Last Stop on the 'Administrative Ride'

In the Bri-Chem trilogy, a tribunal found that the Canada Border Services Agency was disregarding regulation. Challenging the agency proved an uphill, but ultimately worthwhile, battle.
HOW FAR CAN BUREAUCRATS GO in refusing to follow decisions of administrative tribunals? That was the question raised by an importing company in Canada v. Bri-Chem Supply (2016 FCA 257). The court’s answer seems intuitive: not very far.

But if not for an anonymous source who, in the late stages of litigation, provided Peter Kirby of Fasken Martineau DuMoulin LLP, lead counsel for the importers, with an envelope of critical documents, the bureaucrats and administrators at the Canada Border Services Agency (CBSA) might still be getting away with disregarding the directions of the Canadian International Trade Tribunal (CITT), the statutory body that oversees the agency.

Kirby had earlier been counsel for the importer in Frito-Lay Canada v. Canada Border Services Agency (CA CITT), a 2012 ruling in which the CITT upheld the ability of importers to correct erroneous customs declarations in order to obtain more favourable tariff treatment. The CBSA appealed, but eventually discontinued the appeal.

Still, the agency steadfastly refused to apply Frito-Lay when identical issues arose with regard to goods imported by Bri-Chem, Ever Green Ecological Services and Southern Pacific Resource Corp. (SPR), the three companies whose consolidated cases make up the Bri-Chem trilogy. This despite the fact that, as the Federal Court of Appeal (FCA) later noted, the CITT ruling in Frito-Lay was directly on point and rationally indistinguishable from the facts in the trilogy — so much so that the FCA felt compelled to uphold the CITT’s conclusion that CBSA’s conduct amounted to an abuse of process.

PERHAPS ALL OF THIS is not surprising. Bureaucrats are answerable to politicians — as well as to the rule of law. This includes attempting to anticipate political considerations in view of the Canadian-US relationship. Indeed, sources have it that one reason the CBSA took the stand it did in Bri-Chem was because the United States, Canada’s NAFTA partner, was concerned that the Frito-Lay interpretation of the Canadian version of the rules was contrary to the way in which the corresponding American rules, which had been drafted more clearly, had been interpreted.

However that may be, quasi-judicial administrative tribunals are the mechanisms our system has chosen to resolve these types of conflicts, to ensure procedural fairness, and to filter out and rule on the issues through the specialized expertise that generally characterizes tribunal members. It’s only if parties are unhappy with a tribunal’s decision that courts are asked to intervene. For the most part, however, judges — recognizing tribunals’ specialized expertise — are reluctant to override them.

Still, the relationship between bureaucrats and administrative tribunals can be murky. To begin with, tribunal decisions, which are based on the application of law, may not mesh with the policy considerations that tend to drive bureaucratic action. Complicating the matter is the fact that administrative tribunals, unlike courts, are not bound by stare decisis, or the force of precedent.

The upshot is that two tribunal panels deciding the very same issue can supposedly reach varying conclusions. From a bureaucratic perspective, this leaves room for civil servants to sidestep the decisions of tribunals in similar cases by simply pointing to the fact that a tribunal that is hearing a future case could arrive at a different result than a previous panel did.

“While it gave us some comfort that Bri-Chem was a rehearing of the very same issue that was decided in Frito-Lay, the fact that stare decisis did not apply meant that we were not dealing with a slam dunk,” Kirby explains. “Although we were no longer pushing a frontier on the issue, there was uncertainty as to whether the [Canadian International Trade Tribunal] would accept our argument.”

As it turns out, sidestepping CITT decisions turned out to be the CBSA’s modus operandi in Bri-Chem. That Kirby and his team, Arif Chowdhury of Calgary and Aïda Mezouar in Montréal, were able to thwart the bureaucracy is not only a tribute to the rule of law and a significant landmark in shaping the relationship going forward between administrative tribunals and public officials, but also a testament to thoughtful strategy, hard work, focused preparation and skilled advocacy, as well as an object lesson in managing complicated, hard-fought litigation against the state within the strictures of clients’ budgets.

