Originally from Dispute Resolution Journal

In today’s global marketplace it is common for States to become involved in various commercial activities through State-owned enterprises. National practices regarding sovereign immunity are so diverse that formulating rules of universal application is a very difficult task. That task is even more complex when State-owned enterprises are involved in international business transactions. The purpose of this article is to highlight recent trends and issues in the area of sovereign immunity that are frequently encountered in international commercial arbitration.1

The State View of Immunity

State practice suggests that whether a State is seeking immunity from jurisdiction or from execution against State-owned property, the State and its wholly owned or controlled enterprises consider themselves to be functionally the same, so that the activities of State enterprises are considered to be carried out by the State in its exercise of sovereign authority.2 This view is consistent with the view of the United Nations International Law Commission (ILC), which has made relentless efforts to codify the universally acceptable rules on State jurisdictional immunity over the last two decades or so.3 Thus, the recent Convention on Jurisdictional Immunities of States and their Property, drawn on the ILC’s final Draft Articles of 2003, defines the term “State” to include, inter alia, “agencies or instrumentalities of the State or other entities, to the extent that they are entitled to perform and are actually performing acts in the exercise of sovereign authority of the State.”4 Under this definition, a legal action or arbitration commenced against a State agency, enterprise, or instrumentality would be considered to be against the State itself. However, this does not dispose of the issue of sovereign immunity when a State enterprise is a party to an international arbitration.

The approach enshrined in the quoted ILC definition appears to be functional rather than structural, given the phrase “to the extent that.” Thus, no matter what the status of the State agency, instrumentality, or enterprise is vis-à-vis the State, so long as the enterprise “is entitled to perform and is performing acts in the exercise of sovereign authority of the State,” it can invoke sovereign immunity as the State.