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[p.15]
The Chamber of the International Court of Justice formed to deal with the
case above mentioned,
composed as above,
after deliberation,
delivers the following Judgment:
1. By a letter dated 6 February 1987, filed in the Registry of the Court the
same day, the Secretary of State of the United States of America transmitted
to the Court an Application instituting proceedings against the Republic of
Italy in respect of a dispute arising out of the requisition by the
Government of Italy of the plant and related assets of Raytheon-Elsi S.p.A.,
previously known as Elettronica Sicula S.p.A. (ELSI), an Italian company
which was stated to have been 100 per cent owned by two United States
corporations. By the same letter, the Secretary of State informed the Court
that the Government of the United States requested, pursuant to Article 26
of the Statute of the Court, that the dispute be resolved by a Chamber of
the Court.[p 18]
2. Pursuant to Article 40, paragraph 2, of the Statute, the Application was
at once communicated to the Government of the Republic of Italy. In
accordance with paragraph 3 of that Article, all other States entitled to
appear before the Court were notified of the Application.
3. By a telegram dated 13 February 1987 the Minister for Foreign Affairs of
Italy informed the Court that his Government accepted the proposal put
forward by the Government of the United States that the case be heard by a
Chamber composed in accordance with Article 26 of the Statute; this
acceptance was confirmed by a letter dated 13 February 1987 from the Agent
of Italy.
4. By an Order dated 2 March 1987, the Court, after recalling the request
for a Chamber and reciting that the Parties had been duly consulted as to
the composition of the proposed Chamber in accordance with Article 26,
paragraph 2, of the Statute and Article 17, paragraph 2, of the Rules of
Court, decided to accede to the request of the Governments of the United
States of America and Italy to form a special Chamber of five judges to deal
with the case, declared that at an election held on that day President
Nagendra Singh and Judges Oda, Ago, Schwebel and Sir Robert Jennings had
been elected to the Chamber, and declared a Chamber to deal with the case to
have been duly constituted by the Order, with the composition indicated.
5. The Court further fixed time-limits, by the said Order, for the filing of
a Memorial by the United States of America and a Counter-Memorial by Italy,
which were duly filed within the time-limits. In its Counter-Memorial, Italy
presented an objection to the admissibility of the Application; by letters
addressed to the Registrar on 16 November 1987, the Parties agreed, with
reference to Article 79, paragraph 8, of the Rules of Court, that the
objection should "be heard and determined within the framework of the
merits". By an Order dated 17 November 1987, the Chamber took note of that
agreement, found that the filing of further pleadings by the Parties was
necessary, authorized the filing of a Reply by the United States of America
and a Rejoinder by Italy, and fixed time-limits for these; the Reply and
Rejoinder were duly filed within those time-limits.
6. On 11 December 1988 Judge Nagendra Singh, President of the Chamber, died.
Following further consultations with the Parties with regard to the
composition of the Chamber in accordance with Article 17, paragraph 2, of
the Rules of Court, the Court, by Order dated 20 December 1988, declared
that Judge Ruda, President of the Court, had that day been elected a Member
of the Chamber to fill the vacancy left by the death of Judge Nagendra
Singh. In accordance with Article 18, paragraph 2, of the Rules of Court,
President Ruda became President of the Chamber.
7. At 12 public sittings held between 13 February and 2 March 1989, the
Chamber was addressed by the following representatives of the Parties:
For the United States of America: The Honorable A. D. Sofaer
Mr. M. J. Matheson
Mr.T. E.Ramish
Ms M. P. Chandler
Mr. S. D. Murphy
The Honorable R. N. Gardner
Mr. G. Bisconti
Professor F. Bonelli
Professor E. Fazzalari
For Italy: Professor L. Ferrari Bravo
Professor R. Monaco
Mr. I. Caramazza
Professor M.J.Bonell
Professor F. Capotorti
Professor G.Gaja
Mr. K. Highet
Professor B. Libonati
8. The United States called as witnesses Mr. Charles Francis Adams (who was
examined by Mr. Sofaer and cross-examined by Mr. Highet) and Mr. John
Dickens Clare (who was examined by Ms Chandler and cross-examined by Mr.
Highet). The United States called as expert Mr. Timothy Lawrence (who was
cross-examined by Professor Bonell). Mr. Giuseppe Bisconti also addressed
the Court on behalf of the United States; since he had occasion to refer to
matters of fact within his knowledge as a lawyer acting for Raytheon
Company, the President of the Chamber acceded to a request by the Agent of
Italy that Mr. Bisconti be treated pro tanto as a witness. Mr. Bisconti, who
informed the Chamber that both Raytheon Company and Mr. Bisconti himself
waived any relevant privilege, was cross-examined by Mr. Highet. Italy
called as expert Mr. Alan Derek Hayward.
9. During the hearings questions were put to the Parties, and to the
witnesses and experts, by the President and Members of the Chamber; replies
were given orally or in writing prior to the close of the oral proceedings,
with documents in support. The Chamber decided further that each Party might
comment in writing on the replies of the other Party to a series of
questions, put at a late stage of the oral proceedings, and a time-limit was
fixed for that purpose; written comments were duly filed within that
time-limit. A further question was put to one Party after the close of the
hearings and answered in writing; the other Party was given an opportunity
to comment on the answer.
10. In the course of the written proceedings the following submissions were
presented by the Parties:
On behalf of the United States of America,
in the Application:
"while reserving the right to supplement and amend this submission as
appropriate in the course of further proceedings, the United States requests
the Court to adjudge and declare as follows:
(a) that the Government of Italy has violated the Treaty of Friendship,
Commerce and Navigation between the United States of America and the Italian
Republic of l948, in particular, Articles II, III, V and VII of the Treaty,
and Articles I and V of the 1951 Supplement; and
(b) that the Government of Italy is responsible to pay compensation to the
United States, in an amount to be determined by the Court, as measured by
the injuries suffered by United States nationals as a result of these
violations, including the additional financial losses which Raytheon
suffered in repaying the guaranteed loans and in not
[p 20] recovering amounts due on open accounts, as well as expenses incurred
in defending against Italian bank lawsuits, in mitigating the damage to its
reputation and credit, and in pursuing its claim for redress";
in the Memorial:
"the United States submits to the Court that it is entitled to a declaration
and judgment that:
(a) Italy -- by engaging in the acts and omissions described above, which
prevented Raytheon and Machlett, United States corporations, from
liquidating the assets of their wholly-owned Italian corporation ELSI and
caused the latter's bankruptcy, and by its subsequent actions and omissions
-- 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:
-- Article III (2), in that Italy's actions and omissions prevented Raytheon
and Machlett from exercising their right to manage and control an Italian
corporation;
-- Article V (1) and (3), in that Italy's actions and omissions constituted
a failure to provide the full protection and security as required by the
Treaty and by international law;
-- Article V (2), in that Italy's actions and omissions constituted a taking
of Raytheon's and Machlett's interests in property without just compensation
and due process of law;
-- Article VII, in that these actions and omissions denied Raytheon and
Machlett the right to dispose of their interests in immovable property on
terms no less favorable than an Italian corporation would enjoy on a
reciprocal basis;
-- Article I of the Supplement, in that the treatment afforded Raytheon and
Machlett was both arbitrary and discriminatory, prevented their effective
control and management of ELSI, and also impaired their other legally
acquired rights and interests;
(b) that, owing to these violations of the Treaty and Supplement, singly and
in combination, the United States is entitled to compensation in an amount
equal to the full amount of the damage suffered by Raytheon and Machlett as
a consequence, including their losses on investment, guaranteed loans, and
open accounts, the legal expenses incurred by Raytheon in connection with
the bankruptcy, in defending against related litigation and in pursuing its
claim, and interest on such amounts computed at the United States prime rate
from the date of loss to the date of payment of the award, compounded on an
annual basis; and
(c) that Italy accordingly should pay to the United States the amount of US$
12,679,000, plus interest, computed as described above";[p 21]
in the Reply:
"the United States submits to the Court that it is entitled to a declaration
and judgment that:
(a) the claims brought by the United States are admissible before the Court
since all reasonable local remedies have been exhausted;
(b) Italy -- by engaging in the acts and omissions described above and in
the Memorial, which prevented Raytheon and Machlett, United States
corporations, from liquidating the assets of their wholly-owned Italian
corporation ELSI and caused the latter's bankruptcy, and by its subsequent
actions and omissions -- 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:
-- Article III (2), in that Italy's actions and omissions prevented Raytheon
and Machlett from exercising their right to manage and control an Italian
corporation;
-- Article V (1) and (3), in that Italy's actions and omissions constituted
a failure to provide the full protection and security as required by the
Treaty and by international law;
-- Article V (2), in that Italy's actions and omissions constituted a taking
of Raytheon's and Machlett's interests in property without just compensation
and due process of law;
-- Article VII, in that these actions and omissions denied Raytheon and
Machlett the right to dispose of their interests in immovable property on
terms no less favorable than an Italian corporation would enjoy on a
reciprocal basis;
-- Article I of the Supplement, in that the treatment afforded Raytheon and
Machlett was both arbitrary and discriminatory, prevented their effective
control and management of ELSI, and also impaired their other legally
acquired rights and interests;
(c) that, owing to these violations of the Treaty and Supplement, singly and
in combination, the United States is entitled to compensation in an amount
equal to the full amount of the damage suffered by Raytheon and Machlett as
a consequence, including their losses on investment, guaranteed loans, and
open accounts, the legal expenses incurred by Raytheon in connection with
the bankruptcy, in defending against related litigation and in pursuing its
claim, and interest on such amounts computed at the United States prime rate
from the date of loss to the date of payment of the award, compounded on an
annual basis; and
(d) that Italy accordingly should pay to the United States the amount of US$
12,679,000, plus interest, computed as described above and in the Memorial."
On behalf of the Republic of Italy,
in the Counter-Memorial and in the Rejoinder:[p 22]
"May it please the Court,
To adjudge and declare that the Application filed on 6 February 1987 by the
United States Government is inadmissible because local remedies have not
been exhausted.
If not, to adjudge and declare:
(1) that Article III (2) of the Treaty of Friendship, Commerce and
Navigation of 2 February 1948 has not been violated;
(2) that Article V (1) and (3) of the Treaty has not been violated;
(3) that Article V (2) of the Treaty has not been violated;
(4) that Article VII of the Treaty has not been violated;
(5) that Article I of the Supplementary Agreement of 26 September 1951 has
not been violated;
and, accordingly, to dismiss the claim."
11. In the course of the oral proceedings the following submissions were
presented by the Parties:
On behalf of the United States of America,
at the hearing of 16 February 1989:
"The United States requests that the objection of the Respondent be
dismissed and submits to
the Court that it is entitled to a declaration and judgment that:
(1) the Respondent 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, and VII of the Treaty and Article I of the Supplement; and
(2) that, owing to these violations of the Treaty and Supplement, singly and
in combination, the United States is entitled to reparation in an amount
equal to the full amount of the damage suffered by Raytheon and Machlett as
a consequence, including their losses on investment, guaranteed loans, and
open accounts, the legal expenses incurred by Raytheon in connection with
the bankruptcy, in defending against related litigation and in pursuing its
claim, and interest on such amounts computed at the United States prime rate
from the date of loss to the date of payment of the award, compounded on an
annual basis; and
(3) that Italy accordingly should pay to the United States the amount of $
12,679,000 plus interest."
At the hearing of 27 February 1989 (afternoon) the Agent of the United
States confirmed that these were the final submissions of the United States.
On behalf of the Republic of Italy,
at the hearing of 23 February 1989, repeated as final submissions at the
hearing of 2 March 1989 (afternoon):
"May it please the Court,
A. To adjudge and declare that the Application filed on 6 February [p 23]
1987 by the United States Government is inadmissible because local remedies
have not been exhausted.
B. If not, to adjudge and declare:
(1) that Article III of the Treaty of Friendship, Commerce and Navigation of
2 February 1948 has not been violated;
(2) that Article V, paragraphs I and 3, of the Treaty has not been violated;
(3) that Article V, paragraph 2, of the Treaty, and the related provisions
of the Protocol to the Treaty, have not been violated;
(4) that Article VII of the Treaty has not been violated;
(5) that Article 1 of the Supplementary Agreement of 26 September 1951 has
not been violated; and
(6) that no other Article of the Treaty or the Supplementary Agreement has
been violated.
C. On a subsidiary and alternative basis only: to adjudge and declare that,
even if there had been a violation of obligations under the Treaty or the
Supplementary Agreement, such violation caused no injury for which the
payment of any indemnity would be justified.
And, accordingly, to dismiss the claim."
**
12. The claim of the United States in the present case is that Italy has
violated the international legal obligations which it undertook by the
Treaty of Friendship, Commerce and Navigation between the two countries
concluded on 2 February 1948 ("the FCN Treaty") and the Supplementary
Agreement thereto concluded on 26 September 1951, by reason of its acts and
omissions in relation to, and its treatment of, two United States
corporations, the Raytheon Company ("Raytheon") and The Machlett
Laboratories Incorporated ("Machlett"), in relation to the Italian
corporation Raytheon-Elsi S.p.A. (previously Elettronica Sicuia S.p.A.
(ELSI)), which was wholly owned by the two United States corporations. Italy
contests certain of the facts alleged by the United States, denies that
there has been any violation of the FCN Treaty, and contends, on a
subsidiary and alternative basis, that if there was any such violation, no
injury was caused for which payment of any indemnity would be justified.
13. In 1955, Raytheon (then known as Raytheon Manufacturing Company) agreed
to subscribe for 14 per cent of the shares in Elettronica Sic-ula S.p.A.
Over the period 1956-1967, Raytheon successively increased its holding of
ELSI shares (as well as investing capital in the company in other ways) to a
total holding of 99.16 per cent of its shares. In April 1963 the name of the
company was changed from Elettronica Sicuia S.p.A. to "Raytheon-Elsi
S.p.A."; it will however be referred to hereafter as "ELSI". The remaining
shares (0.84 per cent) in ELSI were acquired in April 1967 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 [p 24] slightly under 900
employees. Its five major product lines were microwave tubes, cathode-ray
tubes, semiconductor rectifiers, X-ray tubes and surge arresters.
14. During the fiscal years 1964 to 1966 inclusive, ELSI made an operating
profit, but this profit was insufficient to offset its debt expense or
accumulated losses, and no dividends were ever paid to its shareholders. In
June 1964, the accumulated losses exceeded one-third of the company's share
capital, and ELSI was thus required by Article 2446 of the Italian Civil
Code to reduce its equity from 4,300 million lire to 2,000 million lire. The
capital stock was therefore devalued by 2,300 million lire and recapitalized
by an equal amount subscribed by Raytheon. A similar operation was necessary
in March 1967. In February 1967, according to the United States, Raytheon
began taking steps to endeavour to make ELSI self-sufficient, Raytheon and
Machlett designated a number of highly-qualified personnel to provide
financial, managerial and technical expertise, and Raytheon provided a total
of over 4,000 million lire in recapitalization and guaranteed credit. By
December 1967, according to the United States, major steps had been taken to
upgrade plant facilities and operations.
15. At the same time, however, the Chairman of ELSI, and other senior
Raytheon officials, held numerous meetings, between February 1967 and March
1968, with cabinet-level officials of the Italian Government and of the
Sicilian region, as well as representatives of the Istituto per la
Ricostru-zione Industriale ("IRI"), the Ente Siciliano per la Produzione
Industriale ("ESPI"), and the private sector. IRI was a holding company
controlled by Italy with extensive commercial interests, and dominated at
this time the telecommunications, electronics and engineering markets. ESPI
was the Sicilian Government industrial organization responsible for the
promotion of local development. The purpose of these meetings 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. The management
of Raytheon had formed the view that, "without a partnership with IRI or
other equivalent Italian Governmental entity, ELSI would continue to be an
outsider to the Italian industrial community"; such a partnership would, it
was thought, "positively influence government decision-making in economic
planning", and enable ELSI also to secure benefits and incentives under
Italian legislation designed to favour industrial development in the
southern region, the Mezzogiorno. Evidence has been given that the
management of ELSI was advised that the company was entitled to such
Mezzogiorno benefits, but the Chamber has been told by Italy that it was not
so entitled. The support of the national and regional governments was
regarded as particularly important because in numerous markets crucial to
ELSI's operations and success [p 25] the Italian Government, through IRI or
otherwise, played a dominant role as a customer. A detailed "Project for the
Financing and Reorganization of the Company" was prepared and submitted to
ESPI in May 1967.
16. The management of ELSI took the view that one of the reasons for its
lack of success was that it had trained and was employing an excessively
large labour force. In June 1967 it was decided to dismiss some 300
employees; under an Italian union agreement this involved a procedure of
notifications and negotiations. On the intervention of ESPI, an alternative
plan was agreed to whereby 168 workers would be suspended from 10 July 1967,
with limited pay by ELS I for a period not exceeding six weeks. After a
training programme during which the workers were paid by the Sicilian
Government, it was contemplated that ELSI would endeavour to re-employ the
suspended employees. The necessary additional business to make this possible
was not forthcoming, and the suspended employees were dismissed early in
March 1968. A number of random strikes had occurred in early 1968, and as a
result of the dismissals a complete strike of the plant occurred on 4 March
1968. According to the Government of Italy, this strike also involved an
occupation of the plant by the workforce, which occupation was still
continuing when the plant was requisitioned on 1 April 1968 (paragraph 30
below). The United States claims however that strikes and "sit-ins" prior to
the requisition were only sporadic and that only after the filing of a
petition in bankruptcy on 26 April 1968 (paragraph 36 below) did the workers
actually occupy the plant for a sustained period.
17. When it became apparent that the discussions with Italian officials and
companies were unlikely to lead to a mutually satisfactory arrangement to
resolve ELSI's difficulties, Raytheon and Machlett, as shareholders in ELSI,
began seriously to plan to close and liquidate ELSI to minimize their
losses. General planning for the potential liquidation of ELSI began in the
latter part of 1967, and in early 1968 detailed plans were made for a
shut-down and liquidation at any time after 16 March 1968. On 2 March 1968,
the company's books and accounting records, and, according to a witness at
the hearings, "quite a lot of inventory", were transferred from its offices
in Palermo to a regional office in Milan. On 7 March 1968, Raytheon formally
notified ELSI that, notwithstanding ELSFs need for further capital, Raytheon
would not "subscribe to any further stock which might be issued by
Raytheon-Elsi or to guarantee any additional loans which might be made by
others to Raytheon-Elsi".[p 26]
18. This decision was stated to have been taken, inter alia, on review of
the proposed balance sheet showing the position on 30 September 1967; that
balance sheet showed the book value of the assets of ELSI as 17,956.3
million lire, its total debt as 13,123.9 million lire; the accumulated
losses of 2,681.3 million lire had reduced the value of the equity (capital
stock and capital subscription account) from 4,000 million lire to 1,318.7
million lire. The total debt included a number of liabilities to one United
States bank and several Italian banks, some (but not all) of which were
guaranteed by Raytheon. For the purposes of a possible liquidation, an asset
analysis was prepared by the Chief Financial Officer of Raytheon showing the
expected position on 31 March 1968. This showed the book value of ELSI's
assets as 18,640 million lire; as explained in his affidavit filed 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 assets on this basis (the
"quick-sale value") was calculated to be 10,838.8 million lire. A balance
sheet subsequently prepared to show the position at 31 March 1968,
extrapolated from the balance sheet at 30 September 1967, showed the book
value of total assets as 17,053.5 million lire and total debt of 12,970.6
million lire.
19. During the hearings, at the request of the Agent of Italy, the Chamber
asked the Government of the United States to produce the financial report
showing ELSI's financial position at 30 September 1967, from which the
figures for the book value of its assets had been derived. The report,
prepared by Raytheon's Italian auditors, and dated 22 March 1968, was
produced in evidence. The balance sheet attached thereto showed two sets of
figures; the first of these, corresponding to the figures for assets and
liabilities set out in paragraph 18 above, gave the figures as recorded in
the company's books of account. The second set of figures was based on the
first set, but a number of adjustments had been made in accordance with the
financial accounting policy of Raytheon "In order to assure comparability of
the financial information reported from abroad" by its subsidiary companies.
According to the Co-Agent of the United States, the major difference between
the accounts on the Italian basis and the Raytheon basis was
"the item of Deferred Charges, which for the most part represented the cost
of developing new lines and improving product quality. This asset is carried
on the Italian books but is routinely written off by Raytheon Company."
The adjustment of the item for "Deferred Charges" reduced the total assets
figure by 1,653 million lire. Taking all adjustments into account, [p 27]
the second set of figures gave a value of 14,893.9 million lire for the
assets, and 15,775.2 million lire for the liabilities. The auditors stated
in their covering letter to Raytheon accountants that
"The adjustments made by the company in preparing the above mentioned
balance sheet and statement of income and accumulated losses have not, at
the date of this report, been recorded in the books, essentially for tax
reasons. Accordingly, the accompanying financial statements are not in
agreement with the company's books of account."
Among the "Notes on Financial Statements" attached to the accounts by the
auditors was the following:
"10. The adjusted accumulated losses at September 30, 1967 exceeded the
total of the paid up capital stock, capital reserve and Stockholders
subscription account by an amount of 881.3 million lire. Should this become
'officially' the case (e.g. should the adjustments made in arriving at this
total of accumulated losses be entered in the company's books of account),
under Articles 2447 and 2448 of the Italian Civil Code the directors would
be obliged to convene a Stockholders' Meeting forthwith to take measures
either to cover the losses by providing new capital or to put the company
into liquidation."
The auditors also expressed reservations on two other items totalling
1,168.5 million lire.
20. The officials of Raytheon and ELS I were nevertheless advised by their
Italian counsel in March 1968 that "ELSI's capital, after taking into
account losses to date at that time, was well in excess of the minimum
statutory requirement" (1 million lire) under Articles 2447 and 2448 of the
Italian Civil Code, which provide that if action is not taken to restore the
capital to the required minimum, the company is dissolved as a matter of
law. In the view of ELSFs counsel, "it was therefore possible under Italian
law for ELSI's shareholders to plan an orderly liquidation of the company".
21. Throughout this Judgment this phrase "orderly liquidation" is used
solely in the sense in which it was employed by the officers of ELSI and by
the representatives of the United States, i.e., to denote the operation
planned in 1967-1968 by ELSI's management for the sale of the business or of
its assets, en bloc or separately, and the discharge of ELSI's debts, fully
or otherwise, out of the proceeds, the whole operation being under the
control of ELSI's own management.
22. According to the United States, the chief objectives in the planned
orderly liquidation were to conserve the assets and preserve as many of the
[p 28] characteristics of a going concern as possible in order to attract
and interest prospective buyers; it was planned to advertise ELSI's assets
widely, offering them both as a total package and as separate items -- the
distinct manufacturing lines of the plant. The intention was, if the sums
realized by the sale of the assets were sufficient, to pay all creditors in
full. Planning had however also proceeded on the basis of the "quick-sale"
valuation of the assets (paragraph 18 above), which, it was recognized, was
less than the total liabilities of the company. It was not considered
possible to continue normal production; the personnel was to be dismissed,
with the exception of some 120 key employees needed for the wind-up
operation and for continuing limited production for a time to meet (in
particular) military contracts and maintain customer contact.
23. The intended treatment of creditors in the planned liquidation, in the
event of only the "quick-sale" value being realized, was stated by the
Financial Controller of Raytheon to have been as follows:
"Ideally, we would settle first with the small creditors, subject, of
course, to the agreement of the major creditors, in order to minimize the
administrative effort during liquidation. Secured and preferred creditors
would take priority and would be paid when the assets used for collateral
were sold. Major unsecured creditors were to be paid on a pro rata basis
from within the funds realized from the sale of assets. Then Raytheon would
be called upon to satisfy any guaranteed creditor to the extent not already
paid from asset sale proceeds. We calculated that the secured and preferred
creditors would receive 100 per cent of their outstanding claims, while the
unsecured major creditors who were not covered by Raytheon guarantees would
realize about 50 per cent of their claims. The latter creditors were certain
banks and Raytheon and its subsidiaries. We were confident that an orderly
liquidation of this type would be acceptable to the creditors as it was much
more favorable than could be expected through bankruptcy."
According to the United States, settlement with all the smaller creditors
was regarded as a priority
"to reduce the creditors to a manageable number and also to eliminate the
risk that a small irresponsible creditor would take precipitous action which
would raise formidable obstacles in the way of orderly liquidation".
Appended to one of the affidavits by officers of Raytheon and ELSI annexed
to the United States Memorial were detailed calculations showing (inter
alia) various valuations of ELSI's assets, analysis of the company's [p 29]
liabilities and their priority in liquidation, and estimated distribution of
the proceeds of disposal of assets calculated both on book value and
alternatively on a "minimum liquidation value".
24. It is contended by the United States that notwithstanding Raytheon's
formal notification on 7 March 1968 that it would not subscribe to any
further stock or guarantee any additional loans (paragraph 17 above, in
fine), Raytheon was ready to give certain financial support and guarantees
to enable the orderly liquidation to proceed, as distinct from making more
funds available to ELSI for continued operations. According to officials of
ELSI, if Raytheon had handled the liquidation as planned, it would have
guaranteed the settlements outlined in the previous paragraph; they stated
that
"Demonstrating its support of the liquidation plan, Raytheon organized to
provide funds to ELSI in advance of the sale of its assets so that
disbursements could easily be made to the small creditors and, as a first
step, transferred 150 million lire to the First National City Bank branch in
Milan specifically for that purpose."
Evidence was given at the hearing that payment of small creditors out of
these funds was begun, but then stopped by the creditor banks because this
was "showing preference". It was contemplated that Raytheon would take over
ELSFs accounts receivable (subsequently valued at some 2,879 million lire)
at face value, thus supplying immediate cash resources.
25. In the view of ELSFs legal counsel at the time (paragraph 20 above) and
of Italian lawyers consulted by the United States, ELSI was in March 1968
entitled to engage in orderly liquidation of its assets, was under no
obligation to file a petition in bankruptcy, and was never in jeopardy of
compulsory dissolution under Article 2447 of the Italian Civil Code, and was
at all times in compliance with Article 2446 of the Code. It has however
been contended by Italy that ELSI was in March 1968 unable to pay its debts,
and its capital of 4,000 million lire was completely lost; accordingly, an
orderly liquidation was not available to it, but as an insolvent debtor it
was under an obligation to file a petition in bankruptcy. The disagreement
turns on the value of ELSI's assets for this purpose at 31 March 1968: the
Parties have made conflicting statements of what is correct accounting
practice for the purposes of compliance with the relevant requirements of
Italian law. It has also been observed by Italy that, whether or not ELSI
was insolvent, the procedure contemplated did not correspond to a voluntary
liquidation as provided for in Article 2450 of the Italian Civil Code; under
that procedure a liquidator has to be appointed by the shareholders, or if
they fail to do so, by the Tribunal. According to one expert appearing on
behalf of Italy, ELSI being insolvent the only [p 30] course open to it in
order to avoid the duty of filing a petition in bankruptcy was to request to
the tribunal to be admitted to the procedure of judicial settlement
("concordato preventivo") under Articles 160 et seq. of the Italian
Bankruptcy Act; this would have required proof that at least 40 per cent of
the unsecured claims would be met. The expert appearing on behalf of the
United States however stated that apparent inability to pay all creditors at
100 per cent is not fatal to voluntary and orderly liquidation. In this
context he mentioned in particular the practice of "private settlement"
("concordato stragiudiziale").