LIKE A VOLCANO, many years in the making before it erupts, the circumstances giving rise to Bri-Chem have a long and volatile history.

“What CBSA did in Bri-Chem is not different from what it has been doing for 35 years,” says Darrel Pearson, an international trade and customs lawyer in the Toronto office of Bennett Jones LLP. “The agency has always viewed itself as the self-proclaimed final authority on customs law and policy, feeling at liberty to dispute any legal argument or decision on the basis that it knows better because it understands the underlying policy and has been involved in the negotiations leading to the relevant international treaties.”

The Canada Border Services Agency’s intransigence is so ingrained, sources report, that after one trade lawyer outlined the agency’s attitude in a public forum, senior CBSA officers subsequently confronted the lawyer with unpublishable expletives and refused to shake the lawyer’s hand.

As well, when the CBSA — whose counsel in Bri-Chem did not respond to a request for an interview — loses at the CITT, it is rarely comfortable with an appeal to the Federal Court of Appeal because that, too, might produce a “wrong” decision. “When it comes to customs classification, procedure and valuation, CBSA has a pattern of leaving CITT decisions in place but refusing to change its policy,” Pearson says. “Their reasoning is based on the fact that stare decisis does not apply at the CITT, and their attitude is, ‘If the tribunal can change its decision, why should we be bound?’”

This was precisely the border agency’s approach in Bri-Chem. “CBSA took the position that Frito-Lay was a singular case and they were not going to apply it as a general rule,” Kirby says.

The reasoning, however, ignores the fact that the CITT is statutorily charged with reviewing the CBSA’s decision — an appellate body, so to speak. “Stare decisis is a horizontal concept that affects only the other tribunals deciding the same question,” Kirby says. “Stare decisis does not affect the CBSA and it does not mean that tribunal decisions cannot be applied in a general way in accordance with the rule of law, to which the CBSA is clearly beholden.”

The alternative is chaos. “The rule of law, which includes respect for tribunal decisions, is central because otherwise we would have administrators making unpublished law,” Kirby says.

BOTH FRITO-LAY AND BRI-CHEM turned on the applicability of certain duty rates and importers’ right to correct their original declarations. The duty rate applicable to goods imported into Canada is a function of their tariff classification and their tariff treatment.

In both Frito-Lay and the Bri-Chem trilogy, the tariff treatments at issue were Most Favoured Nation (MFN) and NAFTA US tariff treatment (NAFTA). The MFN tariff treatment is available to goods from every country except North Korea. It is the fallback tariff treatment for all goods.

At the time of entry, the importers mistakenly claimed MFN treatment. As the imports were of US origin, the proper declaration ought to have cited tariff-free NAFTA treatment. But because the particular MFN tariff rate in each case for the classifications claimed was also zero, there was no immediate incentive for the importers to correct their declaration, as they were entitled to do under the rules.

As it turned out, all four importers not only chose the wrong tariff treatment, but also the wrong tariff classification. Had they chosen the correct classification under the MFN treatment, the importers would have been liable to duty. In Frito-Lay, for example, the goods had been erroneously classified as “cardboard,” which attracted a zero MFN rate, as opposed to “corn snacks,” which attracted an 11-per-cent MFN rate.

After CBSA began audits, several years after the goods’ first entry, it became evident that the chosen classifications were incorrect. CBSA’s practice was to assess duty on the basis of the erroneous classification by reclassifying the goods correctly but to do nothing about the erroneous tariff treatment. In these instances, then, CBSA refused to accept the change in tariff treatment from MFN to NAFTA even though the goods were demonstrably eligible for NAFTA tariff treatment. The agency reasoned that, as the country of origin had not changed, there was no basis for correction of the treatment.

