The Investment Treaty Arbitration Review: Attribution of Acts or Omissions to the State
i General rules of attribution under ILC articles
Most frequently, foreign investors interact with a state through dealing with state organs, state-owned entities, individual government officials, state enterprises, courts or various agencies. When a foreign investor has suffered losses, the question arises as to whether and to what extent the conduct of such organs, entities and individuals alleged to have caused such losses may be attributable to the state in the context of claims against investment treaties. Application of the rules of attribution under international law may assist in answering this question and determine what conduct can be considered an 'act of state' giving rise to a claim against the state under an investment treaty.
The set of rules that address the criteria for and consequences of responsibility of the state for internationally wrongful acts are set forth in the International Law Commission's 2001 Articles on State Responsibility (hereinafter the ILC Articles).2 Under Article 2 of the ILC Articles, there are two necessary and sufficient criteria for state responsibility to arise: an allegedly wrongful conduct should be attributable to a state, and such conduct should institute a breach of an international obligation of the state. Although the ILC Articles is not a treaty, since their adoption in 2011 they have been widely relied upon by international tribunals in investor–state disputes as reflecting customary international law.
The rules of attribution of conduct to states are addressed in Part one, Chapter II of the ILC Articles. There are three basic ILC Articles relating to attribution: (i) Article 4, which deals with organs of the State; (ii) Article 5, which deals with separate entities authorised to exercise governmental authority; and (iii) Article 8, which deals with private entities whose conduct is under the direction or control of the state.
These rules may be summarised as follows.
The state, for the purposes of attribution, is a very broad concept and is regarded to be as a single person in international law. Because the abstract 'state' acts only through its 'agents', which are under control of the state, any such acts of those agents are attributed to the state if done under actual or apparent authority of the state.
The state is always responsible for the conduct of its organs. Any conduct of a state organ is attributable to the state, irrespective of whether it exercises legislative, executive, judicial or any other functions, what position it holds in the state structure and whether it is part of the central government or a territorial unit. The state is responsible for conduct of its organs whether or not they are acting ultra vires or in breach of the rules governing its operation as a matter of domestic law. So, there is general responsibility of the state for the acts of its organs. The issues of attribution of the conduct of the state organs to the state have been widely addressed by the tribunals in the investment treaty arbitration without too much difficulty.
If an entity is not a state organ but exercises elements of governmental authority in relation to the investment, its conduct is attributable to the state to the extent that the entity was acting in that capacity. This issue is addressed in Article 5,3 which deals with separate entities that formally are not state organs, but that are, nevertheless, authorised to exercise governmental authority for various purposes.
The conduct of private persons or entities not exercising delegated governmental authority may be attributable to the state when the conduct was taken upon the instructions, or under the direction or control of that state.4 The issue is addressed in the ILC Article 8. The latter relates to situations in which the conduct of a person or entity is attributable to a state not because it is a state organ or because it is exercising public authority, but because it is acting on the instructions of or under the direction or control of the state in a certain respect. In principle, this rule requires that the state, in effect, caused the conduct to be taken in circumstances that justify attributing the action to the state itself.
ii De jure organs of the state
ILC Article 4 establishes the rule that any conduct of a state organ shall be deemed to be an act of the state and, therefore, is attributable to the state. However, there is no single, accepted definition of what constitutes a state organ.
According to the ILC Article Commentary,5 the reference to a 'state organ' covers all the individuals or entities that form the organisational structure of the state and act on its behalf. This is reflected in ILC Article 4(1), which makes clear that the rule regarding attribution of conduct of state organs applies 'whether the organ exercises legislative, executive, judicial or any other functions', and that an entity may be classified as a state organ, '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'.
Obvious examples of the state organs include the government itself, various governmental ministries and agencies, but can also include any natural or legal person that holds a public office, or anybody that exercises public authority. There are many examples when acts of municipal organs of the state (not being the part of central government), or municipal officers, etc., have been treated as attributable to the state.
