Hayes Forest Services Limited

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IN THE MATTER OF THE FOREST ACT, R.S.B.C. 1996, c. 157, TIMBER HARVESTING CONTRACT AND SUBCONTRACT REGULATION, (B.C. Reg. 22/96) AND THE COMMERCIAL ARBITRATION ACT, R.S.B.C. 1996, c.55

AND

AN OBJECTION CONCERNING A FORESTRY REVITALIZATION PROPOSAL FOR THE FIBRE BASKET COMPRISING TREE FARM LICENCE NO. 19, FOREST LICENCE NO. A19321 AND TIMBER LICENCES T0286, T0349, T0353, T0362, T0376, T0801, T0835, T0844, T0892, AND T0893 IN RESPONSE TO THE ORDERS REDUCING THE AAC FOR THE LICENCES FROM 1,249,946 M3 TO 1,174,186 M3

BETWEEN:

HAYES FOREST SERVICES LIMITED

LOGGING CONTRACTOR

AND:

WESTERN FOREST PRODUCTS INC.

LICENCE HOLDER

ARBITRATION AWARD

SOLE ARBITRATOR: / Paul J. Pearlman, Q.C.
DATE OF AWARD: / May 31, 2006
COUNSEL FOR
HAYES FOREST SERVICES LIMITED: / Kenneth N. Affleck, Q.C. and Robert Hrabinsky
Macaulay McColl
Barristers & Solicitors
P.O. Box 11635
1575 - 650 West Georgia Street
Vancouver, B.C. V6B 4N9
COUNSEL FOR
WESTERN FOREST PRODUCTS INC.: / Eric J. Harris, Q.C. and Paul McLean
Harris & Company
Barristers & Solicitors
14th Floor Bentall 5
550 Burrard Street
Vancouver, B.C. V6C 2B5
COUNSEL FOR
STRATHCONA CONTRACTING LTD.: / Stephen R. Ross and David Mitchell
Miller Thompson LLP
Barristers and Solicitors
1000 - 840 Howe St.
Vancouver, BC V6Z 2M1

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TABLE OF CONTENTS

PAGE
This Proceeding / 1
The Parties / 2
Hayes’ Objection / 2
The Position of Western / 6
Summary / 7
Issues: / 8
A: Does the Regulation permit Hayes to maintain its objection under section 33.1(4) notwithstanding the acceptance of the Proposal? / 8
B:If so, has Western failed to provide Hayes with sufficient information to determine whether the licence holder had complied with section 33.21(1) of the Regulation? / 12
C:Did Western apply the ACC reduction criteria fairly, impartially, and without regard to any past disagreement between the parties in making the Proposal that terminated Hayes’ replaceable contract? / 12
The Test for Application of the Fairness Objection Criteria Under Section 31.22(h) of the Regulation / 13
CCAA Proceedings / 16
2003 Logging / 17
Western’s Bargaining Strategy with the Ministry of Forests in Developing its Proposal / 19
Western’s Consideration of AAC Reduction Criteria with Respect to Other Full Phase Logging Contractors in the Nootka Region / 24
Comment of Ron Todd that Hayes was Unreasonable and Uncompetitive / 25
Western’s Prior Disagreements with Hayes / 26
Cap Variance Application / 27
Western’s Failure to Consider Alternatives to Termination of Hayes’ Contract / 35
Conclusion / 38

4129-p\0018

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IN THE MATTER OF THE FOREST ACT, R.S.B.C. 1996, c. 157, TIMBER HARVESTING CONTRACT AND SUBCONTRACT REGULATION, (B.C. Reg. 22/96) AND THE COMMERCIAL ARBITRATION ACT, R.S.B.C. 1996, c.55

AND

BETWEEN:

HAYES FOREST SERVICES LIMITED

LOGGING CONTRACTOR

AND:

WESTERN FOREST PRODUCTS INC.

LICENCE HOLDER

ARBITRATION AWARD

This Proceeding

By agreement of the parties, this conciliation proceeded as an arbitration of the objections by Hayes Forest Services Limited (“Hayes”) to the Forestry Revitalization Proposal dated June 3, 2005 (the “Proposal”) made by Western Forest Products Inc. (“Western”), to its full phase logging contractors, and dedicated phase contractors operating in the Nootka Region. That Proposal resulted in the termination of Hayes’ replaceable contract for the provision of logging services at Plumper Harbour.
The Proposal was one of a number of forestry revitalization proposals made by Western as a consequence of the reduction and take back of approximately twenty percent of the allowable annual cut (“AAC”) held by the Doman Group of Companies, of which Western is a member, under its various tree farm licences and forest licences, pursuant to the Forestry Revitalization Act, S.B.C. 2003, c. 17.

