Disputes and risk allocation

Dispute resolution

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.

Indemnification

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.

Parent guarantee

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.