The Rise Of The Trade Agreements: New Obligations, New Opportunities

November 17, 2017


One of the conditions by the members of the European Union for launching into free trade negotiations with Canada in 2009 was that local government procurement — the so-called subnational level of government — be included within the scope of the negotiations. This was a significant departure from existing international free trade arrangements, including the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) Agreement on Government Procurement, which apply only to the federal, provincial and territorial levels of governments.

Recently, two major trade agreements have come to apply to municipalities and to members of the Broader Public Sector (BPS) in Canada, which include, among others, hospitals, school boards, colleges and universities. The Canadian Free Trade Agreement (CFTA) came into force on July 1, 2017, and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) became effective on September 21, 2017.

While trade agreements generally aim to promote the exchange of goods and services between their signatories, the procurement rules contribute to this overall objective by setting up rules of engagement based on fairness (where all parties are treated the same), transparency (where the rules are knowable to any interested party), and reciprocal non-discrimination (where no party is put at a competitive disadvantage because of its home jurisdiction). Such rules open-up markets by stimulating the sale and purchase of goods, services and construction across borders, driving down price and increasing value for public sector buyers.

It is undeniable that the CFTA and CETA impose new obligations on public organizations at the subnational level, but it is worth noting that the agreements also create new opportunities to optimize value for public procuring organizations.

The Canadian Free Trade Agreement

The CFTA is a domestic trade agreement between the federal, provincial and territorial governments. It replaces the Agreement on Internal Trade (AIT). Chapter 5 of the CFTA (Government Procurement) shares much in common with its predecessor AIT, but there are some important differences. The CFTA contains clarifications and explicit rules and procedures that differ from the AIT, including those relating to tender notices, local preference, electronic posting, supplier experience and prequalification, technical specifications, new information and modifications, negotiations, public-private partnerships, and debriefs.

The CFTA also offers some new opportunities for public organizations. Article 512, on negotiation, is an example. Article 512 invites a customized procurement process that leverages negotiations with bidders. Because negotiations are the best, and arguably the only, way to truly optimize value (financial and otherwise), Article 512 creates a range of opportunities having the potential to drive down costs (by 15-20% or more) and increase the value of the good/services or solution being procured. Drafting a solid bid call document is always a good thing, but innovation and value lie in negotiations.

A note on the AIT/CFTA: Ontario’s Broader Public Sector Procurement Directive, which came into force in 2011, is based on the AIT. While the Directive was not intended to amend the requirements of the procurement chapter of the AIT, there are now ambiguities between the requirements of the Directive and Chapter 5 of the CFTA. Until the Government of Ontario makes the required adjustments to the Directive to reflect the requirements of the CFTA, references to the AIT in the Directive should be read as references to the CFTA.

The Canada-European Union Comprehensive Economic and Trade Agreement

CETA is an international trade agreement between Canada and the 28 member states of the European Union. CETA sets new standards in the trade of goods, services (and construction), non-tariff barriers, investment, government procurement, and other sectors, including labour and the environment. With respect to covered procurements, CETA requires procuring entities to comply with certain specific rules and procedures relating to, for example, notices of intended procurement, selective tendering and submission dates.

Currently, 99% of EU tariff lines on Canadian goods are estimated to be duty-free, compared to approximately 25% before CETA.

CETA applies to higher value procurements when compared to the thresholds set out in the CFTA. The CETA threshold for the procurement of goods and services at the sub-federal government level has been set at 200,000 SDR (SDR is an international reserve asset created by the International Monetary Fund), or $340,000 CAD and at the federal government level at 130,000 SDR or $221,000 CAD. The threshold for construction services at all levels of government is set at 5 million SDR or $8.5 million CAD. The thresholds will be set at regular intervals by Global Affairs Canada.

CETA represents an outstanding new opportunity for Canadian companies to explore bidding on EU procurement contracts at the federal and sub-federal levels of public organizations in 28 EU countries, ranging from municipalities, hospitals, universities, to many others.

Bid Dispute Resolution

With respect to procurements outside the federal environment, both CETA and the CFTA require the creation, by government parties, of a well-developed procurement complaint system. Both trade agreements provide for the establishment of a timely, effective, transparent and non-discriminatory administrative or judicial review procedure through which a disappointed bidder may challenge a breach of the agreements’ procurement chapter. Both also obligate each government party to put in place procedures that provide for rapid interim measures to preserve the disappointed bidder’s opportunity to participate in the procurement and for corrective action or compensation for the loss or damages suffered. Given how a single significant damage award could have the effect of financially devastating a procuring entity, particularly smaller ones, both CETA and the CFTA contemplate limits on the amount of damages that could be awarded. These will focus on the costs of participating in the tender process and the costs relating to the challenge.

Ending Comments

CETA and the CFTA provide public sector procuring organizations an opportunity to review their procurement policies and procedures, procurement documents and practices to ensure they comply with the new trade agreements. They should also ensure they take full advantage of the new opportunities to achieve greater value from their procurements. Both require a detailed review of CETA and the CFTA to carefully assess the impact of the new trade agreements on both their procurement activities and procurement governance.

Denis Chamberland, counsel to Fogler, Rubinoff LLP, is a procurement and trade law specialist. He was retained by the Government of Ontario to advise on the drafting of the BPS Procurement Directive and to draft the standard RFP documents which are now used by BPS organizations across Ontario.