Case concerning Electronica Sicula

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British Institute of International and Comparative Law

Case concerning Elettronica Sicula S. p. A. (ELSI) (United States of America v. Italy)Author(s): Martin DixonReviewed work(s):Source: The International and Comparative Law Quarterly, Vol. 41, No. 3 (Jul., 1992), pp. 701-708Published by: Cambridge University Presson behalf of the British Institute of International andComparative LawStable URL: http://www.jstor.org/stable/760557.

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JULY1992] ICJ Cases 701led to Mr Mazilu, who supposedly lacked the intellectual capacity to prepare aUN report, becoming the country's Vice-President after the Revolution.

MARIAARISTODEMOU

40. This was the view expressed by Romania's Permanent Mission to the UN in August1989: I.C.J. Rep. 1989, para.26.

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 InternationalCourt of Justice instituting proceedings against Italy in respect of a dispute arisingout of the requisitioning of the plant and assets of Raytheon-Elsi S.p.A,- anItalian company based in Sicily but wholly owned by two US corporations.3TheCourt's jurisdiction arose under Article XXVI of the United States-Italy Treatyof Friendship, Commerce and Navigation (FCN Treaty) of 2 June 1948and bothparties requested that the matter be referred to a Chamber of the Court inaccordance with Article 26 of the ICJ Statute. The original five-judge Chamberwas appointed in March 1987.4The issue at the heartof the dispute was the bankruptcyof ELSI in March/April1968' and its subsequent sale at a reduced price to the State-owned IndustriaElettronica Telecommunicazioni S.p.A. (ELTEL). The United States claimedthat the requisition had caused the bankruptcyof the company, thereby violatingseveral substantive and procedural rights guaranteed by the FCN Treaty. In itsCounter-Memorial and Rejoinder, Italy raised a preliminary objection to theadmissibility of the claim on the ground that local remedies had not beenexhausted and, in any event, flatly denied any violation of the Treaty.7In the oralhearings Italy furthersubmitted on a subsidiary and alternative basis only thateven supposing a violation of its obligations, no injuryhad been caused for whichpayment of indemnity would be justified.s

A. The Exhaustion of Local RemediesWith the consent of the parties, the Chamber dealt with the local remedies

1. I.C.J. Rep. 1989, 15, Judgment 20 July 1989 ( Judgment ).2. An orderof the Mayorof Palermodated1Apr. 1968.3. In1967,Raytheon wned99.16%of ELSI's haresandMachlettLaboratoriesnc.(awholly 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 NagendraSingh and Judges Oda, Ago, Schwebel and Jennings. Judge Ruda later replaced PresidentSingh as both President of the Court and of the Chamber following the latter'sdeath, I.C.J.Rep. 1988, 158, Order of 20 Dec. 1988.5. The actual date of bankruptcydepends on whether one takes the date of petition tothe Italian bankruptcy court, 26 Apr. 1968, or the possibly earlier date at which theobligation under Italian law to file for bankruptcy arose, this being a matter of disputebetween the parties. In the Chamber's opinion, the difference was irrelevant, but see infratext accompanying n.45.6. Judgment, para.10.7. Ibid.8. Idem, para.11. The United States claimed 12,679,000 US dollars in compensation.

G


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702 International and Comparative Law Quarterly [VOL.41objection within the framework of the merits. This particular aspect of the caseand its impact on previous jurisprudence have been dealt with in an earliervolume of this journal,' and the following discussion concentrates on the mainpoints raised by the parties and the Chamber's response to them.First, the United States advanced three reasons why the local remedies rule wasa priori inapplicable:(i) that the jurisdictionalclause made no mention of the local remedies rule, andtherefore it was inapplicable to disputes arisingunder the Treaty.' The Chamberaccepted that parties to a treaty could dispense with the local remedies rule byagreement, but did not believe that an important principle of customary lawshould be held to have been tacitly dispensed with, in the absence of any wordsmaking clear an intention to do so . This confirms the powerful nature of therule requiringlocal remedies to be exhausted and makes it clear that although it isnot a rule of jus cogens, clear and unambiguous words are necessary if States wishto take claims on behalf of nationals directly to an international tribunal.

