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Shield or Sword? The Misuse of Sovereign Immunity by State-Owned Enterprises in International Commerce.

Shield or Sword? The Misuse of Sovereign Immunity by State-Owned Enterprises in International Commerce

                                       Author- Aishi Ghosh, Kolkata

ABSTRACT

This article examines the misuse of sovereign immunity by state-owned enterprises in international commerce. It argues that SOEs exploit the doctrine by combining commercial participation with sovereign protection, undermining accountability. Through comparative analysis of legal frameworks, the paper highlights inconsistencies and proposes reforms to ensure fairness, predictability, and effective enforcement in global trade.

Keywords: Sovereign Immunity; State-Owned Enterprises; International Law; Commercial Activity; Enforcement; Arbitration; FSIA; Restrictive Doctrine

INTRODUCTION

Sovereign immunity protects states from being compelled to defend their sovereign action in foreign courts based on the principle of equality among nations and mutual respect. However, the landscape of global commerce has significantly transformed. State-Owned Enterprises (SOEs) now operate as powerful participants in international markets, engaging in commercial transactions, but when disputes arise, the same entity may invoke the shield of sovereign immunity, arguing that it forms part of the state and cannot be sued or have its assets seized.

This transforms immunity from being a defensive protection to a strategic tool.

THE EVOLUTION OF SOVEREIGN IMMUNITY

Sovereign immunity developed in the 19th century under the absolute doctrine, which held that a foreign state could not be sued in another country’s courts under any circumstances without its consent. The classic expression is The Parlement Belge (1880), where the Court of Appeal held that even state-owned vessels used for public purposes were immune from legal proceedings.[1]

In the 20th century as States increasingly entered the commercial world through operating railways, trading commodities, and running commercial shipping lines, the absolute doctrine soon appeared unfair. Private companies competing with state enterprises found themselves at a distinct disadvantage as they could be sued for their actions, but state-owned entities could simply claim immunity and avoid liability. This imbalance led to the development of the restrictive doctrine in sovereign immunity. This approach distinguishes between acts carried out in sovereign authority (acta jure imperii) and commercial acts (acta jure gestionis), and entails that immunity is granted only for the former.

The United Nations Convention on Jurisdictional Immunities of States and Their Property (UNCSI), adopted in 2004, reflects the restrictive doctrine. Article 2(1)(c) defines a “commercial transaction” based on the nature of the contract or transaction, rather than its purpose. It prevents states from claiming immunity by asserting that a commercial purchase was carried out for some broader governmental objective.[2]

SOEs IN INTERNATIONAL COMMERCE

SOEs have a separate legal identity under their domestic law, yet they remain wholly or majorly owned or controlled by governments, often to serve broader policy objectives alongside their commercial functions. Chinese SOEs, for instance, are established as “enterprise legal persons” i.e., independent corporate entities under the Company Law, with decision-making power conferred by the Constitution.[3] They are expected to operate like private companies and assume independent legal liabilities.

The critical question that arises is when an SOE should share the same immunity as the state. Under section 14 of the UK State Immunity Act 1978, a separate entity is immune only if it acts within its sovereign authority, and only if, in similar circumstances, the state itself would have been immune. Similarly, the United States Foreign Sovereign Immunities Act 1976, extends immunity to “agencies or instrumentalities” of foreign states, subjected to the same commercial exception, applicable to states themselves.[4]

SOEs’ status cannot be easily separated from the nature of their acts. An SOE might generally operate as a separate legal person, but still exercise governmental authority in specific transactions. Whereas, even an entity that forms part of the state structure may lose immunity when it engages in business activities. This complexity is well illustrated by the Trendtex Trading Corporation v Central Bank of Nigeria, where the Central Bank of Nigeria, though clearly a governmental institution, was denied immunity because its transaction involving letter of credit was considered purely commercial in nature.[5]

HOW SOEs MISUSE SOVEREIGN IMMUNITY

  • The Misuse of Sovereign Immunity

SOEs primarily try to escape courts’ jurisdiction. Even where a court determines jurisdiction because the transaction falls within the commercial exception, the claimant may find enforcement difficult as the SOEs’ assets are protected from execution. The SOE benefits commercially from participation in the market while shielding itself from the consequences of breaching its obligations.

