Legal Complexities of Acquisition

Any examination of defence procurement must begin with an understanding of its legislative and regulatory framework. In this regard, two documents govern defence procurement. First, the Agreement on Internal Trade (AIT) and second the Government’s Contract Regulations (GCR). For a procurement to be legal, it must comply with both documents. 

In the case of the recent announcement to acquire 18 Super Hornets as an “interim” procurement, the government has argued that, due to the urgency of the situation, and since this is an “interim” purchase, it complies with the relevant laws and regulations. Let’s see if this is true.

AIT: Agreement on Internal Trade 
No one fact has a more profound impact on the defence-procurement process and on the behaviour of its participants and stakeholders than the following:

Canada is unique among its western allies in requiring, through its AIT legislation, that the acquisition of defence-related goods and services be competed.

Generally, competition benefits everyone. Men and women in the military benefit from the “best” that the marketplace has to offer; taxpayers benefit as competition requires contenders to “sharpen their pencils” to get orders. Canadian industry gains by having the opportunity to team with various prime contractors to deliver their industrial regional commitments; and finally, ministers are able to blunt attacks on their integrity or allegations of political interference.

Three trade agreements have an impact upon federal public sector procurement – the North American Free Trade Agreement, the World Trade Organization-Agreement on Government Procurement, and the Agreement on Internal Trade. However, the first two of these exclude defence-specific products. Only the AIT includes defence-specific goods and services and it is binding only on the Canadian federal government, provinces, and territories. As a result, the large national defence acquisitions are subject to the terms and conditions of a trade agreement including specified redress mechanisms. 

Under the AIT agreement, there are severe legal consequences if the procurement process is not conducted with fairness to all parties, or if politicians are found to have inappropriately intervened.

For officials working in the system, it is gratifying to know that their efforts will not be discarded because of political considerations. If a politically-guided system were the reality, discussions between the bureaucrats and industry become redundant – after all, why would industry waste time and money working with bureaucrats if politicians can overrule the official recommendations? In such a scenario, industry would quite rightly devote the bulk of its efforts to lobbying and influencing ministers. 

Reassuringly however, the current legal framework creates confidence within the industrial sector, as it assures that success or failure will be determined solely on the quality of each bid.

The AIT was signed on 18 July 1994, and entered into force on 1 July 1995. As mentioned, it is not an international trade agreement, but rather an internal one that is intended to apply to the federal government, the provinces, and the territories. 

One of its well-known, unintended consequences is that it provides foreign companies more access to Canadian military procurement than they have under either NAFTA or WTO-AGP.

The AIT threshold for goods is $25,000 and for services is $100,000. Procurements above these thresholds are subject to the terms and conditions of the AIT, including allowing access to a bid challenge procedure. To this end, the federal government has designated a quasi-judicial tribunal, the Canadian International Trade Tribunal, to hear and rule on complaints. 

Only Canadian suppliers can, under the AIT, challenge defence procurements (this is hardly a constraint on foreign suppliers). Under the AIT, a Canadian supplier is defined as a supplier that has a place of business in Canada. Clearly, this is not a difficult hurdle to overcome (a single part-time representative in a home office will suffice) and, foreign defence suppliers are easily able to obtain access to the provisions of the AIT. 

I will discuss two areas in the AIT that are relevant to defence procurement – the articles dealing with procurement and the national security exemption.

Article 506.2 of the AIT outlines the requirement for competition: 
(noted bolded text added for emphasis or relevance)

Article 506.2
A call for tenders shall be made through one or more of the following methods:

  1. the use of an electronic tendering system that is equally accessible to all Canadian suppliers;
  2. publication in one or more predetermined daily newspapers that are easily accessible to all Canadian suppliers; or
  3. the use of source lists, provided that, in respect of any source list:
    1. registration on the source list is consistent with Article 504;
    2. all registered suppliers in a given category are invited to respond to all calls for tenders in that category; and
    3. a supplier that meets the conditions for registration on the source list is able to register at any time.