(ii) that the local remedies rule was inapplicable to that part of the applicationwhich requested a declaration that the United States' own rightsunder the Treatyhad been violated.' Again, the Chamber agreed with the US submission that thelocal remedies rule was inapplicable to direct injury cases. It did, however,examine the substance of the issue before it, rather than concentrate on the typeof relief claimed, and concluded that there was no alleged violation of the UnitedStates' own rights under the Treaty which could be regarded as distinct from thealleged violation of Raytheon and Machlett's rights guaranteed by that Treaty. 5As illustrated elsewhere,' the Chamber rightly moved away from the reasoningevident in the Interhandelcase, 7where the applicabilityof the local remedies ruleseemed to turn on the form of relief sought by the applicant rather than on thenature of the dispute.(iii) that Italy was estopped from pleading the local remedies rule by its silence onthis point when presented with the US diplomatic claim in 1974.' While again

9. Judgment,paras.49 tseq.10. MatthewH. Adler, TheExhaustionof Local Remedies Rule After the Inter-national 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 theapplication of the Treaty, which the High Contracting Parties shall not satisfactorily adjustby diplomacy, shall be submitted to the International Court of Justice, unless the HighContracting 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. Interhandelcase (preliminaryobjections) (United States v. Switzerland) I.C.J. Rep.1959, 6.18. Judgment, para.53.


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JULY 992] ICJCases 703accepting the possibility of an estoppel in appropriate circumstances, the Cham-ber summarily rejected this argument because there are obvious difficulties inconstruing an estoppel from a mere failure to mention a matter at a particularpoint in somewhat desultory diplomatic exchanges .''

Thus, the local remedies rule was applicable and the Chamber went on todetermine whether it had been satisfied. Given that the substance of the US claimwas that ELSI'hadbeen sent spinning into bankruptcyby the Mayor of Palermo'srequisition order, the first step was for ELSI to challenge the legitimacy of thatorder in the Italian courts. This had been done successfully by the trustee inbankruptcy acting on ELSI's behalf and partial compensation had beenobtained. In such circumstances, local remedies had been exhausted unlessItalian law enabled Raytheon and Machlett to sue on their own behalf in respectof alleged violations of their own rights. Italy claimed that such relief wasavailable (and had not been sought) because Article 2043 of the Italian CivilCode was said to give a right of action in respect of breaches of provisions ofself-executing treaties.The Chamber met this argument with a common-sense application of the localremedies rule that other tribunals would do well to follow. In its view, it was forItaly to show that Raytheon and Machlett could have relied on the Italian CivilCode to obtain redress for violations of the FCN Treaty in Italiancourts and thisburden of proof had not been discharged.22 In any event, the Chamber deter-mined that only the substance of an international claim need have been litigatedbefore domestic courts in order to satisfy the local remedies rule. It was notnecessary either to have the matter litigated by the same party on whose behalfthe international claim is later made or to have it pleaded in the same manner.-3Before the Chamber, the crucial submission was that the requisition had causedthe bankruptcy of ELSI and this was the very issue pursued by the trustee inbankruptcy on ELSI's behalf. In effect, the local remedies rule was satisfiedbecause of an identity of substance between the domestic and internationalclaims, this being consistent with the policy behind that rule.

B. Violating the FCN TreatyItwas on this issue that the Chamberparted company. Fourof the judges decidedthat 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 orderon the groundthat it was a typical case of excess of power , Judgment, para.75. On 26 Apr. 1975, theCourt of Cassation upheld an order of the Court of Appeal of Palermo which had awardedthe trustee in bankruptcy damages for loss of the use of the plant during the requisitionperiod, idem, para.43.21. Any act committed either wilfully or through fault which causes wrongful damagesto another person implies that the wrongdoer is under an obligation to pay compensation forthose damages.22. The Chamber was not convinced either that Art.2043 gave the rightof action allegedby 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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704 International and Comparative Law Quarterly [VOL.41United States, although Judge Oda of the majority believed that it had relied onthe wrong provisions when seeking to establish its

