An unusual case has woven its way to the Supreme Court of Canada. A decision there could change not only liquor laws in this country, but also the governance of all inter-provincial trade.

Notes:

  1. A condensed version of this discussion piece was published as an Op-Ed in the Globe and Mail, August 8, 2017.
  2. A grateful (anonymous) acknowledgement to a leading Canadian national business law firm, who provided input and legal references to a previous draft.  The input provided may not represent the views or legal advice of the law firm.

By Karen Graham, Principal, KMG Strategy/Wine Drops

As Canada, the United States and Mexico proceed with NAFTA renegotiations, the provinces and federal government are continuing their efforts to eliminate trade barriers within Canada – except when it comes to liquor.

Perhaps as a nod to Canada’s 150th birthday, on April 7, 2017 Canada’s federal government and provincial premiers released the Canadian Free Trade Agreement (“CFTA”) which sets out new arrangements for inter-provincial treatment and recognition of goods, services and credentials.   Historically, and most unfortunately, our provincial governments have always had difficulty incorporating liquor into their internal trade agreements, and the present iteration is no exception. Liquor is expressly excluded from the CFTA at this time,[1] as it was from operative clauses of its predecessor Agreement on Internal Trade.

Against this backdrop, on May 4, 2017, the Supreme Court of Canada agreed to hear New Brunswick’s appeal of its Provincial Court’s decision in R. v. Gerard Comeau[2] (“Comeau“), scheduled for December 7, 2017. In Comeau, the New Brunswick Provincial Court held that section 134(b) of the New Brunswick Liquor Control Act (the “Act“) represents a trade barrier and therefore the section violated section 121 of the Constitution Act, 1867 (the “Constitution“).   Section 134(b) of the Act makes it is unlawful for any person in New Brunswick to possess liquor not purchased from the New Brunswick Liquor Corporation, except for a relatively small amount as specified in the Act and its regulations.

Depending upon the Supreme Court of Canada’s decision, 354 bottles of beer may just disrupt inter-provincial trade arrangements in liquor and other industries which are similarly protected by the provinces.

A Cocktail of Constitutional Elements

On October 6, 2012, Mr. Gerard Comeau of Tracadie, New Brunswick, was charged under section 134(b) of the Act that he “did have or keep liquor not purchased from the Corporation” resulting from a trip to Quebec where he purchased 354 bottles of beer and three bottles of liquor. Subsequent to the April 29, 2016 New Brunswick Provincial Court decision acquitting him, the New Brunswick Court of Appeal on October 21, 2016 declined to hear the New Brunswick Crown’s appeal, setting the stage for New Brunswick’s appeal to the Supreme Court of Canada.

The issues in Comeau are essentially:

(1) whether section 121 of the Constitution is a free trade provision; and

(2) if section 121 is a free trade provision, whether sections 91 and 92 of the Constitution (which divide powers between the provinces and the federal government) are subordinate to section 121.

If section 121 is held to be a free trade provision and sections 91 and 92 subordinate to it, then section 134(b) of the Act violates section 121 of the Constitution. Section 121 states that “[a]ll Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.”

New Brunswick Provincial Court Justice Ronald LeBlanc determined that section 134(b) of the Act did violate section 121 of the Constitution. In arriving at this decision, Justice LeBlanc examined the intent and history of section 121, and noted that in deciding the issue, “[t]he very nature of the Canadian federation is at stake.”

Admitted Free

In Gold Seal Ltd. v. Alberta (Attorney General)[3] (“Gold Seal“), the leading authority on section 121, the Supreme Court of Canada interpreted “admitted free” as limited to protecting inter-provincial flow of trade from customs duties. The decision was reaffirmed in Atlantic Smoke Shops Limited v. Conlon (1943); Murphy v. CPR (1958); and Reference re Agricultural Products Marketing Act (1978)).