Within the federal government, the electronic tendering system is administered by Public Services and Procurement Canada (PSPC). 

There can, of course, be exceptions to open competition, and Articles 506.11 and 506.12 describe those instances. (Portions irrelevant to defence have been deleted for space, but can be found in our online version): 

Article 506.11 
An entity of a Party may use procurement procedures that are different from those described in paragraphs 1 through 10 in the following circumstances provided that it does not do so for the purpose of avoiding competition between suppliers or in order to discriminate again supplies of any other Party:

  1. where an unforeseeable situation of urgency exists and the goods, services or construction cannot be obtained in time by means of open procurement procedures;
  2. where goods or consulting services regarding matters of a confidential or privileged nature are to be purchased and the disclosure of those matters through an open tendering process could reasonably be expected to compromise government confidentiality, cause economic disruption or otherwise be contrary to the public interest;
  3. where a contract is to be awarded under a cooperation agreement that is financed, in whole or in part, by an international cooperation organization, only to the extent that the agreement between the Party and the organization includes rules for awarding contracts that differ from the obligations set out in this Chapter;
  4. where construction materials are to be purchased and it can be demonstrated that transportation costs or technical considerations impose geographic limits on the available supply base, specifically in the case of sand, stone, gravel, asphalt compound and pre-mixed concrete for use in the construction or repair of roads;
  5. where compliance with the open tendering provisions set out in this Chapter would interfere with a Party's ability to maintain security or order or to protect human, animal or plant life or health; and
  6. in the absence of a receipt of any bids in response to a call for tenders made in accordance with the procedures set out in this Chapter.

Article 506.12 
Where only one supplier is able to meet the requirements of procurement, an entity may use procurement procedures that are different from those described in paragraphs one through ten in the following circumstances:

  1. to ensure compatibility with existing products, to recognize exclusive rights, such as exclusive licenses, copyright and patent rights, or to maintain specialized products that must be maintained by the manufacturer or its representative;
  2. where there is an absence of competition for technical reasons and the goods or services can be supplied only by a particular supplier and no alternative or substitute exists;
  3. for the procurement of goods or services the supply of which is controlled by a supplier that is a statutory monopoly;
  4. for the purchase of goods on a commodity market;
  5. for work to be performed on or about a leased building or portions thereof that may be performed only by the lessor;
  6. for work to be performed on property by a contractor according to provisions of a warranty or guarantee held in respect of the property or the original work;
  7. for a contract to be awarded to the winner of a design contest.
  8. for the procurement of a prototype or a first good or service to be developed in the course of and for a particular contract for research, experiment, study or original development, but not for any subsequent purchases;
  9. for the purchase of goods under exceptionally advantageous circumstances such as bankruptcy or receivership, but not for routine purchases;
  10. for the procurement of original works of art;
  11. for the procurement of subscriptions to newspapers, magazines or other periodicals; and
  12. for the procurement of property.

While these clauses are, in general, self-explanatory, I would like to comment on article 506.11 (a) – particularly the words “unforeseeable situation of urgency.” 

The key word is “unforeseeable.” It is often suggested to me that because of an urgent need, a particular good or service should be sole-sourced. That argument is fallacious. An “urgent need” caused by bureaucratic or political delays does not justify avoiding competition. During the Y2K “crisis”, client departments wanted to bypass competition because of the urgency. I had to explain that the year 2000 was likely foreseeable for about 2000 years.

Conversely, if unforecasted operational requirements arise due to an imminent theatre operation, then clause 506.11(a) can apply, and special procurement processes can be implemented to shorten the cycle times. 

National Security
In exceptional situations where the National Security of the country is at risk, a government can invoke Section 1804 and extricate itself from the articles in the AIT. The process requires DND to recommend invoking this clause, with PSPC approving it. I am not aware of any instances where PSPC refused. Once invoked, the procurement falls outside the AIT and is not subject to its redress mechanisms. 

