CASE CONCERNING ELETTRONICA SICULA S.P.A.
(ELSI)  Numerous meetings were also held with Italian companies to find ELSI
(UNITED STATES OF AMERICA v. ITALY)
20 July 1989
RELATIONSHIP BETWEEN INTERNATIONAL AND
NATIONAL/MUNICIPAL LAW
SUMMARY: The United States instituted proceedings against 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., an Italian
company producing electronic components and previously known as
Elettronica Sicula S.p.A. (ELSI), which was stated to have been 100 per cent
owned by two United States corporations. After a detailed consideration of
the facts alleged and the relevant conventional provisions, the Chamber
found that the Respondent had not breached the 1948 Treaty of Friendship,
Commerce and Navigation and the Agreement supplementing that Treaty
in the manner claimed by the Applicant, and rejected the claim for
reparation made by the United States.
DOCTRINE: The reference in Article III to conformity with "the applicable
laws and regulations" cannot mean that, if an act is in conformity with the
municipal law and regulations (as, according to Italy, the requisition was),
that would of itself exclude any possibility that it was an act in breach of
the FCN Treaty. Compliance with municipal law and compliance with the
provisions of a treaty are different questions. 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.
FACTS:
 1967: Raytheon Company, a US Corporation, held 99.16% of the shares in
Electronica Sicula S.p.A (ELSI), with the remaining 0.84% held by
Machlett Laboratories Inc, another US Corp.
o ELSI was established in Palermo, Sicily where it has a plant for
production of electronic parts (microwave tubes, cathode-ray
tubes, semiconductor rectifiers, x-ray tubes, surge arresters) and
had a workforce of 900 employees.
 From 1964-66, ELSI had been in economic trouble. ELSI made an
operating profit, but was not enough to offset its debt expense and
accumulated losses. So, Raytheon began taking steps to make ELSI more
self-sufficient.
an Italian partner with “economic influence and power” and to explore
possibilities of Italian governmental support.
 However, when it became less likely to reach an agreement with these
parties, Raytheon and Machlett as ESLI shareholders, began to plan to
close and liquidate ELSI to minimize their losses.
o After an asset analysis prepared by the CFO, the total debt of
ESLI amounted to 13,123.9 million lire. The balance sheet for the
end of September 1967 showed that under Italian law and
accounting principles, the book value of ELSI's assets still
exceeded its liabilities. However, internal accounting
adjustments in accordance with Rayhteon's accounting policy
showed ELSI insolvent.
o The “orderly liquidation” that was being contemplated was the
sale of ELSI’s business or its assets, and the discharge of its debts
out of the proceeds of the said sale. This sale was going to be
under the control of ELSI’s own management.
o All creditors were to be paid in full, or, if only the “quick-sale”
value (i.e. the total realizable value of the assets) was realized.
The unsecured major creditors would receive 50% of their
claims.
 March 1968: It was decided that ELSI would cease operations.
o Still, meetings with Italian officials continued, wherein they
pressed ELSI not to close and not to dismiss the workforce.
Nonetheless, letters of dismissal were sent to its employees.
 April 1968: Mayor of Palermo issued an order effective immediately,
requisitioning ELSI’s plant and other related assets for a 6-month period.
The ESLI plant was still occupied by employees after the requisition.
o ELSI brought an administrative appeal against the requisition to
the Prefect of Palermo.
o A bankruptcy petition was also filed by ELSI, referring to the
requistion as why the company had lost control of the plant and
coult not avail itself of an immediate source of liquid funds, and
mentioning payments which had become due and could not be
met.
 May 1968: A decree of bankruptcy was issued by the Tribunale di
Palermo.
 August 1969: The administrative appeal filed by ELSI was eventually
resolved, wherein the requisition order by the Mayor was annulled by
the Prefect of Palermo. It had been 16 months since the appeal was filed.
 June 1970: The trustee in bankruptcy brought proceedings in the Court of
Palermo against the Minister of the Interior of Italy and the Mayor of
 Palermo for damages resulting from the requisition. The CA of Palermo
awarded damages.
 1974: The US transmitted a note to Italy enclosing a claim on behalf of
Raytheon, based on several alleged violations of the Treaty of
Friendship, Commerce and Navigation concluded between Italy and the
United States (FCN Treaty).
