IN THE MATTER OF THE FOREST ACT R - British Columbia



IN THE MATTER OF THE FOREST ACT R.S.B.C. 1979, c. 140, as amended

AND IN THE MATTER OF THE TIMBER HARVESTING CONTRACT AND

SUBCONTRACT REGULATION, B.C. REG. 22/96 (the “Regulation”)

AND IN THE MATTER OF THE COMMERCIAL ARBITRATION ACT, S.B.C.

1986, c. 3, AND IN THE MATTER OF A DISPUTE

BETWEEN:

R.W. SAUNDERS & SONS LTD.

CLAIMANT

AND:

MacMILLAN BLOEDEL LIMITED

RESPONDENT

DECISION AND AWARD

1. I have been appointed by the parties to arbitrate this dispute under the Timber Harvesting Contract and Subcontract Regulation, B.C. Reg. 22/96 (the “1996 Regulation”). This dispute arises as a result of MacMillan Bloedel Limited (“M.B.”) closing down its Kennedy Lake Division in 1998. At the time M.B. shut down its Kennedy Lake Division, and ceased logging operations in Clayoquot Sound, R.W. Saunders and Sons Ltd. (“Saunders”) held a replaceable contract to provide log hauling services to M.B. Saunders has a long history of performing those services for M.B.’s company harvesting operations in the Kennedy Lake Division of MacMillan Bloedel’s Tree Farm Licence 44.

Positions of the Parties

2. Saunders contends that M.B. has wrongfully reduced the amount of work available to it under its replaceable contract, and maintains that it is entitled to a proportionate share of log hauling work elsewhere in T.F.L. 44. Counsel for Saunders submits that his client’s contract is a volume independent contract within the meaning of s.1(1) of the 1996 Regulation. Alternatively, he argues that if that contract is properly characterized as a dedicated phase contract, Saunders is nonetheless entitled to a proportionate share of hauling work within T.F.L. 44, notwithstanding the cessation of M.B.’s company operation in the Kennedy Lake Division. Saunders maintains that it is entitled to a share of hauling work elsewhere in T.F.L. 44 determined by reference to the proportion of timber harvesting operations conducted by the Kennedy Lake crew in 1991, when Saunders first became entitled to a replaceable contract. In 1991, Saunders hauled 10.3% of the total volume of timber harvested in T.F.L. 44. As I understand Saunders’ submissions, it seeks a determination that it is now entitled to 10.3% of the hauling work currently available in T.F.L. 44.

M.B. responds by arguing that Saunders held a dedicated phase contract in respect of its Kennedy Lake operations, and that upon the closure of the Kennedy Lake Division, Saunders was not entitled to any allocation of an amount of work elsewhere in T.F.L. 44. In essence, M.B. contends that because Saunders’ replaceable contract was dedicated to the Kennedy Lake company operation, the 1996 Regulation neither contemplates nor requires that M.B. allocate an amount of work to Saunders elsewhere upon the termination of the Kennedy Lake company operation.

The Issues

3. Two issues arise in this arbitration:

(a) whether Saunders has a “dedicated phase contract” within the meaning of the Timber Harvesting Contract and Subcontract Regulation B.C. Reg. 22/96 (the “1996 Regulation”) dedicated to M.B.’s company operations in the Kennedy Lake operating area of T.F.L. 44; and if so,

(b) whether upon the closure of MacMillan Bloedel’s company operations at Kennedy Lake, was Saunders entitled to perform a proportion of the timber hauling required for operations elsewhere in T.F.L. 44?

The Facts

4. This arbitration proceeded upon an Agreed Statement of Facts (Exhibit 1). No witnesses testified in this proceeding. Because the history of the work performed by Saunders for M.B., and the events culminating in the closure of the Kennedy Lake company operation are important to a full understanding of this dispute, I reproduce below much of the Agreed Statement of Facts:

“ 1. The Claimant (“Saunders”) has been providing log hauling services to the Respondent (“MacMillan Bloedel”) since 1965 as part of MacMillan Bloedel’s timber harvesting operations on Tree Farm Licence No. 44, a replaceable tree farm licence in the coastal area held by MacMillan Bloedel pursuant to the Forest Act.

2. In 1991, the Timber Harvesting Contracts and Subcontracts Regulation (the “Regulation”) was enacted and Saunders became entitled to a “replaceable contract”, as defined in the Regulation, from MacMillan Bloedel to perform timber harvesting services. In particular, Saunders was entitled to perform “hauling”, as that term is defined as a “phase” in the Regulation.

Saunders’ Relationship with MacMillan Bloedel Prior to 1991

3. Saunders provided log hauling pursuant to various contracts. An example of one such contract, dated January 1, 1990, is found at Exhibit 2, Tab 1. With the exception of a small amount of work in approximately 1986, all of the services which Saunders performed were performed in relation to MacMillan Bloedel’s company harvesting operations in its Kennedy Lake Division.

Saunders’ Relationship With MacMillan Bloedel From 1991 - 1997

4. From 1991 - 1997 Saunders provided log hauling services as part of MacMillan Bloedel’s timber harvesting operations under Tree Farm Licence 44 pursuant to its replaceable contract.

5. During the period 1991 to 1997, MacMillan Bloedel and Saunders executed two written contracts:

(a) A contract with MacMillan Bloedel dated September 1, 1992 (the “1992 Contract”, Exhibit 2, Tab 2); and

(b) A contract with MacMillan Bloedel dated January 1, 1995 (the “1995 Contract”, Exhibit 2, Tab 3).

6. Effective April 1, 1996, the Regulation was substantially amended (the “Amended Regulation”).

7. The parties have not executed a written replacement to the 1995 Contract. MacMillan Bloedel offered Saunders a form of replacement contract (Exhibit 2, Tab 4). Saunders has declined to execute that form of contract, and has taken the position that it does not comply with the requirements of the Amended Regulation and the 1995 Contract.

