By Andrijana Mišović[1]
Introduction
In the context of international investment law and arbitration, a State contract refers to a contract concluded between a State and a foreign investor. But what if the contract is concluded between a State-owned (or otherwise State-related) entity and a foreign investor? What kind of State involvement is required for the State to be bound by the contract? Answering this question may be important both for establishing tribunals’ jurisdiction and for determining a treaty breach (breach of the umbrella clause).
In this post, I explain how to determine whether an investment contract concluded between a foreign investor and a State-related entity qualifies as a State contract. The analysis proceeds in three parts. The first part critically examines the rules of attribution under the Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA), as a framework that tribunals often apply to this issue. The second part introduces an alternative framework – general principles of law (GPL), which should govern this matter. Finally, the third part demonstrates how the outcome can differ when GPL are applied instead of the ARSIWA rules of attribution.
Against Applying the ARSIWA Rules of Attribution
Tribunals often apply ARSIWA rules of attribution to attribute contracts to the State. This can be illustrated by the following two examples.
In Toto v. Lebanon, the investor entered into a contract with an entity attached to the Lebanese Ministry of Public Works – Conseil Executif des Grands Projets (CEGP) and later its successor, the Council for Development and Reconstruction (CDR). The Claimant argued that CEGP and later CDR were acting on behalf of the Respondent State (Toto Costruzioni v. Lebanon [2009], para 17). The Respondent objected to the Tribunal’s ratione personae jurisdiction, arguing that it was not a party to the contract, because the contract was signed by entities with financial and administrative autonomy (Ibid, para 50). The Tribunal sided with the Claimant. It held that CEGP and CDR were ‘in charge of studying and implementing development and reconstruction projects’; that they elaborated and implemented projects assigned to it by the Council of Ministers of the Lebanese Government; and that the funds for performance of the projects were ‘provided for in the State budget’ (Ibid, paras 58, 59). On this basis, the Tribunal concluded that the entities were ‘exercising in the context of the Contract the governmental authority of the Republic of Lebanon’, and that Lebanon ‘may be internationally liable’ for their acts (Ibid, para 60).
Although the Tribunal concluded that governmental authority was exercised ‘in the context of the Contract’, the facts on which it relied related to the entity’s general exercise of governmental authority rather than specific contractual relationship between the Government and the investor. In any event, empowerment to exercise governmental authority is not an appropriate standard for contract attribution. Whether an entity is empowered to exercise governmental authority does not answer the question whether the Government is a party to the contract.
Another example is Strabag v. Libya. After entering into a joint venture with the Libyan Investment and Development Company (LIDCO), Strabag and the joint venture company entered into a series of contracts with Libyan State-owned entities, which all had separate legal personality and independent financial liability according to the Libyan law. The entities included HIB (Housing and Infrastructure Board) – in charge of preparing urban planning schemes and engineering designs for the development of towns; RBA (Roads and Bridges Authority) – which had a wide range of responsibilities relating to land transportation, design and maintenance of roads and transportation infrastructure; and TPB (Transportation Projects Board) – which implemented transportation infrastructure projects.
During the arbitration proceedings, Libya challenged the Tribunal’s personal jurisdiction arguing that it was not itself a party to the various contracts at issue. The Tribunal disagreed. It specifically relied on Article 5 of the ARSIWA and held that ‘States may operate through parastatal entities, which exercise elements of governmental authority’ (Strabag v. Libya [2020], para 170). The Tribunal relied on ‘the overall circumstances cumulatively’: ‘the public importance of the functions’ of the State-owned enterprises (SOEs); lack of administrative and financial autonomy; the fact that the contracts in question are ‘deeply bound with State interest’; ‘overwhelming evidence’ demonstrating that ‘an array of public authorities had a major hand in the conclusion and performance of the contracts’ (Ibid, para 187). For the Tribunal this was ‘an exceptional combination of circumstances’ based on which it concluded that the Respondent entered into the contracts in question (Ibid).
