Those doing business with foreign governments would be wise to adhere to the dictate of caveat venditor: seller beware. Cross-border “government” contracting often involves doing business not directly with the sovereign itself, but rather with an enterprise created by, owned by and answerable to, but legally distinct from, the government. These state-owned entities abound in various sectors, including oil and gas, telecommunications, finance, healthcare and transportation, as well as sovereign wealth funds. While disputes may arise with those companies as in any commercial relationship, enforcing the terms of a contract with a state-owned enterprise or otherwise holding such an entity or its sovereign owner legally accountable can present special challenges.
The largest state-owned enterprises may have a presence and assets in various countries around the world, and thus can be subject to effective enforcement of court judgments or arbitral awards for breach of contract. But smaller state-owned companies may not do business outside their home countries, making it difficult, and often impractical, to sue them elsewhere. In those cases, jilted contractors may seek to recover against the sovereign itself, on the theory that the state enterprise is the agent or alter ego of the government. In the United States, however, that approach requires piercing a rather resilient sovereign veil, in some cases by showing that the government controls the company’s “day to day” operations.
In its May 17, 2016, decision in GSS Group LTD v. National Port Authority of Liberia and Republic of Liberia, No. 14-7041, the U.S. Court of Appeals for the D.C. Circuit added another wrinkle, holding that the government of Liberia could not be sued in the United States to enforce an arbitral award that was based on that government’s forcing its state-owned company to cancel a contract with a private firm. In contrast to decisions in prior cases, the court found that the government was acting as a regulator, not as a business principal, when it intervened to direct the actions of its company. The case thus serves as a reminder of the dual role that foreign sovereigns play with regard to offshore investments, and the importance of a proper risk-mitigation strategy.
State-Owned Enterprise as Alter Ego of the Sovereign: The Bancec Test
In determining whether a foreign government can be held liable for the acts of a state-owned enterprise in a U.S. court, the starting point is the Supreme Court’s 1983 decision in First National City Bank v. Banco Para el Comercio Exterior de Cuba (Bancec), 462 U.S. 611 (1983). In that case, the court held that “government instrumentalities established as juridical entities distinct and independent from their sovereign should ordinarily be treated as such.”1 It thus established, as a general rule, that a foreign government may not be sued in U.S. courts based on the actions of state-owned or state-created companies.2 At the same time, however, it recognized certain limited exceptions. First, it held that under traditional rules of agency, a foreign government can be liable for the acts of a state company when the company “is so extensively controlled by its owner that a relationship of principal and agent is created.”3 Second, it held that a foreign government can be made liable for a state company’s actions when failure to do so would “work fraud or injustice.”4
Courts have repeatedly addressed attempts to invoke the “extensive control” exception. In Transamerica Leasing, Inc. v. La Republica de Venezuela, 200 F.3d 843, 849-50 (D.C. Cir. 2000), the D.C. Circuit held that a principal-agent relationship would arise under the exception only if (1) the sovereign makes plain its desire for the instrumentality to act on the sovereign’s behalf; (2) the instrumentality agrees to so act; (3) the sovereign has final say over matters delegated to the instrumentality; and (4) the sovereign wields its power more directly than voting a majority of the instrumentality’s stock or choosing the instrumentality’s board of directors.5 The exception has been held not to apply even when the foreign government owns the entirety of the company’s stock;6 determines the appointment and removal of the company’s directors and officers;7 appoints its own officials to the company’s board;8 borrows or directs the use of the company’s funds;9 provides funding to the company;10 or makes major policy decisions for the company.11
To establish the exception and treat the company as an agent of the government, a plaintiff must demonstrate that the government exercised substantial day-to-day control over the ordinary business operations of the company.12 Relevant factors in this analysis include whether the government (1) uses the instrumentality’s property as its own; (2) ignores the instrumentality’s separate status or ordinary corporate formalities; (3) deprives the instrumentality of the independence from close political control that is generally enjoyed by government agencies; (4) requires the instrumentality to obtain approvals for ordinary...
