Just Posted Discussion Draft: "‘Un Somaro Piumato’--Rethinking the Scope and Nature of State Liability for Acts of their Commercial Instrumentalities: State Owned Enterprises and State-Owner Liability in the Post-Global"

 

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I am delighted to share for comment the pre-publication discussion draft of a contribution I am working on.  The final version of the work will appear in Julien Chaisse, Jędrzej Górski and Dini Sejko (eds) The Regulation of State-controlled enterprises: An Interdisciplinary and Comparative Examination’ (Springer forthcoming 2021).  My thanks to the editors for putting together a marvelous collection of essays about which I will have more to say in a later post. 

 

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My contribution is entitled ‘Un Somaro Piumato’--Rethinking the Scope and Nature of State Liability for Acts of their Commercial Instrumentalities: State Owned Enterprises and State-Owner Liability in the Post-Global. In it I wrestle with the issue of state liability for the wrongs of their SOEs.  That once straightforward though contentious issue has become somewhat complicated by a number of regulatory trajectories that have only come into sharper focus in the last decade. These include the governmentalization of the economic sector, the delegation of sovereign regulatory authority to public and private entities operating in markets, and the rise of production chain based business and human rights torts under a loosely identifiable global judicial common approach. At a more conceptual level, the contribution begins to consider the ramification in the post global era of the state as its own legal subject. 

 

My research assistant challenged me to describe the project and I offered this:   

 

States are not subject to the same rules for upstream liability as private companies, even when they (or at least an organ of state) operates effectively like an apex enterprise in a production chain. Where private apex companies may be held liable for damages caused by their subsidiaries or other controlled entities, the state is rarely held accountable for the state owned enterprises that it supervises. This is because society has indulged the belief that (or invested in the meaning of) the state as somehow special. And while one could cut off th head of the incarnation of the state form time to time or overthrow a dynasty when its mandate was revoked, one could not seek damages for their sovereign (and once upon a time any) acts. This was not problematic in the through the 20th century (though controversial at least about the extent of the usual sovereign immunity waivers for commercial activity and certain torts). But two significant trends in this century now challenge the old premises that limit state accountability as the apex owner of SOEs, both tied to the emergence of expectations of enterprise responsibility across production chains with respect to human rights and sustainability norms. rules, and laws. The first is a function of the governmentalization and legalization of that regulatory role as indivisible from enterprise role in more narrowly conceived economic activities. The second is a function of the rise of common law business and human rights torts that extends  principles of legal responsibility in private law much farther across production chains. 

 

The first is the governmentalization of the private sector. produced as accountability and compliance regimes have increasing vested apex companies with regulatory duties extending to some significant portion of their production chains. If all companies are now exercising sovereign power (through due diligence and reporting and accountability laws) then it seems that the sovereign activities exception to immunity waivers no longer ought to apply. Conversely the argument could be made that all entities irrespective of their character as private or public ought to enjoy sovereign immunity with respect to their regulatory obligations, that is state immunity ought to shield all companies as sovereign agent of the state (no one is going to like that). Additionally inherent in the principles by which SOEs are entitled to operate under the same rules as private companies is the notion that the state can simultaneously act as the ultimate corporate “owner” of the enterprise AND ALSO as the regulator of that enterprise without conflicts of interest (break of which would produce liability). Taken together these principles are “activated” where as has become more common after 2010, states (1) impose legal compliance and regulatory responsibilities soon enterprises that cover the entity’s production chain (at least through its direct and indirect subsidiaries and affiliates). The German Supply Chain Due Diligence Law is a good example. The result is that there is now a principle of responsibility that is centered at the highest level of corporate supervision. With SOEs that necessarily has to be the ownership agency in the state itself (it is in this sense that suggest that the state becomes its own legal subject).  