As the state is free to establish its internal governmental and administrative structure and functions of its organs, the internal law of the state is of primary importance for determining what constitutes an organ of the state.6 It will be essential to consider whether the entity is classified as a state organ under such state's internal law (de jure organ). But while the state remains free to determine its internal structure and functions through its own law and practice, international law has a distinct role.
The ILC Articles Commentary explains that in some systems the status and functions of various entities are determined not only by law, but also by practice, and in such cases the internal law itself will not perform the task of classification. In other words, a fact that an entity is not identified as a state organ under internal law does not entail that this entity cannot be identified by an arbitral tribunal as a state organ for the purposes of attribution.7 For example, the conduct of certain entities performing public functions and exercising public powers may be attributed to the state even if those entities are not formally regarded by internal law as sate organs8 (de facto organ). ILC Articles Commentary makes clear that a state cannot avoid responsibility for the conduct of a body that does in truth act as one of its organs merely by denying it that status under its own law.9
When the internal law identifies an entity as a state organ, no issues arise in relation to attribution. Difficulty may arise when an entity is not qualified as a 'state organ' under its own law, but in truth acts as one of the de facto organs of the state.
iii De facto organs of the state
i Conduct of an entity, which is not a state organ but that exercises governmental powers
In practice, the issue of attribution often arises in relation to conduct of entities, which are not classified as state organs under domestic law, but they are empowered by the state to exercise governmental authority in certain respects. When such entities exercise delegated public or governmental powers, their conduct towards a foreign investor may be attributable to the state with the effect that the state is responsible for that conduct as if it were its own. Article 5 clarifies that the ultimate test is the function carried out by a person or entity irrespective of its organisational or structural status. As long as, and to the extent that, governmental authority is exercised, the conduct in question is attributable to the state. The ILC Commentary to Article 5 explains that:
[a]rticle 5 deals with the attribution to the state of conduct of bodies that are not state organs, but that nonetheless are authorised to exercise governmental authority. This is intended to address the phenomenon of para-statal entities that exercise elements of governmental authority in some sense, as well as situations where former state corporations have been privatised but retain certain public or regulatory functions10
When exercising certain governmental authority, an entity that is not a state organ must be acting within authority specifically delegated to it. In such case, the conduct of such entity may be attributable to the state. The notion of delegated authority must be distinguished from conduct generally permitted by law. As the commentary to the ILC Articles provides:
[t]he internal law in question must specifically authorise the conduct as involving the exercise of public authority; it is not enough that it permits activity as part of the general regulation of the affairs of the community.11
The conduct of a state organ is attributable to the state even when it is ultra vires or otherwise contrary to law. The same in principle applies for an entity, which is not a state organ, but with delegated governmental authority. Conduct taken in that capacity is attributable to the state even when it is ultra vires or otherwise contrary to its authority.
This rule follows from the principle that a state cannot rely on its own internal law to avoid classification of an act as being unlawful under international law. It means that a state cannot rely upon its internal law to avoid an act being attributable to it. The conduct of a state organ or entity empowered to exercise elements of the governmental authority, acting it its official capacity, therefore, is attributable to the state even if the organ or entity acted in excess of authority.
ii Entities acting under the instructions or control of the state
As follows from the ILC Commentary, Article 5 has particular importance in instances where 'former state-owned corporations have been privatised but retain certain public or regulatory functions'. This is particularly true of utility and infrastructure industries, such as the production and distribution of energy (hydroelectric power, oil, gas and coal), post and telecommunications, transportation (railway, airports, and airlines) and financial services. Such situations are also quite common for post-Soviet countries.
Difficulties may arise in determining when the conduct of this state-owned entity (SOE) may be regarded as governmental conduct. According to the ILC Commentary:
[b]eyond a certain limit, what is regarded as 'governmental' depends on the particular society, its history and traditions. Of particular importance will be not just the content of the powers, but the way they are conferred on an entity, the purposes for which they are to be exercised and the extent to which the entity is accountable to the government for their exercise.12
The scope of 'governmental authority' is not defined. A tribunal's decisions in various treaty arbitrations demonstrate that many factors may be considered for the purpose of assessing whether the conduct of an SOE should be qualified as governmental conduct. Such factors may include whether the conduct is taken pursuant to a statutory authority, whether it is taken pursuant to the direction of the state and whether the activities at issue are funded by the state.
