

35, On 26 April 1968 the Chairman of the Board of ELSI wrote to
Mr. Carollo formally rejecting the proposal for participation in the new
management company; in his view the proposal “was a temporary care-
taker measure which would not solve the fundamental problem, namely
keeping ELSI in Sicily and making it a viable and vital industry”, and that
it “would only aggravate ELSI’s critical financial condition”. The letter
continued : “We are therefore forced to file [a] voluntary petition for bank-
ruptcy, as required by Italian law.”

36. In view of what had been said by Mr. Carollo that the requisition of
the plant would be maintained for months, “at least until the courts will
have resolved the case”, ELSI’s Italian counsel advised as follows:

“The disposability of ELSI’s assets was a fundamental prerequi-
site to ELSI’s shareholders’ ability to take ELSI through an orderly
liquidation; they were relying on the proceeds of these sales in large
part to pay ELSI’s creditors in an orderly manner. Without the ability
to dispose of its assets, ELSI would not have the liquidity needed to
pay its debts as they came due and therefore would soon become
technically insolvent under Italian law.

I advised ELSI’s directors that they had an obligation to file a peti-
tion for a declaration of bankruptcy, failing which they could be held
personally liable pursuant to Article 217 of the Bankruptcy Law,
Royal Decree of March 16, 1942, No. 267.”

On 25 April 1968 the Board of Directors voted to file a voluntary petition
in bankruptcy, and the bankruptcy petition was filed on 26 April 1968.
The petition referred to the requisition order of 1 April 1968 and stated
(inter alia):

“Because of the order of requisition, against which the Company

24
36 ELETTRONICA SICULA (JUDGMENT)

has in due time filed an appeal, the Company has lost the control of
the plant and cannot avail itself of an immediate source of liquid
funds; in the meanwhile payments have become due (as for instance
instalments of long-term loans; an instalment of Lit. 800,000,000 to
Banca Nazionale del Lavoro became due on April 18, 1968 and the
note therefor has been or will be protested, etc.); it is acknowledged
that it is impossible for the Company to pay such sums with the funds
existing or available such impossibility being due to the events of
these last weeks .. .”

A decree of bankruptcy was issued by the Tribunale di Palermo on 16 May
1968, and a Palermo lawyer was appointed curatore (trustee in bank-
rupicy). A creditors’ committee of five members was appointed, com-
posed of two representatives of ELSI’s employees, two representatives of
bank creditors, and a representative of Raytheon Europe International
Company (“Raytheon Europe”) (the European management subsidiary
of, and wholly owned by, Raytheon), which had submitted a claim as
creditor in the bankruptcy. Raytheon itself and another of its subsidi-
aries, Raytheon Service Company, had unsecured claims against ELSI of
some 1,140 million lire for goods and services they had advanced to ELSI
on unsecured open accounts. On advice of Italian counsel, however,
Raytheon and Raytheon Service Company did not file claims in the bank-
ruptcy proceedings because it was clear that they would not receive
enough in the bankruptcy to justify their filing costs.

37. From April 1968 onwards discussions were held between
Raytheon’s Italian counsel, representatives of the creditor banks and offi-
cials of the Italian Government, with a view to the takeover of ELSI by a
company owned by the Italian Government and a settlement with the
ELSI creditors. This proposed settlement involved the grant to the new
company by Raytheon of a technical license (to use Raytheon patents and
know-how) of the same scope as ELSI had; the payment by Raytheon of
the debts of ELSI which it had guaranteed, but no others, and a formal
release and indemnity of Raytheon in this latter respect; and a waiver by
Raytheon of its rights of subrogation resulting from payment of the guar-
anteed debts. According to Raytheon’s Italian counsel, he was told by
Italian Government officials in October 1968 that the majority of the
Italian creditor banks were agreeable to a settlement on payment of
40 per cent of their claims, and that only one bank was holding out for
50 per cent. In July, a statement had been made in the Italian Parliament
by the Minister of Industry, Commerce and Crafts, which has been sub-
ject to differing interpretations, but which put forward as a fact the
establishment by the Sicilian region and other public agencies of a
management company, which would allow productive activities to be
resumed until such time as the financial problems of ELSI could be

25
37 ELETTRONICA SICULA (JUDGMENT)

finally resolved, if possible through settlement out of court. On 13 No-
vember 1968 the Italian Government issued a press communiqué which
stated that

“while the STET Group [Societa finanziaria telefonica, an affiliate
or subsidiary of IRI] remains committed to build a new plant in
Palermo for the production of telecommunication products, the
IRI-STET Group, urged by the Government, after the examination
of alternative solutions which proved unfeasible, stated its willing-
ness to intervene in the take-over of the [ELSI] plant in the organi-
zation of new lines of production”.

According to the communiqué, the conditions of STET’s intervention
were to be agreed between the STET Group and the authorities of the
Sicilian region.

38. The court dealing with the bankruptcy ordered an auction of
ELSI’s premises, plant and equipment to be held on 18 January 1969, and
set a minimum bid of 5,000 million lire. This auction, and the subsequent
auctions mentioned below, were advertised in leading newspapers both in
Italy and in Belgium, Japan, the Netherlands, the United Kingdom and
the United States. No bids were received at this auction, and a second
auction was set for 22 March 1969, this time with the inclusion also of the
entire inventory at the plant and elsewhere, the minimum bid being set at
6,223,293,258 lire. In the meantime negotiations were being carried on for
a takeover of the plant by an IRI subsidiary and the re-employment of
most of ELSI’s former staff. It was reported in the Sicilian press, first that
on 18 March 1969 it had been agreed that IRI would acquire ELSTs assets,
beginning with a lease of the plant for 150 million lire, and secondly that
the former President of Sicily, Mr. Carollo, had stated at a public meet-
ing on 5 April 1969 that there had been a written agreement with IRI in
October 1968 that

“entailed the acquisition of the [ELSI] factory by IRI for the sum of
four billion lire. It was even agreed that IRI would be absent from the
first auction, participating instead in the second one, where the basic
price was precisely four billion lire”.

39. No bids were received at the second auction. A week later a propo-
sal to lease and re-open the plant was made to the trustee in bankruptcy by
ELTEL (Industria Elettronica Telecommunicazioni S.p.A.), a subsidiary
of IRI set up in December 1968. The terms proposed for the lease were not
acceptable as such to the creditors’ committee, which did however recom-

26
38 ELETTRONICA SICULA (JUDGMENT)

mend (inter alia) that it should be granted if ELTEL agreed to purchase all
ELSDP’s inventorial raw material for 1,800 million lire; the representative
of Raytheon Europe on the committee vigorously opposed the lease. The
trustee in bankruptcy however recommended that the lease be granted on
the terms requested, and on 8 April 1969 the bankruptcy judge so directed.
Raytheon Europe appealed against this decision but without success. A
third auction was scheduled for May 1969; in April ELTEL proposed to
buy the work in progress — the material left on ELSI’s production lines
when the plant was requisitioned — for 105 million lire; this had been
valued in the course of the bankruptcy proceedings at 217 million lire.
Raytheon Europe’s representative on the creditors’ committee opposed
this sale, but was outvoted.

40. The third auction of ELSI’s premises, plant and equipment and in-
ventory was held on 3 May 1969, the minimum bid being set at 5,000 mil-
‘lion lire, but again no bids were received. ELTEL had informed the bank-
ruptcy court on 16 April 1969 that it was willing to offer 3,205 million lire
for the premises, plant and equipment, excluding the supplies — “mer-
chandise, raw materials and semifinished goods” — which it did not re-
gard as indispensable. On 3 May 1969, the trustee in bankruptcy requested
the bankruptcy court to approve a sale of the work in progress to ELTEL
on the terms proposed by ELTEL and approved by the creditors’ commit-
tee. On 9 May 1969, Raytheon Europe’s appeal against the decision
authorizing the lease of the premises and plant to ELTEL was rejected.
On 27 May 1969 ELTEL made an offer to the bankruptcy court to buy
the remaining plant, equipment and supplies for 4,000 million lire. The trus-
tee in bankruptcy proposed acceptance (subject to minor changes in the
terms), and the creditors’ committee decided on 6 June 1969 to approve
the proposal, the Raytheon Europe representative voting against. On
7 June 1969 the bankruptcy judge set 12 July 1969 as date for an auction on
the terms approved by the creditors’ committee. On 9 June 1969 Raytheon
Europe appealed against this decision, but the appeal was rejected on
20 June 1969. The auction was held on 12 July 1969, and ELTEL pur-
chased the auctioned property at the total price of 4,006 million lire.

41. The appeal filed by ELSI on 19 April 1968 (paragraph 32 above)
against the requisition order of 1 April 1968 was determined by the Prefect
of Palermo by a decision given on 22 August 1969. The Parties are at issue
on the question whether this period of time was or was not normal for an
appeal of this character. The decision on the appeal was given following a
request to that effect by the trustee in bankruptcy made on 9 July 1969, in
exercise of a right to request a decision conferred by an Italian Law of
3 March 1934. That Law provides that if the appeal has not been heard 120
days after it has been filed (ï.e., in this case by 17 August 1968), a request

27
39 ELETTRONICA SICULA (JUDGMENT)

may be served on the Prefect requiring him to render a decision within
60 days thereafter; if he fails to do so, this is treated as a dismissal of the
appeal. The decision of the Prefect was to uphold the appeal and thus to
annul the requisition order made by the Mayor of Palermo; the precise
terms of the decision will be considered later in this Judgment (para-
graphs 75, 96, 125 and 126). The Mayor of Palermo appealed against the
Prefect’s decision to the President of Italy who, having been advised by
the Council of State that the Mayor’s appeal was inadmissible, so ruled on
22 April 1972.

42. In the meantime, on 16 June 1970 the trustee in bankruptcy had
brought proceedings in the Tribunale di Palermo (“the Court of Palermo”)
against the Minister of the Interior of Italy and the Mayor of Palermo for
damages resulting from the requisition. The damages claimed were iden-
tified as

“the considerable decrease in value of the plant and the electronic
equipment existing in Palermo at 79 Via Villagrazia, which results
from the difference between the book value at the date of the bank-
ruptcy of Raytheon-Elsi, of Lire 6,623,000,000 and the evaluation
made on October 11, 1968 (that is, immediately after the six-month
period of requisition had elapsed) by the Court Appraiser, Prof.
Mario Puglisi, appointed by the Judge by Decree of September 19,
1968, of Lire 4,560,588,400, with a real loss of value of
Lire 2,062,411,600 and as the lack of disposability of the plant and
relative equipment for six months which, on the basis of the amorti-
zation rate for the industrial plants, equal to 10% per year, can be
determined in Lire 33,150,000, and, therefore, in the aggregate
amount of Lire 2,395,561,600, plus the interests at the legal rate from
October 1, 1968 to the payment.”

43. On 2 February 1973, the Court of Palermo, in a decision to be
examined more fully below (paragraphs 57, 58, 97 and 127), ruled that
the trustee was not entitled to compensation for the requisition, either in
respect of the alleged decrease in value of the plant and equipment, or of
the alleged lack of disposability thereof. On appeal, the Corte di Appello di
Palermo (“the Court of Appeal of Palermo”), in its decision of 24 January
1974, upheld the conclusion of the lower court as regards the damages
claimed for the alleged decrease in value of the plant and equipment. It
however reversed the finding of the lower court on the second head of
damage, and found that the trustee was entitled to compensation from the
Minister of the Interior for loss of use and possession of ELSI’s plant and
assets during the six-month requisition period. It therefore awarded, in
effect, a “rental” payment of some 114 million lire, computed as half the
annual rate of 5 per cent of the total value of the assets. This decision,
which will be examined in more detail below (paragraphs 97, 98 and 127),
was upheld by the Court of Cassation on 26 April 1975. The amount of

28
40 ELETTRONICA SICULA (JUDGMENT)

the judgment was ultimately received by the trustee and, less costs and
expenses, distributed to ELSIJ’s creditors.

44. In the bankruptcy proceedings, creditors presented claims against
ELSI totalling some 13,000 million lire; these did not include amounts
due to Raytheon and Raytheon Service Company (see paragraph 36
above). The bankruptcy proceedings closed in November 1985. Accord-
ing to the bankruptcy reports, the bankruptcy realized only some
6,370 million lire for ELSI’s assets, as compared with the minimum liqui-
dation value estimated by ELSI’s management in March 1968 at
10,840 million lire. Of the amount realized, some 6,080 million lire went to
pay banks, employees, and other creditors. The remainder went to pay
bankruptcy administration, tax, registry, and customs charges. All of the
secured and preferred creditors who filed claims in the bankruptcy were
paid in full. The unsecured creditors received less than one per cent of
their claims; accordingly no surplus remained for distribution to the
shareholders, Raytheon and Machlett.

45. Raytheon had guaranteed the indebtedness of ELSI to a number of
banks, and on the bankruptcy of ELSI it was accordingly liable for, and
paid, the sum of 5,787.6 million lire to the banks in accordance with the
terms of the guarantees. Five of the seven banks which had also made |
unguaranteed loans to ELSI brought proceedings in the Italian courts
seeking payment of these loans by Raytheon, on the basis primarily of
Article 2362 of the Italian Civil Code, which renders a sole shareholder
liable for the debts of the company. It was argued that Raytheon was in
effect sole shareholder, since Machlett was its wholly-owned subsidiary.
Three of these cases were ultimately resolved by the Italian Court of Cas-
sation in favour of Raytheon, and two were discontinued by the plaintiffs.

