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Published: Fri, 02 Feb 2018

Usa Versus Italy The Elettronica Sicula Case International Law Essay

International trade and investment breed prosperity. Prosperity, in turn, fosters peaceful relations. Through legal regimes that encourage and strengthen trade and investment, international law contributes greatly to the “creation of conditions of stability and well-being which are necessary for peaceful and friendly relations among nations.” For the United States, bilateral treaties have held center stage in setting legal standards for the establishment and protection of United States investments overseas, including those that take the form of foreign incorporated businesses. One measure of the effectiveness of these legal standards is their success at resolving international investment disputes when they arise. Without enforceable legal protections, the prospective investor has a lower expectation of security in the investment and is therefore less inclined to conduct business abroad. Consequently, a legal regime that fails to protect overseas investment carries a cost in foregone welfare and ultimately lessens opportunities for nations to forge strong and lasting economic ties.

International litigation arising from disputes of a commercial character has unfortunately been far from encouraging to investors. The contribution of the International Court of Justice has been particularly chilling. If after more than twenty years one rereads the Judgment in the Barcelona Traction case in which Belgium suffered so remarkable a defeat, one is more than ever disappointed by the Court’s lack of appreciation of the very specific facts of the case, the narrow reasoning and the almost complete adherence to conceptualism as opposed to equity. It is even more noteworthy that post- Franco Spain, now a member of the European Community, did not regard it as one of its first duties to undo the wrong of which even the Court must have been conscious and which a civilized country would not wish to deny or uphold. Recently the Court, or rather one of its Chambers consisting of Judges Ruda (as President), Oda, Ago, Sir Robert Jennings and Schwebel, had another opportunity of judging a dispute of a commercial character, viz., a dispute between the United States of America and Italy that arose from a substantial investment by a United States company in Italy. It led to a decision that has attracted singularly little comment and deserves greater attention than it has so far received.


The investment

In 1952, Raytheon Company — a United States manufacturer of electronics equipment — entered into a licensing and technical assistance agreement with an Italian company. This relationship eventually led Raytheon to become a partial shareholder in a relatively new company, Elettronica Sicula S.p.A. (ELSI), located in Palermo, Sicily. From 1956 through 1967, Raytheon invested some 7.42 billion lire in ELSI, ultimately acquiring over ninety-nine percent of its shares. In addition, Raytheon guaranteed more than five billion lire worth of loans to ELSI from various Italian banks. In April 1967, Machlett Laboratories, a wholly-owned subsidiary of Raytheon, acquired ELSI’s remaining shares.

ELSI manufactured sophisticated electronic components and equipment, based largely on patents, licenses, and technical assistance provided by Raytheon. While ELSI sold its products throughout the world (sales in 1965 and 1966 exceeded eight billion lire), the company never became economically self-sufficient. During fiscal years 1964 through 1966, ELSI earned an operating profit, but this profit was insufficient to offset its debt expenses and accumulated losses. ELSI never paid any dividends to its shareholders.

B. The Decision to Liquidate

By 1968, however, the causes of ELSI’s condition were less germane than the rights and obligations of the United States and Italy under the FCN Treaty. Raytheon had decided not to infuse additional capital into ELSI, and since no further capital was forthcoming from an Italian partner, Raytheon developed a plan to close and liquidate ELSI to minimize Raytheon’s losses. Under this plan, ELSI would maintain limited operations to complete work-in-progress and to fill existing purchase orders. This action would preserve ELSI as a going concern and make it more attractive to potential purchasers, who would have the chance to acquire ELSI’s established name and reputation, its customer and supplier relationships, and the necessary patent and trademark licenses and technical assistance from Raytheon. Raytheon planned at that time to offer ELSI for sale both as a total package and separately by product lines in order to maximize the liquidation price.

On March 16, 1968, ELSI’s Board of Directors voted to cease full-scale production by March 29 and to liquidate ELSI. The company’s shareholders voted to affirm this decision on March 28. On March 29, ELSI sent dismissal letters to those employees deemed unnecessary to fulfill the liquidation plan.

