British Institute of International and Comparative Law

Case concerning Elettronica Sicula S. p. A. (ELSI) (United States of America v. Italy) Author(s): Martin Dixon Reviewed work(s): Source: The International and Comparative Law Quarterly, Vol. 41, No. 3 (Jul., 1992), pp. 701708 Published by: Cambridge University Press on behalf of the British Institute of International and Comparative Law Stable URL: http://www.jstor.org/stable/760557 . Accessed: 24/05/2012 01:21
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led to Mr Mazilu, who supposedly lacked the "intellectual capacity" to prepare a UN report," becoming the country's Vice-President after the Revolution. MARIAARISTODEMOU CASE CONCERNING ELETTRONICA SICULA S.p.A. (ELSI)

(UNITED STATES OF AMERICA v. ITALY)'

On 6 February 1987, the United States filed an application with the International Court of Justice instituting proceedings against Italy in respect of a dispute arising out of the requisitioning of the plant and assets of Raytheon-Elsi S.p.A,- an Italian company based in Sicily but wholly owned by two US corporations.3 The Court's jurisdiction arose under Article XXVI of the United States-Italy Treaty of Friendship, Commerce and Navigation (FCN Treaty) of 2 June 1948 and both parties requested that the matter be referred to a Chamber of the Court in accordance with Article 26 of the ICJ Statute. The original five-judge Chamber was appointed in March 1987.4 The issue at the heart of the dispute was the bankruptcy of ELSI in March/April 1968' and its subsequent sale at a reduced price to the State-owned Industria Elettronica Telecommunicazioni S.p.A. (ELTEL). The United States claimed that the requisition had caused the bankruptcy of the company, thereby violating several substantive and procedural rights guaranteed by the FCN Treaty." In its Counter-Memorial and Rejoinder, Italy raised a preliminary objection to the admissibility of the claim on the ground that local remedies had not been exhausted and, in any event, flatly denied any violation of the Treaty.7 In the oral hearings Italy further submitted "on a subsidiary and alternative basis only" that even supposing a violation of its obligations, no injury had been caused for which payment of indemnity would be justified.s A. The Exhaustion of Local Remedies

With the consent of the parties, the Chamber dealt with the "local remedies"
40. This was the view expressed by Romania's Permanent Mission to the UN in August 1989: I.C.J. Rep. 1989, para.26. 1. I.C.J. Rep. 1989, 15, Judgment 20 July 1989 ("Judgment").

wholly owned subsidiary of Raytheon) the remaining 0.84%, Judgment, para. 15. 4. I.C.J. Rep. 1987, 3, Order of 2 March 1987. The members were President Nagendra Singh and Judges Oda, Ago, Schwebel and Jennings. Judge Ruda later replaced President Singh as both President of the Court and of the Chamber following the latter's death, I.C.J. Rep. 1988, 158, Order of 20 Dec. 1988. 5. The actual date of bankruptcy depends on whether one takes the date of petition to the Italian bankruptcy court, 26 Apr. 1968, or the possibly earlier date at which the obligation under Italian law to file for bankruptcy arose, this being a matter of dispute between the parties. In the Chamber's opinion, the difference was irrelevant, but see infra text accompanying n.45. 6. Judgment, para. 10.

2. An orderof the Mayorof Palermodated 1 Apr. 1968. 3. In 1967,Raytheon owned99.16%of ELSI'ssharesandMachlett Laboratories Inc.(a

