12 September 2019
SIAC-CIL Academic-Practitioner Colloquium

Mr Csaba Kovács’ presentation of his paper titled “Attribution of the Conduct of State-owned Enterprises to the State”
By Lexi Menish and Samantha Tan, Freshfields Bruckhaus Deringer


The 3rd SIAC-CIL Academic-Practitioner Colloquium brought to life a critical but complex and often misunderstood international investment law question: when is a State responsible for the conduct of a separate legal entity?

This question is obviously fraught with uncertainty. The apparent irreconcilabilities in the arbitral case law on attribution inspired Mr Csaba Kovács to dive in and attempt to make sense of it all in his book, Attribution in International Investment Law, the first published monograph dedicated to this topic.

The Colloquium’s panellists reviewed Mr Kovács’ book and peppered him with challenging questions on the topic. The esteemed Vice-President of the SIAC Court of Arbitration; Director of the Centre for International Law (Singapore), Professor Lucy Reed, told us in her opening address that the Academic-Practitioner Colloquium was designed for that very purpose, for academics to gather comments from practitioners on their work, and for cross-pollination of ideas between legal academics and practitioners. Mr Kovács was impressive. In the spirit of lively discourse, the discussion at times resembled a cross-examination, and Mr Kovács defended his publication valiantly.

The general focus of the panel was the question of how satisfactory the International Law Commission’s Draft articles on Responsibility of States for International Wrongful Acts (ILC Articles) are as the generally accepted rules for attributing conduct to a State. The Colloquium also addressed, on the flipside of attribution, when a State-owned enterprise should be precluded from bringing a claim against another State under an investment treaty.

This discussion among experts in this complex area of law was intellectually rigorous, yet elegantly translated into easy-to-understand pieces, including by the moderator, Mr Toby Landau QC (whose light-hearted interjections in this substantive two-hour session were no doubt appreciated by the audience).

Mr Kovács’ introduction to his paper

To frame the panel discussion, Mr Kovács introduced the premise: a State can be responsible for internationally wrongful conduct only if it consists of an action or an omission that is attributable to the State under international law.

Mr Kovács then explained the legal framework for answering the question of when conduct is attributable to the State under international law: special rules in the treaty under which the claim against the State has been brought, i.e., lex specialis; and, in the absence of express treaty wording, the ILC Articles.

Under the ILC Articles, Mr Kovács explained, an act can be attributed to the State if the person performing the act:

is an organ of the State (Article 4);

exercises governmental powers delegated by the State in relation to this act (Article 5); or

acts on the instructions, or under the direction or control, of the State (Article 8).

Mr Kovács then discussed the challenges commonly faced in applying the ILC Articles to the infinitely diverse structures that States adopt to conduct their affairs.

Mr Kovács introduced Article 4 of the ILC Articles as focusing on the entity in question, rather than on its act. He explained:

to equate a State-owned enterprise with a State organ when it does not have that status under internal law must be “exceptional”, requiring “proof of a particularly great degree of State control over them”, i.e., a relationship of “complete dependence”; and

investment tribunals have identified a number of factors that could indicate that a State-owned enterprise is a State organ, such as its establishment by law, lack of separate legal personality, lack of institutional or operational independence, performance of core governmental functions, lack of separate patrimony, lack of financial autonomy, and its being subject to judicial review or governmental oversight, but not its ownership or control of shareholding by the State.

On Article 5 of the ILC Articles, Mr Kovács discussed the trickiness of determining whether an act was commercial or sovereign, only the latter of which would be the basis for State responsibility. He postulated the following rebuttable presumptions based on the arbitral jurisprudence:

an act is commercial if a private entity in an open, competitive market could also perform it, even if such act serves a general interest; and

an act is governmental if it concerns an asset or activity normally reserved to the State, even if such act was performed through contractual or commercial means.

On Article 8, Mr Kovács distinguished between conduct carried out on the State’s instructions—which he said covers only express instructions—and conduct carried out under the State’s direction or control—which he said requires the State to have directed or controlled the specific operation of which the impugned conduct was an integral part. He highlighted that there may also be an additional requirement that the State-owned enterprise’s exercise of public powers or the State’s use of its ownership interest or control of a State-owned enterprise was “to achieve a particular result”.

Mr Kovács concluded that the investment arbitration jurisprudence showed that the ILC Articles were widely accepted and largely applied consistently to determine attribution, and that the expansion of the current scope of such attribution rules is unlikely, although their application requires flexibility.

Mr Colin Liew, Advocate, Essex Court Chambers Duxton, commented that the test of control used for the Article 4 analysis had been doubted by a decision of the International Criminal Tribunal for the Former Yugoslavia in which it formulated an alternative “overall control” test. Mr Liew also observed that according to the jurisprudence, in less than “exceptional” cases entities have also been deemed to be State organs under Article 4.

Mr Kovács agreed that the tribunals in Flemingo DutyFree Shop v Poland and Ampal-American Israel et al v Egypt had indeed found State-owned entities to be State organs despite their being separate legal entities. He opined, however, that those cases are outliers and context-specific. Mr Kovács explained that in Flemingo, for example, Poland had made concessions that the entity in question performed strategic functions for the State that could not be transferred to a private party, and such evidence is rare. Mr Landau added that the “complete dependence” test was adopted from the Nicaragua decision by the International Court of Justice about State control over conduct in a State-State dispute, which might not apply in the same way in an investor-State context.

