Canada: Prohibited Compliance: Canada’s Latest Attack Against Buy America Causes Cancellation Of U.S. Procurement

The Buy America legislation recently reared its ugly head on Canadian soil. On November 6, 2014, the Alaska Department of Transportation & Public Facilities issued an invitation to bid (ITB) for the removal and replacement of the ferry terminal facility in Prince Rupert, British Columbia, that is presently owned by the Prince Rupert Port Authority but utilized by Alaska Marine Highway System (AMHS) ferries.1 A mandatory requirement in the ITB was that all iron and steel products associated with this project be subject to Buy America provisions, which require the use of U.S. steel and iron materials.2 Naturally, Canada and the Province of British Columbia were outraged at the prospect that a refurbishment of one of the busiest terminals in Canada would shut out the use of Canada's own steel in favour of U.S. materials. Nonetheless, the Alaska administration continued to defend the protectionist measure on the grounds that its use was consistent with American obligations under the international procurement agreements, which do not apply to state acquisitions.

The Government of Canada did not stand down and, on January 21, 2015, released an order prohibiting individuals and entities in Canada from complying with the U.S. Buy America measures in their bids for the overhaul of the Prince Rupert ferry terminal (Buy America FEMA Order). Issued on January 19, 2015, under the Foreign Extraterritorial Measures Act (FEMA), the Buy America FEMA Order is an extraordinary step; nothing of the kind has been undertaken since 1992, when the Canadian government first made it a criminal offence for Canadian companies and their directors, officers and senior employees to comply with the U.S. trade embargo of Cuba. As Ed Fast, Minister of International Trade for Canada, noted at the issuance of this latest FEMA order, "We have been clear: the application of protectionist Buy America provisions on Canadian soil is unacceptable and an affront to Canadian sovereignty."

This latest Canadian shot across the bow was met with a decision two days later by the Alaskan authority to simply cancel the procurement until further notice.3 Hopefully in the interim cooler heads will prevail and a solution will be reached that will allow Canadian materials to be used in Canadian infrastructure projects of this nature.

FEMA Background

Originally enacted in 1984 to address the increasing extraterritorial enforcement of U.S. anti-trust laws, FEMA is a tool by which the Canadian government can take action when foreign actors "cross the line" and begin to infringe on Canadian sovereignty. It allows the Attorney General to issue orders that:

  • prohibit the production of documents and business records to a foreign tribunal;
  • allow Canadian entities to sue for damages sustained as the result of proceedings in a foreign tribunal under a designated foreign law;
  • prohibit compliance with foreign measures; and
  • require a Canadian entity to notify the Attorney General regarding communications received regarding foreign measures.

With the consent of the Minister of Foreign Affairs, the Attorney General may also issue an order to block foreign decrees.

Canada's only FEMA order until now, originally issued in 1992 and significantly expanded in 1996, targets the U.S. trade embargo of Cuba (Cuba FEMA Order). Certain provisions of the U.S. Cuban Assets Control Regulations, Export Administration Regulations and Helms-Burton Act restrict the ability of Canadian companies to engage in business with Cuba. The Cuba FEMA Order makes it a criminal offence for Canadian corporations4 and their directors, officers, managers and employees in a position of authority to comply with these kinds of U.S. extraterritorial measures to the extent that they operate or are likely to operate to prevent, impede or reduce trade or commerce between Canada and Cuba. The Cuba FEMA Order also requires immediate notification to the Attorney General of Canada of any communications related to these U.S. measures that are received from a person in a position to direct or influence the policies of the corporation in Canada.

The Cuba FEMA Order continues to cause significant challenges to businesses in Canada that are required to comply with the U.S. trade embargo of Cuba but are subject to Canadian law that prohibits such compliance. With the recent U.S. announcement of certain relaxations in the Cuban trade embargo and the renewed interest in trade and investment opportunities in Cuba, this conflict between Canadian and U.S. law will be exacerbated, as the complete repeal of the U.S. trade embargo remains unlikely.

Application of Buy America to the Prince Rupert Ferry Terminal

Although the Prince Rupert ferry terminal is situated on Canadian Crown land, the land is leased from the Prince Rupert Port Authority by the AMHS and the ferries provide an important maritime link with Alaska. American interests in the facility are significant, and the U.S. Federal Highway Administration is funding most of the approximately $15 million in planned improvements.

However, this funding does not come without a cost, as bidders on the project are required to use American-made iron and steel in accordance with U.S. Buy America measures. Such requirements can be waived at the request of the governor of the procuring state government, but Alaska governor Bill Walker has refused to make the necessary requests. This has triggered the issuance of the Buy America FEMA Order.

The Buy America FEMA Order

Section 1 of the Buy America FEMA Order prohibits any person in Canada, in respect of alterations or improvement to be made to the premises leased by the State of Alaska from the Prince Rupert Port Authority, from complying with the legislative provisions that constitute the Buy America requirements. Additionally, the Buy America FEMA Order prohibits compliance by any person in Canada with any directive, instruction, intimation of policy or other communication supporting the application of these requirements from a person who is in a position to direct or influence the policies of the person in Canada; this specifically includes any such communications or directives in the tender documents issued in respect of alterations or improvements to be made to the premises.

The scope of the Buy America FEMA Order goes beyond this particular project on the leased premises; it applies to any project at the ferry terminal going forward. Infrastructure improvements at the leased premises that require iron or steel are effectively stalled until one of the two parties backs down. This includes those listed in any tender documents for such projects.

The Buy America FEMA Order also clarifies that persons who comply with the Buy America requirements or related communications before the day on which it came into force (January 19, 2015) contravene the Buy America FEMA Order only if they take some further action after that date that constitutes compliance.

In its Regulatory Impact Analysis Statement accompanying the Buy America FEMA Order, the Canadian government notes that coverage of the prohibition includes bidder declarations of compliance with Buy America measures (such as material origin certificates) and co-operation with any audit procedure seeking to verify compliance with those measures.

Notably, the Buy America FEMA Order broadly applies to "any person in Canada," and not just Canadian incorporated companies or Canadian citizens. Any entity would have to have physical assets in Canada in order to work on the ferry terminal. This could make it a "person in Canada," subject to Canadian jurisdiction, and would also mean that it would have physical assets in Canada, all potentially subject to seizure.

As with the Cuba FEMA Order, the stakes for violating the Buy America FEMA order are high. Upon conviction, individuals face a fine of up to $150,000 and up to five years in prison. Corporations stand to incur fines of up to $1.5 million.

Future Developments

The recent cancellation of the Prince Rupert ferry terminal project is likely not the end of the story. The Buy America FEMA Order establishes an important precedent for future blocking measures to be taken against Buy America measures that may arise in connection with other U.S.-funded infrastructure projects on Canadian territory. McCarthy Tétrault's International Trade and Investment Law Group has significant expertise in the application of FEMA orders and in the area of government procurement and infrastructure projects and will continue to follow developments on these matters.

Footnotes

1 http://aws.state.ak.us/OnlinePublicNotices/Notices/View.aspx?id=174591

2 United States Code, title 23, section 313, or U.S. Code of Federal Regulations, title 23, part 635, section 410

3 http://www.cbc.ca/news/canada/british-columbia/alaska-cancels-15m-prince-rupert-ferry-terminal-project-for-time-being-1.2927201

4 The Cuba FEMA Order defines a Canadian corporation as "a corporation registered or incorporated under the laws of Canada or of a province and that carries on business in whole or in part in Canada."

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