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What statutes or regulations govern procurement of defence and security articles?
The procurement of goods and services for defence and security is governed by laws and regulations that pertain to procurement law generally and to security requirements specifically associated with the goods and services that are typically identified as being related to defence and security.
At the federal level, laws and regulations of general application include the Government Contracts Regulations and any applicable policies promulgated by the Treasury Board and Public Services and Procurement Canada. The government procures defence and security articles in a manner similar to other goods and services and uses a competitive solicitation process. While Canada has exempted security and defence-related procurements from the procurement disciplines of international trade agreements (such as the World Trade Organization Agreement on Government Procurement (AGP) and the Comprehensive Economic Trade Agreement (CETA)), Canada nonetheless conducts such procurement in a manner consistent with those agreements by using competitive solicitation processes that (subject to security concerns) are open to foreign suppliers.
Laws and regulations that specifically apply to the procurement of defence and security articles include: the Defence Production Act; the Controlled Goods Regulations; and Security of Information Act.
The Defence Production Act address two key issues:
- It grants the Minister of Public Services and Procurement Canada (which department was formerly known as the Department of Public Works and Government Services) significant ministerial oversight of ‘defence contracts’ and powers to secure goods, technology and services necessary for the defence of Canada. For example, the Minister has the power to review amounts paid under a defence contract to ensure that a defence contractor is not being paid amounts ‘in excess of the fair and reasonable cost of performing the contract together with a fair and reasonable profit’. Also, for example, the Minister has the power to relieve a contractor ‘from any claims, actions or proceedings for the payment of royalties for the use or infringement of any intellectual property rights’ and to pay the holder of such rights ‘reasonable compensation’ for the infringement.
- It creates the legislative framework and statutory offences with respect to the handling of ‘controlled goods’ pursuant to the Controlled Goods Regulations. The Controlled Goods Regulations, which are made under the Defence Production Act, govern the transfer of ‘controlled goods’. Controlled goods are those goods listed in the Schedule to the Defence Production Act, which lists various articles and associated data that have military applications. Pursuant to the Controlled Goods Regulations a firm that handles controlled goods must register with the government’s Industrial Security Directorate and handle and transfer such goods in the manner prescribed by the regulations. Subject to certain limited exemptions, a firm may only grant access to persons registered with the Industrial Security Directorate.
The Security of Information Act is legislation designed to ensure that classified or protected information is safeguarded against unauthorised disclosure. Pursuant to the Security of Information Act, the government has implemented a series of policies, procedures and protocols associated with accessing, storing and handling of classified or protected information, which are administered by the Industrial Security Directorate.
How are defence and security procurements identified as such and are they treated differently from civil procurements?
Defence and security procurements are not identified as such. However, the solicitation documents pertaining to defence and security procurements will reference requirements that are unique to defence and security procurements such as being subject to the Defence Production Act, Controlled Goods Regulations and security requirements.
How are defence and security procurements typically conducted?
Defence and security procurements are conducted in the same manner as other procurements in that the government will use a request for proposal process to solicit bids. Complex procurements or those that involve access to classified information may involve an initial vetting of potential suppliers through a ‘letter of interest’ process whereby the government requests that potential suppliers indicate their interest in participating in the procurement and may conduct an initial assessment of potential suppliers to ensure that bidders meet minimum requirements.
Are there significant proposals pending to change the defence and security procurement process?
The procurement of sophisticated and expensive defence goods, such as ships, aircraft and vehicles is complex. The government continues to look at ways of making the process more efficient and less time-consuming. However, defence and security procurements have not changed in a material way in recent years.
Are there different or additional procurement rules for IT versus non-IT goods and services?
There are no different or additional procurement rules for information technology. However, the contract resulting from the procurement will include provisions regarding ownership of intellectual property, which may be a specific concern to suppliers of information technology.
Are most defence and security procurements conducted in accordance with the GPA or other treaty-based procurement rules, or does this jurisdiction commonly use the national security exemption to procure them?
Most defence and security procurements are conducted in a manner that accords with the GPA and other treaty-based procurement rules (such as the AGP and the CETA) in the sense that the solicitation documents reflect the procedural requirements of treaty-based procurement rules (such as including a clear statement of work, evaluation criteria, etc).
