1
IN THE MATTER OF AN ARBITRATION
BETWEEN PACIFIC FOREST PRODUCTS LIMITED
AND HAYES FOREST SERVICES LIMITED
BEFORE THE ARBITRATOR
W.J. WALLACE, Q.C., C. ARB.
REASONS FOR DECISION AND AWARD
D. ERIC J. HARRIS, Q.C. FOR PACIFIC FOREST PRODUCTS LIMITED
D. GEOFFREY COWPER, Q.C. FOR HAYES FOREST SERVICES LIMITED
Jennifer Holmes/537517
1
I N D E X
1.INTRODUCTION: THE RATE ISSUE
2.PRIOR HISTORY OF CONTRACTUAL RELATIONS BETWEEN THE COMPANY AND THE CONTRACTOR
3.PROSPECTIVE OR RETROSPECTIVE APPROACH
4.ACTUAL COSTS (1996)
5.HISTORICAL RATES
6.1996 FAILED NEGOTIATIONS
7.INCREMENT OF $6.79/-M3
8.STANDBY RATES
9.HOURLY MACHINE RATES
10.ROAD CONSTRUCTION RATES
11.LOGGING RATES
Falling
Yarding
Loading
Hauling
Other Direct Costs
Depreciation
Overhead and Administration
12.CLAIM FOR INTEREST ON WORKING CAPITAL
Profit and Risk
13.SUMMARY OF RATES FIXED FOR THE 12 MONTH PERIOD ENDING DECEMBER 31, 1996
Standby Rates
Hourly Machine Rental Rates
Road Construction Rates
Logging Rates
14.COMPETITIVE RATE ANALYSIS
15.COSTS
Jennifer Holmes/537517
1
IN THE MATTER OF AN ARBITRATION
BETWEEN PACIFIC FOREST PRODUCTS LIMITED
AND HAYES FOREST SERVICES LIMITED
REASONS FOR DECISION AND AWARD
1.INTRODUCTION - THE RATE ISSUE
1.1This arbitration is held pursuant to the Forestry Act, 1979, R.S.C. c. 140 and, in particular, to the Timber Harvesting Contract and Sub-contractors Regulation, B.C. Reg., 22/-96 of that Act (the “Regulation”).
1.2The Hayes family had logged TFL19 (Timber Forestry License) for Pacific Forest Products Limited (“the Company”) for some 20 years. In the late 1980’s, the sons of Mr. Hayes, Sr., purchased Pat Carson Bulldozing which logged a different contract for a different licensee. It was then merged with the original Company under the name Hayes Forest Services Limited (“Contractor”).
1.3The logging contract under which this dispute arose is a replaceable contract for a term of five years entered into between the Company and Pat Carson Bulldozing on the 1st of October, 1991 (Exhibit 1). TFL19 is a 25 year renewable license respecting a specific area located in the Company’s Gold River Woodland Division on the west side of Vancouver Island in the vicinity of the Municipalities of Gold River, Tahsis and Zeballos. TFL19 has a cut of approximately 540,000 m3/-year. The Contractor is one of the largest logging contractors on the west coast of British Columbia. It contracts with a number of licensees and others.
1.4The Regulation was originally enacted in January, 1990 and was amended in 1991. It, in general, provided that certain timber harvesting contracts had to be in writing and had to include a provision permitting either the licensed holder or a contractor to require that any dispute arising under the Contract be referred to arbitration. In April, 1996, the 1991 Regulation was repealed and the present Regulation substituted for it. It sets out in considerable detail, in Section 25, the mandate of an arbitrator in resolving rate disputes which arise under the timber harvesting contracts.
1.5The Contractor submits that, in order for it to recover its costs and earn a reasonable profit as stipulated in Section 25 of the Regulation, it has to receive from the Company increased rates for the contractual services which it will perform in 1996. The Regulation, Section 26 provides that when the rate dispute remains unresolved, pending arbitration, the Contractor will continue performing the contract and will be paid the rates agreed for the previous year. There is also a provision for either party to the dispute, dissatisfied with the previous year’s rates, applying for a provisional rate during negotiation and arbitration.
1.6The Company resists the Contractor’s claim for higher rates, submitting that the Contractor has failed to establish that the rates claimed are both competitive and necessary for the Contractor, operating efficiently, to receive a reasonable profit.
