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Title Elettronica Sicula S.p.A (ELSI):U.S.A v. Italy- A Case Study
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Article by Habib Zafar NALSAR
Category Law Students
Content

 

ABSTRACT:

In 1967, Raytheon held 99.16% of the shares in ELSI, the remaining 0.84% being held 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 slightly under 900 employees. In February 1967, according to the United States, Raytheon began taking steps to endeavor to make ELSI self-sufficient. At the same time numerous meetings were held between February 1967 and March 1968 with Italian officials and companies, the purpose of which 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. When it became apparent that these discussions were unlikely to lead to a mutually satisfactory arrangement, Raytheon and Machlett, as shareholders in ELSI, began seriously to plan to close and liquidate ELSI to minimize their losses. On 28 March 1968, it was decided that the Company cease operations. Meetings with Italian officials however continued, at which the Italian authority rigorously pressed ELSI not to close the plant and not to dismiss the workforce. On 29 March 1968 letters of dismissal were mailed to the employees of ELSI.  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. On 19 April 1968 ELSI brought an administrative appeal against the requisition to the Prefect of Palermo. A bankruptcy petition was filed by ELSI on 26 April 1968, referring to the requisition as the reason why the company had lost control of the plant and could not avail itself of an immediate source of liquid funds, and mentioning payments which had become due and could not be met. A decree of bankruptcy was issued by the Tribunal di Palermo on 16 May 1968. The administrative appeal filed by ELSI against the requisition order was determined by the Prefect of Palermo by a decision given on 22 August 1969, by which he annulled the requisition order. The Parties are at issue on the question whether this period of time was or was not normal for an appeal of this character. In the meantime, on 16 June 1970 the trustee in bankruptcy had 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 Court of Appeal of Palermo awarded damages for loss of use of the plant during the period of the requisition. The bankruptcy proceedings closed in November 1985. Of the amount realized, no surplus remained for distribution to the shareholders, Raytheon and Machlett.

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. Italy, raised preliminary objection to the admissibility of the claim on the ground that local remedies had not been exhausted and any event, flatly denied any violation of the treaty. In the oral hearing Italy further submitted “in a subsidiary and alternative basis only” that even supposing a violation of its obligation, no injury had been caused for which payment of indemnity would be justified.

The Chamber rejected the objection of non-exhaustion of the local remedies and after examining found that the Respondent, Italy, had not violated the FCN Treaty in the manner asserted by the Applicant, it follows that the chamber rejected the claim for reparation made by the Applicant.

 

Background:

This case is in respect of a dispute arising out of the requisitioning of the plant and assets of Elettronica Sicula S.p.A (ELSI)[1], An Italian company established in Palermo, Italy; which was 100 percent owned by the two United States Corporations: Raytheon company [Raytheon] which held 99.16% of the shares and its subsidiary Machlett laboratories [Machlett] which held the remaining 0.84% of shares. The issue at the heart of the dispute was the bankruptcy of ELSI in March/April 1968[2] and its subsequent sale at a reduced price (due to requisition) than fair market value to the state owned Telecommunicazioni S.p.A (ELTEL).

 

Facts---

The ELSI had a plant with workmen of 900 persons working for the production of Electronic components like microwaves tubes, cathode-ray tubes, semi-conductor rectifiers, X-rays tube and surge arresters. From 1964 to 1966, ELSI made an operating profit but this was insufficient to offset its debt expenses or accumulated losses. By late 1967, ELSI’s financial situation had become so precarious that a shutdown of the plant appeared inevitable unless Raytheon furnished additional capital or another source of funding materialized. Raytheon was not willing to provide further large scale financial aid to ELSI or to guarantee further loans so as to maintain the Italian business operators. Representatives of ELSI and Raytheon held numerous meetings with officials of the Italian government for an attempt to secure governmental support for ELSI. When it become apparent that these discussion is likely to be result less, on March 16, 1968, ELSI’s Board of Directors decided to cease the operation of the company immediately to dismiss its employees, and this decision was promptly communicated to the workmen and the shareholders because an asset analysis was prepared by the chief financial officer of Raytheon showing the expected position on 31st March, 1968. This showed the book value of ELSI’sasset as 18,640 million lire, as explained in his affidavit in these proceedings, it also showed “the minimum prospects of recovery of values which we could be sure of, in order to ensure an orderly liquidation process”, and the total realizable value of the asset on this basis the “quick –sale value” was calculated to be 10,838.8 million lire. The total debt of the company at 30 September, 1967 was 13,123.9 million lire. The “orderly liquidation” contemplated was an operation being under the control of ELSI’s business or its assets, en bloc or separately, and the discharge of its debt, fully of otherwise ort of the proceeds, the whole operation being under the control of ELSI’s own management. it was contemplated that all creditors would be paid in full or, if only the “quick sale value” was realized, about 50% of their claim, and that this would be acceptable as mere favorable than what could be expected in a bankruptcy.