* *

46. On 7 February 1974, the Embassy in Rome of the United States
transmitted to the Italian Ministry of Foreign Affairs a note enclosing the
“claim of the Government of the United States of America on behalf of
Raytheon Company and Machlett Laboratories, Incorporated”. That
claim, which was based not only on the FCN Treaty but also on customary
international law, incorporated a Memorandum of Law, Chapter VI of
which was devoted to “Exhaustion of Local Remedies”. It was there noted
that it was “generally recognized that local remedies must be exhausted
before a claim may be formally espoused under principles of international
law”; an account was given of the relevant litigation in Italy (some of
which was at the time still pending) and, in the light of annexed opinions

29
41 ELETTRONICA SICULA (JUDGMENT)

of two Italian legal experts, it was concluded that “Raytheon and Mach-
lett have exhausted every meaningful legal remedy available to them in
Italy”. At the time this claim was submitted, the Court of Appeal of Pal-
ermo had ruled on the action by the trustee in bankruptcy, but the case was
thereafter brought before the Court of Cassation (paragraph 43 above); it
is recognized by both Parties that any other action arising out of the requi-
sition would by then have been barred by limitation of time. It appears
that the United States received no formal response from Italy to the claim
until 13 June 1978, when Italy denied the claim in a written aide-mémoire,
the text of which has been supplied to the Chamber. The aide-mémoire
contained no suggestion that local remedies had not been exhausted, and
indeed stated that “the claim is juridically groundless, both from the inter-
national and domestic point of view”. During the oral proceedings in the
present case, counsel for Italy asserted that at an unspecified date prior to
the institution of the present proceedings the Italian Government “had
made it clear to the United States Government that as a Respondent it
would raise the objection of non-exhaustion of local remedies in judicial
proceedings”. No evidence to that effect has however been supplied to the
Chamber.

* *

47. Many of the documents constituting evidence submitted to the
Chamber are in the Italian language. Where the Chamber relies in the
present Judgment on passages in these documents, it will, for the sake of
clarity, set out the original Italian together with an English translation,
which is not always the translation supplied by one of the Parties pursuant
to Article 51, paragraph 3, of the Rules of Court.

x * x»

48. It is common ground between the Parties that the Court has juris-
diction in the present case, under Article 36, paragraph 1, of its Statute,
and Article XXVI of the Treaty of Friendship, Commerce and Navi-
gation, of 2 June 1948 (“the FCN Treaty”), between Italy and the
United States; which Article reads:

“Any dispute between the High Contracting Parties as to the
interpretation or the application of this Treaty, which the High Con-
tracting Parties shall not satisfactorily adjust by diplomacy, shall
be submitted to the International Court of Justice, unless the High
Contracting Parties shall agree to settlement by some other
pacific means.”

30
42 ELETTRONICA SICULA (JUDGMENT)

The jurisdiction is thus confined to questions of “the interpretation or
the application” of the FCN Treaty and Protocols and of the Agreement
Supplementing the Treaty between the United States of America and the
Italian Republic, of 26 September 1951 (which Agreement is herein-
after called “the Supplementary Agreement”), Article IX of which pro-
vides that it is to “constitute an integral part” of the FCN Treaty. This
same jurisdiction may accordingly be exercised by this Chamber, created
by the Court to deal with this case by virtue of Article 26, paragraph 2,
of its Statute, and Articles 17 and 18 of its Rules, at the request of and
after consultation with the Parties.

49. While the jurisdiction of the Chamber is not in doubt, an objection
to the admissibility of the present case was entered by Italy in its Counter-
Memorial, on the ground of an alleged failure of the two United States
corporations, Raytheon and Machlett, on whose behalf the United States
claim is brought, to exhaust the local remedies available to them in Italy.
This objection, which the Parties agreed should be heard and determined
in the framework of the merits, must, therefore, be considered at the
outset.

50. The United States questioned whether the rule of the exhaustion of
local remedies could apply at all to a case brought under Article XX VI of
the FCN Treaty. That Article, it was pointed out, is categorical in its terms,
and unqualified by any reference to the local remedies rule; and it seemed
right, therefore, to conclude that the parties to the FCN Treaty, had they
intended the jurisdiction conferred upon the Court to be qualified by the
local remedies rule in cases of diplomatic protection, would have used
express words to that effect; as was done in an Economic Co-operation
Agreement between Italy and the United States of America also con-
cluded in 1948. The Chamber has no doubt that the parties to a treaty can
therein either agree that the local remedies rule shall not apply to claims
based on alleged breaches of that treaty; or confirm that it shall apply. Yet
the Chamber finds itself unable to accept that an important principle of
customary international law should be held to have been tacitly dispensed
with, in the absence of any words making clear an intention to do so. This
part of the United States response to the Italian objection must therefore
be rejected.

51. The United States further argued that the local remedies rule would
not apply in any event to the part of the United States claim which
requested a declaratory judgment finding that the FCN Treaty had been
violated. The argument of the United States is that such a judgment would
declare that the United States own rights under the FCN Treaty had been
infringed; and that to such a direct injury the local remedies rule, which
is a rule of customary international law developed in the context of the
espousal by a State of the claim of one of its nationals, would not apply.
The Chamber, however, has not found it possible in the present case to

31
43 ELETTRONICA SICULA (JUDGMENT)

find a dispute over alleged violation of the FCN Treaty resulting in direct
injury to the United States, that is both distinct from, and independent
of, the dispute over the alleged violation in respect of Raytheon and
Machlett. The case arises from a dispute which the Parties did not “satis-
factorily adjust by diplomacy”; and that dispute was described in the
1974 United States claim made at the diplomatic level as a “claim of the
Government of the United States of America on behalf of Raytheon
Company and Machlett Laboratories, Incorporated”. The Agent of
the United States told the Chamber in the oral proceedings that
“the United States seeks reparation for injuries suffered by Raytheon and
Machlett”. And indeed, as will appear later, the question whether there has
been a breach of the FCN Treaty is itself much involved with the financial
position of the Italian company, ELSI, which was controlled by Raytheon
and Machlett.

52. Moreover, when the Court was, in the Interhandel case, faced with a
not dissimilar argument by Switzerland that in that case its “principal sub-
mission” was in respect of a “direct breach of international law” and
therefore not subject to the local remedies rule, the Court, having ana-
lysed that “principal submission”, found that it was bound up with the
diplomatic protection claim, and that the Applicant’s arguments “do not
deprive the dispute ... of the character of a dispute in which the Swiss
Government appears as having adopted the cause of its national ...”
(Interhandel, Judgment, I.C.J. Reports 1959, p. 28). In the present case,
likewise, the Chamber has no doubt that the matter which colours and
pervades the United States claim as a whole, is the alleged damage
to Raytheon and Machlett, said to have resulted from the actions of the
Respondent. Accordingly, the Chamber rejects the argument that in the
present case there is a part of the Applicant’s claim which can be severed
so as to render the local remedies rule inapplicable to that part.

53. There was a further argument of the Applicant, based on estoppel
in relation to the application of the local remedies rule, which should be
examined. In the “Memorandum of Law” elaborating the United States
claim on the diplomatic plane, transmitted to the Italian Government by
Note Verbale of 7 February 1974, one finds that the whole of Part VI
(pp. 53 et seq.) deals generally and at some length with the “Exhaustion of
Local Remedies”. There were also annexed the opinions of the lawyers
advising the Applicant, which dealt directly with the position of Raytheon
and Machlett in relation to the local remedies rule. The Memorandum
concluded that Raytheon and Machlett had indeed exhausted “every
meaningful legal remedy available to them in Italy” (paragraph 46 above).
In view of this evidence that the United States was very much aware that it
must satisfy the local remedies rule, that it evidently believed that the rule
had been satisfied, and that it had been advised that the shareholders of

32
44 ELETTRONICA SICULA (JUDGMENT)

ELSI had no direct action against the Italian Government under Italian
law, it was argued by the Applicant that Italy, if it was indeed at that time
of the opinion that the local remedies had not been exhausted, should
have apprised the United States of its opinion. According to the
United States, however, at no time until the filing of the Respondent’s
Counter-Memorial in the present proceedings did Italy suggest that
Raytheon and Machlett should sue in the Italian courts on the basis of
the Treaty. The written aide-mémoire of 13 June 1978, by which Italy
rejected the 1974 claim, had contained no suggestion that the local
remedies had not been exhausted, nor indeed any mention of the matter.

54. It was argued by the Applicant that this absence of riposte from
Italy amounts to an estoppel. There are however difficulties about draw-
ing any such conclusion from the exchanges of correspondence when the
matter was still being pursued on the diplomatic level. In the Interhandel
case, when Switzerland argued that the United States had at one time actu-
ally “admitted that Interhandel had exhausted the remedies available in
the United States courts”, the Court, far from seeing in this admission an
estoppel, dismissed the argument by merely observing that “This opinion
was based upon a view which has proved unfounded” (Interhandel, Judg-
ment, I.C.J. Reports 1959, p. 27). Furthermore, although it cannot be ex-
cluded that an estoppel could in certain circumstances arise from a silence
when something ought to have been said, there are obvious difficulties
in constructing an estoppel from a mere failure to mention a matter at a
particular point in somewhat desultory diplomatic exchanges.

55. On the basis that the local remedies rule does apply in this case, this
Judgment may now turn to the question whether local remedies were, or
were not, exhausted by Raytheon and Machlett.

56. The damage claimed in this case to have been caused to Raytheon
and Machlett is said to have resulted from the “losses incurred by ELSI’s
owners as a result of the involuntary change in the manner of disposing of
ELS?’s assets”: and it is the requisition order that is said to have caused
this change, and which is therefore at the core of the United States com-
plaint. It was, therefore, right that any local remedy against the Italian
authorities, calling in question the validity of the requisition of ELSI’s
plant and related assets, and raising the matter of the losses said to result
from it, should be pursued by ELSI itself. In any event, both in order to
attempt to recover control of ELSI’s plant and assets, and to mitigate
any damage flowing from the alleged frustration of the liquidation plan,
the first step was for ELSI — and only ELSI could do this — to appeal to

33
45 ELETTRONICA SICULA (JUDGMENT)

the Prefect against the requisition order. After the bankruptcy, however,
the pursuit of local remedies was no longer a matter for ELSI’s manage-
ment but for the trustee in bankruptcy (Raytheon could, even after the
bankruptcy, have influenced decisions of the committee of creditors, had
it not decided against claiming in bankruptcy in respect of sums due to it
as creditor; it did exercise some influence however through its subsidiary
company, Raytheon Europe, which did claim as a creditor).

57. After the trustee in bankruptcy was appointed, he, acting for ELSI,
by no means left the Italian authorities and courts unoccupied with
ELSI’s affairs. It was he who, under an Italian law of 1934, formally
requested the Prefect to make his decision within 60 days of that request;
which decision was itself the subject of an unsuccessful appeal by the
Mayor to the President of Italy. On 16 June 1970, the trustee, acting for the
bankrupt ELSI, brought a suit against the Acting Minister of the Interior
and the Acting Mayor of Palermo, asking the court to adjudge that the
defendants should |

“pay to the bankrupt estate of Raytheon-Elsi ... damages for the
illegal requisition of the plant machinery and equipment .. . for the
period from April 1 to September 30, 1968, in the aggregate amount
of Lire 2,395,561,600 plus interests . . .”

On 2 February 1973, the Court of Palermo, as indicated above (para-
graph 43), rejected the claim. The trustee in bankruptcy then appealed to
the Court of Appeal of Palermo; which Court gave a judgment on 24 Jan-
uary 1974 which “partly revising the judgment of the Court of Palermo”
ordered payment by the Ministry of the Interior of damages of
114,014,711 lire with interest. Appeal was taken finally to the Court of
Cassation which upheld the decision of the Court of Appeal, by a decision
of 26 April 1975.

58. It is pertinent to note that this claim for damages (paragraph 42
above), as it came before the Court of Palermo in the action brought by the
trustee, was described by that Court as being based (inter alia) upon the
argument of the trustee in bankruptcy

“that the requisition order caused an economic situation of such
gravity that it immediately and directly triggered the bankruptcy of
the company”

(“il provvedimento di requisizione avrebbe determinato una situazione
economica di tale pesantezza. da farne scaturire immediatamente e
direttamente il fallimento della societa”).

Similarly the Court of Appeal of Palermo had to consider whether there
was a “causal link between the requisition order and the company’s bank-
ruptcy”. It is thus apparent that the substance of the claim brought to the

34
46 ELETTRONICA SICULA (JUDGMENT)

adjudication of the Italian courts is essentially the claim which the
United States now brings before this Chamber. The arguments were dif-
ferent, because the municipal court was applying Italian law, whereas
this Chamber applies international law; and, of course, the parties were
different. Yet it would seem that the municipal courts had been fully
seized of the matter which is the substance of the Applicant’s claim
before the Chamber. For both claims turn on the allegation that the requi-
sition, by frustrating the orderly liquidation, triggered the bankruptcy,
and so caused the alleged losses.

59. With such a deal of litigation in the municipal courts about what is
in substance the claim now before the Chamber, it was for Italy to demon-
strate that there was nevertheless some local remedy that had not been
tried; or at least, not exhausted. This burden Italy never sought to deny. It
contended that it was possible for the matter to have been brought before
the municipal courts, citing the provisions of the treaties themselves, and
alleging their violation. This was never done. In the actions brought before
the Court of Palermo, and subsequently the Court of Appeal of Palermo,
and the Court of Cassation, the FCN Treaty and its Supplementary
Agreement were never mentioned. This is not surprising, for, as Italy
recognizes, the way in which the matter was pleaded before the courts
of Palermo was not for Raytheon and Machlett to decide but for the trus-
tee. Furthermore, the local remedies rule does not, indeed cannot, require
that a claim be presented to the municipal courts in a form, and with
arguments, suited to an international tribunal, applying different law to
different parties: for an international claim to be admissible, it is suffi-
cient if the essence of the claim has been brought before the competent
tribunals and pursued as far as permitted by local law and procedures,
and without success.