However, most defence and security procurements conducted in Canada are exempt from the GPA as defence and security goods are not included in Canada’s schedule to the GPA, the CETA and other international trade agreements. As a result, the non-discrimination and national treatment provisions of the GPA, the CETA and other international trade agreements do not apply. Equally, the procurement dispute process under such treaties does not apply.
Having said that, the government has entered into the Canadian Free Trade Agreement (CFTA) with provincial and territorial governments. The CFTA applies to the procurements for defence and security items. On that basis, the CFTA prescribes the minimum procedural requirements for a procurement of defence and security articles and services and affords national and non-discrimination treatment to ‘Canadian Suppliers’. Equally, ‘Canadian Suppliers’ have standing to bring a dispute to the Canadian International Trade Tribunal with respect to an alleged breach of the CFTA. The threshold to be considered a ‘Canadian Supplier’ is low and is defined as being ‘a supplier that has a place of business in Canada’ at which it ‘conducts activities on a permanent basis that is clearly identified by name and accessible during normal business hours’. ‘Foreign suppliers’ often open an office in Canada as a means of supporting bidding efforts and also to qualify as ‘Canadian Suppliers’.
Disputes and risk allocation
How are disputes between the government and defence contractor resolved?
In the context of a dispute regarding the procurement process, a supplier that qualifies as a ‘Canadian Supplier’ has standing under the CFTA to bring a procurement complaint to the Canadian International Trade Tribunal, which is Canada’s bid dispute resolution authority. The government may invoke a ‘national security exemption’ that has the effect of precluding challenges under the CFTA or any other trade agreement.
Also, suppliers that cannot advance a complaint before the Canadian International Trade Tribunal owing to standing or jurisdictional considerations, may seek judicial review of the procurement decision by making an application to the Federal Court of Canada.
In a situation where the dispute relates to the contract between a successful bidder and the government, disputes will be resolved in accordance with any applicable contract provisions (such as mediation or arbitration) or otherwise resolved through the domestic court process applicable to contract disputes.
To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?
Government contracts often include the potential use of alternative dispute resolution processes. However, these processes are normally only available with the consent of the government. Without such provisions or in the event that the government does not consent to using alternative dispute mechanisms, the typical jurisdiction for resolution of contract disputes would be the superior court of a province, such as the Ontario Superior Court of Justice. The Federal Court of Canada has concurrent (but not exclusive) jurisdiction over contract disputes involving the government as a defendant. The Federal Court of Canada does not have jurisdiction over disputes between contractors and subcontractors. Put another way, a contractor may start a proceeding against the government in Federal Court or, alternatively, in the superior court of a province. All other contract claims would normally be advanced in the superior court of a province.
What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?
Normally, the government limits its liability to a contractor to the full value of the contract. This would preclude claims for amounts that exceed the contract value.
It is only in rare circumstances that the government would put a limit on the contractor’s liability. Often the government will seek guarantees from a contractor’s parent company to ensure contractual performance.
Limits on liability
Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?
Yes, the government may agree to limit the contract’s liability under the contract.
There are no statutory or regulatory limits to the contractors’ potential recovery against the government for breach. However, the government’s standard contracting documents limit liability to a stated amount, which is often identified as limitation of expenditure or limitation of liability.
Risk of non-payment
Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?
The contracting procedures used by the government require Treasury Board approval for major contracts, which entails that funds have been budgeted and allocated to meet the terms of payment. The government is not known to have defaulted on a payment owing to a lack of funds.
Under what circumstances must a contractor provide a parent guarantee?
The government may seek a parent guarantee in circumstances where there is a concern regarding the contractor’s financial capability to fulfil the contract requirements. The assessment of a contractor’s financial capability is based on a review of its audited financial statements and other relevant information. In a situation where the contractor is a subsidiary of a larger corporate structure, the government will often require the parent organisation provides a guarantee, particularly with respect to complex or major procurements.
Defence procurement law fundamentals
Mandatory procurement clauses
Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?
At the most basic level, the Government Contracts Regulations require that Canada solicit bids for government contracts by giving public notice or inviting suppliers to participate.
Also, the Government Contracts Regulations include terms that are deemed to be included in any government contract such as: the contractor has not paid any contingency fee to obtain the contract; the contractor’s accounts and records shall be subject to audit; the contractor has not committed any specified offences; and the Access to Information Act applies to information received under the contract.