26. The management of ELSI was conscious that a financial crisis was
imminent, and during the period from September 1967, the responsible
officers of the company were keeping a close watch on the declining funds to
ensure that the company did not reach a point where continued operation
would be contrary to Italian law. At a meeting held on 21 February 1968
between representatives of Raytheon and ELSI and the President of the
Sicilian region, the Chairman of ELSI "drew a precise time chart showing:
(a) February 23 -- Board Meeting; (b) February 26 to 29 -- inevitable bank
crisis; (c) March 8 -- we run out of money and shut the plant"; the
hand-written minutes of that meeting record also that "the date of March 8
was stressed repeatedly as the absolute limit for the shut-down due to a
total financial crisis".
27. On 16 March 1968, the Board of Directors of ELSI met to consider a
report on the financial situation, and concluded "that there is no
alternative to the discontinuation of the company's activities"; the Board
"decided the cessation of the company's operations, to be carried out as
follows:
(1) production will be discontinued immediately;
(2) commercial activities and employment contracts will be terminated on
March 29,1968".
This decision was notified to the employees of ELSI by a letter of 16 March
1968. On 28 March 1968, a meeting of shareholders of ELSI was held, at which
it was decided (inter alia) '"to ratify the resolutions adopted by the Board
of Directors at the meeting of March 16, 1968, and hence to agree that the
Company cease operations". Meetings with Italian officials however continued
up to 29 March 1968; the Italian authorities continued to give broad
assurances of an intervention by ESPI, and vigorously pressed ELSI not to
close the plant and not to dismiss the workforce, but the officials of the
company insisted that this was inevitable unless more capital was
forthcoming. On 29 March 1968 letters of dismissal were mailed to the
employees of ELSI.
[p 31]
28. The Managing Director of ELSI had a meeting early on the morning of 31
March 1968 with the President of the Sicilian region, Mr. Carollo, at which
the latter stated that the Italian Prime Minister had said that a company
would be formed by ESPI and IMI (Istituto Mobiliare Italiano) to deal with
the acquisition of ELSI's assets, and that a holding company would be formed
which would eventually own ELSI. Mr. Carollo continued by saying that "to
keep the people in Palermo and avoid an exodus to other jobs, and to protect
the plant and machinery, the plant would be requisitioned . . . ." On 1
April 1968 representatives of the company met representatives of the bank
creditors of ELSI to discuss the company's plans for an orderly liquidation.
According to the United States, ELSI's representatives stated that Raytheon
was not prepared to provide any further financial support to ELSI either by
way of capital, loans, advances, or guarantees, but also informed the banks
of the arrangement (referred to in paragraph 24 above) which would provide
for ELSI's immediate cash needs in such an orderly liquidation through the
sale to Raytheon of ELSI's accounts receivable at 100 per cent of face
value, the proceeds being used to pay off the small creditors and to meet
payroll and severance pay claims as well as other pressing priority
obligations.
29. No agreement was reached at that meeting; certain of the banks requested
more information, and another meeting was to be held later with an agreed
agenda. Subsequently ELSI's representatives learnt that the plant had been
requisitioned. According to the United States, and in the view of the
officers of Raytheon and ELSI, there was reason to believe that in a
liquidation the creditor banks would have accepted a settlement of their
claims on payment of 40 to 50 per cent of each, but no independent evidence
is available that such was the banks' attitude at that time. It does not
appear from the evidence that the banks were asked specifically at the
meeting of 1 April 1968 whether they would co-operate on the basis of a
guaranteed 50 per cent of their claims; on the contrary, it was contended on
behalf of the United States by ELSI's then legal adviser that
"There is no evidence of bank negotiations at the time of the requisition
because at the time the stockholders were fully confident that ELSI's assets
would have recovered book value, and there was no need at the time to start
any such negotiations. What the stockholders and ELSI's Board were seeking
at the time was an understanding with the banks on the manner and timing of
an orderly liquidation."[p 32]
According to the same legal adviser, the banks were ready, during
negotiations in September-October 1968, after ELSI had been declared
bankrupt, to accept settlement on the basis of 40 per cent or 50 per cent
payment (see paragraph 37 below).
30. 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. The text of this order, in the translation supplied by the
United States, was as follows:
"The Mayor of the Municipality of Palermo,
Taking into consideration that Raytheon-Elsi of Palermo has decided to close
its plant located in this city at Via Villagrazia, 79, because of market
difficulties and lack of orders;
That the company has furthermore decided to send dismissal letters to the
personnel consisting of about 1,000 persons;
Taking norice that ELSI's actions, beside provoking the reaction of the
workers and of the unions giving rise to strikes (both general and
sectional) has caused a wide and general movement of solidarity of all
public opinion which has strongly stigmatized the action taken considering
that about 1,000 families are suddenly destituted;
That, considering the fact that ELSI is the second firm in order of
importance in the District, because of the shutdown of the plant a serious
damage will be caused to the District, which has been so severely tried by
the earthquakes had during the month of January 1968;
Considering also that the local press is taking a great interest in the
situation and that the press is being very critical toward the authorities
and is accusing them of indifference to this serious civic problem;
That, furthermore, the present situation is particularly touchy and
unforeseeable disturbances of public order could take place;
Taking into consideration that in this particular instance there is
sufficient ground for holding that there is a grave public necessity and
urgency to protect the general economic public interest (already seriously
compromised) and public order, and that these reasons justify requisitioning
the plant and all equipment owned by Raytheon-Elsi located here at Via
Villagrazia 79;
Having noted Article 7 of the law of 20 March 1865 No. 2248 enclosure e;
Having noted Article 69 of the Basic Regional Law EE.LL.,[p 33]
Orders
the requisition, with immediate effect and for the duration of six months,
except as may be necessary to extend such period, and without prejudice for
the rights of the parties and of third parties, of the plant and relative
equipment owned by Raytheon-Elsi of Palermo.
With a subsequent decree, the indemnification to be paid to said company for
the requisition will be established."
The order was served on the company on 2 April 1968.
31. On 6 April 1968 the Mayor issued an order entrusting the management of
the requisitioned plant to Mr. Aldo Profumo, the Managing Director of ELSI,
for the purpose, inter alia, of "avoiding any damage to the equipment and
machinery due to the abandoning of all activity, including maintenance". Mr.
Profumo declined to accept this appointment, and on 16 April 1968 the Mayor
wrote to Mr. Silvio Laurin, the senior director, appointing him temporarily
to replace Mr. Profumo "in the same capacity, with the same powers,
functions and limitations", and Mr. Laurin accepted this appointment. The
company management requested another of its directors, Mr. Rico Merluzzo, to
stay at the plant night and day "to preclude local authorities from somehow
asserting that the plant had been 'abandoned' by ELSI".
32. On 9 April 1968 ELSI addressed a telegram to the Mayor of Palermo, with
copies to other Government authorities, claiming (inter alia) that the
requisition was illegal and expressing the company's intention to take all
legal steps to have it revoked and to claim damages. On 12 April 1968 the
company served on the Mayor a formal document dated 11 April 1968 inviting
him to revoke the requisition order. The Mayor did not respond and the order
was not revoked, and on 19 April 1968 ELSI brought an administrative appeal
against it to the Prefect of Palermo, who was empowered to hear appeals
against decisions by local governmental officials. The decision on that
appeal was not given until 22 August 1969 (paragraph 41 below); in the
meantime however the requisition was not formally prolonged, and therefore
ceased to have legal effect after six months, more than four months after
the bankruptcy of ELSI had been declared (paragraph 36 below).
33. As noted above (paragraph 16) the Parties disagree over whether,
immediately prior to the requisition order, there had been any occupation of
ELSI's plant by the employees, but it is common ground that the plant was so
occupied during the period immediately following the requisition. On 19
April 1968 the representatives of the company stated, in an appeal against
the requisition addressed to the Prefect of Palermo, that there had at that
time been no occupation of the plant as a consequence of the dismissal of
the employees on 29 March 1968, but that on 30 March 1968 a group of
representatives of the personnel went to the plant to talk to the [p 34]
company executives and "peacefully remained thereafter all day on the
premises", and on subsequent days a small group of employees wandered about
on the premises. The Mayor of Palermo, in an affidavit, has stated that
"The occupation of the plant by the employees (which started well before the
requisition) turned out to be of a 'cooperative' nature after the
requisition and was no obstacle to the continuation of those activities
which were possible under the circumstances",
and an official of the Municipality of Palermo has stated, in an affidavit,
that "there were no problems such as 'hard' picketing" and that one of the
production lines was re-activated and "we proceeded regularly with the
contracts in hand". According to an affidavit filed by the United States
"the plant sat idle for the remainder of 1968", but Italy has produced
evidence showing that some work in progress was continued and completed in
the months following the requisition, in particular for the Nato Hawk
programme.
34. On 19 and 20 April 1968 meetings were held between officials of Raytheon
and the President of the Sicilian region, Mr. Carollo, who stated that "the
Regional and Central Governments had reached agreement to form a management
company with IRI participation to operate ELSI" and invited Raytheon to join
the management company. The proposal would have entailed the contribution by
ELSI of new capital and its assuming complete responsibility for past debts;
in the discussion Mr. Carollo stated that "the Region now has a single goal,
to keep the workers employed". At the request of Raytheon, Mr. Carollo, on
20 April 1968 supplied Raytheon with a memorandum to provide the company
with "some fundamental elements of judgment". In that memorandum he
explained that it was impossible for the time being for Raytheon to
liquidate ELSI, for the following reasons:
"1. Nobody in Italy will purchase [Nessuno in Italia comprerd], that is to
say IRI will not purchase, neither for a low nor for a high price, the
Region will not purchase, private enterprise will not purchase. Let me add
that the Region and IRI and anybody else who has any possibility to
influence the market will refuse in the most absolute manner to favor any
sale while the plant is closed.
2. The Banks, which have outstanding credits for approximately 16 billion
Lire, cannot and will not accept any settlement even at the cost of dragging
the Company into litigation on an international level. I mean to refer to
Raytheon and not to ELSI because the distinction between ELSI and Raytheon
is not found to be admissible, since any and all financing was granted to
ELSI based on the moral [p 35] guarantee of Raytheon, whose executives have
always negotiated said financing.
3. Anyway, it is known in Italy that one can enforce the claims directly
against Raytheon because it has interests and revenues in our country also
outside ELSI.
It is obvious that every attempt will be made (even at the cost of long
litigation) to obtain from Raytheon what is owed by ELSI.
4. In the event that the plant will be kept closed, waiting for Italian
buyers who will never materialize, the requisition will be maintained at
least until the courts will have resolved the case. Months will go by. . ."
35. On 26 April 1968 the Chairman of the Board of ELSI wrote to Mr. Carollo
formally rejecting the proposal for participation in the new management
company; in his view the proposal "was a temporary caretaker measure which
would not solve the fundamental problem, namely keeping ELSI in Sicily and
making it a viable and vital industry", and that it "would only aggravate
ELSI's critical financial condition". The letter continued: "We are
therefore forced to file [a] voluntary petition for bankruptcy, as required
by Italian law."
36. In view of what had been said by Mr. Carollo that the requisition of the
plant would be maintained for months, "at least until the courts will have
resolved the case", ELSFs Italian counsel advised as follows:
"The disposability of ELSI's assets was a fundamental prerequisite to ELSFs
shareholders' ability to take ELSI through an orderly liquidation; they were
relying on the proceeds of these sales in large part to pay ELSI's creditors
in an orderly manner. Without the ability to dispose of its assets, ELSI
would not have the liquidity needed to pay its debts as they came due and
therefore would soon become technically insolvent under Italian law.
………………………………………………………………………………………………
I advised ELSI's directors that they had an obligation to file a petition
for a declaration of bankruptcy, failing which they could be held personally
liable pursuant to Article 217 of the Bankruptcy Law, Royal Decree of March
16,1942, No. 267."
On 25 April 1968 the Board of Directors voted to file a voluntary petition
in bankruptcy, and the bankruptcy petition was filed on 26 April 1968. The
petition referred to the requisition order of 1 April 1968 and stated (inter
alia):
"Because of the order of requisition, against which the Company [p 36] has
in due time filed an appeal, the Company has lost the control of the plant
and cannot avail itself of an immediate source of liquid funds; in the
meanwhile payments have become due (as for instance instalments of long-term
loans; an instalment of Lit. 800,000,000 to Banca Nazionale del Lavoro
became due on April 18, 1968 and the note therefor has been or will be
protested, etc.); it is acknowledged that it is impossible for the Company
to pay such sums with the funds existing or available such impossibility
being due to the events of these last weeks. . ."
A decree of bankruptcy was issued by the Tribunale di Palermo on 16 May
1968, and a Palermo lawyer was appointed curatore (trustee in bankruptcy). A
creditors' committee of five members was appointed, composed of two
representatives of ELSI's employees, two representatives of bank creditors,
and a representative of Raytheon Europe International Company ("Raytheon
Europe") (the European management subsidiary of, and wholly owned by,
Raytheon), which had submitted a claim as creditor in the bankruptcy.
Raytheon itself and another of its subsidiaries, Raytheon Service Company,
had unsecured claims against ELSI of some 1,140 million lire for goods and
services they had advanced to ELSI on unsecured open accounts. On advice of
Italian counsel, however, Raytheon and Raytheon Service Company did not file
claims in the bankruptcy proceedings because it was clear that they would
not receive enough in the bankruptcy to justify their filing costs.
37. From April 1968 onwards discussions were held between Raytheon's Italian
counsel, representatives of the creditor banks and officials of the Italian
Government, with a view to the takeover of ELSI by a company owned by the
Italian Government and a settlement with the ELSI creditors. This proposed
settlement involved the grant to the new company by Raytheon of a technical
license (to use Raytheon patents and know-how) of the same scope as ELSI
had; the payment by Raytheon of the debts of ELSI which it had guaranteed,
but no others, and a formal release and indemnity of Raytheon in this latter
respect; and a waiver by Raytheon of its rights of subrogation resulting
from payment of the guaranteed debts. According to Raytheon's Italian
counsel, he was told by Italian Government officials in October 1968 that
the majority of the Italian creditor banks were agreeable to a settlement on
payment of 40 per cent of their claims, and that only one bank was holding
out for 50 per cent. In July, a statement had been made in the Italian
Parliament by the Minister of Industry, Commerce and Crafts, which has been
subject to differing interpretations, but which put forward as a fact the
establishment by the Sicilian region and other public agencies of a
management company, which would allow productive activities to be resumed
until such time as the financial problems of ELSI could be [p 37] finally
resolved, if possible through settlement out of court. On 13 November 1968
the Italian Government issued a press communique which stated that
"while the STET Group [Societa finanziaria telefonica, an affiliate or
subsidiary of IRI] remains committed to build a new plant in Palermo for the
production of telecommunication products, the IRI-STET Group, urged by the
Government, after the examination of alternative solutions which proved
unfeasible, stated its willingness to intervene in the take-over of the
[ELSI] plant in the organization of new lines of production".
According to the communique, the conditions of STET's intervention were to
be agreed between the STET Group and the authorities of the Sicilian region.
38. The court dealing with the bankruptcy ordered an auction of ELSI's
premises, plant and equipment to be held on 18 January 1969, and set a
minimum bid of 5,000 million lire. This auction, and the subsequent auctions
mentioned below, were advertised in leading newspapers both in Italy and in
Belgium, Japan, the Netherlands, the United Kingdom and the United States.
No bids were received at this auction, and a second auction was set for 22
March 1969, this time with the inclusion also of the entire inventory at the
plant and elsewhere, the minimum bid being set at 6,223,293,258 lire. In the
meantime negotiations were being carried on for a takeover of the plant by
an IRI subsidiary and the re-employment of most of ELSFs former staff. It
was reported in the Sicilian press, first that on 18 March 1969 it had been
agreed that IRI would acquire ELSFs assets, beginning with a lease of the
plant for 150 million lire, and secondly that the former President of
Sicily, Mr. Carollo, had stated at a public meeting on 5 April 1969 that
there had been a written agreement with IRI in October 1968 that
"entailed the acquisition of the [ELSI] factory by IRI for the sum of four
billion lire. It was even agreed that IRI would be absent from the first
auction, participating instead in the second one, where the basic price was
precisely four billion lire".
39. No bids were received at the second auction. A week later a proposal to
lease and re-open the plant was made to the trustee in bankruptcy by ELTEL
(Industria Elettronica Telecommunicazioni S.p.A.), a subsidiary of IRI set
up in December 1968. The terms proposed for the lease were not acceptable as
such to the creditors' committee, which did however recom-[p 38]mend (inter
alia) that it should be granted if ELTEL agreed to purchase all ELSI's
inventorial raw material for 1,800 million lire; the representative of
Raytheon Europe on the committee vigorously opposed the lease. The trustee
in bankruptcy however recommended that the lease be granted on the terms
requested, and on 8 April 1969 the bankruptcy judge so directed, Raytheon
Europe appealed against this decision but without success. A third auction
was scheduled for May 1969; in April ELTEL proposed to buy the work in
progress -- the material left on ELSI's production lines when the plant was
requisitioned -- for 105 million lire; this had been valued in the course of
the bankruptcy proceedings at 217 million lire. Raytheon Europe's
representative on the creditors' committee opposed this sale, but was
outvoted.
40. The third auction of ELSI's premises, plant and equipment and inventory
was held on 3 May 1969, the minimum bid being set at 5,000 million lire, but
again no bids were received. ELTEL had informed the bankruptcy court on 16
April 1969 that it was willing to offer 3,205 million lire for the premises,
plant and equipment, excluding the supplies -- "merchandise, raw materials
and semifinished goods" -- which it did not regard as indispensable. On 3
May 1969, the trustee in bankruptcy requested the bankruptcy court to
approve a sale of the work in progress to ELTEL on the terms proposed by
ELTEL and approved by the creditors' committee. On 9 May 1969, Raytheon
Europe's appeal against the decision authorizing the lease of the premises
and plant to ELTEL was rejected. On 27 May 1969 ELTEL made an offer to the
bankruptcy court to buy the remaining plant, equipment and supplies for
4,000 million lire. The trustee in bankruptcy proposed acceptance (subject
to minor changes in the terms), and the creditors' committee decided on 6
June 1969 to approve the proposal, the Raytheon Europe representative voting
against. On 7 June 1969 the bankruptcy judge set 12 July 1969 as date for an
auction on the terms approved by the creditors' committee. On 9 June 1969
Raytheon Europe appealed against this decision, but the appeal was rejected
on 20 June 1969. The auction was held on 12 July 1969, and ELTEL purchased
the auctioned property at the total price of 4,006 million lire.
41. The appeal filed by ELSI on 19 April 1968 (paragraph 32 above) against
the requisition order of 1 April 1968 was determined by the Prefect of
Palermo by a decision given on 22 August 1969. The Parties are at issue on
the question whether this period of time was or was not normal for an appeal
of this character. The decision on the appeal was given following a request
to that effect by the trustee in bankruptcy made on 9 July 1969, in exercise
of a right to request a decision conferred by an Italian Law of 3 March
1934. That Law provides that if the appeal has not been heard 120 days after
it has been filed (i.e., in this case by 17 August 1968), a request
[p 39] may be served on the Prefect requiring him to render a decision
within 60 days thereafter; if he fails to do so, this is treated as a
dismissal of the appeal. The decision of the Prefect was to uphold the
appeal and thus to annul the requisition order made by the Mayor of Palermo;
the precise terms of the decision will be considered later in this Judgment
(paragraphs 75, 96, 125 and 126). The Mayor of Palermo appealed against the
Prefect's decision to the President of Italy who, having been advised by the
Council of State that the Mayor's appeal was inadmissible, so ruled on 22
April 1972.
42. In the meantime, on 16 June 1970 the trustee in bankruptcy had brought
proceedings in the Tribunale di Palermo ("the Court of Palermo") against the
Minister of the Interior of Italy and the Mayor of Palermo for damages
resulting from the requisition. The damages claimed were identified as
"the considerable decrease in value of the plant and the electronic
equipment existing in Palermo at 79 Via Villagrazta, which results from the
difference between the book value at the date of the bankruptcy of
Raytheon-Elsi, of Lire 6,623,000,000 and the evaluation made on October 11,
1968 (that is, immediately after the six-month period of requisition had
elapsed) by the Court Appraiser, Prof. Mario Puglisi, appointed by the Judge
by Decree of September 19, 1968, of Lire 4,560,588,400, with a real loss of
value of Lire 2,062,411,600 and as the lack of disposability of the plant
and relative equipment for six months which, on the basis of the
amortization rate for the industrial plants, equal to 10% per year, can be
determined in Lire 33,150,000, and, therefore, in the aggregate amount of
Lire 2,395,561,600, plus the interests at the legal rate from October 1,1968
to the payment."
43. On 2 February 1973, the Court of Palermo, in a decision to be examined
more fully below (paragraphs 57, 58, 97 and 127), ruled that the trustee was
not entitled to compensation for the requisition, either in respect of the
alleged decrease in value of the plant and equipment, or of the alleged lack
of disposability thereof. On appeal, the Corte di Appello di Palermo ("the
Court of Appeal of Palermo"), in its decision of 24 January 1974, upheld the
conclusion of the lower court as regards the damages claimed for the alleged
decrease in value of the plant and equipment. It however reversed the
finding of the lower court on the second head of damage, and found that the
trustee was entitled to compensation from the Minister of the Interior for
loss of use and possession of ELSI's plant and assets during the six-month
requisition period. It therefore awarded, in effect, a "rental" payment of
some 114 million lire, computed as half the annual rate of 5 per cent of the
total value of the assets. This decision, which will be examined in more
detail below (paragraphs 97,98 and 127), was upheld by the Court of
Cassation on 26 April 1975. The amount of [p 40] the judgment was ultimately
received by the trustee and, less costs and expenses, distributed to ELSI's
creditors.
44. In the bankruptcy proceedings, creditors presented claims against ELSI
totalling some 13,000 million lire; these did not include amounts due to
Raytheon and Raytheon Service Company (see paragraph 36 above). The
bankruptcy proceedings closed in November 1985. According to the bankruptcy
reports, the bankruptcy realized only some 6,370 million lire for ELSFs
assets, as compared with the minimum liquidation value estimated by ELSI's
management in March 1968 at 10,840 million lire. Of the amount realized,
some 6,080 million lire went to pay banks, employees, and other creditors.
The remainder went to pay bankruptcy administration, tax, registry, and
customs charges. All of the secured and preferred creditors who filed claims
in the bankruptcy were paid in full. The unsecured creditors received less
than one per cent of their claims; accordingly no surplus remained for
distribution to the shareholders, Raytheon and Machlett.
45. Raytheon had guaranteed the indebtedness of ELSI to a number of banks,
and on the bankruptcy of ELSI it was accordingly liable for, and paid, the
sum of 5,787.6 million lire to the banks in accordance with the terms of the
guarantees. Five of the seven banks which had also made unguaranteed loans
to ELSI brought proceedings in the Italian courts seeking payment of these
loans by Raytheon, on the basis primarily of Article 2362 of the Italian
Civil Code, which renders a sole shareholder liable for the debts of the
company. It was argued that Raytheon was in effect sole shareholder, since
Machlett was its wholly-owned subsidiary. Three of these cases were
ultimately resolved by the Italian Court of Cassation in favour of Raytheon,
and two were discontinued by the plaintiffs.
**
46. On 7 February 1974, the Embassy in Rome of the United States transmitted
to the Italian Ministry of Foreign Affairs a note enclosing the "claim of
the Government of the United States of America on behalf of Raytheon Company
and Machlett Laboratories, Incorporated". That claim, which was based not
only on the FCN Treaty but also on customary international law, incorporated
a Memorandum of Law, Chapter VI of which was devoted to " Exhaustion of
Local Remedies". It was there noted that it was "generally recognized that
local remedies must be exhausted before a claim may be formally espoused
under principles of international law"; an account was given of the relevant
litigation in Italy (some of which was at the time still pending) and, in
the light of annexed opinions [p 41] of two Italian legal experts, it was
concluded that "Raytheon and Machlett have exhausted every meaningful legal
remedy available to them in Italy". At the time this claim was submitted,
the Court of Appeal of Palermo had ruled on the action by the trustee in
bankruptcy, but the case was thereafter brought before the Court of
Cassation (paragraph 43 above); it is recognized by both Parties that any
other action arising out of the requisition would by then have been barred
by limitation of time. It appears that the United States received no formal
response from Italy to the claim until 13 June 1978, when Italy denied the
claim in a written aide-memoire, the text of which has been supplied to the
Chamber. The aide-memoire contained no suggestion that local remedies had
not been exhausted, and indeed stated that "the claim is juridically
groundless, both from the international and domestic point of view". During
the oral proceedings in the present case, counsel for Italy asserted that at
an unspecified date prior to the institution of the present proceedings the
Italian Government "had made it clear to the United States Government that
as a Respondent it would raise the objection of non-exhaustion of local
remedies in judicial proceedings". No evidence to that effect has however
been supplied to the Chamber.
**
47. Many of the documents constituting evidence submitted to the Chamber are
in the Italian language. Where the Chamber relies in the present Judgment on
passages in these documents, it will, for the sake of clarity, set out the
original Italian together with an English translation, which is not always
the translation supplied by one of the Parties pursuant to Article 51,
paragraph 3, of the Rules of Court.
***
48. It is common ground between the Parties that the Court has jurisdiction
in the present case, under Article 36, paragraph 1, of its Statute, and
Article XXVI of the Treaty of Friendship, Commerce and Navigation, of 2 June
1948 ("the FCN Treaty"), between Italy and the United States; which Article
reads:
"Any dispute between the High Contracting Parties as to the interpretation
or the application of this Treaty, which the High Contracting Parties shall
not satisfactorily adjust by diplomacy, shall be submitted to the
International Court of Justice, unless the High Contracting Parties shall
agree to settlement by some other pacific means."[p 42]
The jurisdiction is thus confined to questions of "the interpretation or the
application" of the FCN Treaty and Protocols and of the Agreement
Supplementing the Treaty between the United States of America and the
Italian Republic, of 26 September 1951 (which Agreement is hereinafter
called "the Supplementary Agreement"), Article IX of which provides that it
is to "constitute an integral part" of the FCN Treaty. This same
jurisdiction may accordingly be exercised by this Chamber, created by the
Court to deal with this case by virtue of Article 26, paragraph 2, of its
Statute, and Articles 17 and 18 of its Rules, at the request of and after
consultation with the Parties.
49. While the jurisdiction of the Chamber is not in doubt, an objection to
the admissibility of the present case was entered by Italy in its
Counter-Memorial, on the ground of an alleged failure of the two United
States corporations, Raytheon and Machlett, on whose behalf the United
States claim is brought, to exhaust the local remedies available to them in
Italy. This objection, which the Parties agreed should be heard and
determined in the framework of the merits, must, therefore, be considered at
the outset.