 

The second has emerged recently as courts, especially in common law states (but not always) develop what might be characterized as a common law human rights torts. As a consequence of this development, courts have been willing to extend  (or apportion) liability for certain damages caused at  the lower levels of a production chain characterized by interlinked autonomous enterprises across different domestic legal orders, to apex enterprises.  The crux of this private law development is centered on attribution rules which make no distinction between what might otherwise have been labeled economic or sovereign functions. The apex company may be accountable for the damages caused by downstream subsidiaries where sufficient regulatory or operational control can be attributed to them (without invoking traditional and restrictive common law rules of agency or equity rules of veil piercing. This emerging private law system of liability ought not to be applied by reference to the sovereign character of the body corporate that serves as the apex enterprise of a production chain.  Having posted that contemporary principles among developed states (through the normative work of the Organization for Economic Cooperation and Development) now assume that an organ of state can serve expressly as the apex body corporate for the exercise of corporate oversight of SOEs (for and in the name of the ultimate individual shareholders--the people) even as it also is constituted as the institution through which sovereign authority is exercised, there is no reason why the rules of apportioning responsibility to the apex enterprise ought not to apply as well to states. 

 

Taken together this suggests that the state’s presumption of immunity with respect to its SOEs is not limited by the commercial activities exception. Alternatively the trajectories of change might suggest instead that the delegated regulatory responsibilities of enterprises must be recharacterized as commercial in character—a bitter pill to swallow for those invested in state sovereign immunity).  Likewise, the presumption of immunity in this context would ironically enough enhance the argument from the private sector that principles of equity and level placing field ought to extend such immunity to the regulatory responsibilities of the private enterrise.  

I welcome engagement and discussion; these are topics for which definitive conclusions are not yet possible.  But the identification fo trajectories and the evaluation of their consequences--the way we invest them with meaning and value, add important dimensions to the legal and policy discussions that are now taking place.   

 

The abstract and Introduction follow.  The paper may be accessed HERE. 

 

 

 

‘Un Somaro Piumato’--Rethinking the Scope and Nature of State Liability for Acts of their Commercial Instrumentalities: State Owned Enterprises and State-Owner Liability in the Post-Global

Larry Catá Backer[1]

 

Abstract: Under what circumstances might a state be subject to liability for the conduct of its state owned enterprises (SOEs)? That question, always controversial but apparently settled  by the end of the last century, has once again become  important as the old conceptual categories for liability have become unsettled. It is now no longer clear that states may authoritatively claim immunity for themselves and for the non-commercial activities of the SOEs.  This contribution examines the effect of substantial transformations in the legal environment of enterprise operation on the conceptual framework within which principles of immunity (and its waiver) was grounded. The legalization of responsible business conduct through disclosure and supply chain due diligence legislation, as well as the rise of human rights business torts based on production chain responsible governance responsibility have upended the traditional conceptual framework of immunity and of the separation of the state from its economic organs. The governmentalization of economic activities and the extension of regulatory responsibilities of apex economic enterprises across their supply chains  have produced a context in which private enterprises now assert sovereign authority even as states exercise private market power through their management and control of autonomous economic actors in markets. In this context Part 2 considers the challenge to the standard model of state owner liability for the conduct or activities of SOEs in the form of the new supply chain due diligence laws, and the Modern Slavery reporting provisions being enacted in Europe and Australia. Part 3 then considers the challenge to traditional models that may emerge from the development of human rights tort law. The contribution argues that the resulting context provides a basis for either for extending sovereign immunity to those regulatory responsibilities of all economic actors (irrespective of their public or private ownership) or of the reconception of sovereign regulation through legal compliance obligations as inherently commercial and thus not protected b principles of sovereign immunity when undertaken by SOEs. Further, the contribution suggests that this emerging conception of the role of economic actors produces a context in which the state can become its own legal subject,  the state can simultaneously serve as the apex body corporate subject to regulatory obligations within its production chain and liable therefore and at the same time the sovereign authority to enforces those obligations.