 November 1985: Bankruptcy proceedings closed. No surplus remained
of the amount realized, for distribution to the shareholders Raytheon
and Machlett.
 1987: The US filed an application before the International Court of
Justice.
o According to the wishes of the parties, the case was submitted to
and decided by a Chamber of the Court under Article 26(2) of
the Statute of the Court.
o The United States principally reproached the Respondent (a)
with having effected an unlawful requisition of the ELSI plant,
thus depriving the shareholders of their direct right to proceed
to the liquidation of the company’s assets under normal
conditions ; (b) with having been incapable of preventing the
occupation of the plant by the employees ; (c) with having failed
to reach any decision as to the legality of the requisition during a
period of sixteen months ; and (d) with having intervened in the
bankruptcy proceedings, with the result that it had purchased
ELSI at a price well below its true market value.
 Regarding the FCN treaty, US claims the respondent has violated it in
the following manner:
o For violating Article III of the Treaty, the right "to control and
manage corporations", since the unlawful requisition interfered
with the control and management of ELSI and its orderly
liquidation, leading to its bankruptcy;
o For violating Article V, paragraphs 1 and 3, of the FCN Treaty,
which were concerned with the protection and security of
nationals and their property, since the administrative appeal was
delayed;
o For violating Article V, paragraph 2, of the Treaty, taking
without due process of law, since the requisition amounted to an
expropriation.;
o For violating Article I of the Supplementary Agreement to the
FCN Treaty, which prohibited "arbitrary or discriminatory
measures", since the requisition order was an arbitrary act; and
o For violating the right to dispose of property and interests,
guaranteed by Article VII of the FCN Treaty, since the US
shareholders were deprived of their right to dispose of ELSI’s
real property.
 For the procedural aspect, Italy entered an objection to the admissibility
of the present case on the ground of an alleged failure of the two United
States corporations to exhaust local remedies.
o The United States questioned whether the rule of the exhaustion
of local remedies could apply at all, as Article XXVI of the FCN
Treaty was unqualified by any reference to the local remedies
rule.
o The United States further argued that the local remedies rule
was inapplicable in so far as its claim was for a declaratory
judgment of a direct injury to the United States by infringement
of its rights under the FCN Treaty.
ISSUE/S & RATIO:
1. W/N Italy’s objection to the admissibility of the case on the ground of
failure to exhaust local remedies should be sustained. – NO.
HELD: The municipal courts in Italy had been fully seized of the matter
which was the substance of the Applicant's claim before the Chamber.
Furthermore, since it was for Italy to show the existence of a local
remedy, and since Italy had not been able to satisfy the Chamber that
there clearly remained some remedy which Raytheon, independently of
ELSI, ought to have pursued and exhausted, the Chamber rejected the
objection
 The Chamber rejected these arguments from the US:
o That the local remedies rule is inapplicable because the US’
claim was for a declaratory judgment of a direct injury to the
US by infringement of its rights under the FCN Treaty,
which was independent of the dispute over the alleged
violation in respect of Raytheon and Machlett;
o That Italy was in estoppel since it did not mention in its
Counter-Memorial that Raytheon and Machlett should have
sued in the Italian courts;
 The Chamber here found that there are difficulties in
constructing an estoppel argument based merely on
the failure to mention a matter at a particular point.
 The Chamber ruled that it is ELSI should have pursued local
remedies, which it did by filing the administrative appeal.
o The damage claimed by Raytheon and Machlett were said to
have resulted from the “losses incurred by ELSI’s owners as
 a result of the involuntary change (i.e. the requisition order)
in the manner of disposing ELSI’s assets.” This is therefore at
the core of the US complaint.
o Both he appeal taken by ELSI against the requisition order
and the bankruptcy proceedings filed by the trustee were
enough to fully let the municipal courts aware of the matter
which is the substance of the US’ claim before the Chamber.
2. W/N the respondent violated Article III of the FCN Treaty regarding the
“right to control and manage corporations", due to rhe requisition of the
ELSI plant, frustrating its “orderly liquidation” – NO.