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9. Saunders hauled timber for MacMillan Bloedel pursuant to its replaceable contract from 1991 - 1997 as follows:

YEAR TOTAL HIGHWAY HAULING

VOLUME (m3) VOLUME (m3) REVENUE ($)

1991 228,519 17,400 1,758,895

1992 187,410 0 1,073,551

1993 154,163 8,769 1,006,285

1994 164,449 4,045 1,057,997

1995 131,662 3,074 910,481

1996 49,355 0 414,618

1997 approx. 16,000 0 0

1998 0 0 0

10. Saunders did not assert any entitlement to make up its diminishing volume elsewhere on T.F.L. 44 from 1991 - 1996. Near the end of 1996, MacMillan Bloedel informed Saunders that it intended to shut down the Kennedy Lake operations in the near future and that Saunders’ services would no longer be required at that point. Saunders then asserted an entitlement to obtain work on the entirety of TFL No. 44. At no time has Saunders expressly surrendered any legal right.

MacMillan Bloedel’s Operations in TFL No. 44

11. TFL No. 44 is an area based licence which covers a large area near Port Alberni on Vancouver Island. MacMillan Bloedel manages the harvest of timber from this licence through a number of administrative divisions. Some of these divisions harvest timber from other tenures as part of their timber harvesting operations.

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13. In 1991, MacMillan Bloedel had the following logging divisions within TFL No. 44:

(a) Kennedy Lake - a company run division where Saunders did virtually 100% of the log hauling from 1990 - 1997. In 1993 the management and administration of Kennedy Lake and Estevan were merged. From 1994 to 1997 Saunders continued to haul virtually 100% of the timber harvested by the Company operation that continued to operate in the geographic area that had been Kennedy Lake Division, and did not haul timber from other areas;

(b) Estevan - a division of contractor operations where Saunders did not operate under contract for MacMillan Bloedel. The contractor operations included full phase, volume dependent contractors, J.A. McKay Trucking Ltd., Mars Industries Ltd., and Hayes Forest Service Ltd., who operated the Cypre area, Kildonan area and the Great Central Lake area, respectively;

(c) Sproat Lake - a company operation where Saunders has never operated and has never hauled logs from under contract with MacMillan Bloedel; and

(d) Cameron - a company operation that Saunders has never hauled logs from under contract with MacMillan Bloedel; and

(e) Franklin River - a company and contractor operation that Saunders has not hauled logs from since approximately 1986. In 1986 Saunders did a modest amount (less than 10%) of the hauling from that Division.

14. In 1993, MacMillan Bloedel effected two mergers of its divisions, creating the Cameron/Franklin Division and the Kennedy/Estevan Division.

15. After Kennedy Lake Division and Estevan Division were merged the operations continued to be directed, through 1996, from two offices. Some management and forestry services were provided by some individuals to both offices.

16. Operations associated with the areas of the two former divisions remained operationally distinct. Timber harvesting personnel, both company crews and contractors, continued to work exclusively within either the geographical areas that had previously been Kennedy Lake Division and Estevan Division, as they had done prior to the administrative merger of the two divisions.

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18. The services which Saunders provided under contract to MacMillan Bloedel related exclusively to timber harvested in MacMillan Bloedel’s Kennedy Lake Division until 1993, and thereafter, to the Kennedy/Estevan Division. Following the merger of the Kennedy Lake and Estevan Divisions, the services provided by Saunders under contract to MacMillan Bloedel continued to be exclusively in the geographical area which had previously been the Kennedy Lake Division and were provided to the company operation that continued to operate in the area that had been the Kennedy Lake Division.

19. From 1990 - 1998, TFL No. 44 had had the following annual allowable cut (AAC) levels:

1990 - 2,748,126 m3,

1991 - 1993 - 2,590,127 m3,

1994 - 2,230,627 m3,

1995 - 1997 - 2,138,127 m3,

1998 - 1,800,127 m3.

20. For the five-year cut control period of 1990 - 1994, MacMillan Bloedel harvested a total of 11,324,424 m3 of timber on TFL No. 44 (88.8% of the total AAC).

21. From 1995 - 1998, MacMillan Bloedel has harvested the following volumes on TFL No. 44:

1995 - 2,152,145 m3 (99.6% of AAC);

1996 - 1,762,825 m3 (81.4% of AAC);

1997 - 1,389,408 m3 (64% of AAC); and

1998 - 1,149,147 m3 (64% of AAC)

22. From 1991 - 1998, MacMillan Bloedel’s Kennedy Lake Division harvested the following volumes:

Total Production km3 1991 1992 1993 1994 1995 1996 1997 1998

Kennedy Lake 233 184.8 154.3 161.2 134 51.9 20.8 0

Kennedy Lake Division and the Issues Relating to Operating in Clayoquot Sound

23. MacMillan Bloedel has signed an agreement with Ma Mook Development Corporation (a company owned by First Nations in the Clayoquot Sound area) pursuant to which they formed a joint venture company, Iisaak Forest Resources Ltd. Iisaak will harvest timber in the Clayoquot Sound area, and is owned 49% by MacMillan Bloedel and 51% by Ma Mook. MacMillan Bloedel currently intends to transfer a portion of its timber harvesting rights under TFL 44 (in the Clayoquot Sound area) to Iisaak for this purpose. Approval in principle has been provided by the Minister of Forests to that transfer.

24. The transfer of timber harvesting rights to Iisaak will involve a partition of TFL 44 on a geographic basis. The Clayoquot Sound area will be segregated into a separate licence which will be transferred to Iisaak. The area of this licence will include, almost all of the operating area of the Kennedy Lake Division, and a significant portion of the old Estevan Division operating area.

25. The balance of the geographic area of TFL 44 will subsist under the present licence, held exclusively by MacMillan Bloedel. The AAC for the subsisting TFL 44 will be approximately 1,760,000 m3.

26. Historically, Kennedy Lake Division operated predominantly within the boundaries of the Clayoquot Sound area.

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30. In 1993, the Province announced the Clayoquot Sound Land Use Decision. This decision resulted in increased protected areas, and increased restrictions on operations in the remaining areas.

31. In 1993, the Province formed the Scientific Panel whose mandate was to deal with forest practices within Clayoquot Sound. The Panel generated five reports in the period January, 1994 to April, 1995.