7. Ibid.

8. Idem, para. 11. The United States claimed 12,679,000 US dollars in compensation.

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objection within the framework of the merits."This particular aspect of the case and its impact on previous jurisprudence have been dealt with in an earlier volume of this journal,'" and the following discussion concentrates on the main points raised by the parties and the Chamber's response to them. First, the United States advanced three reasons why the local remedies rule was a priori inapplicable: (i) that the jurisdictional clause made no mention of the local remedies rule," and therefore it was inapplicable to disputes arising under the Treaty.' The Chamber accepted that parties to a treaty could dispense with the local remedies rule by agreement, but did not believe that "an important principle of customary law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so"."This confirms the powerful nature of the rule requiring local remedies to be exhausted and makes it clear that although it is not a rule of jus cogens, clear and unambiguous words are necessary if States wish to take claims on behalf of nationals directly to an international tribunal. (ii) that the local remedies rule was inapplicable to that part of the application which requested a declaration that the United States' own rights under the Treaty had been violated.'" Again, the Chamber agreed with the US submission that the local remedies rule was inapplicable to "direct" injury cases. It did, however, examine the substance of the issue before it, rather than concentrate on the type of relief claimed, and concluded that there was no alleged violation of the United States' own rights under the Treaty which could be regarded as distinct from the alleged violation of Raytheon and Machlett's rights guaranteed by that Treaty. 5 As illustrated elsewhere,'" the Chamber rightly moved away from the reasoning evident in the Interhandelcase,"7where the applicability of the local remedies rule seemed to turn on the form of relief sought by the applicant rather than on the nature of the dispute. (iii) that Italy was estopped from pleading the local remedies rule by its silence on this point when presented with the US diplomatic claim in 1974.'"While again et seq. 9. Judgment, paras.49 10. MatthewH. Adler, "The Exhaustionof Local Remedies Rule After the International Court of Justice's Decision in ELSI" (1990) 39 I.C.L.Q. 641. 11. "Any dispute between the High Contracting Parties as to the interpretation or the application of the Treaty, which the High Contracting 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", Judgment, para.48. 12. Judgment, para.50. 13. Ibid. 14. Judgment, para.51. 15. Ibid. 16. Adler, op. cit. supra n. 10, at p.651. 17. Interhandel case (preliminary objections) (United States v. Switzerland) I.C.J. Rep. 1959, 6. 18. Judgment, para.53.

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accepting the possibility of an estoppel in appropriate circumstances, the Chamber summarily rejected this argument because "there are obvious difficulties in construing an estoppel from a mere failure to mention a matter at a particular point in somewhat desultory diplomatic exchanges".'' Thus, the local remedies rule was applicable and the Chamber went on to determine whether it had been satisfied. Given that the substance of the US claim was that ELSI'had been sent spinning into bankruptcy by the Mayor of Palermo's requisition order, the first step was for ELSI to challenge the legitimacy of that order in the Italian courts. This had been done successfully by the trustee in bankruptcy acting on ELSI's behalf and partial compensation had been obtained." In such circumstances, local remedies had been exhausted unless Italian law enabled Raytheon and Machlett to sue on their own behalf in respect of alleged violations of their own rights. Italy claimed that such relief was available (and had not been sought) because Article 2043 of the Italian Civil Code" was said to give a right of action in respect of breaches of provisions of self-executing treaties. The Chamber met this argument with a common-sense application of the local remedies rule that other tribunals would do well to follow. In its view, it was for Italy to show that Raytheon and Machlett could have relied on the Italian Civil Code to obtain redress for violations of the FCN Treaty in Italian courts and this burden of proof had not been discharged.22 In any event, the Chamber determined that only the substance of an international claim need have been litigated before domestic courts in order to satisfy the local remedies rule. It was not necessary either to have the matter litigated by the same party on whose behalf the international claim is later made or to have it pleaded in the same manner.-3 Before the Chamber, the crucial submission was that the requisition had caused the bankruptcy of ELSI and this was the very issue pursued by the trustee in bankruptcy on ELSI's behalf. In effect, the local remedies rule was satisfied because of an identity of substance between the domestic and international claims, this being consistent with the policy behind that rule. B. Violating the FCN Treaty

It was on this issue that the Chamber parted company. Four of the judges decided that Italy had not violated any of the provisions of the Treaty alleged by the
19. Idem, para.54. 20. On 22 Aug. 1969, the Prefect of Palermo annulled the requisition order on the ground that it was "a typical case of excess of power", Judgment, para.75. On 26 Apr. 1975, the Court of Cassation upheld an order of the Court of Appeal of Palermo which had awarded the trustee in bankruptcy damages for loss of the use of the plant during the requisition period, idem, para.43. 21. "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 damages." 22. The Chamber was not convinced either that Art.2043 gave the right of action alleged by Italy, or that the allegedly violated provisions of the FCN Treaty were self-executing, Judgment, para.62. 23. Idem, para.59.