60. The question, therefore, reduces itself to this: ought Raytheon and
Machlett, suing in their own right, as United States corporations allegedly
injured by the requisition of property of an Italian company whose shares
they held, have brought an action in the Italian courts, within the general
limitation-period (five years), alleging violation of certain provisions of
the FCN Treaty between Italy and the United States; this mindful of the
fact that the very question of the consequences of the requisition was
already in issue in the action brought by its trustee in bankruptcy, and
that any damages that might there be awarded would pass into the pool of
realized assets, for an appropriate part of which Raytheon and Machlett
had the right to claim as creditors?

61. Italy contends that Raytheon and Machlett could have based such
an action before the Italian courts on Article 2043 of the Italian Civil
Code, which provides that “Any act committed either wilfully or through
fault which causes wrongful damages to another person implies that the
wrongdoer is under an obligation to pay compensation for those dam-

35
47 ELETTRONICA SICULA (JUDGMENT)

ages.” According to Italy, this provision is frequently invoked by indivi-
duals against the Italian State, and substantial sums have been awarded
to claimants where appropriate. If Raytheon and Machlett suffered
damage caused by violations by Italian public authorities of the FCN
Treaty and the Supplementary Agreement, an Italian court would, it
was contended, have been bound to conclude that the relevant acts of
the public authorities were wrongful acts for the purposes of Article 2043.
It is common ground between the Parties that implementing legislation
(‘ordini di esecuzione”) was enacted (Law No. 385 of 15 June 1949 and
Law No. 910 of | August 1960), to give effect in Italy to the FCN Treaty
and Supplementary Agreement, but that their provisions cannot be in-
voked in-protection of individual rights before the Italian courts unless
those provisions are regarded by the courts as self-executing. In order to
show that the relevant provisions would be so regarded, decisions of the
Court of Cassation have been cited by Italy in which provisions of the
FCN Treaty (not the provisions relied on in the present case) have been
applied for the benefit-of United States nationals who have invoked them
before Italian courts, and a provision of a treaty between Italy and the
Federal Republic of Germany, said to be comparable with Article V of
the FCN Treaty, was given effect.

62. However, those decisions were not based on Article 2043 of the
Italian Civil Code; and the treaty provisions applied were given effect in
conjunction with municipal legislation or the provisions of other treaties,
through the mechanism of a most-favoured-nation provision. In none of
the cases cited was the FCN Treaty provision relied on to establish the
wrongfulness of conduct of Italian public officials. When in 1971
Raytheon consulted two Italian jurists on the question of local remedies
for the purposes of a diplomatic claim, it apparently did not occur to either
of them to refer even as a possibility to action under Article 2043 in con-
junction with the FCN Treaty. It thus appears to the Chamber to be im-
possible to deduce, from the recent jurisprudence cited, what the attitude
of the Italian courts would have been had Raytheon and Machlett
brought an action, some 20 years ago, in reliance on Article 2043 of the
Civil Code in conjunction with the provisions of the FCN Treaty and
the Supplementary Agreement. Where the determination of a question of
municipal law is essential to the Court’s decision in a case, the Court will
have to weigh the jurisprudence of the municipal courts, and “If this is
uncertain or divided, it will rest with the Court to select the interpretation
which it considers most in conformity with the law” (Brazilian Loans,
P.C.LJ., Series A, Nos. 20/21, p. 124). In the present case, however, it was
for Italy to show, as a matter of fact, the existence of a remedy which was
open to the United States stockholders and which they failed to employ.
The Chamber does not consider that Italy has discharged that burden.

63. It is never easy to decide, in a case where there has in fact been
much resort to the municipal courts, whether local remedies have truly
been “exhausted”. But in this case Italy has not been able to satisfy the

36
48 ELETTRONICA SICULA (JUDGMENT)

Chamber that there clearly remained some remedy which Raytheon and
Machlett, independently of ELSI, and of ELSI’s trustee in bankruptcy,
ought to have pursued and exhausted. Accordingly, the Chamber will
now proceed to consider the merits of the case.

x * x

64. Paragraph | of the United States final submissions claims that:

“(1) the Respondent violated the international legal obligations
which it undertook by the Treaty of Friendship, Commerce and
Navigation between the two countries, and the Supplement
thereto, and in particular, violated Articles III, V, and VII of the
Treaty and Article I of the Supplement”.

It is necessary therefore to examine these Articles of the FCN Treaty and
the Supplementary Agreement, against the conduct which is said to have
been a violation of the obligations set out in these Articles. In doing so, it
will be kept in mind that although the stated purposes of the FCN Treaty
were those normally to be found in treaties of that kind, nevertheless a
purpose of the Supplementary Agreement, which is to “constitute an inte-
gral part” of the FCN Treaty, was to give “added encouragement to in-
vestments of the one country in useful undertakings in the other country”.

65. The acts of the Respondent which are thus alleged to violate its
treaty obligations were described by the Applicant’s counsel in terms
which it is convenient to cite here:

“First, the Respondent violated its legal obligations when it unlaw-
fully requisitioned the ELSI plant on 1 April 1968 which denied the
ELSI stockholders their direct right to liquidate the ELSI assets in an
orderly fashion. Second, the Respondent violated its obligations
when it allowed ELSI workers to occupy the plant. Third, the
Respondent violated its obligations when it unreasonably delayed
ruling on the lawfulness of the requisition for 16 months until imme-

‘diately after the ELSI plant, equipment and work-in-process had
all been acquired by ELTEL. Fourth and finally, the Respondent
violated its obligations when it interfered with the ELSI bankruptcy
proceedings, which allowed the Respondent to realize its previously
expressed intention of acquiring ELSI for a price far less than its
fair market value.”

66. The most important of these acts of the Respondent which the
Applicant claims to have been in violation of the FCN Treaty is the
requisition of the ELSI plant by the Mayor of Palermo on 1 April 1968,
which is claimed to have frustrated the plan for what the Applicant terms
an “orderly liquidation” of the company as set out in paragraphs 22-25

37
49 ELETTRONICA SICULA (JUDGMENT)

above. It is fair to describe the other impugned acts of the Respondent,
to be explained more fully below (paragraph 115), as ancillary to this
core claim based on the requisition and its effects.

67. The Chamber is faced with a situation of mixed fact and law of con-
siderable complexity, wherein several different strands of fact and law
have to be examined both separately and for their effect on each other: the
meaning and effect of the relevant Articles of the FCN Treaty and Supple-
mentary Agreement; the legal status of the Mayor’s requisition of ELSI’s
plant and assets; and the legal and practical significance of the financial
position of ELS] at material times, and its effect, if any, upon ELSI’s plan
for orderly liquidation of the company. It will be convenient to begin by
examining these considerations in relation to the Applicant’s claim that
the requisition order was a violation of Article III of the FCN Treaty.

k O*

68. Article III of the FCN Treaty is in two paragraphs. Paragraph 1
provides for rights of participation of nationals of one High Contracting
Party, in corporations and associations of the other High Contracting
Party, and for the exercise by such corporations and associations of their
functions. Since there is no allegation of treatment less favourable than
is required according to the standards set by this paragraph, it need not
detain the Chamber. Paragraph 2 of Article III is however important for
the Applicant’s claim; it provides:

“The nationals, corporations and associations of either High Con-
tracting Party shall be permitted, in conformity with the applicable
laws and regulations within the territories of the other High Con-
tracting Party, to organize, control and manage corporations and
associations of such other High Contracting Party for engaging in
commercial, manufacturing, processing, mining, educational, phil-
anthropic, religious and scientific activities. Corporations and asso-
ciations, controlled by nationals, corporations and associations of
either High Contracting Party and created or organized under the
applicable laws and regulations within the territories of the other
High Contracting Party, shall be permitted to engage in the afore-
mentioned activities therein, in conformity with the applicable laws
and regulations, upon terms no less favorable than those now or here-
after accorded to corporations and associations of such other High
Contracting Party controlled by its own nationals, corporations and
associations.”

Again there is no allegation of treatment of ELSI according to standards
less favourable than those laid down in the second sentence of the para-

38
50 ELETTRONICA SICULA (JUDGMENT)

graph: the allegation by the United States of a violation of this paragraph
by Italy relates to the first sentence.

69. In terms of the present case, the effect of the first sentence of this
paragraph is that Raytheon and Machlett are to be permitted, in con-
formity with the applicable laws and regulations within the territory of
Italy, to organize, control and manage ELSI. The claim of the United
States focuses on the right to “control and manage”; the right to “organize”,
apparently in the sense of the creation of a corporation, is not in question
in this case. Is there, then, a violation of this Article if, as the United
States alleges, the requisition had the effect of depriving ELSI of both the
right and practical possibility of selling off its plant and assets for satis-
faction of its liabilities to its creditors and satisfaction of its shareholders ?

70. It is undeniable that the requisition of a firm’s “plant and relative
equipment” must normally amount to a deprivation, at least in important
part, of the right to control and manage. It was objected by Italy that the
requisition in no way affected “control by the shareholders over the com-
pany”, but merely concerned the management by the company of prop-
erty belonging to the company. It is true that the direct impact of the requi-
sition was only on control of the property requisitioned. It is however also
undeniable that this requisition, which remained in effect until 30 Septem-
ber 1968, was issued to avoid the closure of ELSI’s plant, the dismissal of
its workforce, and as a consequence the probable dispersal of the assets,
all of which were integral to ELSI’s plan for orderly liquidation. Since the
requisition thus had the design of preventing Raytheon from exercising,
for six critical months, what was at that time a most important part
of its right to control and manage ELSI, there exists a question whether
the requisition was in conformity with the requirements of Ar-
ticle II], paragraph 2, of the FCN Treaty. Before coming to a conclusion
on that question it is necessary now to take into consideration certain
other matters.

71. Article III of the FCN Treaty, both in paragraph 1 concerning
rights to be enjoyed by the nationals of one party in the territory of the
other, and in paragraph 2, concerning rights of nationals of one party to
“organize, control and manage” corporations of the other party, contains
the qualifying phrase, “in conformity with the applicable laws and regula-
tions” of the latter party. It was argued by Italy that this clause confirms
that the correct interpretation of that paragraph is that it was not intended
to confer upon United States nationals any rights of control and manage-
ment more extensive, or more extensively protected, than those enjoyed
by other stockholders, of whatever nationality, in Italian companies.
Therefore, it was said, the requisition was no breach of the rights con-
ferred by the FCN Treaty, because its “invalidity .. . as ascertained by the
decision of the Prefect of Palermo, does not alter the fact that it was issued
by the competent authority on a regular legal basis”. But, in the Cham-
ber’s view, the reference to conformity with “the applicable laws and regu-

39
51 ELETTRONICA SICULA (JUDGMENT)

lations” cannot mean that, if an act is in conformity with the municipal law
and regulations, that would of itself exclude any possibility that it was an
act in breach of the FCN Treaty.

72. The reference to conformity with “the applicable laws and regu-
lations” surely means no more than that Italian corporations and
associations controlled by United States nationals must conform to the
local applicable laws and regulations; moreover, they must do so even
if they believe a law or regulation to be in breach of the FCN Treaty,
and, indeed, even if it were in breach of the FCN Treaty. This the Appli-
cant has never denied. Raytheon and Machlett did conform to the terms
of the requisition. Indeed they had no other choice.

73. The question still remains, therefore, whether the requisition was or
was not a violation of Article III, paragraph 2. This question arises irre-
spective of the position in municipal law. Compliance with municipal law
and compliance with the provisions of a treaty are different questions.
What is a breach of treaty may be lawful in the municipal law and what is
unlawful in the municipal law may be wholly innocent of violation of a
treaty provision. Even had the Prefect held the requisition to be entirely
justified in Italian law, this would not exclude the possibility that it was a
violation of the FCN Treaty.

74, This question whether or not certain acts could constitute a breach
of the treaty right to be permitted to control and manage is one which must
be appreciated in each case having regard to the meaning and purpose of
the FCN Treaty. Clearly the right cannot be interpreted as a sort of war-
ranty that the normal exercise of control and management shall never
be disturbed. Every system of law must provide, for example, for inter-
ferences with the normal exercise of rights during public emergencies
and the like. In this respect considerable interest must attach to the
reasons given by the Prefect in his decision, and to the legal analysis of
that decision by the Court of Appeal of Palermo.

75. The Prefect took note in his decision of the fact that the Mayor had
relied on legislative authority empowering him to act in cases of “grave
public necessity and unforeseen urgency”. He did not find that those
conditions were absent; he however annulled the requisition on the basis
primarily of the following considerations:

“Non wha dubbio che anche se possono considerarsi, in linea del tutto
teorica, sussistenti, nella fattispecie, gli estremi della grave necessita
pubblica e della contingibilita ed urgenza che determinarono l'adozione
del provvedimento, il fine cui tendeva la requisizione non poteva trovare
pratica realizzazione con il provvedimento stesso, tanto é vero che nes-
suna ripresa di attività dell’azienda vi é stata a seguito della requisi-
zione, né avrebbe potuto esserci. Manca, pertanto, nel provvedimento,
genericamente, la causa giuridica che possa giustificarlo e renderlo ope-
rante.”

There has been some controversy between the Parties as to the translation

40
52 ELETTRONICA SICULA (JUDGMENT)

of this passage (see paragraph 123 below); in the view of the Chamber it
may be translated as follows:

“There is no doubt that, even though, from the purely theoretical
standpoint, the conditions of grave public necessity and of unfore-
seen urgency warranting adoption of the measure may be considered
to exist in the case in point, the intended purpose of the requisition
could not in practice be achieved by the order itself, since in fact there
was no resumption of the company’s activity following the requisi-
tion, nor could there have been such resumption. The order therefore
lacks, generically, the juridical cause which might justify it and make
it operative.”