When an SOE is not acting within delegated governmental authority, its conduct presumptively shall be deemed to be a private conduct and, as principal rule, cannot be attributed to the state. Exceptions to this rule may occur in a situation where, given a specific factual relationship between that entity and the state, such an SOE was acting on the instructions of or under the direction or control of the state in a certain respect. Such situations are addressed in ILC Article 8.13
In principle, this rule does not require that the conduct in question be taken within the scope of governmental authority or a delegation of public power. It only requires that the state caused the conduct to be taken in circumstances that justify attributing the action to the state itself. When the conduct is in fact authorised by the state, it does not matter whether that conduct involves governmental activity.14
In the case Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, the tribunal noted that Article 8 of the ILC Articles stipulates an effective control test under which, for the conduct to be attributable to the state, it is required that the state exercises both general control over a private party and specific control over the conduct in question.15 In the absence of evidence of both general and specific control, the conduct cannot be attributable to the state.16 This approach was supported in many other international investment cases.
There is no consensus as to consideration of Article 8 with other ILC Articles. Some important observations regarding the state's control were made in the case Tatneft v. Ukraine. Ukraine argued lack of a tribunal's jurisdiction to hear the case as the dispute was in fact between Ukraine and Russia. Based on Article 8 of the ILC Articles, Ukraine was arguing that Tatneft management was controlled by Tatarstan and is overall dependent from the government.17 Tatneft acknowledged that 'the Tatarstan government is able to exercise considerable influence over us. The Tatarstan government has used its influence in the past to mandate oil sales and to cause us to raise capital for the benefit of Tatarstan or to pay the debts of Tatarstan when independently we may not have entered into such transactions'.18 The tribunal did not specifically differentiate in its analyses the arguments under Articles 5 and 8 of the ILC Articles, analysing simultaneously whether there is governmental dependency and control over Tatneft and whether Tatneft is de jure or de facto instrumentality of the state.19 The tribunal decided that there were no convincing arguments in favour of governmental dependency of Tatneft. The tribunal held that it is not unusual that the governmental and commercial interests may coincide in a foreign business project.20
iii 'Structural' and 'functional' tests
In investment treaty cases, where the conduct that gave rise to the investor's claim was undertaken by an SOE, the states often raise defence that the conduct of an SOE cannot be attributed to the state as the SOE enjoys a separate legal personality from the state and the mere ownership of a legal entity by the state is not sufficient to attribute conduct of that entity to the state. On the other hand, investors often claim that the SOE either acted in the capacity of a state organ (ILC Article 4), or exercised governmental functions (ILC Article 5), or the conduct in question was directed or controlled by the state (ILC Article 8). Thus, to address those issues a tribunal has to examine links between the state and SOE to determine whether the conduct of an SOE towards a foreign investor can be attributed to the state, with the effect that the state is responsible for that conduct as if it were its own.
Many tribunals carry out such examination based on analysis of the 'structural – functional test' elaborated by the tribunal in the Maffezini v. Spain case.21
The Maffezini case involved the claims of Mr Emilio Agustin Maffezini and his dealings with the Sociedad para el Desarrollo Industrial de Galicia (SODIGA), an entity owned by the regional government of Galicia and established to promote economic development in that region of Spain. Mr Maffezini claimed that he suffered losses in regard to his investment and that his project failed because of actions he alleged that SODIGA had taken. Mr Maffezini claimed that those actions constituted violations of the BIT between Spain and Argentina.
A central question in the dispute was whether the acts complained were attributable to Spain and therefore whether they could form the basis of a claim under the applicable BIT. Spain objected to that because SODIGA was a private corporation and not the Spanish government. Mr Maffezini countered that SODIGA was a 'public entity' and, therefore, that its actions were attributable to the state.