C. The Requisition by the Italian Government

On April 1, 1968, the Mayor of Palermo issued an order requisitioning ELSI’s plant and related tangible assets for six months. The order was based on an 1865 law that provided Italian administrative authorities with the power to “dispose of private property” for reasons of “grave public necessity.” The requisition noted that ELSI’s decision to close its plant gave rise “to strikes (both general and sectional),” aggravated the difficulties of the region, which had been “severely tried” by recent earthquakes, and created a “touchy” situation in which “unforeseeable disturbances of public order could take place.” The order also stated that ELSI’s plan spurred a public reaction that “strongly stigmatized” the action and caused the local press to be “very critical toward the authorities” and to accuse them of “indifference.” These conditions, according to the Mayor, created a “grave public necessity and [an] urgency to protect the general economic public interest.”

On April 2, 1968, ELSI’s management surrendered control of the plant and assets to the Mayor of Palermo. Surprisingly, the Mayor did not then keep the plant open and regularly operating. Workers were allowed to enter the plant premises, but production largely remained at a standstill. On April 9, ELSI’s management petitioned the Mayor to lift his order, arguing that the requisition was illegal. On April 12, the company again invited the Mayor to revoke his order. When it received no response from the Mayor, ELSI’s management appealed the order to the Prefect of Palermo, the Mayor’s administrative superior.Again, ELSI’s management argued that the requisition was illegal, arbitrary, and ultra vires. However, the Prefect did not rule on this appeal for sixteen months.

D. The Bankruptcy

On April 25, 1968, ELSI’s Board of Directors voted to file a voluntary petition in bankruptcy. The Civil and Criminal Tribunal of Palermo adjudged ELSI bankrupt on May 16, 1968, and designated a trustee to represent the creditors’ interests in ELSI’s assets. The dispute between the United States and Italy over the reason for the bankruptcy became the focal issue on which the ELSI decision turned. The United States argued that Raytheon quickly recognized that it would not be permitted to place ELSI through an orderly liquidation. Without the constant infusion of funds from Raytheon, ELSI could no longer meet its financial obligations as they came due, and unless ELSI’s board of directors was willing to incur possible personal liability for ELSI’s debts, ELSI had no choice under Italian law but to declare bankruptcy.

Italy argued that immediately prior to the time of the requisition, ELSI’s financial condition was so grave that the company should have been placed in bankruptcy under Italian law. Consequently, the requisition did not cause the bankruptcy. Even if the bankruptcy had been related to the requisition, Italy argued, ELSI’s shareholders did not lose anything since by April 1 the corporation’s liabilities exceeded its assets.

The requisition began on April 1 and lasted through September 1968. On July 25, 1968 — long before the bankruptcy court held any auction of ELSI’s assets — the Italian Minister of Industry, Commerce and Crafts announced to the Parliament that the Italian government intended to take over ELSI’s plant through a subsidiary of the government-owned conglomerate, Istituto per la Ricostruzione Industriale (IRI). On November 13, 1968, the government stated that an entity of IRI would acquire ELSI’s plant. The following month, IRI formed a new subsidiary, Industria Elettronica Telecommunicazioni S.p.A. (ELTEL), to take over ELSI’s plant and assets.

The bankruptcy court began its efforts to liquidate ELSI soon after the formation of ELTEL. The first auction of ELSI’s plant and equipment occurred on January 18, 1969, with a minimum bid of five billion lire (U.S. $8,000,000). No buyers appeared at the auction. On March 22, the bankruptcy court held a second auction, adding ELSI’s inventory to the assets for sale and setting a minimum bid of approximately 6.2 billion lire (U.S. $ 9,957,000). Again, no buyers appeared. Shortly after this auction, ELTEL proposed to the trustee that it be allowed to lease and reopen the plant for eighteen months. The trustee recommended this course of action, and the judge agreed to grant ELTEL the lease. In April 1969, ELTEL proposed to the trustee that it be allowed to buy ELSI’s work-in-progress — material left on the production lines — for 105 million lire (U.S. $168,000). The bankruptcy court approved the sale. On May 3, the bankruptcy court held the third auction of ELSI’s plant, equipment, and inventory for the same price as the first auction. For a third time, no buyers appeared. On May 27, ELTEL offered to buy the remaining plant, equipment, and supplies for four billion lire (U.S. $6,400,000). With the approval of the creditors’ committee, the bankruptcy court scheduled a fourth auction on these terms, and the sale was consummated.