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United States," although Judge Oda of the majority believed that it had relied on the wrong provisions when seeking to establish its claim.-25 The United States claimed that Italy had violated the Treaty in five respects. First, that Raytheon and Machlett were prevented from exercising their rights to "organize, control and manage" ELSI as guaranteed by Article 111(2)because the requisition order prevented a planned "orderly liquidation" of the company which would have minimised losses to both creditors and the US shareholders.26 Second, that by allowing workers to occupy the premises for a short period, Italy had violated Article V(1) and (3) which imposed an obligation to protect foreign assets to the same degree as those of nationals or those of other foreign nationals or as required by international law.7 Third, that Italy had embarked on a series of acts that amounted to a "taking" of property contrary to Article V(2) of the Treaty. In effect, this was a claim of "disguised" expropriation that was alleged to have begun with the requisition order and ended with the sale of assets to ELTEL at an undervalue.2 Fourth, that Article VII had been violated because the application of Italian law to this matter was on terms less favourable than either the application of Italian law to an Italian corporation or the application of the relevant US State law2" to an Italian company in the United States.3"Fifth, that the treatment of Raytheon and Machlett was arbitrary and discriminatory and therefore contrary to Article 1 of the Supplementary Agreement to the FCN
Treaty.31

As the Chamber noted, these claims raised difficult issues about the interpretation of the FCN Treaty that were not made any easier by the complicated financial position of ELSI and the two parties' disagreements over the translation and effect of relevant Italian laws and court orders. In such circumstances, it is not surprising that the Chamber once again took a broad view of the issues before it. In essence, the dispute boiled down to three questions. (a) The Chamber agreed that Italian workmen had occupied the premises of ELSI as the United States claimed in their second submission. Italy, however, objected that Article V was inapplicable because it gave protection to US property in Italy whereas the only "property" ever in any danger was the property of an Italian company in Italy.32 Without deciding the matter, the Chamber assumed that 24. JudgeSchwebelfoundthat Italyhadviolatedthe FCNTreatyin at leasttwo of the

five ways alleged by the United States, Judgment, pp.83-84 (dissenting opinion). 25. Judge Oda believed that the Treaty provisions allegedly violated by Italy were concerned only with injury caused to US nationals in Italy. Here, the injury was to an Italian company and, following the Barcelona Tractioncase, no claim on behalf of the shareholders could be maintained. However, he believed that other Articles did protect shareholders' rights, although they had not been violated for the reasons given by the majority, Judgment, pp.77-73, 78-79, 81-82 (separate opinion). 26. Judgment, paras.68 et seq. 27. Idem, paras. 102 et seq. It was also alleged that a breach of Art.V was occasioned by the delay in obtaining a ruling on ELSI's appeal against the requisition order. The Chamber thought the delay unusual but not tortious, ibid. 28. Judgment, paras. 113 et seq. 29. Delaware (Raytheon) and Connecticut (Machlett). 30. Judgment, paras. 131 et seq. 31. Idem, para. 120. 32. Idem, para. 106.

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"property" could mean a company itself and this, of course, was owned by US nationals. However, the Chamber took the robust view that the duty of protection was not absolute. It was not a warranty against any and every circumstance and, in any event, the workers had not damaged the plant at all.." The Chamber concluded, therefore, that Italy had not fallen below the standard of protection required by the Treaty. With one reservation, this seems a sensible result based entirely on the facts before the Chamber. Unless the treaty established a "trespass-style" obligation wherein the merest penetration was a fault, it must be correct that Italy did not become liable by reason only of minimal acts of encroachment. Likewise, the fact is that the Court of Appeal of Palermo described the occupation as "unlawful"34 not conclusive, for that description related to a state of affairs in municipal not international law. However, some care must be taken in this regard to distinguish between breach of an obligation and damage arising from that breach. It is not in all circumstances that the question of whether a duty binding on X has been violated can be answered by measuring the degree of damage caused by Y. The issue was whether Italy violated its obligation and not whether the workers caused any damage. If by measuring Italy's conduct against the appropriate standard there was liability, then the damage actually caused by the workers would be relevant in quantifying the compensation to be paid. Of course, the absence of damage may indicate that the obligation to protect has been discharged (as here), but that cannot be the only criterion for assessing the liability of a State faced with such a duty. (b) The majority of the Chamber considered that the treatment of the US corporations was neither arbitrary nor discriminatory. First, their treatment was not discriminatory because the requisition order was not made because of their nationality and many Italian companies had been requisitioned in similar circumstances." This clearly follows previous jurisprudence on the meaning of 'discrimination"'"and appears unchallengeable on the facts.3 However, in also deciding that the US corporations had not been treated arbitrarily, the Chamber adopted a rather narrow view of that concept. Rightly, the Chamber notes that just because actions are found to be "arbitrary" in municipal law."does not mean that they are arbitrary in customary international law or under a specific treaty provision.3"For example, the obligations binding a State and the standard of care required of it in international law may well be different from those substantive and jurisdictional obligations placed on State
33. Idem, paras. 107-108. 34. Idem, para. 108. 35. Idem, para. 122. 36. E.g. B.P. Exploration Co. (Libya) Ltd v. Libyan Arab Republic (1974) 53 I.L.R. 329. 37. There was no discrimination in favour of the State-owned purchaser of ELSI because the United States did not allege a conspiracy to transfer those assets to the Italian State at an undervalue, Judgment, para. 122. 38. Which, considering difficulties of translation, may have been the decision of the Prefect of Palermo when annulling the requisition order of the Mayor, idem, para. 123. 39. Idem, para. 124. So also if the municipal action is "unlawful".