50. The United States questioned whether the rule of the exhaustion of local
remedies could apply at all to a case brought under Article XXVI of the FCN
Treaty. That Article, it was pointed out, is categorical in its terms, and
unqualified by any reference to the local remedies rule; and it seemed
right, therefore, to conclude that the parties to the FCN Treaty, had they
intended the jurisdiction conferred upon the Court to be qualified by the
local remedies rule in cases of diplomatic protection, would have used
express words to that effect; as was done in an Economic Co-operation
Agreement between Italy and the United States of America also concluded in
1948. The Chamber has no doubt that the parties to a treaty can therein
either agree that the local remedies rule shall not apply to claims based on
alleged breaches of that treaty; or confirm that it shall apply. Yet the
Chamber finds itself unable to accept that an important principle of
customary international law should be held to have been tacitly dispensed
with, in the absence of any words making clear an intention to do so. This
part of the United States response to the Italian objection must therefore
be rejected.
51. The United States further argued that the local remedies rule would not
apply in any event to the part of the United States claim which requested a
declaratory judgment finding that the FCN Treaty had been violated. The
argument of the United States is that such a judgment would declare that the
United States own rights under the FCN Treaty had been infringed; and that
to such a direct injury the local remedies rule, which is a rule of
customary international law developed in the context of the espousal by a
State of the claim of one of its nationals, would not apply. The Chamber,
however, has not found it possible in the present case to [p 43] find a
dispute over alleged violation of the FCN Treaty resulting in direct injury
to the United States, that is both distinct from, and independent of, the
dispute over the alleged violation in respect of Raytheon and Machlett. The
case arises from a dispute which the Parties did not "satisfactorily adjust
by diplomacy"; and that dispute was described in the 1974 United States
claim made at the diplomatic level as a "claim of the Government of the
United States of America on behalf of Raytheon Company and Machlett
Laboratories, Incorporated". The Agent of the United States told the Chamber
in the oral proceedings that "the United States seeks reparation for
injuries suffered by Raytheon and Machlett". And indeed, as will appear
later, the question whether there has been a breach of the FCN Treaty is
itself much involved with the financial position of the Italian company,
ELSI, which was controlled by Raytheon and Machlett.
52. Moreover, when the Court was, in the Interhandel case, faced with a not
dissimilar argument by Switzerland that in that case its "principal
submission" was in respect of a "direct breach of international law" and
therefore not subject to the local remedies rule, the Court, having analysed
that "principal submission", found that it was bound up with the diplomatic
protection claim, and that the Applicant's arguments "do not deprive the
dispute . . . of the character of a dispute in which the Swiss Government
appears as having adopted the cause of its national . . ." (Interhandel,
Judgment, I.CJ. Reports 1959, p. 28). In the present case, likewise, the
Chamber has no doubt that the matter which colours and pervades the United
States claim as a whole, is the alleged damage to Raytheon and Machlett,
said to have resulted from the actions of the Respondent. Accordingly, the
Chamber rejects the argument that in the present case there is a part of the
Applicant's claim which can be severed so as to render the local remedies
rule inapplicable to that part.
53. There was a further argument of the Applicant, based on estoppel in
relation to the application of the local remedies rule, which should be
examined. In the "Memorandum of Law" elaborating the United States claim on
the diplomatic plane, transmitted to the Italian Government by Note Verbale
of 7 February 1974, one finds that the whole of Part VI (pp. 53 et seq.)
deals generally and at some length with the "Exhaustion of Local Remedies".
There were also annexed the opinions of the lawyers advising the Applicant,
which dealt directly with the position of Raytheon and Machlett in relation
to the local remedies rule. The Memorandum concluded that Raytheon and
Machlett had indeed exhausted "every meaningful legal remedy available to
them in Italy" (paragraph 46 above). In view of this evidence that the
United States was very much aware that it must satisfy the local remedies
rule, that it evidently believed that the rule had been satisfied, and that
it had been advised that the shareholders of [p 44] ELSI had no direct
action against the Italian Government under Italian law, it was argued by
the Applicant that Italy, if it was indeed at that time of the opinion that
the local remedies had not been exhausted, should have apprised the United
States of its opinion. According to the United States, however, at no time
until the filing of the Respondent's Counter-Memorial in the present
proceedings did Italy suggest that Raytheon and Machlett should sue in the
Italian courts on the basis of the Treaty. The written aide-memoire of 13
June 1978, by which Italy rejected the 1974 claim, had contained no
suggestion that the local remedies had not been exhausted, nor indeed any
mention of the matter.
54. It was argued by the Applicant that this absence of riposte from Italy
amounts to an estoppel. There are however difficulties about drawing any
such conclusion from the exchanges of correspondence when the matter was
still being pursued on the diplomatic level. In the Interhandel case, when
Switzerland argued that the United States had at one time actually "admitted
that Interhandel had exhausted the remedies available in the United States
courts", the Court, far from seeing in this admission an estoppel, dismissed
the argument by merely observing that "This opinion was based upon a view
which has proved unfounded" (Interhandel, Judgment, I.C.J. Reports 1959, p.
27). Furthermore, although it cannot be excluded that an estoppel could in
certain circumstances arise from a silence when something ought to have been
said, there are obvious difficulties in constructing an estoppel from a mere
failure to mention a matter at a particular point in somewhat desultory
diplomatic exchanges.
55. On the basis that the local remedies rule does apply in this case, this
Judgment may now turn to the question whether local remedies were, or were
not, exhausted by Raytheon and Machlett.
**
56. 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 any local remedy against the Italian
authorities, calling in question the validity of the requisition of ELSI's
plant and related assets, and raising the matter of the losses said to
result from it, should be pursued by ELSI itself. In any event, both in
order to attempt to recover control of ELSI's plant and assets, and to
mitigate any damage flowing from the alleged frustration of the liquidation
plan, the first step was for ELSI -- and only ELSI could do this -- to
appeal to [p 45] the Prefect against the requisition order. After the
bankruptcy, however, the pursuit of local remedies was no longer a matter
for ELSI's management but for the trustee in bankruptcy (Raytheon could,
even after the bankruptcy, have influenced decisions of the committee of
creditors, had it not decided against claiming in bankruptcy in respect of
sums due to it as creditor; it did exercise some influence however through
its subsidiary company, Raytheon Europe, which did claim as a creditor).
57. After the trustee in bankruptcy was appointed, he, acting for ELSI, by
no means left the Italian authorities and courts unoccupied with ELSI's
affairs. It was he who, under an Italian law of 1934, formally requested the
Prefect to make his decision within 60 days of that request; which decision
was itself the subject of an unsuccessful appeal by the Mayor to the
President of Italy. On 16 June 1970, the trustee, acting for the bankrupt
ELSI, brought a suit against the Acting Minister of the Interior and the
Acting Mayor of Palermo, asking the court to adjudge that
the defendants should
"pay to the bankrupt estate of Raytheon-Elsi . . . damages for the illegal
requisition of the plant machinery and equipment. . . for the period from
April 1 to September 30,1968, in the aggregate amount of Lire 2,395,561,600
plus interests . . ."
On 2 February 1973, the Court of Palermo, as indicated above (paragraph 43),
rejected the claim. The trustee in bankruptcy then appealed to the Court of
Appeal of Palermo; which Court gave a judgment on 24 January 1974 which
"partly revising the judgment of the Court of Palermo" ordered payment by
the Ministry of the Interior of damages of 114,014,711 lire with interest.
Appeal was taken finally to the Court of Cassation which upheld the decision
of the Court of Appeal, by a decision of 26 April 1975.
58. It is pertinent to note that this claim for damages (paragraph 42
above), as it came before the Court of Palermo in the action brought by the
trustee, was described by that Court as being based (inter alia) upon the
argument of the trustee in bankruptcy
"that the requisition order caused an economic situation of such gravity
that it immediately and directly triggered the bankruptcy of the company"
("il provvedimento di requisizione avrebbe determinate una situazione
economica di tale pesantezza da fame scaturire immediatamente e direttamente
il fallimento della societa").
Similarly the Court of Appeal of Palermo had to consider whether there was a
"causal link between the requisition order and the company's bankruptcy". It
is thus apparent that the substance of the claim brought to the [p 46]
adjudication of the Italian courts is essentially the claim which the United
States now brings before this Chamber. The arguments were different, because
the municipal court was applying Italian law, whereas this Chamber applies
international law; and, of course, the parties were different. Yet it would
seem that the municipal courts had been fully seized of the matter which is
the substance of the Applicant's claim before the Chamber. For both claims
turn on the allegation that the requisition, by frustrating the orderly
liquidation, triggered the bankruptcy, and so caused the alleged losses.
59. With such a deal of litigation in the municipal courts about what is in
substance the claim now before the Chamber, it was for Italy to demonstrate
that there was nevertheless some local remedy that had not been tried; or at
least, not exhausted. This burden Italy never sought to deny. It contended
that it was possible for the matter to have been brought before the
municipal courts, citing the provisions of the treaties themselves, and
alleging their violation. This was never done. In the actions brought before
the Court of Palermo, and subsequently the Court of Appeal of Palermo, and
the Court of Cassation, the FCN Treaty and its Supplementary Agreement were
never mentioned. This is not surprising, for, as Italy recognizes, the way
in which the matter was pleaded before the courts of Palermo was not for
Raytheon and Machlett to decide but for the trustee. Furthermore, the local
remedies rule does not, indeed cannot, require that a claim be presented to
the municipal courts in a form, and with arguments, suited to an
international tribunal, applying different law to different parties for an
international claim to be admissible, it is sufficient if the essence of the
claim has been brought before the competent tribunals and pursued as far as
permitted by local law and procedures, and without success.
60. The question, therefore, reduces itself to this: ought Raytheon and
Machlett, suing in their own right, as United States corporations allegedly
injured by the requisition of property of an Italian company whose shares
they held, have brought an action in the Italian courts, within the general
limitation-period (five years), alleging violation of certain provisions of
the FCN Treaty between Italy and the United States; this mindful of the fact
that the very question of the consequences of the requisition was already in
issue in the action brought by its trustee in bankruptcy, and that any
damages that might there be awarded would pass into the pool of realized
assets, for an appropriate part of which Raytheon and Machlett had the right
to claim as creditors?
61. Italy contends that Raytheon and Machlett could have based such an
action before the Italian courts on Article 2043 of the Italian Civil Code,
which provides that "Any act committed either wilfully or through fault
which causes wrongful damages to another person implies that the wrongdoer
is under an obligation to pay compensation for those dam-[p 47]ages."
According to Italy, this provision is frequently invoked by individuals
against the Italian State, and substantial sums have been awarded to
claimants where appropriate. If Raytheon and Machlett suffered damage caused
by violations by Italian public authorities of the FCN Treaty and the
Supplementary Agreement, an Italian court would, it was contended, have been
bound to conclude that the relevant acts of the public authorities were
wrongful acts for the purposes of Article 2043, It is common ground between
the Parties that implementing legislation ("ordini di esecuzione") was
enacted (Law No. 385 of 15 June 1949 and Law No. 910 of 1 August 1960), to
give effect in Italy to the FCN Treaty and Supplementary Agreement, but that
their provisions cannot be invoked in protection of individual rights before
the Italian courts unless those provisions are regarded by the courts as
self-executing. In order to show that the relevant provisions would be so
regarded, decisions of the Court of Cassation have been cited by Italy in
which provisions of the FCN Treaty (not the provisions relied on in the
present case) have been applied for the benefit of United States nationals
who have invoked them before Italian courts, and a provision of a treaty
between Italy and the Federal Republic of Germany, said to be comparable
with Article V of the FCN Treaty, was given effect.
62. However, those decisions were not based on Article 2043 of the Italian
Civil Code; and the treaty provisions applied were given effect in
conjunction with municipal legislation or the provisions of other treaties,
through the mechanism of a most-favoured-nation provision. In none of the
cases cited was the FCN Treaty provision relied on to establish the
wrongfulness of conduct of Italian public officials. When in 1971 Raytheon
consulted two Italian jurists on the question of local remedies for the
purposes of a diplomatic claim, it apparently did not occur to either of
them to refer even as a possibility to action under Article 2043 in
conjunction with the FCN Treaty. It thus appears to the Chamber to be
impossible to deduce, from the recent jurisprudence cited, what the attitude
of the Italian courts would have been had Raytheon and Machlett brought an
action, some 20 years ago, in reliance on Article 2043 of the Civil Code in
conjunction with the provisions of the FCN Treaty and the Supplementary
Agreement. Where the determination of a question of municipal law is
essential to the Court's decision in a case, the Court will have to weigh
the jurisprudence of the municipal courts, and "If this is uncertain or
divided, it will rest with the Court to select the interpretation which it
considers most in conformity with the law" (Brazilian Loans, P.C.IJ., Series
A, Nos. 20/21, p. 124). In the present case, however, it was for Italy to
show, as a matter of fact, the existence of a remedy which was open to the
United States stockholders and which they failed to employ. The Chamber does
not consider that Italy has discharged that burden.
63. It is never easy to decide, in a case where there has in fact been much
resort to the municipal courts, whether local remedies have truly been
"exhausted". But in this case Italy has not been able to satisfy the [p 48]
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. Accordingly, the Chamber will now proceed to consider
the merits of the case.
***
64. Paragraph 1 of the United States final submissions claims that:
"(1) the Respondent 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, and VII of the Treaty and Article I of the Supplement".
It is necessary therefore to examine these Articles of the FCN Treaty and
the Supplementary Agreement, against the conduct which is said to have been
a violation of" the obligations set out in these Articles. In doing so, it
will be kept in mind that although the stated purposes of the FCN Treaty
were those normally to be found in treaties of that kind, nevertheless a
purpose of the Supplementary Agreement, which is to "constitute an integral
part" of the FCN Treaty, was to give "added encouragement to investments of
the one country in useful undertakings in the other country".
65. The acts of the Respondent which are thus alleged to violate its treaty
obligations were described by the Applicant's counsel in terms which it is
convenient to cite here:
"First, the Respondent 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. Second, 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."
66. 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 as set out in paragraphs 22-25 [p 49] above. It is fair to
describe the other impugned acts of the Respondent, to be explained more
fully below (paragraph 115), as ancillary to this core claim based on the
requisition and its effects.
67. The Chamber is faced with a situation of mixed fact and law of
considerable complexity, wherein several different strands of fact and law
have to be examined both separately and for their effect on each other: the
meaning and effect of the relevant Articles of the FCN Treaty and
Supplementary Agreement; the legal status of the Mayor's requisition of
ELSI's plant and assets; and the legal and practical significance of the
financial position of ELSI at material times, and its effect, if any, upon
ELSI's plan for orderly liquidation of the company. It will be convenient to
begin by examining these considerations in relation to the Applicant's claim
that the requisition order was a violation of Article III of the FCN Treaty.
**
68. Article III of the FCN Treaty is in two paragraphs. Paragraph 1 provides
for rights of participation of nationals of one High Contracting Party, in
corporations and associations of the other High Contracting Party, and for
the exercise by such corporations and associations of their functions. Since
there is no allegation of treatment less favourable than is required
according to the standards set by this paragraph, it need not detain the
Chamber. Paragraph 2 of Article III is however important for the Applicant's
claim; it 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. Corporations and associations, controlled by nationals,
corporations and associations of either High Contracting Party and created
or organized under the applicable laws and regulations within the
territories of the other High Contracting Party, shall be permitted to
engage in the aforementioned activities therein, in conformity with the
applicable laws and regulations, upon terms no less favorable than those now
or hereafter accorded to corporations and associations of such other High
Contracting Party controlled by its own nationals, corporations and
associations."
Again there is no allegation of treatment of ELSI according to standards
less favourable than those laid down in the second sentence of the para-[p
50]graph: the allegation by the United States of a violation of this
paragraph by Italy relates to the first sentence.
69. In terms of the present case, the effect of the first sentence of this
paragraph is 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 right to "organize", apparently in
the sense of the creation of a corporation, is not in question in this case.
Is there, then, 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?
70. It is undeniable that the requisition of a firm's "plant and relative
equipment" must normally amount to a deprivation, at least in important
part, of the right to control and manage. It was objected by Italy that the
requisition in no way affected "control by the shareholders over the
company", but merely concerned the management by the company of property
belonging to the company. It is true that the direct impact of the
requisition was only on control of the property requisitioned. It is however
also undeniable that this requisition, which remained in effect until 30
September 1968, was issued to avoid the closure of ELSI's plant, the
dismissal of its workforce, and as a consequence the probable dispersal of
the assets, all of which were integral to ELSFs plan for orderly
liquidation. Since the requisition thus had the design of preventing
Raytheon from exercising, for six critical months, what was at that time a
most important part of its right to control and manage ELSI, there exists a
question whether the requisition was in conformity with the requirements of
Article III, paragraph 2, of the FCN Treaty. Before coming to a conclusion
on that question it is necessary now to take into consideration certain
other matters.
71. Article III of the FCN Treaty, both in paragraph 1 concerning rights to
be enjoyed by the nationals of one party in the territory of the other, and
in paragraph 2, concerning rights of nationals of one party to "organize,
control and manage" corporations of the other party, contains the qualifying
phrase, "in conformity with the applicable laws and regulations" of the
latter party. It was argued by Italy that this clause confirms that the
correct interpretation of that paragraph is that it was not intended to
confer upon United States nationals any rights of control and management
more extensive, or more extensively protected, than those enjoyed by other
stockholders, of whatever nationality, in Italian companies. Therefore, it
was said, the requisition was no breach of the rights conferred by the FCN
Treaty, because its "invalidity. . . as ascertained by the decision of the
Prefect of Palermo, does not alter the fact that it was issued by the
competent authority on a regular legal basis". But, in the Chamber's view,
the reference to conformity with "the applicable laws and regu-[p
51]lations" cannot mean that, if an act is in conformity with the municipal
law and regulations, that would of itself exclude any possibility that it
was an act in breach of the FCN Treaty.
72. The reference to conformity with "the applicable laws and regulations"
surely means no more than that Italian corporations and associations
controlled by United States nationals must conform to the local applicable
laws and regulations; moreover, they must do so even if they believe a law
or regulation to be in breach of the FCN Treaty, and, indeed, even if it
were in breach of the FCN Treaty. This the Applicant has never denied.
Raytheon and Machlett did conform to the terms of the requisition. Indeed
they had no other choice.
73. The question still remains, therefore, whether the requisition was or
was not a violation of Article III, paragraph 2. This question arises
irrespective of the position in municipal law. Compliance with municipal law
and compliance with the provisions of a treaty are different questions. What
is a breach of treaty may be lawful in the municipal law and what is
unlawful in the municipal law may be wholly innocent of violation of a
treaty provision. Even had the Prefect held the requisition to be entirely
justified in Italian law, this would not exclude the possibility that it was
a violation of the FCN Treaty.
74. This question whether or not certain acts could constitute a breach of
the treaty right to be permitted to control and manage is one which must be
appreciated in each case having regard to the meaning and purpose of the FCN
Treaty. Clearly the right cannot be interpreted as a sort of 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. In this
respect considerable interest must attach to the reasons given by the
Prefect in his decision, and to the legal analysis of that decision by the
Court of Appeal of Palermo.
75. The Prefect took note in his decision of the fact that the Mayor had
relied on legislative authority empowering him to act in cases of "grave
public necessity and unforeseen urgency". He did not find that those
conditions were absent; he however annulled the requisition on the basis
primarily of the following considerations:
"Non v'ha dubblo cheanche se possono considerarsi, in linea deltutto
teorica, sussistenti, nella fattispecie, gli estremi detla grave necessita
pubblica e della contingibilita ed urgenza che determinarono I'adozione del
provvedimento, il fine cuitendeva la requisizione non potevatrovare pratica
realizzazione con il provvedimento stesso, tanto e vero che nes-suna ripresa
di attivita dell'azienda vi e stata a seguito della requisizione, ne avrebbe
potuto esserci. Manca, pertanto, nel provvedimento, genericamente, la causa
giuridica chepossa giustificarlo e renderlo operante."
There has been some controversy between the Parties as to the translation 40
[p 52] of this passage (see paragraph 123 below); in the view of the Chamber
it may be translated as follows:
"There is no doubt that, even though, from the purely theoretical
standpoint, the conditions of grave public necessity and of unforeseen
urgency warranting adoption of the measure may be considered to exist in the
case in point, the intended purpose of the requisition could not in practice
be achieved by the order itself, since in fact there was no resumption of
the company's activity following the requisition, nor could there have been
such resumption. The order therefore lacks, generically, the juridical cause
which might justify it and make it operative."
The Court of Appeal of Palermo, for reasons to be examined more fully below
(paragraph 127), considered that the Prefect's finding had been one of
"un tipico caso di eccesso dipotere, cke e, come e noto, un vizio di
legitti-mitd dell'atto amministrativo"
("a typical case of excess of power, which is of course a defect of
lawfulness of an administrative act").
The requisition was thus found 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.
76. There remains however a crucial question to be considered. According to
the Respondent, Raytheon and Machlett were, because of ELSFs financial
position, already naked of those very rights of control and management of
which they claim to have been deprived. It is necessary now, 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.
*
77. 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. This plan for an orderly liquidation was
however very much bound up with the financial state of ELSI, and the two
need to be considered together.
78. ELSI's lack of success was attributed by its management at least in part
to the fact that it was over-manned in relation to its order book; it had
needed repeated injections of fresh capital, and was never able to produce
an operating profit sufficient to offset its debt expense and its
accumulate-[p 53]ing losses. No dividends were ever paid to its
shareholders. The 30 September 1966 balance sheet already showed accumulated
losses of some 2,000 million lire.
79. The position was worsening, moreover, as the balance sheet for 30
September 1967 (above at paragraphs 18-19) showed. Raytheon's Italian
auditors pointed out that the balance sheet, when "adjusted" to Raytheon's
own accounting requirements for internal purposes (the unadjusted statement,
however, appears to have satisfied Italian legal requirements), then showed
adjusted accumulated losses, actually exceeding "the total of the paid up
capital stock, capital reserve and Stockholders' subscription account" by
881.3 million lire; and warned that if these adjustments to the total of
accumulated losses were entered in the company's books of account,
"under Articles 2447 and 2448 of the Italian Civil Code, the directors would
be obliged to convene a Stockholders' meeting forthwith to take measures
either to cover the losses by providing new capital or to put the company
into liquidation".
80. On 7 March 1968, Raytheon formally notified ELSI of its decision that
Raytheon would not provide any further capital, whether in the form of
subscribing to new stock or guaranteeing additional loans. At a board
meeting of ELSI held in Rome on 16 March 1968, it was decided on the
"cessation of the company's operations"; that production would be
"discontinued immediately"; that "commercial activities and employment
contracts" would be terminated on 29 March 1968; and that "a shareholders'
meeting be called for 28 March 1968, to adopt the necessary resolutions".
This was not, however, in ELSFs plans, to involve a liquidation under
Article 2450 of the Italian Civil Code, which requires a liquidator to be
appointed. The plan for an orderly liquidation, as conceived by the ELSI
management, was to be managed by them. At a special meeting of shareholders,
held on 28 March 1968, in Palermo, it was resolved to ratify the resolutions
adopted by the Board of Directors at the meeting of 16 March 1968; and
"to empower the Board of Directors to make contacts with the banks and
principal creditors of the company to reach an agreement on procedures to be
followed in the interest of all the creditors for the orderly disposal of
the company's assets at their highest realizable value. . ."
("di dare mandate al Consiglio di Amministrazione di prendere contatti con
gli istituti di credito e con i maggiori creditori della Societd per
concordare procedure che consentano nell'interesse di tutti i creditori una
ordinata alienazione delle attivitd sociali al massimo valore di
realizzazione").[p 54]
81. This policy of the ELSI management during the months prior to the
requisition had, however, a Janus-like character. Although the orderly
liquidation contemplated closure of the plant, and dismissal of the
workforce, an alternative aim of the management and of Raytheon was to keep
the place going, the hope being that the threat of closure and dismissal of
the workforce might bring such pressures to bear on the Italian authorities
as to persuade them to provide what Raytheon had long hoped for: an
influential Italian partner, new capital, and Mezzogiomo benefits. The
"Project for the Financing and Reorganization of the Company" prepared in
May 1967 spelled out the need for additional capital, new products from
Italian Government sources, and financial help for transport costs, capital
investment and training; the Project made it clear that the alternative was
that Raytheon would decline to invest more funds, over 300 people would
become redundant forthwith, and dwindling markets would reduce the
employment level still further; as stated in that Project, "The alternative
is really the actual destruction of the existing asset with the undesirable
social effects which must follow."
82. Right up to the eve of the requisition the company's representatives
went on talking to Italian officials; but at the same time the company's
management, according to an affidavit by one of its officials,
"were aware of the need to have back-up plans in case these efforts were not
successful. In the latter part of 1967, we reluctantly began to plan in
general for the potential liquidation of ELSI."
In the words of the affidavit of another company official, Raytheon had
"developed a plan for the orderly disposal of ELSI over about six months
during 1968. While this plan was being developed, Raytheon and ELSI
representatives continued to meet with Italian Government representatives in
an ongoing attempt to find a way for the company to continue to operate."
The company no doubt wished to postpone liquidation as long as possible,
both in the hope of avoiding it, and because the threat of closure of the
plant would be a means of pressure on the Italian authorities so long as it
remained only a threat. The risk, of which the company was well aware, was
that to carry on too long might topple the company into insolvency under
Italian law. In the event the Italian authorities did not come to the
rescue, at least not with terms acceptable to ELSI's management; and the
management was left at the last minute with the orderly liquidation plan to
be put into effect as seemingly the only way of avoiding bankruptcy or
liquidation under the supervision of the Italian court; and the [p 55]
bankruptcy of its subsidiary was undoubtedly a most unwelcome prospect for
Raytheon.
83. 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. That plan, as originally conceived, contemplated that the
disposal of plant and assets might produce enough to pay all creditors 100
per cent of their dues, with a modest residue for the shareholders. In one
of the affidavits quoted above it is stated: "If the assets had been
disposed of at book value all liabilities, including the payables to
Raytheon Company, would have been paid in full." And, indeed, the trustee in
bankruptcy, in his report of 28 October 1968 to the bankruptcy judge,
explained that in March 1968:
"the management of Raytheon-Elsi decided, and publicly stated their
intention (which was later adopted by the Board of Directors), to suggest to
the shareholders the liquidation of the company. The intention was to
proceed with an orderly liquidation of all assets in order to pay all the
Company's creditors 100 per cent."
This must have seemed a reasonable aim, for the "book value" may well have
been a conservative figure. It has not been demonstrated that ELS I was,
until shortly before the bankruptcy petition, ever actually in default.
Moreover, Raytheon had opened an account in Milan for the payment at 100 per
cent of small creditors.
84. Nevertheless since no new investment capital was forthcoming, the
possibility of paying creditors in full depended upon putting the orderly
liquidation plan into operation in good time. Time was running out because
money was running out. As the position worsened daily, the moment might at
any time arrive when liabilities exceeded assets, or default resulted from
lack of liquidity. ELSFs management had prepared the assessment of the
"quick-sale value" (see paragraph 18 above), which was markedly less than
book value, being aware that the sale of the company's assets might fail to
provide sums approximating to book value. There were plans also to approach
the large bank creditors in the hope of securing their agreement to
settlements of 50 per cent.