This harmonsied interpretation enables the provincial and federal legislatures to exercise their respective legislative powers under sections 91 and 92 of the Constitution in co-existence with section 121. Section 92 enumerates provincial powers, which include:

92 In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say,

(2) Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.

(9) Shop, Saloon, Tavern, Auctioneer, and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes.

Section 92 appears to grant the provinces authority to legislate the production, sale, regulation and consumption of alcohol, whilst section 121 guarantees free trade of goods between the provinces. The sections can be interpreted such that one is subordinate to the other, or as Gold Seal did, section 121 can be interpreted narrowly such that it allows provinces to exercise the powers granted to it under section 92.

Last Call for Interprovincial Non-Tariff Trade Barriers?

The main issue in Comeau was: Did the framers of Canada’s Constitution intend that goods produced within one Canadian province should be admitted into each of the other provinces free of duties or charges? Or admitted free, full stop?

Justice LeBlanc made several findings of significance in his decision. These have the effect of throwing into question not only the interpretation of section 121, but also the ways in which provinces may trade with each other within Canada, and even subsequent court decisions resting on the Gold Seal case. The significant findings include:

  1. The wording of section 121 was intended by the Fathers of Confederation to mean “unfettered economic exchange and a more comprehensive economic union”, and was not intended to be restricted to the prohibition of customs duties or charges (paras 177 and 178).
  2. Therefore, “with a great deal of trepidation”, Justice LeBlanc finds the Gold Seal case was wrongly decided, due to the unwarranted narrow and strict interpretation of section 121. All other subsequent cases flowing from it would “undoubtedly” be re-examined also by the Supreme Court of Canada, should it agree that Gold Seal was wrongly decided (para 189).
  3. “I am certain that interpreting section 121 of the Constitution Act, 1867, as permitting the free movement of goods among the provinces without barriers, tariff or non-tariff will have a resounding impact.” Statutes of constitutional force must be interpreted in accordance with and anchored in the historical context of the provision (para 191).

The legal and public policy implications from an SCC decision overturning 95 years of constitutional interpretation

Given the national significance and scope of the trial judge’s decision, the Supreme Court of Canada will be called upon to either reaffirm Gold Seal or establish a new precedent and clarify the scope of the Comeau interpretation regarding trade barriers.[4]

Justice LeBlanc’s decision in Comeau is interesting for its treatment of two legal principles: vertical stare decisis and the “living tree” doctrine. Stare decisis (“to stand by things decided”) means that judges are bound by decisions in previous cases, especially decisions from a higher level of court. By this rule, Justice LeBlanc would be bound by the Supreme Court of Canada’s ruling in Gold Seal. However, a recent case from the Supreme Court of Canada confirms that there is a rare exception to this rule. Trial courts are permitted to overturn a decision of a higher court where a new legal issue is raised, or where there is a change in the circumstances or evidence that “fundamentally shifts the parameters of the debate”.[5] Justice LeBlanc ultimately determined that the historical evidence presented in Comeau was significant enough to overrule over 95 years of precedent from Gold Seal.

Justice LeBlanc’s decision also provides an example of originalist interpretation of the Constitution. Originalism interprets the Constitution’s meaning based on what the drafters intended at the time it was created. While originalism is prevalent in American constitutional law, Canada generally favours the “living tree” approach. Under this approach, the meaning of the Constitution is not fixed as it was written in 1867, but can adapt over time.[6] Justice LeBlanc’s decision interprets section 121 based on the original intent of the drafters of the Constitution. The bulk of the decision is addressed to the historical setting and context to the enactment of the Constitution. Justice LeBlanc considered statements by the drafters of the Constitution, drafts of previous versions of section 121, expert testimony, speeches and public statements by the Fathers of Confederation (including Alexander Galt, George Brown, and John A. MacDonald). The Supreme Court of Canada will have to address the issues of stare decisis and originalism at the appeal to determine how section 121 should be interpreted and if Gold Seal can be overturned.