The Parties

Hayes is a full phase logging contractor that provides both conventional timber harvesting and heli-logging services to licensees operating in the coastal area of British Columbia. Hayes had performed logging services for Western at Plumper Harbour under a replaceable logging contract since 1997.
Western is a major licence holder. It operates in the Nootka region, on the west coast of Vancouver Island, under a fibre basket comprising Tree Farm Licence No. 19, Forest Licence No. A19321 and various timber licences. The company also holds Tree Farm Licence No. 6 and Forest Licence A19240 on northern Vancouver Island. In addition, Western holds Tree Farm Licence No. 25, portions of which are located on Vancouver Island and the central coast, and Forest Licence A16845 on the central coast. At the time the Forestry Revitalization Act came into force, Western held a number of other forest licences, some of which were surrendered in their entirety as a result of negotiations between Western and the Crown for the allocation of the twenty percent take back from the Doman/Western group of licences.
Strathcona Contracting Ltd. (“Strathcona”) was the 100% dedicated road building contractor to Hayes’ full phase logging contract at Plumper Harbour.
Strathcona’s road building contract was terminated under Western’s revitalization Proposal only because that Proposal terminated Hayes’ full phase logging contract.
Western has acknowledged that, but for the termination of Hayes’ replaceable logging contract at Plumper Harbour, Strathcona’s road building contract would not have been terminated in Western’s June 3, 2005 Proposal.

Hayes’ Objections

Hayes pursues two objections to the Proposal. First, pursuant to section 33.1(4) of the Timber Harvesting Contract and Subcontract Regulation, B.C. Reg. 22/96, as amended (the “Regulation”, Hayes objects that contrary to section 33.22(i), the Proposal fails to set out enough information to allow a contractor acting reasonably to determine if and how the licence holder is in compliance with section 33.21.
Section 33.21 of the Regulation provides:

33.21(1)Subject to subsection (2), the total effect of the reduction in allowable annual cut for an ungrouped licence or for a group of licences under the Forestry Revitalization Act as

(a)proposed in all forestry revitalization proposals made by the licence holder for that ungrouped licence or group of licences and accepted or deemed to be accepted under this Division, and

(b)imposed by proportionate reduction under section 33.6

must not result in the replaceable contract proportion being less than the minimum replaceable contract proportion

(2)The minister may by order permit the effect of the reduction in allowable annual cut for an ungrouped licence or a group of licences to be applied in a manner that results in the replaceable contract proportion being less than the minimum replaceable contract proportion.

(3)If, as a result of a proportionate reduction or of one or more forestry revitalization proposals, or both, in respect of an ungrouped licence or a group of licences, the proportion of timber harvesting services to be carried out by contractors under replaceable contracts with the licence holder is less than

(a)the minimum replaceable contract proportion, or

(b)some other proportion ordered by the minister under subsection (2);

the amount of work in each replaceable contract that pertains to the ungrouped licence or group of licences is increased proportionately such that the replaceable contract proportion equals the minimum replaceable contract proportion, or some other proportion order by the minister under subsection (2).

Hayes contends that the Proposal failed to provide sufficient information regarding the minimum replaceable contract proportion variance granted to Western by the Minister of Forests on May 27, 2005, to permit a contractor to determine the replaceable contract proportion permitted by the variance, and whether the replaceable contract proportion of the Proposal complies with the variance.
In essence, Hayes contends that Western provided inaccurate information to the Minister when it advised that it had no significant volume of unencumbered AAC. Hayes says that Western had approximately 38,000 m3 of unencumbered volume in the Nootka region, an additional 44,930 m3 of unencumbered volume in TFL 25, and 109,198 m3 of unencumbered volume in FL A16845, and that it misled the Minister by failing to disclose these volumes in its variance application.
Hayes’ second objection arises pursuant to section 33.42 and 33.22(h) of the Regulation, which provide:

33.42(1)If a forestry revitalization proposal in respect of the coastal area is not rejected under section 33.41 (2) within 30 days after the last day the proposal is delivered to a contractor,

(a)the forestry revitalization proposal is deemed to be accepted and each contract entered into by the licence holder in respect of the licences in the proposal is deemed to be amended or terminated as provided for in the proposal, and

(b)if one or more impacted contractors who objected to the proposal have made a fairness objection under section 33.4 (5), a dispute is deemed to exist between the licence holder and each impacted contractor who objected to the proposal and who made a fairness objection.