2.PRIOR HISTORY OF CONTRACTUAL RELATIONS BETWEEN THE COMPANY AND THE CONTRACTOR
2.1The logging rates paid to the Contractor by the Company with respect to various west coast operations is set forth in Ex34 as follows:
HAYES FOREST SERVICES
LOGGING RATE TRENDS
1990 / 1991 / 1992 / 1993 / 1994 / 1995 / (1996)Kleeptee / 30.00 / 31.05
Wilson / 30.03 / 31.08
McCurdy / 30.87 / 31.95
Houston / 32.19 / 31.90
Conuma / 31.14 / 30.90 / 32.20 / 33.62
Gold River / 30.69 / 34.50 / 34.63 / (35.45)
Notes:
-Kleeptee, Wilson, McCurdy and Houston includes camp and dry land sorting
-1993 rates are weighted averages for two sets of rates for each area
-Conuma includes dry land sorting. In 1994 33% of the production was from Conuma
-1995 rate is blended … 19% of the production was from Conuma which includes dry land sorting
-1996 rate is Pacific’s offer and is all Gold River (ie. No camp or dry land sorting)
2.2In a letter of March 15, 1995 (Ex24) from the Company to the Contractor, the 1995 logging rate of $34.63 is set out and hourly rates for specific equipment are also delineated. (Note all hourly rate jobs were to be pre-authorized.) The road construction rates for 1995 were settled in September 1995 and incorporated in Supplementary Change #2. They were paid retroactively from the 1st of January, 1995 (Exhibit # 1, Supplementary Change Schedule No. 2).
2.3In February, March and April, 1996, the parties engaged in negotiations to fix the 1996 Logging Rate, the Road Construction Rate and the Hourly Equipment Rate. The negotiations were unsuccessful and the Licensee in May 1996 referred the rate dispute to arbitration.
3.PROSPECTIVE OR RETROSPECTIVE APPROACH
3.1I accept Mr. Harris’ submission on behalf of the Company that the Regulation is intended to create a balance between the legitimate and reasonable interests of both the license holder and contractor, namely, for a company, a competitive rate in terms of cost and productivity and, for a contractor, operating efficiently, the opportunity to earn a reasonable profit.
3.2Mr. Harris submitted that an arbitration under the Regulations is analogous to an “interest” arbitration where the arbitrator’s task is to determine what the parties, acting reasonably, would have agreed to, that is, the arbitrator should attempt to replicate the agreement the parties, acting reasonably, would have made as of January 1, 1996.
3.3As I understand Mr. Harris’ submission, this “interest” approach to the arbitration obliges the arbitrator to base his award on a consideration of the evidence as of 1st of January, 1996. Accordingly, the arbitrator should not consider the evidence of actual costs and performance experienced by the Contractor in 1996.
3.4Mr. Cowper for the Contractor, on the other hand, submits the arbitrator is obliged to consider the actual costs of both 1995 and 1996, which he describes as the “best criteria by which to determine a proper rate”.
3.5In my view, I can see little value to be secured by attaching a label (i.e. “interest” or “rights” arbitration) to the arbitration in this case, regardless of its usefulness in other activities such as labour disputes. In the present case, I consider I am governed in my role of arbitrator by the provisions of the Regulations and in particular Sections 25 and 26 which direct in part, that:
“…the arbitrator must determine the rate, according to which a license holder and a contractor acting reasonably in similar circumstances would agree is a rate that:
a) is competitive by industry standards; and
b) would permit a contractor operating in a manner that is reasonably efficient in the circumstances in terms of costs and productivity to earn a reasonable profit.” (emphasis added)
3.6Furthermore, I consider the evidence must be viewed “objectively” not “subjectively”. The Regulation refers to “What a license holder and a contractor… would agree to”—not what the licensee and the contractor might have agreed to had they not gone to arbitration.
3.7While some of the sections of the Regulation support an approach which does not include a consideration of “actual costs” alleged to have been incurred in 1996, I would not accept the submission that the arbitrator is so confined as to the evidence he may hear and consider. Rather, I would adopt Lord Macnaghten’s view in The Bwllfa and Merthyr Dare Steam Collieries (1891) Limited v. The Pontypridd Waterworks Company (1903) A.C. 426(HL) where he stated at page 431:
“If the question goes to arbitration, the arbitrator’s duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion, it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?”