32. The Panel’s work was accepted and endorsed by the Province, industry and key environmental and aboriginal groups.

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35. Throughout the period 1985 to 1996 various individuals, environmental groups and public interest groups blockaded or otherwise interfered with logging activities in Clayoquot Sound, mounted domestic and international publicity campaigns against logging in Clayoquot Sound, and organized international boycotts against forest products from British Columbia on account of logging in Clayoquot Sound. The activities against logging in Clayoquot Sound also resulted in confrontations with those who supported logging. These activities attracted significant attention locally and internationally.

36. On March 19, 1994 and April 24, 1996, the Province and various First Nations leaders signed two agreements: the Interim Measures Agreement and the Interim Measures Extensions Agreement, respectively. Those two agreements detail the terms and conditions under which various logging First Nations were prepared to have activity take place in Clayoquot Sound. The two agreements are found at Exhibit 2, Tabs 14 and 15.

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38. The foregoing activities have had dramatic effect on that portion of the MacMillan Bloedel’s AAC of the TFL 44 that was within Clayoquot Sound. The following chart describes reductions in the AAC of TFL 44 and how those reductions relate to Clayoquot Sound.

Ministry of Forests Allocation of TFL 44 AACs From 1991 to 2002 (000 m3)

Period Alberni Alberni Ucluelet Clayoquot “Marginal” Total TFL

East West 44

1991 - 1993 1255 700 20 705 2680

1994 1168 571 34 498 50 2321

1995 - 1997 1168 571 34 405 50 2228

1998 - 2000 1760 (including 40 marginal) across 130 1890

39. The significant reduction in the AAC of the Clayoquot Sound area by the Ministry of Forests was largely as a result of the recommendations of the Scientific Panel and the Land Use Decision. These recommendations included reduced harvest levels, greatly limiting logging in underdeveloped areas, setting aside large protected areas, and using different harvesting techniques.

40. As a result of these reductions in cutting rights and other reductions elsewhere on TFL No. 44, MacMillan Bloedel commenced a lawsuit against the Provincial Government seeking compensation (Exhibit 2, Tab 18). This has been settled by the Provincial Government agreeing to pay compensation in the amount of $83,700,000 to MacMillan Bloedel for the loss of cutting rights.

41. The activities and events described in paragraphs 27 to 39 have had a significant effect on the workers within Clayoquot Sound. The chart which follows deals with AAC of TFL 44 attributed to Clayoquot Sound, the actual cut of Kennedy Lake Division and the consequences of these reductions on the Kennedy Lake Workforce.

Year AAC Clayoquot Actual Cut KLD Employees (Hourly) Staff

1991 705 233000 135 22

1992 705 184891 112 10

1993 705 154316 89 13

1994 498 161167 84 21*

1995 405 134034 77 21*

1996 405 51900 77 22*

1997 405 20793 32 6

1998 130 0 0 4

* Includes staff looking after Estevan Division after merger of divisions in 1993.

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43. In the fall of 1997, MacMillan Bloedel gave notice to its Kennedy Lake employees and contractors that the Division would be closed on January 31, 1998. Attached as Exhibit 2, Tab 21 is the form of Notice sent to R.W. Saunders and Sons Ltd.

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Affected Contractors

46. The Contractors directly affected by the closure of Kennedy/Estevan Lake Division, the reduction of cut in the Clayoquot Sound area, and the proposed transfer of the portion of TFL 44 to a new licence are R.W. Saunders and McKay. Mars and Hayes although not operating in the Clayoquot area, were also affected. McKay traditionally conducted its operations in the Cypre operating area of Estevan Division, pursuant to a full phase volume dependent contract (Exhibit 2, Tabs 22 and 23). The whole of the Cypre operating area fell within the Clayoquot region.

47. In January, 1997, MacMillan Bloedel initiated a private mediation process for Mars, McKay, Hayes, MacMillan Bloedel and the union representing MacMillan Bloedel’s employees on TFL 44 in an effort to allocate the work on TFL 44. Saunders neither asked nor was invited to participate in the mediation process.

48. As a result of this mediation, all parties agreed that the three full phase contractors would receive volume dependent replaceable contracts specifying that they be entitled to their traditional percentage of the timber harvested on the licence. Further, as a result of this process, MacMillan Bloedel and the union agreed to allow McKay to move into new operating areas, traditionally harvested by Hayes’ and company crews, in order to obtain its timber entitlement (Exhibit 2, Tab 24).

49. As a result of this process, McKay has been operating in the Franklin Division area and in the Great Central Lake area, (which was formerly in the Estevan Division). Also as a result of the mediation process, Hayes has operated in the new areas within Franklin Division.

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54. In July, 1999, MacMillan Bloedel sought consent from the Minister of Forests to transfer certain Timber Harvesting rights from itself to Iisaak. This application included seeking to subdivide MacMillan Bloedel’s TFL 44 and transferring a portion of that TFL to Iisaak. The areas being subdivided and transferred are described in the map which is attached as Exhibit 2, Tab 27.

55. In light of the difficulties and uncertainties associated with harvesting in Clayoquot Sound, MacMillan Bloedel has requested that harvesting operations of the new Joint Venture not be volume driven. That request is at Exhibit 2, Tab 28. As of the date of MacMillan Bloedel’s proposal to the Ministry for approval for the subdivision and transfer to Iisaak the AAC of the area in question was 130,000 cubic metres. However, in 1999 and 2000 Iisaak anticipates harvesting approximately 4,000 metres annually in order to assess how logging can take place within the guidelines and constraints that will exist. At this point no one knows what increases in harvesting activity will be achievable beyond this level. The Chief Forester will be setting a new AAC for the Iisaak licence.”

5. It is immediately apparent from the Agreed Statement of Facts that, with the exception of a small amount of hauling performed for M.B.’s Franklin River Division in 1986, Saunders has performed hauling services exclusively for M.B.’s company operation at Kennedy Lake. Between 1991, when the Timber Harvesting Contracts and Subcontracts Regulation, (B.C. Reg. 256/91) (the “1991 Regulation”) was first promulgated and 1997, Saunders performed virtually 100% of the log hauling for M.B.’s Kennedy Lake company operation. Between 1991 and 1998, the volume of timber harvested by the Kennedy Lake Division declined from 233,000 m3 in 1991 to nothing in 1998.