The Court of Appeal of Palermo, for reasons to be examined more fully
below (paragraph 127), considered that the Prefect’s finding had been one
of

“un tipico caso di eccesso di potere, che à, come é noto, un vizio di legitti-
mità dell'atto amministrativo”

(“a typical case of excess of power, which is of course a defect of
lawfulness of an administrative act”).

The requisition was thus found not to have been justified in the applicable
local law; if therefore, as seems to be the case, it deprived Raytheon and
Machlett of what were at the moment their most crucial rights to control
and manage, it might appear prima facie a violation of Article III, para-
graph 2.

76. There remains however a crucial question to be considered.
According to the Respondent, Raytheon and Machlett were, because of
ELSI’s financial position, already naked of those very rights of control
and management of which they claim to have been deprived. It is neces-
sary now, therefore, to consider what effect, if any, the financial position
of ELSI may have had in that respect, first as a practical matter, and then
also as a question of Italian law.

*

77. The essence of the Applicant’s claim has been throughout that
Raytheon and Machlett, which controlled ELSI, were by the requisition
deprived of the right, and of the practical possibility, of conducting an
orderly liquidation of ELSI’s assets. This plan for an orderly liquidation
was however very much bound up with the financial state of ELSI, and the
two need to be considered together.

78. ELSI’s lack of success was attributed by its management at least in
part to the fact that it was over-manned in relation to its order book; it had
needed repeated injections of fresh capital, and was never able to produce
an operating profit sufficient to offset its debt expense and its accumulat-

41
53 ELETTRONICA SICULA (JUDGMENT)

ing losses. No dividends were ever paid to its shareholders. The 30 Sep-
tember 1966 balance sheet already showed accumulated losses of some
2,000 million lire.

79. The position was worsening, moreover, as the balance sheet for
30 September 1967 (above at paragraphs 18-19) showed. Raytheon’s
Italian auditors pointed out that the balance sheet, when “adjusted”
to Raytheon’s own accounting requirements for internal purposes (the
unadjusted statement, however, appears to have satisfied Italian legal
requirements), then showed adjusted accumulated losses, actually ex-
ceeding “the total of the paid up capital stock, capital reserve and Stock-
holders’ subscription account” by 881.3 million lire; and warned that if
these adjustments to the total of accumulated losses were entered in
the company’s books of account,

“under Articles 2447 and 2448 of the Italian Civil Code, the directors
would be obliged to convene a Stockholders’ meeting forthwith to
take measures either to cover the losses by providing new capital orto
put the company into liquidation”.

80. On 7 March 1968, Raytheon formally notified ELSI of its decision
that Raytheon would not provide any further capital, whether in the form
of subscribing to new stock or guaranteeing additional loans. At a board
meeting of ELSI held in Rome on 16 March 1968, it was decided on the
“cessation of the company’s operations” ; that production would be “dis-
continued immediately”; that “commercial activities and employment
contracts” would be terminated on 29 March 1968; and that “a share-
holders’ meeting be called for 28 March 1968, to adopt the necessary reso-
lutions”. This was not, however, in ELSI’s plans, to involve a liquidation
under Article 2450 of the Italian Civil Code, which requires a liquidator to
be appointed. The plan for an orderly liquidation, as conceived by the
ELSI management, was to be managed by them. At a special meeting of
shareholders, held on 28 March 1968, in Palermo, it was resolved to ratify
the resolutions adopted by the Board of Directors at the meeting of
16 March 1968; and

“to empower the Board of Directors to make contacts with the
banks and principal creditors of the company to reach an agreement
on procedures to be followed in the interest of all the creditors for the
orderly disposal of the company’s assets at their highest realizable
value...”

(“di dare mandato al Consiglio di Amministrazione di prendere contatti
con gli istituti di credito e con i maggiori creditori della Societa per
concordare procedure che consentano nell'interesse di tutti i creditori
una ordinata alienazione delle attivita sociali al massimo valore di rea-
lizzazione”).

42
54 ELETTRONICA SICULA (JUDGMENT)

81. This policy of the ELSI management during the months prior to the
requisition had, however, a Janus-like character. Although the orderly
liquidation contemplated closure of the plant, and dismissal of the work-
force, an alternative aim of the management and of Raytheon was to keep
the place going, the hope being that the threat of closure and dismissal of
the workforce might bring such pressures to bear on the Italian authorities
as to persuade them to provide what Raytheon had long hoped for: an
influential Italian partner, new capital, and Mezzogiorno benefits. The
“Project for the Financing and Reorganization of the Company” prepared
in May 1967 spelled out the need for additional capital, new products
from Italian Government sources, and financial help for transport costs,
capital investment and training; the Project made it clear that the alter-
native was that Raytheon would decline to invest more funds, over
300 people would become redundant forthwith, and dwindling markets
would reduce the employment level still further; as stated in that Project,
“The alternative is really the actual destruction of the existing asset with
the undesirable social effects which must follow.”

82. Right up to the eve of the requisition the company’s representatives
went on talking to Italian officials; but at the same time the company’s
management, according to an affidavit by one of its officials,

“were aware of the need to have back-up plans in case these efforts
were not successful. In the latter part of 1967, we reluctantly began to
plan in general for the potential liquidation of ELSI.”

In the words of the affidavit of another company official, Raytheon had

“developed a plan for the orderly disposal of ELSI over about six
months during 1968. While this plan was being developed, Raytheon
and ELSI representatives continued to meet with Italian Govern-
ment representatives in an ongoing attempt to find a way for the
company to continue to operate.”

The company no doubt wished to postpone liquidation as long as pos-
sible, both in the hope of avoiding it, and because the threat of closure of
the plant would be a means of pressure on the Italian authorities so long
as it remained only a threat. The risk, of which the company was well
aware, was that to carry on too long might topple the company into insol-
vency under Italian law. In the event the Italian authorities did not come
to the rescue, at least not with terms acceptable to ELSI’s management;
and the management was left at the last minute with the orderly liquidation
plan to be put into effect as seemingly the only way of avoiding bank-
ruptcy or liquidation under the supervision of the Italian court; and the

43
55 ELETTRONICA SICULA (JUDGMENT)

bankruptcy of its subsidiary was undoubtedly a most unwelcome
prospect for Raytheon.

83. The crucial question is whether Raytheon, on the eve of the requisi-
tion, and after the closure of the plant and the dismissal, on 29 March
1968, of the majority of the employees, was in a position to carry out
its orderly liquidation plan, even apart from its alleged frustration by the
requisition. That plan, as originally conceived, contemplated that the dis-
posal of plant and assets might produce enough to pay all creditors
100 per cent of their dues, with a modest residue for the shareholders. In
one of the affidavits quoted above it is stated: “If the assets had been dis-
posed of at book value all liabilities, including the payables to Raytheon
Company, would have been paid in full.” And, indeed, the trustee in
bankruptcy, in his report of 28 October 1968 to the bankruptcy judge,
explained that in March 1968:

“the management of Raytheon-Elsi decided, and publicly stated
their intention (which was later adopted by the Board of Directors),
to suggest to the shareholders the liquidation of the company. The
intention was to proceed with an orderly liquidation of all assets in
order to pay all the Company’s creditors 100 per cent.”

This must have seemed a reasonable aim, for the “book value” may well
have been a conservative figure. It has not been demonstrated that ELSI
was, until shortly before the bankruptcy petition, ever actually in default.
Moreover, Raytheon had opened an account in Milan for the payment at
100 per cent of small creditors.

84. Nevertheless since no new investment capital was forthcoming, the
possibility of paying creditors in full depended upon putting the orderly
liquidation plan into operation in good time. Time was running out
because money was running out. As the position worsened daily, the
moment might at any time arrive when liabilities exceeded assets, or
default resulted from lack of liquidity. ELSI’s management had prepared
the assessment of the “quick-sale value” (see paragraph 18 above),
which was markedly less than book value, being aware that the sale of the
company’s assets might fail to provide sums approximating to book value.
There were plans also to approach the large bank creditors in the hope
of securing their agreement to settlements of 50 per cent.

85. Did ELSI, in this precarious position at the end of March 1968, still
have the practical possibility to proceed with an orderly liquidation plan?
The successful implementation of a plan of orderly liquidation would
have depended upon a number of factors not under the control of ELSI’s
management. Since the company’s coffers were dangerously low, funds
had to be forthcoming to maintain the cash flow necessary while the plan

44
56 ELETTRONICA SICULA (JUDGMENT)

was being carried out. Evidence has been produced by the Applicant that
Raytheon was prepared to supply cash flow and other assistance neces-
sary to effect the orderly liquidation, and the Chamber sees no reason to
question that Raytheon had entered or was ready to enter into such a com-
mitment. Other factors governing the matter however give rise to some
doubt.

86. First, for the success of the plan it was necessary that the major
creditors (i.e., the banks) would be willing to wait for payment of their
claims until the sale of the assets released funds to settle them: and this
applied not only to the capital sums outstanding, which may not at the
time have yet been legally due for repayment, but also the agreed pay-
ments of interest or instalments of capital. Though the Chamber has been
given no specific information on the point, this is of the essence of such a
liquidation plan: the creditors had to be asked to give the company time.
If ELSI had been confident of continuing to meet all its obligations
promptly and regularly while seeking a buyer for its assets, no negotia-
tions with creditors, and no elaborate calculations of division of the pro-
ceeds, on different hypotheses, such as have been produced to the
Chamber, would have been needed.

87. Secondly, the management were by no means certain that the sale
of the assets would realize enough to pay all creditors in full; in fact, the
existence of the calculation of a “quick-sale value” suggests perhaps more
than uncertainty. Thus the creditors had to be asked to give time in return
for an assurance, not that 100 per cent would be paid, but that a minimum
of 50 per cent would be paid. While in general it might be in the creditors’
interest to agree to such a proposal, this does not mean in this case that
ELSI could count on such agreement. At the date of the requisition, it
seems apparent that the banks, while informed of the financial position,
had not yet even been consulted on whether they would accept a guaran-
teed 50 per cent (see paragraphs 28-29 above), so their reaction remains a
matter of speculation.

88. Nor should it be overlooked that the dismissed employees of ELSI
ranked as preferential creditors for such sums as might be due to them for
severance pay or arrears. In this respect Italy has drawn attention to the
Sicilian regional law of 13 May 1968, providing for the payment

“for the months of March, April and May 1968, to the dismissed em-
ployees of Raytheon-Elsi of Palermo of a special monthly indemnity
equal to the actual monthly pay received until the month of February
1968”.

From this it could be inferred, said Italy, that ELSI did not pay its employ-
ees for the month of March 1968. Further it was conceded by the former

45
57 ELETTRONICA SICULA (JUDGMENT)

Chairman of ELSI, when he appeared as a witness and was cross-
examined, that the cash available at 31 March 1968 (“22 million in the
kitty”), would have been insufficient to meet the payroll of the full staff
even for the first week of April (“at least 25 million”). The suggestion that
ELSI did not meet its March 1968 payroll was not put to the witness; and
counsel for the United States later stated that the assertion that “ELSI
could not make its March payroll”, was “simply wrong”. It is in any event
certain that when the company ceased activity there were still severance
payments due to the dismissed staff; those, the Applicant suggested,
would have been covered by funds to be provided by Raytheon (para-
graph 28 above). They could not have been met from the money still
remaining in ELSI’s coffers at the time.

89. Thirdly, the plan as formulated by ELSI’s management involved a
potential inequality among creditors: unless enough was realized to cover
the liabilities fully, the major creditors were to be content with some
50 per cent of their claims; but the smaller creditors were still to be paid in
full. Whether or not this would have been legally objectionable as a breach
of the rule of par condicio creditorum (it appears that Raytheon contem-
plated accepting a smaller share in the eventual distribution so that the
small creditors could receive 100 per cent without affecting the share attri-
buted to the banks), it was an additional factor which might have caused a
major creditor to hesitate to agree. According to the evidence, when in late
March 1968 ELSI started using funds made available by Raytheon to pay
off the small creditors in full, “the banks intervened and said that they did
not want that to happen as that was showing preference”. Once the banks
adopted this attitude, the whole orderly liquidation plan was jeopardized,
because a purpose of the settlement with small creditors was, according to
the 1974 diplomatic claim, “to eliminate the risk that a small irresponsible
creditor would take precipitous action which would raise formidable
obstacles in the way of orderly liquidation”.

90. Fourthly, the assets of the company had to be sold with the mini-
mum delay and at the best price obtainable — desiderata which are often
in practice irreconcilable. The United States has emphasized the dam-
aging effect of the requisition on attempts to realize the assets; after the
requisition it was no longer possible for prospective buyers to view the
plant, nor to assure them that if they bought they would obtain immediate
possession. It is however not at all certain that the company could have
counted on unfettered access to its premises and plant, and the opportu-
nity of showing it to buyers without disturbance, even if the requisition
had not been made. There has been argument between the Parties on the
question whether and to what extent the plant was occupied by employees
of ELSI both before and after the requisition; but what is clear is that the
company was expecting trouble at the plant when its closure plans became

46
58 ELETTRONICA SICULA (JUDGMENT)

known: the books had been removed to Milan, according to the evidence
given at the hearings, “so that if we did have problems we could at least
control the books” and “we had moved quite a lot of inventory [to Milan]
so that we could sell it from there if we had to”.

