State responsibility for acts of SOEs

Dr Peter Bekker discusses the international law analysis of state-owned enterprises and the degree to which governments are legally responsible for their commercial activities.
Peter Bekker
Peter Bekker
Chair in International Law, Partner (NY1992), CEPMLP, University of Dundee

State-owned enterprises (SOEs) are increasingly crucial in the global economy. UNCTAD defines SOEs as “entities (separate from public administration) that have a commercial activity where the government has a controlling interest (full, majority or significant minority) whether listed or not on the stock exchange.”[1]

Governmental interest in an SOE raises the question: when is a state responsible for (commercial) acts of an SOE? International law provides a framework for answering this attribution question through the ‘Articles on the Responsibility of states for Internationally Wrongful Acts’, a set of rules adopted by the International Law Commission (ILC) of the United Nations in 2001. The ILC Articles define state responsibility as a breach of international law that is attributable to the state. Even though they do not represent binding law, the ILC Articles provide an authoritative source for analysis, as summarised in the table:

ILC article
Broad: Being part of the state’s organic structure
(acting in official capacity)
Article 4:
Focus on the entity’s status (not nature of conduct)
Narrow: Exercising governmental authority
(authorised: Legally linked to the state)
Article 5:
Focus on conduct
High threshold: Acting on the instructions of, or under the direction or control of, the state
(factually linked to the state)
Article 8:
Focus on specific factual relationship

The international law analysis revolves around three questions: what, how, and why. The ‘what’ question is concerned with identifying the circumstances in which it is justified to attribute to the state certain SOE conduct that allegedly is in breach of that state’s international law obligations.

The ‘how’ question involves an analysis of (1) the subject of the conduct, (2) that subject’s link to the state, and (3) the capacity in which it performed the act.

As regards the ‘why’ question, as a rule the conduct of private persons is not attributable to the state under international law – but conduct of organs is. Because international law acknowledges the separate corporate personality of SOEs, their conduct is only ‘exceptionally’ attributable to the state. A state cannot avoid responsibility under international law by relying on its internal law.[2]

According to Article 4 of the ILC Articles, “[t]he conduct of any state organ shall be considered an act of that state under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organisation of the state, and whatever its character as an organ of the central government or of a territorial unit of the state.” It also provides: “An organ includes any person or entity which has that status in accordance with the internal law of the state.” This raises the question: what constitutes ‘government’ and how far beyond ‘core’ government entities can political risk reach and be insurable? Liability coverage offered by MIGA and certain other providers extends to acts of sub-sovereign governmental entities.

Under Article 4, an act of an organ is assimilated with an act of state. But can an SOE ever be part of the state’s organic structure? It is unlikely to have ‘de jure’ organ status under internal law. The broad Article 4 test focuses on the entity rather than the nature of its conduct. The administrative or commercial nature of a contract is disregarded for this purpose. The conduct must be committed in an official capacity. A state cannot argue that an organ’s commercial conduct is not attributable to it: all of the organ’s acts are attributable to the state. Separate legal personality establishes a strong, but rebuttable presumption that the separate entity is not a state ‘organ’.

A state’s internal law may overturn the presumption and serve to disregard separateness. The relevant question is: was there a high degree of integration into the overall organisational structure of the state? Mere state ownership or control of shareholding is insufficient.

According to Article 5 of the ILC Articles, “[t]he conduct of a person or entity which is not an organ of the state under Article 4 but which is empowered by the law of that state to exercise elements of the governmental authority shall be considered an act of the state under international law, provided the person or entity is acting in that capacity in the particular circumstance.” This raises the question: can an SOE exercise governmental authority? A state may act through corporate entities that are not part of the state’s organic structure (so-called ‘para-statal’ entities). A separate entity sometimes is utilised by the state as a vehicle to exercise governmental authority, a flexible notion requiring a fact-specific analysis.

Article 5 provides a narrow test: was the non-organ act an exercise of a delegated governmental function in the state? This constitutes an exception to the separateness rule. Some states delegate to organs, while others delegate to non-organs. The test is a functional test for ‘de jure’ delegation plus actual exercise of governmental authority in relation to the conduct concerned. The focus is on what the entity does in fact. The test excludes commercial or private activity, and state ownership or general control are insufficient.

According to Article 8 of the ILC Articles, “[t]he conduct of a person or group of persons shall be considered an act of a state under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that state in carrying out the conduct.” As regards instructions, any type of activity may trigger attribution. De facto state control involves the rule distinguishing between governmental and commercial acts. Parastatal conduct is attributable only if (1) the state directed or controlled the specific operation, and (2) the conduct was an integral part of that operation.

Attribution remains an evolving concept that will continue to be developed through the decisions of international tribunals adjudicating cases involving SOEs and ‘new-generation’ investment protection treaties addressing SOEs.

Dr Peter Bekker is a professor and Chair in International Law at the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP), University of Dundee (UK), and an active member of the New York Bar.

  1. UNCTAD, World Investment Report, Global Investment Prospect and Trends (2017).
  2. ILC Articles, Art. 32.

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