6. M.B.’s decision to close its Kennedy Lake operation followed a protracted period of environmental, social and political controversy around logging in Clayoquot Sound. By 1998, the AAC for Clayoquot Sound was significantly reduced, primarily as a result of the recommendations of the Scientific Panel, as described in paragraph 39 of the Agreed Statement of Facts. Saunders characterizes M.B.’s decision to terminate its Kennedy Lake company operation as a unilateral decision. While that is true, in the sense that M.B. made the decision without the consent of Saunders, there is nothing in the Agreed Statement of Facts, or the documentary evidence adduced before me, to call into question the bona fides of M.B.’s decision to shut down the Kennedy Lake operation. In this arbitration, I am solely concerned with the proper characterization of Saunders’ replaceable contract and the consequences which flow under the 1996 Regulation from M.B.’s decision to terminate its company operations at Kennedy Lake.

Analysis

Characterization of Saunders’ Replaceable Contract

7. The first question is whether Saunders’ replaceable contract is properly characterized as a “volume independent contract” or a “dedicated phase contract” within the meaning of the 1996 Regulation.

8. Under the 1996 Regulation a volume independent contract is defined as follows:

“Volume Independent Contract” means, for the purposes of Part 6, a replaceable contract that

(a) pertains to a licence for the coastal area,

(b) is not a dedicated phase contract, and

(c) provides exclusively for work relating to one or more phases, where the amount of work associated with that phase does not depend directly on a volume of timber, and by way of example, may include log hauling, logging road construction, logging access road construction, logging road maintenance and temporary logging road deactivation;

It is common ground that at the time M.B. shut down its company operations in the Kennedy Lake Division, Saunders held a replaceable contract. Saunders’ contract pertains to T.F.L. 44, a licence for the coastal area. It provides exclusively for work relating to log hauling, a phase of timber harvesting where the amount of work does not depend directly on a volume of timber. However, under subsection (b) of the definition, Saunders’ contract would only qualify as a volume independent contract if it is not a dedicated phase contract.

9. Under the 1996 Regulation, a dedicated phase contract is defined as follows:

“Dedicated Phase Contract” means a replaceable contract that

(a) pertains to a licence for the coastal area, and

(b) contains an agreement by the contractor to perform all or part of one or more phases of a timber harvesting operation that are required with respect to

(i) the work carried out under another specified replaceable contract entered into by the licence holder with respect to timber harvesting operations carried out under the licence, or

(ii) the timber harvesting operations carried out by a specified company operation. (emphasis added)

10. Thus, Saunders’ replaceable contract would meet the definition of a dedicated phase contract, if, in addition to pertaining to T.F.L. 44, a licence for the coastal area, it can be said to contain an agreement by Saunders to perform all or part of the log hauling required with respect to the timber harvesting operations carried out by a specified company operation of M.B.

11. In order to address the arguments advanced by the parties on the proper characterization of Saunders’ replaceable contract, it is necessary to consider both the history and the objects of the 1996 Regulation, and its predecessor enactment, the 1991 Regulation, as well as some significant differences between the 1991 and 1996 Regulations.

12. The 1991 Regulation, unlike the 1996 Regulation, did not define different classes of replaceable contracts. Nor did it require that all replaceable contracts specify an amount of work, or provide a mechanism for establishing each contractor’s entitlement to a particular amount of work.

13. Sections 158.1 through 158.9 of the Forest Act, R.S.B.C., 1979 c. 140 and the 1991 Regulation established the entitlement of logging contractors to replacement contracts. Section 158.1 of the Forest Act defined a replaceable contract as follows:

“replaceable contract” means a contract:

(a) that includes a requirement that the holder of the forest licence, timber licence, timber sale licence or tree farm licence, as the case may be, by a prescribed time before expiry of the existing contract, must, if the contractor has satisfactorily performed the existing contract up to the time of the offer, make an offer to the contractor, conditional on the contractor continuing to satisfactorily perform the existing contract, of a replacement contract that

(i) provides for payment to the contractor of the amounts agreed by the parties, or failing agreement, of the amounts settled by the method of dispute resolution provided under the existing contract at the time of the offer, and

(ii) subject to a requirement as to length of term prescribed under s. 158(d)(ii)], is otherwise on substantially the same terms and conditions as the existing contract, and

(b) that conforms to the requirements for replaceable contracts prescribed under section 158.6;.... (emphasis added).

14. Under Section 22(2)(c) of the 1991 Regulation, a replacement contract was “on substantially the same terms and conditions as the existing contract” if, inter alia, the replacement contract provided for “the same amount of work as the one it replaces, or for a greater amount of work”. By virtue of Section 26 and Schedule 9, for every contract that specified or depended on a volume of timber, the licence holder was prohibited from terminating the contract or reducing the volume of timber specified in the contract or, if no such volume was specified, the volume of timber upon which the contract depended, except as provided in the 1991 Regulation.

15. There is no doubt that one object of the 1991 Regulation, and the enabling provisions of the Forest Act was, as Saunders submits, to provide security of tenure for contractors who performed satisfactorily. In Lineham Logging Ltd. v. Fletcher Challenge Canada Limited and International Forest Products Limited (February 28, 1994) at p. 17, the Arbitration Board said this:

“It is clear from the evidence, and particularly from the extracts from Hansard tendered in evidence, that the Forest Amendment Act 1991, including Section 158.1, and the Timber Harvesting Contracts and Subcontracts Regulation were enacted in the summer of 1991 as remedial legislation in order to provide stability and security for independent logging contractors and subcontractors in their contractual relationships with the major licencees. It is, therefore, appropriate that this Board interpret the Regulation and Section 158.1 of the Forest Act liberally, and in a manner consistent, in this case, with the achievement of its objectives.”

