Under the new regulation, an NSE is deemed to have been properly invoked when an assistant deputy minister declares it is proper. Fasken trade and procurement specialists tackle this circular reasoning and chart the about-face in Canada’s position on ‘national security’ in procurement.
On June 12, 2019, the Government of Canada introduced amendments to the Canadian International Trade Tribunal Procurement Inquiry Regulations. Described as a “clarification”, the amendments were surprising, not only because of the absence of public notice or consultation, but also because of their apparent contradiction with recent, well-reasoned jurisprudence by a World Trade Organization (WTO) panel, and a body of well-developed decisions from the Canadian International Trade Tribunal (CITT). These new regulations will significantly change the procurement dispute process that federal government suppliers have been able to access for several decades. It will be important to understand this impact when developing your strategy for bidding on government contracts.
The CITT is empowered to investigate complaints by potential suppliers that the federal government violated free trade agreement rules such as those found in the Canadian Free Trade Agreement (CFTA), WTO-AGP, the NAFTA or the agreement with Europe, when procuring goods or services, including construction services. Trade agreements provide that their signatories (i.e. governments) are not precluded from taking those actions considered necessary to protect essential security interests even if those actions violate trade agreement rules that apply to procurement. The federal government has developed a practice of invoking what it refers to as the “National Security Exception” (NSE) to exclude all of its obligations under all trade agreements. In 2012, the government provided notice that it was planning to significantly expand the application of the NSE – including its application to all procurements conducted by Shared Services Canada. When invoking this “blanket” NSE in its procurements, the government had not explained which rules of the trade agreements were being set aside; rather, the approach was to set aside all trade agreements and their rules.
This government practice has been extensively litigated before the CITT in recent years and a robust body of CITT case law quickly developed, providing rules on when and how the government should invoke the NSE.
Under the new regulations, an NSE is deemed to have been properly invoked when an assistant deputy minister (or a person of equivalent rank) of the department responsible for awarding the contract has signed a letter approving the invocation of the NSE, prior to the date of contract award.
The amendments require no government justification for the NSE invocation, including why removing the authority of the CITT to review a procurement is necessary to protect national security. The invocation of an NSE is now considered proper if the paperwork pre-dates the contract award. Government practice prior to the new regulations was to provide notice of the NSE invocation within the procurement documents; however, the regulations have not included this requirement as part of a proper invocation.
The regulation amendments remove the discretion and oust the jurisdiction of the CITT to investigate procurement complaints by suppliers. The CITT must now dismiss any complaint where an NSE has been “properly invoked” for a procurement – whether the government is buying pencils, printers or planes. Not surprisingly, these amendments stand in stark contrast to recent WTO jurisprudence, Canada’s position when litigating this issue before the WTO, and clear and consistent CITT jurisprudence.
While the Government claims that the amendments are needed to bring clarity to this issue, the impact of this change seems a far cry from a simple “clarification”.
Recent WTO Jurisprudence
On April 5, 2019, the WTO issued a landmark ruling in Russia - Measures Concerning Traffic in Transit, regarding the decision by Russia to invoke the “essential security interests” exception found in the General Agreement on Tariffs and Trade (which is the same exception that applies to procurement rules under the various trade agreements Canada has signed) to prevent Ukraine from trading with neighbouring states. Russia claimed that sovereign States had the sole discretion to “self-judge” what actions they considered necessary for the protection of their essential security interests and that this decision was immune from scrutiny by the WTO. This position was supported by the United States but opposed by Canada. In its opposition, Canada claimed that while governments should be given a high level of deference regarding national security matters, they must provide reasons why their good faith belief that valid security interests existed and necessitated the overruling of trade agreements for the measures taken to protect these essential interests.
The WTO ruled that countries seeking to invoke an NSE had a duty to (i) demonstrate that valid security concerns existed which warranted the invocation of an NSE and, (ii) that the measures that were taken were necessary to protect these essential or national security interests. The NSE did not grant an unfettered licence to ignore the obligations under the trade agreements, or enable countries to shield themselves from WTO scrutiny. Importantly, the WTO said that if governments attempted to escape their trade obligations by re-labelling trade interests as “essential security interests”, this would be “entirely contrary to the security and predictability of the multilateral trading system.”
Recent CITT Jurisprudence
The WTO decision is consistent with recent CITT decisions, which have set out rules regarding when and how the federal government can invoke an NSE to exempt itself from complying with its trade agreement obligations.
For example, in 2017, in Hewlett-Packard (Canada) Co v Shared Services Canada, the CITT reviewed (and rejected) the government’s invocation of a blanket NSE issued in 2012; holding that a government institution wanting to invoke a NSE had a duty to “articulate in a concrete manner, a national security issue that is rationally connected to the exclusion of a trade discipline.” Only then could the government properly exclude the CITT from examining whether a federal procurement complied with the trade obligations targeted by the NSE. The government had to identify which trade agreement rules it was excluding from a procurement and why it was necessary to do so for national security reasons.
The CITT cautioned that resorting to “omnibus” NSEs to forestall review of government action undermines public confidence in the integrity of the procurement process. For this reason, the CITT urged that “government institutions limit the NSE only to the extent necessary to protect the national security interest” and that government institutions should “exclude only specific provisions of the trade agreements that cannot be upheld without compromising national security.”
The Regulatory Assessment and Impact Statement (RIAS) provided with the new regulations did not explain how Canada has reconciled these amendments to the CITT regulations with its WTO obligations and international legal jurisprudence; however, these amendments will have a serious impact on how Canada conducts public procurements. The federal and provincial courts remain a venue for suppliers regarding claims of unfairness by the Government in the tendering process. And countries can still challenge Canada before the WTO for improperly invoking the NSE. For federal government suppliers, it is now even more critical that they have in place a robust and comprehensive approach to government procurements that is implemented well in advance of the release of a tender document.
Regardless of how this regulatory change reconciles with national and international trade agreements and jurisprudence, knowing how the procurement system works and how to best advocate for your interests is a crucial and integral part of any successful procurement strategy. Working with a legal team that has knowledge and experience in all of these areas, and that can provide strategic advice in all areas - government relations, trade law, procurement and disputes/litigation - and that can assist with strategic planning and approach from start to finish, is critical to success.