Not surprisingly, the United States and Italy had two very different views of what was going on during the bankruptcy process. The United States asserted that by its acts — delaying the bankruptcy sale by imposing a six-month requisition, allowing the local work force to occupy the plant, and announcing its intention to take over the plant — Italy had essentially scared off potential buyers, producing a bankruptcy sale that greatly benefitted Italy’s own corporate entity. The United States presented evidence, particularly during the oral proceedings, regarding the likelihood of a European company purchasing ELSI’s product lines either together or individually. Italy countered that the United States was advancing an absurd conspiracy theory, envisioning a coordinated effort by numerous central and local government officials over a protracted period. Italy contended that the lack of participation in the bankruptcy auctions proved the low value of ELSI, implying that only the Italian government’s willingness to purchase ELSI permitted any recovery in the bankruptcy process at all.

E. Administrative and Judicial Remedies

Forty days after ELTEL purchased ELSI’s plant and equipment, the Prefect of Palermo ruled on the appeal of the Mayor’s decision to requisition the plant. The Prefect declared the requisition illegal, as it could not have achieved its stated purposes, such as preventing labor unrest by keeping the plant operating. This ruling later formed a cornerstone of the United States case, inasmuch as the principal standards in judging adherence to the treaty obligations discussed below turned in part on whether the Mayor had arbitrarily interfered with property interests. The United States saw the Prefect’s decision as an admission of the arbitrary nature of the requisition by an official of the Italian government.

The Mayor appealed the Prefect’s decision to both the Italian Council of State and the President of Italy. This appeal was dismissed on the ground that the Mayor lacked standing to appeal a decision of the Prefect. Based on the Prefect’s decision, ELSI’s trustee brought suit in the Court of Palermo against the local and national Italian governments. The trustee sought damages for the injuries that the requisition caused to ELSI and to its creditors. The alleged injuries arose from the decrease in the value of ELSI’s plant and equipment during the requisition period, and from ELSI’s inability to dispose of the plant and equipment during that period.

The District Court of Palermo denied the trustee’s claim for compensation. On appeal, however, the Court of Appeal of Palermo awarded compensation of 114 million lire (U.S. $171,000) for the lost use and possession of ELSI’s plant and assets during the six-month requisition period. Often referred to by the United States as a “rental” payment, this compensation made no provision for the decline in value due to the inability to dispose of ELSI’s plant and equipment during the requisition period. The Supreme Court of Appeals, the highest competent Italian court, upheld this decision on appeal.

F. Intervention by the United States

As the appeals were reaching their unsuccessful conclusion, Raytheon sought help from the United States government in “espousing” the claim as an injury to the United States under international law. On February 7, 1974, the United States presented Italy with a diplomatic note advancing a claim “based upon the illegal actions and interferences by Italian authorities contrary to treaty provisions, Italian law, and international law which precluded an orderly liquidation under the laws of Italy of ELSI, S.p.A.” Although some limited discussions took place between United States and Italian officials from 1974 to 1978, Italy did not respond formally to this diplomatic note until the summer of 1978. By an aide-mémoire of June 13, 1978, Italy rejected the claim as groundless, stating, “The records show that the order of seizure, even though unlawful, did not cause damage to the shareholders.” The United States continued its efforts to resolve the claim through diplomatic communications, including unsuccessful discussions held during a May 1979 meeting in Rome between United States Secretary of State Vance and Italian Foreign Minister Forlani. Ultimately, the United States determined to resolve the dispute through a third-party dispute settlement mechanism. From 1981 to 1985, the United States presented diplomatic notes to Italy seeking to submit the claim to binding arbitration.

