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CASE NOTE  

Elettronica Sicula S.p.A. (ELSI) (United States of America v Republic of Italy) Judgment of 20 July, 1989, in ICJ Reports (1989): 15 Date of Judgment: 20 July 1989

Introduction

This landmark case, which is also known as the ELSI case, is cited in International Court of Justice Reports, as Elettronica Sicula S.p.A. (ELSI) Judgment of 20 July, 1989, in ICJ Reports (1989): 15. The Chamber was composed of Judge Ruda (as President), Judge Oda, Judge Ago, Judge Schwebel and Sir Robert Jennings.   In this particular case, the Chamber of the International Court of Justice rejected an Italian objection to the admissibility of the Application and found that Italy had not committed any of the breaches, alleged by the United States, of the “Treaty of Friendship, Commerce and Navigation between the Parties, signed at Rome on 2 February 1989 or the Agreement Supplementing that Treaty. It accordingly rejected the claim to reparation made by the United States.   The broad issue dealt with in this case was whether Republic of Italy had breached the Treaty of Friendship, Commerce and Navigation of 1948 (FCN Treaty), the Protocol and the 1951 Supplementary Agreement thereto. The Judges, except for Judge Schwebel, held this to be untrue and stated various reasons for the same. However, glaring discrepancies were found in the Judgment given by the ICJ, as well as in the dissenting judgment of Judge Schwebel. Questions have been raised about the evidence introduced in this case as well as the documents relied on by the Judges to pass their judgment. Finally, the very fact that municipal law of Italy has no effect on International law goes to show that this case plays an important role for future cases to reassert the importance of state responsibility. In this case, even though under the Italian law, the requisition would have been held unlawful, however, the Judges held that under International law there was no illegality performed by the Italian authorities and the requisition was not the causa causans of the damage.

