What’s on tap next for The Beer Store?

Break­ing the con­tract will likely cost mil­lions. Mean­while, the ex­ist­ing agree­ment stands

Toronto Star - - STAR BUSINESS JOURNAL - JOSH RU­BIN BUSI­NESS RE­PORTER

Pick­ing a fight with multi­na­tional cor­po­ra­tions might be a win­ning po­lit­i­cal strat­egy, but the cost of the On­tario gov­ern­ment’s dust-up with The Beer Store might just drive On­tar­i­ans to drink.

When the gov­ern­ment an­nounced in late May it was pass­ing leg­is­la­tion to rip up its Mas­ter Frame­work Agree­ment with The Beer Store and would al­low the sale of beer in cor­ner stores, Premier Doug Ford and Fi­nance Min­is­ter Vic Fedeli brushed aside con­cerns the re­tailer could come af­ter the prov­ince for com­pen­sa­tion.

In­dus­try sources, how­ever, say the prov­ince could be on the hook for more than $1 bil­lion.

Not only that, but there are sev­eral ways The Beer Store and its own­ers could seek com­pen­sa­tion, rang­ing from a sim­ple breach of con­tract claim to us­ing the in­vestor pro­tec­tion pro­vi­sions in the North Amer­i­can Free Trade Agree­ment (NAFTA).

The most likely sce­nario is that The Beer Store and the prov­ince will ham­mer out an agree­ment so they can avoid a very pub­lic, costly court fight.

But the po­ten­tial pay­out mat­ters, as it will have a big in­flu­ence on what Cana­dian tax­pay­ers will end up los­ing to Big Beer, whether it’s a ne­go­ti­ated set­tle­ment or not.

Jeff Per­ci­val, a part­ner and com­mer­cial lit­i­ga­tor at the Pal­lett Valo law firm with close to 20 years ex­pe­ri­ence, es­ti­mates the fi­nal bill will cost the gov­ern­ment — and On­tario tax­pay­ers — an eye­brow-rais­ing amount.

“I hes­i­tate to put an ex­act fig­ure on it, but it could cer­tainly be in the hun­dreds of mil­lions,” said Per­ci­val, who pointed out that the vast ma­jor­ity of com­mer­cial law­suits — up to 98 per cent — are set­tled be­fore go­ing to trial.

Those set­tle­ments can be cash, other reme­dies (such as po­ten­tially The Beer Store be­ing given ex­clu­sive rights to dis

trib­ute to cor­ner stores), or a mix.

And those hun­dreds of mil­lions of dol­lars are just the out­right com­pen­sa­tion.

On top of that will be the bills for the high-pow­ered law firms and ex­perts hired by The Beer Store and its own­ers, in­clud­ing AB-InBev and Mol­sonCoors, which con­trol roughly 98 per cent of the re­tailer, along with Ja­pan’s Sap­poro, which con­trols most of the rest, and 30 small craft brew­ers, which have a tiny stake.

“It would be hun­dreds of thou­sands of dol­lars in fees, if not mil­lions. And we have a ‘loser pays’ costs sys­tem. There would be val­u­a­tion ex­perts, there would be con­sti­tu­tional ex­perts. You’ve got big law firms on every side,” Per­ci­val said.

A spokesper­son for Fedeli wouldn’t re­spond di­rectly to ques­tions about whether the gov­ern­ment still be­lieves it’s not sub­ject to any li­a­bil­ity, or whether it’s in ne­go­ti­a­tions with The Beer Store.

“The Bring­ing Choice and Con­ve­nience to the Peo­ple Act en­sures we can get the best deal pos­si­ble and con­sumers and tax­pay­ers are no longer held hostage by multi­na­tional com­pa­nies. As we con­tinue work­ing to­ward get­ting a good deal for the peo­ple of On­tario, it would be pre­ma­ture and ir­re­spon­si­ble to as­sume the out­come of this process,” spokesper­son Robert Gib­son said.

In a state­ment af­ter the act was passed, The Beer Store chair Char­lie An­ge­lakos — who’s also a se­nior ex­ec­u­tive at AB-InBev-owned La­batt — blasted the gov­ern­ment’s ac­tions.

“The Beer Store be­lieves in the sanc­tity of le­gal agree­ments,” An­ge­lakos said.

“Busi­nesses must be able to rely on the en­force­abil­ity of le­gal con­tracts they en­ter into, in­clud­ing and par­tic­u­larly with govern­ments.