Meantime, the Italian government, who vigorously opposed ELSI’s decision to close down. The governmental officials made clear to ELSI’s management that if the company carried out its plan, then plant would be requisitioned by the Italian Public authorities. On March 29, 1968 letter of dismissal were mailed to the employees of ELSI and within 2 days (1 April, 1968) the Mayor of Palermo issued an order requisitioning the plant for a period of 6 months. Following the requisition of the plant, ELSI’s management appealed this action to the Mayor of Palermo and, when that had no result, made a further appeal; to the Perfect of Palermo. There was no action on the appeal for 16 months.

According to the United States, the requisitioning of the plant had prevented the orderly   liquidation process from being carried out and caused ELSI’s bankruptcy, resulting in substantial losses to ELSI’s creditors and shareholder. For its part Italy argued that ELSI had been incapable of carrying out the liquidation plan prior to the requisition, and that the requisition had no significant effect upon ELSI’s financial position because the company was already insolvent. On 19 April, 1968 ELSI brought an administrative appeal against the requisition to the Perfect of Palermo. A bankruptcy petition was filed by on 26 April 1968, referring to the requisition as the reason why the company had lost control of the plant and could not avail itself of an immediate source of liquid funds, and mentioning payments which had become due and could not be met. The Palermo district court issued a decree of bankruptcy on May 16, 1968. Despite several attempts by the court to auction off ELSI’s plant and stock, no bids were received. Negotiations among Raytheon’s counsel in Italy, the major creditors and Italian government officials likewise failed to arrive at any settlement. Finally, in July 1969, over the protest of Raytheon, Industria Elettronica Telecommunicazioni [ELTEL] a subsidiary of IRI[3], purchased ELSI’s plant, stock and equipment’s at auction for substantially less than the computed book value of the assets immediately prior to requisition.

Shortly, after this sale, the Perfect Of Palermo ruled in favor of ELSI’s administrative appeal against the Mayor’s requisition order, which had been pending for 16 months, in a decision rendered in August 1969, the Perfect of Palermo held that although the mayor had legal authority to issue a requisition order, the order in this instance was unjustified under Italian law. The Mayor’s appeal of the perfect’s ruling was held inadmissible by the Italian president.

In the meantime, the trustee in bankruptcy had brought an action in the Italian courts against the Italian ministers of the interior and the mayor of Palermo for damages due to the decrease in value of the plant and equipment and the loss of use of the plant after the requisition. The lower court’s initial ruling denying any damages was partially reversed by the court of appeal of Palermo. The Supreme Court (corte de cassazione) confirmed the decision of the court of appeal. However, the only damages were for the loss of use of the plant and its facilities. The court awarded no damages for the decrease in value of the plant, by for the largest component of the losses claimed.

When the bankruptcy proceedings concluded in November 1985, the trustee reported having realized approximately two-thirds of the minimum liquidation value that ELSI’s management had calculated prior to the requisition. As a result, while secured and preferred creditors were paid in full, ELSI’s unsecured creditors received less than 1% of their claims. Raytheon received nothing for its equity investment.

 

Issue in the International Court of Justice ---

On February 6, 1987 the United States filed a unilateral application instituting proceeding against the republic of Italy in the International court of Justice. In its written and oral pleading, the United States alleged that Italy had violated Article III, V & VII of the bilateral treaty of Friendship, Commerce and Navigation of 1948 (FCN Treaty)[4] and Article I and V of the 1951 supplement to the treaty[5] by, inter alia, preventing two U.S corporations, Raytheon and its wholly owned subsidiary, Machlett laboratories, from liquidating the assets of their wholly owned Italian subsidiary, ELSI. Consequently, the U.S charged, Italy was obelized to pay compensation to the United States in the amount of U.S $ 12,679,000 plus interest. Italy denied that even it had violated the FCN treaty; but no injury was caused that would justify the payment of damages. Both the 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[6].