The tribunal recognised first of all the importance of verifying whether SODIGA was an entity whose acts potentially may be attributable to the state. In doing so, the tribunal elaborated a method of analysis based on two tests, which it referred to as a 'structural' test and a 'functional' test. These tests were designed to assess whether SODIGA was what the tribunal referred to as a 'state entity'. The 'structural' test was an assessment of SODIGA's legal personality. It consisted of a review of the laws pursuant to which SODIGA was established, the laws relating to its organisation and the law that regulated its activities.
As applying the 'structural test' was indeterminate and did not lead to a clear conclusion as to whether SODIGA was a 'state entity', the tribunal therefore applied a so-called 'functional test' aimed at verifying whether the function carried out by SODIGA might be deemed 'governmental in nature'. The functional test elaborated in the Maffezini case is substantially equivalent to the test set out in Article 5 of the ILC Articles.22
Application of the 'functional test' is usually the most controversial issue, as it examines not the activities of the SOE as such, but the particular conduct towards a foreign investor. The general rule is that the mere ownership of the legal entity by the state will not automatically convert that entity into an organ of the state,23 as the law respects the formally separate legal personality of the state enterprise. Therefore, the functional test is necessary to establish whether the SOE is exercising elements of governmental or public functions within the meaning of Article 5 of the ILC Articles, or its conduct in question was directed or controlled by the state in the meaning of Article 8 of the ILC Articles.
For qualification of the SOE as the de facto state organ, it is sufficient to establish any one of 'instructions', 'direction' and 'control' related to the conduct of the SOE, which is claimed to have amounted to an internationally wrongful act.24 Degree of control may be different depending on the circumstances in each particular case.25 Even the ownership interest of the state in the corporate entity is not per se sufficient to establish control, it is required that the state uses its ownership for achieving a specific result.26 The below case is a good example, demonstrating how the tribunal tested conduct of the SOE against Articles 4, 5 and 8 of the ILC Articles to the effect that the conduct of the SOE was found to be attributable to the state.
In the case of Deutsche Bank v. Sri Lanka,27 the tribunal had to determine whether Ceylon Petroleum Corporation (CPC), Sri Lanka's national oil company, was an organ of the state and whether its acts were attributable to the state under Article 4 or, alternatively, could its conduct be attributed to the state under Articles 5 or 8 of the ILC Articles. The details of the case, in summary, are the following.
Sri Lanka's state-run oil company Ceylon Petroleum Company (CPC) signed hedging agreements with three international banks, including Deutsche Bank, in 2008 to limit its exposure to oil price rises at a time when oil prices were around US$140 per barrel. Prices then fell to around US$50 per barrel in the wake of the financial crisis, leaving the state entity owing the banks US$460 million. Sri Lanka's Supreme Court ordered the suspension of payments while an investigation was carried out. Deutsche Bank was one of three international banks to seek legal redress after state-owned Ceylon Petroleum Company withheld payments worth US$460 million under hedging agreements following a plunge in oil prices. The other banks were Standard Chartered and Citibank. Deutsche Bank, Standard Chartered and Citibank each brought separate claims against the state, with mixed results.28
In arbitration, the tribunal, inter alia, addressed the issue of whether CPC was an organ of the state under Article 4 or, alternatively, can its conduct be attributed to the state under Articles 5 or 8 of the ILC Articles. The tribunal found that CPC's actions would be attributable to the state, either because CPC is an organ of the state under ILC Article 4 or because CPC lacked separate legal existence, or acted under the instruction of the state. The CPC's actions were not be attributable to Sri Lanka under ILC Article 5 as the specific wrongdoing in the present case (failure to pay the amounts owing under the Hedging Agreement) could not be considered an act of government or sovereign authority.29
When taking decision that CPC was a de facto organ of the state under Article 4 of the ILC Articles, the tribunal took into account the following factors:
- state control of CPC is evident;30
- CPC is of course a 100 per cent state-owned entity and it benefits from the protection of immunity from suit;
- the Minister of Petroleum appoints its directors and may remove them;
- CPC has been established by a statute for the purpose of conducting Sri Lanka's oil policy in the national interest; and
- there is considerable evidence as to the significant control exercised by the government over CPC's personnel, finances and decision making.
