State Enterprises in International Investment Disputes: Focus on Actor Or Action?

STATE ENTERPRISES IN INTERNATIONAL
INVESTMENT DISPUTES: FOCUS ON ACTOR
OR ACTION?
SHIXUE HU*
ABSTRACT
The hybrid roles of state enterprises (SEs) in international investment dis-
putes have puzzled international arbitrators and commentators, resulting in
conflicting decisions on whether SEs should be considered private corporations
or agents of states. This Article contributes to resolving this puzzle by providing
the most updated and systematic case studies of investor-state disputes involv-
ing SEs. It identifies two competing methodologies developed by international
tribunals to determine the roles of SEs: one is an “actor-focused analysis,”
which emphasizes the general characteristics of the SEs; and the other an
“action-focused analysis,” which targets their specific conduct. The methodologi-
cal differences among tribunals result in competing decisions, creating tensions
in international law, also present challenges to domestic regulatory frameworks
concerning SEs’ internationalization.
The Article evaluates and compares the two competing legal methodologies from
both doctrinal and policy perspectives. Responding to criticisms of the action-
focused methodology in existing literature, this Article argues that the action-
focused methodology is supported by authoritative international law sources,
including the text, history, and commentaries of international treaties and custom-
ary international law. The action-focused approach is also more sensible as a policy
matter, because it creates a more effective and responsive arbitral procedure, ensures
the consistency of international investment arbitration, and increases the coherence
of international law. It also better serves domestic policy goals among national se-
curity, fair competition, and economic development.
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
II. THE ISSUE IN A NUTSHELL: THE ROLES OF STATE ENTERPRISE IN
INVESTMENT DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
* J.S.D. candidate, Yale Law School. I would like to thank Professor W. Michael Reisman for his
suggestions and generous support in my research. I thank all the professors of Peking University
International Economic Law Center and the participants at Yale Doctoral Conference for their
valuable comments. Special thanks to Boli Chen, Arash Ghiassi, Yusuf Saei, Zhi’ang Song,
Wenqing Zhao for their great help in this paper. I would also like to thank Rachel Finn, Katie
Rumer, Tanisha Singh, Thomas Spiegler and editors of Georgetown Journal of International Law. All
errors are my own. V
C 2020, Shixue Hu.
323
III. THE ACTOR-FOCUSED METHODOLOGY : OWNERSHIP AND
PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
A. The Maffezini Two-Part Test . . . . . . . . . . . . . . . . . . . . . 331
B. Maffezini Followers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
IV. THE ACTION-FOCUSED METHODOLOGY: THE NATURE OF
CONDUCT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
A. The CSOB Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 335
B. CSOB Followers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
C. Objections to the CSOB Approach . . . . . . . . . . . . . . . . . . 340
V. REVISITING THE RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
A. The ICSID Convention . . . . . . . . . . . . . . . . . . . . . . . . . . 343
1. SE as an Agent of the State. . . . . . . . . . . . . . . . . . 344
2. SE as an Investor/National. . . . . . . . . . . . . . . . . . 346
B. The ILC Articles on State Responsibility. . . . . . . . . . . . . . . 348
1. The General Principle of Objective
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
2. Listed Acts Attributable to States . . . . . . . . . . . . . 349
3. ILC Article 5: Conduct Exercising Governmental
Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
4. ILC Article 8: Conduct Directed or Controlled by
a State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
VI. POLICY CONCERNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
A. Arbitration Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
B. Consistency of ISDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
1. Inconsistency in the Same Case . . . . . . . . . . . . . . 359
2. Inconsistency Among Similar Cases . . . . . . . . . . . 360
C. Coherence in International Law. . . . . . . . . . . . . . . . . . . . 362
1. World Trade Organization . . . . . . . . . . . . . . . . . . 363
2. United Nations Convention on Jurisdictional
Immunities of States and Their Property . . . . . . . 364
3. Santiago Principles of Sovereign Wealth Funds
(the Santiago Principles) . . . . . . . . . . . . . . . . . . . 365
D. Policies in Domestic Laws . . . . . . . . . . . . . . . . . . . . . . . . 366
1. Policies in Corporate Law. . . . . . . . . . . . . . . . . . . 367
2. Domestic Concerns of National Security and Fair
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371
E. Comprehensiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
VII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
GEORGETOWN JOURNAL OF INTERNATIONAL LAW
324 [Vol. 51
I. INTRODUCTION
The acceleration of state participation in international investment
has generated world-wide policy confusion and disputes. Unfortunately,
international investor-state dispute settlement (ISDS) has not yet
formed a clear rule concerning the legal standing of state enterprises
(SEs) in these disputes: when should a SE be treated as representing a
sovereign state, and when should it be regarded as a business investor?
To answer the critical question, this Article conducts a systematic review
of publicized investment arbitrations involving SEs. It finds that arbitra-
tors, the quasi-judges of ISDS, have formed two competing legal meth-
odologies concerning the roles of SEs in investment disputes.
One methodology is what this Article will call the “actor-focused anal-
ysis.” It examines mainly, if not exclusively, the general and fixed char-
acteristics of an entity, including its ownership and institutional
purpose, to determine whether the enterprise should be treated as a
governmental agency. The actor-focused analysis shares the popular
assumption that SEs are the alter egos of states if they are publicly
owned or controlled, and fulfill public purposes.
Yet some other tribunals adopt what this Article will categorize as the
“action-focused analysis.” Unlike the former analysis that asks the “who
they are” kind of questions, it places greater emphasis on the “what
they do” aspect, the nature of the specific conduct of a SE in a dispute.
This approach began with the landmark case CSOB. In CSOB, after con-
sidering the nature of a SE’s conduct, the tribunal concluded that the
specific wrongful acts of the SE were not governmental, even though
the SE was established for public purposes and was wholly state-con-
trolled.
1
The approach taken in CSOB thus departs from the previous
actor-focused orientation. It scrutinizes the particular actions of SEs
rather than their general characteristics. The CSOB tribunal has been
questioned and criticized by many professionals and scholars, though
nevertheless been followed in more recent cases.
2
1. C
ˇeskoslovenska Obchodnı´ Banka AS v. Slovak Republic, ICSID Case No. ARB/97/4,
Objections to Jurisdiction (May 24, 1999), 14 ICSID Rev.–Foreign Inv. L. J. 251 (1999).
2. See Gavrilovic´ and Gavrilovic´ d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39,
Award (July 26, 2018); see also Beijing Urban Construction Group Co. v. Republic of Yemen,
ICSID Case No. ARB/14/30, Decision on Jurisdiction (May 31, 2017). In Gavrilovic´ case, the
plaintiffs sued Croatia at ICSID claiming that a Croatian Fund in charge of privatization of
Croatian SOEs and a Croatian SOE have harmed their investment, thus the state should
compensate the investors. The SOE is on the respondent side. In Beijing Urban Construction Group
Co. case, the SOE is the claimant. Beijing Urban Construction Group Company Limited (BUCG)
is a Chinese state-owned enterprise. It entered into a construction contract with the Yemen Civil
Aviation and Meteorology Authority through an international tender process for a new
FOCUS ON ACTOR OR ACTION?
2020] 325

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