85. Did ELSI, in this precarious position at the end of March 1968, still
have the practical possibility to proceed with an orderly liquidation plan ?
The successful implementation of a plan of orderly liquidation would have
depended upon a number of factors not under the control of ELSI's
management. Since the company's coffers were dangerously low, funds had to
be forthcoming to maintain the cash flow necessary while the plan [p 56] was
being carried out. 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. Other
factors governing the matter however give rise to some doubt.
86. First, for the success of the plan it was necessary that the major
creditors (i.e., the banks) would be willing to wait for payment of their
claims until the sale of the assets released funds to settle them: and this
applied not only to the capital sums outstanding, which may not at the time
have yet been legally due for repayment, but also the agreed payments of
interest or instalments of capital. Though the Chamber has been given no
specific information on the point, this is of the essence of such a
liquidation plan: the creditors had to be asked to give the company time. If
ELSI had been confident of continuing to meet all its obligations promptly
and regularly while seeking a buyer for its assets, no negotiations with
creditors, and no elaborate calculations of division of the proceeds, on
different hypotheses, such as have been produced to the Chamber, would have
been needed.
87. Secondly, the management were by no means certain that the sale of the
assets would realize enough to pay all creditors in full; in fact, the
existence of the calculation of a "quick-sale value" suggests perhaps more
than uncertainty. Thus the creditors had to be asked to give time in return
for an assurance, not that 100 per cent would be paid, but that a minimum of
50 per cent would be paid. While in general it might be in the creditors'
interest to agree to such a proposal, this does not mean in this case that
ELSI could count on such agreement. At the date of the requisition, it seems
apparent that the banks, while informed of the financial position, had not
yet even been consulted on whether they would accept a guaranteed 50 per
cent (see paragraphs 28-29 above), so their reaction remains a matter of
speculation.
88. Nor should it be overlooked that the dismissed employees of ELSI ranked
as preferential creditors for such sums as might be due to them for
severance pay or arrears. In this respect Italy has drawn attention to the
Sicilian regional law of 13 May 1968, providing for the payment
"for the months of March, April and May 1968, to the dismissed employees of
Raytheon-Elsi of Palermo of a special monthly indemnity equal to the actual
monthly pay received until the month of February 1968".
From this it could be inferred, said Italy, that ELSI did not pay its
employees for the month of March 1968. Further it was conceded by the former
[p 57] Chairman of ELSI, when he appeared as a witness and was
cross-examined, that the cash available at 31 March 1968 ("22 million in the
kitty"), would have been insufficient to meet the payroll of the full staff
even for the first week of April ("at least 25 million"). The suggestion
that ELSI did not meet its March 1968 payroll was not put to the witness;
and counsel for the United States later stated that the assertion that "ELSI
could not make its March payroll", was "simply wrong". It is in any event
certain that when the company ceased activity there were still severance
payments due to the dismissed staff; those, the Applicant suggested, would
have been covered by funds to be provided by Raytheon (paragraph 28 above).
They could not have been met from the money still remaining in ELSFs coffers
at the time.
89. Thirdly, the plan as formulated by ELSFs management involved a potential
inequality among
creditors: unless enough was realized to cover the liabilities fully, the
major creditors were to be content with some 50 per cent of their claims;
but the smaller creditors were still to be paid in full. Whether or not this
would have been legally objectionable as a breach of the rule of par condido
creditorum (it appears that Raytheon contemplated accepting a smaller share
in the eventual distribution so that the small creditors could receive 100
percent without affecting the share attributed to the banks), it was an
additional factor which might have caused a major creditor to hesitate to
agree. According to the evidence, when in late March 1968 ELSI started using
funds made available by Raytheon to pay off the small creditors in full,
"the banks intervened and said that they did not want that to happen as that
was showing preference". Once the banks adopted this attitude, the whole
orderly liquidation plan was jeopardized, because a purpose of the
settlement with small creditors was, according to the 1974 diplomatic claim,
"to eliminate the risk that a small irresponsible creditor would take
precipitous action which would raise formidable obstacles in the way of
orderly liquidation".
90. Fourthly, the assets of the company had to be sold with the minimum
delay and at the best price obtainable -- desiderata which are often in
practice irreconcilable. The United States has emphasized the damaging
effect of the requisition on attempts to realize the assets; after the
requisition it was no longer possible for prospective buyers to view the
plant, nor to assure them that if they bought they would obtain immediate
possession. It is however not at all certain that the company could have
counted on unfettered access to its premises and plant, and the opportunity
of showing it to buyers without disturbance, even if the requisition had not
been made. There has been argument between the Parties on the question
whether and to what extent the plant was occupied by employees of ELSI both
before and after the requisition; but what is clear is that the company was
expecting trouble at the plant when its closure plans became [p 58] known:
the books had been removed to Milan, according to the evidence given at the
hearings, "so that if we did have problems we could at least control the
books" and "we had moved quite a lot of inventory [to Milan] so that we
could sell it from there if we had to".
91. Fifthly, there was the attitude of the Sicilian administration: the
company was well aware that the administration was strongly opposed to a
closure of the plant, or more specifically, to a dismissal of the workers.
True, the measure used to try to prevent this -- the requisition order --
was found by the Prefect to have lacked the "juridical cause which might
justify it and make it operative" (paragraph 75 above). But ELSI's
management in March 1968 could not have been certain that the hostility of
the local authorities to their plan of closure and dismissals would not take
practical form in a legal manner. The company's management had been told
before the staff dismissal letters were sent out that such dismissals would
lead to a requisition of the plant.
92. All these factors point towards 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.
93. Finally there was, beside the practicalities, the position in Italian
bankruptcy law. Article 5 of the Italian Bankruptcy Act of 1942 provides
that
"An entrepreneur who is in a state of insolvency shall be declared bankrupt.
The state of insolvency, moreover, becomes apparent not only by default but
also by other external acts which show that the debtor is no longer in a
position regularly to discharge his obligations."
("L"imprenditore che si trova in stato d'insolvenza e dichiarato fallito. Lo
stato d'insolvenza si manifesta con inadempimenti od altrifatti esteriori, i
quali dimoxtrino che il debitore non e piu in grado di sod-disfare
regolarmente ieproprie obbligazioni.")
This formula excludes a merely momentary or temporary disability, and refers
to one which shows every sign of going on. "Regular" payment
("regolarmente") apparently refers to payment in full at the due time. Given
this definition it is apparent that ELSI could have been "insolvent" in the
sense of Italian bankruptcy law, at the end of March, even though not
actually in default. The Chamber has been given conflicting evidence on the
question whether a debtor in such a position is bound under Italian law to
go into bankruptcy, or whether he may still enter into voluntary composition
with his creditors outside the supervision of the bankruptcy court
(paragraph 25 above).[p 59]
94. If however ELSI was in astate of legal insolvency at31 March 1968, and
if, as contended by Italy, a state of insolvency entailed an obligation on
the company to petition for its own bankruptcy, then the relevant rights of
control and management would not have existed to be protected by the FCN
Treaty. While not essential to the Chamber's conclusion, already stated in
paragraph 92 above, an assessment of ELSI's solvency as a matter of Italian
law is thus highly material.
95. Italy has argued that even before the requisition, ELSI was insolvent in
the sense that its liabilities exceeded the value of its assets, and in
support of this has pointed to, first, the "quick-sale value" calculated for
the purposes of the liquidation plan, and secondly the observations of the
auditors on the September 1967 balance sheet. The Chamber does not however
consider that it has to conclude from this that ELSI was insolvent as early
as 1967. The value of assets of this kind, until they are actually sold,
must be a matter for assessment by informed opinion, and different views,
and the use of different accounting conventions, may lead to different
results. The company's management was clearly of the view that it could
legally continue trading up to the end of March 1968, since its former
Chairman has told the Chamber that the company's legal and financial
advisers were keeping a close and continuous watch on the position to ensure
that Italian legal requirements were respected. But there is no doubt that
ELSI was indeed in a state of insolvency when on 25 April 1968 its Board of
Directors voted to file a petition in bankruptcy. The conclusion then made
that "The company's financial situation has worsened and has now reached a
state of insolvency" was based, according to the minutes of the board
meeting, on the fact that "There are payments on long-term loans that fell
due a few days ago, and other payments which the company cannot make as a
result of lack of liquidity. . ." In the bankruptcy petition, it was
specified that "an instalment of Lit. 800,000,000 to Banca Nazionale del
Lavoro became due on 18 April 1968 and the note therefor has been or will be
protested, etc." In other words, the company had by then committed a default
("inadempimento"), by failing to meet its debts as they became due.
96. On this matter of insolvency in Italian law, consideration must also be
given to the reasons employed by the Prefect of Palermo for his decision to
annul the requisition order, and the findings of the Court of Palermo and
the Court of Appeal of Palermo on the action brought by ELSI's trustee in
bankruptcy, for damages following the decision of the Prefect annulling the
requisition order. As indicated above (paragraph 75), the Prefect considered
that the purpose of the requisition could not be achieved, since the
company's activity could not be resumed. He explained that
"lo staio dell' azienda era tale, per circostanze di carattere
economico-funzionale e di mercato, da non consentire la prosecuzione
dell'atti-[p 60]vita. . . La requisizione, quindi, nulla ha mutato nella
situazione azien-dale. . .La situazione di dissesto ha, anzi, determinate la
dichiarazione difallimento dell'azienda. . ."
("the situation of the company, due to functional-economic and market
factors, was such as not to permit of the pursuance of its activity. . . The
requisition consequently changed nothing in the situation of the company. .
. On the contrary, the situation of insolvency determined the declaration of
bankruptcy of the company. . .")
97. The Court of Palermo was faced with the argument, mentioned in paragraph
58 above, that "the requisition order caused an economic situation of such
gravity that it immediately and directly triggered the bankruptcy of the
company". It dealt with this by pointing to the situation of the company on
the eve of the requisition:
"A 31 marzo 1968, in sostanza, lo stabilimento dell' Elsi non era piu in
fase produttiva, fermata per deliberazione dett'organo sociale
compe-tenteche. . . aveva. . .opinato, non potendo trovare altro rimedio,
per la soluzione piu drastica, evidentemente reputandola piu confacente agli
interessi della societd e che aveva come oggetto preciso I'arresto totals
della produzione . . . Devesi a cio aggiungere . . . che proprio dai primi
dell'anno 1968 vi era stato un notevole peggioramento della situazione
generate dell'azienda, che via via si andava aggravando per le sfavo-revoli
condizioni del mercaio, avversata, altresi, dai fatti sismici del gennaio e
da una serie di sdoperi che, per I'appunto, nel mese di marzo ebbero a
carattere ora di continuita ora di intermittenza, con la conse-guenza della
perdita di un considerevole numero di ore lavorative . . ."
("On March 31, 1968, the Elsi plant was for all practical purposes no longer
in operation, stopped in accordance with a decision of the competent organ
of the company which . . . had decided, in the absence of any other
solution, to go for the most drastic solution, evidently considering it most
conducive to the interests of the company, a solution which meant the total
shutdown of production . . . To this must be added . . . that in the early
part of 1968, there was a notable deterioration of the general situation of
the company, which was further aggravated by unfavourable market conditions
as well as the January earthquakes and a series of strikes which in March
were sometimes continuous and sometimes intermittent, causing the loss of a
considerable amount of production hours . . .")
From this the Court was able to conclude that
"Dalle condizioni premesse discende che Vaggancio del fallimento della
societd all'intervenuta requisizione non ha fondamento, siccome,
esattamente, e stato sostenuto coll'amministrazione convenuta, essendo la
situazione economica della Raytheon-Elsi gid gravemente compro-messa da
anniper esplicito riconoscimento dei suoi stessi dirigenti."[p 61]
("It is clear from these conditions that the connection between the
company's bankruptcy and the requisition is unfounded, as the defendant
administration correctly maintained, since Raytheon-Elsi's economic
situation had for years already been seriously compromised, as its own
management explicitly admitted,")
The Court of Palermo did not however go so far as to state that ELSI was
legally insolvent prior to the requisition.
98. However the Court of Appeal of Palermo, in its judgment, states that
ELSI was insolvent before the requisition order was made. The salient
passage on this point in the Court of Appeal's judgment states:
"per quanta riguarda i danni che si fanno consistere nell'avere la
requi-sizioneprovocato il fallimento della societd, la condusione negativa
del tribunate e ampiamente e convincentemente motivata e... le
considera-zioni critiche dell'appellante non vatgono aprovocare un
convincimento diverso;... La circostanza certa della insolvenza della
societd in tempo immediatamenie anteriore allo intervento del Sindaco... e
sufficiente per escludere il collegamento causale fra il successivo
provvedimento di requisizione e il fallimento della societd, per il quale
ultimo quello stato di insolvenza e causa determinante e sufficiente (Art. 5
legge fallim.).
" ("as regards the damages consisting in the fact that the order triggered
the company's bankruptcy, the negative conclusion arrived at by the court
below is amply and convincingly motivated and the critical considerations of
the appellant are not sufficient to lead to a different determination ...
The certain circumstance that the company was insolvent during the time
immediately prior to the Mayor's intervention ... is sufficient to rule out
any causal link between the subsequent requisition order and the company's
bankruptcy of which the company's state of insolvency was the decisive and
sufficient cause (Art. 5, Bankruptcy Law).")
The Court of Appeal also refers to the "prior insolvency" ("precedente
insolvenza") of the company, and to "the decisive effect of the state of
insolvency" ("la efficacia determinante dello stato di insolvenza").
99. Whether these findings by the municipal courts are to be regarded as
determinations as a matter of Italian law that ELSI had been insolvent,
within the meaning of the relevant legislative provisions, on 31 March 1968,
or whether they are no more than findings that the financial position of
ELSI on that date was so desperate that it was past saving, so it was not
the requisition which "caused an economic situation of such gravity that it
immediately and directly triggered the bankruptcy of the company" makes no
difference to the conclusion to be drawn. If ELSI was legally insolvent,
then even if the liquidation plan could in fact have been implemented with
co-operation from the creditors, the stockholders no longer had rights of
control and management to be protected by the FCN Treaty. If, as the Prefect
of Palermo stated, and the courts of Palermo certainly thought, the factual
situation at least was such that the requisition [p 62] changed nothing,
then the United States has failed to prove that there was any interference
with control and management in any real sense. The Chamber has no need to go
into the question of the extent to which it could or should question the
validity of a finding of Italian law, the law governing the matter, by the
appropriate Italian courts. It is sufficient to note that the conclusion
above, that the feasibility of an orderly liquidation plan is not
sufficiently established, is reinforced by reference to the decision of the
courts of Palermo on the claim by the trustee in bankruptcy for damages for
the injury caused by the requisition. Whether regarded as findings of
Italian law or as findings of fact, the decisions of the courts of Palermo
simply constitute additional evidence of the situation which the Chamber has
to assess.
100. It is important, in the consideration of so much detail, not to get the
matter out of perspective: given an under-capitalized, consistently
loss-making company, crippled by the need to service large loans, which
company its stockholders had themselves decided not to finance further but
to close and sell off because, as they were anxious to make clear to
everybody concerned, the money was running out fast, it cannot be a matter
of surprise if, several days after the date at which the management itself
had predicted that the money would run out, the company should be considered
to have been actually or virtually in a state of insolvency for the purposes
of Italian bankruptcy law.
101. If, therefore, the management of ELSI, at the material time, had no
practical possibility of carrying out successfully a scheme of orderly
liquidation under its own management, and may indeed already have forfeited
any right to do so under Italian law, it cannot be said that it was
the requisition that deprived it of this faculty of control and management.
Furthermore, one feature of ELSI's position stands out: the uncertain and
speculative character of the causal connection, on which the Applicant's
case relies, between the requisition and the results attributed to it by the
Applicant. There were several causes acting together that led to the
disaster to ELSI. No doubt the effects of the requisition might have been
one of the factors involved. But the underlying cause was ELSI's headlong
course towards insolvency; which state of affairs it seems to have attained
even prior to the requisition. There was the warning loudly proclaimed about
its precarious position; there was the socially damaging decision to
terminate the business, close the plant, and dismiss the workforce; there
was the position of the banks as major creditors. In short, the possibility
of that solution of orderly liquidation, which Raytheon and Machlett claim
to have been deprived of as a result of the requisition, is purely a matter
of speculation. The Chamber is therefore unable to see here anything which
can be said to amount to a violation by Italy of Article III, paragraph 2,
of the FCN Treaty.
**
102. There are two claims of the Applicant that are based upon the
provisions of Article V of the FCN Treaty: one relates to paragraphs 1 and
3, and is concerned with protection and security of nationals and their
property; another relates to paragraph 2, and is concerned with the taking
or expropriation of property. No claim is based upon paragraph 4 of Article
V. The Applicant's claim under paragraphs 1 and 3 will be dealt with first.
103. Paragraph 1 of Article V provides as follows:
" 1. The nationals of each High Contracting Party shall receive, within the
territories of the other High Contracting Party, the most constant
protection and security for their persons and property, and shall enjoy in
this respect the full protection and security required by international law.
To these ends, persons accused of crime shall be brought to trial promptly,
and shall enjoy all the rights and privileges which are or may hereafter be
accorded by the applicable laws and regulations; and nationals of either
High Contracting Party, while within the custody of the authorities of the
other High Contracting Party, shall receive reasonable and humane treatment.
In so far as the term 'nationals' where used in this paragraph is applicable
in relation to property it shall be construed to include corporations and
associations."
Paragraph 2 of this Article is not relevant here, but is set out in
paragraph 113 of this Judgment. Paragraph 3 provides as follows:
"3. The nationals, corporations and associations of either High Contracting
Party shall within the territories of the other High Contracting Party
receive protection and security with respect to the matters enumerated in
paragraphs 1 and 2 of this Article, upon compliance with the applicable laws
and regulations, no less than the protection and security which is or may
hereafter be accorded to the nationals, corporations and associations of
such other High Contracting Party and no less than that which is or may
hereafter be accorded to the nationals, corporations and associations of any
third country. Moreover, in all matters relating to the taking of privately
owned enterprises into public ownership and the placing of such enterprises
under public control, enterprises in which nationals, corporations and
associations of either High Contracting Party have a substantial interest
shall be accorded, within the territories of the other High Contracting
Party, treatment no less favorable than that which is or may hereafter be
accorded to similar enterprises in which nationals, corporations and
associations of such other High Contracting Party have a substantial
interest, and no less favorable than that which is or may hereafter be
accorded to similar enterprises in which nationals, corporations and
associations of any third country have a substantial interest."[p 64]
104. Paragraph 1 thus 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.
105. A breach of these provisions is seen by the Applicant to have been
committed when the Respondent "allowed ELSI workers to occupy the plant"
(see paragraph 65 above). It is the contention of the United States that
once the plant had been requisitioned, ELSI's employees began an occupation
of the premises which continued, so far as the United States was aware, up
to the re-opening of the plant by ELTEL; and that this occupation had the
tacit approval of local authorities, who made no effort to prevent or to end
it, or otherwise to protect the premises. To this occupation the United
States attributes as injurious consequences, first a deterioration of the
plant and related material and equipment, and secondly that it impeded the
efforts of the trustee in bankruptcy to dispose of the plant.
106. Italy has objected that Article V, paragraphs 1 and 3, guarantees the
protection and security of property belonging to United States companies in
Italy, but the plant in Palermo which, according to the United States,
should have been protected under the FCN Treaty belonged to the Italian
company ELSI. The United States replies that the "property of Raytheon and
Machlett in Italy" was ELSI itself, and Italy was obligated to protect the
entire entity of ELSI from the deleterious effects of the requisition. While
there may be doubts whether the word "property" in Article V, paragraph 1,
extends, in the case of shareholders, beyond the shares themselves, to the
company or its assets, the Chamber will nevertheless examine the matter on
the basis argued by the United States that the "property" to be protected
under this provision of the FCN Treaty was not the plant and equipment the
subject of the requisition, but the entity of ELSI itself.
107. That there was some occupation of the plant by the workers after the
requisition is something that Italy has not sought to deny, and the Court of
Appeal of Palermo referred in passing to the circumstance of the
requisitioning authority having tolerated the "unlawful" act of occupation
of the plant by the workers ("la autorita requirente avesse tollerato
I'illecito penale di una occupazione dei reparti di lavorazione da parte
delle mae-stranze"). It appears, nevertheless, to have been a peaceful
occupation, as may be learned from ELSI's own administrative appeal of 19
April 1968 to [p 65] the Prefect against the requisition, and the affidavits
of the Mayor of Palermo and one of his officials (see paragraph 33 above).
It is difficult to accept that the occupation seriously harmed the interests
of ELSI in view of the evidence produced by Italy that measures taken by the
Mayor of Palermo for the temporary management of the plant permitted the
continuation and completion of work in progress in the months following the
requisition. The United States has asserted that the continued production
was very limited, and cannot be equated with resumption of full production
in the plant, and continues to contend that the plant and machinery fell
into disuse following the requisition and deteriorated rapidly in value. The
Court of Palermo however found itself unable to establish that any damage to
the plant had been caused by the occupying workers.
108. 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. The dismissal of
some 800 workers could not reasonably be expected to pass without some
protest. Indeed, the management of ELSI seems to have been very much aware
that the closure of the plant and dismissal of the workforce could not be
expected to pass without disturbance; as is apparent from the removal of the
company's books and "quite a lot of inventory" to Milan (paragraph 17
above). 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 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.
*
109. 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 requi-[p 66]sition
order, or, to cite the words of counsel for the Applicant (paragraph 65
above),
"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".
The time taken by the Prefect was undoubtedly long; and the Chamber was not
entirely convinced by the Respondent's suggestion that such lengthy delays
by Prefects were quite usual. Yet it must be remembered that the requisition
in fact lapsed after six months and that Italian law did provide a safeguard
against delays by the Prefect. It was possible after 120 days from the
filing of the appeal to serve on the Prefect a request requiring him to
render a decision within 60 days (paragraph 41 above). Raytheon and Machlett
were never in a position to take advantage of this procedure, because by the
time the 120 days had elapsed the trustee in bankruptcy was in control of
the company; on the other hand, the trustee in bankruptcy did employ this
procedure, and the Prefect shortly afterwards gave his decision on the
appeal.
110. Counsel for the Applicant has referred to this delay as "a denial of
the level of procedural justice accorded by international law". Its claim in
this respect is however not founded on the rules of customary international
law concerning denial of justice, nor on the text of the FCN Treaty (Article
V, paragraph 4) which provides for access to justice. The relevance of the
delay of the Prefect's ruling has been expressed in two ways. First, it is
said, had there been a speedy decision by the Prefect, the bankruptcy of
ELSI could have been avoided; the Chamber is unable to accept this argument,
for the reasons already explained in connection with the claim under Article
III, paragraph 2, of the FCN Treaty. Secondly, it is contended that once the
requisition occurred, the Respondent had an obligation to protect ELSI from
its deleterious effects, and one of the ways in which it fell short of this
obligation was by failing to provide an adequate method of overturning the
requisition.
111. The primary standard laid down by Article V is "the full protection and
security required by international law", in short the "protection and
security" must conform to the minimum international standard. As noted
above, this is supplemented by the criteria of national treatment and
most-favoured-nation treatment. The Chamber is here called upon to apply the
provisions of a treaty which sets standards -- in addition to the reference
to general international law -- which may go further in protecting nationals
of the High Contracting Parties than general international law requires; but
the United States has not -- save in one respect -- suggested that these
requirements do in this respect set higher standards than the international
standard. It must be doubted whether in all the circumstances, the delay in
the Prefect's ruling in this case can be regarded as falling below that
standard. Certainly, the Applicant's use [p 67] of so serious a charge as to
call it a "denial of procedural justice" might be thought exaggerated.
112. The United States has also alleged that the delay in ELSI's case was
far in excess of the delay experienced in prior suits involving companies
owned by Italian nationals, and that it therefore constituted a failure to
accord a national standard of protection. As already stated, the Chamber was
not entirely convinced by the contention that such a lengthy delay was quite
usual (paragraph 109 above); nevertheless, it is not satisfied that a
"national standard" of more rapid determination of administrative appeals
has been shown to have existed. The Chamber is therefore unable to see in
this delay a violation of paragraphs 1 and 3 of Article V of the FCN Treaty.
**
113. The Chamber now turns to the United States claim based on Article V,
paragraph 2, of the FCN Treaty, which 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 recipient of such
compensation shall, in conformity with such applicable laws and regulations
as are not inconsistent with paragraph 3 of Article XVII of this Treaty, be
permitted without interference to withdraw the compensation by obtaining
foreign exchange, in the currency of the High Contracting Party of which
such recipient is a national, corporation or association, upon the most
favorable terms applicable to such currency at the time of the taking of the
property, and exempt from any transfer or remittance tax, provided
application for such exchange is made within one year after receipt of the
compensation to which it relates."
This is a most important paragraph, of a kind that is central to many
investment treaties. Where the English version begins by providing that
"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",[p 68]
the corresponding Italian text reads as follows:
"I beni dei cittadini e delle persone giuridiche ed associazioni di
cia-scuna Aha Parte Contraente non saranno espropriati entro i territori
dell'altra Alta Parte Contraente, senza una debita procedura legate e senza
ilprontopagamento di giusto ed effettivo indennizzo."
There was considerable argument before the Chamber over the difference
between the English version of the provision, which uses the word "taken",
and the Italian, which uses the word "espropriati". Both versions are
authentic. Obviously there is some difference between the two versions. The
word "taking" is wider and looser than "espropriazione".
114. The United States argued that, however the provision is read, the
result is the same in this case; which is not the same as arguing that the
two versions mean the same thing; and if one looks at the acts and conduct
which the Applicant claims to constitute a violation of Article V, paragraph
2, one finds this claim expressed in the following terms. In the contention
of the United States, 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. The requisition in itself is, in
the view of the United States, such a taking, because Italy physically
seized ELSI's property with the object and effect of ending Raytheon and
Machlett's control and management, in order to prevent them from conducting
the planned liquidation; and according to the United States, in
international law a "taking" is generally recognized as including not merely
outright expropriation of property, but also unreasonable interference with
its use, enjoyment or disposal. Secondly, the United States claims that the
Respondent, after the requisition and before the Prefect ruled on the
administrative appeal, proceeded through ELTEL to acquire the ELSI plant and
assets for less than fair market value. The matter was summed up by counsel
at the hearings as follows:
"The requisition and the delay in overturning the requisition not only
interfered with Raytheon and Machlett's management and control of ELSI, not
only impaired Raytheon and Machlett's legally acquired interests in ELSI,
but also resulted in what can only be described as the taking of the
property."
115. The specific United States allegations of interference by the Italian
Government with the ELSI bankruptcy proceedings may be summarized as
follows. The object in view is said to have been to secure ELSI's facilities
for IRI, on the terms and at the below-market price which IRI desired, while
responding to the political pressure brought by ELSI's former workers.
