In this SCC Spotlight, Ioana Knoll‑Tudor, Member of the SCC Board, shares practical insights on what distinguishes arbitrations involving state entities and why enforcement is so often where the real battle begins.

Arbitrating with state entities often looks familiar on the surface, but the realities can be very different. From complex approval chains and non-signatory involvement to the ever-present question of sovereign immunity, these cases raise challenges that go well beyond ordinary commercial disputes.

To begin with, are there any notable differences in how arbitrations involving state-owned entities are conducted compared to those between purely private parties?

Absolutely. While the core principles of arbitration remain the same, arbitrations involving state entities tend to be more complex, typically involving long-term, high-value contracts, large amounts in dispute, and public funds.

From a procedural perspective, this means that arbitral tribunals are usually composed of three arbitrators. Moreover, timetables must consider the fact that state entities need to obtain internal approvals, organise tenders for legal representation, translation services and just generally, the chain of communication takes longer.

Most institutions have adapted their rules and practice to address cases where state entities are parties. The SCC has significant experience of administered arbitrations involving states and state entities. Indeed, the SCC administered its first investment treaty arbitration in 1993. While the SCC Rules do not generally distinguish between different types of arbitrations, it has developed longstanding routines to address the special nature of the parties involved in disputes with states and state entities.

What are the main reasons state entities sometimes become involved in arbitration proceedings even if they haven’t actually signed the arbitration agreement themselves?

It is worth mentioning that, almost by definition, these kinds of arbitrations usually arise in sectors where states are heavily involved, such as infrastructure, construction, natural resources, or energy. Because of the scale and public interest in these projects, it is quite common for state entities to be involved in one way or another, even if they have not actually signed the arbitration agreement themselves.

There are definitely situations where private parties want to involve state entities in arbitration, even if those entities never actually signed the arbitration agreement, either for enforcement reasons, or simply because that third party played a significant role in the contract’s performance.

In some jurisdictions, there is often a gap between the entity that signed the contract and the party that investors really want to bring to arbitration; sometimes because, under local law, the signatory is not necessarily the true beneficiary of the contract. That is why you will see investors trying to draw in a state entity that was not formally a party to the agreement.

This extension is never automatic. In practice, arbitral tribunals will look closely at the conduct of the state and the entity, the degree of control exercised, and whether the state entity has directly benefited from the contract. This is a reflection of the practical realities of how states and their entities operate, and it ensures that the right entities are involved in the resolution of the dispute.

When state entities are drawn into arbitration, how does the concept of sovereign immunity come into play, and in what ways can it influence the proceedings or their outcome?

Sovereign immunity can indeed be a significant hurdle in arbitration involving state entities. This concept means that when a state agrees to arbitrate, it is generally considered to have accepted that it can be brought before an arbitral tribunal. That being said, this waiver of immunity from jurisdiction does not automatically mean a waiver of immunity from enforcement. This is a crucial distinction and one that often surprises parties new to arbitrating with state entities.

During the arbitration itself, I often see state entities trying to invoke sovereign immunity to resist being joined to the proceedings, especially if they were not a signatory to the arbitration agreement. However, in my experience, the real impact of sovereign immunity is manifested at the enforcement stage. Even if you obtain a favourable award, enforcing it against a state entity or its assets can be challenging, because it will often argue that its assets are immune from execution, and courts will typically distinguish between assets used for commercial activities (which may be subject to enforcement) and those used for sovereign purposes (such as for diplomatic or military functions, which are usually protected).

Precisely, what are the most common challenges faced when trying to enforce an arbitral award against a state entity?

This is a very pertinent question because I can assure you that enforcing an award against a state or state entity is rarely straightforward… In my experience, state entities are generally less willing to comply voluntarily with arbitral awards than private commercial parties, so you are much more likely to face resistance when it comes to enforcement. This means that, more often than not, award creditors must engage in lengthy post-award battles before national courts, whether it is to oppose annulment or to secure enforcement.

States will often invoke sovereign immunity to shield themselves from enforcement, but as I have seen, they will also deploy a range of tactics to resist enforcement such as re-litigating issues (in set-aside or enforcement proceedings), applying for annulment under the ICSID Convention, or through domestic measures (like legislative changes, liquidation of entities, or even criminal investigations against award creditors). In certain countries, international economic sanctions can also complicate enforcement, particularly if the award would result in funds reaching sanctioned individuals or entities.