This case is a good illustration of the confusion that continues to surround this issue. ‘An exceptional combination of circumstances’ is not a legal standard, and it does not explain what kind of behaviour of the State is required in order for it to be bound by the contract. While the ARSIWA rules on attribution provide an appropriate legal framework for attributing conduct to a State for the purposes of determining State responsibility, they do not provide a suitable framework for contract attribution. While empowerment to exercise governmental authority (ARSIWA Article 5), and the State’s effective control over an entity (ARSIWA, Article 8) are central to attributing that entity’s wrongful act to the State, they do not answer the distinct question of whether the Government itself entered into a contract. Contract attribution should instead focus on factors such as the Government’s participation in negotiation and conclusion of the contract, its conduct throughout the contractual relationship, and whether its actions created an appearance of authority.
In a recent ruling the Austrian Supreme Court criticized Tribunal’s reasoning in Strabag v. Libya and held that when it comes to the contracts with State-affiliated entities with autonomous legal personality, attribution of the contractual breach to the host State cannot be assumed (Strabag v. Libya, Austrian Supreme Court [2022], para 24).
In Favor of General Principles of Law
General principles of law form part of international law, which applies to investor-State relationships (Alvik [2011], p. 46; Sinclair [2017], p. 749; Kriebaum [2022], p. 819; Risvas [2022], p. 183). Historically, international tribunals applied them as an ‘external axis of stability for State contracts’ (Chernykh [2022], p. 205). Such contracts were internationalized through the GPL which was described as a ‘discovery of fire’ that marked the beginning of international investment arbitration (Veeder, [1998], p. 772). Moreover, international tribunals have already applied principles of contract law as the GPL (see for example R.N. Pomeroy et al. v. Iran [1983], p. 17; Morrison-Knudsen Pacific Limited v. The Ministry of Roads and Transportation and The Islamic Republic of Iran [1984], p. 37).
Three principles of contract and agency law (apparent authority, implied consent, and veil piercing) are widely accepted in domestic legal systems and international arbitration, as principles applicable to determine whether a non-signatory is a party to the contract (Mišović [2025], p. 194 et seq). They should be applied to determine whether a State is bound by a contract concluded between an SOE and an investor.
The doctrine of apparent authority is based on reasonable belief of one contractual party that another party was merely acting as an agent of a non-signatory. Such reasonable belief must be based on a certain behaviour of a non-signatory. Applied to this context, if the State acted in such a way that it was reasonable for the investor to conclude that the SOE concluded the contract on the State’s behalf, the contract would be binding for the State (Ibid, p. 196). The principle of implied consent is based on the State’s intention to be contractually bound (Sinclair [2009], p. 104). Such intention is expressed though behaviour, such as involvement in negotiation, performance or termination of the contract. Finally, the veil piercing principle focuses on State control over the entity, coupled with bad faith (for instance the intention to avoid contractual obligations). Veil piercing principle is accepted both in international commercial arbitration (Brekoulakis [2017], p. 615) and in international law (ICJ, Barcelona Traction [1970], p. 3, para 58).
These principles focus on criteria typically used in domestic legal systems to attribute contracts (bind the non-signatories), rather than on the rules governing the attribution of internationally wrongful acts (ARSIWA rules of attribution).
In a recent case CGEP v. UNOPS [2024] the Tribunal applied these principles of binding the non-signatories, as ‘general principles of international commercial law’. The arbitration concerned the alleged non-payment for bus transportation services offered during the 2019 Pan American and Parapan American Games in Lima. The disputed contract was signed between UNOPS (UN Office for Project Services) and CGEP (Peruvian consortium). The crucial question was whether the arbitration clause of the disputed contract could be extended to the Peruvian Ministry of Transport and Communication (the Ministry). The Ministry was not a party to the contract in question, but Peru partnered with the UNOPS for the organization of the games. In order to answer this question, the Tribunal applied ‘general principles of international commercial law’, as chosen by the parties in the arbitration clause of the contract. It explained that although the principles of pacta sunt servanda and the principle of relative effect of contracts are the two core principles which govern the matter, the arbitration agreement can be extended to non-signatories under ‘exceptional circumstances’ (Ibid, para 232). Then, the Tribunal applied articulated legal principles for binding the non-signatories to such exceptional circumstances. It first applied the principle of implied consent and held that there was no evidence demonstrating intention of the Ministry to be bound by the Contract in question (Ibid, paras 237, 251). Second, the Tribunal relied on the veil piercing principle (examined together with the group of companies doctrine) and held that these doctrines presume some corporate relationship between signatory and non-signatory, which was not present in this case (Ibid, paras 253-255). Thus, the Tribunal concluded, based on the general principles of international commercial law, that the contract was not binding for the Ministry.
