Our last international trade brief dealt with the impact of softwood lumber tariffs on Canadian companies, and the Trump administration’s investigation of the effect of steel imports and similar investigation on imported aluminium on national security grounds, using a rarely invoked process. In this brief, in several articles, we discuss government procurement and dispute settlement under the Canadian Free Trade Agreement (CFTA), the alternative of using BITs for investment protection so as to avoid sovereign immunity defences such as was the basis for the rejection of an expropriation claim by a unanimous United States Supreme Court, and Boeing launching a trade remedies petition against Bombardier.

Key improvements in the CFTA government procurement rules

One of the benefits that Canadian businesses should expect from the Canadian Free Trade Agreement (CFTA), which comes into force July 1, 2017, is expanded business opportunities with federal, provincial and territorial governments, especially for small and mid-sized companies. The key improvements of the CFTA’s government procurement rules over that of the Agreement on Internal Trade (the AIT), which it replaces, are set out below:

  1. Expanded procurement: The CFTA will expand the number of government entities at the federal and sub-federal levels that will be bound by its government procurement commitments and rules.
  2. Online portals: Currently, the government procurement process at the sub-federal level occurs almost exclusively offline. By bringing the procurement process into the digital age, it is expected that small to mid-sized Canadian companies will be able to have increased access and bear reduced burden when competing for government contracts in a process that has historically been tilted in favour of larger businesses capable of committing the resources needed to complete time-consuming paper-based bid packages. The CFTA government procurement provisions will, in this respect, work in tandem with the accomplishment of the Canada-EU Comprehensive Economic and Trade Agreement (CETA), which requires the creation of an electronic portal designed to serve as the sole point of access for Canadian and EU government tenders.
  3. Maintaining competitiveness with new EU market entrants: Canadian companies in any particular province do not currently have the same level of access to out-of-province government procurement opportunities as compared to businesses within that province. Under CETA, all government contracts across Canada will be accessible to EU companies via an online portal. CETA’s implementation would therefore put out-of-province Canadian companies bidding for provincial government contracts in another province at a disadvantage. The online portal will therefore also address the issue of access by Canadian companies to Canada-wide tenders for government contracts, and thereby place both EU and Canadian companies on the same footing.
  4. Professional mobility: The CFTA will improve the ability of regulated professionals, such as engineers and architects, to compete for government contracts across the country. In particular, the CFTA promises to eliminate or reduce trade barriers that restrict the mobility of certified workers to work in different jurisdictions across Canada.
  5. Energy sector: The CFTA will, for the first time, provide open procurement rules for the energy sector, which is expected to result in more than $4.7 billion per year in new procurement opportunities [PDF].

Dispute settlement under CFTA

The dispute settlement procedure currently contained in the 1995 Agreement on Internal Trade (the AIT or Agreement) has been criticized by stakeholders for being “slow, complicated, expensive, and … not respected by all governments.”[1] Disputes under the AIT can only be heard by a compliance panel after the required mediation and consultation processes have been exhausted. Compliance panels may issue findings as to whether a party implemented a measure inconsistent with the Agreement and make recommendations for compliance. However, the principal method of enforcement for non-compliance is monetary penalties up to a maximum of $5 million for the largest provinces, and pro-rated by population size for the smaller provinces and territories. The sequential procedural steps required by AIT’s dispute resolution process to reach a monetary penalty order for non-compliance is time-consuming and costly.

One of the goals of the Canadian Free Trade Agreement (the CFTA), which will become effective on July 1, 2017, is to replace the AIT’s dispute settlement procedures, in order to eliminate inefficiencies and to ensure effective compliance by the parties with domestic free trade rules within Canada. The CFTA aims to reduce costs associated with the dispute resolution procedure by empowering compliance panels to summarily dismiss proceedings if they determine that the proceeding is frivolous, vexatious, or an abuse of process.

The CFTA provides for increased monetary penalties of up to $10 million, and pro-rated by population for smaller provinces and territories. It is important to note that, as with the AIT, monetary penalty amounts under the CFTA will not be compensation to the complainant. Rather, the penalty will be deposited in a fund intended to advance and promote internal trade within Canada.

The CFTA, in addition to providing the governments standing to bring matters before a dispute resolution panel, also contains a business-to-government complaint mechanism whereby complainants can initiate complaints to address barriers to trade across Canada. Persons may commence dispute resolution proceedings under the CFTA only after they have requested their respective provincial government in writing to bring a dispute on their behalf, and received notice that the government has declined to bring the matter forward.

New to the CFTA is the Regulatory Reconciliation and Cooperation Table (RCT) [PDF], which will address regulatory barriers to inter-provincial trade. All levels of government will be able to submit complaints to the RCT to request that a specific barrier to trade be reviewed and revised. Participating governments will then work towards negotiating a reconciliation agreement to reduce or eliminate the barrier to trade. However, the RCT process is subject to an opt-out mechanism.

Overall, as with many other parts of the CFTA, the enhancement in the provisions relating to dispute resolution are marginal at best. Canada has implemented far more effective rules in its international treaties with respect to dispute resolution. Even the increase in the monetary penalties seems inconsequential after inflation is considered. The maximum monetary penalty under the CFTA is only $10 million for the largest of the provinces, whereas the previous maximum penalty of $5 million under the AIT comes from an agreement that is over 20 years old.