How are costs allocated between the contractor and government within a contract?
The allocation of costs between the contract and government will vary depending on the contract.
For example, in the context of service type contracts that include the provision of commodity type goods that can vary in costs over time (such as fuel), the government may reimburse the contractor for such costs without any mark-up.
Also, in certain circumstances, the government may use a ‘cost-plus’ model where the contractor is compensated for its costs plus a reasonable mark-up for profit. In such circumstances, standard government contracting provisions apply to define what is an appropriate ‘cost’ for reimbursement.
What disclosures must the contractor make regarding its cost and pricing?
This depends upon the contract. If a ‘cost-plus’ model is used, then there is significant disclosure regarding the contractor’s costs and pricing. This is most often an issue in the context of contracts that have a large service component (such as retrofitting and repairs).
Also, standard government contracting clauses and legislation (such as the Defence Production Act) allow the government to conduct audits.
How are audits of defence and security procurements conducted in this jurisdiction?
Audits are conducted by government officials pursuant to accounting and audit rules of general application, and pursuant to any applicable contract provisions.
Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?
The Treasury Board’s Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts provides that:
The objective of this Policy is to enhance Canada’s economic growth by increasing commercialization of Intellectual Property. To this end, the contractor is to own the rights to Foreground Intellectual Property created as a result of a Crown Procurement Contract.
This position is subject to certain exceptions and exemptions.
‘Foreground Intellectual Property’ means intellectual property ‘first conceived, developed, produced or reduced to practice as part of the work under a Crown Procurement Contract’. The government would maintain a broad licence to any foreground intellectual property.
A variety of exceptions and exemptions exists with regard to this general position, including national security requirements; statutory and regulatory requirements or prior obligations of the government regarding the intellectual property at issue; and where the purpose of the procurement contract is incompatible with the contractor owning the foreground intellectual property, such as when the purpose of the contract is to generate knowledge and information for public dissemination or relates to the development of intellectual property owned by the government.
Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement-related benefits?
Forming legal entities
Describe the process for forming legal entities, including joint ventures, in this jurisdiction.
Legal entities, such as corporations, are formed pursuant to the Business Corporations Acts in effect throughout Canada’s various jurisdictions (ie, federal, provincial and territorial). Joint ventures may take on the form of a corporate entity or may be formulated on the basis of a contractual relationship.
Access to government records
Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?
The Access to Information Act allows a person to request documents in the possession of departments and agencies of the government. The process for making a request is simple. A requester completes a form describing the documents or information sought and the office in the government department where the documents or information are likely to be stored. An initial nominal payment is required with the request. A further fee for making reproductions may also apply.
Contracts (or redacted portions thereof) may be exempt from disclosure on various grounds, including that the disclosure of the information would be contrary to national security interests, include personal information or include third-party information such as trade secrets, confidential commercial information or information the disclosure of which would prejudice the third party’s competitive position.
Supply chain management
What are the rules regarding eligible suppliers and supply-chain management and anti-counterfeit parts for defence and security procurements?
There are no rules of general application. This would be addressed on a contract-by-contract basis.
International trade rules
What export controls limit international trade in defence and security articles? Who administers them?
Exports from Canada are subject to the Export and Import Permits Act, which authorises the creation of an Export Control List. The exportation of articles listed on the Export Control List must be specifically authorised by a permit issued by the Minister of Global Affairs.
What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?
A foreign contractor may bid on a defence and security procurement directly. Subject to security concerns, defence and security procurements are generally open.
However, major defence and security procurements (more than C$100 million) require the successful bidder to commit to Industrial and Technological Benefits (ITB), which generally provide that the successful bidder is to make certain investments in Canada or carry out certain work in Canada. The ITB programme is designed to foster investment in Canada in specified sectors, including manufacturing, aerospace and technology. Normally, the ITB commitment is equivalent to the value paid by Canada to the successful bidder.
Are certain treaty partners treated more favourably?
Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?