 Par. 2, Art. III FCN Treaty: "The nationals, corporations and
associations of either High Contracting Party shall be permitted, in
conformity with the applicable laws and regulations within the
territories of the other High Contracting Party, to organize, control
and manage corporations and associations of such other High
Contracting Party for engaging in commercial, manufacturing,
processing, mining, educational, philanthropic, religious and
scientific activities."
 The US is mainly claiming on its right to control and manage,
because the requisition allegedly had the effect of depriving ESLI of
both the right and practical possibility of selling off its plant and
assets for satisfaction of its liabilities.
 The reference in Article III to conformity with "the applicable laws
and regulations" cannot mean that, if an act is in conformity with the
municipal law and regulations (as, according to Italy, the requisition
was), that would of itself exclude any possibility that it was an act in
breach of the FCN Treaty.
o Compliance with municipal law and compliance with the
provisions of a treaty are different questions.
o The treaty right to be permitted to control and manage
cannot be interpreted as a warranty that the normal exercise
of control and management shall never be disturbed; every
system of law must provide, for example, for interferences
with the normal exercise of rights during public emergencies
and the like.
 The requisition was found both by the Prefect and by the Court of
Appeals of Palermo 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.
 However, Italy was claiming that 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. They claim that Raytheon and Machlett was not in a
position to carry out its liquidation plan, even without the
requisition order.
 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.
o After considering these other factors—the preparedness of
creditors to cooperate in an orderly liquidation, especially in
case of inequality among them, the likelihood of the sale of
the assets realizing enough to pay all creditors in full, the
claims of the dismissed employees, the difficulty of
obtaining the best price for assets sold with a minimum
delay, in view of the trouble likely at the plant when the
closure plans became known, and the attitude of the Sicilian
administration—the Chamber concludes that all these
factors point toward a conclusion that the feasibility 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.
 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 forfeited 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.
o There were several causes acting together that led to the
disaster to ELSI, of which the effects of the requisition might
no doubt have been one. The possibility of orderly
liquidation is purely a matter of speculation.
3. W/N the respondent violated Article V, Par. 1 and 3 of the FCN treaty
concerning the “protection and security of nationals and their property”
when it allowed ELSI workers to occupy the plant belonging to
Raytheon and Machlett– NO.
 Paragraph 1 of Article V 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
associations"; 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 nationals, corporations, and associations of any
third country.
 The reference in Article V to the provision of "constant protection
and security cannot be construed as the giving of a warranty that
property shall never in any circumstances be occupied or disturbed.
o In any event, considering that it is not established that any
deterioration in the plant and machinery was due to the
presence of the workers, and 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.”
 The mere fact that the occupation was referred to by the CA of
Palermo as unlawful does not necessarily mean that the protection
afforded fell short of the national standard to which the FCN Treaty
refers.
o The essential question is, whether the local law, either in its
terms or in its application, has treated United States
nationals less well than Italian nationals. This has not been
shown.
 With regard to the alternative contention that Italy was obliged to
protect ELSI from the deleterious effects of the requisition by
providing an adequate method of overturning it, under Article V,
the "full protection and security must conform to the minimum
international standards, supplemented by the criteria of national
treatment and most-favoured-nation treatment.”
o It cannot be said that the delay in the ruling of the validity of
the requisition fell bellow minimum international standard.
There was a means of requesting a quick decisionTherefore,
such delay is not violative of Article V.
4. W/N the respondent violated Article V, Par. 2 of the FCN treaty
concerning the taking of property without due process of law because
Italy’s act of requisitioning the plant was equivalent to a taking and the
subsequent acquisition of ELSI at less than market value was caused by
this interference – NO.
 The US was alleging here that there was a disguised expropriation,
because the requisition was the beginning of a process that ends with
the acquisition of ELSI for far less than market value, and ultimately,
the title to the property is at stake.
 The Chamber held that 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, the requisition was an act
done beyond the call of duty. In other words, ELSI was already
under an obligation to file for bankruptcy, so why should Italy still
have ordered requisition to start this “process of disguised
expropriation?”
 Furthermore this requisition could not amount to a "taking" contrary
to Article V unless it constituted a significant deprivation of
Raytheon and Machlett's interest 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 administrative appeal delayed.
o But that was not the case here because ELSI was insolvent.