91. Fifthly, there was the attitude of the Sicilian administration: the
company was well aware that the administration was strongly opposed to
a closure of the plant, or more specifically, to a dismissal of the workers.
True, the measure used to try to prevent this — the requisition order —
was found by the Prefect to have lacked the “juridical cause which might
justify it and make it operative” (paragraph 75 above). But ELSI’s
management in March 1968 could not have been certain that the hostility
of the local authorities to their plan of closure and dismissals would not
take practical form in a legal manner. The company’s management had
been told before the staff dismissal letters were sent out that such dis-
missals would lead to a requisition of the plant.

92. All these factors point towards a conclusion that the feasibility at
31 March 1968 of a plan of orderly liquidation, an essential link in the
chain of reasoning upon which the United States claim rests, has not been
sufficiently established.

93. Finally there was, beside the practicalities, the position in Italian
bankruptcy law. Article 5 of the Italian Bankruptcy Act of 1942 provides
that

“An entrepreneur who is in a state of insolvency shall be declared
bankrupt.

The state of insolvency, moreover, becomes apparent not only by
default but also by other external acts which show that the debtor is
no longer in a position regularly to discharge his obligations.”

(“L'imprenditore che si trova in stato d’insolvenza à dichiarato
fallito.

Lo stato d’insolvenza si manifesta con inadempimenti od altri fatti
esteriori, i quali dimostrino che il debitore non é piu in grado di sod-
disfare regolarmente le proprie obbligazioni.”)

This formula excludes a merely momentary or temporary disability, and
refers to one which shows every sign of going on. “Regular” payment (“re-
golarmente”) apparently refers to payment in full at the due time. Given
this definition it is apparent that ELSI could have been “insolvent” in the
sense of Italian bankruptcy law, at the end of March, even though not
actually in default. The Chamber has been given conflicting evidence on
the question whether a debtor in such a position is bound under Italian
law to go into bankruptcy, or whether he may still enter into voluntary
composition with his creditors outside the supervision of the bankruptcy
court (paragraph 25 above).

47
59 ELETTRONICA SICULA (JUDGMENT)

94. Ifhowever ELSI was in a state of legal insolvency at 31 March 1968,
and if, as contended by Italy, a state of insolvency entailed an obligation
on the company to petition for its own bankruptcy, then the relevant rights
of control and management would not have existed to be protected by the
FCN Treaty. While not essential to the Chamber’s conclusion, already
stated in paragraph 92 above, an assessment of ELSI’s solvency as a
matter of Italian law is thus highly material.

95. Italy has argued that even before the requisition, ELSI was insol-
vent in the sense that its liabilities exceeded the value of its assets, and in
support of this has pointed to, first, the “quick-sale value” calculated for
the purposes of the liquidation plan, and secondly the observations of the
auditors on the September 1967 balance sheet. The Chamber does not
however consider that it has to conclude from this that ELSI was insolvent
as early as 1967. The value of assets of this kind, until they are actually
sold, must be a matter for assessment by informed opinion, and different
views, and the use of different accounting conventions, may lead to differ-
ent results. The company’s management was clearly of the view that it
could legally continue trading up to the end of March 1968, since its for-
mer Chairman has told the Chamber that the company’s legal and finan-
cial advisers were keeping a close and.continuous watch on the position to
ensure that Italian legal requirements were respected. But there is no
doubt that ELSI was indeed in a state of insolvency when on 25 April 1968
its Board of Directors voted to file a petition in bankruptcy. The conclu-
sion then made that “The company’s financial situation has worsened and
has now reached a state of insolvency” was based, according to the
minutes of the board meeting, on the fact that “There are payments on
long-term loans that fell due a few days ago, and other payments which
the company cannot make as a result of lack of liquidity . . .” In the bank-
ruptcy petition, it was specified that “an instalment of Lit. 800,000,000 to
Banca Nazionale del Lavoro became due on 18 April 1968 and the note
therefor has been or will be protested, etc.” In other words, the company
had by then committed a default (“inadempimento”), by failing to meet its
debts as they became due.

96. On this matter of insolvency in Italian law, consideration must also
be given to the reasons employed by the Prefect of Palermo for his deci-
sion to annul the requisition order, and the findings of the Court of Pal-
ermo and the Court of Appeal of Palermo on the action brought by ELSI’s
trustee in bankruptcy, for damages following the decision of the Prefect
annulling the requisition order. As indicated above (paragraph 75),
the Prefect considered that the purpose of the requisition could not
be achieved, since the company’s activity could not be resumed. He
explained that

“lo stato dell’azienda era tale, per circostanze di carattere economico-
funzionale e di mercato, da non consentire la prosecuzione dell'atti-

48
60

ELETTRONICA SICULA Gg UDGMENT)

vita ... La requisizione, quindi, nulla ha mutato nella situazione azien-
dale... La situazione di dissesto ha, anzi, determinato la dichiarazione
di fallimento dell’azienda . . .”

(“the situation of the company, due to functional-economic and
market factors, was such as not to permit of the pursuance of its
activity... The requisition consequently changed nothing in the situ-
ation of the company... On the contrary, the situation of insolvency
determined the declaration of bankruptcy of the company. . .”)

97. The Court of Palermo was faced with the argument, mentioned in
paragraph 58 above, that “the requisition order caused an economic situa-
tion of such gravity that it immediately and directly triggered the bank-
ruptcy of the company”. It dealt with this by pointing to the situation of
the company on the eve of the requisition:

“A 31 marzo 1968, in sostanza, lo stabilimento dell’Elsi non era pitt in
Jase produttiva, fermata per deliberazione dell’organo sociale compe-
tente che. . .aveva...opinato, non potendo trovare altro rimedio, per la
soluzione più drastica, evidentemente reputandola più confacente agli
interessi della società e che aveva come oggetto preciso l’arresto totale
della produzione ... Devesi a cid aggiungere ... che proprio dai primi
dell'anno 1968 vi era stato un notevole peggioramento della situazione
generale dell'azienda, che via via si andava aggravando per le sfavo-
revoli condizioni del mercato, avversata, altresi, dai fatti sismici del
gennaio e da una serie di scioperi che, per l'appunto, nel mese di marzo
ebbero a carattere ora di continuità ora di intermittenza, con la conse-
guenza della perdita di un considerevole numero di ore lavorative ...”

(“On March 31, 1968, the Elsi plant was for all practical purposes
no longer in operation, stopped in accordance with a decision of the
competent organ of the company which ... had decided, in the
absence of any other solution, to go for the most drastic solution,
evidently considering it most conducive to the interests of the com-
pany, a solution which meant the total shutdown of production...
To this must be added .. . that in the early part of 1968, there was a
notable deterioration of the general situation of the company, which
was further aggravated by unfavourable market conditions as
well as the January earthquakes and a series of strikes which in
March were sometimes continuous and sometimes intermittent,
causing the loss of a considerable amount of production hours. . .”)

From this the Court was able to conclude that

49

“Dalle condizioni premesse discende che l’aggancio del fallimento
della societa all’intervenuta requisizione non ha fondamento, siccome,
esattamente, é stato sostenuto coll'amministrazione convenuta, essendo
la situazione economica della Raytheon-Elsi gid gravemente compro-
messa da anni per esplicito riconoscimento dei suoi stessi dirigenti.”
61 ELETTRONICA SICULA (JUDGMENT)

(“It is clear from these conditions that the connection between the
company’s bankruptcy and the requisition is unfounded, as the
defendant administration correctly maintained, since Raytheon-
Elsi’s economic situation had for years already been seriously
compromised, as its own management explicitly admitted.”)

The Court of Palermo did not however go so far as to state that ELSI was
legally insolvent prior to the requisition.

98. However the Court of Appeal of Palermo, in its judgment, states
that ELSI was insolvent before the requisition order was made. The
salient passage on this point in the Court of Appeal’s judgment states:

“per quanto riguarda i danni che si fanno consistere nell’avere la requi-
sizione provocato il fallimento della società, la conclusione negativa del
tribunale à ampiamente e convincentemente motivata e. . . le considera-
zioni critiche dell’appellante non valgono a provocare un convincimento
diverso; ... La circostanza certa della insolvenza della società in tempo
immediatamente anteriore allo intervento del Sindaco . . . à sufficiente
per escludere il collegamento causale fra il successivo provvedimento di
requisizione e il fallimento della società, per il quale ultimo quello stato
di insolvenza é causa determinante e sufficiente (Art. 5 legge fallim.).”

(“as regards the damages consisting in the fact that the order trig-
gered the company’s bankruptcy, the negative conclusion arrived at
by the court below is amply and convincingly motivated and the criti-
cal considerations of the appellant are not sufficient to lead to a dif-
ferent determination... The certain circumstance that the company
was insolvent during the time immediately prior to the Mayor’s inter-
vention . . .is sufficient to rule out any causal link between the subse-
quent requisition order and the company’s bankruptcy of which the
company’s state of insolvency was the decisive and sufficient cause
(Art. 5, Bankruptcy Law).”)

The Court of Appeal also refers to the “prior insolvency” (“precedente in-
solvenza”) of the company, and to “the decisive effect of the state of insol-
vency” (“la efficacia determinante dello stato di insolvenza”).

99. Whether these findings by the municipal courts are to be regarded
as determinations as a matter of Italian law that ELSI had been insolvent,
within the meaning of the relevant legislative provisions, on 31 March
1968, or whether they are no more than findings that the financial position
of ELSI on that date was so desperate that it was past saving, so that it was
not the requisition which “caused an economic situation of such gravity
that it immediately and directly triggered the bankruptcy of the company”
makes no difference to the conclusion to be drawn. If ELSI was legally
insolvent, then even if the liquidation plan could in fact have been imple-
mented with co-operation from the creditors, the stockholders no longer
had rights of control and management to be protected by the FCN Treaty.
If, as the Prefect of Palermo stated, and the courts of Palermo certainly
thought, the factual situation at least was such that the requisition

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changed nothing, then the United States has failed to prove that there was
any interference with control and management in any real sense. The
Chamber has no need to go into the question of the extent to which it
could or should question the validity of a finding of Italian law, the law
governing the matter, by the appropriate Italian courts. It is sufficient to
note that the conclusion above, that the feasibility of an orderly liquida-
tion plan is not sufficiently established, is reinforced by reference to the
decision of the courts of Palermo on the claim by the trustee in bankruptcy
for damages for the injury caused by the requisition. Whether regarded as
findings of Italian law or as findings of fact, the decisions of the courts of
Palermo simply constitute additional evidence of the situation which the
Chamber has to assess.

100. It is important, in the consideration of so much detail, not to get
the matter out of perspective: given an under-capitalized, consistently
loss-making company, crippled by the need to service large loans, which
company its stockholders had themselves decided not to finance further
but to close and sell off because, as they were anxious to make clear to
everybody concerned, the money was running out fast, it cannot be a mat-
ter of surprise if, several days after the date at which the management itself
had predicted that the money would run out, the company should be con-
sidered to have been actually or virtually in a state of insolvency for the
purposes of Italian bankruptcy law.

101. If, therefore, the management of ELSI, at the material time, had
no practical possibility of carrying out successfully a scheme of orderly
liquidation under its own management, and may indeed already have for-
feited any right to do so under Italian law, it cannot be said that it was the
requisition that deprived it of this faculty of control and management.
Furthermore, one feature of ELSI’s position stands out: the uncertain and
speculative character of the causal connection, on which the Applicant’s
case relies, between the requisition and the results attributed to it by the
Applicant. There were several causes acting together that led to the disas-
terto ELSI. No doubt the effects of the requisition might have been one of
the factors involved. But the underlying cause was ELSI’s headlong
course towards insolvency; which state of affairs it seems to have attained
even prior to the requisition. There was the warning loudly proclaimed
about its precarious position; there was the socially damaging decision to
terminate the business, close the plant, and dismiss the workforce; there
was the position of the banks as major creditors. In short, the possibility of
that solution of orderly liquidation, which Raytheon and Machlett claim
to have been deprived of as a result of the requisition, is purely a matter of
speculation. The Chamber is therefore unable to see here anything which
can be said to amount to a violation by Italy of Article III, paragraph 2, of
the FCN Treaty.

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102. There are two claims of the Applicant that are based upon the pro-
visions of Article V of the FCN Treaty: one relates to paragraphs 1 and 3,
and is concerned with protection and security of nationals and their
property; another relates to paragraph 2, and is concerned with the
taking or expropriation of property. No claim is based upon paragraph 4
of Article V. The Applicant’s claim under paragraphs 1 and 3 will be
dealt with first.

103. Paragraph 1 of Article V provides as follows:

“1. The nationals of each High Contracting Party shall receive,
within the territories of the other High Contracting Party, the most
constant protection and security for their persons and property, and
shall enjoy in this respect the full protection and security required by
international law. To these ends, persons -accused of crime shall be
brought to trial promptly, and shall enjoy all the rights and privileges
which are or may hereafter be accorded by the applicable laws and
regulations; and nationals of either High Contracting Party, while
within the custody of the authorities of the other High Contracting
Party, shall receive reasonable and humane treatment. In so far as the
term ‘nationals’ where used in this paragraph is applicable in relation
to property it shall be construed to include corporations and associa-
tions.”

Paragraph 2 of this Article is not relevant here, but is set out in para-
graph 113 of this Judgment. Paragraph 3 provides as follows:

“3. The nationals, corporations and associations of either High
Contracting Party shall within the territories of the other High
Contracting Party receive protection and security with respect to the
matters enumerated in paragraphs | and 2 of this Article, upon com-
pliance with the applicable laws and regulations, no less than the
protection and security which is or may hereafter be accorded to the
nationals, corporations and associations of such other High Con-
tracting Party and no less than that which is or may hereafter be
accorded to the nationals, corporations and associations of any third
country. Moreover, in all matters relating to the taking of privately
owned enterprises into public ownership and the placing of such
enterprises under public control, enterprises in which nationals,
corporations and associations of either High Contracting Party have
a substantial interest shall be accorded, within the territories of the
other High Contracting Party, treatment no less favorable than that
which is or may hereafter be accorded to similar enterprises in which
nationals, corporations and associations of such other High Con-
tracting Party have a substantial interest, and no less favorable than
that which is or may hereafter be accorded to similar enterprises in
which nationals, corporations and associations of any third country
have a substantial interest.”