Having requisitioned the plant and caused ELSI's bank-[p 69]ruptcy, the
Government of Italy discouraged private bidders at the auctions held to
dispose of ELS Fs assets, by informing the public at large that the
Government would be taking over ELSI's facilities. While proceeding with
plans to take over ELSI, for example by negotiating agreements for rehiring
the staff, IRI is said to have "boycotted" the first three auctions of the
assets, at which the terms set by the bankruptcy judge were not to its
liking. ELTEL proposed to the trustee in bankruptcy that it be permitted to
lease the plant, and to purchase the work in progress, and this was agreed
to by the bankruptcy authorities on terms which, it is claimed, were adverse
to ELSI's interests, both because the sums involved were too low and because
ELTEL was placed in a position to dictate the terms of the final sale. At
the final auction, ELTEL, already in possession under the lease, acquired
the plant and related equipment for 4,000 million lire, the figure reported
in the press to have been previously agreed on between IRI and the Italian
authorities. As a result of the arrangements made with the bankruptcy
authorities for a piecemeal take-over, the total amount received for ELSFs
assets was slightly over 4,000 million fire, as compared with the company's
book valuation of over 12,000 million lire.
116. Thus, the charge based on the combination of the requisition and sub
sequent acts is really that the requisiti on was the beginning of a process
that led to the acquisition of the bulk of the assets of ELSI (which was
wholly owned by Raytheon and Machlett) for far less than market value. That
is a charge, not of mere temporary taking -- though the United States also
contended that a temporary requisition can constitute an indirect taking --
but of a process by which title to ELSI's assets itself was in the end
transferred. So far as the requisition is concerned, counsel put the United
States argument this way:
"the fact that the requisition was for an extendable six-month period does
not make this any less of an expropriation of interests in property, given
the fact that the requisition drove ELSI into bankruptcy".
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 title to property itself that is at stake. The
argument is that if a series of acts or omissions of the Italian authorities
had the end result, whether intended or not and whether the result of
collusion or not, of causing United States property in Italy to be
ultimately transferred into the ownership of Italy, without proper
compensation, there would be a violation of Article V, paragraph 2, of the
FCN Treaty.[p 70]
117. It must immediately be added that the United States, in the course of
the oral proceedings, in response to an Italian assertion that it was
attempting to establish a conspiracy to bring about the change of ownership,
made it very clear that this part of its case did not depend upon, or in any
way involve, any allegation that the Italian authorities were parties to
such a conspiracy. The United States stated formally that it "has never
argued and does not now argue that the acts and omissions of the Respondent
that violated the Treaty amount to a 'conspiracy'". Moreover, it was added
that whilst the relief sought was "based on the acts and omissions of the
Respondent's agents and officials at the federal and local levels (including
IRI), without any allegation that these officials were working in
conspiracy", the United States did not "speculate as to why these agents and
officials of the Respondent acted in the manner they did"; or, as the United
States Agent put it in his argument:
"These acts and omissions constituted Treaty violations ... whether or not
the Italian Government entities involved knew of each other's actions, and
whether or not they were acting in concert or at cross purposes."
118. The argument that there was a "taking" involving transfer of title
gives rise to a number of difficulties. Even assuming, though without
deciding, that "espropriazione" might be wide enough to include not only
formal and open expropriation, but also a disguised expropriation, there
would still be a question whether the paragraph can be extended to include
even a "taking" of an Italian corporation in Italy, of which, strictly
speaking, Raytheon and Machlett only held the shares. This, however, is
where account must also be taken of the first paragraph of the Protocol
appended to the FCN Treaty, which provides:
" 1. The provisions of paragraph 2 of Article V, providing for the payment
of compensation, shall extend to interests held directly or indirectly [si
estenderanno ai diritti spettanti direttamente od indiretta-mente ai
cittadini..] by nationals, corporations and associations of either High
Contracting Party in property which is taken within the territories of the
other High Contracting Party."
The English text of this provision suggests that it was designed precisely
to resolve the doubts just described. The interests of shareholders in the
assets of a company, and in their residuary value on liquidation, would
appear to fall in the category of the "interests" to be protected by Article
V, paragraph 2, and the Protocol. Italy has however drawn attention to the
use in the Italian text -- which is equally authentic -- of the narrower
term [p 71] "diritti" (rights), and has argued that, on the basis of the
principle expressed in Article 33, paragraph 4, of the Vienna Convention on
the Law of Treaties, the correct interpretation of the Protocol must be in
the more restrictive sense of the Italian text.
119. In the view of the Chamber, however, neither this question of
interpretation of the two texts of the Protocol, nor the questions raised as
to the possibilities of disguised expropriation or of a "taking" amounting
ultimately to expropriation, have to be resolved in the present case,
because it is simply not possible to say that the ultimate result was the
consequence of the acts or omissions of the Italian authorities, yet at the
same time to ignore the most important factor, namely ELSI's financial
situation, and the consequent decision of its shareholders to close the
plant and put an end to the company's activities. As explained above
(paragraphs 96-98), the municipal courts considered that ELSI, if not
already insolvent in Italian law before the requisition, was in so
precarious a state that bankruptcy was inevitable. The Chamber 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 in paragraphs 99-100 above.
**
120. Article 1 of the Supplementary Agreement to the FCN Treaty, which
confers rights not qualified by national or most-favoured-nation standards,
provides as follows:[p 72]
"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 United States bases its claims upon allegations that measures were taken
which were both "arbitrary" and "discriminatory" in the sense of this test.
121. The Applicant pressed strongly the claim that the requisition was an
arbitrary or discriminatory act which violated both the "(a)" and the "(b)"
clauses of the Article. The requisition, it is said, clearly prevented
Raytheon and Machlett exercising their control and management of ELSI and
also resulted in an impairment of their legally acquired rights and
interests in ELSI, inasmuch as it prevented the voluntary liquidation of
ELSI and caused it to file for bankruptcy. To the claim as it is presented
in those terms, however, the Chamber has already given its answer: 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 (paragraph 101 above). Accordingly, it cannot be said that it
was the requisition per se which either prevented Raytheon's effective
control and management of ELSI, or which resulted in impairing legally
acquired rights, in the sense of the clauses called "(a)"and "(b)"in Article
I of the Supplementary Agreement. Yet, although this is an answer to the
claim as it is presented in terms of those clauses of Article I, it is not
the end of the matter. 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.
122. The allegation of the United States that Raytheon and Machlett were
subjected to "discriminatory" measures can be dealt with shortly. It is
common ground that the requisition order was not made because of the
nationality of the shareholders; there have been many cases of requisition
[p 73] orders made in similar circumstances against wholly Italian-owned
companies. But the United States claims that there was "discrimination" in
favour of IRI, an entity controlled by Italy; and this was, in the view of
the United States, contrary to the FCN Treaty and Supplementary Agreement.
It is contended that the interests of IRI were directly contrary to those of
Raytheon and Machlett, and the Italian Government intervened to advance its
own commercial interests at the latter's expense. However, the requisition
order in itself did not serve any interest of IRI; it is only if the
requisition is regarded as a step in a process destined to transfer ELSl's
assets to IRI that the factual situation would afford any basis for the
argument now under examination. As indicated above, the United States stated
formally during the oral proceedings that it was not arguing that the acts
and omissions complained of amount to a "conspiracy", and did not speculate
as to why the relevant agents and officials of the Respondent acted as they
did (see paragraph 117 above). There is no sufficient evidence before the
Chamber to support the suggestion that there was a plan to favour IRI at the
expense of ELS I, and the claim of "discriminatory-measures" in the sense of
Article I of the Supplementary Agreement must therefore be rejected.
123. In order to show that the requisition order was an "arbitrary" act in
the sense of the Supplementary Agreement to the FCN Treaty, 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". Relying on its own English translation of
the decision of the Prefect of Palermo of 22 August 1969, the Applicant
concludes that the Prefect found that the order was "destitute of any
juridical cause which may justify it or make it enforceable". Italy first
contended that the word "or" in the translation of this passage should be
replaced by "and", and subsequently put forward the alternative translation
that "the order, generically speaking, lacks the proper motivation that
could justify it and make it effective". It may be noted in passing that
when ELSI, immediately after the making of the requisition order, formally
invited the Mayor of Palermo to revoke the order, it referred to it
throughout as "the said illegal and arbitrary order" ("detto illegale
edarbi-trario provvedimento"); but the appeal submitted to the Prefect,
while citing numerous legal grounds for annulment, including "eccesso di
potere persviamento del fine" ("excess of power by deviation from the
purpose"), contained no claim that the order had been "arbitrary". It is
therefore appropriate for the Chamber to examine the legal grounds given by
the Prefect of Palermo for his decision, as well as what was said by the
Court of Appeal of Palermo on the legal impact of the Prefect's decision on
the requisition order, and consider whether the findings of the [p 74]
Prefect or of the Court of Appeal are equivalent to, or suggest, a
conclusion that the requisition was an "arbitrary" action.
124. Yet it must be borne in mind 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, as a breach of treaty or
otherwise. A finding of the local courts that an act was unlawful may well
be relevant to an argument that it was also arbitrary; but by itself, and
without more, unlawfulness cannot be said to amount to arbitrariness. It
would be absurd if measures later quashed by higher authority or a superior
court could, for that reason, be said to have been arbitrary in the sense of
international law. To identify arbitrariness with mere unlawfulness would be
to deprive it of any useful meaning in its own right. Nor does it follow
from a finding by a municipal court that an act was unjustified, or
unreasonable, or arbitrary, that that act is necessarily to be classed as
arbitrary in international law, though the qualification given to the
impugned act by a municipal authority may be a valuable indication.
125. The principal passage from the decision of the Prefect which is
relevant here has already been quoted (paragraph 75 above), but it is
convenient to set it out again here:
"Non v'ha dubbio che anche se possono considerarsi, in linea deitutto
teorica, sussistenti, nella fattispecie, gli estretni della grave necessita
pubblica e della contingibilitd ed urgenza che determinarono ladozione
delprovvedimento, il fine cui tendeva la requisizione non poteva trovare
pratica realizzazione con il provvedimento stesso, tanto e vero che nes-suna
ripresa di attivitd dell'azienda vi e stata a seguito della requisizione, ne
avrebbe potuto esserci. Manca, pertanto, nel provvedimento, genericamente,
la causa giuridica che possa giustificarlo e renderlo ope-rante."
The differing translations offered by the Parties of the sentence upon which
the Applicant places considerable reliance are set out in paragraph 123
above. In the Chamber's translation, the passage reads:
"There is no doubt that, even though, from the purely theoretical
standpoint, the conditions of grave public necessity and of unforeseen
urgency warranting adoption of the measure may be considered to exist in the
case in point, the intended purpose of the requisition could not in practice
be achieved by the order itself, since in fact there was no resumption of
the company's activity following the requisition, nor could there have been
such resumption. The order therefore [p 75] lacks, generically, the
juridical cause which might justify it and make it operative."
126. In support of this conclusion, the Prefect explained that the Mayor had
believed that he could deal with the situation by means of a requisition,
without appreciating that
"the state of the company as a result of circumstances of a
functional-economic and market nature, was such as not to permit of the
continuation of its activity".
He also emphasized the shutdown of the plant and the protest actions of the
staff, and the fact that the requisition had not succeeded in preserving
public order. Finally the Prefect also observed that the order had been
adopted
"anche sotto I'influsso delle pressioni e dei rilievi formulati dalla
statnpa cittadina, per cui e da ritenere che il Sindaco, anche per
sottrarvisi e di-mostrare I'intendimento delta Pubblica
Amministrazione di intervenire in qualche modo, addivenne alla requisizione
quale provvedimento diretto piu che altro a poire in evidenza la sua
intenzione di affrontare comunque ilproblema ".
In the translation of the Prefect's decision supplied by the Applicant:
"also under the influence of the pressure created by, and of the remarks
made by the local press; therefore we have to hold that the Mayor, also in
order to get out of the above and to show the intent of the Public
Administration to intervene in one way or another, issued the order of
requisition as a measure mainly directed to emphasize his intent to face the
problem in some way [or, as quoted in the judgment of the Court of Appeal of
Palermo, in the translation supplied by the Applicant: 'his intention to
tackle the problem just the same']".
It was of course understandable that the Mayor, as a public official, should
have made his order, in some measure, as a response to local public
pressures; and the Chamber does not see, in this passage of the Prefect's
decision, any ground on which it might be suggested that the order was
therefore arbitrary.
127. In the action brought by the trustee in bankruptcy for damages on
account of the requisition, the Court of Palermo and subsequently the Court
of Appeal of Palermo had to consider the legal significance of the decision
of the Prefect. The Court of Palermo accepted the argument of the respondent
administration that "il provvedimento prefettizio e sostan-zialmente di
revoca dell'atto richiamato essendo stati ritenuti irrealizzabili gli scopi
cuilo stesso miravano", i.e., that "the Prefect's order is in substance a
revocation of the act in question, the objectives which were contemplated by
it having been adjudged to have been impossible to achieve". When the matter
came before the Court of Appeal, it observed that this argument was contrary
to the argument of the trustee in bankruptcy "che ravvisa in [p 76] detto
decreto una dichiarazione di illegittimitd del provvedimento di
requisi-zione", i.e., "who regarded the [Prefect's] decree as a declaration
of the unlawfulness of the requisition order". The Court of Appeal
understood the lower court as meaning simply that "i vizi del provvedimento
di requisizione, rilevati dal Ptefetto, sono vizi di merito e nort vizi di
legittimitd", i.e., "the defects found by the Prefect in the requisition
order
were defects in respect of the merits and not defects in respect of
lawfulness"; it found that this finding was incorrect because the reasoning
of the Prefect was, in its view, a clear finding of "un tipico caso di
eccesso dipotere, che e, come e noto, un vizio di legittimitd dell'atto
amministrativo", i.e., "a typical case of excess of power, which is of
course a defect in respect of lawfulness of an administrative act". Having
reached this conclusion, the Court of Appeal refers later in its judgment to
the requisition as having been "unlawful" ("illecito"). The analysis of the
Prefect's decision as a finding of excess of power, with the result that the
order was subject to a defect of lawfulness does not, in the Chamber's view,
necessarily and in itself signify any view by the Prefect, or by the Court
of Appeal of Palermo, that the Mayor's act was unreasonable or arbitrary.
128. Arbitrariness is not so much something opposed to a rule of law, as
something opposed to the rule of law. This idea was expressed by the Court
in the Asylum case, when it spoke of "arbitrary action" being "substituted
forthe rule of law" (Asylum, Judgment, I.C.J. Reports 1950, p. 284). It is a
wilful 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.
129. The United States argument is not of course based solely on the
findings of the Prefect or of the local courts. United States counsel felt
able to describe the requisition generally as being an "unreasonable or
capricious exercise of authority". Yet one must remember the situation in
Palermo at the moment of the requisition, with the threatened sudden
unemployment of some 800 workers at one factory. It cannot be said to have
been unreasonable or merely capricious for the Mayor to seek to use the
powers conferred on him by the law in an attempt to do something about a
difficult and distressing situation. Moreover, if one looks at the
requisition order itself, one finds an instrument which in its terms recites
not only the reasons for its being made but also the provisions of the law
on which it is based: one finds that, although later annulled by the Prefect
because "the intended purpose of the requisition could not in practice be
achieved by the order itself' (paragraph 125 above), it was nonetheless
within the competence of the Mayor of Palermo, according to the very
provisions of the law cited in it; one finds the Court of Appeal of Palermo,
which did not differ from the conclusion that the requisition was intra
vires, ruling that it was unlawful as falling into the recognized category
of administrative law of acts of "eccesso di potere ". Furthermore, here was
an act belong-[p 77]ing to a category of public acts from which appeal on
juridical grounds was provided in law (and indeed in the event used, not
without success). Thus, 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.
130. The Chamber does not, therefore, see in the requisition a measure which
could reasonably be said to earn the qualification "arbitrary", as it is
employed in Article I of the Supplementary Agreement. Accordingly, there was
no violation of that Article.
**
131. Finally, the United States claims that there has been a violation by
Italy of Article VII of the FCN Treaty. This long and elaborately drafted
Article, in four paragraphs, is principally concerned with ensuring the
right "to acquire, own and dispose of immovable property or interests
therein within the territories of the other High Contracting Party". The
full text is as follows:
" 1. The nationals, corporations and associations of either High Contracting
Party shall be permitted to acquire, own and dispose of immovable property
or interests therein within the territories of the other High Contracting
Party upon the following terms:
(a) in the case of nationals, corporations and associations of the Italian
Republic, the right to acquire, own and dispose of such property and
interests shall be dependent upon the laws and regulations which are or may
hereafter be in force within the state, territory or possession of the
United States of America wherein such property or interests are situated;
and
(b) in the case of nationals, corporations and associations of the United
States of America, the right to acquire, own and dispose of such property
and interests shall be upon terms no less favorable than those which are or
may hereafter be accorded by the state, territory or possession of the
United States of America in which such national is domiciled, or under the
laws of which such corporation or association is created or organized, to
nationals, corporations and associations of the Italian Republic; provided
that the Italian Republic shall not be obligated to accord to nationals,
corporations and associations of the United States of America rights in this
connection more extensive than those which are or may hereafter be accorded
within the territories of such Republic to nationals, corporations and
associations of such Republic.[p 78]
2. If a national, corporation or association of either High Contracting
Party, whether or not resident and whether or not engaged in business or
other activities within the territories of the other High Contracting Party,
is on account of alienage prevented by the applicable laws and regulations
within such territories from succeeding as devisee, or as heir in the case
of a national, to immovable property situated therein, or to interests in
such property, then such national, corporation or association shall be
allowed a term of three years in which to sell or otherwise dispose of such
property or interests, this term to be reasonably prolonged if circumstances
render it necessary. The transmission or receipt of such property or
interests shall be exempt from the payment of any estate, succession,
probate or administrative taxes or charges higher than those now or
hereafter imposed in like cases of nationals, corporations or associations
of the High Contracting Party in whose territory the property is or the
interests therein are situated.
3. The nationals of either High Contracting Party shall have full power to
dispose of personal property of every kind within the territories of the
other High Contracting Party, by testament, donation or otherwise and their
heirs, legatees or donees, being persons of whatever nationality or
corporations or associations wherever created or organized, whether resident
or non-resident and whether or not engaged in business within the
territories of the High Contracting Party where such property is situated,
shall succeed to such property, and shall themselves or by their agents be
permitted to take possession thereof, and to retain or dispose of it at
their pleasure. Such disposition, succession and retention shall be subject
to the provisions of Article IX and exempt from any other charges higher,
and from any restrictions more burdensome, than those applicable in like
cases of nationals, corporations and associations of such other High
Contracting Party. The nationals, corporations and associations of either
High Contracting Party, shall be permitted to succeed, as heirs, legatees
and donees, to personal property of every kind within the territories of the
other High Contracting Party, left or given to them by nationals of either
High Contracting Party or by nationals of any third country, and shall
themselves or by their agents be permitted to take possession thereof, and
to retain or dispose of it at their pleasure. Such disposition, succession
and retention shall be subject to the provisions of Article IX and exempt
from any other charges, and from any restrictions, other or higher than
those applicable in like cases of nationals, corporations and associations
of such other High Contracting Party. Nothing in this paragraph shall be
construed to affect the laws and regulations of either High Contracting
Party prohibiting or restricting the direct or indirect ownership by
[p 79] aliens or foreign corporations and associations of the shares in, or
instruments of indebtedness of, corporations and associations of such High
Contracting Party carrying on particular types of activities.
4. The nationals, corporations and associations of either High Contracting
Party shall, subject to the exceptions in paragraph 3 of Article IX, receive
treatment in respect of all matters which relate to the acquisition,
ownership, lease, possession or disposition of personal property, no less
favorable than the treatment which is or may hereafter be accorded to
nationals, corporations and associations of any third country."
The Italian text of the opening sentence of paragraph 1 is as follows:
"I cittadini e le persone giuridiche ed associazioni di ciascuna Alta Parte
Contraente avranno facolta di acquistare, possedere e disporre di beni
immobili o di altri diritti reali nei territori dell'altra Alta Parte
Contraente alte seguenti condizioni..."
132. It was objected by Italy that this Article does not apply at all to
Raytheon and Machlett because their own property rights (diritti reali")
were limited to shares in ELS I, and the immovable property in question (the
plant in Palermo) was owned by ELS I, an Italian company. The United States
contended that "immovable property or interests therein" is a phrase
sufficiently broad to include indirect ownership of property rights held
through a subsidiary that is not a United States corporation. The argument
turned to a considerable extent on the difference in meaning between the
English, "interests" and the Italian, "diritti reali". "Interest" in English
no doubt has several possible meanings. But since it is in English usage a
term commonly used to denote different kinds of rights in land (for example
rights such as charges, or easements, and many kinds of "future interests"),
it is possible to interpret the English and Italian versions of Article VII
as meaning much the same thing; especially as the clause in question is in
any event limited to immovable property. The Chamber however has some
sympathy with the contention of the United States, as being more in accord
with the general purpose of the FCN Treaty. The United States argument is
further that Raytheon and Machlett, being the owners of all the shares, were
in practice the persons who alone could decide (before the bankruptcy),
whether to dispose of the immovable property of the company; accordingly, if
the requisition [p 80] did, by triggering the bankruptcy, deprive ELSI of
the possibility of disposing of its immovable property, it was really
Raytheon and Machlett who were deprived; and allegedly in violation of
Article VII.
133. There are however problems in any attempt to apply the provisions of
Article VII to the actual facts of this case. First, the protection which
paragraph 1 of Article VII affords to this group of rights is not
unqualified. The qualification designated "(a)"refers to the rights enjoyed
by Italian nationals in the territory of the United States of America, which
in effect simply subjects Italian nationals to the municipal laws in the
United States, and does not concern us. Qualification "(b)"does, for this
applies to the rights enjoyed by United States nationals in the territory of
the Republic of Italy. It is a convoluted qualification because it lays down
alternative standards, which standards are themselves then both qualified by
the same proviso. The terms governing the rights are to be no less
favourable than those which are or may hereafter be accorded by the "state,
territory or possession of the United States of America in which such
national is domiciled, or under the laws of which such corporation or
association is created or organized" -- which in the case of Raytheon is the
State of Delaware and in the case of Machlett the State of Connecticut --
"to nationals, corporations and associations of the Italian Republic". The
proviso is:
"that the Italian Republic shall not be obligated to accord to nationals,
corporations and associations of the United States of America rights in this
connection more extensive than those which are or may hereafter be accorded
within the territories of such Republic to nationals, corporations and
associations of such Republic".
134. The Chamber has thus to make the somewhat elaborate juridical calculus
which this provision in the FCN Treaty appears to demand for its
application. No very cogent evidence was put before the Chamber to show that
the application of Italian law in this matter was less favourable than the
treatment accorded by Italy to its own nationals, corporations and
associations, in Italy. Indeed it appeared that, particularly during the
troubled times of 1968, requisitions of Italian companies by the local
Mayors had happened rather frequently. The claim must therefore be taken to
be that ELS I was given less favourable treatment than might have been
enjoyed by an Italian company under the laws of Delaware and Connecticut in
similar circumstances. The United States drew attention to texts showing
that
"Under the laws of both Delaware and Connecticut, corporations may be
dissolved and their assets sold pursuant to determinations by their boards
of directors and shareholders",
[p81] and that if those States were to take the immovable property of a
corporation for a lawful public use, they would have to make compensation;
Italy has not disputed these legislative provisions.
135. Secondly, however, even so 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 ELS I, 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 ELS I 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.
**
136. Having found that the Respondent has not violated the FCN Treaty in the
manner asserted by the Applicant, it follows that the Chamber rejects also
the claim for reparation made in the submissions of the Applicant.
***
137. For these reasons,
The Chamber,
(1) Unanimously,
Rejects the objection presented by the Italian Republic to the
admissi-bility of the Application filed in this case by the United States of
America on 6 February 1987;
(2) By four votes to one,
Finds that the Italian Republic has not committed any of the breaches,
alleged in the said Application, of the Treaty of Friendship, Commerce and
Navigation between the Parties signed at Rome on 2 February 1948, or of the
Agreement Supplementing that Treaty signed by the Parties at Washington on
26 September 1951.
In favour: President Ruda; Judges Oda, Ago and Sir Robert Jennings; against
: Judge Schwebel.
(3) By four votes to one,
Rejects, accordingly, the claim for reparation made against the Republic of
Italy by the United States of America.
In favour: President Ruda; Judges Oda, Ago and Sir Robert Jennings;
Against : Judge Schwebel. [p 82]
Done in English and in French, the English text being authoritative, at the
Peace Palace, The Hague, this twentieth day of July, one thousand nine
hundred and eighty-nine, in three copies, one of which will be placed in the
archives of the Court and the others transmitted to the Government of the
United States of America and the Government of the Republic of Italy,
respectively.
(Signed) Jose Maria Ruda,
President.
(Signed) Eduardo Valencia-Ospina,
Registrar.
Judge Oda appends a separate opinion to the Judgment of the Chamber.
Judge Schwebel appends a dissenting opinion to the Judgment of the Chamber.
(Initialled) J.M.R.
(Initialled) E.V.O.
[p 83]
Separate opinion of judge Oda
I have voted in favour of the Judgment because I have concluded that Italy
has not committed any breach either of the 1948 FCN Treaty or of the 1951
Supplementary Agreement, and that the United States of America's claim for
compensation, arising from its allegations relating to such a breach, must
accordingly be rejected. However, I came to this conclusion for reasons
which are not entirely the same as those underlying the Chamber's Judgment,
and feel that it is appropriate for me to state my personal views.
I
The legal proceedings instituted between 1968 and 1975 before the Prefect of
Palermo and the Italian courts at three different levels (from the Court of
Palermo to the Court of Cassation), that were brought to challenge the
requisition order issued by the Mayor of Palermo on 1 April 1968, were
initiated by ELSI or, later, by its trustee in bankruptcy, but not by
Raytheon and Machlett as its shareholders (see Judgment, paras. 41-43). In
those proceedings, it was accordingly that company — not its shareholders —
which alleged that its rights had been breached by acts of the Italian
authorities which had been directed against it.
For all that, the United States Government started, in February 1974, to
negotiate with the Italian Government with a view to obtaining protection
for Raytheon and Machlett (United States corporations) as shareholders, but
not for ELSI (an Italian corporation) (see Judgment, para. 46). The action
of the United States Government in bringing the present case against the
Italian Government before the International Court of Justice resulted from
its espousal of the cause of Raytheon and Machlett, the shareholders (see
United States submissions: Judgment, paras. 10-11). It did no? espouse the
cause of ELSI.
II
The very concept of a joint-stock company embodies a distinction between the
corporate entity and the assemblage of shareholders. The fundamental
character of the company, particularly with regard to the shareholders'
status, was so clearly expounded in the Court's Judgment in the case
concerning the Barcelona Traction, Light and Power Company, Limited (New
Application) that it is relevant to quote certain passages from that
decision.[p 84]
"41. ... The concept and structure of the company are founded on and
determined by a firm distinction between the separate entity of the company
and that of the shareholder, each with a distinct set of rights. The
separation of property rights as between company and shareholder is an
important manifestation of this distinction. So long as the company is in
existence the shareholder has no right to the corporate assets.
