Update on the previous comment, I realised the issue was the the
partition where /var was mounted to hat nosuid set. Seems /var/lib/lxc
must allow for the suid bit to be set. The problem is that people often
have /home mounted with nosuid as a normal security precaution, so this
effects running unprivileged containers as well.

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https://bugs.launchpad.net/bugs/1389305

Title:
  sudo doesn't work on unprivileged lxc container on top of ecryptfs

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