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104. Paragraph | thus provides for “the most constant protection and
security” for nationals of each High Contracting Party, both “for their
persons and property”; and also that, in relation to property, the term
“nationals” shall be construed to “include corporations and associa-
tions”; and in defining the nature of the protection, the required standard
is established by a reference to “the full protection and security required
by international law”. Paragraph 3 elaborates this notion of protection
and security further, by requiring no less than the standard accorded
to the nationals, corporations and associations of the other High
Contracting Party; and no less than that accorded to the nationals, cor-
porations and associations of any third country. There are, accordingly,
three different standards of protection, all of which have to be satisfied.

105. A breach of these provisions is seen by the Applicant to have been
committed when the Respondent “allowed ELSI workers to occupy the
plant” (see paragraph 65 above). It is the contention of the United States
that once the plant had been requisitioned, ELSI’s employees began an
occupation of the premises which continued, so far as the United States
was aware, up to the re-opening of the plant by ELTEL; and that this
occupation had the tacit approval of local authorities, who made no effort
to prevent or to end it, or otherwise to protect the premises. To this occu-
pation the United States attributes as injurious consequences, first a
deterioration of the plant and related material and equipment, and
secondly that it impeded the efforts of the trustee in bankruptcy to dis-
pose of the plant. |

106. Italy has objected that Article V, paragraphs 1 and 3, guarantees
the protection and security of property belonging to United States
companies in Italy, but the plant in Palermo which, according to the
United States, should have been protected under the FCN Treaty belonged
to the Italian company ELSI. The United States replies that the “property
of Raytheon and Machiett in Italy” was ELSI itself, and Italy was obli-
gated to protect the entire entity of ELSI from the deleterious effects of
the requisition. While there may be doubts whether the word “property”
in Article V, paragraph 1, extends, in the case of shareholders, beyond
the shares themselves, to the company or its assets, the Chamber will
nevertheless examine the matter on the basis argued by the United States
that the “property” to be protected under this provision of the FCN
Treaty was not the plant and equipment the subject of the requisition, but
the entity of ELST itself.

107. That there was some occupation of the plant by the workers after
the requisition is something that Italy has not sought to deny, and the
Court of Appeal of Palermo referred in passing to the circumstance of the
requisitioning authority having tolerated the “unlawful” act of occupation
of the plant by the workers (“la autorità requirente avesse tollerato l'illecito
penale di una occupazione dei reparti di lavorazione da parte delle mae-
stranze”). It appears, nevertheless, to have been a peaceful occupation, as
may be learned from ELSI’s own administrative appeal of 19 April 1968 to

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the Prefect against the requisition, and the affidavits of the Mayor of Pal-
ermo and one of his officials (see paragraph 33 above). It is difficult to
accept that the occupation seriously harmed the interests of ELS] in view
of the evidence produced by Italy that measures taken by the Mayor of
Palermo for the temporary management of the plant permitted the contin-
uation and completion of work in progress in the months following the
requisition. The United States has asserted that the continued production
was very limited, and cannot be equated with resumption of full produc-
tion in the plant, and continues to contend that the plant and machinery
fell into disuse following the requisition and deteriorated rapidly in value.
The Court of Palermo however found itself unable to establish that any
damage to the plant had been caused by the occupying workers.

108. The reference in Article V to the provision of “constant protection
and security” cannot be construed as the giving of a warranty that prop-
erty shall never in any circumstances be occupied or disturbed. The dis-
missal of some 800 workers could not reasonably be expected to pass with-
out some protest. Indeed, the management of ELSI seems to have been
very much aware that the closure of the plant and dismissal of the work-
force could not be expected to pass without disturbance; as is apparent
from the removal of the company’s books and “quite a lot of inventory” to
Milan (paragraph 17 above). In any event, considering that it is not estab-
lished that any deterioration in the plant and machinery was due to the
presence of the workers, and that the authorities were able not merely to
protect the plant but even in some measure to continue production, the
protection provided by the authorities could not be regarded as falling
below “the full protection and security required by international law”; or
indeed as less than the national or third-State standards. The mere fact
that the occupation was referred to by the Court of Appeal of Palermo
as unlawful does not, in the Chamber’s view, necessarily mean that the
protection afforded fell short of the national standard to which the
FCN Treaty refers. The essential question is whether the local law, either
in its terms or its application, has treated United States nationals less well
than Italian nationals. This, in the opinion of the Chamber, has not been
shown. The Chamber must, therefore, reject the charge of any violation of
Article V, paragraphs | and 3.

109. The Applicant sees a further breach of Article V, paragraphs 1
and 3, of the FCN Treaty, in the time taken — 16 months — before the
Prefect ruled on ELSI’s administrative appeal against the Mayor’s requi-

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sition order, or, to cite the words of counsel for the Applicant (para-
graph 65 above),

“the Respondent violated its obligations when it unreasonably
delayed ruling on the lawfulness of the requisition for 16 months
until immediately after the ELSI plant, equipment and work-in-
process had all been acquired by ELTEL”.

The time taken by the Prefect was undoubtedly long; and the Chamber
was not entirely convinced by the Respondent’s suggestion that such
lengthy delays by Prefects were quite usual. Yet it must be remembered
that the requisition in fact lapsed after six months and that Italian law did
provide a safeguard against delays by the Prefect. It was possible after
120 days from the filing of the appeal to serve on the Prefect a request
requiring him to render a decision within 60 days (paragraph 41 above).
Raytheon and Machlett were never in a position to take advantage of this
procedure, because by the time the 120 days had elapsed the trustee in
bankruptcy was in control of the company; on the other hand, the trustee
in bankruptcy did employ this procedure, and the Prefect shortly after-
wards gave his decision on the appeal.

110. Counsel for the Applicant has referred to this delay as “a denial of
the level of procedural justice accorded by international law”. Its claim in
this respect is however not founded on the rules of customary interna-
tional law concerning denial of justice, nor on the text of the FCN Treaty
(Article V, paragraph 4) which provides for access to justice. The rele-
vance of the delay of the Prefect’s ruling has been expressed in two ways.
First, it is said, had there been a speedy decision by the Prefect, the bank-
ruptcy of ELSI could have been avoided; the Chamber is unable to accept
this argument, for the reasons already explained in connection with the
claim under Article III, paragraph 2, of the FCN Treaty. Secondly, it is
contended that once the requisition occurred, the Respondent had an ob-
ligation to protect ELSI from its deleterious effects, and one of the ways in
which it fell short of this obligation was by failing to provide an adequate
method of overturning the requisition.

111. The primary standard laid down by Article V is “the full protec-
tion and security required by international law”, in short the “protection
and security” must conform to the minimum international standard. As
noted above, this is supplemented by the criteria of national treatment
and most-favoured-nation treatment. The Chamber is here called upon to
apply the provisions of a treaty which sets standards — in addition to the
reference to general international law — which may go further in protect-
ing nationals of the High Contracting Parties than general international
law requires; but the United States has not — save in one respect —
suggested that these requirements do in this respect set higher standards
than the international standard. It must be doubted whether in all the
circumstances, the delay in the Prefect’s ruling in this case can be
regarded as falling below that standard. Certainly, the Applicant’s use

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of so serious a charge as to call it a “denial of procedural justice” might
be thought exaggerated.

112. The United States has also alleged that the delay in ELSI’s case
was far in excess of the delay experienced in prior suits involving compan-
ies owned by Italian nationals, and that it therefore constituted a failure to
accord a national standard of protection. As already stated, the Chamber
was not entirely convinced by the contention that such a lengthy delay was
quite usual (paragraph 109 above); nevertheless, it is not satisfied that
a “national standard” of more rapid determination of administrative
appeals has been shown to have existed. The Chamber is therefore unable
to see in this delay a violation of paragraphs | and 3 of Article V of
the FCN Treaty.

113. The Chamber now turns to the United States claim based on
Article V, paragraph 2, of the FCN Treaty, which provides as follows:

“2. The property of nationals, corporations and associations of
either High Contracting Party shall not be taken within the territo-
ries of the other High Contracting Party without due process of law
and without the prompt payment of just and effective compensation.
The recipient of such compensation shall, in conformity with such
applicable laws and regulations as are not inconsistent with para-
graph 3 of Article XVII of this Treaty, be permitted without inter-
ference to withdraw the compensation by obtaining foreign ex-
change, in the currency of the High Contracting Party of which such
recipient is a national, corporation or association, upon the most
favorable terms applicable to such currency at the time of the taking
of the property, and exempt from any transfer or remittance tax,
provided application for such exchange is made within one year
after receipt of the compensation to which it relates.”

This is a most important paragraph, of a kind that is central to many
investment treaties. Where the English version begins by providing that

“The property of nationals, corporations and associations of
either High Contracting Party shall not be taken within the territories
of the other High Contracting Party without due process of law and
without the prompt payment of just and effective compensation”,

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the corresponding Italian text reads as follows:

“I beni dei cittadini e delle persone giuridiche ed associazioni di cia-
scuna Alta Parte Contraente non saranno espropriati entro i territori
dell'altra Alta Parte Contraente, senza una debita procedura legale e
senza il pronto pagamento di giusto ed effettivo indennizzo.”

There was considerable argument before the Chamber over the difference
between the English version of the provision, which uses the word
“taken”, and the Italian, which uses the word “espropriati”. Both versions
are authentic. Obviously there is some difference between the two
versions. The word “taking” is wider and looser than “espropriazione”.

114. The United States argued that, however the provision is read, the
result is the same in this case; which is not the same as arguing that the two
versions mean the same thing; and if one looks at the acts and conduct
which the Applicant claims to constitute a violation of Article V, para-
graph 2, one finds this claim expressed in the following terms. In the con-
tention of the United States, both the Respondent’s act of requisitioning
the ELSI plant and its subsequent acts in acquiring the plant, assets, and
work in progress, singly and in combination, constitute takings of prop-
erty without due process of law and just compensation. The requisition
in itself is, in the view of the United States, such a taking, because Italy
physically seized ELSI’s property with the object and effect of ending
Raytheon and Machlett’s control and management, in order to prevent
them from conducting the planned liquidation; and according to the
United States, in international law a “taking” is generally recognized
as including not merely outright expropriation of property, but also un-
reasonable interference with its use, enjoyment or disposal. Secondly,
the United States claims that the Respondent, after the requisition and
before the Prefect ruled on the administrative appeal, proceeded through
ELTEL to acquire the ELSI plant and assets for less than fair market
value. The matter was summed up by counsel at the hearings as follows:

“The requisition and the delay in overturning the requisition not
only interfered with Raytheon and Machlett’s management and con-
trol of ELSI, not only impaired Raytheon and Machlett’s legally
acquired interests in ELSI, but also resulted in what can only be
described as the taking of the property.”

115. The specific United States allegations of interference by the Ital-
ian Government with the ELSI bankruptcy proceedings may be summar-
ized as follows. The object in view is said to have been to secure ELSI’s
facilities for IRI, on the terms and at the below-market price which IRI
desired, while responding to the political pressure brought by ELSI’s for-
mer workers. Having requisitioned the plant and caused ELSI’s bank-

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69 ELETTRONICA SICULA (JUDGMENT)

ruptcy, the Government of Italy discouraged private bidders at the auc-
tions held to dispose of ELSI’s assets, by informing the public at large that
the Government would be taking over ELSI’s facilities. While proceeding
with plans to take over ELSI, for example by negotiating agreements for
rehiring the staff, IRI is said to have “boycotted” the first three auctions of
the assets, at which the terms set by the bankruptcy judge were not to its
liking. ELTEL proposed to the trustee in bankruptcy that it be permitted
to lease the plant, and to purchase the work in progress, and this was
agreed to by the bankruptcy authorities on terms which, it is claimed, were
adverse to ELSI’s interests, both because the sums involved were too low
and because ELTEL was placed in a position to dictate the terms of the
final sale. At the final auction, ELTEL, already in possession under the
lease, acquired the plant and related equipment for 4,000 million lire, the
figure reported in the press to have been previously agreed on between
IRI and the Italian authorities. As a result of the arrangements made with
the bankruptcy authorities for a piecemeal take-over, the total amount
received for ELSI’s assets was slightly over 4,000 million lire, as com-
pared with the company’s book valuation of over 12,000 million lire.

116. Thus, the charge based on the combination of the requisition and
subsequent acts is really that the requisition was the beginning of a process
that led to the acquisition of the bulk of the assets of ELSI (which was
wholly owned by Raytheon and Machlett) for far less than market value.
That is a charge, not of mere temporary taking — though the United States
also contended that a temporary requisition can constitute an indirect
taking — but of a process by which title to ELSI’s assets itself was in the
end transferred. So far as the requisition is concerned, counsel put the
United States argument this way:

“the fact that the requisition was for an extendable six-month period
does not make this any less of an expropriation of interests in
property, given the fact that the requisition drove ELSI into
bankruptcy”.

What is thus alleged by the Applicant, ifnot an overt expropriation, might
be regarded as a disguised expropriation; because, at the end of the pro-
cess, itis indeed title to property itself that is at stake. The argument is that
if a series of acts or omissions of the Italian authorities had the end result,
whether intended or not and whether the result of collusion or not, of
causing United States property in Italy to be ultimately transferred into
the ownership of Italy, without proper compensation, there would be a
violation of Article V, paragraph 2, of the FCN Treaty.