42. It is a basic characteristic of the corporate structure that the company
alone, through its directors or management acting in its name, can take
action in respect of matters that are of a corporate character. The
underlying justification for this is that, in seeking to serve its own best
interests, the company will serve those of the shareholder too. Ordinarily,
no individual shareholder can take legal steps, either in the name of the
company or in his own name... [T]he shareholders' rights in relation to the
company and its assets remain limited, this being, moreover, a corollary of
the limited nature of their liability.
43. ... [A shareholder] is bound to take account of the risk of reduced
dividends, capital depreciation or even loss, resulting from ordinary
commercial hazards or from prejudice caused to the company by illegal
treatment of some kind.
44. Notwithstanding the separate corporate personality, a wrong done to the
company frequently causes prejudice to its shareholders. But the mere fact
that damage is sustained by both company and shareholder does not imply that
both are entitled to claim compensation ... [N]o doubt, the interests of
the aggrieved are affected, but not their rights. Thus whenever a
shareholder's interests are harmed by an act done to the company, it is to
the latter that he must look to institute appropriate action; for although
two separate entities may have suffered from the same wrong, it is only one
entity whose rights have been infringed.
………………………………………………………………………………………………
50. ... It is to rules generally accepted by municipal legal systems which
recognize the limited company whose capital is represented by shares ...
that international law refers. In referring to such rules, the Court cannot
modify, still less deform them." (I.C.J. Reports 1970, pp. 34,35 and 37.)
Shareholders' material rights remain confined to the area of participation
in the disposal of company profits and, in the event of liquidation, sharing
in the residuary property of the company. They may protect those rights by
exercising their formal entitlement to vote at shareholders' meetings, thus
participating in the management and operation of a company. Indeed,
shareholders' rights in relation to the company and its assets are limited
as a corollary of the shareholders' limited liability.
Italian company law is drafted in accordance with these general prin-[p
85]ciples (Italian Civil Code (Codice civile), Arts. 2350 and 2351) as is
the company law of other countries (cf. Federal Republic of Germany :
Company Law (Aktiengesetz), Arts. 12, 58 (4), 271; France: 1966 Law on
Commercial Companies (Loi n° 66-537 du 24 juillet 1966 sur les sociétés
commerciales), Arts. 174, 347, 417; Japan: Commercial Code (Shoho), Arts.
241, 293, 425; Switzerland: Code of Obligations (Code des obligations),
Arts. 660 and 692).
As the Court explained in 1970, such rights — which have been described as
the "direct rights" ("droits propres") of shareholders — do not connote any
right of action on behalf of the corporate entity. On the contrary, they
rather constitute rights vis-à-vis that entity. It is in this latter respect
that they are protected under domestic laws. If the company or its
management fail to respect any of those rights, the shareholders will be
entitled to seek certain remedies against the company. Interference with
those rights by public authorities may likewise be subject to legal remedy.
In other words, shareholders can institute proceedings in domestic courts if
there are violations of their "direct rights" as shareholders, such as a
denial of their right to benefit from the disposal of company profits or to
participate in the shareholders' meeting. Again, a pertinent passage may be
quoted from the above-mentioned Judgment :
"47. The situation is different if the act complained of is aimed at the
direct rights [droits propres]'of the shareholder as such. It is well known
that there are rights which municipal law confers upon the latter distinct
from those of the company, including the right to any declared dividend, the
right to attend and vote at general meetings, the right to share in the
residual assets of the company on liquidation. Whenever one of his direct
rights is infringed, the shareholder has an independent right of action ...
But a distinction must be drawn between a direct infringement of the
shareholder's rights, and difficulties or financial losses to which he may
be exposed as the result of the situation of the company." (I.C.J. Reports
1970, p. 36.)
However, no infringement of any of these rights has been alleged in
connection with the events that occurred in Sicily in 1968.
To look at the matter from a slightly different perspective, the
shareholders may approve a policy at their meetings, and the company will
be responsible for its implementation. While the company will thus be
responsible to its shareholders for any failure in that regard, those
shareholders cannot claim any rights other than vis-à-vis the company.
Accordingly, if it is found that the policy has been thwarted by the
controversial act of a third party, there may be grounds for deeming the
rights of the company to have been infringed — but not the "direct rights"
of the shareholders. It follows that they have no jus standi vis-à-vis the
third party in question.
*[p 86]
That general principle of law concerning the rights or status of
shareholders, which underlies not only Italian company law but also the
company law of some other civil law countries, may not be altered by any
treaty aimed at the protection of investments unless that treaty contains
some express provision to that end. A question which should therefore be
asked is whether Italy and the United States agreed, by means of the 1948
FCN Treaty or the 1951 Supplementary Agreement, to modify such a general
principle of law or to grant any additional rights to foreign shareholders.
It is difficult to see how an affirmative answer can be given to this
question.
The 1948 FCN Treaty and the 1951 Supplementary Agreement guarantee certain
rights to United States companies participating in business in Italy (and
vice versa). These rights, to which the United States refers in passages of
both the Memorial and the Reply that relate to the status of United States
companies, are here set forth in full:
(a) "The ... [United States] ... corporations ... shall enjoy, throughout
[Italy], rights and privileges with respect to organization of and
participation in corporations ... of [Italy] ..." (Art. Ill (1), first
sentence.)
(b) "The ... [United States]... corporations ... shall be permitted, in
conformity with the applicable laws and regulations within [Italy], to
organize, control and manage corporations ... of [Italy] for engaging in
commercial, manufacturing, processing... activities." (Art. III (2), first
sentence.)
(c) "[The United States corporations] shall receive, within [Italy], the
most constant protection and security for their... property, and shall enjoy
in this respect the full protection and security required by international
law." (Art. V (1), first sentence.)
(d) "The property of ... [the United States] corporations ... shall not be
taken within [Italy] without due process of law and without the prompt
payment of just and effective compensation." (Art. V (2), first sentence.)
(d') "The provisions..., providing for the payment of compensation [as
referred to in (d) above], shall extend to interests held directly or
indirectly by ... [the United States] corporations ... in property which is
taken within [Italy]." (Protocol, para. 1.)
(e) "The ... [United States] corporations ... shall within [Italy] receive
protection and security with respect to the matters enumerated in [(c) and
(d) above], upon compliance with the applicable laws and regulations, no
less than the protection and security which is or may hereafter be accorded
to the ... corporations ... of [Italy] and no less than that which is or
may[p 87]hereafter be accorded to the ... corporations ... of any third
country." (Art. V (3), first sentence.)
(f) "The ... [United States] corporations ... shall be permitted to acquire,
own and dispose of immovable property or interests therein within [Italy]
upon the following terms..." (Art. VII (1).)
(g) "The ... [United States] corporations ... shall not be subjected to
arbitrary or discriminatory measures within [Italy] resulting particularly
in: (a) preventing their effective control and man-agement 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 ... [Italy]
undertakes not to discriminate against ... [United States] corporations ...
as to their obtaining under normal terms the capital, manufacturing
processes, skills and technology which may be needed for economic
development." (Supplementary Agreement, Art. I.)
In fact, the granting of these rights to foreign corporations is not unique
to the 1948 Treaty between Italy and the United States, as similar
provisions are to be found (albeit with some variations) in the FCN
treaties which the United States concluded successively with other countries
in the post-war period. (The 1948 FCN Treaty with Italy was the second of
such treaties to be concluded by the United States, being preceded by the
treaty with China (1946) and followed by the treaties with Ireland (1950;
Greece, Israel and Denmark (1951); Japan (1953); the Federal Republic of
Germany (1954); Iran (1955); the Netherlands and the Republic of Korea
(1956); and others.)
*
My interpretation of those provisions is rather different from the one
adopted by the Chamber in its Judgment.
Firstly, under Articles III (1) (first sentence) and III (2) (first
sentence) of the FCN Treaty, United States nationals (corporations) are
guaranteed the enjoyment of "rights and privileges with respect to
organization of and participation in corporations" of Italy and are given
the right to "organize, control and manage corporations" in Italy (cf.,
e.g., Denmark-United States, Arts. VII (2), VIII ( 1) ; Japan- United
States, Art. VII (1); Fed. Rep. of Germany-United States, Art. VII (1);
Netherlands-United States, Art. VII (1); etc.). Raytheon and Machlett
certainly could, in Italy, "organize, control and manage" corporations in
which they held 100 per cent of the shares — as in the case of ELSI — but
this cannot be taken to mean that those United States corporations, as
shareholders of ELSI, can lay claim to any rights other than those rights of
shareholders guaranteed to them under Italian law as well as under the
general principles of law concerning[p 88] companies. The rights of Raytheon
and Machlett as shareholders of ELSI remained the same and were not
augmented by the FCN Treaty. Those rights which Raytheon and Machlett could
have enjoyed under the FCN Treaty were not breached by the requisition
order, because that order did not affect the "direct rights" of those United
States corporations, as shareholders of an Italian company, but was
directed at the Italian company of which they remained shareholders.
Secondly, the provisions of Article V (1), (2) and (3) (second sentence) of
the FCN Treaty concerning the property of corporations as well as paragraph
1 of the Protocol qualifying Article V (2) of the Treaty (cf., inter alia,
Denmark-United States, Art. VI (1), (3), (5) and Protocol, para. 2;
Japan-United States, Art. VI (1), (3), (4) and Protocol, para. 2; Fed. Rep.
of Germany-United States, Art. V (1), (4), (5) and Protocol, para. 5;
Netherlands-United States, Art. VI (1), (4), (5) and Protocol, para. 6)
similarly cannot be seen as entitling the foreign shareholders to "property"
("beni" in the Italian text), i.e., ownership of the company's assets or the
company itself, or "interests ... in property" ("diritti... su beni" in the
Italian text).
Thirdly, the provisions of Article VII (1) of the FCN Treaty (cf., e.g.,
Denmark-United States, Art. IX (3), (4), (5); Japan-United States, Art. IX
(2); Fed. Rep. of Germany-United States, Art. IX (2); Netherlands-United
States, Art. IX (2)) cannot be interpreted as granting to foreign
shareholders the right "to acquire, own and dispose of immovable property
or interests therein" ("beni immobili o ... altri diritti reali" in the
Italian text), which right is made solely available to a company.
Finally, the provisions of Article I of the Supplementary Agreement do not
provide foreign shareholders with any special protection against the host
country. It is the company, but not its shareholders, that is protected
against any "arbitrary or discriminatory" measures by the host country (cf.,
inter alia, Denmark-United States, Art. VI (4); Japan-United States, Art. V
(1); Fed. Rep. of Germany-United States, Art. V (3); Netherlands-United
States, Art. VI (3)). In fact, whatever measures were deemed necessary to
be taken by virtue of the requisition order of the Mayor of Palermo on 1
April 1968, it was ELSI, a company, not Raytheon and Machlett, its
shareholders, that was subjected to the allegedly "arbitrary or
discriminatory" measures by the Italian authorities.
Can it be presumed that any of these rights guaranteed to United States
corporations under the 1948 FCN Treaty (which rights the Judgment
extensively expounds in paragraphs 64-135) are relevant to those of Raytheon
and Machlett as shareholders of ELSI? The Treaty guarantees the right of
United States corporations to hold as much as 100 per cent of the stock of
an Italian company. Yet there is no reason to interpret the [p 89] FCN
Treaty as having granted to those nationals or corporations of one State
party that hold shares in a corporation of the other State party any further
rights in addition to those to which the same shareholders would have been
entitled under Italian law as well as under the general principles of
company law.
III
The real issue in the present case relates to ELSI as an Italian
corporation controlled by United States corporations (Raytheon and
Machlett) or as an enterprise in Italy in which those United States
corporations had a substantial interest. If the FCN Treaty is to afford
protection to the investments of nationals of one State party in the
territory of another State party, this cannot be done by means of the
provisions listed above. There are, however, certain provisions in the FCN
Treaty which are specifically designed to protect the interests of United
States corporations possessing stock or a substantial interest in an Italian
corporation or enterprise or, more concretely, the interests of Raytheon and
Machlett (United States corporations) as shareholders of ELSI (an Italian
company):
(a) "[Italian] [corporations ... organized or participated in by ... [United
States] corporations ... pursuant to the rights and privileges enumerated
in this paragraph, and controlled by such ... corporations ... shall be
permitted to exercise the functions for which they are created or organized,
in conformity with the applicable laws and regulations, upon terms no less
favorable than those now or hereafter accorded to corporations ... that are
similarly organized or participated in, and controlled, by... corporations
... of any third country." (Art. III (1), second sentence.)
(b) "[Italian] [corporations ... controlled by ... [United States]...
corporations ... and created or organized under the applicable laws and
regulations within [Italy] shall be permitted to engage in [commercial,
manufacturing] activities therein, in conformity with the applicable laws
and regulations, upon terms no less favorable than those now or hereafter
accorded to [Italian] corporations ... controlled by ... [Italian]
corporations ..." (Art. III (2), second sentence.)
(c) "[I]n all matters relating to the taking of privately owned enterprises
into public ownership and the placing of such enterprises under public
control, [Italian] enterprises in which ... [United States] corporations ...
have a substantial interest shall be accorded, within [Italy], treatment no
less favorable than that which is or may hereafter be accorded to similar
enterprises in which... [Italian] corporations ... have a substantial
interest, and no less favorable than that which is or may hereafter be
accorded to simi-[p 90]lar enterprises in which ... [any third country's]
corporations .. .have a substantial interest." (Art. V (3), second
sentence.)
Such provisions are not unique to this FCN Treaty but are also found in
others (cf. Denmark-United States, Arts. VI (5), VIII (2); Japan-United
States, Arts. VI (4), VII (1), (4); Fed. Rep. of Germany- United States,
Arts. V (5), VII (1), (4); Netherlands-United States, Arts. VI (5), VII (1),
(4); etc.).
Article III (1) provides in casu that the Italian company (ELSI) that was
"organized or participated in" and "controlled" by United States
corporations (Raytheon and Machlett) was to be permitted to exercise the
functions for which it was created or organized upon terms no less
favourable than those accorded to corporations that were "organized or
participated in" and "controlled" by corporations of any third country.
Article III (2) provides in casu that the Italian company (ELSI) that was
"controlled" by United States corporations (Raytheon and Machlett) was to be
permitted to engage in commercial, manufacturing or other activities in
Italy in conformity with the applicable laws and regulations upon terms no
less favourable than those accorded to Italian corporations controlled by
Italians.
Article V (3) provides that in all matters relating to the taking of
privately owned enterprises into public ownership and the placing of such
enterprises under public control, an enterprise in Italy (ELSI), in which
United States corporations (Raytheon and Machlett) had a substantial
interest, was to be accorded treatment no less favourable than that
accorded to those enterprises in which Italian corporations or any third
country's corporations had a substantial interest.
These three provisions are extraordinary provisions, intended to ensure that
a firm such as ELSI can still be protected in Italy by the Treaty, despite
the fact that it is an Italian company operating in that country. Yet they
were ignored by both Parties in the proceedings and the Judg-ment contains
scarcely any reference to them.
*
It is a great privilege to be able to engage in business in a country other
than one's own. By being permitted to undertake commercial or manufacturing
activities or transactions through businesses incorporated in another
country, nationals of a foreign country will obtain further benefits. Yet
these local companies, as legal entities of that country, are subject to
local laws and regulations; so that foreigners may have to [p 91]accept a
number of restrictions in return for the advantages of doing business
through such local companies.
The Italy-United States FCN Treaty, like some other FCN treaties as
mentioned above, nonetheless guarantees security to local companies in which
nationals of the other State party have invested, inasmuch as it provides
that they must, by virtue of Article III (1) (second sentence), be given
treatment no less favourable than that afforded to local companies
"organized or participated in" and "controlled" by third-country companies
while, by virtue of Article III (2) (second sentence), they are to be given
treatment no less favourable than that afforded to local companies
"controlled" by local nationals.
Moreover, in matters relating to the "taking of ... enterprises into public
ownership and the placing of ... [them] under public control" (Art. V (3),
second sentence), that Treaty also guarantees special protection to
enterprises in which the corporations of the other State party have a
substantial interest. In this respect I would like to point out, as a
supplementary explanation, that the verb "take", as expressed by
"espro-priare" in the Italian text, is rendered in the 1956 FCN Treaty
between the Federal Republic of Germany and the United States by the German
verb "enteignen", which militates against the acceptance of an
interpretation of the requisition order of the Mayor of Palermo as
amounting to a "taking" of property.
Such local companies or enterprises have dual characteristics in that they
are both local corporations or enterprises and, at the same time,
corporations specifically controlled by nationals (corporations) of the
other State party to the FCN Treaty or enterprises in which those nationals
(corporations) have a substantial interest. In view of these
characteristics, the State party under whose law the company in question is
incorporated is responsible to the other State party for guaranteeing that
company's right to exercise the functions for which it was created, on the
basis of the mostfavoured-nation treatment, or to engage in its business
transactions, on the basis of the national treatment; and the State party on
whose territory the enterprise is located is responsible to the other State
party for affording special protection to that enterprise in the event of
its being placed under public control.
*
One could well be led to wonder whether a foreign country (the United
States) whose nationals practically controlled the corporation (ELSI) of the
host country (Italy) or had a substantial interest in the enterprise (ELSI)
in that host country could in fact espouse the cause of that com-[p92]pany
in a dispute with the latter country. This question brings one up against a
paradox.
However, I believe that, by availing itself of Article III (1) (second
sentence), Article III (2) (second sentence) and Article V (3) (second
sentence) of the 1948 FCN Treaty (which provisions, as I repeat, are not
unique to this Treaty), the United States could properly have espoused the
cause of ELSI, an Italian company, against the Italian Government. This is
why I have referred to these provisions of the FCN Treaty as
"extraordinary" and why I believe that the complaint against Italy should
have been presented to the Court only in reliance on those provisions which
alone protect the interests of United States nationals (Raytheon and
Machlett), as shareholders, albeit in an indirect way. The United States
failed, however, to frame its Application along those lines, while
non-relevant provisions were repeatedly invoked.
To recapitulate, ELSI (an Italian company) and, later, its trustee in
bankruptcy, brought municipal legal proceedings to challenge the
requisition order of the Mayor of Palermo. It took its case to the highest
court in Italy and is accordingly considered to have exhausted all available
municipal remedies. Thus the United States could have espoused the cause of
ELSI on the grounds of "denial of justice" if the judgment of the domestic
court of Italy at the highest level had been found to be "manifestly unjust"
in its application of the FCN Treaty.
Neither ELSI, nor its trustee in bankruptcy acting on its behalf, so much as
invoked the FCN Treaty in those municipal proceedings. (The assertion that
the FCN Treaty is non-self-executing could not have been used by ELSI as an
excuse for failure to invoke it before the municipal courts of Italy, since
enabling legislation had been enacted in that country.) Nor has evidence
been brought by the Applicant to show that, as a consequence of the
requisition order of 1 April 1968, ELSI received less favourable treatment
than any other Italian corporation controlled by nationals of any third
country in exercising its functions, or less favourable treatment than that
afforded any Italian corporation controlled by Italians; again, supposing
that the present case relates to an enterprise placed under public control,
no evidence has been brought to show that ELSI was accorded less favourable
treatment than any other enterprise.
IV
In conclusion, it appears to me that some arguments employed in this case
which has been brought to the Court by the Applicant in an espousal of the
cause of Raytheon and Machlett are, unfortunately, based upon a
misconception of the provisions of the 1948 FCN Treaty.
Even if the present proceedings had been brought in an espousal of [p
93]ELSFs cause, by applying the proper provisions which guaranteed ELSI the
most-favoured-nation treatment or national treatment, the Applicant would
have had to provide sufficient evidence to show that ELSI had been denied
justice in the Italian courts. It has failed to do so.
(Signed) Shigeru Oda
[p 94]
Dissenting opinion of judge Schwebel
The Judgment of the Chamber in my view is sound in two paramount respects
which have important implications for the vitality and growth of
international law in the areas of its concern.
First, the Judgment applies 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 in the particular case
was not in fact played out. It has of course long been of the essence of the
rule of exhaustion of local remedies that local remedies need not be
exhausted where there are no effective remedies to exhaust. It may be said
that the Chamber has done no more than to reaffirm this established element
of the rule. In fact it has reaffirmed it, but in doing so the Judgment
makes a contribution to the elucidation of the local remedies rule by
indicating that, where the substance of the issues of a case has been
definitively litigated in the courts of a State, the rule does not require
that those issues also have been litigated by the presentation of every
relevant legal argument which any municipal forum might have been able to
pass upon, however unlikely in practice the possibilities of reaching
another result were. The United States of America submitted that the claims
brought by it were admissible since "all reasonable" local remedies had been
exhausted; in substance, the Chamber agreed, and rightly so. Its holding
thus confines certain prior constructions of the reach of the rule of
exhaustion of local remedies to a sensible limit.
Second, the Judgment largely construes the Treaty of Friendship, Commerce
and Navigation between the United States and Italy in ways which sustain
rather than constrain it as an instrument for the protection of the rights
of the nationals, corporations and associations of the United States in
Italy and the rights of nationals, corporations and associations of Italy in
the United States. Arguments were pressed on the Chamber which, if accepted,
would have deprived the Treaty of much of its value. In particular, it was
maintained that the Treaty was essentially irrelevant to the claims of the
United States in this case, since the measures taken by Italy (notably, the
requisition of ELSI's plant and equipment) directly affected not nationals
or corporations of the United States but an Italian corporation, ELSI,
whose shares happened to be owned by United States corporations whose
rights as shareholders were largely outside the scope of the protection
afforded by the Treaty. The Chamber did not accept this argument. Nor did
it accept the contention that the right to organize, control [p 95] and
manage a corporation was limited to the founding of a company and the
election of its directors and did not include its continuing management;
nor that the right to control and manage was unaffected by the requisition
of that corporation's plant and equipment. Nor did the Chamber find it
necessary to take a position on the claim that the terms of the Treaty must
be narrowly construed to embrace an expropriation but not a taking (it
rather holds that "this question" does not "have to be resolved in the
present case"). These and other preclusive constructions of the Treaty for
the most part were put aside by the Chamber.
Moreover, the Chamber's Judgment does not impair the principle of "the most
constant protection and security for... persons and property" which the
Treaty prescribes, and the Treaty's provisions for "the prompt payment of
just and effective compensation" for the taking of foreign property are left
intact. The meaning of "just and effective compensation" put forth by the
United States was not questioned. The United States maintained that, when a
State deprives a foreign national of property rights in a business
enterprise, "compensation should be based on the full value of the
business". Normally, the United States pointed out, the value of a business
takes into account its future earnings potential, but, in this case, the
United States made no claim for future profits since ELSI was not
profit-making. Given the fact of ELSI's requisition as long ago as 1968, and
the contention of the United States that that requisition prevented ELSI's
orderly liquidation, the United States proposed the book value of ELSI as of
that time as the measure of its value, while taking care to emphasize that
the United States does not in general view book value as a fair measure of
the value of an ongoing enterprise, that, indeed, book value is widely
rejected as a sufficient measure of the value of a business enterprise.
While these principles went unchallenged, Italy maintained not only that
ELSI was deprived of no rights under the Treaty but that in any event it
was, in view of its condition, worth far less than book value.
In short, the pertinent provisions of the Treaty have been largely
interpreted to give them effect rather than to deprive them of effect. The
claims of the United States in this case have not been sustained, but that
is not because the Chamber has found against the United States on the law of
the Treaty; it has found against the United States on the practical and
legal significance to be attached to the facts of the case.
I do not share all of the Chamber's findings, particularly in two salient
respects. While agreeing with the Chamber's indication that, prima facie,
the requisition of ELSI's plant appears to have deprived Raytheon and
Machlett of their entitlement under Article III of the Treaty to "control
[p 96] and manage" ELSI, I do not agree with the Chamber's conclusion that
nevertheless Article III was not violated because, by the time of the
requisition, its rights of control and management no longer existed either
because the feasibility of an orderly liquidation of ELSI's assets by ELSI
at that time has not been sufficiently established or because ELSI's state
of insolvency by then entailed an obligation on ELSI to have petitioned for
its bankruptcy. Furthermore, I do not share the Chamber's conclusion that
the requisition was not an arbitrary act which violated the provision of
Article I of the Treaty's Supplementary Agreement providing that the
nationals and corporations of the parties "shall not be subjected to
arbitrary ... measures". I concur in the Chamber's classic concept of what
is an arbitrary act in international law, but I disagree with its appraisal
of the order of requisition and with its interpretation of the pointed
holdings of the Prefect and the Palermo Court of Appeal.
Before explaining why I believe these conclusions of the Chamber to be in
error, it may be useful to set out certain broader considerations of the
purposes and purport of the FCN Treaty to which the Chamber has in my
opinion paid insufficient attention.
The Integral Character of the Treaty and its Supplement
A treaty, in the words of Article 2 of the Vienna Convention on the Law of
Treaties, may be embodied "in a single instrument or in two or more related
instruments". The Treaty of Friendship, Commerce and Navigation between the
United States and Italy consists of a treaty, protocol, additional protocol,
and exchanges of notes signed on 2 February 1948, which, in the case of the
protocols, expressly provide that they "shall be considered as integral
parts of said Treaty", as well as an Agreement Supplementing the Treaty of
Friendship, Commerce and Navigation between the United States and Italy
signed on 26 September 1951, which equally provides that it shall
"constitute an integral part of the said Treaty ...".
Because of the content of the customary law of treaties reflected in the
quoted provision of the Vienna Convention, because of the express
provisions of the treaty instruments just quoted, and because of the
meaning of the term "integral", i.e., composed of constituent parts making a
whole, it is clear that the FCN Treaty and its Supplementary Agreement must
be read together as the integral whole which they are proclaimed to be. The
Chamber recognizes this conclusion (though counsel for the Respondent
maintained that Italy did not). The Chamber could hardly do otherwise. It
itself is a creature of a treaty, its Statute, which, the United Nations
Charter provides, "forms an integral part of the present Charter". It would
be hard to conceive of an argument that nevertheless the Statute and Charter
[p 97] are not to be interpreted together, as a single instrument forming an
integral whole, and harder still to imagine that the Court could accept such
an argument.
The Circumstances and Intentions of the Treaty and Supplement
In its pleadings, Italy relied upon the rules of treaty interpretation set
forth in Article 31 of the Vienna Convention on the Law of Treaties as
reflective of customary international law, a position which was not
questioned by the United States. Article 31 provides that, "A treaty shall
be interpreted in good faith in accordance with the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its
object and purpose." It provides that "The context for the purpose of the
interpretation of a treaty shall comprise, in addition to the text, ... its
preamble ..." It specifies that there shall be taken into account, together
with the context, "any subsequent agreement between the parties regarding
the interpretation of the treaty or the application of its provisions". And
it provides in Article 32 that:
"Recourse may be had to supplementary means of interpretation, including the
preparatory work of the treaty and the circumstances of its conclusion, in
order to confirm the meaning resulting from the application of article 31,
or to determine the meaning when the interpretation according to article
31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable."