 

CONTENTIONS OF THE PETITIONER-

 

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[7]. i.e. United States of America claims that Italy, by its actions with respect to an Italian company, Elettronica $icula S.p.A. (ELSI), which was wholly owned by two United States corporations, the Raytheon Company ("Raytheon") and the Machlett Laboratories Incorporated ("Machlett"), has violated certain provisions of the treaty of Friendship, Commerce and Navigation between the two parties concluded in Rome on 2 February 1948  and the Supplementary Agreement thereto concluded on  26 September 1951.

CONTENTIONS OF THE RESPONDENT-

Italy, raised preliminary objection to the admissibility of the claim on the ground that local remedies had not been exhausted and any event, flatly denied any violation of the treaty[8]. In the oral hearing Italy further submitted “in a subsidiary and alternative basis only” that even supposing a violation of its obligation, no injury had been caused for which payment of indemnity would be justified[9].

JUDGEMENT---

1)      Jurisdiction of the Court and Admissibility of the Application; Rule of Exhaustion of Local Remedies-

On the question whether local remedies were, or were not exhausted by Raytheon and Machlett, the Chamber noted that 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 ELSI'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 complaint. It was therefore right that local remedies be pursued by ELSI itself. After examining the action taken by ELSI in its appeal against the requisition order and, later, by the trustee in bankruptcy, who claimed damages for the requisition, the Chamber considers that the municipal courts had been fully seized of the matter which is the substance of the Applicant's claim before the Chamber. Italy however contended that it was possible to cite the provision of the treaties themselves before the municipal courts, in conjunction with Article 2043 of the Italian Civil Code, which was never done. After examining the jurisprudence cited by Italy, the Chamber concludes that it is impossible to deduce what the attitude of the Italian courts would have been if such a claim had been brought. Since it was for Italy to show the existence of a local remedy, and as Italy has not been able to satisfy the 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, the Chamber rejected the objection of non-exhaustion of the local remedies.

 

II. Alleged Breaches of the Treaty of Friendship, Commerce and Navigation and its Supplementary Agreement ---

 

Paragraph I of the United States Final Submissions claimed that:

"(1) Italy 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, VII of the Treaty and Article I of the Supplement. . ."

According to the applicant, the Respondent first violated its legal obligations when it unlawfully 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 and secondly, 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 immediately 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." 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. It is fair to describe the other impugned acts of the Respondent as ancillary to this core claim based on the requisition and its effects.

A. Article III of FCN Treaty 

The allegation by the United States of a violation of Article III of the FCN Treaty by Italy related to the first sentence of the second paragraph, which provides:

"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."

In terms of the present case, the effect of this sentence was that Raytheon and Machlett are to be permitted, in conformity 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 Chamber considers whether there is 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 satisfaction of its liabilities to its creditors and satisfaction of its shareholders.

A requisition of this kind must normally amount to a deprivation, at least in important part, of the right to control and manage. 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 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 Appeal 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, paragraph 2.

According to the Respondent, however, 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. The Chamber had 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. 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, the plan for which liquidation was however very much bound up with the financial state of ELSI. After noting that the orderly liquidation was an alternative to the aim of keeping the place going, and that it was hoped that the threat of closure might bring pressure to bear on the Italian authorities, and that the Italian authorities did not come to the rescue on acceptable terms, the Chamber observes that the crucial question is whether Raytheon, on the eve of the requisition, 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. The successful implementation of a plan of orderly liquidation depends upon a number of factors not under the control of ELSI's management. Evidence has been produced by the Applicant that Raytheon was prepared to supply cash flow and other assistance necessary 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 commitment; but other factors give rise to some doubt.

After considering these other factors governing the matter - the preparedness of creditors to co-operate 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 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. The Applicant's claim under paragraphs 1 and 3 of Article V of the FCN Treaty is concerned with protection and security of nationals and their property.

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 the nationals, corporations and associations of any third country. There are, accordingly, three different standards of protection, all of which have to be satisfied.

A breach of these provisions is seen by the Applicant to have been committed when the Respondent "allowed ELSI workers to occupy the plant". While noting the contention of Italy that the relevant"property", the plant in Palermo, belonged not to Raytheon and Machlett but to the Italian company ELSI, the Chamber examines the matter on the basis of the United States argument that the "property" to be protected was ELSI itself.

