The Investment Canada Act makes its First Court Appearance

Released last week, the Federal Court decision of The Attorney General of Canada v. United States Steel Corporation 2010 FC 642 addresses the rules governing foreign investment in Canada. Meant to govern partnerships and transactions between Canadian entities and foreign investors, the Investment Canada Act (“Act”) creates a controlled climate for foreigners intending to do business in Canada. With any legislation, problems are bound to arise. In force since 1984, the Act was tested in court for the first time in this decision. The Industry Minister used s. 40 of the Act to impose a monetary penalty on an American investor who failed to uphold undertakings it had agreed to perform.

Where It All Began…

In 2007, United States Steel Corporation (U.S. Steel) proposed to investment in and acquire Hamilton-based Stelco Inc.’s business operations and assets. To support its application, U.S. gave 31 undertakings to facilitate the acquisition. Two commitments agreed upon by U.S. Steel were to maintain employment and production levels.

The Act requires potential non-Canadian investors to submit an application for investment to the Minister. Section 21 of the Act states that if the Minister believes the proposal is “likely to be of net benefit to Canada,” then the investment will be approved. U.S. Steel successfully submitted an application to obtain ministerial approval for its proposal.

After receiving approval, U.S. Steel failed to fulfill the two aforementioned commitments. As a result, in 2009 the Minister relied upon s. 39 of the Act to demand that U.S. Steel either: a) cease violating the agreement and remedy the consequences, b) show that no contraventions occurred, or c) justify any non-compliance, depending on what U.S. Steel felt had occurred. Unsatisfied with the company’s response, the Minister filed an application under s. 40 of the Act seeking a compulsion order. He also imposed a penalty of $10,000 per day for every day that U.S. remained non-compliant with its undertakings. Section 40(2) of the Act states:

(2) If, at the conclusion of the hearing on an application referred to in subsection (1), the superior court decides that the Minister was justified in sending a demand to the non-Canadian or other person or entity under section 39 and that the non-Canadian or other person or entity has failed to comply with the demand, the court may make any order or orders as, in its opinion, the circumstances require, including, without limiting the generality of the foregoing, an order…

(c) directing the non-Canadian to comply with a written undertaking given to Her Majesty in right of Canada in relation to an investment that the Minister is satisfied or is deemed to be satisfied is likely to be of net benefit to Canada;

(d) against the non-Canadian imposing a penalty not exceeding ten thousand dollars for each day the non-Canadian is in contravention of this Act or any provision thereof;

U.S. Steel responded by challenging the constitutionality of s. 40 of the Act at the Federal Court of Canada.

The Constitutional Challenge

According to U.S. Steel,  s. 40(2)(d) violates s. 11(d) of the Canadian Charter of Rights and Freedoms. Section 11(d) states:

Any person charged with an offence has the right

d) to be presumed innocent until proven guilty according to law in a fair and public hearing by an independent and impartial tribunal.

As stated in R. v. Wigglesworth, [1987] 2. S.C.R. 541, s. 11(d) will only apply in two situations: (1) if the matter is by its nature a criminal proceeding, or (2) if the matter involves true penal consequences.

(1)  The Matter Is Not Criminal In Nature

The first  issue is whether the Minister’s case is by nature a criminal proceeding.  According to Wilson J. in Wigglesworth and affirmed in Martineau v. M.N.R. (2004), 192 C.C.C. (3d) (S.C.C.), a criminal proceeding is one “of a public nature, intended to promote public order and welfare within a public sphere of activity.” In Martineau, Fish J. developed a three-part test for determining the nature of a proceeding: 1) the objectives of the legislation and the relevant provision; 2) the purpose of the sanction; and 3) the process leading to the imposition of the sanction.

Hansen J. of the Federal Court applied these three tests and held the matter is not a criminal proceeding. First, she found that the objective of both the Act, and s. 40 in particular, is to enforce compliance. U.S. Steel had argued that the existence of a public element to the matter made it a criminal proceeding. Hansen disagreed, finding that the nature of undertakings by a foreign investor is a private matter. Second, she held that the purpose of a monetary penalty is to “encourage and promote timely compliance and to enforce compliance with any undertaking and provisions of the legislation.” Finally, she held that the process itself was civil based on Parliament’s deliberate decision to enforce compliance with the Act through a civil proceeding.

I agree with SCC’s decision in this case. U.S. Steel failed to distinguish the public aspect of the legislation. Unquestionably, the Act is meant to promote a controlled climate for foreign investment in the Canadian economy. Section 40 holds investors accountable for fulfilling their commitments made to the government, not to the Canadian public.

(2)  The Matter Did Not Impose True Penal Consequences

It is possible for s. 11 of the Charter to be engaged in the absence of a true criminal proceeding if penal consequences are imposed. In Wigglesworth, a “true penal consequence” was described as one which “by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large.” U.S. Steel contended that the magnitude of the total monetary penalty imposed ($14.6 million CAD) made the consequences of s. 40 penal.

Hansen J. disagreed, drawing on the decision in Lavallee v. Alberta (Securities Commission), 2010 ABCA 48.  In that case, the Alberta Court of Appeal held that the magnitude of a penalty is not by itself enough for a consequence to qualify as a true penal consequence. Quoting Wittman J. in Lavallee, the Court of Appeal wrote that “it is the magnitude of the administrative penalty combined with the purpose for which it can be imposed that will determine whether it entails true penal consequences.”

Hansen J. determined that because monetary penalties are optional under the Act, and are not used for the benefit of the public, their financial consequences are not penal in nature.

Some Final Thoughts

In light of the financial crisis, this decision is welcome as it reflects an attempt by government to effectively regulate the economy. Controlling and enforcing foreign investment regulation is required to promote a stable economy.