In the current case, the Parties attached radically different
interpretations to the provisions of the Treaty and its Supplementary
Agreement which were at issue between them. It is undeniable that, when
their conflicting arguments are matched together, the meaning of some of the
Treaty's provisions are ambiguous or obscure; indeed, each of the Parties
maintained that the opposing interpretation led to results which, if not
manifestly absurd, were unreasonable. Thus, according to the Vienna
Convention, this is a case in which recourse to the preparatory work and
circumstances of the Treaty's conclusion was eminently in order.
What were the circumstances of the conclusion of the Supplementary Agreement
which forms an integral part of the Treaty itself? And what does the
Treaty's preparatory work and processes of ratification demonstrate its
purpose, or a paramount purpose of the Treaty, to be and what light do those
processes shed on the interpretation to be attached to its provisions?
According to the content of the relevant Italian parliamentary proceed [p
98]ings placed before the Chamber — proceedings which contain authentic
evidence of the intentions of the Parties in concluding the Treaty and its
Supplementary Agreement — Italy proposed conclusion of the Supplementary
Agreement in order to meet the ascertained requirements of American
investors for capital investment in Italy. The Italian Official Gazette
reports, in respect of a Bill for the Ratification and Implementation of
the Supplementary Agreement, that the purpose of the Agreement was to
encourage "inflows of private capital investment into Italy" and "to create
a situation in which foreign investment is secure ..." (Counter-Memorial of
Italy, Annexes, Doc. 9, pp. 1,2.) It continues:
"And since 'foreign investment' today means, above all, investment from the
United States, we deemed it advisable to remove any obstacle to the inflow
of private American capital by concluding a special agreement ... we now
have a much clearer idea of what American investors are looking for, and
realize the need for a special treaty..." {Ibid., p. 3.)
The report continues that the needs of American investors include:
"protection of the rights of the American companies ... in the companies in
which they invest; possibility of repatriating invested capital ...
guarantees against discrimination; guarantees against political risks;..."
(ibid., p. 4).
"What was therefore required was to guarantee the American investors of any
of the aforementioned conditions not already guaranteed, as far as
possible, while at the same time protecting Italian interests, above all by
... obtaining direct, long-term as opposed to speculative, productive
investment." (Ibid.)
The Supplementary Agreement furthermore was intended "to offer investors
the maximum freedom of choice in respect of the companies ... in which they
have a financial holding ..." (ibid., p. 6).
In the debate in the Chamber of Deputies on ratification of the
Supplementary Agreement, the spokesman of the Government observed that the
first part of that Agreement "is certainly the most important" in referring
inter alia to investors' "free transfer of capital ... and their freedom to
manage the companies which these natural or legal persons establish or
procure" (ibid., Doc. 11, pp. 20-21). One of the forms of American
investment which the Agreement was designed to foster is "setting up an
industrial plant in Italy under the direct control of the American parent
companies ..." (ibid., p. 24).
The Report to the Senate of Italy summarized the Supplementary Agreement as
having the following content:
"The ruling out of any discriminatory treatment or arbitrary measures to the
prejudice of citizens, juridical persons, or asso-[p 99]ciations of Italy
or of the United States which operate within the territory of the other
State, the possibility of unobstructed control of enterprises, the most
liberal possible treatment assured for the transferability of capital,
[and] the fiscal concessions are all principles which, suitably
supplementing those contained in the Treaty of Friendship ... aid the
Italian economy [in particular], insofar as they are aimed at favoring the
investment of U.S. capital in Italy." (Memorial of the United States, Annex
89, p. 4.)
The Report of the Secretary of State of the United States which was
transmitted to the United States Senate in connection with its advice and
consent to ratification of the Supplementary Agreement similarly described
the Agreement as containing "amplifications" of the Treaty which, "by
rounding out the comprehensive rules governing general economic relations
established by that treaty, further encourage private capital investments"
(ibid., Annex 88, p. 2).
The truly complementary character of the Supplementary Agreement — the fact
that it was designed to "further" encourage investment of private capital
which the Treaty as concluded in 1948 was (among other purposes) designed to
encourage — was made clear in the process of rati-fication of that Treaty.
Thus the Report of the Committee on Foreign Affairs and Colonies of the
Senate of Italy of 28 May 1949 states, in favouring ratification and
implementation of the Treaty, that it took account of the Italian economy's
"urgent need of foreign capital investment" (Counter-Memorial of Italy,
Annexes, Doc. 7, p. 10). The Report observes that, by its terms, the United
States have
"above all attempted to protect themselves ... against the possible onset of
discrimination against their interests and possible exclusions or
limitations of activity in the Italian market" (ibid., p. 14).
The Report summarizes the most important initial articles of the Treaty as
granting "Full rights... to organize, direct, and control companies... and
to enjoy protection from undue interference ..." (Ibid., p. 7.) Among the
Treaty's underlying principles, the Report states, is "in any case fair
play" (ibid., p. 4).
The Chamber's Judgment quotes the articles of the Treaty and the
Supplementary Agreement at issue between the Partiea. It may be added that
the Preamble to the Supplementary Agreement speaks not only of the parties'
desire to give "added encouragement to investments of the one country in the
other country", but also speaks of "the contribution which may be made
toward this end by amplification of the principles of equitable treatment
set forth in the Treaty ...". Article III of the Supplementary Agreement
further prescribes, "Regarding the transferability of capital invested by
... corporations of either High Contracting Party in the territories of the
other ... the most liberal treatment practicable." And Article V provides
that:
"there shall be applied to the investments made in Italy the regula-[p
100]tions covering the special advantages set forth in the fields of
taxation, customs and transportation rates, for the industrialization of
Southern Italy...".
It should be noted that, in the entire, lengthy, detailed and repeated
consideration of the ratification of the Treaty and its Supplementary
Agreement by Ital), and its apparently effortle3s consideration by the
United States, no trace of support may be found for the interpretation that
the manifold rights so assured to an American investor in Italy and an
Italian investor in the United States were conditioned upon investment being
made in a corporation of the investor's nationality. On the contrary, it was
assumed and indicated that the foreign investor shall enjoy the benefits of
the Treaty and its Supplement, whether he invests in a corporation of his or
the other party's nationality. Thus the Supplementary Agreement was meant to
guaranty the protection "of the rights of American companies ... in the
companies in which they invest"; it was intended to offer investors "the
maximum freedom of choice in respect of the companies ... in which they have
a financial holding"; it was designed to provide for investors' "freedom to
manage the companies" which they "establish or procure", and one of the
forms of American investment was to be "setting up an industrial plant in
Italy under the direct control of the American parent companies...".
From the terms of the Treaty and its Supplementary Agreement, and in the
light of the intent of those terms as that intent is shown by the quoted
excerpts from the processes of the ratification of those instruments, it
follows that Raytheon, in investing so heavily in ELSI, did so within a
treaty framework which entitled it to expect that:
- it (and ELSI) would enjoy "the principles of equitable treatment set forth
in the Treaty" ("in any case fair play");
- it (and ELSI's management) would enjoy "full rights" to organize, to
direct, and to control ELSI; i.e., they would enjoy "freedom to manage" ELSI
and "unobstructed control" of ELSI and "the maximum freedom of choice" in
respect of ELSI;
- it would enjoy "the most liberal treatment practicable" in respect of the
repatriation of its invested capital;
- it (and ELSI) would be "guaranteed against political risks"; and
- ELSI would have the benefit of the application to it of the regulations
implementing the special advantages respecting taxation, customs and
transportation rates for the Mezzogiorno.
The Violation of Raytheon's Right to Control and Manage ELSI
The pivot of the Chamber's conclusion that Italy does not stand in
violation of Article III of the Treaty is that, at the time of the issuance
of the order of requisition, the right to control and manage ELSI was no
longer [p 101] in the hands of ELSI's directors or shareholders but should
have been in the hands of a trustee in bankruptcy. The Chamber is correct in
saying that the "core claim" advanced by the United States is that the
requisition of ELSI was in breach of the right of Raytheon and Machlett to
control and manage ELSI and, as a fundamental incident of such control and
management, to liquidate its assets. Is the Chamber equally correct in
concluding, because of the practicalities of ELSI's financial situation and
the legalities of Italian bankruptcy practice, that Raytheon and Machlett in
any event were no longer able, as of the date of the requisition, to
exercise control and management of ELSI and thus were deprived of no right
by an act that otherwise appears to be in breach of Article III of the
Treaty?
I believe that this cardinal conclusion of the Chamber's Judgment is
incorrect, for the following reasons:
First, it is clear, and accepted by the Chamber, that ELSI was closely
advised at all relevant times both as to its increasingly precarious
financial situation and the legal consequences of that situation. It and its
shareholders acted not in disregard of accounting and legal advice but in
accordance with it. The management and shareholders of ELSI were not
advised, before the requisition took place, that ELSI was in a financial or
legal state of insolvency and that it was therefore required to petition in
bankruptcy or otherwise surrender control and management of ELSI. On the
contrary, they were advised that ELSI, having regard to its financial
situation and the requirements of Italian law, was entitled, as of March
1968, to engage in a liquidation of its assets, in a process to be managed
by ELSI itself. This is of course not a decisive consideration, but it is a
relevant consideration.
Second, in point of fact, as of the day of the requisition, 1 April 1968, no
legal or practical steps had been taken to withdraw the right of control and
management from ELSI's directors or shareholders and place it in other
hands. Not only was ELSI apparently not in default; not only had ELSI most
deliberately not petitioned for bankruptcy; no creditor or public authority
took any step to force it into bankruptcy.
Third, in the months, weeks and days before the requisition, negotiations
to prevent or forestall the closing of ELSI's plant and the dismissal of its
workforce took place between the officers and shareholders of ELSI, on the
one hand, and officials of the Government of Italy and of Sicily on the
other. Those negotiations were not casual and routine. On the contrary,
intensive negotiations involved not only lesser officials of the Italian
Government but very senior officials, including the President of Sicily,
Ministers of the central Government, and the Prime Minister of Italy
himself. The Government of Italy was emphatically and graphically informed
of the financial condition of ELSI and of the decision of its shareholders
[p 102] not to invest further capital in its operations. The facts in these
regards are summarized in paragraphs 26 to 28 of the Judgment of the
Chamber; as the Judgment recounts, Italian authorities nevertheless
continued to press ELSI not to close the plant and not to dismiss the
workforce as late as 29 March 1968. ELSI was officially warned that, if the
plant were to be closed, it would be requisitioned. Even after the
requisition of the plant, Italy officially exerted extreme pressure upon
ELSI to re-open it, the President of Sicily going so far in a written
memorandum as to predict or threaten that liquidation of ELSI would be
"absolutely impossible" as long as "the plant is closed". Far from taking
the position that ELSI was obligated, by reason of its financial position
and the requirements of Italian law, to have petitioned in bankruptcy
before the date of the requisition, 1 April 1968, the President of Sicily
as late as 19 April 1968 pressed ELSI precisely not to go into bankruptcy.
Not only, he warned, would bankruptcy "morally blacken Raytheon's name in
Italy and in Europe"; not only would bankruptcy "now" produce for Raytheon
"nothing for the assets" and require Raytheon "to pay all the debts"; the
Italian banks would force Raytheon eventually to pay ELSFs bank debt and in
the meantime would block any foreign exchange permits for transfer of
royalties to Raytheon earned by another Italian company in which it had
shares, Selenia (Memorial of the United States, Annex 37, pp. 2, 3; Annex
38, pp. 1, 2). On the other hand, if ELSI were to re-open the plant, and if
Raytheon were to co-operate with a provisional management company to be
organized by IRI and the Region of Sicily, they would be
"ready to help Raytheon in the meantime to liquidate ELSI through a useful
sale in the shortest possible time ... taking into account the fundamental
objective of Raytheon which remains after all the liquidation".
The Prime Minister of Italy, the President of Sicily, and the Ministers
concerned of the Government of Italy, presumably acted, and surely must be
presumed to have acted, in accordance with the law of Italy. They were aware
of ELSFs large debts to Italian banks; they had been informed that ELSI had
run out of money and consequently was about to close, or had closed, the
plant. Far from indicating that ELSI was obliged to petition in bankruptcy
or otherwise surrender control and management, far from indicating that the
time for liquidation had passed, far from acting in accordance with such an
understanding of the facts or of the law of Italy, they pressed its
management to keep the plant open, to employ or reemploy the workforce, to
maintain or resume production. That is to say, whether the experts on
Italian law presented by Italy in this case are right as to the requirements
of Italian law, or whether the experts on Italian law presented by the
United States in this case are right as to those require-[p 103]ments, it
is clear that the "living law" of Italy as of the time of the requisition
was inconsistent with the pleading of Italy in the current case and with the
acceptance of that plea by the Chamber. Should Italy in 1989 be heard to
maintain the opposite of what the highest officials of its Government
maintained in 1968? Is the Chamber on sound ground in pivoting its Judgment
on such tremulous terrain?
Fourth, not only does the Chamber's cardinal conclusion conflict with the
construction of Italian law by Italy's most senior officials at the critical
time, it is not fully consistent with the holding of the Court of Appeal of
Palermo on which the Chamber relies. That Court, as does the Chamber,
concluded that ELSI's bankruptcy was caused not by the requisition but by
its prior state of insolvency, finding that "the Company's state of
insolvency was decisive and sufficient cause for its failure (Art. 5,
Bankruptcy Law)". But did the Court of Appeal of Palermo consequently
conclude or imply that ELSI or its shareholders did not enjoy the right to
control and manage ELSI or enjoy other rights of ownership by reason of its
insolvency immediately prior to the Mayor's intervention and hence were
deprived of no such rights by the requisition? Not at all. On the contrary,
not only did the Court of Appeal accept that it was "probable that the
bankruptcy was requested by the Company itself with the intention of getting
out of the very serious situation of operational unavailability created by
the requisition". It held (overturning the lower court in this regard) the
appeal:
"to be justified as regards the damages derivable from the operational
unavailability of the installation, plant and equipment which are the
subject of the requisition order, as a result of the execution of that
order".
It accordingly awarded damages for this incident of the requisition, a
requisition which it repeatedly characterized as "unlawful". There is ample
room to question whether those damages were adequate, but that is beside the
immediate point, namely, that the reasoning and conclusion of the Court of
Appeal of Palermo in this regard appear to be inconsistent with the
Chamber's central reasoning and conclusion. To be sure, the question of
depriving ELSI or its shareholders of their right to control and manage ELSI
was not the question at issue before the Court of Appeal. The question
rather was, what "damages" — and it is significant that the Court employed
the very term "damages" ("danni") — were due to ELSI or its representative
(the trustee in bankruptcy) by reason of a requisition of its plant and
equipment which had been found to be unlawful? The Court of Appeal held that
"damages" were due for the period in which the plant and its equipment were
not available to ELSI or its representative but were operationally
unavailable by reason of the requisition. Thus the Court of Appeal imported
that ELSI or its representative continued as of the date of the requisition
and thereafter to have possessory rights in [p 104] ELSFs plant and
equipment of which they had been deprived by the requisition despite its
finding of ELSI having been insolvent before the requisition took place. If
the Court of Appeal saw ELSI as deprived of no right by the requisition
because such right had been dissolved by the prior fact of insolvency and
its effects in Italian law, how could it have awarded what is described as
"damages" deriving from the requisition?
Fifth, not only did the experts called by the Parties differ in their
financial analyses and legal conclusions: the experts of Italy differed
between themselves. So uncertain was the insolvency of ELSI as of the date
of the requisition that the expert on accountancy who testified for Italy
maintained that ELSI was then "on the verge of insolvency" — but not
insolvent (at least, in practical terms). This was no slip of the tongue.
In his prepared statement to the Chamber of the Court, that expert stated
that ELSI "was on the verge of insolvency well before the requisition of the
plant on 1 April 1968". He was closely questioned on this statement by the
Chamber. He maintained that "the company, at 31 March, was on the verge of
insolvency". The President of the Chamber persisted: "But I think that the
point is this: was it insolvent, or not? Because it is one position to be on
the verge of insolvency, and another to be insolvent." Italy's expert
replied:
"Insolvency is a situation — in French it is 'cessation de paiements'—
where the company cannot pay its liabilities as they fall due. Now, it can
be that a supplier does not press for payment, enabling the company to pay
off other suppliers earlier and, therefore, the insolvency situation, while
technically the company is insolvent, may be prolonged because of the
business life of the company. 'Un etat de cessation depaiements'can exist,
but until one has gone to the court and actually declared that the company
is insolvent, the company can still continue business — which I think was
the case of ELSI."
Italy further introduced into evidence a letter of 9 May 1968 (i.e., after
ELSI had filed for bankruptcy) written by the Mayor of Palermo to the
Director General of the Nato Hawk Management Office in Paris. In speaking of
the "irreplaceable" value of ELSI to Sicily's economic life because of its
"equipment, facilities, highly skilled labour, a management staff, domestic
and foreign commercial relationships ...", the Mayor described
Raytheon-Elsi's decisions to close the plant and dismiss the workforce as
"more like an extreme effort to exert pressure on the central and regional
government organs to get the partnership requested rather [p 105]than like
an absolute need arising from an irreversible corporate situation"
— a statement which is inconsonant not only with Italian counsels'
depreciation of ELSI's assets but inferentially with the conclusion that
ELSI was insolvent in March 1968 and that its bankruptcy was inevitable.
Sixth, and most important, the question of whether ELSI was insolvent as of
1 April 1968 in the last analysis depended upon the policy of its principal
shareholder, Raytheon. Raytheon had and has very ample resources relative to
those at stake in ELSI. It certainly could have paid all of ELSI's debts and
resolved any question of ELSI's insolvency. It cannot be maintained that
Raytheon's policy was to pay all of ELSI's debts. If Raytheon had been
prepared to continue to pour capital into ELSI, the question of its
liquidation would not have arisen. ELSI's financial difficulties came to a
head when Raytheon informed it that it was no longer prepared to invest
capital in ELSI. It is clear, in particular, that Raytheon was not prepared
to pay off the principal on loans which had been extended to ELSI which
Raytheon had not guaranteed, though it was prepared, and proved to be
punctilious in paying in full, the loans to ELSI which it had guaranteed.
But that is not at all to say that Raytheon was not ready and willing to
advance such further sums as might be required to permit an orderly
liquidation of ELSI's assets.
The United States submitted evidence, which the Chamber accepted, showing
that Raytheon had transferred to Italy fresh capital in order to pay off the
claims of small creditors. It submitted evidence, which the Chamber has
accepted, that Raytheon was prepared to purchase the out-standing accounts
receivable of ELSI for 100 per cent of their value; a purchase which would
have infused a large sum of cash into ELSI's virtually empty coffers. It
further submitted evidence, which does not appear to have been challenged,
that, in March 1968, the plant was operating (in so far as strikes
permitted) and ELSI was filling orders and that, after the end of March,
ELSI was prepared, even with its skeleton workforce, to complete
work-in-progress and outstanding orders and to realize a considerable sum
thereby. Most important of all, the United States has vigorously maintained
that Raytheon was prepared to advance the resources to ELSI required to
maintain a sufficient cash flow so that ELSI would have been enabled to
implement an orderly liquidation; and the Chamber has accepted this critical
contention.
Italy's counsel endeavoured to raise doubt about the existence of this last
policy decision of Raytheon, and argued that the Applicant's counsel had
presented this contention only at a late stage of the oral proceedings in
this case, but not at the outset of them or in its written pleadings, and
still less had this critical contention been earlier advanced, as surely it
should [p 106] have been if it were in fact justified. This argument of
Italy was unfounded, for not only had counsel for the United States made
this contention early in oral argument but the trustee in bankruptcy had
made it some fifteen years before, as is shown by the judgment of the Court
of Appeal of Palermo. That Court observed that:
"the appellant's line of argument is... the stockholders of Raytheon-Elsi,
having made good for the losses of prior years would also take action to
bring about an orderly and favorable liquidation of the Company, thus
forestalling bankruptcy, which instead had become necessary as a result of
the requisition order by the Mayor" (Memorial of the United States, Annex
81, p. 15).
It is clear that Raytheon's self-interest called for the adoption and
implementation of a policy of providing ELSI with the cash flow required to
make an orderly liquidation practicable. For one thing, the spectacle of a
Raytheon-owned company going into bankruptcy was one which a lead-ing
international corporation of the standing of Raytheon must have wished to
avoid — not at all costs clearly, but surely at some cost. Moreover, if the
liquidation had been enabled to proceed and succeed by reason of injection
of sufficient cash-flow funds, Raytheon not only would have been repaid its
fresh advances but would have avoided being called upon to pay at least some
and conceivably all of the large loans to ELSI which it had guaranteed.
Since rational corporate policy dictated Raytheon's provision of sufficient
cash flow, and since the presumption of the reasonable corporation should
apply no less than that of the reasonable man, why does it not follow that,
by the provision of cash-flow funds, together with the funds to be realized
from Raytheon's purchase of accounts receivable and otherwise, ELSI would
have been in a position to forestall bankruptcy and perhaps to have avoided
it altogether?
The Chamber's Judgment accepts the critical contention that Raytheon would
have been prepared to advance cash-flow funds while it nevertheless
concludes that, as of the time of the requisition, ELSI was insolvent or, if
not, was in any event fast slipping into bankruptcy. Why?
In my view, it reaches this inconsistent conclusion because it muddles time
factors and facts.
It is the fact that ELSI, after the requisition, petitioned for bankruptcy,
citing the requisition as its cause. That of itself hardly shows that the
requisition was the cause of the bankruptcy; the Chamber's conclusions in
this regard are clearly correct. Causation in a case such as this is a
complex matter, and the requisition can at most only have been one of a
number of causes of ELSI's bankruptcy (though it may well have been the
immediately precipitating factor). But before the requisition, ELSI had not
only not regarded itself as insolvent; not only was ELSI not seen or treated
by all the authorities of Italy with which it was intensively dealing as
being insolvent; not only had ELSI apparently not defaulted in meeting its
obligations; but ELSI was actively planning for the sale of its assets.
There was some evidence introduced of interest on the part of prospective
foreign [p 107] purchasers. If the requisition had not intervened, and if
ELSI's immediate cash-flow requirements actually had been met by Raytheon,
thus buying time in order to sell, can it really be held that ELSI would
have been forced into bankruptcy, at any rate when it was forced into
bankruptcy? Surely, or if not surely, then probably, absent the requisition,
ELSI would have been able to sell, or contract to sell, some of its assets
(in addition to all its accounts receivable, and work-in-progress and
inventory); and if it had realized on this ability, ELSI would have received
returns which were considerable. Those returns might not have been
sufficient to permit ELSI to discharge all of its liabilities as they
accrued. But if they turned out not to have been sufficient, and if ELSI at
some point had found it necessary to go into bankruptcy, or had been forced
into bankruptcy, the losses actually suffered by ELSI and its creditors
would have been materially less than they proved to be, and the sums which
Raytheon was obliged to pay to ELSI's creditors to whom Raytheon had
extended guarantees would have been materially less than they proved to be.
This is so not only because such a bankruptcy would have come later than it
actually did, absent the triggering factor of the requisition; without the
requisition, a trustee in bankruptcy would have had access to the plant and
been in a position to sell off its assets months before the actual trustee
was able to have such access because of the requisition which blocked access
for the six months that it was in force.
Moreover, if the requisition had not intervened and if Raytheon had been
permitted to proceed with supplying sufficient cash flow, there would have
been incentive for the banks in the time so bought to have reached a
settlement with ELSI. For one thing, failure to reach a settlement, if
bankruptcy ensued, would, under Italian law, have required the banks to pay
back to the trustee in bankruptcy all that ELSI had paid to the banks in the
prior year. More than that, it would have made sense for the banks to settle
for 40 or 50 per cent of what was due to them than to have precipitated
bankruptcy proceedings which eventually produced less than 1 per cent.
Arguably the banks believed that, through litigation, they would recover 100
per cent by having Raytheon held responsible for debts of ELSI which
Raytheon had not guaranteed. But under Italian law as it then was, such a
suit could succeed only if Raytheon could be shown to be ELSI's sole
stockholder. Raytheon had never been ELSI's sole stockholder. Until 1967,
substantial equity was held by other Italian corporations and, in 1967,
when Raytheon bought out that equity, care was taken to ensure that a
fraction of the stock was held not by Raytheon but by a company, Machlett,
which in turn was owned by Raytheon. Thus the outcome of litigation must
have appeared problematical and, in the event, the banks did not succeed in
Italian courts in holding Raytheon liable for ELSI's debts.
The Chamber's Judgment concludes that "the possibility" of an orderly [p
108] liquidation by ELSI "is purely a matter of speculation". I agree that
an orderly liquidation would have been beset with uncertainties, but those
uncertainties go not so much to ELSI's ability and entitlement to liquidate
its assets as to the calculability of the damages which may be found to flow
from the denial of that ability and entitlement by the requisition imposed
upon ELSI.
In my view, it is unpersuasive for the Chamber to say, in effect, that ELSI
would have gone into bankruptcy later if not sooner, and accordingly that
the requisition did not matter. It is in this respect that I believe that
the Chamber muddles what it finds to be the facts with time factors. At the
time the requisition took place, it did matter, it did have the economic
effects, or some of the economic effects, just described; and at the time it
took place, it deprived Raytheon and Machlett of their right to control and
manage and hence liquidate ELSI and it deprived ELSI of its right to be
liquidated by a management responsible to Raytheon and Machlett. Accordingly
the requisition placed Italy in violation of its obligation under Article
III of the Treaty to permit Raytheon and Machlett to "control and manage"
ELSI.
This conclusion is the more compelling when the meaning of the Treaty is
interpreted in the light of the provisions and ratification processes set
out in this opinion. Can it be said that the requisition, imposed as it was
when it was, comported with the "full rights" of Raytheon and Machlett to
"organize, direct and control" ELSI, that it comported with their
"unobstructed control" and "maximum freedom of choice" ? Was it consistent
with "the principles of equitable treatment" which the Preamble to the
Supplementary Agreement describes the Treaty as containing? Was the
requisition consonant with assuring to Raytheon "the most liberal treatment
practicable" in respect of the repatriation of its invested capital? Did it
respect "the guaranty against political risks" which the Treaty as a whole
was designed to provide ? Not in my view.
The Arbitrary Measure of Requisition
Was the measure of requisition imposed by the order of the Mayor of Palermo
upon ELSI "arbitrary" as that term is found in Article I of the Treaty's
Supplementary Agreement?
The Chamber rightly concludes that, even if the requisition did not prevent
Raytheon and Machlett from exercising "their effective control and
management" of an enterprise, ELSI, which they had been permitted to acquire
in Italy (see proviso (a) of Art. I, quoted in para. 120 of the Judgment),
and even if the requisition did not impair "their other legally acquired
rights and interests" in ELSI (proviso (b)), the question remains: was the
requisition arbitrary? In my view, for the reasons stated in the previous
sections of this opinion, the requisition did prevent Raytheon and Machlett
from exercising effective control and management of ELSI, [p 109] and it did
impair the legally acquired rights and interests of Raytheon and Machlett in
ELSI. But even if, arguendo, the question of observance by Italy of its
obligations under Article I is framed: "Was the measure of requisition
imposed by the Mayor's order arbitrary ?", that question is, it is believed,
unpersuasively answered by the Chamber.