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officials by their own domestic law, even in respect of the same acts. However, when the Chamber decided that an action is only arbitraryin international law if it is "opposed to the rule of law""'and not when it is opposed to a rule of law, it is effectively limiting the liability that can arise under such an obligation to the most extreme cases of unlawful action by State officials. In contrast, one may argue that an action is "arbitrary"in international law if it contradicts any relevant international standard (jurisdictional or substantive), and not only if the municipal decision maker has acted in wilful disregard of due process of law. This is to a large extent the approach taken by Judge Schwebel in his dissenting opinion when he asserts that what is "arbitrary" under the FCN Treaty should be judged by reference to the context and purpose of that Treaty and not by reference to some a priori absolute standard postulated out of thin air."4The advantages of Judge Schwebel's reference to the source of the obligation (i.e. to refrain from "arbitrary" conduct) in order to determine its meaning is that it is consistent with the approach taken in municipal legal systems to the meaning of "arbitrary""and that it is more likely to encourage States to observe their international obligations than is the absolutist interpretation favoured by the majority of the Chamber. (c) For the majority of the Chamber, the United States' first, third and fourth submissions all raised the same issue and they were all dismissed for the same reason. In essence, the Chamber believed that the question was simply one of causation. If the requisition order had caused the bankruptcy of ELSI, then there may have been a denial of the right to "organize, control and manage" within Article 111(2), there may have been an unlawful "taking" within Article V(2) and there may have been less favourable treatment under Article VII. However, if before the requisition order ELSI was either heading inexorably for bankruptcy or was already formally bankrupt under Italian law, the shareholders had been deprived of nothing: there was nothing to organise, control or manage, nothing that could be lost by a "taking" and no rights that could be prejudiced by less favourable treatment. On this ground, the majority dismissed the US claim, believing that ELSI's parlous financial position meant that Raytheon and Machlett had no rights capable of protection under the Treaty.43 Once again, this shows the Chamber's "belt and braces" approach to the US claim. It does, however, give some cause for concern. Article 111(2)protected the right to "organize, control and manage" property in Italy. The fact that there was a plan for the "orderly liquidation" of ELSI which was forestalled by the requisition meant that the owners lost even the chance of rescuing the ailing business. It is no answer to say that the company was so debt-ridden that such a plan could never work because (a) how does the Chamber know44and (b) the right protected is to organise, control and manage, not to organise control and manage success40. Idem, para. 128. 41. Judgment, p. 102 (dissenting opinion). By applying this purposive standard, he found the requisition to be arbitrary and capricious and contrary to the Treaty. 42. This does not mean that the concept has the same meaning; rather that, as in municipal law, its meaning is related to the context in which it applies. 43. Judgment, paras.85-93. 44. The evidence as to the viability of the rescue plan was conflicting, ibid.