 

 

1. Introduction

 

“The development of the productive forces is also a kind of revolution — a very important one. It is the most fundamental revolution from the viewpoint of historical development.”[2]

 

Un somaro, ma solenne. Quando a un tratto, ho che portento! Su le spalle a cento a cento Gli spuntavano le penne Ed in alto, fsct, volò! Ed in cima a un campanile Come in trono si fermò. [A ass, but solemn. When all of a sudden, oh what a wonder! Up on his back in the hundreds Feathers were poking out And into the air, fsct, he flew! And to the top of a bell tower To perch as if on a throne.][3]

 

This contribution starts with two odd and oddly juxtaposed quotations.  The first sets the stage for the arguments that follow.  More specifically it is a reminder that the orthodox structures for the allocation of liability within and among enterprises, and between enterprises and their owners, is only as powerful as the core organizing principles on which they are based.  In this case, those principles--grounded in a consequential division between public and private functions, between autonomous institutions and divisible functions within such organizations, and between regulation and management--may be losing its coherence in the face of new regulatory structures centered on production chains and national development models. The second, and more ironic, suggests the nature of transition and the risks of presumptions that seem perfectly reasonable from the inside but which appear ridiculous when viewed from outside. In this case, of course, the traditional allocations of legal risks to state that engage in economic activity.

 

The analysis focuses on the arc of development of state liability for their economic activities.  More specifically its aim is to examine  the challenges to the current state of law and practice respecting the liability of governments for the obligations of their state owned enterprises (SOEs).[4] That object, once legal marginalia or the creature of “socialist” law studies, has become an increasingly important element in the battles for the control and rationalization of global production chains--and with that control and rationalization authority over the machinery of meaning making in the fields of law, politics, and economic organization.

 

State-owned enterprises (SOEs) are an important element of most economies, including  many more advanced economies. SOEs are most prevalent in strategic sectors such as energy,  minerals, infrastructure, other utilities and, in some countries, financial services. The presence of SOEs in the global economy has grown strongly in recent years. Today they account for over a fifth of the world's largest enterprises as opposed to ten years ago where only one or two SOEs could be found at the top of the league table. This means that high standards of corporate governance of SOEs are critical to ensure financial stability and sustain global growth.[5]

 

Much excellent academic[6] and policy[7] work continues to at the margins of this area--that is there is a concentration on reform which does not suggest a challenge to the structure on which the current premises of the rules of (and risk allocations to)  states engaging in economic activity now rests.[8]

 

Nonetheless, the return of state capitalism, now within the structures and operating under the premises of post-1945 global economic  order, may well augur a transformation of state free riding (with respect to liability at least) as states seek to project their economic activity globally.[9] What once, not so long ago, had been well settled, even if controversial, may now be challenged from two distinct sources, both products of a mature post 1945 system of globalization. The first emerges from the development of a transnational private law of human rights torts that are increasingly recognized by European and possibly Canadian, courts.[10]  The second is a consequence of the governmentalization of the economic sphere and the resulting administrative functions of such organs.  This development directly challenges the conceptual basis on which state sovereign immunity rules were created a generation or more ago.[11] Hanging over these developments are the trajectories of internationalization that produced first the authority of soft law principles and then the convergence of those norms with hardening through the traditional forms of international law and practice.[12] The contribution’s thesis is this: the increasing willingness to impose responsibilities and liability on upstream owners of operating companies challenges the viability of the current rules that shield states from both responsibility and liability for the acts of their SOEs including their operations in global production chains.  Convergence appears to be moving toward a greater difficulty in sustaining the authority of a theoretical model that would shield states from the responsibility and liability already emerging from private apex entities in global production chains managed through chains of operating companies. 

 

Part 2 considers the challenge to the standard model of state owner liability for the conduct or activities of SOEs in the form of the new supply chain due diligence laws, and the Modern Slavery reporting provisions being enacted in Europe and Australia. It starts from the baseline of contemporary premises about ideal participants in ideal markets and the expectations of state behavior when it organizes sub-national entities to participate in this idealized (or ideologized) space.  It then suggests the way that current developments effectively governmentalizing aspects of economic activity and extending the authority of enterprises along vertically arranged structures of production now challenge the logic and viability of the “deal” that the contemporary premises reflect.[13] In the process it suggests the way that at least with respect to sustainability and human rights responsibilities, SOEs and private forms are converging as simultaneously sovereign and economic entities. But it does more than that, it suggests a reconstitution of the state as the apex body corporate of SOE systems onto which responsibility (and liability) are also imposed. Here one deals with the transformation of attribution rules that either strip the state of immunity or extend sovereign immunity to the governmentalized functions of private enterprises.[14] 

