Law
Sovereign Immunity for State-Owned Enterprises
Quick fact
Under the restrictive theory of sovereign immunity, state-owned enterprises can be sued for their commercial activities, even though they are an arm of the state. This is because courts distinguish between sovereign acts (immune) and commercial acts (not immune), a distinction that has been codified in laws like the U.S. Foreign Sovereign Immunities Act.
Why this is interesting
When a state-owned airline buys airplane parts from a foreign company, can the airline be sued for breach of contract? As it is owned by a government, you might think it is immune—but the answer is more subtle and has huge implications for international trade.
Read the full explanation
Understanding Sovereign Immunity for State-Owned Enterprises
Think of sovereign immunity as a legal shield that normally protects a government from being sued in another country's courts. But when a government decides to go into business, it steps into the marketplace. The key question is: does the government's role as a market participant waive that shield? The answer is yes if the action is 'commercial'. For example, when a state-owned airline buys fuel, it is acting like a private company, not exercising sovereign power. Therefore, it can be sued for breach of contract. This is called the 'commercial activity exception' to sovereign immunity. It prevents unfairness by not letting governments hide behind their status while engaging in ordinary business.
A deeper explanation
Sovereign immunity once granted a state absolute immunity from foreign courts, reflecting the idea that sovereigns are equal and cannot be judged by others. However, in the 20th century, states increasingly entered commercial enterprises, leading to unfair advantages. Courts and legislatures adopted the 'restrictive theory' of immunity: a state is immune for its sovereign acts (acta jure imperii) but not for its commercial acts (acta jure gestionis). The commercial activity exception is grounded in the principle of fairness and is codified in the U.S. Foreign Sovereign Immunities Act (FSIA) and similar laws worldwide. When determining whether an SOE is immune, courts look at the nature of the act, not its purpose. If the act is something a private party could do (e.g., signing a contract), it is commercial and not immune. This distinction matters for international business: it lets parties sue foreign state enterprises for breach, but it also protects states from issues like policy decisions that affect their public duties.