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fully. Further, it is no answer to say that ELSI had actually become bankrupt under Italian law-an issue over which there was real doubt45-because it may have been that the "cut-in"point for bankruptcy under Italian law was far too high for international law to accept. For example, would Raytheon and Machlett have lost their rights to organise, control and manage if Italian bankruptcy law stipulated that a company became bankrupt when its debts amounted to only 20 per cent of its assets? Of course, if the company was as valueless as the Chamber claimed, then this would affect the measure of damages awarded for the breach and perhaps this is what Italy had in mind when it pleaded that even had there been a violation, no injury had been suffered for which payment of indemnity would be justified.4"Yet, given that the right protected by Article 111(2) is more managerial than substantive, it is difficult to see how it was not violated when that managerial function was taken away. This assimilation of liability and loss was also central to the Chamber's rejection of the other two US submissions, although here it may be more appropriate given that the rights protected by Articles V(2) and VII of the Treaty are more substantive. It may be true that it is impossible to "take" foreign-owned property which is effectively valueless and also that one cannot be less favourably treated in a dispute where there is nothing to protect.47 However, both conclusions do depend on a positive finding that the "orderly liquidation" had no chance of success and an acceptance that Italian bankruptcy law complied with international standards regarding the protection of foreign-owned property. It was on the first of these issues that Judge Schwebel disagreed with the Chamber, and it is indeed an essentially factual matter. Of course, the majority view was that ELSI was financially defunct before the requisition and therefore the compatibility of Italian bankruptcy law with international law was never explored and, even if it had been, there is no reason to suppose that it would have been found wanting. However, given that it is virtually impossible to be sure that ELSI could not have been rescued, the Chamber would have been on firmer ground in rejecting any violation of Articles V(2) and VII if it could have been established that ELSI was formally bankrupt and that the Italian bankruptcy "cut-in"point was not unlawful as a matter of international law. C. Conclusion

Some cynical international lawyers have suggested that the only reason the United States began the ELSI litigation was to demonstrate their support for the ICJ after terminating their acceptance of compulsory jurisdiction following Nicaragua v. USA. However, whether that be true, the ELSI case provides much for the international lawyer to digest. First, there is the Chamber's sensible and practical application of the local remedies rule. As well as confirming the mandatory nature of the rule except where explicitly excluded, the Chamber was prepared to apply it in a manner that achieved its purpose, i.e. avoiding unnecessary international litigation. The Chamber was rightly hostile to any application
45. Judgment, para.95. 46. Idem, para. 11. 47. Except the right to organise, manage and control.

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of the rule which permitted a defendant State to avoid international litigation by pleading procedural differences between the pursuit of claims in international and domestic law. Second, although the matter was one of treaty interpretation, three of the majority"'took a cavalier attitude to the distinction between a company and its shareholders propounded by the Barcelona Tractioncase. Of course, it may be that the Articles of the FCN Treaty cited by the United States did protect the rights of shareholders per se, although Judge Oda's criticisms in this regard are well made. Third, the majority judgment does not distinguish clearly between questions of liability and questions of loss. This is most evident in the discussion of the shareholders' right to organise, control or manage and is apparent again when the Chamber pronounces on Italy's liability following the workers' occupation. The matter is not entirely academic because the violation of managerial rights can cause compensatable loss independent of the question of any physical loss. This is even more apposite when there is no physical loss because the particular asset is worthless. Finally, the Chamber did not explore adequately the question of formal bankruptcy under Italian law. This is surprising given the conflicting evidence as to the viability of ELSI before that bankruptcy and a more thorough examination would have allayed doubts about the Chamber's findings on the question of causation.
MARTIN DIXON

II.

CASES BEFORE THE COURT*

1. Land, Island and Maritime Frontier Dispute (El Salvador/Honduras: Nicaragua Intervening). 2. Maritime Delimitation in the Area between Greenland and Jan Mayen (Denmark v. Norway). 3. Aerial Incident of 3 July 1988 (Islamic Republic of Iran v. United States of America), Jurisdiction and Admissibility. 4. Certain Phosphate Lands in Nauru (Nauru v. Australia), Jurisdiction and Admissibility. 5. Territorial Dispute (Libyan Arab Jamahiriya/Chad). 6. East Timor (Portugal v. Australia). 7. Maritime Delimitation between Guinea-Bissau and Senegal (GuineaBissau v. Senegal). 8. Passage through the Great Belt (Finland v. Denmark). 9. Maritime Delimitation and Territorial Questions between Qatar and Bahrain (Qatar v. Bahrain), Jurisdiction and Admissibility. 10. Questions of Interpretation and Application of the 1971 Montreal Convention arising from the Aerial Incident at Lockerbie (Libyan Arab Jamahiriya v. United Kingdom).

48. PresidentRudaandJudgesJenningsand Ago.

* As at 31 May 1992.