This was important because the Customs Act limits requests for refunds based on NAFTA to a one-year retroactive period. In stark contrast, however, the same rules would have permitted reassessment based on tariff reclassification for the four retroactive years affected by the erroneous classifications in Frito-Lay and Bri-Chem. Consequently, if the tariff classification changed but the tariff treatment did not, the importers would have to pay four years’ MFN duty. Even if the correction to the NAFTA version was accepted after the duty was paid, the importers would have been limited to refunds for only one year.

In all four cases, rather than wait for CBSA to finish its audit and change the tariff classification only, the importers filed simultaneous corrections to the tariff classification and the tariff treatment. This moved the duty rate from a zero (but incorrect) MFN classification to a zero NAFTA tariff treatment, meaning the change was revenue-neutral. The importers’ argument was that these simultaneous corrections to tariff classification and tariff treatment were not a request for a refund and therefore were not barred by the one-year limitation on NAFTA refund claims.

the CBSA as bordering on original sin, resulting in tactics that eventually earned a reprimand from the tribunal. “The Tribunal understands the foregoing as straightforward corrections to everyday mistakes and believes that the CBSA should have simply acknowledged these corrections for what they were. In the Tribunal’s view, that should have been the end of the matter in this case,” the CITT stated in its Frito-Lay reasons. “Instead, as of the filing of the corrections, the CBSA took Frito-Lay for what can only be described as somewhat of an administrative ride.”

The “administrative ride” included challenging the jurisdiction of the CITT: the CBSA argued that its very failure to respond to Frito-Lay’s tariff corrections meant that the agency had not rendered a “decision” that could found an appeal.

“The case was an uphill struggle to get to the Tribunal because the CBSA did everything they could to avoid the litigation,” Kirby says. “So much so that, after waiting for two years for a decision which the Customs Act requires to be issued ‘without delay,’ we had to convince the CITT that the CBSA’s refusal to issue a decision was a decision in itself that was capable of appeal.”

Fortunately, Frito-Lay’s struggle ended with the tribunal’s conclusion that the chip maker was entitled to correct both the tariff treatment and the tariff classification, thus avoiding duty for any of the four years of imports.

Frito-Lay, however, did not spare other importers similar grief. The issue arose again in March 2014 with respect to three separate importers, whose cases constituted the Trilogy: Bri-Chem, Ever Green Ecological Services Inc. (EGES) and Southern Pacific Resource Corp. (SP). “Early on in these matters, it became clear that CBSA would not follow the Frito-Lay ruling,” Kirby says. “Not only that, but we had to face the same stalling tactics and refusal to issue decisions that we encountered in Frito-Lay.”

THE TRILOGY PROVED even more complex than Frito-Lay. After Bri-Chem and EGES filed their simultaneous corrections to the treatments and classifications specified in the original declaration, CBSA rendered a decision accepting the change of classification but rejecting the change of treatment from MFN to NAFTA. “That meant we had a ‘decision,’ and we could move on to the next level,” Kirby says.

Not so with respect to Southern Pacific. CBSA backdated its final audit of SP to a date before SP filed its changes to both the tariff classification and treatment. For its part, the audit, by contrast, changed the original classification but did not affect the original treatment. However, by making the change of classification retroactive to a date before SP filed its own changes to the declaration, CBSA put SP in a situation where the company would now be seeking a refund, making it subject to the one-year NAFTA limitation on refunds. Had the audit not been backdated, SP’s amendments would have amounted to a “reclassification” not subject to that limitation.

As a young lawyer called to the Québec Bar in 2015 in the midst of these proceedings, Mezouar was shocked by CBSA’s conduct. “Originally I was more concerned about the legal challenge raised by the CBSA and not the legitimacy of their conduct,” she says. “But when I understood what the issue in this case was really all about — whether the CBSA could simply ignore a CITT decision when faced with the same factual and legal issues — the agency’s conduct seemed outrageous, unreasonable and completely at odds with the core values of our judicial system.”

Shock value aside, Kirby found himself on the horns of a dilemma.