In 1985, the parties met in Rome and agreed that instead of arbitration, the United States would submit the dispute to the ICJ. On October 7, 1985, the United States announced that it had agreed with Italy to bring the dispute before “a special chamber as provided by the Court’s Statute and rules of procedure, subject to mutually satisfactory resolution of implementing arrangements.” On February 6, 1987, the United States filed its application instituting proceedings before the ICJ. The parties subsequently filed two rounds of pleadings: the United States Memorial (May 15, 1987), the Italian Counter–Memorial (November 16, 1987), the United States Reply (March 19, 1988), and the Italian Rejoinder (July 18, 1988). Upon considering the views of the parties, the ICJ formed a Chamber of five judges to hear the case: Judge Roberto Ago (Italy), Judge Sir Robert Jennings (United Kingdom), Judge Shigeru Oda (Japan), Judge Steven Schwebel (United States), and President Nagendra Singh (India), who was replaced by President José María Ruda (Argentina) upon Judge Singh’s death in December 1988. The Chamber held a hearing in The Hague from February 13 to March 3, 1989.


The cause of action arose from the convergence of three events:

The Mayor of Palermo’s requisition of ELSI, 

The Italian subsidiary of Raytheon and Machlett; ELSI’s bankruptcy;

The acquisition of ELSI by an Italian state-owned entity.

The United States charged Italy with the following violations:

Impairing Raytheon and Machlett’s right to manage and control under article III(2) of the 1948 FCN;  failure to provide the full protection and security dictated by treaty and international law under article V(1) and (3);

A taking by the Italian government without just compensation under article V(2); denial of the right to dispose of property interests on terms no less favorable than those to which Italian companies were entitled on a reciprocal basis under article VII;

Discriminatory treatment of Raytheon and Machlett under article I of the supplement.

Jurisdictional issue

Before adjudicating the dispute on the merits, the World Court addressed the question of its jurisdiction. Article XXVI of the FCN Treaty explicitly confers jurisdiction upon the World Court with respect to questions of interpretation and application of the treaty and its supplement. 



The United States argued before the Chamber that Raytheon undertook extensive efforts to improve ELSI’s financial performance by enhancing its administrative efficiency and by upgrading the plant facilities. Nevertheless, according to the United States, the real key to making ELSI successful lay in overcoming an inherent competitive disadvantage vis-à-vis Italian-owned company by securing an Italian investment partner with economic power and political influence. In doing so, ELSI would gain the support of the national and regional governments, which granted certain benefits to businesses operating in southern Italy. The United States argued that when Raytheon’s efforts to obtain such an Italian partner failed, ELSI lost all ability to provide a return.

The United States argued that the requisition was an unlawful, arbitrary act taken by political authorities to appease public opinion. The United States noted that on March 31, 1968, the President of the Sicilian Region had met with ELSI’s Managing Director to inform him that the Italian government would not allow ELSI to close, since a closure would produce significant unemployment just before the national elections of May 1968. Furthermore, the United States introduced as evidence several comments made by officials of the Italian government before and after the requisition stating that the government wished to take over ELSI itself rather than allow its liquidation.

The United States argued that Raytheon quickly recognized that it would not be permitted to place ELSI through an orderly liquidation. Without the constant infusion of funds from Raytheon, ELSI could no longer meet its financial obligations as they came due, and unless ELSI’s board of directors was willing to incur possible personal liability for ELSI’s debts, ELSI had no choice under Italian law but to declare bankruptcy.


Italy countered that Raytheon essentially caused ELSI’s demise with bad management, including poor product selection, poor choice of location, poor labor relations, and exorbitant charges for technical assistance. Italy further argued that it had given ELSI considerable financial assistance and that the success of non-Italian competitors during this period showed that ELSI’s problems did not derive from its foreign ownership. Italy admitted that ELSI had approached it for help, but stated that the financial contributions requested by ELSIexceeded the government’s resources.

The Italian government responded that the United States was accusing it of a grand conspiracy to take over a relatively worthless company. Italy argued that the Mayor of Palermo had acted as he thought necessary, given the labor unrest that could have resulted had the government remained silent. Even if the Mayor had made a mistake in requisitioning the plant, Italy contended, he nevertheless had still exercised a police power granted to him by Italian law, and therefore had not acted improperly.

