European Union: Update - Canada-EU Comprehensive Economic And Trade Agreement (CETA)

Last Updated: June 3 2016
Article by Roy Nieuwenburg

In our September 29, 2014 Construction Law Bulletin, we alerted readers to the projected implications of the Canada-EU Comprehensive Economic Trade Agreement. [“MASH Sector Needs to Brace for Possible New Era in Procurement - Canada-EU Comprehensive Economic Trade Agreement (CETA)”]. The final CETA text was published February 29, 2016. Here is an overview and summary:

Timing – legal review has been completed – now projected to be signed in 2016 and in force in 2017

The Canada-EU joint statement dated 29 February 2016 stated:

“Canada and the European Commission are very pleased to announce that the legal review of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) English text has been completed...

Canada and the European Commission will now complete the translation and review of the text in French and the 21 other EU treaty languages.

Once finalized, we will focus on the swift ratification of CETA so that individuals and businesses, both large and small, are able to benefit from the opportunities offered by this gold standard agreement. We are confident that CETA will be signed in 2016 and enter into force in 2017.”

Thresholds

The monetary thresholds under CETA are expressed in special drawing rights [SDRs] described at the Government of Canada website as follows:

“The Agreement applies only to high-value procurement contracts in order to ensure that governments can continue to use procurement to support local development, especially small and medium-sized enterprises. The threshold-value for procurement contracts in CETA will range from 130,000 to five million special drawing rights (an international value of the International Monetary Fund for which the corresponding range is $203,372 to $7.8 million for 2013).”

Teeth behind CETA – the ISDS provisions (applicable only for Section C and Section D of Chapter 8 [Investment])

Chapter 8 [Investment] of CETA contains a controversial provision that gives investors the right to seek compensation from states through international tribunals if government policies damage their business interests. Much has been written about the associated Investor-State Dispute Settlement (ISDS) process.Reports emerged in late 2014 that EU objections to these provisions threatened the deal. An agreement was reached at the end of February 2016 that switched the method of selection of the dispute resolution tribunal to a roster selection regime, with an appeal process, from the originally proposed ad hoc forum where three arbitrators sat on the tribunal, one of whom was appointed by the complaining Party, another by the responding Party and a third by the chairperson or by agreement of the disputing parties. The new regime is modelled to a large degree on the World Trade Organization appellate body. While the tribunal under the new method will still be composed of three arbitrators, the arbitrators will be chosen from a roster of 15 people nominated by Canada and the EU. It will have five members who are Canadian nationals, five from the EU and five who are neither. The member from the third country will chair the tribunal.

It is important to recognize the limited scope of application of this remedy, as described at the European Commission website:

“2. EFFECTIVE, FAIR AND TRANSPARENT INVESTMENT DISPUTE RESOLUTION SYSTEM

Scope

Investment dispute settlement under CETA is strictly limited to breaches of the few investment protection provisions which enshrine fundamental principles such as nondiscrimination, expropriation only for a public purpose and against adequate compensation and fair and equitable treatment (see explanations above) and which has caused damage to a specific investor. But a claim cannot be brought to investment dispute settlement simply because an action has an impact on investors’ profits. Also it cannot be used by an investor to claim a breach of another part of the CETA agreement. For example, it cannot be used to obtain market access by investors. This is an important clarification.

Relevant CETA provisions: Article 8.18 Scope

So, for example, if a Canadian entity established a new plant or mine in an EU member state, and the new plant or mine was nationalized or expropriated, the investor would have direct recourse (including a claim for monetary compensation and restitution of property, under Article 8.39) against the EU or member state.1 But this remedy would not extend to a complaint by a disgruntled bidder under a procurement or bidding process (for which Chapter 19 [Government Procurement] would apply).