Similarly, in R.G. Daines Contracting Co. Ltd. v. Pacific Forest Products Ltd. (Nov. 21, 1994), Arbitrator Johnston at p. 13 of his award, found that the general legislative intent of the 1991 Regulation included the provision of “security of tenure”, similar to that enjoyed by licence holders, to contractors entitled to replaceable contracts.

16. The 1996 Regulation extensively amended its predecessor. The amendments most germaine to this arbitration include Section 17, which requires replaceable contracts to specify an amount of work to be performed in each year of the term of the contract, and Section 18, which sets out the mechanisms for determining the amount of work to be specified in replaceable contracts, with separate amount of work formulae for volume dependent, dedicated phase, and volume independent contracts. Section 1 (1) of the 1996 Regulation contains the definitions of the latter two classes of replaceable contract previously reproduced at pages 12 and 13 of this award.

17. During this arbitration hearing, the parties tendered two documents pertaining to the legislative history of the 1996 Regulation. Saunders filed a report dated January, 1994 entitled Coastal Joint Review Report and Recommendations to the Ministry of Forests, which sets out joint recommendations agreed to by the Council of Forest Industries, IWA - Canada and The Truck Loggers Association for amendments to the 1991 Regulation (Exhibit 3). M.B. filed as Exhibit 4 a document entitled “Coast Interior Joint Review - June 20 - 21, 1995, Meeting Flipchart Notes Re: Amount of Work.”

18. The parties have agreed upon the following facts respecting these documents:

“(a) After the 1991 Regulation came in force, various industry participants made submissions to the Minister of Forests expressing dissatisfaction and/or concern with the Regulation;

(b) In response, the Ministry of Forests sponsored a series of consultations and meetings amongst these participants, including COFI, the IWA and the TLA to seek a common understanding of their various issues/concerns with respect to the 1991 Regulation, and joint recommendations on amendments to the Regulation to address these issues/concerns;

(c) The Minister of Forests then appointed a panel chaired by Daniel Johnston to draft amendments to the 1991 Regulation intended to implement the joint recommendations;

(d) On June 20 and 21, 1996, (sic) Mr. Johnston chaired a joint coastal/interior meeting of those various industry participants to discuss the draft Regulation the panel had prepared and, at that meeting, Mr. Johnston distributed and explained the “Amount of Work Notes” to the participants; and,

(e) The 1996 Regulation was the result of this process.”

19. Exhibits 3 and 4 are admissible as part of the “legislative history” of the 1996 Regulation for the limited purpose of assisting in determining the factual context in which that Regulation was enacted, and to identify the mischief which the 1996 Regulation purports to correct: R.v. Morgentaler (1993) 107 D.L.R. (4th) 537 (S.C.C.) and R.v. Haywood (1994) 120 D.L.R. (4th) 348 (S.C.C.).

20. The Coast Joint Review Report and Recommendations to the Ministry of Forests (Exhibit 3) identified four general objectives which ought to be met by the Timber Harvesting Contracts and Subcontracts Regulation. They were security, competitiveness, fairness and flexibility.

21. Under the heading of “Replaceability and a Mechanism to Deal With Change”, the authors of the Coastal Joint Review say this:

“All parties agreed in principle to providing security to contractors on a sectoral basis. They also agreed that there should not be a rigid application of replaceability such that it results in unfairness, uneconomic units or an inability on the part of licensees to respond to change.

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The parties agreed that the mechanism to provide flexibility should simply set general criteria of principles to be applied. Detailed regulation of every eventuality is not desirable.”

22. One of the recommendations of Joint Committee was that the Regulation ought to be amended to specify contract volumes. The Coast Joint Review further recommended that “contract volumes should be tied to AAC with a mechanism permitting/requiring the licence holder to increase or decrease the volume relative to cut control requirements”, and that “this mechanism should provide all replaceable contracts to be treated in an equivalent manner over time”.

23. Exhibit 4, the Coast/Interior Joint Review June 20 - 21, 1995 Meeting - Flipchart Notes re: Amount of Work also records a recommendation that each contract must specify an amount of work. Exhibit 4 indicates that the participants contemplated three categories of contracts. They were general contracts, defined as any contract that is not a dedicated phase contract or volume independent contract, dedicated phase contracts and volume independent contracts. With respect to dedicated phase contracts, Exhibit 4 includes a suggested definition, and then these entries:

“Amount of Work

Tied directly to whatever amount of the phase (s) is required by the timber harvesting operations that the contract is dedicated to.

Disputes regarding the specified amount of work

Resolve with reference to the contract it is dedicated to.”

I understand from Exhibit 4 that by June, 1995, those charged with drafting what became the 1996 Regulation had in mind amendments which would require each replaceable contract to specify an amount of work, and that the amendments would provide for three classes of replaceable contract with defining characteristics similar to those ultimately incorporated in the 1996 Regulation for volume dependent, volume independent, and dedicated phase contracts.

24. It is clear from Exhibit 3 and Sections 17 and 18 of the 1996 Regulation that one aspect of the “mischief” which the Lieutenant Governor in Council sought to address in 1996 was the absence from the 1991 Regulation of a requirement that all replaceable contracts specify an amount of work. Sections 17(1) and (2) of the 1996 Regulation provide as follows:

“Amount of work must be specified

17. (1) A replaceable contract must specify an amount of work to be performed in each year during the term of the contract.

(2) A replaceable contract must provide that the specified amount of work to be performed in each year of the replaceable contract may not be reduced by a licence holder except as expressly provided for in the regulation or in a clause required, or permitted to be in the contract by this regulation.”

25. Section 18 of the 1996 Regulation identifies three classes of replaceable contract, and provides separate and distinct formulae, in Subsections (2), (4) and (6) for determining the amount of work for each class of replaceable contract. Section 18(1) applies to all replaceable contracts other than dedicated phase contracts or volume independent contracts. It provides that the amount of work for these contracts, (referred to in Schedule 8 of the 1996 Regulation and elsewhere in this award as volume dependent contracts), must be expressed as the amount of work required to process an amount of timber, stated as a specified percentage of the total amount of timber processed by the licence holder under the licence in a given year.

26. For Dedicated Phase Contracts, Sections 18(3) and (4) provide:

“(3) Except as otherwise provided in this Part, the amount of work specified in a dedicated phase contract that pertains to a licence for the coastal area must be expressed as a specified percentage of the total amount of work that is

(a) of the type provided for in the contract, and

(b) required to facilitate the work carried out under the replaceable contract or by the company operation to which the contract is dedicated.

(4) Subject to any adjustment provided for in subsection (7), the specified percentage referred to in subsection (3) must be equal to

(C ÷ D) x 100

where

C is the total amount of work that was performed by the contractor in the later of 1991 and the calendar year that the contractor first became entitled to a replaceable contract, and

D is the total amount of work of the type provided for in the contract that is required to facilitate the work carried out under the replaceable contract, or by the company operation to which the contract is dedicated, in the year used to determine the value of C.”

Sections 18(3) and (4) of the 1996 Regulation thus give effect to the recommendation of its drafters, as set out in the extract from Exhibit 4 reproduced in paragraph 23 of this award, that the amount of work for a dedicated phase contract should be tied directly to the timber harvesting operation to which the contract is dedicated.

27. For volume independent contracts, Section 18(5) provides:

“18 (5) Except as otherwise provided in this Part, the amount of work specified in a volume independent contract that pertains to a licence for the coastal area must be expressed as an amount equal to the specified percentage of E - F

where

E is the total amount of work of the type provided for in the contract, expressed in units appropriate to that type of work, that is required by the licence holder in any year for the purposes of all timber harvesting operations carried out under the licence, and

F is the total amount of work of the type provided for in the contract, expressed in the same units that are used to determine the value of E, that is carried out on behalf of the licence holder in the year used to determine the value of E for the purposes of timber harvesting operations under the licence

(a) pursuant to replaceable contracts described in subsection (1),

(b) pursuant to dedicated phase contracts, and

(c) by employees of a licence holder as part of company operations that operate as an integrated unit performing a substantial proportion of timber harvesting operation but, for greater certainty, not including work that, if performed by a contractor, would be characterized as work performed under a volume independent contract.”

Counsel for Saunders describes Section 18(5) of the 1996 Regulation as creating “a residual pool” of work for a particular phase in which a volume independent contractor is entitled to share proportionately with other volume independent contractors who perform the same phase. The contractor’s share is the proportionate share of that work which it performed at the time when it first became entitled to a replaceable contract. In the case of Saunders, that would be 1991.

28. Saunders submits that in order for a contract to meet the definition of a “dedicated phase contract” in Section 1 (1) of the 1996 Regulation, a replaceable contract must contain an agreement by the contractor to have its amount of work determined by reference to the amount of work to be allocated to a specified company crew. Saunders then submits that, in this case, there was no such agreement between Saunders and M.B. Exhibit 2, Tab 3, the contract of January 1, 1995 - December 31, 1996, which was made prior to the enactment of the 1996 Regulation, does not, according to Saunders, specify an amount of work or restrict Saunders’ supply of work to any particular geographic or administrative division within the licence. Saunders argues that M.B. always reserved to itself the discretion to direct hauling elsewhere, and that accordingly, it cannot be said that the contract entitles or restricts Saunders to haul exclusively for the Kennedy Lake company crew. Furthermore, counsel for the claimant points out that when, following the enactment of the 1996 Regulation, M.B. proposed that Saunders enter into a dedicated phase contract for 100% of the hauling for the Kennedy Lake company operation, it declined to do so.

29. Counsel for M.B. responds that the 1996 Regulation establishes three distinct categories of replaceable contract, each with its own formula for determining an amount of work expressed as a “specified percentage”, and determined by a formula unique to that class of contract. According to M.B., this results in the contractor having the right to perform the same proportion of the same type of work it has historically performed on behalf of a licence holder, and produces a balance between the contractor’s interest in security and the licence holder’s’s need for flexibility to determine the actual amount of timber it will harvest in any given year. Counsel for M.B. then submits that nothing in the 1996 Regulation requires or permits either a licence holder or a contractor to choose or agree to a particular amount of work determination mechanism. Section 18 of the 1996 Regulation is a complete scheme, where each of the three amount of work formulae is tied to a particular class of replaceable contract. M.B. relies upon its offer to Saunders, following the enactment of the 1996 Regulation, of a replaceable contract in the form of a dedicated phase contract, as evidence of its contemporaneous understanding that the hauling contract was indeed a dedicated phase contract.

30. Saunders first became entitled to a replaceable contract in 1991. Subsequent to the enactment of the 1991 Regulation, the parties entered into two written contracts. The first of these was the log hauling contract of September 1, 1992 made between Saunders and M.B.’s Kennedy Lake Division (Exhibit 2, Tab 2). This contract stipulates that the contractor “shall haul logs from the area described in Schedule “A” and Appendix I and II attached to places specified in Schedule “A” during the term of the contract.” Schedule “A” describes the area to be “as designated by the Company”, and provides for delivery of logs to the Kennedy Lake dryland sort or “as designated by the Company”. Appendix I stipulates rates of payment for two areas: Kennedy Lake (“off highway”) and Rankin (“off highway”), both of which are located within the area of operations of M.B.’s Kennedy Lake Division. From 1991 to 1995, Saunders log hauling activities in T.F.L. 44 were confined exclusively to the Kennedy Lake Division, as they were for every year since 1965, with the exception of a very limited amount of timber hauled from the Franklin River Division in 1986. Saunders hauled virtually 100% of the logs harvested by M.B.’s Kennedy Lake company crew while the log hauling contract of September 1, 1992 remained in force.

31. The second contract made in writing between Saunders and M.B. covered the period January 1, 1995 to December 31, 1996. It is reproduced at Exhibit 2, Tab 3. The face page of this log hauling contract identifies the parties as Saunders and M.B.’s Kennedy Lake/Estevan Divisions. It also describes the area to which the contract applies as “Kennedy Operating Area”. As paragraphs 14 to 16 of the Agreed Statement of Facts make clear, while this contract refers to M.B.’s Kennedy Lake/Estevan Divisions, this was an administrative designation only. In fact, harvesting operations within the former Kennedy Lake and Estevan Divisions remained operationally distinct. The 1995 contract also provided that the contractor, “shall haul logs from the area described in Schedule “A” and Appendix I and II attached to places specified in Schedule A”. Again, Schedule “A” to the 1995 contract refers to the area, “as designated by the Company”. Appendix I contains a detailed schedule setting out rates for hauling from various locations within the former Kennedy Lake Division. The evidence before me indicates that Saunders’ log hauling services under this contract were again confined exclusively to the Kennedy Lake operating area. To put it another way, the only area where M.B. designated that Saunders perform log hauling services under this contract was the Kennedy Lake operating area.

32. According to paragraph 22 of the Agreed Statement of Facts, the amount of timber harvested by M.B. from the Kennedy Lake operating area declined from 223,000 m3 in 1991 to 20,800 m3 in 1997. Over the same period of time, the volume hauled by Saunders decreased from 228,519 m3 in 1991 to 16,000 m3 in 1997. Again, as is set out in the Agreed Statement of Facts, Saunders did not assert at any time between 1991 and 1996 that it was entitled to additional volumes elsewhere within TFL 44 in order to make up for the declining volumes it was hauling from the Kennedy Lake operating area.

33. Between 1991 and 1996, Saunders hauled virtually all of the timber harvested by MacMillan Bloedel’s Kennedy Lake company crew (the percentages vary between 95.1% and 99.9%).

34. While Saunders’ proportionate share of the volume of timber hauled from the Kennedy Lake operating area remained constant over the years 1991 through 1996, its proportion of the total amount of timber harvested from TFL 44 varied substantially from year to year.

35. The amount of timber that Saunders hauled during the years 1991 through 1996, calculated as a proportion of M.B.’s entire harvest in T.F.L. 44 during each of those years varied from a high of 10.3% in 1991 to a low of 3% in 1996.

36. Counsel for M.B. argues that these variations are consistent with Saunders holding log hauling contracts dedicated to MacMillan Bloedel’s Kennedy Lake company operation, and are inconsistent with any proposition that Saunders holds a contract entitling it to a proportionate share of hauling work within TFL 44 as a whole. I agree with that submission.

Dedicated Phase Contract

37. I am persuaded that Saunders’ replaceable contract is properly characterized as a dedicated phase contract. In reaching this conclusion, I rely not only upon the language of Saunders’ last contract in writing with M.B., the contract of January 1, 1995 reproduced at Exhibit 2, Tab 3, which I have discussed above, but more importantly, upon the fact that the consistent practice of the parties indicates that Saunders’ hauling services were exclusively dedicated since 1986, to M.B.’s Kennedy Lake company operation. As we have seen, particularly during the years 1991 through 1996, Saunders’ share of the total amount of hauling work within T.F.L. 44 fluctuated significantly. However, throughout that time, it performed virtually all of the hauling work for M.B.’s Kennedy Lake company operation, and no other hauling work. I also take into account the fact that Saunders did not, at any time, before M.B. gave notice of its intention to shut down the Kennedy Lake company operation, assert an entitlement to a proportionate share of hauling elsewhere within T.F.L. 44, notwithstanding a steady and drastic decline in the amount of work available to Saunders at Kennedy Lake between 1991 and 1996. In short, the history of the services performed by Saunders for M.B., and the conduct of the parties, both before and immediately after the entry into force of the 1996 Regulation, at least up to the time M.B. gave notice of its intention to cease operations at Kennedy Lake, provides compelling evidence of an agreement by Saunders to perform all of the log hauling required with respect to the timber harvesting operations carried out by M.B.’s Kennedy Lake company operation.

Whether Saunders is Entitled to Hauling Work Elsewhere in T.F.L. 44

38. I turn now to the second issue. If, as I have found, Saunders holds a dedicated phase contract, is it, following the closure of the company operation to which its hauling contract was dedicated, now entitled to a proportionate share of hauling work elsewhere in T.F.L. 44?

39. Section 18(3) of the 1996 Regulation, which I cite here again for convenience, addresses the amount of work to which a dedicated phase contractor is entitled:

18 (3) Except as otherwise provided in this Part, the amount of work specified in a dedicated phase contract that pertains to a licence for the coastal area must be expressed as a specified percentage of the total amount of work that is:

(a) of the type provided for in the contract, and

(b) required to facilitate the work carried out under the replaceable contract or by the company operation to which the contract is dedicated.

The amount of work entitlement of the dedicated phase contractor is thus calculated as a specified percentage of the total amount of work performed in connection with a particular replaceable contract or company operation, rather than the licence as a whole.

40. By way of contrast, for a volume dependent contract, such as a contract for a full phase stump to dump logging operation, the amount of work entitlement, under Section 18 (1) of the Regulation is expressed as a percentage of the work performed in relation to the entire licence. Similarly, under Section 18 (5) of the 1996 Regulation, the amount of work entitlement of the holder of a volume independent contract is determined as a specified percentage of the residue of the total amount of work of a particular type carried out on behalf of the licence holder throughout the licence.

41. I am unable to find any provision in 1996 Regulation which requires a licence holder to offer a dedicated phase contractor, upon the cessation of the company operation to which that contract is dedicated, a replacement contract in another area of the licence. Nor am I persuaded that I should imply or infer such a requirement, particularly when the regulation expressly provides for three distinct classes of replaceable contract, each with its own amount of work formula. In Troubridge Towing Co. v. Fletcher Challenge Canada Ltd. (March 29, 1996), Vancouver Registry No.C941993 (B.C.S.C.), a case decided under the 1991 Regulation, Vickers J., at para. 28 characterized the provisions for a replacement contract as “a significant incursion into existing contractual rights”, which had retroactive application. His Lordship went on to hold that in such circumstances, those provisions should be strictly construed. I bear that admonition in mind in construing the replacement contract provisions of the 1996 Regulation, which also limit the contractual rights of the parties, and also apply retroactively.