  • Avoiding Arbitration and Litigation

Even when SOEs have agreed to arbitration clauses, they try to resist arbitration by invoking sovereign immunity. They may argue that their agreement to arbitrate was not a binding waiver of their immunity from suit. This argument contradicts the principle that agreeing to arbitration implies accepting the jurisdiction of the arbitral tribunal.

The Supreme Court of United States addressed this issue in CC/Devas (Mauritius) Ltd v Antrix Corp. Ltd (2025), where it held that when the arbitration exception under the Foreign Sovereign Immunities Act 1976 applies, courts can exercise jurisdiction over foreign states and their instrumentalities without requiring any separate analysis of minimum-contact.7 Moreover, the Court rejected the Ninth Circuit’s requirement that claimants must additionally establish that the defendant had sufficient contacts with the forum. This decision strengthens the position of private parties contracting with SOEs, but it does not eliminate the expense of litigation.

  • Evading Enforcement of Awards

Even where a claimant successfully obtains an arbitral award or court judgment, enforcement can be challenging. The claimant must locate assets owned by the SOE, establish that they are not protected by immunity, and persuade a court to permit their seizure. SOEs often structure their operations in ways that make enforcement difficult, such as by placing assets beyond reach, holding property through subsidiary companies or in jurisdictions with restrictive enforcement regimes.

The Cairn Energy dispute with India illustrates these difficulties. After obtaining a US$1.2 billion arbitral award against India, Cairn sought to enforce against shares in Air India, the state-owned airline, held in the United States.[6] A key legal issue was whether Air India could be treated as the “alter ego” of the Indian state. This principle was governed by factors established in First National City Bank v Banco Para el Comercio Exterior de Cuba (Bancec), which established that government instrumentalities are presumed to be legally separate from the state. This presumption can be rebutted only through clear evidence of extensive state control.[7]

  • Hiding Behind State Identity

SOEs may present themselves as commercial entities when seeking contracts, investments, or market opportunities, as commercial entities. Their promotional materials emphasize their independence, efficiency, and market orientation. But when legal proceedings threaten, the same entities assert that they are organs of the state entitled to immunity.

The People’s Republic of China adheres formally to the absolute immunity doctrine, but it has consistently argued in foreign courts that Chinese SOEs are separate legal entities and do not enjoy sovereign immunity.[8] In the “Fireworks case” (Scott v People’s Republic of China), the Chinese government submitted that the legal status and responsibilities of the state itself and those of SOEs should be separated.[9] More recently, in a letter submitted before a Hong Kong court concerning the China National Coal Group, the Chinese government stated that SOEs are independent legal entities, carrying out activities of production and operation on its own and assume independent legal liabilities, with no special legal entity status superior to other enterprises.[10]

This position that SOEs are separate and not entitled to immunity helps Chinese entities maintain fairness in international commerce. However, it creates a potential contradiction if an SOE tries to claim immunity in future litigation, it would contradict the position its government has consistently maintained.

JUDICIAL AND COMPARATIVE ANALYSIS

  • United States

The Foreign Sovereign Immunities Act 1976 (FSIA) of the United States provides the sole basis for obtaining jurisdiction for legal proceedings over foreign states and their instrumentalities in US courts. Section 1605(a)(2), the commercial activity exception removes immunity when a dispute arises out of commercial activities carried on in the United States, or an act performed in the United States in connection with commercial activity elsewhere, or an act outside the United States in connection with commercial activity that causes a direct effect in the United States.

The FSIA defines “commercial activity” by reference to the nature of the conduct rather than its purpose. This formulation, drawn from the legislative history, directs courts to examine whether the activity is of a type that private businesses ordinarily engage in, rather than whether the state had a public purpose in undertaking it. The Supreme Court affirmed this approach in Republic of Argentina v Weltover Inc (1992), where it held that Argentina’s issuance of bonds was a commercial act because private parties also issue bonds, even though the purpose was to manage Argentina’s currency reserves.[11] Recent FSIA jurisprudence has addressed procedural aspects of suing state instrumentalities.

In CC/Devas v Antrix (2025), the Supreme Court rejected the Ninth Circuit’s requirement that claimants must establish minimum contacts beyond those required by the FSIA itself.[12] Justice Kavanaugh’s opinion for the Court emphasized that section 1330(b) of the FSIA provides for personal jurisdiction whenever an exception applies and service is proper; no additional constitutional analysis is required. This decision simplifies litigation against SOEs in US courts.