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117. It must immediately be added that the United States, in the course
of the oral proceedings, in response to an Italian assertion that it was
attempting to establish a conspiracy to bring about the change of owner-
ship, made it very clear that this part of its case did not depend upon, or in
any way involve, any allegation that the Italian authorities were parties to
such a conspiracy. The United States stated formally that it “has never
argued and does not now argue that the acts and omissions of the
Respondent that violated the Treaty amount to a ‘conspiracy’”. More-
over, it was added that whilst the relief sought was “based on the acts and
omissions of the Respondent’s agents and officials at the federal and
local levels (including IRD), without any allegation that these officials
were working in conspiracy”, the United States did not “speculate as
to why these agents and officials of the Respondent acted in the manner
they did”; or, as the United States Agent put it in his argument:

“These acts and omissions constituted Treaty violations ...
whether or not the Italian Government entities involved knew of
each other’s actions, and whether or not they were acting in concert
or at cross purposes.”

118. The argument that there was a “taking” involving transfer of title
gives rise to a number of difficulties. Even assuming, though without
deciding, that “espropriazione” might be wide enough to include not
only formal and open expropriation, but also a disguised expropriation,
there would still be a question whether the paragraph can be extended
to include even a “taking” of an Italian corporation in Italy, of which,
strictly speaking, Raytheon and Machlett only held the shares. This,
however, is where account must also be taken of the first paragraph of
the Protocol appended to the FCN Treaty, which provides:

“1. The provisions of paragraph 2 of Article V, providing for the
payment of compensation, shall extend to interests held directly or
indirectly /si estenderanno ai diritti spettanti direttamente od indiretta-
mente ai cittadini. . .] by nationals, corporations and associations of
either High Contracting Party in property which is taken within the
territories of the other High Contracting Party.”

The English text of this provision suggests that it was designed precisely to
resolve the doubts just described. The interests of shareholders in the
assets of a company, and in their residuary value on liquidation, would
appear to fall in the category of the “interests” to be protected by Article V,
paragraph 2, and the Protocol. Italy has however drawn attention to the
use in the Italian text — which is equally authentic — of the narrower term

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“diritti” (rights), and has argued that, on the basis of the principle
expressed in Article 33, paragraph 4, of the Vienna Convention on the
Law of Treaties, the correct interpretation of the Protocol must be in the
more restrictive sense of the Italian text.

119. In the view of the Chamber, however, neither this question of in-
terpretation of the two texts of the Protocol, nor the questions raised as to
the possibilities of disguised expropriation or of a “taking” amounting
ultimately to expropriation, have to be resolved in the present case,
because it is simply not possible to say that the ultimate result was the con-
sequence of the acts or omissions of the Italian authorities, yet at the
same time to ignore the most important factor, namely ELSI’s financial
situation, and the consequent decision of its shareholders to close the
plant and put an end to the company’s activities. As explained above (para-
graphs 96-98), the municipal courts considered that ELSI, if not already
insolvent in Italian law before the requisition, was in so precarious a state
that bankruptcy was inevitable. The Chamber cannot regard any of the
acts complained of which occurred subsequent to the bankruptcy as
breaches of Article V, paragraph 2, in the absence of any evidence of col-
lusion, which is now no longer even alleged. Even if it were possible to see
the requisition as having been designed to bring about bankruptcy, as a
step towards disguised expropriation, then, if ELSI was already under an
obligation to file a petition of bankruptcy, or in such a financial state
that such a petition could not be long delayed, the requisition was an
act of supererogation. Furthermore this requisition, independently of
the motives which allegedly inspired it, being by its terms for a limited
period, and liable to be overturned by administrative appeal, could not,
in the Chamber’s view, amount to a “taking” contrary to Article V unless
it constituted a significant deprivation of Raytheon and Machlett’s inter-
est in ELSI’s plant; as might have been the case if, while ELSI remained
solvent, the requisition had been extended and the hearing of the admin-
istrative appeal delayed. In fact the bankruptcy of ELSI transformed
the situation less than a month after the requisition. The requisition
could therefore only be regarded as significant for this purpose if it
caused or triggered the bankruptcy. This is precisely the proposition
which is irreconcilable with the findings of the municipal courts, and
with the Chamber’s conclusions in paragraphs 99-100 above.

120. Article I of the Supplementary Agreement to the FCN Treaty,
which confers rights not qualified by national or most-favoured-nation
standards, provides as follows:

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72 ELETTRONICA SICULA (JUDGMENT)

“The nationals, corporations and associations of either High Con-
tracting Party shall not be subjected to arbitrary or discriminatory
measures within the territories of the other High Contracting Party
resulting particularly in: (a) preventing their effective control and
management of enterprises which they have been permitted to estab-
lish or acquire therein; or, (6) impairing their other legally acquired
rights and interests in such enterprises or in the investments which
they have made, whether in the form of funds (loans, shares or other-
wise), materials, equipment, services, processes, patents, techniques
or otherwise. Each High Contracting Party undertakes not to discri-
minate against nationals, corporations and associations of the other
High Contracting Party as to their obtaining under normal terms the
capital, manufacturing processes, skills and technology which may
be needed for economic development.”

The United States bases its claims upon allegations that measures were
taken which were both “arbitrary” and “discriminatory” in the sense of
this text.

121. The Applicant pressed strongly the claim that the requisition was
an arbitrary or discriminatory act which violated both the “(a)” and the
“(b)” clauses of the Article. The requisition, it is said, clearly prevented
Raytheon and Machlett from exercising their control and management of
ELSI and also resulted in an impairment of their legally acquired rights
and interests in ELSI, inasmuch as it prevented the voluntary liquidation
of ELSI and caused it to file for bankruptcy. To the claim as it is presented
in those terms, however, the Chamber has already given its answer: the
absence of a sufficiently palpable connection between the effects of the
requisition and the failure of ELSI to carry out its planned orderly liquida-
tion (paragraph 101 above). Accordingly, it cannot be said that it was the
requisition per se which either prevented Raytheon’s effective control and
management of ELSI, or which resulted in impairing legally acquired
rights, in the sense of the clauses called “/a)” and “/b)” in Article I of the
Supplementary Agreement. Yet, although this is an answer to the claim as
it is presented in terms of those clauses of Article I, it is not the end of the
matter. The effect of the word “particularly”, introducing the clauses “(a)”
and “/b)”, suggests that the prohibition of arbitrary (and discriminatory)
acts is not confined to those resulting in the situations described in “(a)”
and “(b)”, but is in effect a prohibition of such acts whether or not they
produce such results. It is necessary, therefore, to examine whether the
requisition was, or was not, an arbitrary or discriminatory act of itself.

122. The allegation of the United States that Raytheon and Machlett
were subjected to “discriminatory” measures can be dealt with shortly. It
is common ground that the requisition order was not made because of the
nationality of the shareholders; there have been many cases of requisition

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orders made in similar circumstances against wholly Italian-owned com-
panies. But the United States claims that there was “discrimination” in
favour of IRI, an entity controlled by Italy; and this was, in the view of the
United States, contrary to the FCN Treaty and Supplementary Agree-
ment. It is contended that the interests of IRI were directly contrary to
those of Raytheon and Machlett, and the Italian Government intervened
to advance its own commercial interests at the latter’s expense. However,
the requisition order in itself did not serve any interest of IR]; it is only if
the requisition is regarded as a step in a process destined to transfer ELSI’s
assets to IRI that the factual situation would afford any basis for the argu-
ment now under examination. As indicated above, the United States
stated formally during the oral proceedings that it was not arguing that the
acts and omissions complained of amount to a “conspiracy”, and did not
speculate as to why the relevant agents and officials of the Respondent
acted as they did (see paragraph 117 above). There is no sufficient evi-
dence before the Chamber to support the suggestion that there was a plan
to favour IRI at the expense of ELSI, and the claim of “discriminatory
measures” in the sense of Article I of the Supplementary Agreement must
therefore be rejected.

123. In order to show that the requisition order was an “arbitrary” act
in the sense of the Supplementary Agreement to the FCN Treaty, the
Applicant has relied (inter alia) upon the status of that order in Italian law.
It contends that the requisition “was precisely the sort of arbitrary action
which was prohibited” by Article I of the Supplementary Agreement, in
that “under both the Treaty and Italian law, the requisition was unreason-
able and improperly motivated”; it was “found to be illegal under Italian
domestic law for precisely this reason”. Relying on its own English trans-
lation of the decision of the Prefect of Palermo of 22 August 1969, the
Applicant concludes that the Prefect found that the order was “destitute
of any juridical cause which may justify it or make it enforceable”. Italy
first contended that the word “or” in the translation of this passage should
be replaced by “and”, and subsequently put forward the alternative trans-
lation that “the order, generically speaking, lacks the proper motivation
that could justify it and make it effective”. It may be noted in passing that
when ELSI, immediately after the making of the requisition order, form-
ally invited the Mayor of Palermo to revoke the order, it referred to it
throughout as “the said illegal and arbitrary order” (“detto illegale ed arbi-
trario provvedimento”); but the appeal submitted to the Prefect, while
citing numerous legal grounds for annulment, including “eccesso di potere
per sviamento del fine” (“excess of power by deviation from the purpose”),
contained no claim that the order had been “arbitrary”. It is therefore
appropriate for the Chamber to examine the legal grounds given by the
Prefect of Palermo for his decision, as well as what was said by the
Court of Appeal of Palermo on the legal impact of the Prefect’s deci-
sion on the requisition order, and consider whether the findings of the

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Prefect or of the Court of Appeal are equivalent to, or suggest, a con-
clusion that the requisition was an “arbitrary” action.

124. Yet it must be borne in mind that the fact that an act of a public
authority may have been unlawful in municipal law does not necessarily
mean that that act was unlawful in international law, as a breach of treaty
or otherwise. A finding of the local courts that an act was unlawful may
well be relevant to an argument that it was also arbitrary; but by itself, and
without more, unlawfulness cannot be said to amount to arbitrariness.
It would be absurd if measures later quashed by higher authority or a
superior court could, for that reason, be said to have been arbitrary in the
sense of international law. To identify arbitrariness with mere un-
lawfulness would be to deprive it of any useful meaning in its own right.
Nor does it follow from a finding by a municipal court that an act was
unjustified, or unreasonable, or arbitrary, that that act is necessarily to
be classed as arbitrary in international law, though the qualification
given to the impugned act by a municipal authority may be a valuable
indication.

125. The principal passage from the decision of the Prefect which is
relevant here has already been quoted (paragraph 75 above), but it is con-
venient to set it out again here:

“Non wha dubbio che anche se possono considerarsi, in linea del tutto
teorica, sussistenti, nella fattispecie, gli estremi della grave necessita
pubblica e della contingibilità ed urgenza che determinarono l'adozione
del provvedimento, il fine cui tendeva la requisizione non poteva trovare
pratica realizzazione con il provvedimento stesso, tanto é vero che nes-
suna ripresa di attivita dell'azienda vi é stata a seguito della requisi-
zione, né avrebbe potuto esserci. Manca, pertanto, nel provvedimento,
genericamente, la causa giuridica che possa giustificarlo e renderlo ope-
rante.”

The differing translations offered by the Parties of the sentence upon
which the Applicant places considerable reliance are set out in para-
graph 123 above. In the Chamber’s translation, the passage reads:

“There is no doubt that, even though, from the purely theoretical
standpoint, the conditions of grave public necessity and of unfore-
seen urgency warranting adoption of the measure may be considered
to exist in the case in point, the intended purpose of the requisition
could not in practice be achieved by the order itself, since in fact there
was no resumption of the company’s activity following the requisi-
tion, nor could there have been such resumption. The order therefore

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lacks, generically, the juridical cause which might justify it and make
it operative.”

126. In support of this conclusion, the Prefect explained that the
Mayor had believed that he could deal with the situation by means of a
requisition, without appreciating that

“the state of the company as a result of circumstances of a functional-
economic and market nature, was such as not to permit of the con-
tinuation of its activity”.

He also emphasized the shutdown of the plant and the protest actions of
the staff, and the fact that the requisition had not succeeded in preserving
public order. Finally the Prefect also observed that the order had been
adopted

“anche sotto l’influsso delle pressioni e dei rilievi formulati dalla stampa
cittadina, per cui é da ritenere che il Sindaco, anche per sottrarvisi e di-
mostrare Vintendimento della Pubblica Amministrazione di intervenire
in qualche modo, addivenne alla requisizione quale provvedimento
diretto più che altro a porre in evidenza la sua intenzione di affrontare
comunque il problema”.

In the translation of the Prefect’s decision supplied by the Applicant:

“also under the influence of the pressure created by, and of the
remarks made by the local press; therefore we have to hold that the
Mayor, also in order to get out of the above and to show the intent of
the Public Administration to intervene in one way or another, issued
the order of requisition as a measure mainly directed to emphasize
his intent to face the problem in some way [or, as quoted in the judg-
ment of the Court of Appeal of Palermo, in the translation supplied
by the Applicant: ‘his intention to tackle the problem just the same’]”.

It was of course understandable that the Mayor, as a public official,
should have made his order, in some measure, as a response to local public
pressures ; and the Chamber does not see, in this passage of the Prefect’s
decision, any ground on which it might be suggested that the order was
therefore arbitrary.

