Sink or Swim: The Challenge to DFO’s Ban on Controlling Agreements Continues in Kirby Elson v. Canada (Attorney General)
June 7, 2017
By Sarah Campbell, Partner at McInnes Cooper,
Daniel Watt, Partner at McInnes Cooper
On June 5, 2017 – the last day of the appeal period – the unsuccessful fisher filed an appeal of the Federal Court’s May 5, 2017 decision in Kirby Elson v. Canada (Attorney General). The decision is considered a test case challenge to the Federal Department of Fisheries and Oceans’ ban on controlling agreements in the Atlantic inshore fishery, which drastically changed how fisheries participants structure their commercial relationships. To ensure the preservation of license value, for their benefit and that of any lenders with security in such assets, fisheries participants are well-advised to carefully structure all commercial agreements relating to inshore fishing licenses so they do not constitute controlling agreements under DFO’s Preserving the Independence of the Inshore Fleet in Canada’s Atlantic Fisheries (PIIFCAF) Policy – at least until the appeal is heard and decided.
The case emphasizes both the critical importance of compliance with DFO policy generally and PIIFCAF specifically – and the potentially catastrophic consequences of non-compliance. Here’s how PIIFCAF changed commercial arrangements in the Atlantic inshore fishery, an overview of the ongoing court challenge and three practical implications of the Federal Court decision, if it withstands appeal, for fisheries participants.
NO CONTROLLING AGREEMENTS ALLOWED
PIIFCAF effectively prohibits controlling agreements in the Atlantic inshore fishery, and drastically changed the way in which fisheries participants had structured their commercial relationships.
Trust Agreements. Prior to 2007, fisheries participants often structured commercial relationships using trust agreements, which vest legal title to fishing licenses in one individual (generally the named licence holder) to be held for the benefit of the beneficial owner (some other person or entity). In some cases, they used such trust agreements for tax purposes to enable incorporation of the business; in others, they used them for commercial purposes to achieve growth and scale in an industry that restricts the number of licenses issued. For example, small independent fishers sometimes used them to acquire access to additional licenses and larger corporations (often fish processors) sometimes used them as a strategy to effect vertical integration.
PIIFCAF. In 2007, DFO introduced the Preserving the Independence of the Inshore Fleet in Canada’s Atlantic Fisheries (PIIFCAF) Policy (known in the industry as PIIFCAF), ostensibly aimed at the processor-nominee arrangements but impacting all agreements meeting its definition of a “controlling agreement” – including tax-planned arrangements and independent fishers. PIIFCAF defines “controlling agreement” as an agreement between a licence-holder and a third party to control or influence the licence-holder’s decision to submit a request to DFO for a licence transfer. This definition clearly includes traditional trust agreements, but doesn’t affect commercial and financial agreements that do not include control or influence of the licence-holder’s decision to submit a request for a license transfer.
The Response. To comply with PIIFCAF, fisheries participants generally restructured their commercial relationships by terminating the trust agreements, but not all took their boats and went home. Kirby Elson v. Canada (Attorney General) is considered a test case challenge to DFO’s ban on controlling agreements in the Atlantic inshore fishery. Pursuant to the Federal Court’s May 5, 2017 decision, this challenge failed.
THE CASE THAT GOT AWAY
In Kirby Elson v. Canada (Attorney General), Elson, a fisher, had contractual arrangements with two fish processing companies since 2003. Through a controlling agreement, the processing companies provided Elson with funds to acquire licenses, a vessel, vessel insurance maintenance, and a crew; in return, Elson landed and sold all of his fish at the companies’ direction and agreed not to transfer his license without their consent. Elson didn’t, however, exit the controlling agreement within the time DFO prescribed. In 2015, DFO denied Elson’s application to renew his license. Elson applied to be exempted from PIIFCAF’s application. The Minister of Fisheries and Oceans initially denied the application. Elson appealed to the Atlantic Fisheries License Appeal Board, which recommended the appeal be denied. The Minister confirmed the denial by a December 23, 2015 letter. Elson applied to the Federal Court of Canada for judicial review of the denial – but lost:
Which decision(s) is (are) subject to judicial review? The Court concluded only the ultimate December 23, 2015 denial letter – not the decisions and steps leading up to it – is subject to judicial review.
Was the Minister’s decision based on relevant considerations? Elson’s counsel argued the Minister was not within his authority to make the decision on the basis he did. PIIFCAF, as a regulation of contracts, was an invalid exercise of the federal fisheries power, which relates to fishery as a resource and does not extend to other industry-related activities – such as contracts between processors and harvesters. Elson’s counsel submitted the objects of the federal fisheries power is fish stocks or conservation, but there was no evidence PIIFCAF had any impact on these. DFO argued a policy (thus this Policy), is not subject to a constitutional division of powers challenge because it is not a legislative instrument; only the statute that enables a policy (here, the Fisheries Act) is reviewable in this way, and Elson did not challenge the Act. In the alternative, DFO argued PIIFCAF was a proper exercise of Parliament’s power over “sea coast and inland fisheries”, which is sufficiently broad to encompass managing fisheries and related socio-economic objectives. The Court reviewed the common law and sided with DFO, agreeing PIIFCAF was not the proper subject of a division of powers analysis; even if it were, it would have passed the test as “in pith and substance … a valid exercise of the federal fisheries power”. The Court concluded controlling agreements and PIIFCAF are relevant considerations for the Minister in issuing fishing licenses.