  • United Kingdom

The United Kingdom adopted, similar restrictive theory- the State Immunity Act 1978 (SIA). It was enacted partly in response to judicial development such as in the Trendtex Trading Corporation v Central Bank of Nigeria (1977). Section 3 of the SIA, removes sovereign immunity in disputes arising from commercial transactions, defined in terms similar to the FSIA and UNCSI. A commercial transaction includes “any contract for the supply of goods or services,” “any loan or other transaction for the provision of finance,” and “any other transaction or activity into which a State enters or in which it engages otherwise than in the exercise of sovereign authority.”[13]

The SIA treats SOEs as separate entities different from states themselves. Section 14(1) provides that a separate entity is immune only if the proceedings relate to anything done by it in the exercise of sovereign authority and/or the circumstances must be such that the state itself would have been immune. This formulation requires courts to examine both the nature of the act and the context in which it was performed. For example, an SOE that generally operates in the marketplace, may exercise sovereign authority when implementing government policy or regulating economic activity.

In Kuwait Airways Corporation v Iraqi Airways Company (1995), the House of Lords held that the seizure of Kuwaiti aircraft by Iraqi Airways during the invasion of Kuwait was a sovereign act, even though it was carried out by a commercial airline.[14]  The key factor considered was the nature of the act (which was carried out pursuant to a governmental decree), rather than the commercial status of the entity.

  • Contrasting Approaches

Despite the broad convergence on restrictive immunity, significant differences remain in how jurisdictions apply these principles to SOEs. Some legal systems, particularly in civil law jurisdictions, retain broader immunity for state entities, particularly in enforcement matters. The Dutch Supreme Court’s decision in Anatolie Stati v Kazakhstan (2020), the court set aside an appeal for attachment of shares held in a Kazakh sovereign wealth fund, applying Article 19 of UNCSI as customary international law and placing the burden on the claimant to prove that the assets were not used for public purposes.[15]

PROPOSED REFORM

  • Narrowing Scope of Immunity

Reform should clarify that SOEs enjoy no immunity for commercial acts, regardless of their state ownership. This principle is already recognized in the restrictive theory, but its application to SOEs remains inconsistent.

International frameworks should make the position clear that SEOs are subject to the same jurisdictional rules as private enterprises. Article 10 of the UNCSI confirms that a state cannot invoke immunity in proceedings relating to a commercial transaction. Article 2(1)(b)(iii) defines “state” to include “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.” This formulation correctly limits immunity to entities acting sovereignly and does not confer immunity on SOEs merely because they are state-owned.

  • Recognizing SOEs as Separate Legal Entities

A related reform that can be undertaken is to consistently treat SOEs as distinct legal entities. The presumption established in Bancec that state-owned entities are separate from the state should be applied consistently across jurisdictions. This presumption protects SOEs from being held liable for state’s obligations, and at the same time prevents SOEs from claiming sovereign immunity for their own commercial acts. The two aspects are symmetrical i.e., if an SOE is separate enough to own property and contract in its own name, it is separate enough to be sued. The question is the nature of SOEs’ act. An SOE that operates commercially is not exercising sovereign authority, regardless of whether it is formally classified as a state organ. The functional approach adopted in section 14 of the UK SIA, asking whether the entity acted in the exercise of sovereign authority, provides the correct analytical framework.

  • Strengthening Arbitration Enforcement

Arbitration plays a crucial role in resolving disputes involving SOEs. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards requires courts of contracting states to recognize and enforce arbitration agreements and awards, with limited exceptions. States should ensure that their arbitration laws apply equally to SOEs and that arbitration agreements are treated as waivers of immunity. The US Supreme Court’s decision in CC/Devas v Antrix reinforced this framework by confirming that the arbitration exception under the FSIA provides clear jurisdiction.[16] Other jurisdictions should adopt similar approaches, ensuring that SOEs which agree to arbitration and cannot later resist enforcement by invoking immunity. States should also consider adopting legislation that expressly provides that agreement to arbitrate constitutes a waiver of immunity in proceedings to confirm or enforce the resulting award.