claim.-25The United States claimed that Italy had violated the Treaty in five respects.First, that Raytheon and Machlett were prevented from exercising their rightstoorganize, control and manage ELSI as guaranteed by Article 111(2)because therequisition order prevented a planned orderly liquidation of the companywhich would have minimised losses to both creditors and the US shareholders.26Second, that by allowing workers to occupy the premises for a short period, Italyhad violated Article V(1) and (3) which imposed an obligation to protect foreignassets to the same degree as those of nationals or those of other foreign nationalsor as required by international law.7 Third, that Italy hadembarked on a series ofacts that amounted to a taking of property contrary to Article V(2) of theTreaty. In effect, this was a claim of disguised expropriation that was alleged tohave begun with the requisition order and ended with the sale of assets to ELTELat an undervalue.2 Fourth, that Article VII had been violated because theapplication of Italian law to this matter was on terms less favourable than eitherthe application of Italian law to an Italian corporation or the application of therelevant US State law2 to an Italian company in the United States.3 Fifth, thatthe treatment of Raytheon and Machlett was arbitraryand discriminatory andtherefore contrary to Article 1 of the Supplementary Agreement to the FCNTreaty.31As the Chamber noted, these claims raised difficult issues about the interpreta-tion of the FCN Treaty that were not made any easier by the complicated financialposition of ELSI and the two parties' disagreements over the translation andeffect of relevant Italian laws and court orders. In such circumstances, it is notsurprisingthat 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 ELSIas the United States claimed in their second submission. Italy, however, objectedthat Article V was inapplicable because it gave protection to US property in Italywhereas the only property ever in any danger was the property of an Italiancompany in Italy.32Without deciding the matter, the Chamber assumed that

24. JudgeSchwebel oundthatItalyhadviolated he FCNTreaty n at least two of thefive ways alleged by the United States, Judgment, pp.83-84 (dissenting opinion).25. Judge Oda believed that the Treaty provisions allegedly violated by Italy wereconcerned only with injurycaused to US nationals in Italy. Here, the injurywas to an Italiancompany and, following the Barcelona Tractioncase, no claim on behalf of the shareholderscould be maintained. However, he believed that other Articles did protect shareholders'rights, although they had not been violated for the reasons given bythe 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 bythe delay in obtaining a rulingon ELSI's appeal against the requisition order. The Chamberthought 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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JULY1992] ICJ Cases 705property could mean a company itself and this, of course, was owned by USnationals. However, the Chambertook the robust view that the duty of protection

was not absolute. It was not a warrantyagainst any and every circumstanceand, inany event, the workers had not damaged the plant at all.. The Chamber con-cluded, therefore, that Italy had not fallen below the standard of protectionrequired by the Treaty.With one reservation, this seems a sensible result based entirely on the factsbefore the Chamber. Unless the treaty established a trespass-style obligationwherein the merest penetration was a fault, it must be correct that Italy did notbecome liable by reason only of minimal acts of encroachment. Likewise, the factthat the Court of Appeal of Palermo described the occupation as unlawful 34snot conclusive, for that description related to a state of affairs in municipal notinternational law. However, some care must be taken in this regardto distinguishbetween breach of an obligation and damage arisingfrom that breach. It is not inall circumstances that the question of whether a duty binding on X has beenviolated can be answered by measuring the degree of damage caused by Y. Theissue was whether Italy violated itsobligation and not whether the workers causedany damage. If by measuring Italy's conduct against the appropriate standardthere was liability, then the damage actually caused by the workers would berelevant in quantifying the compensation to be paid. Of course, the absence ofdamage 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 withsuch a duty.(b) The majority of the Chamber considered that the treatment of the UScorporations was neither arbitrarynor discriminatory. First, their treatment wasnot discriminatory because the requisition order was not made because of theirnationality and many Italian companies had been requisitioned in similar circum-stances. This clearly follows previous jurisprudence on the meaning of 'dis-crimination ' and appears unchallengeable on the facts.3