In particular, CPC was required to follow any written directions of the Minister of Petroleum, regardless of whether those directions are in the best interests of CPC. CPC acted under the direct instruction of Sri Lanka both in (1) negotiating and executing the Hedging Agreement as part of the overall hedging programme; and (2) refusing to pay the amounts owing following termination of the Hedging Agreement as a direct result of orders CPC received from the Supreme Court and the Central Bank. A directive from the Cabinet and the Minister obliged CPC to start the hedging programme. CPC had to hedge. It did not have any choice. This was confirmed both by Mr de Mel and Mr Karunaratne.31
The tribunal also noted that the mere fact that a state-controlled entity takes the form of a separate legal entity is not decisive to separate it from the state organ; while it may be unusual for a state enterprise to be considered an organ of the state, this is only the case where the state enterprise is genuinely independent.32
The opposite approach was taken by the tribunal in the decision in Tulip v Turkey.33 The arbitral tribunal held that the actions of a Turkish investment trust, a private company wholly controlled by the national housing authority, were not attributable to the Turkish state. What is important in this case is that the tribunal rejected the position set forth in Maffezini v. Spain, that state control of a corporate entity gives rise to a rebuttable presumption that the entity is a state organ.
The case related to a contract for the construction of residential and commercial buildings in Istanbul, between a joint venture, in which Tulip Real Estate Investment (Tulip) was the lead partner, and Emlak, a Turkish real estate investment trust that is 100 per cent controlled by the Turkish Housing Development Administration (TOKI). The project was subject to numerous delays, due to, inter alia, problems with the zoning plan for the district, and Emlak terminated the contract in May 2010. Tulip filed an International Centre for Settlement of Investment Disputes (ICSID) claim alleging, inter alia, expropriation and denial of fair and equitable treatment.
Tulip submitted that Emlak was empowered to exercise elements of governmental authority and its conduct should be attributed to the Turkish state, in accordance with Article 5 ILC Articles. Tulip also claimed that Emlak acted under 'the instructions of, or under the direction or control of' the state (in this instance, TOKI, the public housing authority) and therefore its conduct should be attributed to the state pursuant to Article 8 ILC Articles.
The tribunal rejected all of Tulip's arguments on attribution. First, it held that Emlak, a private company established under Turkish domestic law, was not a state organ for the purposes of Article 4 ILC Articles. Specifically, it rejected the position that state control or ownership of a corporate entity can trigger a 'presumption of statehood', stating that there was 'no basis under international law' for this position and that the state ownership could not 'convert a separate corporate entity into an “organ” of the state'. The tribunal also concluded that Emlak was not empowered to exercise governmental powers for the purposes of Article 5, as Emlak's role in respect of zoning permits did not amount to a sovereign power.
The tribunal was divided, however, as to whether Emlak acted under TOKI's direction or control. The majority found that it had not. The tribunal accepted that, from an 'ordinary company law perspective', Emlak was under TOKI's managerial control and there were occasions where TOKI did in fact use Emlak to exercise sovereign powers. However, the only relevant question for the tribunal was whether TOKI exerted sovereign direction or control over Emlak in respect of the specific activity at issue in the dispute. Applying the high threshold of 'effective control', the tribunal was satisfied that Emlak exercised its own independent business judgment and acted in its best commercial interests. There was no proof that its decision to terminate the contract was in pursuit of any sovereign interest or was motivated by an ulterior state purpose.
The issue of attribution becomes increasingly important in investment arbitration, first and foremost, in the context of the state responsibility. Recent case law shows that the tribunals are unwilling to overcome the separateness between state-owned entities and the state unless strong and reliable evidence indicates that a state-owned entity was either a de facto organ of the state, or exercised governmental authority, or was acting under control or instructions of the state. Prof. Crawford, basing on the ILC Article commentary, suggested a set of basic criteria for determining whether an entity exercises the governmental authority: (1) the content of the powers; (2) the manner in which they are conferred on the entity; (3) the purposes for which the powers are to be exercised; and (4) the extent to which the entity is publicly accountable for their exercise.34
1 Oleg Alyoshin is a partner and Olha Nosenko and Ivan Yavnych are associates at Vasil Kisil & Partners.
3 ILC Articles, Article 5.
4 ILC Articles, Article 8.
5 ILC Articles Commentary, Chapter II, para. 6. Available at: https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. The same principle is stipulated in Article 27 of the Vienna Convention on the Law of Treaties, which reads: 'A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty'.