“One of the most difficult things that a lawyer must do is explain what is going on to the clients,” he says. “This is a very technical area, one with which clients generally don’t tend to engage. But the more arbitrary the decisions are, the more difficult it is to keep the clients — who in this case went so far as to ask how it was that such things happen in Canada — on board. When the clients see such irrational behaviour, they always ask themselves if there’s any point in getting further involved.”

Getting further involved would be costly. Although Frito-Lay was a case with upwards of ten figures at stake, SP involved less than $1 million and both Bri-Chem and EGES had exposure under $500,000 each. “Deciding whether to continue is the kind of business decision that happens all the time, and it requires counsel to come up with a realistic budget,” Kirby said.

Through a combination of circumstances, Kirby and his team were able to do that. To begin with, the fees could be spread across the three clients. But perhaps more importantly, the situation demonstrates how much experience counts.

“We weren’t starting from zero and probably knew the issues as well as anyone in the country,” Kirby says. “Luckily, we had litigated Frito-Lay and had access to all the work and legal arguments in that case. So not only had a great deal of the work already been done, but in revisiting issues with which we were familiar, with the benefit of hindsight, we were able to make significant improvements to our case. Had these been cases of first instance, we may not have been able to put together a satisfactory budget.”

Indeed, the Fasken team’s combination of experience, cost-effective approach and strategy impressed Southern Pacific so much that the company’s investors decided to continue funding the case even after the company went into receivership.

TO DEAL WITH the backdating issue on the SP file, Kirby and his team resorted to judicial review in Calgary, where the company’s Canadian operations were based. Kirby enlisted Chowdhury, who was based in Calgary and had an administrative law background, to file Federal Court applications ordering the CBSA to process SP’s corrections and cancel the backdated decision. “The basis of our argument was that CBSA’s conduct was procedurally unfair,” Chowdhury says. “Essentially, we resorted to procedural tools to allow us to move forward with the substantive arguments.”

When CBSA filed a responding affidavit in the judicial-review proceedings, the affiant turned out to be from an individual devoid of useful knowledge. “Instead of producing the officer who made the backdated decision, CBSA produced someone whose knowledge about customs procedure was much more general,” Kirby said.

It had become apparent that CBSA wanted to avoid explaining the backdating. Kirby ramped up the pressure by filing a motion to strike the affidavit. With pressure building on the agency, the parties agreed to hold the judicial review in abeyance and proceed directly by way of an appeal to the CITT. To facilitate that, CBSA processed SP’s correction. Unsurprisingly, the agency rejected the NAFTA treatment change on the grounds that the original MFN treatment was not incorrect. Once again, the rejection blithely ignored the impact of Frito-Lay.

SP then appealed to the CITT. Despite the agreed stay of the judicial reviews, the CBSA’s appetite for co-operation was hardly whetted. The agency refused to have all three appeals heard on the same day and sought to revisit the jurisdictional argument again, also in three separate hearings. “That could have been a disaster from a budgetary perspective,” Kirby says.

As it turned out, the jurisdictional arguments in all three cases were heard together on one day. At the hearing, the futility of separating the jurisdictional hearings from the substantive case became apparent when the CITT refused to decide the issue prior to the argument on the merits.

But the CITT also refused to consolidate the three substantive appeals. Fortunately, the tribunal scheduled Bri-Chem and EGES on successive days, and set SP for hearing on the week following. Still, the Fasken team had to file three sets of pleadings, and budgetary considerations forced Kirby to attend all the hearings on his own, without support from his colleagues.

IN THE COURSE OF PREPARING for the hearings, however, Kirby continued to press for information. Fasken filed a request under the Access to Information Act for all CBSA documents relating to the decision to disregard Frito-Lay. CBSA responded that it would take two years to process the application because of the large number of documents involved. This meant that the information would not be available for the three companies’ appeals to the CITT.

Then an envelope appeared on Kirby’s desk. “It contained documents that included a PowerPoint presentation on how to end-run the CITT, and that proved there was a high-level, concerted plan formulated by CBSA to ignore the CITT and Frito-Lay. I was amazed to see the degree of effort to which CBSA resorted by way of training officials to ignore the decision.”