In the absence of a higher court (the New Brunswick Court of Appeal) ruling on the merits of Justice LeBlanc’s provincial court decision, the decision is the law of New Brunswick today and is persuasive in other jurisdictions. However, Comeau does not consider the federal Importation of Intoxicating Liquors Act, which also creates inter-provincial trade barriers, section 3(1) of which states that:

3(1)     Notwithstanding any other Act or law, no person shall import, send, take or transport, or cause to be imported, sent, taken or transported, into any province from or out of any place within or outside Canada any intoxicating liquor, except such as has been purchased by or on behalf of, and that is consigned to Her Majesty or the executive government of, the province into which it is being imported, sent, taken or transported, or any board, commission, officer or other governmental agency that, by the law of the province, is vested with the right of selling intoxicating liquor.

Justice LeBlanc declined to address the issue of whether section 3 of the Importation of Intoxicating Liquors Act violated section 121 of the Constitution Act because the federal government was never invited to participate in the legal proceedings.

The political and public policy implications from the decision are no less far-reaching than the legal ones. A Supreme Court decision that accepts a robust interpretation of section 121 as a free trade provision would throw many provincial arrangements (marketing boards, product standards, economic development promotional policies, procurement etc.) into disarray. [7]

For decades, provinces have used their section 92 powers to develop preferential systems (i.e. non-tariff barriers) for in-province industries, goods, and professional designations, among others. While the CFTA claims to address a number of these barriers, it is not yet clear if this new agreement will fully meet the original spirit and intent of section 121 as interpreted in Justice LeBlanc’s decision. And as with all governance and inter-provincial matters in Canada, it will take a long time to implement.

If the SCC Upholds Comeau…

… it could mean the end of provincial monopolies when they act to protect in-province producers at the expense of other Canadian producers.[8] As co-counsel for the Comeau defence Ian A. Blue noted, “Provincial liquor monopolies are now vulnerable to judicial deconstruction,” as the federal Importation of Intoxicating Liquors Act (Section 3) is in itself a non-tariff barrier in contravention of the Comeau interpretation of section 121 of the Constitution.[9] What would replace them? A provincially-“bounded” liquor warehousing and distribution system like that in Alberta? A completely open retail market across the entire country? The latter seems less likely given the important regulatory and safety function embedded in liquor boards, as well as much wider implications if commercial customers could purchase liquor from anywhere in the country. And an unintended consequence of a wide-open market could be to permit private sector concentration of segments of the liquor supply chain. Is it any better to end public monopolies to have them replaced by private ones?

On the question of provincial Crown revenue being put at risk if liquor monopolies are “deconstructed”, it is not known what effects a completely open domestic liquor market would have if allowed to flourish. At minimum, a review of provincial liquor taxation would likely be in order. Many Canadian wine (and presumably craft beer and spirits) producers wait with great anticipation to learn if their product may be shipped from one province directly to consumers in all other provinces (known in the industry as Direct to Consumer, or DTC). If the effect of the Comeau decision and a possible confirming Supreme Court of Canada decision is to complete the work of federal Bill C-311 (passed in 2012 decriminalising inter-provincial direct shipments of Canadian wine in small quantities for personal consumption), it could well reduce provincial Crown revenue if DTC sales skyrocket, ceteris paribus. [10] Less clear is whether the Supreme Court will provide any guidance on whether commercial customers may order beverage alcohol across provincial boundaries – a potential outcome of a robust interpretation of section 121.

The implications extend to other sectors, as suggested by the most recent case on section 121, Reference re Agricultural Products Marketing Act (1978). If the Supreme Court upholds the lower court decision, questions will need to be answered around foundational issues, such as:

  • Is there a need for provincial marketing bodies, if, for example, milk or cheese or greenhouse vegetables or chicken or logs or indeed any Canadian-made good must be treated equally everywhere in the country?
  • Is there a need to have an inter-provincial discussion about the fair share of benefits from the transmission of energy products (either liquids or electrons) between provinces if the produce of any province must be admitted free into any other province?

