What you should know about the Financial Administration Act (Ontario)

Section 28 of Ontario’s Financial Administration Act (the “FAA”) provides that a ministry or public entity shall not enter into any financial arrangement, commitment, guarantee, indemnity or similar transaction that would increase, directly or indirectly, the indebtedness or contingent liabilities of the Province of Ontario, unless written approval is obtained from the Minister of Finance. It would appear that compliance with s. 28 FAA is extremely rare considering that, to our knowledge, the Minister has not established categories of transactions that are automatically exempt and ministerial approval is virtually never obtained. This short article will describe the scope of s. 28 FAA and suggest reasons why it is ignored. Firstly, which institutions fall under the FAA’s definitions of “ministry” and “public entity” is not always immediately obvious (the term “public entity” shall be used indistinctly for the remainder of this article). The FAA defines these terms so as to include a Crown agency, a corporation that is owned, operated or controlled by the Government of Ontario, or any other board, commission, authority or unincorporated body of the Government of Ontario. In certain cases, one must look to the law that creates the entity to find out that what should be a public entity is not (for example, Ontario Power Generation Inc.) and conversely, that what should perhaps not be a public entity, actually is (for example, community colleges). Secondly, the types of transactions covered by the statutory provision are potentially extremely broad in scope, so much so that pragmatism and common business sense may have trumped the black letter of the law. After all, the rationale for this provision was to curb the Government’s unbudgeted liabilities, many of which often came as a surprise to the Minister of Finance, who was then obliged to fund them under section 22 of the Proceedings Against the Crown Act, as it then read. The purpose of section 28 was to impose some discipline over the assumption of “true” contingent liabilities by the Crown. For instance, while a public entity can easily ascertain whether it is directly indebting the Government of Ontario through a financial arrangement or similar transaction, it is less obvious determining whether indirect indebtedness is being created, and still less obvious determining when a contingent liability arises. Indeed, in our recent dealings with the Ministry of Training, Colleges and Universities, which has an MOU with the Minister of Finance regarding the processing of s. 28 FAA approvals, we were advised that the lawyers for the Ministry of Finance take an extremely broad view of what constitutes a financial arrangement or commitment that creates a contingent liability. Predictably, indemnification provisions, save harmless clauses and third-party guarantees are all contingent liabilities. But so are all representations and warranties given by the public entity, as well as all of its covenants to perform an obligation. Moreover, whether or not such clauses are part of a financial arrangement, commitment, guarantee, indemnity or similar transaction seems of little relevance (although the Ministry could be construing the term “commitment” with considerable liberty). As a result, it seems that virtually any clause that could be breached by the public entity in a commercial contract theoretically triggers a requirement to seek s. 28 approval. As though that weren’t enough, other clauses are considered by staff to be “risky” and therefore subject to the approval process. These include choice of law clauses designating foreign laws and choice of forum clauses designating foreign courts. Thirdly and lastly, the consequences of not seeking and obtaining a s. 28 FAA approval are perhaps not severe enough to deter non-compliance. True enough, section 28 FAA deems the non-approved contract to be non-binding on, and unenforceable against, the public entity. However, one may suppose that where the public entity is deriving more rewards than liabilities from the contract, it will have no incentive to invoke the contract’s nullity. In practice, what could prove more problematic for the public entity is a request from the other party(ies) to the contract for a legal opinion confirming the enforceability of the contract and the receipt of all required approvals. While such a request is not likely if the transaction is of a small size, an unqualified opinion could not be given if a ministerial approval or exemption has not been obtained. For more information on the above, please contact Business Lawyer, Martin Aquilina at 613-747-2459 x 308 or at maquilina@hazlolaw.com