More teeth - Domestic Review Procedures

Chapter 19 [Government Procurement] contains provisions for openness, transparency and non-discrimination designed to ensure free market access. Article 19.17 sets out detailed provisions stipulating that each Party shall provide a timely, effective, transparent and non-discriminatory administrative or judicial review procedure through which a supplier may challenge a breach of Chapter 19 [Government Procurement]. In the event of a complaint by a supplier, the Party (referring to the Parties to the Agreement) of the procuring entity conducting the procurement shall encourage the procuring entity and the supplier to seek resolution of the complaint through consultations. Each Party shall establish or designate at least one impartial administrative or judicial authority that is independent of its procuring entities to receive and review a challenge by a supplier arising in the context of a covered procurement. The participants to the proceedings shall have the right to be heard prior to a decision of the review body being made on the challenge. The review body shall make its decisions or recommendations in a timely fashion, in writing, and shall include an explanation of the basis for each decision or recommendation. Each Party shall adopt or maintain procedures that provide for: (a) rapid interim measures to preserve the supplier’s opportunity to participate in the procurement. Such interim measures may result in suspension of the procurement process. The procedures may provide that overriding adverse consequences for the interests concerned, including the public interest, may be taken into account when deciding whether such measures should be applied. Just cause for not acting shall be provided in writing; and (b) corrective action or compensation for the loss or damages suffered, which may be limited to either the costs for the preparation of the tender or the costs relating to the challenge, or both, if a review body determines that there has been a breach or a failure.2

The key here is "rapid interim measures" and "corrective action or compensation".

It remains to be seen whether tribunals will be much inclined to make awards beyond “costs for the preparation of the tender or the costs relating to the challenge”. I expect they will.

Section 8 of Article 19.17 provides that within ten years after the entry into force of this Agreement, the Parties will take up negotiations to further develop the quality of remedies, including a possible commitment to introduce or maintain pre-contractual remedies.

Prescribed requirements

Since the last version of the CETA text, there has been some relaxation and clarification of the prescribed requirements under Chapter 19 [Government Procurement]. For example:

  1. Sections 3 and 4 of Article 19.10 [Time-Periods] stipulate a requirement of at least 40 days for submission of tenders, but this is reduced to 13 days for commercial goods or services where the procuring entity publishes by electronic means (and reduced to 10 days where the procuring entity accepts tenders by electronic means).
  2. Public opening is not mandatory. Announcement of prices is not mandatory.
  3. Section 4 of Article 19.14 [Treatment of Tenders and Awarding of Contracts] stipulates that:

    ”4. To be considered for an award, a tender shall be submitted in writing and shall, at the time of opening, comply with the essential requirements set out in the notices and tender documentation and be from a supplier that satisfies the conditions for participation.” [emphasis added] As I have advocated for many years, an astute procuring entity should be wary of identifying anything as an essential requirement, and reserve the right to waive any non-compliance, regardless of severity, so as to preserve its ability to accept bids that are most advantageous.

  4. Section 9 of Article 19.14 [Technical Specifications and Tender Documentation] stipulates that:

    “9. The evaluation criteria set out in the notice of intended procurement or tender documentation may include, among others, price and other cost factors, quality, technical merit, environmental characteristics and terms of delivery.” [emphasis added]

Are the Provinces and Territories and the MASH sector covered in the Agreement?

The Canadian Government Procurement Market Access Offer includes, for British Columbia:

under Annex X-02 [Sub-Central Government Entities]:

British Columbia
This Annex covers all:

  1. ministries, agencies, boards, councils, committees, commissions and similar agencies of government;
  2. regional, local, district or other forms of municipal government; and
  3. school boards and publicly-funded academic, health and social service entities.

and under Annex X-03 [Other Entities]:

British Columbia
This Annex covers all:

  1. Crown corporations, government-owned commercial enterprises, and other entities that are owned by the Government of British Columbia through ownership interest; and
  2. corporations or entities owned or controlled by one or more municipal governments.

From the above it is clear that subject to ratification CETA purports to cover the Provinces and Territories and the MASH sector.

The European Commission website proclaims:

“Besides the improved conditions on investment protection, CETA will offer EU firms better business opportunities in Canada and support jobs, by making business between the EU and Canada easier. The deal will remove 99% of customs duties, leading to tariff savings for EU exporters of around 470 million euro a year for industrial goods. It will end limitations in access to public procurement, making it possible for EU firms to bid for public contracts - at the federal level as well as in Canada's provinces, regions and cities.”

Do the Provinces and Territories have to agree?

Can the Government of Canada do this on its own? The Provinces and Territories are parties to the Agreement on Internal Trade [AIT], for example, but are not parties to CETA. There is a constitutional division of powers between the federal government and the Provinces and Territories.3 Will any reluctant Provinces or Territories be cajoled into complying? The federal government has gone a long way down the road on this and made specific promises about the Market Access Offer of the Provinces or Territories. They seem confident that the Provinces and Territories will follow suit.4

What about municipalities, universities, colleges and hospitals?

MASH sector entities, such as municipalities, universities, colleges and hospitals, are not on the same footing as Provincial ministries. They have varying degrees of autonomy. As noted above, CETA purports to extend to these MASH sector entities, even though they are not parties to CETA. How will they be made to comply?

In British Columbia, funding by the Province for universities and other institutions is linked with a "letter of expectations". For example in the past the Province has used this to co-opt compliance with the AIT and also the NWPTA5. Your operating grant and availability of Provincial funds for capital projects may be re-considered if you're not respecting the spirit of the Province's procurement mandates. The same might be used for CETA.

Side observations

By the by I will offer a couple of observations.

First, in my experience, it has not been the direct objective of the trade agreements (such as CETA, the AIT, and the NWPTA) that causes challenges to the procuring entity, but rather the indirect measures prescribed for that purpose. I will elaborate:

direct objective: that there be no preferential treatment for Canadian versus non-Canadian bidders, or for bidders of one Province over another.

indirect measures prescribed: transparency (all good); public opening (okay, when warranted); and empirical application of objective criteria / elimination of subjective or business judgement, whether or not well grounded (impractical or overly constraining, in many cases, in my opinion).

Where a procuring entity has no intention of giving preference to Canadian versus non-Canadian bidders or for bidders of one Province over another, then the direct objective of the trade agreement is fulfilled (or at least is not transgressed). With few exceptions I can think over more than 35 years of experience, I have not encountered procuring entities applying this kind of preference (after explaining the exposure and liability that would govern based on the Chinook Aggregates line of cases). But even where the procuring entity conscientiously respects and observes the direct objective, the procuring entity can run afoul of the indirect measures prescribed, and be exposed to liability as a result.

The other observation I will offer is that for many years it has struck me as incongruent and curious that in practice bidders from outside jurisdictions (that is, bidders from jurisdictions outside of the jurisdictions of the parties to the trade agreements) ride the coattails of those agreements to enjoy the same benefits. Do you ever see a tender or RFP that says “we won’t discriminate against EU entities or AIT, NAFTA and NWPTA entities, but we reserve the right to discriminate against others”. I haven’t. So in practice (leaving aside federal procurements, for which further considerations apply) a bidder from Russia, Japan or North Korea benefits from the “level playing field” and “duty to treat fairly” principles embodied in the tender or RFP documents in the same way as a bidder from a jurisdiction that is party to these trade agreements. CETA is an improvement in that it will give remedies (with teeth) that will benefit the intended parties and not be available to non-parties.

How is this going to affect tenders and RFPs for organizations covered by the agreement?