There is no operating definition of “national security” and each case is looked at on its own merits. Accordingly, it does leave its application subject to political manipulation by the decision makers in place at the time.

Article 1804
Nothing in this Agreement shall be construed to:

  1. require the federal government to provide, or allow access to, information the disclosure of which it determines to be contrary to national security; or
  2. prevent the federal government from taking any action that it considers necessary to protect national security interests or, pursuant to its international obligations, for the maintenance of international peace and security.

GCR: Government Contract Regulations
In addition to the AIT, defence procurement is governed by the Treasury Board’s GCR made under the Financial Administration Act, and procurements must comply with both documents. For our purposes, sections 3 and 6 are the most relevant:

Section 3 

  1. These Regulations apply to all goods, service and construction contracts that are entered into by a contracting authority and that provide for the payment of any money by Her Majesty, except:
    1. a contract entered into by the National Film Board;
    2. a contract for the construction of buildings entered into under the Veterans’ Land Act;
    3. a contract entered into under the Indian Act that involves Indian moneys as defined in that Act;
    4. a contract for the performance of legal services;
    5. a contract for the fit-up of an office or a residential accommodation if the contract for fit-up is part of a transaction authorized pursuant to the Federal Real Property and Federal Immovables Act or the regulations made under it;
    6. arrangements entered into under an Interchange Canada Agreement; or
    7. a contract whose purpose is, for operational reasons, to fulfill an interim requirement for defence supplies or services or to ensure defence logistical capabilities on an interim basis, and any related contract. 

Section 6 
Notwithstanding section 5, a contracting authority may enter into a contract without soliciting bids where:

  1. the need is one of pressing emergency in which delay would be injurious to the public interest;
  2. the estimated expenditure does not exceed
    1. $25,000,
    2. $100,000, where the contract is for the acquisition of architectural, engineering and other services required in respect of the planning, design, preparation or supervision of the construction, repair, renovation or restoration of a work, or
    3. $100,000, where the contract is to be entered into by the member of the Queen’s Privy Council for Canada responsible for the Canadian International Development Agency and is for the acquisition of architectural, engineering or other services required in respect of the planning, design, preparation or supervision of an international development assistance program or project;
  3. the nature of the work is such that it would not be in the public interest to solicit bids; or
  4. only one person is capable of performing the contract.

Of particular interest is Section 3(g), which talks about an interim requirement. This section was added to the Government Contract Regulations on 23 June 2015. 

Though denied by Air Force leaders, this “interim requirement” is the basis by which the government’s decision to sole-source 18 Super Hornets complies with the GCRs, however, in order for a procurement to be legal, it must comply with both documents.   

Based on the legal requirements outlined in this article, the government is clearly not in compliance with the AIT with regards to the sole-sourcing of a replacement for the fighter jets. Nor is there any way to make it work within the current legal framework. 

While the current need for fighter jets is of an urgent nature, that need has been forecasted for many years and as such, does not represent an “unforeseeable sense of urgency”. Consequently, the announced government intent does not comply with the provisions in the AIT. 

In plain English, the government does not have the legal authority to sole-source fighter aircraft.

By claiming that a “capability gap” exists, the government could invoke the National Security exemption and extricate itself from the AIT. However, such a decision would likely be viewed with derision and undermine the government’s credibility. Besides, if there truly is a “capability gap”, the government can still address it by conducting an open, fair and transparent competition – beginning right now. 

Such a competition can be concluded within one year, would save billions of dollars, would provide Canada with far more robust industrial and technical benefits, and most importantly, would provide our men and women in the military with the equipment they need now rather than a decade from now. 

Frankly, it’s time the government “walked the talk” and supported the military with product rather than rhetoric. 

Alan Williams, former ADM (Materiel) at DND (1999-2005), is President of The Williams Group, which provides expertise in policy, programs and procurement.