42. Saunders argues that there is no provision in its contract with M.B. which would either authorize the termination of that contract, or alternatively, relieve M.B. from its obligation to provide a replacement contract. The contractor submits that even if there were such a provision, it would not be enforceable due to Section 160 of the Forest Act, which provides that where the parties have not so amended a replaceable contract, it is deemed to be amended to include the statutory provisions required by the 1996 Regulation. Counsel then argues that any authority to terminate Saunders’ replaceable contract must be found within the standard terms imposed under the 1996 Regulation. Saunders contends that Section 13 and 17 of the 1996 Regulation provide the contractor with security of tenure by providing that for so long as the licence holder retains the licence, it is obliged to replace all replaceable contracts on substantially the same terms and conditions, and on a continuous basis. Further, counsel for the claimant submits the licence holder may only reduce the amount of work to be performed under Saunders’ replaceable contract in the manner expressly provided in the 1996 Regulation.

43. Saunders also asserts that there is no justiciable distinction between its circumstances and those of McKay, a contractor which formerly operated in the Cypre area of Clayoquot Sound, and which now holds a replaceable contract elsewhere in T.F.L. 44. However, McKay is a stump to dump contractor, whose amount of work entitlement falls within Regulation 18 (1). It is thereby entitled to an amount of work determined as a specified percentage of the total amount of timber processed by M.B. under T.F.L. 44 in any given year. In short, McKay holds a volume dependent replaceable contract rather than a dedicated phase contract.

44. The contractor further argues that the fundamental reform implemented by both the 1991 and the 1996 Regulation was the imposition of a continuing obligation on the licence holder to provide a replaceable contract to each of its logging contractors upon substantially the same terms and conditions as the contract which it replaced. In essence, Saunders maintains that all holders of replaceable contracts, regardless of the particular type of replaceable contract they hold, have a continuing right to work somewhere in the licence area unless and until the licence holder terminates the contract for failure to perform satisfactorily as contemplated by s.13(1), or the licence is cancelled, suspended or expires under s. 15, or there is an AAC reduction in conformance with ss.27 and 28 of the 1996 Regulation.

45. Saunders’ submissions, which were forcefully advanced on this branch of the case, fail, in my view, to take into account the language of Section 18(3) and 18(4) of the 1996 Regulation, which, as I have emphasized before, expressly tie the amount of work entitlement of a dedicated phase contractor to a specified company operation, rather than to the licence as a whole. This is the critical feature which serves to distinguish a dedicated phase contract from a volume independent contract, and also to limit the obligation of the licence holder to offer a replaceable contract. The 1996 Regulation provides “security of tenure” to the dedicated phase contractor for so long as the company operation to which that contract is dedicated continues to operate. While that company operation continues, the dedicated phase contractor is entitled to a replacement contract under Section 13(1) of the Regulation which must, inter alia, be “on substantially the same terms and conditions as the contract it replaces.”

46. Under Section 1(7), the replacement contract is on substantially the same terms and conditions as the contract it replaces if, inter alia, it pertains to the same area as the one it replaces, or to a similar area, and it provides for a specified amount of work that is the same as or greater than the amount of work specified in the contract it replaces. Because the amount of work specified under a dedicated phase contract is stated as a specified percentage of the amount of work required to support a particular timber harvesting operation, I conclude that the drafters of the 1996 Regulation must have intended that the licence holder would meet its obligation under Section 13 to offer a replacement contract on substantially the same terms and conditions as the contract it replaced by offering a contract for the same or a greater amount of work dedicated to the same specified company operation.

47. Where, as here, the dedicated phase contractor performed 100% of a particular phase of the timber harvesting operation, it would continue to have that 100% share for so long as the company operation continued, even if the licence holder reduced or ceased operations elsewhere within the licence area.

48. To summarize, in the case of a dedicated phase contractor, the obligation of a licence holder to provide a replacement contract on substantially the same terms and conditions as the contract it replaces is an obligation to provide a replacement contract dedicated to the same company operation, rather than an obligation to provide an entirely new contract elsewhere in the licence area. While it is true that Section 14 of the 1996 Regulation provides the licence holder with a discretion to require a contractor to move to a new operating area, there is nothing in the 1996 Regulation which would compel the licence holder to offer a dedicated phase contractor a replacement contract in an entirely different operating area.

49. Saunders is correct in asserting that this is not a case where a licence holder has purported to terminate the contract for unsatisfactory performance, nor is it a case where the contract was terminated, pursuant to Section 15 of the 1996 Regulation as a result of the cancellation, expiry or surrender of a licence. However, it is equally not a case where the AAC reduction provisions of Sections 27 and 28 of the 1996 Regulation were engaged or are applicable. The parties found themselves in the position which gave rise to this dispute not as the result of a reduction in the AAC of the licence as a whole, but rather as a result of the closure of the M.B. company operation in the Kennedy Lake operating area of T.F.L. 44. In fact, as is apparent from paragraphs 38 and 41 of the Agreed Statement of Facts, during 1995, 1996 and 1997, there was no reduction in the AAC for the T.F.L. as a whole, or in the AAC for Clayoquot Sound although the amount of timber actually harvested declined drastically. On October 31, 1997, M.B. gave notice to its employees and contractors, including Saunders, that the Kennedy Lake operation would close on January 31, 1998 (Exhibit 2, Tab 21). By virtue of the particular type of replaceable contract held by Saunders at that time, which tied its amount of work entitlement directly to M.B.’s Kennedy Lake company operation, upon the cessation of that operation, Saunders had no entitlement to an amount of work elsewhere.

Award

50. For these reasons, I find that Saunders has a dedicated phase contract, rather than a volume independent contract. As a result of the closure of M.B.’s Kennedy Lake operation, there is no longer any amount of work available from the timber harvesting operation to which Saunders’ contract was dedicated. I also find that upon the closure of the Kennedy Lake company operation, Saunders had no entitlement to an amount of work elsewhere in T.F.L. 44, and in particular, no entitlement to an amount of work determined by reference to the proportion of timber harvesting operations performed by the Kennedy Lake crew at the time that Saunders first became entitled to a replaceable contract. It is so awarded.

DATED at Victoria December 1, 1999 ______________________________

PAUL J. PEARLMAN, Q.C.

Arbitrator

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