Italy argued that immediately prior to the time of the requisition, ELSI’s financial condition was so grave that the company should have been placed in bankruptcy under Italian law. Consequently, the requisition did not cause the bankruptcy. Even if the bankruptcy had been related to the requisition, Italy argued, ELSI’s shareholders did not lose anything since by April 1 the corporation’s liabilities exceeded its assets.



 The court’s jurisdictional analysis considered Italy’s challenge that the United States had not complied with the requirement of local exhaustion. The court dismissed the U.S. suggestion that the exhaustion-of-local-remedies rule did not apply absent explicit mention in the treaty. On the contrary, the court held the exhaustion-of-local-remedies requirement to be a principle of customary international law, applicable unless explicitly waived. Furthermore, the court found that Italy’s failure to allege a lack of compliance with local exhaustion requirements in its diplomatic exchanges with the United States did not constitute an estoppel. In the end the court determined that the United States fulfilled its obligation under the local-exhaustion rule.


In a complex opinion, the I.C.J. held that Italy had not violated the FCN Treaty. Despite the court’s broad interpretation of the treaty, the court found that the United States failed to state a claim absent a direct causal link between the mayor’s requisition order and ELSI’s bankruptcy. The court determined that the core claim was found in article III of the treaty: impairment of the right to manage and control. Although the Italian courts found the requisition order unjustifiable, the I.C.J. was left to determine the financial position of ELSI. If ELSI’s position was so precarious that Raytheon and Machlett would not have been able to manage and control it before the requisition order, then ELSI was already deprived of the rights allegedly impaired by the order. The court also considered whether the orderly liquidation plan was still feasible as of March 31, 1968, after the dismissal of ELSI’s employees, and found that the United States had failed to establish the feasibility of liquidation. Based on the court’s answers to these questions, Italy’s actions or omissions were found not to have directly impaired the management and control of ELSI, thereby leaving no cause of action.

The court enumerated the factors that rendered the potential success of the liquidation plan questionable. In order for the plan to have worked, the court reasoned, ELSI’s major creditors must have been willing to wait for payment, which was unlikely. The court found that ELSI’s twin aims of speed and maximum price were potentially incompatible and pointed out that ELSI had been warned that sending dismissal letters to its employees might result in requisition. The court held that the United States had not demonstrated the feasibility of an orderly liquidation, and therefore no violation of article III (2) of the FCN Treaty existed

The court then considered the U.S. claims under article V of the treaty, the first of which concerned the protection and security of nationals, in this case, U.S. investors and their property in Italy. The United States argued that the occupation by the workers diminished the plant’s value, both because it caused the plant to deteriorate, and because it impeded efforts by the bankruptcy trustee to dispose of the plant. The treaty provides for application of a national standard; in the court’s judgment, the United States failed to demonstrate any departure from a national standard. The court also pointed out that ELSI’s management was aware that sending dismissal letters was likely to result in worker unrest. Neither party contested the fact that there had been many requisitions of Italian companies in similar situations. The United States also argued that the Prefect’s sixteen-month delay in ruling on ELSI’s appeal of the requisition order violated Italy’s obligations under article V. However, the I.C.J. did not find that the delay fell below either the minimum international or the national standard.

The second U.S. claim under article V alleged that the requisition and sale of assets constituted a taking without due process and without just and effective compensation under article V (2). The U.S. charge included not just the requisition of the plant but also the subsequent acquisition of ELSI’s assets for a sum far below market value; essentially, Italy’s conduct amounted to disguised expropriation. Declining to resolve the controversy over textual interpretation, the court found that Italy’s acts or omissions could not constitute a taking unless Raytheon and Machlett were significantly deprived of their interests. In light of the attitude of local authorities, the Italian bankruptcy laws, the attitude of the various creditors, and the attitude of its workers, both ELSI’s financial woes and the pending closure made bankruptcy inevitable. The court did not find that the Italian government’s conduct in any way precipitated the bankruptcy, nor amounted to a taking.