(2)For a dispute deemed to exist under subsection (1),

(a)the sole issue is whether a forestry revitalization proposal deemed to be accepted meets the requirements of section 33.22 (h) with respect to the impacted contractors who have made fairness objections,

(b)the conciliator may have regard to other forestry revitalization proposals made by the licence holder, and

(c)if the conciliator concludes that the requirements of section 33.22(h) are not met in respect of one or more of the impacted contractors who have made fairness objections, the licence holder is liable to those impacted contractors for damages in an amount determined by the conciliator in accordance with section 33.7.

(emphasis added)

33.22A licence holder in making a forestry revitalization proposal must do the following:

………

(h)apply the AAC reduction criteria fairly, impartially and without regard to any past disagreements between the parties; … .

(emphasis added)

Hayes submits that Western applied the AAC reduction criteria unfairly, partially, and with regard to past disputes, and says that the termination of Hayes’ replaceable contract at Plumper Harbour was the primary objective of Western’s Proposal for the Nootka region.
In support of this proposition, Hayes refers to the history of its disputes with Western, alleges that Western made a concerted effort to terminate Hayes’ replaceable contract while under the protection of the Companies Creditors Arrangement Act, R.S.C. 1985, c. 36 (“CCAA”), and that when these efforts failed, Western used the Proposal to achieve this objective.
Hayes also points to the history of Western’s negotiations with the Province regarding the allocation of the twenty percent reduction in its AAC resulting from the enactment of the Forestry Revitalization Act in March 2003. Hayes maintains that Western sought to avoid the loss of any volume from the Nootka region until after its efforts to obtain a court order for termination of Hayes’ replaceable contract in the CCAA proceedings had failed in the summer of 2004. At about that time, Hayes says Western made a complete “about face” and sought a reduction of 75,760 m3 from the Nootka region so that Western might attempt to rationalize its business in that region through the removal of a single contractor - Hayes. It relies upon this development as evidence of prohibited partial behaviour by the licence holder. The claimant argues that the evolution of Western’s bargaining position regarding the take back allocation provides evidence of a breach by the licence holder of section 33.22(h) of the Regulation.
In addition, Hayes submits that Western treated it harshly by representing that Hayes would log at Plumper Harbour in 2003, and subsequently directing Hayes not to do so. Hayes also alleges harsh treatment by Western on the ground that Hayes was the only one of six full phase logging contractors operating within the Nootka Contract Administration with whom Western arbitrated rate disputes. The claimant also categorizes as harsh treatment Western’s failure, while it was under CCAA protection, to pay in full amounts due as a result of Arbitrator Borowciz’s logging rates award of February 12, 2004 (Ex. 1, Vol. 2, Tab 43).
As part of its fairness objection, Hayes also relies upon its claim that Western misled the Minister in order to obtain the minimum replaceable contract proportion variance. The claimant says Western knew that it would not be able to terminate Hayes’ replaceable contract without obtaining the variance from the Minister. According to Hayes, Western then incorrectly advised the Minister that it did not have any significant volumes of unencumbered AAC, and that if it failed to obtain the variance, Western would be compelled to contract out approximately 180,000 m3 of existing company operations in order to meet the minimum replaceable contract proportion.
Finally, Hayes also contends that Western made the decision to terminate Hayes’ replaceable contract without any meaningful consideration or analysis of which contractor in the Nootka region should be terminated, and without any consideration of alternatives to the termination of Hayes’ replaceable contract. Hayes says that this constitutes further evidence of unfairness and partiality by the licence holder.
Hayes asks that I make the following determinations:
contrary to subsection 33.22(i) of the Regulation, the Proposal fails to set out enough information to allow a contractor acting reasonably to determine if and how the licence holder is in compliance with section 33.21;
the Proposal does not meet the requirements of section 33.22(h).