3.8Furthermore, on my interpretation of the Regulations, Section 25(2)(f) specifically authorizes the arbitrator to take into consideration: “(f) any other data or criteria that the arbitrator considers relevant in ascertaining the rate…” that a license holder and a contractor acting reasonably in similar circumstances would agree to.
3.9In my opinion, a license holder and a contractor “acting reasonably” must be presumed to have a “reason” for the conclusion they respectively reach. The “reason” must be based upon the evidence adduced at the hearing. There must be evidence from which to draw the appropriate inferences and reach the appropriate conclusions. Otherwise, one is left with results based on speculation or conjecture, which, in my view, is not “acting reasonably”.
3.10The Regulation requires the arbitrator to determine the rate which meets the criteria set out in Section 25. In the absence of an express restriction confining my consideration of the evidence to that which preceded January the 1st, 1996, I consider it to be contrary to reason to disregard such obviously relevant evidence.
4.ACTUAL COST (1996)
4.1The fact that I consider it appropriate to take into account 1996 actual costs in determining the rate does not alter the requirement that the rate is determined as of January the 1st, 1996. I will be considering actual 1996 costs, which I consider the best evidence, rather than go through the artificial exercise of speculating, as of January the 1st, 1996, what the 1996 costs would be. Such consideration will be against the background that the rates are to take effect as of January 1, 1996.
5.HISTORICAL RATES
5.1In reply to the emphasis placed by Mr. Harris for the Company on the historical rate structure agreed to by the parties, Mr. Cowper for the Contractor submitted that the final rate in 1994 was not settled until the year was over and only then on a “horse trade” basis, and that there is evidence with respect to logging and road rates which demonstrates that the historical rates had been suppressed by the exertion of economic power by the Company.
5.2In my opinion, I cannot now speculate why either party reached the rate agreement they did in 1994 and 1995. I can only assume that both parties were represented by experienced and able company officers, assisted by experienced and competent counsel. Accordingly, I can only construe 1994 and 1995 rates as representing rates which the parties agreed were in their own best interest and appropriate for the services performed by the Contractor in those years. I will not go behind the rates to take into account any other alleged motivation in making such an agreement.
6.1996 FAILED NEGOTIATIONS
6.1Evidence was presented, by the witnesses called and in the exhibits filed, that the parties negotiated from February, 1996 to May, 1996 in an effort to reach an agreement as to rates. From time to time they appeared to reach an accord with respect to some of the issues in dispute. However, in May, (Exhibit 121) it is apparent that negotiations broke down and the entire rate dispute was referred to arbitration.
6.2I do not consider it appropriate for me to take the evidence of these aborted negotiations into consideration for the following reasons:
(i)Positions are adopted and concessions made during negotiations in the hope of reaching a settlement. They are not advanced as binding positions if no agreement is reached and, accordingly, are usually regarded as privileged communications made solely for the purpose of reaching a settlement. To later introduce them into evidence to the disadvantage of a party in an arbitration or other litigation would detrimentally affect the negotiation process and induce parties who might become engaged in arbitration, to refrain from adopting unqualified positions when negotiating for fear that concessions offered may be used against them.
(ii)Regulation 25 requires that the arbitrator view the dispute from the point of view of “a license holder and a contractor acting reasonably” (i.e. objectively) not from the point of view of this license holder and this contractor (i.e. subjectively). It may well be that what the respective parties had in mind during their aborted negotiations would not be considered by a licensee or a contractor, who heard the evidence adduced in an arbitration, to be either reasonable or designed to achieve the objectives of the Regulations (i.e. a competitive rate which would permit an efficient contractor to earn a profit). I must determine the rate objectively on the evidence adduced in accord with the terms of Regulation 25.
6.3I would note in passing, that the position would be different if my role was that of a mediator. Then one could properly put to one side the issues where there was apparent agreement and concentrate on the issues still in dispute in the hope of resolving them. My role as an arbitrator, pursuant to Regulation 25, does not permit this approach in determining an appropriate rate.