Yes, the government has imposed trade sanctions on various jurisdictions through the United Nations Act (which implements United Nations Security Council sanctions) and the Special Economic Measures Act (which implements autonomous sanctions issued by the government of Canada). Also, Canada recently adopted the Justice for Victims of Corrupt Foreign Officials Act, which allows Canada to impose an asset freeze and a dealings prohibition against individuals who, in the opinion of the Governor in Council, are responsible for or complicit in gross violations of internationally recognised human rights or are foreign public officials or their associates, who are responsible for or complicit in acts of significant corruption.
Measures under the United Nations Act and the Special Economic Measures Act are currently in place with respect to the following jurisdictions: the Central African Republic, Democratic Republic of the Congo, Eritrea, Iran, Iraq, Lebanon, Libya, Myanmar, North Korea, Russia, Somalia, South Sudan, Sudan, Syria, Ukraine, Venezuela, Yemen and Zimbabwe.
Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?
Yes, defence trade offsets are part of Canada defence and security procurement regime. The government has adopted the ITB Policy. The ITB programme is administered by Industry Canada. Under the ITB Policy, contractors awarded defence procurement contracts are required to undertake business activities in Canada, equal to the value of the contract. Bidders are required to articulate the proposed business activities in their respective proposals submitted in response to the procurement and bids are evaluated on the basis of the ‘value proposition’ that the bidder proposes to Canada at the time of bid. After a contract is awarded, the contractor is required to start fulfilling its commitments and to identify further business activities in Canada, as may be required to meet its overall ITB obligation (ie, 100 per cent of contract value). For example, if contractor’s value proposition includes specific commitments and activities equal to 75 per cent of the contract value, it will be required to identify additional activities equal to 25 per cent of the contract value after the contract is awarded.
Ethics and anti-corruption
Private sector appointments
When and how may former government employees take up appointments in the private sector and vice versa?
Former government employees are subject to restrictions associated with their employment. Generally, former government employees must undergo a ‘cooling-off’ period before they may join a private sector employer that has significant dealings with government.
The government hires employees from the private sector. Such employees are subject to conflict-of-interest guidelines.
How is domestic and foreign corruption addressed and what requirements are placed on contractors?
Domestic and foreign corruption is addressed through criminal laws of general application, which include the Criminal Code and the Corruption of Foreign Public Officials Act. Also, the government has adopted the Integrity Regime, which is a set of contractual provisions and associated policies (such as the Ineligibility and Suspension Policy) that have the effect of prohibiting bidders and contractors that have been convicted of specific offences from participating in procurements. The offences that may result in disqualification range from offices related to the participation in a criminal organisation, fraud against the government or bid rigging. Disqualification may result from the commission of an offence as articulated as being part of Canada’s domestic law or a foreign equivalent to a listed domestic offence.
Following consultations, Canada has decided to create a revised Ineligibility and Suspension Policy, which is expected to be published in November 2018 and come into effect in January 2019. The revision is expected to introduce greater flexibility for disbarment decisions; and expand the scope of ‘triggers’ for potential disbarment to include certain provincial and federal offences (such as labour or occupational health and safety and environmental violations) and to take into consideration any foreign decisions and judgments suggesting misconduct.
What are the registration requirements for lobbyists or commercial agents?
Lobbyists or commercial agents are required to register under lobbyist registry legislation. With respect to procurements conducted by the government, the applicable legislation is the Lobbying Act. The Lobbying Act requires lobbyist and commercial agents to file a registration identifying themselves, their clients, the topic of their lobbying activity and the government offices or officials that are being lobbied.
Limitations on agents
Are there limitations on the use of agents or representatives that earn a commission on the transaction?
Yes. Pursuant to the Lobbying Act and standard contracting provisions, the paying of a commission to a third-party agent or representative is prohibited.
Conversion of aircraft
How are aircraft converted from military to civil use, and vice versa?
What restrictions are there on manufacture and trade of unmanned aircraft systems or drones?
Unmanned aircraft systems or drones for military purposes are subject to export and import controls.
Which domestic labour and employment rules apply to foreign defence contractors?
Domestic labour and employment rules apply to work done in Canada.
Pursuant to the Federal Contractors Program, contractors who bid on an initial goods and services contract, a standing offer, or a supply arrangement estimated at C$1 million or more (including applicable taxes) with the government must first certify their commitment to implement employment equity by signing the Agreement to Implement Employment Equity prior to contract award. Once an eligible contract is awarded to the contractor, the contractor is then required to meet Federal Contractors Program requirements, which include collecting of information regarding employment equity, carrying out a work force analysis, establishing short- and long-term goals with respect to employment equity and make reasonable progress and efforts in reaching those goals.