IMG_20190912_205826 IMG_2293
Left to Right: Prof Vincent-Joel Proulx,
Nicholas Lingard, Csaba Kovacs, Toby Landau QC, Darius Chan and Colin Liew

Members of the audience

Prof Vincent-Joel Proulx, Assistant Professor, Faculty of Law, National University of Singapore, raised a series of questions about ILC Article 5, including how control and supervision come into play in the application of Article 5. The Commentary to the ILC Articles notes that executive control over the conduct in question is not a determinative factor, whereas World Trade Organisation (WTO) arbitration jurisprudence suggests that “meaningful control” is relevant, and some arbitral tribunals (e.g., EnCana v Ecuador) emphasised the importance of statutory supervision by the State over the delegated activity. He also queried the relationship between Article 5 and the lex specialis of a particular investment treaty, asking to what extent a treaty can displace Article 5.

Mr Kovács and some of the other panellists engaged in a lively discussion of the first question, with Mr Kovács explaining that tribunals do tend to treat supervision and/or control as relevant, noting that the extent, rather than the existence of control, appears to be most relevant, and that executive control is not required, but accountability to the State is. Mr Landau asked whether supervision was also relevant, and Mr Kovács replied that some tribunals have considered it as a relevant, but not determinative, factor. Mr Landau also observed that the test under Article 5 is whether an entity is exercising a delegated, sovereign function, and queried the relevance of supervision and control to that analysis, to which Mr Lingard added that the focus of Article 5 is the conduct itself, and thus supervision or control would appear to be irrelevant.

Mr Nicholas Lingard, Partner and Head of the International Arbitration Group in Asia, Freshfields Bruckhaus Deringer, explained that although satisfaction of any of the Article 4, Article 5 or Article 8 tests is sufficient to establish attribution, States often prefer to “lose” on Article 8, as a finding of attribution on the basis of Article 8 is limited to the facts of the particular case. On the other hand, a finding under Articles 4 or 5 that a State enterprise was a State organ or was exercising a governmental function could be used in subsequent cases. Mr Lingard then queried the distinction under Article 8 between “acting on the instructions of” versus “under the direction or control of” the State. Mr Lingard pointed out that on one view, an instruction must be “binding and express”, evidence of which can be hard to come by, but may cover non-sovereign conduct, whereas according to the ILC Commentary to Article 8, conduct “under the direction or control” of the State must be sovereign in nature.

Mr Lingard also discussed the Al Tamimi v Oman tribunal’s failure to engage Article 8 on the basis that the scope of the applicable treaty—the US-Oman Free Trade Agreement—was expressly limited to where a State enterprise or other person “exercises any regulatory, administrative or other governmental authority delegated to it by that Party”, and therefore could be deemed to have excluded the applicability of Article 8. Mr Lingard explored related language in other investment treaties that arguably could be read to exclude liability on the basis of Article 8 (e.g., the 2012 US Model BIT).

Mr Kovács acknowledged the observation and agreed that an investment treaty, as lex specialis, could displace certain ILC Articles if the treaty parties so agreed.

Mr Darius Chan, Of Counsel, Norton Rose Fulbright, discussed attribution as it applied to State-owned entities as claimants in ICSID proceedings. Recourse to ICSID jurisdiction is limited to “nationals” of an ICSID Contracting State other than the respondent State. Whether a State-owned entity can qualify as a “national” (and thus a claimant) is often determined by the so-called “Broches Test”, which holds that a State-owned entity may qualify as a “national” for the purposes of the ICSID Convention unless it is “acting as an agent for the government” (i.e., ILC Article 8) or “is discharging an essentially governmental function” (i.e., ILC Article 5). Mr Chan queried both: (a) whether an ICSID tribunal should consider both the nature and purpose of the State-owned entity’s activity when applying the Broches Test; and (b) to what extent the applicable bilateral investment treaty (BIT), if it includes State-owned entities within the definition of “investor”, should be conclusive in an ICSID arbitration. As to the former, interesting questions arise in the context of China’s Belt and Road Initiative, in which Chinese State-owned entities are making investments that can be characterised as having a commercial nature, but which the Chinese government has billed as having an arguably public purpose.

With respect to Mr Chan’s question as to nature versus purpose, Mr Kovács opined that purpose is a factor tribunals will consider, but is not generally determinative: the nature of the State-owned entity’s investment activity typically carries more weight. On Mr Chan’s second point regarding the definition of “investor” in BITs, Mr Kovács analogised other jurisdictional hurdles under the ICSID Convention, such as the dual-national test or the so-called “double-barrelled” test for the inherent characteristics of “investment” under ICSID Convention Article 25, and suggested that irrespective of whether State-owned entities may bring claims under the applicable BIT, the ICSID Convention’s jurisdictional requirements must still be satisfied.


Questions from the audience followed, including a particularly interesting question about the relationship between the ILC Articles and traditional veil-piercing analysis under municipal law.

Upon conclusion of the Q&A, the discussion continued informally over drinks long into the evening. The Colloquium clearly resonated and gave the participants and attendees plenty of food for thought.

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