The documents arrived anonymously. No one knows, or no one is saying, where the documents came from. At the time, Kirby did not know who the source was, but when interviewed was able to confirm that they did not come from within the CBSA. “They clearly originated with someone who was concerned with the direction the issues were taking,” he says. Given the long history of friction between the CBSA and the tribunal, that “someone” could easily have been an insider at the CITT.

The possibility that the leak came from the CITT shows how important these cases were to Canada’s administrative law structure. “I think these documents were critical in convincing the tribunal that it had a serious problem on its hands,” Kirby says. “The evidence made it clear that we were not dealing with a case where the agency was putting a new interpretation on a different set of facts. Instead, the CBSA was baldly stating that it wouldn’t follow the tribunal’s decisions even when they were applicable.”

By contrast, the CITT followed its mandate to the letter. Although the CITT member who heard the Trilogy, Jason Downey, was the same individual who decided Frito-Lay, he did not blindly follow his own previous decision, correctly treating the appeals as de novo matters. “Downey made us argue the law as if Frito-Lay had not been decided,” Kirby says. “But he also asked the CBSA to distinguish the case and all they could do was point to distinctions without a difference.”

Needless to say, the CITT decisions were disastrous, if not shameful, for the agency. “The CBSA got caught with its pants down this time,” Pearson says. “It’s a lucky thing that the parties affected had the wherewithal to take this on and retained good counsel to do so.”

The CITT not only applied Frito-Lay in all three cases but found that CBSA had committed an abuse of process by re-litigating Frito-Lay and deliberately ignoring the decision. Using harsh language, the tribunal implied that it would have awarded costs to the importers had it the power to do so. “It’s very rare to see language of that ilk employed in administrative decision-making,” Kirby says.

More importantly, perhaps, the tribunal addressed the rule of law in no uncertain terms: “Finally, the Tribunal wishes to articulate its concern in regard to the practice of putting the precedential value of its decisions into question by the CBSA. Both respectful and responsible application of Tribunal precedent is important for stability and predictability in the importing community. Importers should not be subjected to costly and unfair litigation of cases for matters that have already been dealt with through proper legal authority. This is a matter that goes to the heart of, and constitutes a fundamental tenet of, the rule of law and fair and easy access to Canada’s system of administrative justice. Such opposition ultimately leads to a breach of trust in the system and obfuscates the proper administration of justice.”

Undaunted and apparently unabashed, the CBSA appealed to the FCA, where it fared no better than it had at first instance. In October 2016, the court upheld the CITT’s substantive ruling and its finding of abuse of process, quoting liberally from Downey’s reasons, including his concern that the CBSA “knowingly frustrated importers from the applicability of Frito-Lay in either similar or even identical situations of fact” and had “embark[ed] on what appears to have been a policy of outright disregard for Frito-Lay.”

Finally, the court provided definitive guidance on the proper relationship between Canadian administrators and administrative tribunals in general:

“Tribunals and administrators are both public bodies established by legislation. Both wield public power and both must obey all relevant legislation, often the same legislation. They are independent from each other. But they are in a hierarchical relationship. Tribunals pass judgment on the acts of administrators.”

Although tribunals were not bound by the decisions of earlier panels, they were not entitled to depart from the decisions “unless there is good reason.” For their part, administrators regulated by tribunals “must” follow tribunal decisions.

AT PRESS TIME, about six months had elapsed since the FCA ruling. Pearson believes that the CBSA will come to its senses and “pull back” on its resistance to and become “more respectful” of the CITT. Kirby predicts that the agency will likely “take the FCA decision to heart.”

Pearson says the decision provides much needed clarity. “As lawyers working in the field, we now have a much better road map for advising importers on what to anticipate and how to move forward.”

For that, the Fasken team can deservedly take a fair share of the credit.

Julius Melnitzer is a freelance legal-affairs writer in Toronto.
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