 

Part 3 then considers the challenge to traditional models that may emerge from the development of human rights tort law, especially in common law states and the Netherlands,[15] and the effects of emerging soft law responsibility regies on  the authority of the traditional narrative of state immunity from the consequences of the economic activities it controls or directs. Both challenges then suggest the context in which state and private enterprise control of economic activity within global production chains merge.  In both cases that merger then ought to affect the application of agency, veil piercing and sovereign immunity rules to states respecting their SOEs.[16] But here, the rise of human rights torts also suggests the rise of a private duty of state owners to ensure that their downstream enterprises comply with their human rights and sustainability duties. Passive ownership is, in this case, a potential trigger for liability for failure to undertake duties of reasonable oversight, and reasonable oversight may in turn produce the sort of connection between the state and its SOEs to support a veil piercing or agency relationship.

---

[1] W. Richard and Mary Eshelman Faculty Scholar Professor of Law and International Affairs, Pennsylvania State University; member, Coalition for Peace & Ethics.

[2] Deng Xiaoping, “To Build Socialism We Must First Develop the Productive Forces” (Marxists.org, 5 May 1980) <https://www.marxists.org/reference/archive/deng-xiaoping/1980/101.htm accessed 22 June 2021>. The reference here is to the Chinese Marxist Leninist notion of economic capacity comprehensively understood.  Ibid. The idea was to shift the focus from the strict division of public and private--of political-regulatory spheres and economic-productive spheres, in the interlinking of economic activity (in whatever form organized) and the political-regulatory authority (and objectives) of the state. At its base, it is grounded in the assumption that governmental interventions in markets must necessarily serve the interests of the state and augment, supplement, or constitute an alternative form of objectives based regulatory and administrative authority. This forms a core premise of Chinese Marxist-Leninism enshrined in the Constitution of the Communist Party of China 24 October 2017 <http://www.xinhuanet.com//english/download/Constitution_of_the_Communist_Party_of_China.pdf> (“In building socialism in China, the basic tasks are to further release and develop the productive forces and gradually achieve socialist modernization and, to this end, reform those elements and areas within the relations of production and the superstructure that are unsuited to the development of the productive forces.” Ibid., General Program).

[3] Giacomo Rossini, La Cenerentola (Jacopo Ferretti (Librettist) premiered Teatro Valle, Rome, 26 January 1817), Act I , Scene 2, ‘Miei rampolli femminini’. The reference is to an interrupted dream related by Don Magnifico to his two daughters about his triumph through their (marriage) activities. Don Magnifico and his daughters provide a buffo metaphor for the state and its enterprises in a larger context in which superior forces may yet constrain their ambitions.

[4] Like most terms with legal consequences, there  is no consensus on the meaning of the  term “State Owned Enterprise” (SOE)  or its application to the increasing variety of state interventions in markets  and engagement in economic activity. Most definitions converge around a core of meaning that posits an entity of some sort, separable from other aspects of organizational structures, over which the state exercises significant, and perhaps decisive, control.  See, e.g., PwC, Report: State Owned Enterprises: Catalysts for Public Value Creation? (PwC, April 2015) <https://www.pwc.com/gr/en/publications/assets/state-owned-enterprises-catalysts-for-public-value-creation.pdf >This essay will argue that such definitions--that focus on the twin attributes of entity ad control may fail to include significant emerging forms of SOE forms. 

[5] Organization of Economic Cooperation and Development, Ownership and Governance of State-Owned Enterprises: A Compendium of National Practices (OECD, 2018), Foreword, p 4.