The April 2016 issue of Lexpert Magazine quoted a Toronto lawyer [Judy Wilson, a partner at Blake, Cassels & Graydon LLP] as saying: “The trade agreements all mimic one another in how they regulate procurement ... If you're an organization that has good competitive procurement processes, which most Canadian public-sector organizations do, it's not going to affect fundamentally how you do your business. It's going to affect you from a trade perspective, e.g., can you give extra points for local content? And if you can, how does it work and what sectors are excluded? But it's not going to affect the fundamentals of your procurement - a fair, open, transparent process. Frankly, if you're compliant with the Agreement on Internal Trade (AIT) in how you do your procurement, the odds are you're going to be compliant across the board." I agree. I would add that:

  1. you will, however, want to be attentive to a number of specific prescribed requirements, set out in Chapter 19 [Government Procurement], described above;
  2. you are going to have to be alert to the fact that if faced with a complaint, you may be drawn into a challenge process under Chapter 19 [Government Procurement];
  3. due to Sections 3 and 4 of Article 19.10, you will be encouraged to publish opportunities and accept tenders by electronic means (if you do not already do so); and
  4. if your tender or RFP conditions include a limitation of liability (such as “the liability of [procuring entity] shall be limited to $X, regardless”), as many do, then I suggest it would be advisable to qualify the limitation of liability by stipulating that to the extent that [procuring entity] in fact extended a preference to a local supplier contrary to Sections 1 and 2 under the heading Non-Discrimination of Article 19.4 [General principles] of CETA or corresponding provisions of any other trade agreements binding upon [procuring entity], the limitation of liability does not apply; but otherwise the limitation of liability shall apply in all cases despite any non-compliance or discrepancy in regard to the notice requirements or other technical or process requirements prescribed by CETA or other trade agreements. {I will leave to a later day an explanation of the rationale for doing so.}

Concluding comments

Trade agreements take a long time to work their way through to implementation. The Government of Canada has done a good job of reporting on the progress of CETA and its expected content and timing. It’s been a while already, and the confident prediction, referred to above, that CETA will be in force in 2017 might be optimistic.

For high-value procurement contracts, CETA will loom large in the background. For procurements of lesser value, of course CETA will not apply if the amount is under the prescribed thresholds, and regardless existing practices probably already address the mandates of openness, transparency and non-discrimination. Be aware that under CETA a disgruntled bidder might take a run at challenging your decisions and the manner in which the process is being run, with recourse to "rapid interim measures" and "corrective action or compensation".

Useful links

The final CETA text can be found at the Government of Canada website here.

The European Commission website also provides helpful resources here.

Footnotes

1 A recent example of investor-state arbitration under another treaty: on April 4, 2016, the Canadian gold-mining company Crystallex International Corporation secured an arbitral award against The Bolivian Republic Of Venezuela of US$1.202 billion for unfair and inequitable treatment and the unlawful expropriation of its investment in the Las Cristinas mining project.

2 In contrast, new bid protest mechanisms under the NWPTA that took effect July 1, 2015 are less robust. They allow an arbiter to report on findings of fact, make a determination on whether the procurement was consistent with the agreement, and make recommendations as to how the government entity can bring itself into compliance. The arbiter may also issue a costs award (e.g., fees, expenses, legal representation) not exceeding $50,000, as well as a recoupment award (i.e., the cost of preparing the bid or tender response) of up to $50,000.

3 Although the federal government has sole authority to negotiate, sign and ratify international treaties, implementation and compliance are an area of federal, provincial and territorial responsibility. In the 1937 Labour Conventions Case the Privy Council held that the federal government cannot use the need to comply with international treaties as justification for encroaching on areas of provincial jurisdiction.

4 The federal government is fully responsible to the international community for compliance with the treaties that it signs. Her Majesty is indivisible. In order to limit Canada's liability where a treaty concerns an area of provincial legislative jurisdiction, some treaties contain a "federal state clause" qualifying its liability to performing only those international obligations that come within federal jurisdiction (and perhaps to make best efforts to get provincial compliance). Article 1.8 of CETA seems to reflect that the federal government will be fully responsible, stating: "[Extent of obligations] 1. Each Party is fully responsible for the observance of all provisions of this Agreement. 2. Each Party shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance at all levels of government."

5 New West Partnership Trade Agreement among Alberta, British Columbia and Saskatchewan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Roy Nieuwenburg
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