127. Inthe action brought by the trustee in bankruptcy for damages on
account of the requisition, the Court of Palermo and subsequently the
Court of Appeal of Palermo had to consider the legal significance of the
decision of the Prefect. The Court of Palermo accepted the argument of
the respondent administration that “il provvedimento prefettizio é sostan-
zialmente di revoca dell’atto richiamato essendo stati ritenuti irrealizzabili gli
scopi cui lo stesso miravano’”, i.e., that “the Prefect’s order is in substance a
revocation of the act in question, the objectives which were contemplated
by it having been adjudged to have been impossible to achieve”. When the
matter came before the Court of Appeal, it observed that this argument
was contrary to the argument of the trustee in bankruptcy “che ravvisa in

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detto decreto una dichiarazione di illegittimita del provvedimento di requisi-
zione”, i.e., “who regarded the [Prefect’s] decree as a declaration of the un-
lawfulness of the requisition order”. The Court of Appeal understood the
lower court as meaning simply that “i vizi del provvedimento di requisizione,
rilevati dal Prefetto, sono vizi di merito e non vizi di legittimità”, 1.e., “the
defects found by the Prefect in the requisition order were defects in
respect of the merits and not defects in respect of lawfulness”; it found
that this finding was incorrect because the reasoning of the Prefect was,
in its view, a clear finding of “un tipico caso di eccesso di potere, che é, come
é€ noto, un vizio di legittimita dell'atto amministrativo’, 1.e., “a typical case of
excess of power, which is of course a defect in respect of lawfulness of an
administrative act”. Having reached this conclusion, the Court of Appeal
refers later in its judgment to the requisition as having been “unlawful”
(“illecito”). The analysis of the Prefect’s decision as a finding of excess
of power, with the result that the order was subject to a defect of lawfulness
does not, in the Chamber’s view, necessarily and in itself signify any
view by the Prefect, or by the Court of Appeal of Palermo, that the Mayor’s
act was unreasonable or arbitrary.

128. Arbitrariness is not so much something opposed to a rule of law,
as something opposed to the rule of law. This idea was expressed by the
Court in the Asylum case, when it spoke of “arbitrary action” being “sub-
stituted for the rule of law” (Asylum, Judgment, I.C.J. Reports 1950, p. 284).
It is a wilful disregard of due process of law, an act which shocks, or at
least surprises, a sense of juridical propriety. 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.

129. The United States argument is not of course based solely on the
findings of the Prefect or of the local courts. United States counsel felt
able to describe the requisition generally as being an “unreasonable or
capricious exercise of authority”. Yet one must remember the situation in
Palermo at the moment of the requisition, with the threatened sudden un-
employment of some 800 workers at one factory. It cannot be said to have
been unreasonable or merely capricious for the Mayor to seek to use the
powers conferred on him by the law in an attempt to do something about a
difficult and distressing situation. Moreover, if one looks at the requisi-
tion order itself, one finds an instrument which in its terms recites not only
the reasons for its being made but also the provisions of the law on which it
is based: one finds that, although later annulled by the Prefect because
“the intended purpose of the requisition could not in practice be achieved
by the order itself” (paragraph 125 above), it was nonetheless within the
competence of the Mayor of Palermo, according to the very provisions of
the law cited in it; one finds the Court of Appeal of Palermo, which did
not differ from the conclusion that the requisition was intra vires, ruling
that it was unlawful as falling into the recognized category of administra-
tive law of acts of “eccesso di potere”. Furthermore, here was an act belong-

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ing to a category of public acts from which appeal on juridical grounds
was provided in law (and indeed in the event used, not without success).
Thus, the Mayor’s order was consciously made in the context of an operat-
ing system of law and of appropriate remedies of appeal, and treated as
such by the superior administrative authority and the local courts. These
are not at all the marks of an “arbitrary” act.

130. The Chamber does not, therefore, see in the requisition a measure
which could reasonably be said to earn the qualification “arbitrary”, as it
is employed in Article I of the Supplementary Agreement. Accordingly,
there was no violation of that Article.

* *

131. Finally, the United States claims that there has been a violation by
Italy of Article VII of the FCN Treaty. This long and elaborately drafted
Article, in four paragraphs, is principally concerned with ensuring the
right “to acquire, own and dispose of immovable property or interests
therein within the territories of the other High Contracting Party”. The
full text is as follows:

“1. The nationals, corporations and associations of either High
Contracting Party shall be permitted to acquire, own and dispose of
immovable property or interests therein within the territories of the
other High Contracting Party upon the following terms:

(a) in the case of nationals, corporations and associations of the
Italian Republic, the right to acquire, own and dispose of such
property and interests shall be dependent upon the laws and
regulations which are or may hereafter be in force within the
state, territory or possession of the United States of America
wherein such property or interests are situated; and

(b) in the case of nationals, corporations and associations of the
United States of America, the right to acquire, own and dispose of
such property and interests shall be upon terms no less favorable
than those which are or may hereafter be accorded by the state,
territory or possession of the United States of America in which
such national is domiciled, or under the laws of which such cor-
poration or association is created or organized, to nationals, cor-
porations and associations of the Italian Republic; provided that
the Italian Republic shall not be obligated to accord to nationals,
corporations and associations of the United States of America
rights in this connection more extensive than those which are or
may hereafter be accorded within the territories of such Republic
to nationals, corporations and associations of such Republic.

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ELETTRONICA SICULA (JUDGMENT)

2. If a national, corporation or association of either High Con-
tracting Party, whether or not resident and whether or not engaged in
business or other activities within the territories of the other High
Contracting Party, is on account of alienage prevented by the applic-
able laws and regulations within such territories from succeeding as
devisee, or as heir in the case of a national, to immovable property
situated therein, or to interests in such property, then such national,
corporation or association shall be allowed a term of three years in
which to sell or otherwise dispose of such property or interests, this
term to be reasonably prolonged if circumstances render it necessary.
The transmission or receipt of such property or interests shall
be exempt from the payment of any estate, succession, probate or
administrative taxes or charges higher than those now or hereafter
imposed in like cases of nationals, corporations or associations of
the High Contracting Party in whose territory the property is or
the interests therein are situated.

3. The nationals of either High Contracting Party shall have full
power to dispose of personal property of every kind within the terri-
tories of the other High Contracting Party, by testament, donation or
otherwise and their heirs, legatees or donees, being persons of what-
ever nationality or corporations or associations wherever created or
organized, whether resident or non-resident and whether or not en-
gaged in business within the territories of the High Contracting Party
where such property is situated, shall succeed to such property, and
shall themselves or by their agents be permitted to take possession
thereof, and to retain or dispose of it at their pleasure. Such disposi-
tion, succession and retention shall be subject to the provisions of
Article IX and exempt from any other charges higher, and from any
restrictions more burdensome, than those applicable in like cases of
nationals, corporations and associations of such other High Con-
tracting Party. The nationals, corporations and associations of either
High Contracting Party, shall be permitted to succeed, as heirs, lega-
tees and donees, to personal property of every kind within the terri-
tories of the other High Contracting Party, left or given to them by
nationals of either High Contracting Party or by nationals of any
third country, and shall themselves or by their agents be permitted
to take possession thereof, and to retain or dispose of it at their
pleasure. Such disposition, succession and retention shall be subject
to the provisions of Article IX and exempt from any other charges,
and from any restrictions, other or higher than those applicable in
like cases of nationals, corporations and associations of such other
High Contracting Party. Nothing in this paragraph shall be con-
strued to affect the laws and regulations of either High Contracting
Party prohibiting or restricting the direct or indirect ownership by
79 ELETTRONICA SICULA (JUDGMENT)

aliens or foreign corporations and associations of the shares in, or
instruments of indebtedness of, corporations and associations of
such High Contracting Party carrying on particular types of activi-
ties.

4. The nationals, corporations and associations of either High
Contracting Party shall, subject to the exceptions in paragraph 3 of
Article IX, receive treatment in respect of all matters which relate to
the acquisition, ownership, lease, possession or disposition of
personal property, no less favorable than the treatment which is
or may hereafter be accorded to nationals, corporations and asso-
ciations of any third country.”

The Italian text of the opening sentence of paragraph 1 is as follows:

“I cittadini e le persone giuridiche ed associazioni di ciascuna Alta
Parte Contraente avranno facolta di acquistare, possedere e disporre di
beni immobili o di altri diritti reali nei territori dell’altra Alta Parte
Contraente alle seguenti condizioni...”

132. It was objected by Italy that this Article does not apply at all to
Raytheon and Machlett because their own property rights (“diritti reali”)
were limited to shares in ELSI, and the immovable property in question
(the plant in Palermo) was owned by ELSI, an Italian company. The
United States contended that “immovable property or interests therein”
is a phrase sufficiently broad to include indirect ownership of property
rights held through a subsidiary that is not a United States corporation.
The argument turned to a considerable extent on the difference in
meaning between the English, “interests” and the Italian, “diritti reali”.
“Interest” in English no doubt has several possible meanings. But since
it is in English usage a term commonly used to denote different kinds of
rights in land (for example rights such as charges, or easements, and many
kinds of “future interests”), it is possible to interpret the English and
Italian versions of Article VII as meaning much the same thing; especially
as the clause in question is in any event limited to immovable property.
The Chamber however has some sympathy with the contention of the
United States, as being more in accord with the general purpose of the
FCN Treaty. The United States argument is further that Raytheon and
Machlett, being the owners of all the shares, were in practice the persons
who alone could decide (before the bankruptcy), whether to dispose of
the immovable property of the company; accordingly, if the requisition

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did, by triggering the bankruptcy, deprive ELSI of the possibility of dis-
posing of its immovable property, it was really Raytheon and Machlett
who were deprived; and allegedly in violation of Article VII.

133. There are however problems in any attempt to apply the provi-
sions of Article VII to the actual facts of this case. First, the protection
which paragraph 1 of Article VII affords to this group of rights is not un-
qualified. The qualification designated “(a)” refers to the rights enjoyed
by Italian nationals in the territory of the United States of America, which
in effect simply subjects Italian nationals to the municipal laws in the
United States, and does not concern us. Qualification “(b)” does, for this
applies to the rights enjoyed by United States nationals in the territory
of the Republic of Italy. It is a convoluted qualification because it lays
down alternative standards, which standards are themselves then both
qualified by the same proviso. The terms governing the rights are to be
no less favourable than those which are or may hereafter be accorded
by the “state, territory or possession of the United States of America in
which such national is domiciled, or under the laws of which such cor-
poration or association is created or organized” — which in the case
of Raytheon is the State of Delaware and in the case of Machlett the
State of Connecticut — “to nationals, corporations and associations of
the Italian Republic”. The proviso is:

“that the Italian Republic shall not be obligated to accord to nation-
als, corporations and associations of the United States of America
rights in this connection more extensive than those which are or may
hereafter be accorded within the territories of such Republic to
nationals, corporations and associations of such Republic”.

134. The Chamber has thus to make the somewhat elaborate juridical
calculus which this provision in the FCN Treaty appears to demand for its
application. No very cogent evidence was put before the Chamber to
show that the application of Italian law in this matter was less favourable
than the treatment accorded by Italy to its own nationals, corporations
and associations, in Italy. Indeed it appeared that, particularly during the
troubled times of 1968, requisitions of Italian companies by the local
Mayors had happened rather frequently. The claim must therefore be
taken to be that ELSI was given less favourable treatment than might have
been enjoyed by an Italian company under the laws of Delaware and
Connecticut in similar circumstances. The United States drew attention
to texts showing that

“Under the laws of both Delaware and Connecticut, corporations
may be dissolved and their assets sold pursuant to determinations by
their boards of directors and shareholders”,

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81 ELETTRONICA SICULA (JUDGMENT)

and that if those States were to take the immovable property of a corpora-
tion for a lawful public use, they would have to make compensation; Italy
has not disputed these legislative provisions.

135. Secondly, however, even so there remains precisely the same diffi-
culty as in trying to apply Article III, paragraph 2, of the FCN Treaty:
what really deprived Raytheon and Machlett, as shareholders, of their
right to dispose of ELSI’s real property, was not the requisition but the
precarious financial state of ELSI, ultimately leading inescapably to
bankruptcy. In bankruptcy the right to dispose of the property of a cor-
poration no longer belongs even to the company, but to the trustee acting
for it; and the Chamber has already decided that ELSI was on a course to
bankruptcy even before the requisition. The Chamber therefore does not
find that Article VII of the FCN Treaty has been violated.

x Ox

136. Having found that the Respondent has not violated the
FCN Treaty in the manner asserted by the Applicant, it follows that the
Chamber rejects also the claim for reparation made in the submissions of
the Applicant.

137. For these reasons,
THE CHAMBER,
(1) Unanimously,

Rejects the objection presented by the Italian Republic to the admissi-
bility of the Application filed in this case by the United States of America
on 6 February 1987;

(2) By four votes to one,

Finds that the Italian Republic has not committed any of the breaches,
alleged in the said Application, of the Treaty of Friendship, Commerce
and Navigation between the Parties signed at Rome on 2 February 1948,
or of the Agreement Supplementing that Treaty signed by the Parties at
Washington on 26 September 1951.

IN FAVOUR: President Ruda; Judges Oda, Ago and Sir Robert Jennings;

AGAINST: Judge Schwebel.

(3) By four votes to one,

Rejects, accordingly, the claim for reparation made against the Repub-
lic of Italy by the United States of America.

IN FAVOUR: President Ruda; Judges Oda, Ago and Sir Robert Jennings;
AGAINST: Judge Schwebel.

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Done in English and in French, the English text being authoritative, at
the Peace Palace, The Hague, this twentieth day of July, one thousand
nine hundred and eighty-nine, in three copies, one of which will be placed
in the archives of the Court and the others transmitted to the Government
of the United States of America and the Government of the Republic of
Italy, respectively.

(Signed) José Maria RuDA,
President.

(Signed) Eduardo VALENCIA-OSPINA,
Registrar.

Judge Opa appends a separate opinion to the Judgment of the
Chamber.

Judge SCHWEBEL appends a dissenting opinion to the Judgment of the
Chamber.

(Initialled) J.M.R.
(Initialled) E.V.O.

71