6 ILC Articles, Article 4(2).
7 Kaj Hober, 'State Responsibility and Investment Arbitration', Journal of International Arbitration, 2008, Volume 25, Issue 5, pp. 550–551. The ILC Articles Commentary, Article 4, p. 42: ' . . . it is not sufficient to refer to internal law for the status of state organs. In some systems the status and functions of various entities are determined not only by law but also by practice, and reference exclusively to internal law would be misleading'.
8 See para. (11) of the commentary to Article 4; see also ILC Article 5 and commentary.
9 ILC Articles Commentary, Article 4, para. 11. Available at: https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
10 ILC Articles Commentary, Article 5, para. 1.
11 ILC Articles Commentary, Article 5, para. 7.
12 ILC Articles Commentary, Article 5, para. 6.
13 ILC Article, Article 8 'Conduct directed or controlled by a state'.
14 Csaba Kovács, Attribution in International Investment Law, International Arbitration Law Library, Volume 45 (Kluwer Law International, 2018), p. 51.
15 Georg Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, paras 828–831, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C3985/DS11355_En.pdf.
16 id., paras 828–831, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C3985/
17 Tatneft v. Ukraine, para. 110, 112, https://www.italaw.com/sites/default/files/case-documents/italaw11494.pdf.
19 id., paras 143–148 https://www.italaw.com/sites/default/files/case-documents/italaw11494.pdf.
20 id., paras 145, 147, https://www.italaw.com/sites/default/files/case-documents/italaw11494.pdf.
21 Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7.
22 The tribunal split the complained conduct of SODIGA into three components, of which it found that two had no particularly governmental character, but one – the use of SODIGA's particular powers and authority with respect to financial institutions –had a governmental character. The tribunal found a breach of a BIT and awarded damages only with respect to those consequences that flowed from the one act or conduct where it could discern a particular governmental role involved.
23 J Crawford (2013). State Responsibility: The General Part (Cambridge Studies in International and Comparative Law, pp. 113–140). Cambridge: Cambridge University Press, p. 118.
24 Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries, 2001, p 48 para. 7, https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
25 Prosecutor v. Duško Tadi´c case, para. 117, https://www.icty.org/x/cases/tadic/acjug/en/tad-aj990715e.pdf; Bayindir Insaat Turizm Ticaret Ve Sanayi A.Ş v. the Islamic Republic of Pakistan, para. 130, https://www.italaw.com/sites/default/files/case-documents/ita0075.pdf.
26 Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries, 2001, p. 48 para. 6, https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
27 Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2, Award (31 October 2012).
28 In 2011, a UK court ordered Ceypetco to pay Standard Chartered around US$162 million for breaching their hedging agreement. The English Court of Appeal upheld the decision last July, though Ceypetco has since applied for leave to appeal to the Supreme Court. Citibank, on the other hand, lost its US$192 million claim in 2011 in an arbitration by London Court of International Arbitration seated in Singapore. A tribunal chaired by VV Veeder QC held that under Sri Lankan law the hedging agreements were speculative and that Ceypeto had no authority to enter into them.
29 Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2, Award (31 October 2012), para. 405(f).
30 id., para. 405; having made this conclusion, the tribunal also referred to the findings of the Supreme Court of Sri Lanka, which considered CPC to be 'a government creation clothed with juristic personality so as to give it an aura of independence' with 'deep and pervasive state control', such that that its business is mainly, if not wholly, controlled by the state.
32 id., para. 405(a).
33 Tulip Real Estate and Development Netherlands B.V. v. Republic of Turkey, ICSID Case No. ARB/11/28, 10 March 2014.
34 J Crawford (see footnote 23), p. 129.