FAIR MARKET RATE

Loggers performing services under a Bill 13 replaceable contract (also known as an evergreen contract) are entitled to be paid a "fair market rate". What is a fair market rate?

A fair market rate is one that a willing consumer of these services (i.e. a licensee) would pay to a willing supplier of the services (i.e. a contractor) in a free and open market. The theory behind the legislation is that the parties to a replaceable contract are not willing participants - the licensee is forced to engage a particular contractor, and the contractor is forced to work for a particular licensee. That being the case, one is to examine the logging rates paid in the unregulated side of the industry, where a licensee can hire whomever it wishes, and a contractor can work for whomever it chooses (or even leave the industry and work in another industry such a mining), as establishing the rates that the forced parties are obligated to pay and be paid.

What should a contractor do if presented with a rate that it considers unfair?

The first and obvious response to that is to try to negotiate a better rate. The fact is that virtually all rates are settled by negotiation. And, despite what I regularly say about rates being dictated by the rate one's fellow contractors are prepared to work for, I appreciate that in the business rates are often settled upon using productivity and costing models that are intended to arrive at a fair rate.

My advice to a contractor in negotiations? If your practice is to negotiate based on these formulas, then be informed - look for errors in your adversary's figures and methods. Often these are based on estimations of future productivity which are overly optimistic. Or they are based on past costing that is now outdated. Know your adversary's figures better than he does, and be prepared to present a case for why those ought to be altered in the unique circumstances of your block. Remember, a couple of percent here multiplied by a couple of percent there can tum a bottom line number from an unprofitable to a profitable one.

As well, a contractor wants to be negotiating from a position of knowledge and strength. Information is an important commodity, although not easy to come by. It is helpful to know what other contractors are prepared to work for on a block like the one in dispute. When a licensee says, "we're paying the market rate", is the contractor in a position to refute that statement?

On the flip side, it is a pet peeve of mine that many contractors are prepared to share too much confidential financial information with their licensees. They may think that this works to their advantage, but in my view they are likely to be taken advantage of.

When I say negotiate from a position of strength, there are always express or implied threats from the parties. In the case of the contractor, the threat is that he'll walk away from the job rather than work at the rate offered. Or, it's that he'll take the licensee to arbitration for a fair rate. In the case of the licensee, the threat is that he'll bring in a different contractor to do the work. Or, not harvest the block at all. Or, that he'll take the contractor to arbitration.

I am going to assume that the contractor is unable to negotiate a satisfactory rate at the early stages.

The next important step is to make this two-step assessment: is the rate being negotiated for replaceable or non-replaceable work? And, if it is replaceable, to what extent is the licensee obligated to have the contractor work on the disputed block, in order to comply with the amount of work required in the contract? If the volume is non-replaceable, then the contractor can simply refuse to work for the rate offered. (This is an overly general statement, and I encourage contractors to review the exact terms of their contracts before making this imprtant decision.)

If the contractor is working under a replaceable contract, then he needs to assess whether the licensee's response to a demand for an increased rate is likely to be, "go park your equipment; we will find another block for you later; and, we will ensure that you will have received your required annual volume by the end of the year."

If the contractor is working under his replaceable contract, and if the licensee wants or needs that contractor to perform services, then the "rate dispute" provisions of the regulation can be triggered. The process is started by the exchange of "rate proposals". This term is defined in the Timber Harvesting Contract and Subcontract Regulation, which is easily found on the internet. Contractors should familiarize themselves with the requirements of a rate proposal, and the way in which these are to be exchanged, including the deadlines involved.

If the exchange of rate proposals does not result in agreement, then the parties move into the rate dispute provisions of the regulation. Soon they go to mediation, which is settlement negotiation with a trained mediator. I am not able, in the confines of this article, to spell that out in detail. I can say, though, that 70% to 80% of all cases settle at mediation. Relatively speaking the process is quick and inexpensive. In theory, the parties are to be in a mediation within two months of the process being invoked. If settlement cannot be achieved at mediation, the process nevertheless results in an airing of differences and helps to illicit important information from the opponent.

Failing settlement at mediation, the parties are onto arbitration (which is a court-like process). That's supposed to happen within one and a half months following mediation. There are to be two days of arbitration, and no more, during which the parties present their evidence and arguments.

For rate disputes, a baseball-style arbitration that has been the law since 2004. The arbitrator is to be presented with the licensee's final rate, and the contractor's final rate, and may only select between the two. The question to be answered is, "which rate is closest to the fair market rate?"

This system has been quite effective in keeping rate disputes away from arbitrators. The new process is much simpler, faster, and less expensive than the old process was. In part, that is because there is an inherent tendency in the process to force the parties into taking reasonable positions on rates.

Familiarity with these rules is one of several useful tools for contractors wanting to negotiate successfully.

John Drayton is a Kamloops lawyer practicing in the areas of motor transport and forestry law.