If the SCC confirms Gold Seal…

… not much changes in the ordinary course of inter-provincial commerce, particularly in Canadian alcohol. Section 92 provincial powers would be affirmed, and section 121 would presumably revert to the prior narrow interpretation established in Gold Seal to prohibit tariff barriers only, specifically customs duties.

Recorking our Comeau review

The decision by the Supreme Court of Canada to hear the appeal of the Comeau case is itself a very significant development in Constitutional history. A decision upholding Comeau and overturning the 95-year-old Gold Seal precedent would upend the rules governing how internal commerce and trade are conducted. The implications of this in Canada are profound.

It is unsettling – or fitting – that the timing echoes events of 150 years ago. At the “Constitutional moment”, the Framers of the Constitution included robust free trade clauses in our 1867 Constitution because the impending repeal by the United States of the Reciprocity Treaty in 1866 (after 12 years) loomed large over the new country’s economic viability. This historical context was certainly compelling to the Provincial Court of New Brunswick in the Comeau decision, and has a familiar feel to the protectionist sentiment in the United States today. The relatively free trade era afforded by NAFTA and the Canada-US Free Trade Agreement could well be in decline.

In response, Canada would do well in its 150th year to complete its own internal free trade project, such that: All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces (emphasis added).

As for the man at the centre of the entire case, after the provincial court decision was announced in 2016, Gerard Comeau said, “After three years, I’m thirsty!”[11]  He may yet be able to buy whatever Canadian beer he wishes, “admitted free” from wherever in the country it is made.

 

Notes

[1] A Working Group of all parties is to report in one year on opportunities to “further enhance trade in alcoholic beverages in Canada…” Canadian Free Trade Agreement, (2017), accessible via http://www.ait-aci.ca/wp-content/uploads/2017/04/CFTA-Consolidated-Text-Final-English.pdf

[2] R v Comeau, 2016 NBPC 3 (CanLII); R. v. Comeau, NBCA Order denying leave to appeal dated

October 19, 2016, Larlee J.A.

[3] Gold Seal Ltd. v. Alberta (Attorney General), (1921), 62 S.C.R. 424

[4] On the question of imported beverage alcohol, it is our view that nothing in an SCC decision upholding Comeau would directly resolve the underlying arguments of the countries bringing the present World Trade Organisation (WTO) challenge against BC-only wine on grocery store shelves.

[5] Carter v. Canada (Attorney General), 2015 SCC 5.

[6] Edwards v. Canada (Attorney General), 1929 UKPC 86; Reference re Same-Sex Marriage, 2004 SCC 79.

[7] It is outside the scope of this paper but is worth noting that most of the items enumerated above appear to be addressed in the CFTA 2017.

[8] Most provinces’ liquor control boards also have a regulatory, standards and licensing mandate. Presumably these will not be challenged insofar as they protect the public interest and uphold public safety.

[9] Ian A. Blue, “The recent Comeau decision could utterly destroy Canada’s outdated liquor-control regimes,” National Post, May 16, 2016. Accessible via http://news.nationalpost.com/full-comment/ian-a-blue-the-recent-comeau-decision-could-utterly-destroy-canadas-outdated-liquor-control-regimes

[10] In Manitoba, which opened its borders to DTC immediately after Bill C-311 passed unanimously in Parliament and received Royal Assent on June 28, 2012, the subsequent two years of liquor sales reported to Statistics Canada show Manitoba liquor revenue going up: by three percent from 2012 to 2013; and by nine percent from 2013 to 2014. As presented by Arnold B. Schwisberg, co-counsel to Gerard Comeau, Wine and Liquor Law Seminar, Vancouver, BC, February 14, 2017.

[11] CBC, “New Brunswick judge throws out cross-border booze limits”, April 29, 2016. Accessible via: http://www.cbc.ca/news/canada/new-brunswick/gerard-comeau-border-alcohol-ruling-1.3554908

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