Facts of the Case

On 6 February 1987 the United States of America filed an application instituting proceedings against the Republic of Italy. The United States founded the jurisdiction of the Court on Article XXVI of the Treaty of Friendship, Commerce and Navigation concluded by the two states in Rome on 22 February 1948.   In its application the United States contended that the requisition order by the Government of Italy of the assets of Elettronica Sicula S.p.A. (ELSI), whereby a company controlled by the Italian Government acquired the assets, violated several of the articles of the Treaty of Friendship, Commerce and Navigation of 1948 (FCN Treaty). Further, United States requested ICJ that the Government of Italy be held responsible to pay compensation to the United States for the damages suffered.   The main facts leading to the dispute relates to ELSI, an Italian corporation wholly owned by the United States corporations Raytheon Company and its subsidiary the Machlett Laboratories. This company was established in Palermo, Italy, where it produced electronic components. ELSI had been in economic trouble since the 1960s so ELSI and Raytheon had been engaged in various meetings with the officials of the Italian Government to secure governmental support and save ELSI’s plant from falling apart. The Mayor of Palermo issued a requisition on 1st April, 1968 and ordered to take over ELSI’s plant and related assets for six months. The requisition order was challenged in front an administrative appeal which did not succeed. Thereby in July 1969, ELSI was purchased for far less book value by a subsidiary of the State-controlled IRI. The Court of Palermo dismissed an action for damages brought upon due to the requisition order. On appeal, the Court of Appeal of Palermo granted a small portion of the damages but largely dismissed the claims. This decision was further upheld by the Court of Cassation in 1975. Thereafter on 6 February 1987 the United States of America filed an application instituting proceedings against the Republic of Italy. Thus, based on the above mentioned facts, the United States claimed damages in the sum of U.S. $12,679,000, plus interest.[1]   The main questions that the ICJ had to decide was – a)      As contended by Italy, whether there was any failure of the two United States corporations to exhaust local remedies? b)      Whether orderly liquidation of ELSI’s assets would have been feasible at the time of the requisition? c)      Whether the requisition order had violated Article I of the Supplementary Agreement to the FCN Treaty, which prohibited arbitrary or discriminatory measures? d)     Whether the actions of Italy violated Article III, Article V and Article VII of the FCN Treaty?   Analysis of Majority Judgment: Judge Ruda (as President), Judge Ago and Sir Robert Jennings   With the application, United States of America sought the ICJ’s intervention to order full compensation be made to the United States for the damages suffered by United States investors, Raytheon and Machlett, as a result of Italy’s failure to accord them protections guaranteed by the FCN Treaty and Supplement.   With regard to the admissibility of the application, Italy entered an objection on the ground that there was alleged failure of the two United States corporations to exhaust local remedies. The ICJ accepted the application filed by the United States and unanimously rejected the objection presented by Italy to the admissibility of the Application filed by United States. The Chamber held that Italy failed to show existence of any local remedies which Raytheon, independently of ELSI, ought to have pursued and exhausted. The Chamber held that municipal courts in Italy had been fully seized of the matter which was raised by United States in front of the ICJ Chamber. Therefore the Judges unanimously allowed the application.[2]   Moving on to the merits of the case, the majority Judges (except for Judge Schwebel) ruled that passing of the requisition order by Italy did not cause any damages to the investors. They stated that orderly liquidation of ELSI’s assets would still have been feasible at the time of the requisition and it did not affect the rights of the investors in any manner. The Chamber held that the right to control and manage corporations, as stated in Article III of the FCN Treaty had not been violated, since it had not been established that the creditors would have given the company enough time for an orderly liquidation. Thus the requisition, while unlawful according to municipal law, was not the cause of ELSI’s bankruptcy and therefore it did not violate Article III of the FCN Treaty.[3] The Chamber also stated that there was no violation of Article V of the FCN Treaty. Requisition of the plant did not cause any material harm to ELSI. [4] The requisition order was not the triggering event in the chain that led to the sale of ELSI’s assets.[5] Further, the Chamber of ICJ dismissed the contention raised by United States that the taking over by Italy had been performed without a due process of law and contrary to Article V, paragraph 2 of the FCN Treaty. The Chamber held that since ELSI was already under an obligation to file for bankruptcy, there was no expropriation by the requisition order passed by Italy.   The majority Judges also held that the requisition order had not violated Article I of the Supplementary Agreement to the FCN Treaty. They stated that the requisition order did not propagate arbitrary or discriminatory measures to allow Italy to requisition ELSI’s plant. According to the Judges, arbitrariness requires something more than mere unlawfulness and since the requisition order passed by Italy was consciously made under an operating system of law; thereby it cannot be termed as an arbitrary act.[6] Finally, the Chamber of Judges held that there has been no violation of Article VII of the FCN Treaty as the act of Italy did not deprive the United States shareholders of their right to dispose of ELSI’s real property. According to the Judges, what really deprived the shareholder was the precarious financial state of ELSI, which ultimately led to bankruptcy.[7] Concluding thus, the Chamber of Judges held that the Respondent, Italy, had not violated the FCN Treaty in the manner asserted by the Applicant. The Chamber thus rejected the claim for reparation made by the United States of America.   Separate Judgment of Judge Oda According to Judge Oda, he came to the same conclusion as the majority judgment on separate reasons. He stated that no individual shareholder can take legal steps either in the name of the company or in his own name as stated in the Barcelona Traction case.[8] In this case, neither ELSI, nor its trustee invoked the FCN Treaty in the municipal proceedings. Thus United States failed to show that it had been denied justice in the Italian courts and thereby their application for repatriation stands dismissed.   Dissenting Judgment of Judge Schwebel In his dissenting opinion, Judge Schwebel stated that the treaty protected shareholder’s rights. He raised serious doubts about the insolvency of ELSI and the requisition order passed by the Mayor of Palermo. The Mayor’s failure to abide by his own decree suggests capriciousness in the process of requisition. In conclusion, he stated that the processes undertaken by Italy amounted to arbitrary act within the meaning of the FCN Treaty’s Supplementary Agreement. The requisition deprived Raytheon of its Treaty right to control and manage and hence liquidate ELSI.   Critical Analysis It is evident from the discussion of the case that United States suffered a huge loss by the judgment passed. This case brought out serious discrepancies in the role of municipal law in international law. From Italy’s point of view the decision passed by the ICJ was helpful but from United States point of view the judgment seriously impeded United States effort to safeguard their investors. According to me, this judgment did not help much in forming international customary law, though for foreign investors this case did mark as an important law to make them aware about the importance of standard form of agreements.  Treaties for the promotion and protection of investments need a fresh look after the debacle of this judgment. Treaties need to be drafted in such a way that it protects the investors from claims in respect of acts suffered by the domestic company substantially owned by him.[9]   The majority judgment is positive to the extent that it rules that even if the requisition order had not been passed, ELSI would still have undergone bankruptcy. However, I believe the Judges ought to have examined more witnesses who were involved in the case. Discovery of documents and examining each fact that led to the passing of the requisition order by the Italian Republic needs to be examined thoroughly.   Judge Oda had claimed that ELSI had not relied on the FCN Treaty in the municipal proceedings and thus cannot claim the same in front of the ICJ. However, I don’t see any merit in this statement. As rightly stated by the Majority Judgment, the municipal courts were fully aware of the case and United States did not fail to exhaust the local remedies.   The dissenting judgment by Judge Schwebel points out rightly that Article 31 of the Vienna Convention on the Law of Treaties has to be construed from ordinary meaning of the act that states the object and purpose of the act. The FCN Treaty was not interpreted correctly by the majority Judges of the Chamber and this is too needs a better exploration in future cases.   The Chamber’s majority decision is thorough in analysis though it left out the discussion about the compensation of U.S. $12,679,000 claimed by the United States. This issue has been clearly left out by all the judges. The separate Judgment of Judge Oda is surprising as it fails to understand the true import of the FCN Treaty and the state responsibility of Italy to protect the investors. This case continues from the Barcelona Traction case and concludes on the importance of well formed agreements in matters of foreign investment.[10]