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. 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 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 in 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 1 and 3.

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 requisition order. For the reasons already explained in connection with Article III, the Chamber rejects the contention that, had there been a speedy decision by the Prefect, the bankruptcy might have been avoided. With regard to the alternative contention that Italy was obliged to protect ELSI from the deleterious effects of the requisition, inter alia by providing an adequate method of overturning it, the Chamber observes that under Article V the "full protection and security" must conform to the minimum international standard, supplemented by the criteria of national treatment and most-favored-nation treatment. It must be doubted whether in all the circumstances, the delay in the Prefect's ruling can be regarded as falling below the minimum international standard. As regards the contention of failure to accord a national standard of protection, the Chamber, though not entirely convinced by the Respondent's contention that such a lengthy delay as in ELSI's case was quite usual, is nevertheless not satisfied that a "national standard" of more rapid determination of administrative appeals has been shown to have existed. It is therefore unable to see in this delay a violation of paragraphs 1 and 3 of Article V of the FCN Treaty.

C. Article V, paragraph 2, of FCN Treaty 

The first sentence of Article V, paragraph 2, of the FCN Treaty provides as follows:

"2. 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."

The Chamber notes a difference in terminology between the two authentic texts (English and Italian); the word "taking" is wider and looser than "expropriazione".

In the contention of the United States, first, 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 property without due process of law and just compensation. Secondly, the United States claims that, by interference with the bankruptcy proceedings, the Respondent proceeded through the ELTEL Company to acquire the ELSI plant and assets for less than fair market value.

The Chamber observed that 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 for far less than market value. What is thus alleged by the Applicant, if not an overt expropriation, might be regarded as a disguised expropriation; because, at the end of the process, it is indeed tide to property itself that is at stake. The United States had, however, during the oral proceedings, disavowed any allegation that the Italian authorities were parties to a conspiracy to bring about the change of ownership.

Assuming, though without deciding, that "expropriazione" might be wide enough to include a disguised expropriation, account has further to be taken of the Protocol appended to the FCN Treaty, extending Article V, paragraph 2, to "interests held directly or indirectly by nationals" of the Parties. The Chamber finds that it is not possible in this connection to ignore ELSI's financial situation and the consequent decision to close the plant and put an end to the company's activities. It 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 collusion, 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 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. 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 above. D. Article I of Supplementary Agreement to FCN Treaty (paras. 120-130).

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

"The nationals, corporations and associations of 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 enterprises or in the investments which they have made, whether in the form of funds (loans, shares or otherwise), materials, equipment, services, processes, patents, techniques or otherwise. Each High Contracting Party undertakes not to discriminate 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 answer to the Applicant's claim that the requisition was an arbitrary or discriminatory act which violated both the "(a)" and the "(b)" clauses of the Article is the absence of a sufficiently palpable connection between the effects of the requisition and the failure of ELSI to carry out its planned orderly liquidation. However, the Chamber considered that 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.

The United States claims that there was "discrimination" in favor of IRI, an entity controlled by Italy; there is, however, no sufficient evidence before the Chamber to support the suggestion that there was a plan to favor IRI at the expense of ELSI, and the claim of "discriminatory measures" in the sense of the Supplementary Agreement must therefore be rejected.

In order to show that the requisition order was an "arbitrary" act in the sense of the Supplementary Agreement, 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 unreasonable and improperly motivated"; it was "found to be illegal under Italian domestic law for precisely this reason".

Though examining the decisions of the Prefect of Palermo and the Court of Appeal of Palermo, the Chamber observed 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. By itself, and without more, unlawfulness cannot be said to amount to arbitrariness. The qualification given to an act by a municipal authority (e.g., as unjustified, or unreasonable or arbitrary) may be a valuable indication, but it does not follow that the act is necessarily to be classed as arbitrary in international law.

Neither the grounds given by the Prefect for annulling the requisition, nor the analysis by the Court of Appeal of Palermo of the Prefect's decision as a finding that the Mayor's requisition was an excess of power, with the result that the order was subject to a defect of lawfulness, signify, in the Chamber's view, necessarily and in itself any view by the Prefect, or by the Court of Appeal of Palermo, that the Mayor's act was unreasonable or arbitrary. Arbitrariness is a willful 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. Independently 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 seek to use his powers in an attempt to do something about the situation in Palermo at the moment of the requisition. The Mayor's order was consciously made in the context of an operating 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. Accordingly, there was no violation of Article I of the Supplementary Agreement.