Did the Minister reasonably exercise or fetter his discretion? Elson’s counsel argued the Minister’s decision was unreasonable because he had fettered his wide discretion (i.e., unduly limited his freedom to decide the issue in some way) by treating PIIFCAF as absolutely mandatory, without considering Elson’s individual circumstances. Counsel submitted Elson was particularly dependent on the relationship borne from the controlling agreement for his livelihood, and could not carry on business without it. He further argued that the Labrador market is not sufficiently competitive to allow him to operate without this partnership, and that his controlling agreement did not pose a threat to the inshore fishery in the area. DFO argued the Minister had not unduly fettered his discretion in his application of PIIFCAF to Elson: the Minister considered the relevant considerations, including Elson’s individual circumstances, and there was no evidence of an overly inflexible process in reaching a decision. The Court agreed with DFO that Elson failed to provide any details or supporting evidence of the extenuating circumstances he claimed would affect him, despite fair opportunity to do so. The Court further concluded that the presence of some mandatory requirements in PIIFCAF did not necessarily equate to a fettering of the Minister’s discretion. However, while it did not affect its ultimate decision, the Court did note the Minister’s December 23, 2015 letter ought to have specified that in exercising his discretion, he also had “broad discretion under section 7 of the Fisheries Act”; instead, he relied only on PIIFCAF in his letter. The Court recognised this as a fettering of his discretion, as he ought to have considered that he could have granted the relief Elson sought in a way other than relying on PIIFCAF.
Did the Minister have an open mind? Elson’s counsel argued the Minister (and DFO) had made up their minds that they would not consider an exception to PIIFCAF long before he applied. But the Court decided Elson had not demonstrated the Minister had prejudged his appeal without having considered his circumstances to the extent a convincing case would not have changed his mind.
What is the appropriate remedy? The Court upheld the Minister’s decision not to grant Elson an exemption from PIIFCAF. It was within the Minister’s power to decide, and he had come to a decision with an open mind. Although the Minister had fettered his discretion by limiting it to that provided under PIIFCAF, and not the Fisheries Act, he could have reasonably only come to the same conclusion. Noting Elson neither terminated his controlling agreement, nor amended it to bring it into compliance with PIIFCAF, he therefore did not meet the eligibility requirements for renewal of his license.
3 KEY CATCHES
On June 5, 2017, Elson filed a Notice of Appeal to appeal the decision to the Federal Court of Appeal; the appeal hearing hasn’t even been scheduled. In the meantime, PIIFCAF – and the Federal Court’s decision – stand. Here are three practical implications for fisheries participants to catch from the Federal Court’s decision:
Non-compliance can be catastrophic. Fisheries participants must carefully structure all commercial agreements relating to inshore fishing licenses to ensure they don’t run afoul of PIIFCAF by constituting controlling agreements within PIIFCAF’s meaning. These arrangements and agreements can be complex, and legal advice likely of great value. The risk of non-compliance can be catastrophic: loss of (or failure to renew) the licenses. Fishing licences and quota may be valuable assets, but since they aren’t “property” for this purpose, DFO is generally not obligated to compensate fishers for licences it revokes or does not reissue.
Broad discretion exposes fishery participants and lenders to risk. It’s clear that licence / quota issuance is subject to broad Ministerial discretion, and apparent that Policy compliance is of critical importance to ensure the preservation of license value to license holders and commercial parties – or bear the significant consequences of non-compliance. But compliance is also critically important to ensure the preservation of license value to parties seeking to lend against the security of such assets, since non-compliance puts their security at significant risk. These parties are equally well advised to seek legal advice to make their security as firm as possible. And there could be more to come: the decision – depending on the outcome on appeal – just might embolden DFO to take more concerted action to ferret out non-compliant controlling agreements.
Limited scope for constitutional challenge. Policy compliance is important for another reason: the legal options to challenge the Minister’s action in response to DFO policy non-compliance are limited – as are any challenges to fisheries licensing and quota decisions generally. The decision doesn’t just not overturn the DFO’s ban of controlling agreements; it generally upholds DFO’s ability to regulate the socio-economic aspects of the fisheries – using policies that are essentially shielded from constitutional challenge. The basis on which such policy decisions can be challenged are narrow, involving questions of whether the Minister’s decision is based on relevant considerations, if the Minister reasonably exercised or fettered their discretion, or if they had an open mind.
Please contact your McInnes Cooper lawyer or any member of the Fish & Seafood Industry Team @ McInnes Cooper to discuss this topic or any other legal issue.
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