7.INCREMENT OF $6.79/-M3
7.1The Contractor advances a claim for an increment to the logging rate based on actual costs to compensate the Contractor for the Company’s alleged inadequate logging plan and inadequate preparation for logging for 1996. As Mr. Cowper for the Contractor submitted, “the $6.79 is essentially a number reflecting what Hayes would have been able to earn” had a properly prepared adequate logging plan been in place. It is the Contractor’s submission that the failure to get the requisite approvals and properly develop the logging shows in time rendered the logging operation less efficient and more costly.
7.2In my view the increment is a claim for “licensee-caused” damages resulting from alleged licensee misfeasance or nonfeasance in 1996. Such would not be in the mind of parties when negotiating a rate in 1996, nor would it be present in competitive rates for similar operations. To make such an award would be analogous to awarding damages in an action. This is beyond the mandate given an arbitrator under Regulation 25. The Contractor may have a claim for damages in a proper case despite the various sections of the Regulations which may restrict such an action. I express no view on that possibility, but I am of the view that the arbitrator cannot validly make such an award in these proceedings.
7.3Having said this, I will not exclude from consideration any evidence which relates to 1996 actual cost of the operation which would normally be the subject of determining an appropriate contingency factor when considering future rates.
8.STANDBY RATES
8.1The Contractor has made the following statement in support of his claim for Standby Rates:
“A significant amount of equipment must be made available on site and then used only a fraction of the potential hours for the equipment. We have calculated standby hours based on a conservative estimate of 1500-1600 hours per year per equipment piece less actual hours worked.”
8.2The rates requested are based on the standby calculations in the “Blue Book” (Ex110/1/2)
8.3Leaving for the moment the use to which the “Blue Book” can be put in this Arbitration, it is clear that if a party is to rely on the Blue Book in support of a certain rate structure, all of the provisions of the Blue Book must be considered. In the Introduction to the Blue Book at the paragraph subtitled “Standby Rates”, it is stated, in part, that “There must be an agreement on the conditions under which standby will apply, before payment will be allowed”. There is no evidence of such an agreement in these proceedings.
8.4The Logging Contract does not provide for Standby Rates and Mr. Donald Hayes, in his evidence (Vol.1/1126/22), confirms that Standby Rates have “never been incorporated” nor have they ever been paid. Accordingly, I am of the opinion that the Contractor cannot rely upon the Blue Book in support of its claim for standby rates.
8.5Since historically Standby Rates did not form a separate element of the rate considered by the parties in their agreements and since consideration was not specifically given in 1996 to the conditions under which Standby Rates would be allowed such as designating the particular equipment for which Standby charges would be allowed: the rates for such equipment, etc., I would not allow Standby Charges as a separate item of costs on this rate dispute. On a future occasion the parties may wish to resolve the issue of what, if any, standby services should be separately considered and an appropriate rate fixed for such services. If they cannot agree, they may well refer the issue to an “amount of work dispute” arbitration (pursuant to Section 23 of the Regulations).
9.HOURLY MACHINE RATES
9.1This category covers the rates for the use of equipment in unspecified but necessary work areas such as digging and building culverts, building bridges, etc.
9.2At Ex110/3/2 the Contractor has, in support of its claim for hourly rates for its equipment, submitted that:
“For the hourly rates we have looked to the Blue Book which is published by the Ministry of Transport and Highways of the Province of British Columbia and is based on input from the licensees. The rates from this book are used by Pacific in submission to the Ministry of Forests in their stumpage calculations on every block of timber and road heading which they log on crown lands. Further these are the rates which are paid to Pacific and others by the Ministry of Forests and other government agencies for work performed. These rates are also paid to the other Pacific Contractors.
There are certain costs to a Contractor which are not included in the Blue Book rates but are in addition to these. To determine what was included in the Blue Book rates we received information directly from the Ministry of Transportation and Highways.
For those items not anticipated in the Blue Book rates, we have calculated the incremental costs and rate adjustments.”
9.3The “Blue Book” referred to in these proceedings is a comprehensive listing of equipment rental rates published by Crown Publications Inc. entitled “Province of British Columbia, B.C. Hydro and Power Authority, and B.C. Rail Ltd. EQUIPMENT RENTAL RATE GUIDE, 1996-1997” and is Ex110/3.
9.4In the Blue Book Introduction it is noted that:
“They [the rates] are intended primarily for use within government sponsored projects, but are also being made available for private industry …”