[6] W Mark C Weidemairer, ‘Piercing the (Sovereign) Veil: The Role of Limited Liability in State Owned Enterprises’ [2021] 46(3) BYU Law Review 795; Garry D. Bruton, Mike W. Peng, David Ahlstrom, Ciprian Stan, and Kehan Xu, ’State-owned Enterprises Around the WORLD as Hybrid Organizations’ [2014] 29(1) Academy of Management Perspectives ; H Chen, JZ Chen, GJ Lobo, Y Wang ‘Association Between Borrower and Lender State Ownership and Accounting Conservatism’ [2010] 48(5) Journal of Accounting Research, 973–1014; .

[7] Przemyslaw Kowalski, Max Büge, Monika Sztajerowska, and Matias Egeland ‘State-Owned Enterprises

Trade Effects and Policy Implications’ [2013]  OECD Trade Policy Papers No. 147 (OECD Publishing, Paris) <https://doi.org/10.1787/5k4869ckqk7l-en>; American Law Institute

[8] For a discussion at the very start of the construction of the current system with respect to sovereign immunity, see, Arthur K. Kuhn ‘The Extension of Sovereign Immunity to Government Owned Commercial Corporations’ [1945] The American Journal of International Law 772-775.

[9] Aldo Musacchio, and Francisco Flores-Macias ‘The Return of State-Owned Enterprises: Should We Be Afraid?’ [4 April 2009] Harvard International Review (website) <http://hir.harvard.edu/2009/04/the-return-of-state-owned-enterprises/> accessed 26 June 2021.

[10] See, e.g., Okpabi v Royal Dutch Shell Plc [2021] UKSC 3; Vedanta Resources PLC & Another v Lungowe &  Others [2019]  UKSC  20; Nevsun Resources Ltd. v. Araya, 2020 SCC 5 (CanLII), <https://canlii.ca/t/j5k5j>, retrieved on 2021-06-27.

[11] The current approach was codified in the Foreign Sovereign Immunities Act (FSIA) of 1976 28 U.S.C.  §§ 1330, 1332, 1391(f), 1441(d), and 1602–1611. See also  e.g., Republic of Argentina v. Weltover, 504 U.S. 607 (1992); OBB Personenverkehr AG v. Sachs, 577 U.S. --- (2015), 136 S.Ct. 390  (2015)and generally American Law Institute, Restatement 4^th Foreign Relations Law of the United States ¶¶ 453-454 (American Law Institute 2017).

[12] See Surya Deva Regulating Corporate Human Rights Violations (Routledge2012).

[13] Insightfully considered recently in Judith Schönsteiner, ‘Attribution of State Responsibility for Actions or Omissions of State-Owned Enterprises in Human Rights Matters’ [2019] 40(4) U. Pa. J. Int’l L. 896.

[14] This effectively flips the logic of the traditional debate that produced, in its time, the contemporary approach to immunity grounded in waivers for commercial activity. See, e.g., Arthur K. Kuhn ‘The Extension of Sovereign Immunity to Government Owned Commercial Corporations’ [1945] The American Journal of International Law 772-775. Yet the issue has long been attached to the challenge of privatization of governmental services.  For a useful discussion in the US context, see, Lauren Villa, ‘Public Service, Private Entity: Should the Nature of the Service or Entity be Controlling on Issues of Sovereign Immunity’ [2004] 78 St. John’s Law Review 1257.

[15] See, e.g., The State of the Netherlands v. Urgendda, No. 19/00135 ECLI:NL:HR:2019:2007 (20 Dec. 2019) <http://climatecasechart.com/climate-change-litigation/wp-content/uploads/sites/16/non-us-case-documents/2020/20200113_2015-HAZA-C0900456689_judgment.pdf>; Vereniging Milieudefensie et al v Royal Dutch Shell PLC No C/09/571932/HA ZA 19-379 ECLI:NL:RBDHA:2021:5339 (26 May 2021) <http://climatecasechart.com/climate-change-litigation/wp-content/uploads/sites/16/non-us-case-documents/2021/20210526_8918_judgment-2.pdf>.

[16] Recently considered in its connection to sovereign immunity in W Mark C Weidemairer, ‘Piercing the (Sovereign) Veil: The Role of Limited Liability in State Owned Enterprises’ [2021] 46(3) BYU Law Review 795.