The Chamber acknowledges that the requisition was found to be improperly
motivated by the Prefect of Palermo, and unlawful and indeed "a typical case
of excess of power" by the Palermo Court of Appeal. It nevertheless
concludes that, in these Italian administrative and judicial proceedings,
the requisition was not held to be arbitrary, in terms or in substance. It
further holds that, even if the requisition had been found in these
municipal proceedings to have been arbitrary, that would not be
determinative in international law: it would be no more than "a valuable
indication". Still relying on its interpretation of what was held in Italian
administrative and judicial proceedings, the Chamber holds that the
requisition was not arbitrary in the international legal sense, because it
was an act opposed to a rule of law rather than to the rule of law. It
defines as arbitrariness a wilful disregard of due process of law; holds
that the requisition was neither unreasonable nor capricious; and concludes
that, since the Mayor's order was made in a context of an operating system
of law and of remedies, it was not arbitrary.
The Chamber's reasoning thus turns on three propositions, all of which are
in my view unfounded: first, that the Prefect and Palermo Court of Appeal
did not find the requisition to be arbitrary; second, that the requisition,
in international law, was neither unreasonable nor capricious; and third,
that in any event the Italian processes of appeal and redress to which the
order of requisition was subject ensured that the order was not arbitrary.
These propositions will be considered in turn.
(i) The rulings of the Prefect and the Court of Appeal
The Chamber quotes from the Prefect's decision what it characterizes as "the
principal passage which is relevant" in the following terms:
"There is no doubt that, even though, from the purely theoretical
standpoint, the conditions of grave public necessity and of unforeseen
urgency warranting adoption of the measure may be considered to exist in the
case in point, the intended purpose of the requisition could not in practice
be achieved by the order itself, since in fact there was no resumption of
the company's activity following the requisition, nor could there have been
such resumption. The order therefore lacks, generically, the juridical cause
which might justify it and make it operative." [p 110]
It appears to conclude from this and other passages of the Prefect's
decision that the Mayor's order of requisition was held by the Prefect to
have been intra vires. What the Prefect held, however, was that the Mayor
relied on provisions of law which, in conditions of grave public necessity
and unforeseen urgency, entitle the Mayor to issue an order of requisition
of private property; but in this case, the Prefect found, these conditions
were present from "the purely theoretical standpoint", a finding which
appears to mean that they were not actually present.
The Chamber reaches the opposite conclusion; quoting the foregoing passage
of the Prefect's decision, it holds that the Prefect "did not find that
those conditions were absent". In my opinion, the difficulty with the
Chamber's conclusion is that — if one reads on — it emerges from the
Prefect's decision that the conditions of grave public necessity and
unforeseen urgency were indeed seen to be absent. The Prefect wrote: "Once
the competence of the Mayor has been ascertained, it is necessary to
ascertain whether in the situation there were the grounds for the exercise
of the power." (Memorial of the United States, Annex 76, p. 10.) That
statement is immediately followed by the quotation from the Prefect's
decision which has just been reproduced. The Prefect's decision then
continues:
"In fact, the Mayor believed to be able to face the situation existing in
Raytheon-Elsi's plant by means of an order of requisition, clearly without
taking into consideration the fact that the situation of the company — for
functioning-economical reason and for reason of market — was such as not to
permit the continuation of the activity, unless by means of interventions by
the responsible organs directed to solve the financial and industrial
problems of the company.
The requisition did not change anything in the situation of the company;
this is proved by the fact that neither the stopped activity was resumed,
nor, as a consequence of the order, more favorable conditions were created
in the company. On the contrary, the situation of insolvency determined the
declaration of bankruptcy of the company, with the consequence that the
plant was taken away from the disposability of the Public Administration.
It is also important to emphasize that the plant, at the time of the
declaration of bankruptcy, was not working and that the employees were
staying therein to protest for the nonresumption of the activity and for
dismissal of the whole personnel.
As far as the danger of 'unforeseeable acts of perturbation of the public
order', that the Mayor wanted to avoid by means of the requisition, are
concerned, the events subsequent to the requisition have clearly
demonstrated the inefficacy of the measure; this is proved by the fact that
the parades and demonstrations of protest followed one another, creating
also a situation of perturbation of the public order, [p 111] until the
situation was faced by responsible organs of the Government and, even
though with the delays which are unfortunately inevitable, was drawn toward
a solution." (Memorial of the United States, Annex 76, pp. 11-12.)
That is to say, after having held that, "from the purely theoretical
standpoint, the conditions of grave public necessity and of unforeseen
urgency warranting adoption" of the order of requisition "may be considered
to exist in the case in point", the Prefect goes on to examine what was the
case "in fact" and concludes (a)that the order of requisition could not
restore ELSI's plant to operation, that it could not solve the financial and
industrial problems of the company; (b) the requisition order did not in
fact cause the activities of the company which had been stopped to resume
nor did it otherwise aid ELSI; (c)the plant remained closed and occupied by
the former employees; and (d) public order was in any event disturbed,
despite the requisition: in short, that the requisition order proved
unjustified on all counts. What support do such holdings provide for the
Chamber's conclusion that the conditions of grave public necessity and
unforeseen urgency were not found by the Prefect to have been "absent"?
More than this, the essential point of the passage of the Prefect's holding
which the Chamber quotes, and which is reproduced at the outset of this
section of this opinion, is that the requisition could not achieve its
intended purposes and therefore lacked justifying juridical cause. That is
to say, the Prefect held that, since the order of requisition could not, was
incapable of, achieving what it purported to achieve, it lacked the
juridical motivation which might justify it and make it operative. That is
not far from stating expressly that the requisition was ill-motivated and
hence unreasonable or even capricious.
The Prefect's decision continues, in one translation provided by the United
States:
"We cannot refrain from stating that the order was issued — as it appears
from the same order and as it has been observed by the appellant — also
under the influence of the pressure created by, and of the remarks made by
the local press; therefore we have to hold that the Mayor, also in order to
get out of the above and to show the intent of the Public Administration to
intervene in one way or another, issued the order of requisition as a
measure mainly directed to emphasize his intent to face the problem in some
way."
The last phrase of the Prefect's decision, as quoted in the judgment of the
Court of Appeal of Palermo, is otherwise rendered in the translation of that
judgment supplied by the United States: "the Mayor... resorted to
requisition as a step aimed more than anything else at bringing out his
intention to tackle the problem just the same". The Prefect referred in this
passage to the provision of the Mayor's order which read:[p 112]
"Considering also that the local press is taking a great interest in the
situation and that the press is being very critical toward the authorities
and is accusing them of indifference to this serious civic problem..."
In respect of the foregoing passage, the following question was put to Italy
in the course of the oral proceedings:
"This holding of the Prefect appears to mean that the Mayor issued the order
not for defensible juridical reasons but as a way of showing the public that
he was doing something, whether that something was lawful or sensible or
not: he issued the order 'to show the intent of the Public Administration to
intervene in one way or another'; the order was issued as a measure 'mainly'
directed to 'emphasize his intent' to face the problem 'in any way'. Now my
question is this, is a measure taken by a public authority 'to intervene in
one way or another' with a view not towards resolving a problem — and the
Prefect held that the order could not resolve the problem — but in order to
appease press and public criticism or win public favour 'in any way' an
arbitrary measure?"
Italy in part replied:
"The answer is, that if the measure was taken solely ' "to intervene in one
way or another" ... with a view not towards resolving a problem ... but in
order to appease press and public criticism or to win public favour "in any
way"', then it probably would have been an arbitrary measure.
But, if there were other substantial and sincere motivations behind the
measure in addition to that of appeasing public opinion, i.e. 'to protect
general public interest... and public order' it would then by no means have
been an arbitrary measure."
This reply raises the question of whether a single, unseverable public act
which in part has arbitrary elements and in part has not, is arbitrary, of
whether an official act which is partially arbitrary in motivation (not to
speak of implementation, as I shall), qualifies as arbitrary.
But what were the motivations of the order of requisition? Were they, as
Italy claims, to protect the general public interest and public order? As
just indicated, those claims apparently were not upheld by the Prefect.
Apart from finding such factors to be present from "the purely theoretical
standpoint", his holding that the requisition order in fact neither
promoted the public interest nor promoted the preservation of public order
does not support the substantiality of these motivations.
It cannot be doubted that an essential purpose of the requisition was to
prevent ELSI from dispersing and liquidating its assets. This was made [p
113] perfectly plain by the statements of the President of Sicily cited
above (and see paras. 28 and 34 of the Chamber's Judgment) as well as the
Mayor's letter of 9 May 1968 which is explicit in referring to the dangers
of the "dismemberment" and "dismantlement" of ELSI. The requisition order
may well also have been designed to give an understandably concerned and
critical public opinion the impression that the Mayor was attempting "to do
something", or, as the Prefect put it, "to intervene in one way or another"
so as to show the Mayor's intent "to face the problem", to take "a step
aimed more than anything else at bringing out his intention to tackle the
problem just the same". But those are hardly justifications which show that
the act was reasonable rather than unreasonable, judicious rather than
capricious. To prevent ELSI from selling — and probably dispersing in places
other than Palermo — its assets may have seemed justifiable to the Mayor,
who, in taking this decision, gave no sign of being aware of the existence
of any rights which ELSI enjoyed under the FCN Treaty. It was not, however,
a measure which could re-open the plant, re-start full production, and put
ELSI's former workforce back to work, nor was it a precondition of Sicily's
continuing, as it did, to pay their salaries (as Italy expressly conceded).
Particularly in the context of the Treaty rights and expectations set out in
this opinion, can action designed to prevent ELSI from selling its assets
and repatriating any resultant capital be seen as other than arbitrary? The
Chamber rightly holds that the
"question of whether or not certain acts could constitute a breach of the
treaty right to be permitted to control and manage, is one which must be
appreciated in each case having regard to the meaning and purpose of the FCN
Treaty".
Shall not what is "arbitrary" under the Treaty equally be considered in each
case having regard to the meaning and purpose of the Treaty?
It is significant that the Court of Appeal of Palermo attached importance
to the holding of the Prefect which appraised the Mayor's order as one which
was responsive to press criticism and "mainly" intended to show his
willingness to intervene "in one way or another". In characterizing that
holding as "severe", and as "showing a typical case of excess of power" on
the part of the Mayor "which... is a defect of legitimacy on the part of the
administrative act", the Court of Appeal held:
"the Prefect's decree works ex tunc and not ex nunc and hence deprives the
requisition of the assets of the appealing Company, as performed by the
administration, of any justification, which is why, in any case, there
arises the problem of the damages that the Company may have suffered as a
result... it is quite evident that — when the [p 114] Prefect pointed out
that'... the ultimate goal of the requisition could not have been attained
in practice through the order itself and that '... the order generically
lacks the juridical cause that could justify it or render it operative' as
was then amply demonstrated, concluding with the severe finding that'... the
Mayor... resorted to requisition as a step aimed more than anything else at
bringing out his intention to tackle the problem just the same' — he is
obviously showing a typical case of excess of power which, as we know, is a
defect of legitimacy on the part of the administrative act ..." (Memorial of
the United States, Annex 81, pp. 13-14).
If a "typical case of excess of power" does not connote a classic case of an
arbitrary act, what does ?
The holding of the Court of Appeal is instructive in a further respect as
well. The order of the Mayor concluded: "With a subsequent decree, the
indemnification to be paid to said company for the requisition will be
established." As the Court of Appeal points out, such a subsequent decree
never was issued by the Mayor; no compensation was offered to or paid over
to ELSI for the requisition by the Italian administration. The Court of
Appeal held that:
"Now, apart from the consideration that the failure to determine this
indemnity (no authority has ever proceeded to do that although this should
have been done before the requisition came to an end), by itself would have
been enough to recognize the unlawfulness of the requisition ... one cannot
fail to stress the incongruency of denying the Company — which had been
subjected to this unlawful requisition — an indemnity which most certainly
it would have been awarded if this same action had been taken lawfully by
the administration." (Ibid., p. 19.)
The Court is doubtless correct in holding that the Mayor's failure to pay
compensation for the requisition compounded its unlawfulness. But does not
the Mayor's failure to abide by his own decree suggest capriciousness in the
process of requisition? It can hardly be seen as consistent with the due
process which is the antithesis of what is arbitrary.
(ii) The unreasonable and capricious nature of the requisition
It has, it is believed, been shown in the foregoing section that the measure
of requisition was unreasonable and capricious since, cumulatively:
- the legal bases on which the Mayor's order relied were justified only in
theory;
- the order was incapable of achieving its purported purposes; [p 115]
- the order did not achieve its purported purposes;
- the order, issued, as it specified, "also" because "the local press is
taking a very great interest in the situation and ... the press is being
very critical toward the authorities and is accusing them of indifference
to this serious civic problem", was in part designed to give an impression
of the Mayor confronting the problem "in one way or another", rather than
prescribing a measure which could have been responsive to the problem;
- the order accordingly was not simply unlawful but "a typical case of
excess of power";
- a paramount purpose of the requisition was to prevent the liquidation of
ELSI's assets by ELSI, a purpose pursued without regard to treaty
obligations of contrary tenor (and the Treaty's obligations, Italy
maintains, bound it not only externally but were self-executing
internally);
- the Mayor transgressed the terms of his own order by failing to issue a
decree for indemnification for the requisition and by failing to offer or
pay that indemnification.
By its nature, what is unreasonable or capricious is subject in a given
instance to a range of appreciation; these are terms which, while having a
sense in customary international law, have no invariable, plain meaning but
which are capable of application only in the particular context of the facts
of a case. Given the facts of this case, it is concluded, for the reasons
stated, that the order of requisition as motivated, issued and implemented
was unreasonable and capricious and hence arbitrary.
(iii) The process of appeal does not necessarily render a measure otherwise
arbitrary non-arbitrary
The weightiest reason advanced by the Chamber in support of its conclusion
that the requisition was not arbitrary may be that it was reviewed
administratively and judicially. Those review processes in this case must
enjoy every presumption of being objective, not only, if principally,
because they were processes of the application of the law of Italy through
Italian administrative and judicial procedures, but because, in the event,
they manifested objectivity, ruling in favour of ELSI's interests in
principle, even if in practice ELSI or its creditors gained little
financial satis-faction from them. To be sure, the Prefect's decision was
seriously and unjustifiably delayed, and that delay was materially
prejudicial to the interests of ELSI and its creditors. Nevertheless it
remains the fact that, in this case, Italian administrative and judicial
processes functioned. There is attraction in the argument that, since ELSI
or its representative (the trustee in bankruptcy) had access to processes of
justice, and since the procedures and results of that process cannot be seen
as tantamount to a denial of justice, that is the end of the matter, that,
even if the order of [p 116]
requisition was arbitrary and hence initially engaged Italy's responsibility
under the Treaty, that responsibility was never consummated by reason of the
fact that, in the end, ELSI's case was dealt with by Italy's internal
processes. Indeed, the conclusion that ELSI's case was dealt with is
critical to the Chamber's conclusion in this case that the requirement of
the exhaustion of local remedies was fulfilled.
Substantial as these considerations may be, I do not find them convincing,
for reasons which are best explained in the light of the International Law
Commission's proposals for codification of the law of State responsibility.
Articles 20 and 21 of the Commission's Draft Articles on State
Responsibility provide as follows:
"Article 20. Breach of an international obligation requiring the adoption of
a particular course of conduct
There is a breach by a State of an international obligation requiring it to
adopt a particular course of conduct when the conduct of that State is not
in conformity with that required of it by that obligation.
Article 21. Breach of an international obligation requiring the achievement
of a specified result
1. There is a breach by a State of an international obligation requiring it
to achieve, by means of its own choice, a specified result if, by the
conduct adopted, the State does not achieve the result required of it by
that obligation.
2. When the conduct of the State has created a situation not in conformity
with the result required of it by an international obligation, but the
obligation allows that this or an equivalent result may nevertheless be
achieved by subsequent conduct of the State, there is a breach of the
obligation only if the State also fails by its subsequent conduct to achieve
the result required of it by that obligation." ( Yearbook of the
International Law Commission, 1977, Vol. II, Part Two, p. 11.)
The Commentary to these articles explains that Article 20 concerns
international obligations which require the State to perform or to refrain
from a specifically determined action; these obligations are sometimes
called obligations "of conduct" or obligations "of means". Such obliga-tions
are to be contrasted with the obligations "of result" described in Article
21. What distinguishes the first type of obligation from the second is not
that obligations "of conduct" or "of means" do not have a particular object
or result, but that their object or result must be achieved through action,
conduct or means "specifically determined" by the international obligation
itself, which is not true of obligations "of result" (ibid., pp. 13-14). If
a State fails to perform or to refrain from a specifically [p 117]
determined action, that course of conduct of itself definitively gives rise
to its international responsibility.
Is the obligation undertaken by the parties to the Supplementary Agreement
not to subject corporations of either party to "arbitrary or discriminatory
measures" within the territories of the other "resulting particularly in" —
but not exclusively in — the detailed results set out in subpara-graphs (a)
and (b) of Article I an obligation of conduct or an obligation of result?
The particular objects of the obligation not to subject such corporations to
arbitrary or discriminatory measures are very specifically set out. But the
particular means of achieving these objects are not. Thus, in terms of the
analysis of the Commission, the obligation of Article I would seem to be an
obligation not of means but of result, as international treaty obligations
concerning the protection of aliens and their interests normally are.
Nevertheless, it does not follow in the current case that Italy is absolved
of its arbitrary treatment of ELSI and the interests of its shareholders in
ELSI by reason of the administrative and judicial proceedings which followed
the requisition.
I so conclude because, to pursue the terminology of the Draft Articles of
the Commission:
"There is a breach by a State of an international obligation requiring it
to achieve, by means of its own choice, a specified result, if, by the
conduct adopted, the State does not achieve the result required of it by
that obligation."
In the current case, Italy did not achieve the specified result, namely,
relieving ELSI of the effects of the arbitrary measure of requisition. It
did not achieve the specified result in general, or in respect of the very
particular objects set out in subparagraphs (a) and (b) of Article I.
The Commission's Draft Articles indicate that it is not enough for the
offending action of a State to be reviewed administratively and judicially.
That action must be fully corrected, "the result required" must "be
achieved". Can it be maintained that the measure of requisition imposed upon
ELSI was fully corrected by Italian administrative and judicial proceedings,
that the object of not subjecting ELSI to such an arbitrary measure was
subsequently though not initially achieved?
The Prefect annulled the order of requisition. But the Prefect did not do so
for some 16 months after its imposition. Italy in effect has maintained that
it is normal for a Prefect not to open his "in" box for 16 months, that ELSI
did not stamp its appeal "urgent", and that there is a process to activate
an inactive Prefect which ELSI did not pursue. I share the Chamber's view
that these arguments are unpersuasive. There was no convincing demonstration
that such lassitude was the norm; evidence of orders of req-[p 118]uisition
being overturned in days, not months, was introduced. ELSI's appeal was
instinct with urgency, by its nature; and ELSI's situation and position, a
principal pre-occupation of the local public and press, must have been known
to the Prefect of Palermo. By the statutory time at which the Prefect could
have been activated, ELSI was in bankruptcy and no longer able to invoke
that procedure.
The Prefect's decision was important for the reasons which appear in the
Chamber's Judgment and this opinion. But coming as late as it did, it could
not and did not provide the result which Italy's obligation not to subject
ELSI to arbitrary measures was designed to achieve. By the time 16 months
had elapsed, ELSI had long since been effectively barred from collecting 100
per cent of its accounts receivable, receiving cash-flow support from
Raytheon, completing work-in-progress and selling that work and inventory,
and soliciting the sale of and showing and selling off its plant and
equipment with a professional knowledge of its assets and their attraction
to buyers which a trustee in bankruptcy could not be expected to possess.
The Prefect would have had to have acted almost immediately — as other
Prefects in some other requisition cases had been shown to have acted — if
the requisition was to have been lifted before ELSI was forced into
bankruptcy. But he did not, and, in the light of the predictions or threats
made to ELSI and Raytheon by the President of Sicily (see para. 34 of the
Chamber's Judgment), ELSI may have had scant reason to be confident that he
would.
The Commentary of the International Law Commission cites a case in which it
has been held that "the required result could be regarded as frustrated as
soon as the law authorizing expropriation was enacted" because "the
enactment of the law seriously reduced the commercial value of the
foreigner's property" (loc. cit., p. 26). In the light of the effects just
recounted of the requisition on ELSI's situation, may it not similarly be
concluded that the required result of holding ELSI free of arbitrary
measures could be regarded as definitively frustrated as soon as the order
of requisition was applied to it because its application "seriously reduced
the commercial value" of Raytheon's interests in ELSI? The Commentary makes
clear that, in order for a State to be absolved of a breach of an
international obligation of result, of a breach which has begun or only
been adumbrated, the required result must not have become "finally
unattainable in fact by reason of that action or omission" which is
provisionally in breach (ibid., p. 28). For the reasons just set out, it may
be doubted whether the result of making ELSI whole, of fully removing the
effects of the requisition, was in fact feasible. [p 119]
In order for the obligation of result to be met in the current case, Italian
administrative or judicial recourse would, in the Commission's words, have
had "fully to achieve the required result by new conduct which eliminates
entirely and ab initio the incompatible situation created by its previous
conduct" (loc. cit., p. 28). Alternatively, it could furnish an equivalent
result, as by rendering "full and complete compensation" for the breach
(ibid., p. 29). It remains to be considered whether the judgments of the
Court of Palermo or the Court of Appeal of Palermo provided full and
complete compensation.
In the proceedings before the Court of Palermo, the trustee in bankruptcy
maintained that ELSI had been obliged to file for bankruptcy by reason of
the situation created by the order of requisition; that, even after
bankruptcy had been declared, the trustee could not take possession of the
plant and equipment due to the order which remained in effect until 30
September 1968, which caused "unimaginable damages for the bankrupt company
and, therefore, for the creditors"; that the order of requisition had been
declared illegal by the Prefect; and that the Ministry of Interior and the
Mayor of Palermo should be condemned to pay damages to the bankrupt estate
of ELSI due to the illegal occupation of the plant. Such damages were
claimed to be the considerable decrease in the value of the plant and its
equipment which resulted from the difference between book value as of the
date of the bankruptcy and the evaluation of the plant and equipment made by
the court appraiser immediately after the six-month period of requisition
had elapsed, i.e., 2,395,561,600 lire plus interest.
The Court of Palermo, after examining evidence of the financial condition
of ELSI on the eve of the requisition, and observing that by that date
ELSI's plant was for all practical purposes no longer in operation,
concluded that the connection between the company's bankruptcy and the
requisition was unfounded. It rejected the claim that damage was evidenced
by the difference in evaluations described, or arose from the lack of access
to the plant for the period of the requisition, since the bankruptcy was
due to other, much more relevant causes; the evaluations on the credit side
of the balance sheet were "relative"; and it was not proved that any damage
flowed from lack of access to the plant by the trustee or from the
occupation of the plant by workers or from negligent custody of the plant.
That is to say, the Court of Palermo provided no compensation whatever for
the requisition, because of its finding that it caused no damage whatever to
ELSI.
The substantial judgment of the Court of Appeal of Palermo has been largely
dealt with by the Chamber's Judgment and in this opinion. On the question of
damages, the Court held that:
"as regards the damages consisting in the fact that the order triggered the
Company's bankruptcy, the negative conclusion arrived at by the [p 120]
Court [of Palermo] is amply and convincingly motivated ... in any case...
there is no proof whatsoever as to the damages incurred from that
viewpoint".
The Court of Appeal attributed decisive effect to what it found to be the
prior insolvency of ELSI and held that "it is then certain that the
damages" claimed, since "they are connected to the bankruptcy", could not
be considered to exist. There was no proof of the reliability of the figures
shown in the balance sheet, nor proof that the reduction in value claimed by
the trustee was caused by the requisition. No expert could, in 1974,
establish the actual value of the plant and equipment on the date of the
order of requisition.
Nevertheless, as noted above, the Court of Appeal found the appeal to be
justified "as regards the damages derivable from the operational
unavailability of the installation, plant, and equipment which are the
subject of the requisition order ...". It held that it was indisputable
that, if the order of requisition had been lawful, it would have required
the payment of an indemnity; it was the more incongruous not to pay an
indemnity for an unlawful takeover. Deprivation of the enjoyment of an asset
is an economic sacrifice which entails indemnification if lawfully carried
out, and restitution of damage is required when it is unlawful. The
requisitioning authority was responsible at least for the payment of the
economic value of its possession of the requisitioned property. Moreover,
"the delay in the process of taking possession by the receivers delayed the
liquidation operations and hence the realization of the value of the
requisitioned property to the evident damage" of the bankruptcy assets. The
Court, "in the absence of proof as to any greater damage", equated damage to
the amount of the interest at the rate of 5 per cent per year on the value
of the requisitioned property, as that value had been determined by the
evaluator appointed by the trustee, a sum which came to 114,014,711 lire, -
plus interest to run from the date on which the requisition expired.
May the measure and amount of compensation awarded by the Court of Appeal of
Palermo be viewed as "full and complete compensation" which provides an
equivalent result to ELSI's never having been requisitioned? Surely not.
Whether or not the requisition was the cause of ELSI's bankruptcy — indeed,
accepting that it was not "the" cause — the requisition inflicted
uncompensated damage upon ELSI and its creditors, including (a) ELSI's
practical inability to sell its accounts receivable for 100 per cent of
their face value; (b) ELSI's actual inability to complete its
work-in-progress and sell that work and its inventory for their value (in
the event, work-in-progress was sold for materially less than its appraised
value); and (c) ELSI's actual inability to arrange the showing and sale of
its plant, product lines and equipment and its inability to bring to bear
its knowledge of its assets and of the industry so as to raise the maximum
return from the sale of those assets (including intangible assets).[p 121]
It cannot be supposed that the sale of the company's assets in bankruptcy
proceedings could have realized the full value of ELSI's assets. That would
have been unlikely in any bankruptcy sale; it is the less likely to have
been the case in the circumstances of the sale as it eventually took place.
For the reasons just stated, the amount awarded by the Court of Appeal of
Palermo cannot have filled the large gap between the amount realized in the
bankruptcy proceedings and the value of ELSI's assets.
It may of course be maintained that, even in the absence of the
requisition, ELSI would have gone bankrupt. That indeed is the essential
conclusion of the Italian courts and of this Chamber. But this conclusion
does not take account of the fact — or of what is believed to have been
shown in this opinion to be the fact — that, if the requisition had not been
imposed when it was imposed, ELSI would have been enabled to realize
materially more from its assets than in fact was realized, even if, at some
point, ELSI might have been obliged to go into bankruptcy.
It accordingly follows that ELSI was not placed in the position it would
have been in had there been no requisition. The equivalent result was not
attained by Italian administrative and judicial processes, however
estimable they were. Thus, in my view, those processes do not absolve Italy
of having committed an arbitrary act within the meaning of the Treaty's
Supplementary Agreement.
(Signed) Stephen M. Schwebel. |
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