“If a ne­go­ti­ated amend­ment is not reached and the gov­ern­ment of On­tario de­cides to pro­claim the act into law, The Beer Store will vig­or­ously en­force its rights to reme­dies, in­clud­ing dam­ages, when the gov­ern­ment breaches its le­gal obli­ga­tions.”

While pre­dict­ing the out­come of a trial is a bit of a mug’s game, Per­ci­val be­lieves The Beer Store would be on very solid le­gal ground — not least be­cause there’s still plenty of time left in the Mas­ter Frame­work Agree­ment.

If con­tract law is one fruit­ful le­gal av­enue for The Beer Store and its own­ers to pur­sue, NAFTA is most cer­tainly an­other, said Barry Ap­ple­ton, a Toron­to­based in­ter­na­tional trade lawyer whose firm has of­fices and clients in Canada and the U.S.

“This is ex­actly the type of bul­ly­ing that NAFTA was put in place to pre­vent. And it was mostly be­cause we were con­cerned about how the Amer­i­cans would be treat­ing our com­pa­nies,” said Ap­ple­ton, who pointed out three main ar­eas of NAFTA — and its USMCA suc­ces­sor — which could be used by The Beer Store.

“They’re pro­tected un­der due process, ex­pro­pri­a­tion and con­trac­tual rights,” said Ap­ple­ton. “The way this was done was pretty much the worst pos­si­ble way to pro­tect On­tario from a NAFTA claim.”

While “ex­pro­pri­a­tion” might bring to mind the na­tion­al­iza­tion of Amer­i­can-owned fac­to­ries af­ter the Cuban rev­o­lu­tion, it’s not an un­fair com­par­i­son, Ap­ple­ton in­sisted.

“Did they have rights? Yes. Were those rights cut out by gov­ern­ment fiat? Does it mat­ter whether it’s Chavez, Cas­tro or Doug Ford? No. The prin­ci­ple is the same,” said Ap­ple­ton, who es­ti­mated tax­pay­ers could be on the hook for even more than some in­dus­try sources have sug­gested.

“I’d be sur­prised if it weren’t big­ger than a bil­lion. What’s the fair mar­ket value of hav­ing a quasi-monopoly?” Ap­ple­ton said.

While it’s an On­tario gov­ern­ment bill that sparked the dis­pute, it would be the fed­eral gov­ern­ment that would have to pay any penalty un­der NAFTA rules, Ap­ple­ton said.

If that hap­pens, he’d ex­pect the fed­eral gov­ern­ment, in turn, to come af­ter On­tario to cough up the money.

Even though a sec­tion of the Mas­ter Frame­work Agree­ment (87-e, if you’re look­ing) pre­cludes the use of NAFTA and other in­ter­na­tional treaties to set­tle dis­putes, Ap­ple­ton said it’s so poorly drafted that while The Beer Store it­self might not be able to use NAFTA, its own­ers — or their share­hold­ers — most cer­tainly could.

“You could drive a beer truck through the loop­hole,” Ap­ple­ton said.

At this point the gov­ern­ment has passed its bill rip­ping up the agree­ment with The Beer Store, but it has yet to pro­claim it as law — some­thing they have up to 10 years to do.

That’s led to spec­u­la­tion the prov­ince is still hop­ing for a ne­go­ti­ated set­tle­ment, per­haps even be­fore a suit is filed.

Those ne­go­ti­a­tions are likely hap­pen­ing be­hind the scenes, pos­si­bly even with­out the lawyers.

“I’d be sur­prised if that’s not go­ing on,” Per­ci­val said.

Mean­while, the ex­ist­ing Mas­ter Frame­work Agree­ment is still the law of the land.

What­ever the sce­nario, it could be years be­fore the out­come is known.

If this turns into a court­room bat­tle, it might not be re­solved un­til af­ter the next provin­cial elec­tion.

And that isn’t due to take place un­til 2022.

RICHARD LAUTENS TORONTO STAR FILE PHOTO

In­dus­try sources say the prov­ince could be on the hook for more than $1 bil­lion if it rips up the Mas­ter Frame­work Agree­ment with The Beer Store.

CHRIS YOUNG THE CANA­DIAN PRESS FILE PHOTO

NAFTA might be a fruit­ful av­enue for The Beer Store to pur­sue, Toronto in­ter­na­tional trade lawyer Barry Ap­ple­ton says.

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