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June 2003 - Spotlight

Struggling with changes

Logging contractors and licensees in BC are struggling with legislative changes recently introduced by the provincial government.

By Brian Mulholland

As part of a continuing effort to revitalize the forest industry, the government of British Columbia recently introduced legislation which transforms tenure, stumpage, cut control and appurtenancy (tying timber rights to local processing facilities and jobs). Next on the list of the government’s intended changes is reform of the Timber Harvesting Contract and Subcontract Regulation—Bill 13—which applies to many licences on the BC Coast and to some licences in the interior of the province.

It’s anticipated that these changes will be introduced later this year. Bill 13 has been controversial, to say the least. It has caused much discord among licence holders and contractors and has led to numerous arbitrations. The policy objectives of Bill 13 have been to protect the financial and job security of the contract logging community and to ensure a balance in negotiating power between licence holders and individual contractors.

The BC government has suggested that it will seek to simplify and streamline the dispute resolution process of Bill 13 and provide the clarity and direction necessary to ensure a consistent, market-based approach to rate setting. There is little disagreement about the need for these changes. Consideration is also being given as to whether to eliminate the replaceability provisions for new timber harvesting contracts and to grandfather current contracts which contain replacement provisions.

This is perhaps the most controversial of the changes being considered for Bill 13 and one which will be regarded by some as inconsistent with the policy objectives of Bill 13. The BC Ministry of Forests undertook a review of Bill 13 in 2001. They met with various stakeholders on the coast and in the interior of the province. The results of their review indicated that, to no one’s surprise, licence holders and contractors are on opposite sides of the fence when it comes to the subject of replaceable contracts.

Legislative changes being considered by the BC government—concerning the replaceable rights of logging contractors—have left some people in the logging community extremely nervous about their future.

Most contractors would agree that the introduction of replaceable contracts has helped to create a balance of negotiating power between licence holders and contractors and to create financial and job security for contractors and their workers. It is clear that those who hold replaceable contracts are in a much stronger bargaining position with licence holders than those who do not. Some are calling for an expansion of the types of forest tenures which are subject to replaceable contracts. Licence holders can be expected to resist any change that would increase the number of replaceable contracts. Most, if not all licensees, view the mandatory provisions of Bill 13 regarding terms to be included in replaceable contracts (especially replacement rights) as unnecessary interference with the rights of people in business to contract freely.

Opponents of replacement rights say that Bill 13 has distorted the market for contracting services, created significant entry barriers for new contractors and has resulted in an increase in costs and a reduction in profitability. It has also been said that replaceable contracts have created a disincentive for contractors to innovate and seek cost reductions. Some licence holders have suggested that the removal of the replaceability requirement would actually increase the security of the contractors, since the six-month eligibility requirement in order to qualify for replacement rights has caused many competent contractors to be let go before the end of the six-month eligibility period.

The flip side of this is that it demonstrates the lengths that some licence holders are prepared to go to in order to avoid having to enter into replaceable contracts with their contractors. Assuming that Bill 13 is going to be amended and not simply repealed, how should the replaceability provisions of Bill 13 be amended? Phasing out the replaceable contract and grandfathering existing replaceable contracts as is currently being considered by the government is one option, although it may well suffer the fate of many attempts to compromise—nobody is satisfied. One problem with this option is that the grandfathering of contracts will create two classes of contractors.

It will not do much to resolve problems on the BC coast where replaceable contracts are prevalent, nor will it change the perception among contractors in the BC Interior that they are disadvantaged under Bill 13 when compared with their coastal counterparts. Rather than outright elimination of replacement rights under new contracts, another compromise that may be worth considering is to limit the number of replacement contracts to which a contractor is entitled under Bill 13. This would provide some security of tenure to the contractor while providing the licence holder with the ability to change contractors after a reasonable period of time has elapsed.

This option might include the elimination of replaceability rights from any contract that is assigned from one contractor to another. Alternatively, a contractor who takes an assignment of a replaceable contract could be limited to one replacement contract following the expiry of the term of the contract that has been assigned to it. Contractors will object to this change on the basis that such a change to Bill 13 will not give them sufficient security of tenure and will significantly reduce the value of their businesses to prospective purchasers. Another option to consider is to give licence holders and contractors the right to contract out of the replaceability provisions under Bill 13, provided that the contracting out mechanism is set up in such a way that contractors are not forced to contract out.

This might be achieved by allowing contracting out only for long-term contracts. A further option if replacement rights are to be eliminated might be to require licence holders to contract out a larger portion of their harvest to independent contractors. This would foster a division between harvesting, which would be done by contractors, and milling, which would be done by licence holders. As the BC forest industry moves towards a more market-based system where timber is auctioned to the highest bidder, consideration could also be given to auctioning the timber harvesting of a specified percentage of that auctioned timber to “qualified contractors,” for example, contractors who meet criteria established by the Ministry of Forests.

This change would be consistent with a more market-based approach. There is little doubt that Bill 13 will be amended. The question is how it will be amended. All of the options reviewed above have drawbacks to them and it’s expected that many people, licence holders and contractors alike, will be opposed to them. The forest industry in British Columbia is going through a period of great transition in an effort to restore its strength and competitiveness. It is inevitable that not everyone will be pleased with the changes. Discussion continues about the move to take back 20 per cent of forest companies’ tenure volume and the significant impact that will have on both licence holders and contractors.

That, coupled with the pressure on government to amend Bill 13, has contractors extremely nervous about their future. It is critical that any changes made by government maintain a fair balance between the interests of contractors and licence holders.

Brian Mulholland is a partner with the law firm of Edwards, Kenny & Bray in Vancouver, BC. He is the chair of EKB’s Forestry Law practice group and has a business law practice which includes many clients in the forest industry. He can be reached at (604) 661-1095 or by e-mail at bmulholland@ekb.com . “Please see our advertisement on page 24.”

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