The court dismissed the claim under article I of the supplement, which protects against arbitrary and discriminatory measures.  For the reasons enumerated above, the court found no causal connection between the requisition of the plant and the failure of the orderly liquidation plan. Although the requisition alone may not necessarily have produced adverse results, the court found it necessary to consider whether the requisition order was arbitrary and discriminatory.  The  court found the requisition unlawful, but its status under municipal law is not determinative of its status under international law. In order for an action to be arbitrary, it is not enough that it be against a rule of law; it must be against “the rule of law.”  In other words, it was not sufficient for an action to be illegal–it must have flouted the very concept of a legal system. The I.C.J. chamber did not find the mayor’s actions against the rule of law.

The final claim rested upon article VII of the FCN Treaty, which provides for the right to acquire, own, and dispose of immovable property within Italy. The court found that the provision had not been violated, and that qualification (a), referring to the rights of Italian nationals in the United States, did not apply. The court also found that the treatment of ELSI had not been less favourable than that which had been accorded Italy’s own nationals in similar situations. Italy demonstrated, and the United States did not dispute, that similar requisitions of Italian companies occurred frequently. In addition, the difficulty of finding a causal connection between the requisition and the bankruptcy given ELSI’s precarious financial situation led the court to find no violation of article VII.


Judge Schwebel, the sole dissenter, endorsed the court’s position as to the exhaustion of local remedies and agreed with the court’s interpretation of the FCN Treaty. However, he disagreed with the majority’s factual determinations and agreed with the U.S. position on those matters. He disagreed with the majority’s finding on the feasibility of an orderly liquidation and with the majority’s position with respect to the requisition order. Judge Schwebel agreed with the U.S. interpretation of the treaty. His dissent emphasized the history behind FCN treaties and relied more extensively upon the preparatory work of the U.S.-Italy FCN than did the opinions of other members of the court. He also found the exhortations of the Italian authorities that Raytheon not close the ELSI plant to be evidence that, far from precipitating its bankruptcy, the Italian authorities pressed ELSI not to go into bankruptcy. Finally, he found that the Italian judgments supported the conclusion that the Palermo Mayor’s requisition was arbitrary, unreasonable, and capricious under international law.


The I.C.J. exercises both contentious and advisory jurisdiction. Compulsory jurisdiction, the third of the three types of contentious jurisdiction, has been the subject of controversy with regard to the United States.  But the case concerning Elettronica Sicula falls under the second form of contentious jurisdiction: over cases arising under treaties stipulating I.C.J. jurisdiction for dispute resolution. The willingness of the United States to bring a dispute to the international tribunal has symbolic significance. The United States maintains that it is still willing to accept I.C.J. jurisdiction where appropriate under U.S. standards, as in this dispute. 

The case concerning Elettronica Sicula marked the first U.S. appearance before the I.C.J. since its withdrawal in 1986, and therefore strengthened the World Court. Italy’s success on the merits demonstrates not only that the Italian courts provided adequate local remedies for a foreign claimant, but also that the I.C.J. was not wary of finding against the United States or dismissing its claims. The United States failed to win the case, despite the fact it was heard by a special fivemember chamber comprised of judges from Latin America, Japan, Britain, Italy, and the United States. In the past the United States had suggested that the I.C.J. tended to reflect Third World views, and thus submitted disputes to chambers reflecting Western thought.  The court’s decision on the merits reflects its willingness, even on the part of such special chambers, to find against the United States. Its holding on treaty interpretation supports the U.S. interpretation and should therefore encourage more parties to bring their disputes before the I.C.J. by adopting the U.S. argument that local exhaustion may not be a prerequisite to I.C.J. jurisdiction in the absence of explicit treaty provisions. By ruling that only the substance of the allegations must have been pursued in the local courts in the absence of a strong showing by Italy of a local remedy that should have been pursued, the court has clearly lowered the threshold for jurisdiction.

The United States expressed its satisfaction with the judgment and agreed to respect the I.C.J. decision. Consistent with the prevalent view regarding the lack of precedential value of I.C.J. judgments, the United States asserted it did not regard the judgment to have implications beyond the specific case.  The next time a dispute arises under one of the hundreds of foreign-investment treaties to which the United States is a party, the United States may well bring it directly before the I.C.J. The question remains, however, whether the United States will be as compliant when summoned as a defendant.

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