Defence contract rules
Are there any specific rules that contractors, foreign or domestic, are bound by in defence contracts?
Do contractors avail themselves of these rules when they perform work exclusively outside of the jurisdiction?
Must directors, officers or employees of the contractor provide personal information or certify that they fulfil any particular requirements to contract with a government entity?
The review of personal information of directors, officers and employees occurs in three contexts. First, to the extent that a security requirement applies to access sensitive or classified information either at the bidding stage or under the resulting contract, directors, officers or employees may be required to undergo a security check. Second, a security check is generally required to handle goods or technical information that are subject to the Controlled Goods Regulations. Third, the government has adopted the integrity regime, which consists of various contractual provisions that require bidders and contractors to certify that the bidder, contractor or related entities have not been convicted or charged with specified offences, which range from being part of a criminal organisation to competition law offences to frauds against the government.
What registration or licensing requirements exist to operate in the defence and security sector in the jurisdiction?
There are no registration or licensing requirements that generally pertain to the defence and security sector as such. However, registrations may be required with respect to the handling of certain goods and technical data. For example, pursuant to the Controlled Goods Regulations, a company handling military-type goods or technical data is required to register with the Industrial Security Directorate and maintain a Controlled Goods Registration. Also, individuals who have access to classified or protected information and establishments that house such information will have to undergo a security assessment and adhere to relevant policies administered by the Industrial Security Directorate.
What environmental statutes or regulations must contractors comply with?
Contractors are expected to comply with environmental statutes and regulations of general application. Environmental legislation exists at both the federal level of government and the provincial or territorial level of government. As such, legislative and regulatory requirements depend on the jurisdiction in which the work is being conducted. As a general example, contractors would be expected to comply with the Canadian Environmental Protection Act and environmental legislation applicable in the provinces or territories in which they operate such as, for example, the Ontario Environmental Protection Act.
Must companies meet environmental targets? What are these initiatives and what agency determines compliance?
At present, companies are not required to meet specific environmental targets. They are expected to meet any environmental laws of general application for work that is being conducted in Canada. The government has adopted the Policy on Green Procurement. This policy requires the procuring entity to consider the environmental impact of the procurement and to include measures in any resulting contract that lessen any adverse environmental impacts and, to the extent such measures are included, the enforcement becomes an issue of contract law.
Do ‘green’ solutions have an advantage in procurements?
Green solutions do not have an advantage unless they are evaluated as part of the evaluation criteria expressly included in the solicitation documents.
Updates & Trends
Updates & Trends
Updates and trends
The proposed language of the United States-Mexico-Canada Agreement does not include a chapter dealing with procurement in Canada. Global Affairs Canada advises that Canada and the United States will retain access to each other’s procurement markets, including at the sub-federal level, through their obligations under the WTO AGP of which both Canada and the United States are parties. The government procurement obligations between Mexico and Canada will be provided under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
Remediation agreements (deferred prosecution)
Canada amended its Criminal Code to help resolve criminal prosecutions for corporations, which came into effect in September 2018. A remediation agreement is aimed at denouncing wrongdoing and imposing proportionate penalties, while limiting the unintended consequences that harsh penalties can have on corporations (such as their innocent employees). To qualify, a corporation must have committed a criminal act with a ‘reasonable prospect of conviction’ and it is in the public interest to do so. In assessing the ‘public interest’, the prosecutor may include such relevant factors as whether the corporation self-reported and whether it has acted swiftly to remediate the harm caused. Exemptions to these agreements include: crimes that cause or are likely to cause death or serious bodily harm, crimes that cause or are likely to cause injury to Canada’s national defence or security, and crimes committed in connection with gangs or terrorist groups. A remediation agreement may include an imposed compliance programme or other conditions. All such agreements must be approved by a court. When approved, a stay of all pending criminal proceedings is issued.
Ineligibility and Suspension Policy
Canada is in the process of revising and expanding its Ineligibility and Suspension Policy to provide more flexibility in terms of remedies and to expand the policy to address environmental, safety and labour matters.