E. Article VII of FCN Treaty (paras. 131-135)

Article VII of the FCN Treaty, in four paragraphs, is principally concerned with ensuring the right "to acquire, own and dispose of immovable property or interests therein [in the Italian text, "beniimmobilio. . . altri diritti real)"] within the territories of the other High Contracting Party".

The Chamber notes the controversy between the Parties turning on the difference in meaning between the English "interests", and the Italian, "diritti reali)", and the problems arising out of the qualification, by the Treaty, of the group of rights conferred by this Article, laying down alternative standards, and subject to a proviso. The Chamber considers, however, that, for the application of this Article, there remains precisely the same difficulty 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 corporation 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.

Separate Opinion of Judge Oda

Judge Oda, in his separate opinion, agreed with the operative findings of the Judgment. He notes, however, that, in initiating the proceedings, the United States espoused the cause of its nationals (Raytheon and Machlett) as shareholders in an Italian company (ELSI), whereas, as the Court itself determined in the Barcelona Traction Judgment of 1970, the rights of shareholders as such lie beyond the reach of diplomatic protection under general international law.

In Judge Oda's view, the 1948 FCN Treaty was intended neither to alter the shareholders' status nor to augment the shareholders' rights in any way. The provisions in the FCN Treaty upon which the Applicant relied, and which are extensively addressed in the Judgment, were not intended to protect the rights of Raytheon and Machlett as shareholders of ELSI.

The 1948 FCN Treaty, like similar FCN treaties to which the United States is a party, enables one State party to espouse the cause of a company of the other State party in an action against the latter when the company in question is controlled by nationals of the party bringing the action. The United States could thus have brought an action for breach of certain provisions of the 1948 Treaty which entitled it to defend an Italian company (ELSI) in which its nationals (Raytheon and Machlett) possessed a controlling interest.

Yet the Applicant had not relied on those provisions, and the Chamber in its Judgment had made scarcely any reference to them. Even if the proceedings had been brought as an espousal of ELSI's cause, the Applicant, in Judge Oda's view, would still have had to prove a denial of justice.

Dissenting Opinion of Judge Schwebel

Judge Schwebel agreed with the Judgment in what he termed two paramount respects which have important implications for the vitality and growth of international law.

First, the Judgment applied a rule of reason in its interpretation of the reach of the requirement of the exhaustion of local remedies. It holds not that every possible local remedy must have been exhausted to satisfy the local remedies rule but that, where in substance local remedies have been exhausted, that suffices to meet the requirements of the rule even if it may be that a variation on the pursuit of local remedies was not played out. This holding thus confines certain prior constructions of the rule to a sensible limit.

Second, the Judgment largely construed the FCN Treaty in ways which sustain rather than constrain it as an instrument for the protection of the rights of nationals and corporations of the United States and Italy. The Chamber declined to accept a variety of arguments pressed upon it which, if accepted, would have deprived the Treaty of much of its value. In particular, the Chamber declined to hold that ELSI, an Italian corporation whose shares were owned by United States corporations, was outside the scope of protection afforded by the Treaty. The claims of the United States in the case were not sustained, but that was not because the Chamber found against the United States on the law of the Treaty; it found against the United States on the practical and legal significance to be attached to the facts of the case.

 

*****

 

 

 


[1] An order of the Mayor of Palermo, Dated: 1 April,1968

[2] The actual date of bankruptcy depends on whether one takes the date of petition to the Italian bankruptcy court 26 April, 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 parties.

[3] IRI is the Italian governmental owned corporation, Istituto per la Ricostruzione Industriale.

[4] Feb 2, 1948, 63 stat. 2255, Tias No. 1965, 79 UNTS 171.

[5] Sept. 26, 1951, 12 UTS 131, TIAS No. 4685, 404 UNTS 326.

[6] ICJ Rep. 1987, 3, order of 2 March 1987. The members were President Nagendra Singh and Judges Oda, Ago, Schwebel and Jenning. Judge Ruda later replaced President Singh as both president of the court and of the chamber following the latter’s death. ICJ Rep. 1988,158, order of 20 Dec, 1988.

[7] Of 2ndJune,1948.

[8] Ibid.

[9] Idem, The United States claimed 12,679,000 U.S dollar in compensation.

 

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