Conclusion

ELSI case is important as it is the only case involving foreign investment that the ICJ has addressed on the merits till date. The Court denied the US’s claims holding that the requisition order passed by the Mayor of Palermo did not cause the property loss.[11] Of particular importance in this case is the fact that the Court discussed and addressed the meaning of arbitrariness in international law. The majority judgment avoided the issue whether US was entitled to bring the claim under the FCN Treaty and proceeded on the basis that the property protected was not ELSI’s plant and equipment (its property), but ELSI itself (the company).[12] The ELSI case highlighted some of the procedural and substantive inadequacies with the diplomatic protection model in safeguarding shareholder interests.

On critically viewing the Judgment we find no mention of the damages in the sum of U.S. $12,679,000 claimed by the United States. This is striking as the written pleadings had clearly explained the alleged damages but none of the Judges discussed this point. Even in his dissenting judgment, Judge Schwebel failed to mention this point. Further, it is striking that under the municipal law of Italy, the requisition order of the Mayor was held unlawful[13] but under International law, Italy was not held guilty of any illegality, tort or wrong.[14] This creates a strange situation where municipal law is not recognized by International law. The Chamber of ICJ by majority judgment held that the fact that an act of public authority may have been unlawful in municipal law but that does not necessarily imply that the said act would be unlawful under International law. From the above discussion it is evident that the ELSI case will serve as a benchmark for future assessment of property protection.[15] In future, foreign investors need to minutely look into the agreement that they draft, given the fact that United States hugely suffered at the hands of the International Court of Justice by this judgment. Bibliography Elettronica Sicula S.p.A. (ELSI) Judgment of 20 July, 1989, in ICJ Reports (1989): 15 Barcelona Traction, Judgment of 24 Jul. 1964, ICJ, 6 and Judgment of 5 Feb. 1970. Para 42 F.A. Mann, Foreign Investment in the International Court of Justice: The ELSI Case, 86 Am. J. Int’l L. 92, 99-101 (1992) Kubiatowski, Stephen A. The Case of Elettronica Sicula S.p.A: Toward Greater Protection of Shareholders’ Rights in Foreign Investments. 29 Colum. J. Transnat’l L. 215 (1991). K.J. Hamrock. The ELSI case: Toward and International Definition of ‘Arbitrary Conduct’. (1992) TILJ 837 V.Lowe. ‘Shareholders Rights to Control and Manage: From Barcelona Traction to ELSI,’ in N. Ando, E. McWhinney & R. Wolfrum, eds. Liber Amicorum Judge Shigeru Oda (The Hague: Kluwer Law International, 2002)


[1] F.A. Mann, Foreign Investment in the International Court of Justice: The ELSI Case, 86 Am. J. Int’l L. 92, 99-101 (1992)
[2] Kubiatowski, Stephen A. The Case of Elettronica Sicula S.p.A: Toward Greater Protection of Shareholders’ Rights in Foreign Investments. 29 Colum. J. Transnat’l L. 215 (1991).
[3]Elettronica Sicula S.p.A. (ELSI) Judgment of 20 July, 1989, in ICJ Reports (1989): 15, paras 92, 99 and 101.
[4] ELSI, para. 119.
[5] Ibid.
[6] ELSI, para. 130.
[7] Ibid, paras 133-134.
[8] Barcelona Traction, Judgment of 24 Jul. 1964, ICJ, 6 and Judgment of 5 Feb. 1970. Para 42
[9] F.A. Mann, Foreign Investment in the International Court of Justice: The ELSI Case, 86 Am. J. Int’l L. 92, 99-101 (1992)
[10] Barcelona Traction, Judgment of 24 Jul. 1964, ICJ, 6 and Judgment of 5 Feb. 1970. Para 42
[11] K.J. Hamrock. The ELSI case: Toward and International Definition of ‘Arbitrary Conduct’. (1992) TILJ 837
[12] V.Lowe. ‘Shareholders Rights to Control and Manage: From Barcelona Traction to ELSI,’ in N. Ando, E. McWhinney & R. Wolfrum, eds. Liber Amicorum Judge Shigeru Oda (The Hague: Kluwer Law International, 2002)
[13] Elettronica Sicula S.p.A. (ELSI) Judgment of 20 July, 1989, in ICJ Reports (1989): 15, paras 127-129.
[14] F.A. Mann, Foreign Investment in the International Court of Justice: The ELSI Case, 86 Am. J. Int’l L. 92, 99-101 (1992).
[15] Murphy, Sean D. The ELSI Case: An Investment Dispute at the International Court of Justice. 16 Yale J. Int’l L. 391 (1991).
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