  • Limiting Enforcement Immunity

Enforcement immunity presents particular difficulties because it protects state assets from seizure even where jurisdiction over the underlying claim is proper. The distinction between jurisdictional immunity and enforcement immunity is well-established, but its application to SOEs requires clarification. Where an SOE is not immune from suit, its commercial assets should be available to satisfy judgments.

Article 19 of UNCSI provides that enforcement measures may be taken against property of a state “specifically in use or intended for use by the State for other than government i.e., noncommercial purposes.” This formulation protects assets used for sovereign functions while permitting enforcement against commercial property. This test, applied to SEOs, requires courts to examine the actual use of the assets in question, rather than accepting formal claims that all state property is immune.

The Crystallex litigation concerning Venezuelan assets illustrates both the possibilities and limitations of enforcement against SOEs. The successful effort to attach shares of PDVSA, the Venezuelan state oil company, required years of litigation and depended on the unique circumstances of Venezuela’s presence in the United States.[17] Most claimants lack the resources to pursue such extended enforcement actions. Reform should aim to make this process simpler, faster, and predictable.

CONCLUSION

Sovereign immunity was meant to protect states when performing core sovereign functions and their protection remains essential. When states participate in business through SOEs, they step into the role of market players. Using immunity to avoid commercial responsibility creates unfair advantages, weakens trust, and disrupts global trade. A fair approach is to apply the restrictive theory consistently, treating SOEs like private businesses thereby ensuring accountability while protecting state sovereignty, and confidence in international commerce.

REFERENCES

Table of Cases

  • CC/Devas (Mauritius) Ltd v Antrix Corp Ltd 605 US ___ (2025)
  • Crystallex International Corporation v Bolivarian Republic of Venezuela, No 17-1626 (3d Cir 2019)
  • First National City Bank v Banco Para el Comercio Exterior de Cuba (Bancec) 462 US 611 (1983)
  • Kuwait Airways Corporation v Iraqi Airways Company [1995] 1 WLR 1147 (HL)
  • Republic of Argentina v Weltover Inc 504 US 607 (1992)
  • The Parlement Belge (1880) 5 PD 197
  • Trendtex Trading Corporation v Central Bank of Nigeria [1977] QB 529 (CA)

Table of Legislation

  • Foreign Sovereign Immunities Act 1976 (US) 28 USC §§ 1330, 1602-1611
  • State Immunity Act 1978 (UK), ss 3(3), 14(2)
  • United Nations Convention on Jurisdictional Immunities of States and Their Property (adopted 2 December 2004, not yet in force) UN Doc A/RES/59/38

Secondary Sources

Footnotes

[1] The Parlement Belge (1880) 5 PD 197

[2] United Nations Convention on Jurisdictional Immunities of States and Their Property (adopted 2 December 2004) UN Doc A/RES/59/38, art 2(1)(c)

[3] Constitution of the People’s Republic of China, art 16; Company Law of the People’s Republic of China, art 3

[4] Foreign Sovereign Immunities Act 1976 (US), 28 USC § 1603(b)

[5] Trendtex Trading Corporation v Central Bank of Nigeria [1977] QB 529 (CA).

[6] Cairn Energy PLC v Republic of India (US District Court, SDNY, May 2021)

[7] First National City Bank v Banco Para el Comercio Exterior de Cuba 462 US 611 (1983)

[8] Guan Feng (n 3)

[9] Scott v People’s Republic of China (ND Tex 1979) No CA3-79-0836-D

[10] Letter from the Central People’s Government concerning China National Coal Group, submitted to Hong Kong court (2017)

[11] Republic of Argentina v Weltover Inc 504 US 607 (1992)

[12] CC/Devas (Mauritius) Ltd v Antrix Corp Ltd 605 US ___ (2025)

[13] State Immunity Act 1978, s 3(3)

[14] Kuwait Airways Corporation v Iraqi Airways Company [1995] 1 WLR 1147 (HL)

[15] Anatolie Stati v Republic of Kazakhstan (Dutch Supreme Court, December 2020)

[16] CC/Devas v Antrix (n 7)

[17] Crystallex International Corporation v Bolivarian Republic of Venezuela No 17-1626 (3d Cir 2019)

Aishi Ghosh
Author: Aishi Ghosh

BBA LL.B. (Hons.) Student [2nd Year]| Aspiring Corporate Lawyer | Business & Legal Enthusiast