However, in also deciding that the US corporations had not been treatedarbitrarily, the Chamber adopted a rather narrow view of that concept. Rightly,the Chamber notes that just because actions are found to be arbitrary inmunicipal law. does not mean that they are arbitraryin customary internationallaw or under a specific treaty provision.3 For example, the obligations binding aState and the standard of care required of it in international law may well bedifferent 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 purchaserof ELSI becausethe United States did not allege a conspiracy to transfer those assets to the Italian State at anundervalue, Judgment, para. 122.38. Which, considering difficulties of translation, may have been the decision of thePrefect 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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706 International and Comparative Law Quarterly [VOL.41officials by their own domestic law, even in respect of the same acts. However,when the Chamber decided that an action is only arbitrary n international law if itis opposed to the rule of law 'and not when it is opposed to a rule of law, it iseffectively limitingthe liability that can arise under such an obligation to the mostextreme cases of unlawful action by State officials. Incontrast, one may argue thatan action is arbitrary n international law if it contradicts any relevant inter-national standard (jurisdictional or substantive), and not only if the municipaldecision maker has acted inwilful disregardof due process of law. This is to a largeextent the approach taken by Judge Schwebel in his dissenting opinion when heasserts that what is arbitrary under the FCN Treaty should be judged byreference to the context and purpose of that Treaty and not by reference to some apriori absolute standard postulated out of thin air. 4The advantages of JudgeSchwebel's reference to the source of the obligation (i.e. to refrain from arbi-trary conduct) in order to determine its meaning is that it is consistent with theapproachtaken in municipal legal systems to the meaningof arbitrary and thatit is more likely to encourage States to observe their internationalobligations thanis the absolutist interpretation favoured by the majority of the Chamber.(c) For the majority of the Chamber, the United States' first, third and fourthsubmissions all raised the same issue and they were all dismissed for the samereason. In essence, the Chamber believed that the question was simply one ofcausation. If the requisition order had caused the bankruptcyof ELSI, then theremay have been a denial of the right to organize, control and manage withinArticle 111(2),there may have been an unlawful taking within Article V(2) andthere may have been less favourable treatment under Article VII. However, ifbefore the requisition order ELSI was either heading inexorably for bankruptcyor was already formally bankrupt under Italian law, the shareholders had beendeprived of nothing: there was nothing to organise, control or manage, nothingthat could be lost by a taking and no rights that could be prejudiced by lessfavourable treatment. On this ground, the majority dismissed the US claim,believing that ELSI's parlous financial position meant that Raytheon andMachlett had no rights capable of protection under the Treaty.43Once again, this shows the Chamber's belt and braces approach to the USclaim. It does, however, give some cause for concern. Article 111(2)protected therightto organize, control and manage property in Italy. The fact that there wasa plan for the orderly liquidation of ELSI which was forestalled by the requisi-tion meant that the owners lost even the chance of rescuing the ailing business. Itis no answer to say that the company was so debt-ridden that such a plan couldnever work because (a) how does the Chamber know44and (b) the right protectedis to organise, control and manage, not to organise control and manage success-

