In my law practice I frequently deal with real estate appraisals.

If an appraiser wants to estimate the fair market value of property X, he or she will likely take a direct comparison approach. The appraiser will select three recent sales of similar properties as a starting point. Because no two properties are alike, adjustments are made to the three comparable sales, to bring them in line with property X. The intent is to make an apples-to-apples comparison. So, if one comparable has a larger house, then the price will be adjusted. So too if the comparable house is newer, or if it has a shop, or if the lot size is different, etc.

When selecting comparables, properties in the same neighbourhood are more useful than properties across town. Sales last month are more useful than sales six months ago. Forced sales, for example, sales in a foreclosure, are not helpful—they fail to meet the willing buyer-willing seller requirement of a fair market.

Once the three comparables are adjusted, they are averaged, and an estimate is then made of the value of property X.

Even then, this is only an estimate of value. Often the estimate is a good one, and property X might indeed sell for a price very close to that estimate. Sometimes, though, property X is offered for sale and sells for a price quite different from the appraisal—sometimes higher, sometimes lower.

These same concepts can be applied to the negotiation of logging rates and trucking rates.

Where no Bill 13 replaceable contract applies, one sees a true free market. Licensees are free to hire whichever contractors they want. Contractors are free to work for whichever licensee they wish, or maybe log a BC timber sale, or maybe work in the mining or heavy construction sectors. In a free market there are existing parties leaving the market from time to time, and new parties entering the market. It is through the magic of supply and demand that rates are settled: willing buyers (licensees) settle rates with willing sellers (contractors).

A Bill 13 replaceable contract does not involve a willing buyer and a willing seller. The licensee is forced by law to engage one particular contractor, and that contractor is forced to provide logging services for that licensee. Because the free market does not apply in settling rates, the law has an established mechanism for settling those rates. Essentially the question is: had the rate been negotiated in the open market between a willing buyer and a willing seller, what rate would they have agreed upon? If the two parties cannot come to an agreement as to what the fair market rate is, then the Regulation provides a mechanism of mediation and arbitration to establish that figure.

The bottom line, then, is that it is the market that establishes the rates. What your fellow contractor is prepared to work for, either on the very block that you are negotiating the rate for, or an adjoining block, or for a different licensee is the same general area, or in the next community over, is what establishes the rates.

The issue is not whether a contractor is covering his costs and making a reasonable profit. Of course, over the long term, obtaining a reasonable profit is going to drive the market rate. If contracting is an unprofitable venture over the long term, then contractors will not invest in new equipment, and some contractors will leave the market, and others will not replace them. On the other hand, if contracting proves to be exceptionally profitable, there will be more equipment purchased, and more entrants.

But, as I say, it is all about rates. More particularly, it is all about taking other known rates, making necessary adjustments, and making an apples-to-apples comparison, just the same way that the appraisers do. Recent rates are more useful than old rates; closer blocks are more useful than distant blocks.

Unfortunately, the chronic problem for contractors is that it is often impossible to obtain reliable information about other rates. Licensees want to keep those rates confidential from their competing licensees. Licensees often want to keep their rates with one contractor confidential from the other contractors, and often there are gag orders in their contracts. When contractors do talk amongst themselves, often they don’t accurately divulge their rates.

This problem of a lack of information can be overcome within a Bill 13 rate dispute, where the arbitrator can compel both sides to disclose relevant information they have concerning other rates. But, without that, it simply takes old fashioned sleuthing to figure out what rates are being paid. Certainly a contractor that works for more than one licensee is going to be better informed on the matter.

As the saying goes, “the devil is in the details”. When I was involved negotiating some log hauling rates, that became quite evident. One would think that a comparison of tonne-hour rates, between three licensees, would be a rather easy exercise. It wasn’t. Fuel adjustment clauses were applied differently. There were different axle configurations. There were different top-up provisions for light loads. Highway trips were different from off-highway. The licensees provided different benefits to the contractor’s employees. What might have been given in the tonne-hour rate got taken back in the cycle time, with some licensees providing a less generous allowance for offloading and for chaining up, which impacted the overall rate.

Doing a comparison of logging blocks is even more complex. There are differences in piece size, slope, log specifications, number of sorts, waste, etc.

In my view, information is the key ingredient to successful rate negotiation. I encourage the same approach that the real estate appraisers take. Take rates settled on comparable blocks; make appropriate adjustments for an apples-to-apples comparison; average those rates out. Even then, this is just an estimate of a fair market rate. Parties are still entitled to bargain from there. And, in the case of a Bill 13 replaceable contract, one party can invoke the arbitration provisions.

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