Circumstances Where a State-Owned Enterprise Can Declare Force Majeure Based Upon the Actions of Its Own State

In contract law, a party may be discharged from its obligations under a contract where an unforeseen event prohibits continued performance.  This is referred to as a force majeure or “Act of God.”  My article, The Ability of a State-Owned Enterprise to Declare Force Majeure Based Based Upon Actions of the State, discusses the unique circumstances in private international law where a State-owned enterprise is able to avail itself of a force majeure clause in a contract by the actions of its own State.  Such a situation is not prohibited under the law as State-owned companies are generally treated as any other private entity.  

However, arbitration panels views these situations with circumspect, and will closely scrutinize the circumstances surrounding the events.  They weigh three factors to determine whether the State enterprise may be discharged from performance.  As discussed in the article, they are:

(1) the state enterprise must possess a legal identity distinct from that of the state in commercial transactions; (2) the state enterprise must not be in collusion with the host state to bring about the action that precipitated the force majeure; [or] (3) the action of the host state must be either an act of state or a political decision of national sovereignty outside of the state’s purely pecuniary interest in the commercial transaction.

The concern is that States will collude with their wholly owned companies to get out of unfavorable contract situations leading to inequitable results.