40. Idem, para.128.41. Judgment, p. 102(dissenting opinion). By applyingthis purposive standard, he foundthe requisition to be arbitraryand capricious and contrary to the Treaty.42. This does not mean that the concept has the same meaning; rather that, as inmunicipal 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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JULY1992] ICJ Cases 707fully. Further, it is no answer to say that ELSI had actually become bankruptunder Italian law-an issue over which there was real doubt45-because it mayhave been that the cut-in point for bankruptcyunder Italian law was far too highfor international law to accept. For example, would Raytheon and Machlett havelost their rights to organise, control and manage if Italian bankruptcy law stip-ulated that a company became bankruptwhen its debts amounted to only 20 percent of its assets? Of course, if the company was as valueless as the Chamberclaimed, then this would affect the measure of damages awarded for the breachand perhaps this is what Italy had in mind when it pleaded that even had therebeen a violation, no injury had been suffered for which payment of indemnitywould be justified.4 Yet, given that the right protected by Article 111(2)is moremanagerial than substantive, it is difficult to see how it was not violated when thatmanagerial function was taken away.This assimilation of liabilityand loss was also central to the Chamber'srejectionof the other two US submissions, although here it may be more appropriategiventhat the rights protected by Articles V(2) and VII of the Treaty are moresubstantive. It may be true that it is impossible to take foreign-owned propertywhich is effectively valueless and also that one cannot be less favourablytreated ina dispute where there is nothing to protect.47 However, both conclusions dodepend on a positive finding that the orderly liquidation had no chance ofsuccess and an acceptance that Italian bankruptcy law complied with inter-national standardsregardingthe protection of foreign-owned property. It was onthe first of these issues thatJudge Schwebel disagreed with the Chamber, and it isindeed an essentially factual matter. Of course, the majority view was that ELSIwas financially defunct before the requisition and therefore the compatibility ofItalian bankruptcy law with international law was never explored and, even if ithad 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 havebeen rescued, the Chamber would have been on firmer ground in rejecting anyviolation of Articles V(2) and VII if it could have been established that ELSI wasformally bankruptand that the Italianbankruptcy cut-in point was not unlawfulas a matter of international law.

C. ConclusionSome cynical international lawyers have suggested that the only reason theUnited States began the ELSI litigation was to demonstrate their support for theICJ after terminating their acceptance of compulsory jurisdiction following Nic-araguav. USA. However, whether that be true, the ELSI case provides much forthe international lawyer to digest. First, there is the Chamber's sensible andpractical application of the local remedies rule. As well as confirming the manda-tory nature of the rule except where explicitly excluded, the Chamber wasprepared to apply it in a manner that achieved its purpose, i.e. avoiding unneces-sary 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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708 International and Comparative Law Quarterly [VOL. 41of the rule which permitted a defendant State to avoid international litigation bypleading proceduraldifferences between the pursuitof claims in internationalanddomestic law. Second, although the matterwas one of treaty interpretation, threeof the majority ' ook a cavalier attitude to the distinction between a company andits shareholders propounded by the Barcelona Tractioncase. Of course, it may bethat the Articles of the FCN Treaty cited by the United States did protect therights of shareholders per se, although Judge Oda's criticisms in this regard arewell made. Third, the majority judgment does not distinguish clearly betweenquestions of liabilityand questions of loss. This is most evident in the discussion ofthe shareholders' rightto organise, control or manage and is apparentagainwhenthe Chamber pronounces on Italy's liability following the workers' occupation.The matter is not entirely academic because the violation of managerial rightscancause compensatable loss independent of the question of any physical loss. This iseven more apposite when there is no physical loss because the particularasset isworthless. Finally, the Chamber did not explore adequately the question offormal bankruptcy under Italian law. This is surprising given the conflictingevidence as to the viability of ELSI before that bankruptcyand a more thoroughexamination would have allayed doubts about the Chamber's findings on thequestion of causation.

MARTIN DIXON

48. PresidentRudaandJudgesJenningsandAgo.

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 Iranv. UnitedStatesofAmerica), Jurisdiction and Admissibility.

4. Certain Phosphate Lands in Nauru (Nauru v. Australia), JurisdictionandAdmissibility.5. Territorial Dispute (Libyan Arab Jamahiriya/Chad).6. East Timor (Portugal v. Australia).7. Maritime Delimitation between Guinea-Bissau and Senegal (Guinea-Bissau v. Senegal).8. Passage through the Great Belt (Finland v. Denmark).9. Maritime Delimitation andTerritorialQuestions between Qatar and Bah-rain (Qatar v. Bahrain), Jurisdiction and Admissibility.10. Questions of Interpretation and Application of the 1971 Montreal Con-vention arising from the Aerial Incident at Lockerbie (Libyan ArabJamahiriya v. United Kingdom).

* As at 31 May 1992.

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