It should be noted that in this case, the ‘general principles of international commercial law’ were applied as the law chosen by the parties. However, even in the absence of an explicit choice by the parties, general principles of law can be applied as a part of international law. State involvement brings the matter within the realm of public international law (PIL), and GPL should be applied as a part of PIL (see more in Risvas [2022]).
The Impact of the Applicable Framework on the Outcome
Having outlined the two cases in the first part of this post (Toto v. Lebanon and Strabag v. Libya) let us now examine whether their outcomes would have been different had GPL been applied instead of the ARSIWA rules of attribution.
In Toto v. Lebanon, the Tribunal held that CEGP acted as ‘the agent and implementing authority’ of the State (Toto Costruzioni Generali v. Lebanon [2009], para 58). The Tribunal applied Article 5 of the ARSIWA and held that because CEGP had certain tasks which manifested governmental authority, the contract in question was attributable to the State. Application of the GPL would probably lead to a different outcome. First, under the apparent authority principle, the Claimant would have to show that it reasonably believed, based on the Government’s behaviour that the real contractor was the State, not the CEGP. Claimant did not rely on such Government’s behaviour. Second, under the implied consent theory, Claimant would have to demonstrate that the Government was involved in the negotiation and performance of the contract in question, which was also not argued. Finally, the veil piercing doctrine would require certain bad faith (for instance, the intention to avoid contractual obligations) on the side of the Government, coupled with control of the State over the entity. Although the entity was controlled by the State (Ibid, para 51) this is not sufficient to attribute all its contracts to the State.
In Strabag v. Libya, the Tribunal attributed contracts concluded by various State-related entities to Libya based on various circumstances, such as that contracts in question were bound with State interest; different public authorities were included in conclusion and performance of the contracts; lack of autonomy of the entities in question, etc. However, these circumstances would not necessarily justify attribution under the GPL framework. The implied consent principle would require Government officials to be involved in the process of negotiation and performance of the contracts. The fact that various ‘public authorities’ were involved would not be sufficient, as such. This is because governmental authority is different from public function (Viñuales, Hailes [2024], p. 270). In this case the term ‘authority’ was often used to describe a State-related public entity (for example Roads and Bridges Authority [RBA] – an entity with separate legal personality under Libyan law). Thus, it is difficult to conclude, on this basis, that the Government itself expressed its intent to be bound by the contracts through its participation in contract negotiation and performance. The apparent authority principle would require that the investor reasonably concluded based on the behaviour of the Government representatives that the State was a real party to the contract. It would not suffice that the contract was concluded in the interest of the State. Finally, the lack of administrative and financial autonomy and dependence on the State might be a relevant factor for application of the veil piercing principle, but it would have to be coupled with bad faith, as seen above.
Choosing the legal framework applied to contract attribution may be crucial to the outcome of the case. Applying ARSIWA rules of attribution to contract attribution is not only wrong (because the rules are not designed for contract attribution) but can also have major practical impact on the case. The rules which should govern this matter are GPL of contract and agency law which are developed precisely for this purpose – to determine whether a contract binds a non-signatory.
[1] Postdoctoral Researcher and Lecturer at the University of Vienna. This post draws on her PhD thesis: ‘Attributing Investment Contracts of State-Owned Entities to the Host State’ and her article ‘Attributing investment contracts: the general principles approach’ (2025) 28 (2) Journal of International Economic Law.