The requisition could therefore only be regarded as
significant for this purpose if it caused or triggered the
bankruptcy. As said before, the requisition did not trigger
the bankruptcy because ELSI was already insolvent even
before the requisition was ordered.
 The Chamber left the question open, whether the Italian term
"espropriazione" should be interpreted in a stricter sense than the
English term "taking". The term espropriazione was found in the
Italian texts, while taking was found in the English texts.
5. W/N the respondents violated Article I of the Supplementary
Agreement to the FCN Treaty, which prohibited "arbitrary or
discriminatory measures", when it ordered the requisition, leading to a
failure of ELSI to carry out its planned liquidation – NO.
 Article I, which confers rights not qualified by national or most
favoured-nation standards, provides as follows: "The nationals,
corporations and associations nsof either High Contracting 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
establish or acquire therein; or, (b) impairing their other legally
acquired rights and interests in such enteqprises or in the
investments'which they have made, whether in tlne form of funds
 (loans, shares or otherwise), materials, equipment, services, seek to use his powers in an attempt to do something about
processes, patents, techniques or otherwise. Each High Contracting the situation in Palermo at the moment of requisition.
Party undertakes not to discriminate against nationals, corporations
and associations of the other High Contracting Party as to their Ruling/Dispositive:
obtaining under normal terms the capital, manufacturing processes,
skills and technology which may be needed for economic For these reasons,
development." THE CHAMBER
 The United States claims that there was "discrimination" in favour of
IRI, an entity controlled by Italy (the ones who eventually bought (1) UNANIMOUSLY,
ELSI); there is, however, no sufficient evidence to support the REJECTS the objection presented by the Italian Republic to to
suggestion that there was a plan to favour IRI at the expense of ELSI, admissibility of the Application filed in tis case by the United States;
and the claim of "discriminatory measures" in the sense of the
Supplementary Agreement must thereforebe rejected. (2) BY FOUR VOTES TO ONE
 In order to show that the requisition order was an "arbitrary" act in Finds that the Italian Republic has not committed any of the breaches
alleged in the said Application, of the Treaty of Friendship, Commerce and
the sense of the Supplementary Agreement, the US has relied upon
Navigation between the Parties signed at Rome on 2 February 1948, or of
the status of that order in Italian law.
the Agreement Supplementing that Treaty signed by the Parties at
o US contends that the requisition "was precisely the sort of
Washington on 26 September 1951.
arbitrary action which was prohibited" by Article I of the
(In favor: President Ruda, Judges Oda, Ago and Jennings. Against: Judge
SupplementaryAgreement, in that "Under both the Treaty
Schwebel)
and Italian law, the requisition was unreasonable and
improperly motivated"; it was "found to be illegal under (3) BY FOUR VOTES TO ONE
Italian domestic law for precisely this reason". Rejects, accordingly, the claim for reparation made against the Republic of
 Though examining the decisions of the Prefect of Palermo and the Italy by the United States.
Court of Appeal of Palermo, the Chamber observes that the fact that (In favor: President Ruda, Judges Oda, Ago and Jennings. Against: Judge
an act of a public authority may have been unlawful in municipal Schwebel)
law does not necessarily mean that that act was unlawful in
international law. Done in English and in French, the English text being authoritative, at
o By itself, unlawfulness cannnot besaid to amount to arbi- the Peace Palace, The Hague, this twentieth day of July, one thousand
trariness. The qualification given to an act by a municipal nine hundred and eighty-nine, in three copies, one of which will be placed
authority (e.g., as unjustified, or unreasonable or arbitrary) in the archives of the Court and the others transmitted to the Government
may be a valuable indication, but it does not follow that the of the United States of America and the Government of the Republic of
act is necessarily to be classed as arbitrary in international Italy, respectively.
law.
 Nonetheless, there was no arbitrary act to speak of. Arbitrariness is a
willful disregard of due process of law , an act which shocks, or at
least surprises, a sense of juridical propriety.
o 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.
o Independentlly of the findings of the Prefect or of the local
courts, the Chamber considers that it cannot be said to have
been unreasonable or merely capricious for the Mayor to