The Position of Western

Western argues that because its Proposal was accepted, there is no authority for Hayes to pursue its general objection to the Proposal under sections 33.1(4) and 33.22(i) of the Regulation. The licence holder also argues that even if that objection could be maintained, there is no evidence that Western’s calculation of the minimum replaceable contract proportion was improper or misleading, or that it prevented Hayes from assessing the Proposal. Western points out that the Ministry of Forests made its own assessment and determination of the licence holder’s variance request. In answer to Hayes’ argument that there were significant unencumbered volumes of timber, Western points out that the 38,000 m3 of allegedly unencumbered volume in the Nootka region was all subject to a Fibre Basket Agreement, and was volume in respect of which all of the replaceable full phase contractors in the Nootka region had a right to bid.
With respect to the disputed volumes in TFL 25 and FL A16845, Western says that it was entitled to calculate AAC for these licences on an annual pro-rated basis, and did so. In good faith, it endeavoured to provide the Ministry of Forests with what it believed to be the most accurate calculation of its AAC at the time the Minister’s reduction orders were made. Western also says that it was reasonable to take into account the very real prospect for pending volume reductions to TFL 25 and FL A16845 through the land use planning process then under way.
Western also argues that some timber, while not subject to Bill 13 commitments, was nonetheless encumbered by agreements made between Western and three First Nations.
Western responds to Hayes’ fairness objection by denying that it is engaged in any conduct that contravenes section 33.22(h) of the Regulation. The licence holder says that its response to the take back, including the Proposal, was based throughout on bona fide business considerations aimed at minimizing the impact of the AAC reduction on its core assets, TFLs 6 and 19, and that its decision to terminate Hayes’ replaceable contract in the Nootka region was made without regard to past disputes with that contractor.
Further, Western submits that in assessing Hayes’ fairness objection to the Proposal, I should, in keeping with section 33.42(2)(b) of the Regulation, cited at paragraph 12 above, have regard to the other forestry revitalization proposals made by the licence holder which, across Western’s operations, resulted not only in the termination of the contracts of Hayes and Strathcona, but in the termination of an additional 13 contractors holding replaceable logging agreements.

Summary

For the reasons that follow, I have concluded that Hayes’ objection under subsection 33.22(i) of the Regulation fails. Hayes’ fairness objection succeeds. Although I have rejected many of the grounds advanced by Hayes in support of its fairness objection, I have found that Western unfairly and unreasonably failed to consider alternatives which had the potential to mitigate the impact of the take back in the Nootka region on Hayes. Those alternatives included the provision of a dedicated phase heli-logging contract to Hayes for all contractor logging operations in the Nootka region in exchange for Hayes’ loss of its Bill 13 conventional logging rights at Plumper Harbour.

Issues

A.Does the Regulation permit Hayes to maintain its objection under section 33.1(4) notwithstanding the acceptance of the Proposal?

B.If so, has Western failed to provide Hayes with sufficient information to determine whether the licence holder had complied with section 33.21(1) of the Regulation?

C.Did Western apply the ACC reduction criteria fairly, impartially, and without regard to any past disagreement between the parties in making the Proposal that terminated Hayes’ replaceable contract?

Issue A:Does the Regulation permit Hayes to maintain its objection under section 33.1(4) notwithstanding acceptance of the Proposal?

Under its Proposal of June 3, 2005, Western proposed to terminate one full phase stump to dump contractor, Hayes, and its dedicated road contractor, Strathcona, while maintaining the volumes for each of the remaining five stump to dump contractors in the Nootka region, Frank Beban Logging Ltd., Friell Lake Logging Ltd., Onion Lake Logging Ltd., Russell & Lilly Ltd. and Spirit Lake Timber Ltd. (Ex. 1, Vol. 2, Tab 113).
On June 3, 2005, Hayes, an “impacted contractor” within the meaning of Division 5.1 of the Regulation, gave Western written notice of its objections to the Proposal (Ex. 1, Vol. 2, Tab 129).
Division 5.1 of the Regulation contains both general dispute provisions, and specific dispute resolution provisions. Section 33.1(4) of the Regulation contains the general dispute provision:

33.1(4) If any provision in this Division requires either a licence holder or a contractor who has a replaceable contract with that licence holder to do something or not to do something, and the licence holder or contractor contravenes that requirement,

(a)any contractor, if the licence holder has contravened the requirement, or

(b)the licence holder, if a contractor has contravened the requirement,

may, by written notice to the other party, commence a dispute.

As we have seen, Hayes argues that the Proposal failed to provide enough information with respect to the variance of the minimum replaceable contract proportion, and thereby contravened section 33.22(i) of the Regulation, which provides:

33.22A licence holder in making a forestry revitalization proposal must do the following: