Vol. 148, No. 17 — August 13, 2014

Registration

SOR/2014-191 August 1, 2014

CANADA GRAIN ACT

Regulations Amending the Canada Grain Regulations

P.C. 2014-894 July 31, 2014

The Canadian Grain Commission, pursuant to subsection 116(1) (see footnote a) of the Canada Grain Act (see footnote b) and subject to the approval of the Governor in Council, makes the annexed Regulations Amending the Canada Grain Regulations.

Winnipeg, July 21, 2014

ELWIN HERMANSON
Chief Commissioner

MURDOCH MACKAY
Commissioner

His Excellency the Governor General in Council, on the recommendation of the Minister of Agriculture and Agri-Food and pursuant to subsection 116(1) (see footnote c) of the Canadian Grain Act (see footnote d), approves the making of the annexed Regulations Amending the Canada Grain Regulations by the Canadian Grain Commission.

REGULATIONS AMENDING THE CANADA GRAIN REGULATIONS

AMENDMENT

1. The Canada Grain Regulations (see footnote 1) are amended by adding the following after section 29.1:

PART 4.1

GRAIN DELIVERY CONTRACTS

29.2 In this Part, “delivery period” means, in relation to a contract for the purchase of grain, the period specified in the contract during which grain is to be delivered by the producer to the licensee. (période de livraison)

29.3 (1) Any contract between a producer and a licensee for the purchase of grain within a delivery period must include a provision stating that, in the event that delivery of the kind and grade of grain indicated in the contract is not accepted by the licensee during the delivery period, a penalty is to be paid by the licensee to the producer.

(2) The contract must also include provisions stating that the penalty

COMING INTO FORCE

2. These Regulations come into force on August 1, 2014, but if they are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The issue of accountability in grain sales contracts, particularly between grain companies and producers, has long been a source of concern for western Canadian producers. Given last year’s large crop, limited available country elevator capacity, rail service issues, and resulting logistical challenges, grain companies have frequently been unable to accept producer deliveries and as a result, failed to accept producers’ grain within contracted periods.

Grain sales are often covered by private contracts between producers and grain companies, although penalties for noncompliance are typically not balanced. Many contracts for the purchase of grain stipulate penalties for producer non-delivery, within a stipulated time period, but do not contain similar penalties or requirements for compensation for non-acceptance of delivery by grain companies. Producers have limited recourse options in the event of a dishonoured contract due to the relative market influence of the contracting parties. There are currently no Canada Grain Regulations (CGR) provisions that prescribe penalties for breached contracts between grain companies and producers.

Background

The Government introduced amendments to the Canada Grain Act (CGA) through the Fair Rail for Grain Farmers Act (the Act), a targeted emergency package of legislative changes. The changes to the CGA permit the regulation of contracts relating to grain and the arbitration of disputes respecting provisions in those contracts. Amendments to the CGA came into force on May 29, 2014.

Objectives

Amendments to the CGR to require inclusion of penalty clauses in contracts for the purchase of grain which include a specified delivery period, between producers and grain companies, are subsequent to amendments to the CGA contained within the Fair Rail for Grain Farmers Act. They are important to both assist in the recovery from the grain transportation crisis during this crop year, and to complement the broader emergency legislative package. The changes to contractual obligations between producers and grain companies will contribute to an efficient, effective and reliable supply chain by addressing failures to accept grain in compliance with specified delivery periods, which impact Western Canadian producers.

The objectives of this package are to protect the interests of producers, and contribute to a more balanced relationship between producers and grain companies.

Description

The following is a description of the regulatory changes.

The Act amends subsection 116(1) of the CGA by adding an authority to make regulations setting out contractual obligations to be included in commercial contracts relating to grain, including provisions regarding compensation or penalties for breaches of contract provisions. In addition, the CGA is amended by adding several clauses to establish that the Canadian Grain Commission (CGC) may act as an arbitrator, or appoint a third party arbitrator, upon the request of one of the parties who alleges non-compliance with one or more contractual provisions set out by regulations made under the associated amendment to section 116(1).

The regulatory changes reflect the amendments to the CGA, and will enhance producer protection in grain contracts between producers and licensed primary and process grain elevators, and grain dealers. The new Regulations prescribe contractual obligations to be included in commercial grain contracts in order to ensure that grain companies take steps to either adhere to the timing of calling in contracted grain, or pay farmers a penalty if they do not meet contracted delivery timeframes.

Specifically, a new section will be added to the CGR to establish that all contracts for the purchase of grain by a licensee from a producer, if the contracts include a specified period during which grain is to be delivered by the producer, must include a provision stating that a penalty will be paid by the licensee to the producer, should delivery of the kind and grade of grain covered by the contract not be accepted by the licensee within the delivery period stated in the contract.

To provide for consistency with respect to payment of penalties relating to delivery periods, the Regulations will establish that these contract provisions include that

The precise nature of the penalty provision to be included in contracts will not be completely defined in the Regulations. Since some grain companies already have penalty provisions in place, and others are beginning to develop penalty provisions in advance of the Regulations, each company may have a unique strategy regarding how to implement this requirement. Prescribing the exact penalty amount would unnecessarily impact the negotiating process and deprive producers of the ability to consider various kinds of penalty provision forms as part of their marketing choice.

The CGC does not intend for the Regulations to apply to contracts signed before the date that the Regulations comes into force.

Consultation

Introduction of Bill C-30, the Fair Rail for Grain Farmers Act, generated extensive stakeholder discussions throughout the agricultural community and received wide coverage in the media. Stakeholders, including producer groups, industry associations, grain handlers, and provincial governments had the opportunity to express their views on the proposed legislation during hearings of the Standing Committee on Agriculture and Agri-Food (SCAAF). Regulatory amendments were signalled to stakeholders during the SCAAF process.

Although regulatory amendments are complementary to the changes to the CGA contained in the Fair Rail for Grain Farmers Act, the CGC conducted additional stakeholder consultations to gather feedback on regulatory direction.

May and June 2014 — Targeted engagement

Throughout May and early June 2014, the CGC engaged with directly affected stakeholders by holding targeted meetings and conference calls with grain handlers, industry associations and producer groups to explain the legislative amendments and a subsequent regulatory proposal.

The proposal received some opposition from licensed grain companies. These companies expressed concern about Government intervention in commercial grain delivery contract negotiations and indicated that regulatory penalty provisions are unnecessary, as some companies already include, or are beginning to include, such provisions voluntarily. In response, the CGC clarified that regulated penalty clauses in contracts would be appropriate for the circumstances and would facilitate a more equitable and transparent contracting environment for all parties. Grain companies expressed indifference to this rationale, but did recognize that the grain market is competitive and in order to grow market share, strong relationships with producers are important.

Some producer groups and industry associations expressed support for the proposal, as regulatory amendments are meant to enhance producer protection, address delivery period defaults by grain companies, and facilitate more disciplined and equitable contracting agreements between producers and grain companies. However, many producer associations were opposed to highly prescriptive regulation stating that contract requirements and negotiations are a commercial process between themselves and grain companies.

July 2014, Stakeholder Engagement - Potential Grain Delivery Contract Regulations

In addition to the targeted consultations, on July 4, 2014, the CGC released the Stakeholder Engagement - Potential Grain Delivery Contract Regulations document, which outlined potential regulations for grain delivery contracts between producers and grain companies. The CGC posted the document on its external Web site. At the same time, an email was sent to industry and producer stakeholders, including CGC licensees, producer associations, industry organizations, and relevant Government organizations informing them of the consultation process and directing them to the Web site. Stakeholders had until July 12, 2014, to provide written submissions.

The CGC received 19 written submissions from producer, industry, and Government organizations, and CGC licensees. These results were taken into consideration in the preparation of these Regulations. The following paragraphs summarize the major issues raised by interested parties on the potential regulatory amendments and the CGC’s analysis leading up to the development of the final Regulations.

Response: Currently, most contracts for the purchase of grain contain penalties for producer default of contract obligations, but do not contain reciprocal penalty provisions for grain company contract defaults. Including mandatory regulated penalty clauses will increase fairness and accountability in the contracting process and protect the producers’ interests.

Response: A specific regulatory provision speaking to inadequate rail service is not necessary in the Regulations. Including this type of clause would negate the benefit and intention of a regulated penalty provision in grain contracts, would not change accountability within the supply chain, and could permit non-compliance by licensees and railways. Currently, producers are subject to damages when they cannot deliver due to factors outside their control.

Response: A specific regulatory provision speaking to inadequate rail service is not necessary in the Regulations. Including this type of clause would negate the benefit and intention of a regulated penalty provision in grain contracts. Alternative processes exist for licensees experiencing railway service issues. Additional regulatory amendments flowing from the Fair Rail for Grain Farmers Act (interswitching rates, definitions of operational terms for arbitrated service agreements, and additional data requirements for railways) are under the purview of Transport Canada and the Canadian Transportation Agency.

Response: The Regulations are not prescriptive in terms of penalty amounts, method or type of payment, or delivery period. Including specific provisions would leave inadequate flexibility for both producers and licensees to negotiate various kinds of penalty clauses, contract terms, and marketing decisions. Allowing a more transparent, flexible and balanced contracting approach should increase stakeholder understanding of the responsibilities, obligations, and penalties associated with defaulting on commercial contractual obligations.

Given the consultation processes, and as this regulatory package is subsequent to the Fair Rail for Grain Farmers Act, stakeholder opposition and potential controversy on the Regulations is expected to be minimal.

“One-for-One” Rule

The “One-for-One” Rule refers to the Government initiative to reduce regulatory red tape and control administrative burden to Canadian businesses. This rule does not apply to this package, as there is no change in administrative costs to business.

Small business lens

The small business lens does not apply to this package, as it imposes costs of less than $100,000 on business.

Rationale

The regulatory changes are reflective of the amendments to the CGA, and will enhance producer protection. The more balanced and comprehensive contracting approach will increase stakeholder understanding of the responsibilities, obligations, and penalties associated with defaulting on commercial contractual obligations.

Mandatory penalties for contractual breaches will directly address the issue of grain companies not calling in grain from producers within stipulated contract timeframes. However, by permitting parties to determine some aspects of the penalties, the flexibility to adjust to changing market conditions is retained. As grain companies are expected to offer variations on the penalty provision in their contracts, producers will have an added dimension of differentiation when determining where to sell their grain.

The amendments are not expected to affect the commercial contracting process or the relative use of delivery contracts to other grain marketing tools. As part of industry practice, most grain delivery contracts specify a delivery timeframe. These timeframes are based on a grain company’s sales commitments and are a commercial decision between a grain company and a producer. Although grain companies can determine the length of a delivery timeframe in contracts, producers can negotiate contract terms. It is in the interests of a grain company to negotiate an acceptable timeframe with a producer in order to secure the required grain to fill company sales commitments and maintain a good working relationship with producers.

Benefits

The Regulations will benefit the entire grain sector and the Canadian economy as a whole by creating incentives to encourage efficient, reliable and timely movement of grain through improved relationships and more balanced accountability between producers and grain handlers. This will facilitate fair and equitable completion of transactions, reduce overall system costs, and help Canadian grain compete more effectively in the world market.

The amendments are of particular benefit in crop years with relatively large grain supply and logistical, transportation and export challenges. Grain companies often sign contracts to secure grain volumes beyond actual storage capacity in a particular month given uncertain transportation opportunities and challenges. The amendments will encourage grain companies to be more cognizant of transportation capacity when negotiating producer delivery contracts.

Including mandatory penalty provisions in grain delivery contracts will also add an element of discipline to the negotiation between grain companies and producers, and the subsequent actions of these parties that does not exist now. If grain is not accepted in the contracted delivery period, producers can receive at least some remuneration for the cost of storing the grain longer than planned. Also, as producers are the starting point of the grain supply chain, handling and transportation system costs are often passed back, and realized in the final price producers receive for their grain. The requirement for penalty provisions for non-compliance with contracted delivery timeframes will also increase the protection of producers against broader grain market dynamics.

Costs

The regulatory changes will result in a one-time increase in compliance burden to directly affected stakeholders — licensed primary and process elevators, and grain dealers — to amend any existing standard contract templates to include the required penalty provisions. As of March 2014, the affected group represents 133 licensees. Given that most of the affected stakeholders have existing procedures and standard contracts in place with producers for grain deliveries, it is anticipated that the compliance costs to re-work their contract systems and forms will be limited to a minimal, one-time development cost.

In order to comply with the Regulations, licensees will need to draft, review, and insert a standard penalty clause in their existing grain delivery contracts with producers if there is not one in place already. Although compliance time will vary between licensees, based on discussions with a group of affected stakeholders, it is estimated that, on average, each affected company can complete the contract update process in eight hours. This time estimate is inclusive of all required management, legal, and information technology (IT) resource input. Stakeholder input indicates that updating standard delivery contracts will require approximately two hours of management time to develop the penalty provision, two hours of drafting, one hour of company technical support to update the standard delivery contract template, and three hours for additional technical support to adjust accounting and other affected IT systems. The cost calculated by the Regulatory Cost Calculator based on these assumptions is a one-time cost of $649 per licensee, in 2012 dollars. There are no requirements for record keeping or ongoing reporting to Government.

Licensed grain companies will also bear the cost of any potential payouts resulting from the proposed provisions. However, this cost should be minimal given marketing incentives to accept delivery and existing practices and regulations for acceptance of grain into a grain handling facility. The relative size of the stakeholders affected by delivery delays suggests that the cost of these delays has a greater proportional impact on producers’ operating margins than grain companies, railways, or others. By shifting some of the burden of contract non-compliance to grain companies, stakeholders will more appropriately bear the costs of these delays.

This regulatory package does not result in additional costs to the Government, consumers, or Canadians. However, pursuant to the amended CGA, the CGC can be requested to provide arbitration on a dispute relating to the delivery contract provisions. These types of requests will be arbitrated directly by the Commission as part of their ongoing duties and will incur no new costs for the Government. Any related legal costs incurred by the negotiating parties in order to go to arbitration will be at their own expense.

Implementation, enforcement and service standards

These regulatory changes are subsequent to the CGA amendments that were communicated as part of the Fair Rail to Grain Farmers Act that came into force on May 29, 2014. The regulatory amendments are targeted to come into force on August 1, 2014.

In order to ensure a smooth operational and compliance transition, the CGC will be informing grain producers, producer organizations, grain industry associations, and affected CGC licensees of the regulatory changes through email and notices. In addition, information on the new regulatory protections available to producers will be posted on the external CGC Web site.

The regulatory amendments do not impact the CGC’s mandate or strategic priorities. The CGC will continue to ensure compliance with the new regulatory requirements using its existing enforcement and compliance mechanisms. Enforcement of the inclusion of penalty provisions in grain delivery contracts will occur if a producer brings forth a complaint to the CGC. In terms of arbitration of a dispute regarding failure by a licensee to comply with contracts, the Commission will employ its existing complaint resolution procedures or refer the case to arbitration pursuant to the amended CGA section 92.1.

Contact

Melanie Gustafson
Canadian Grain Commission
303 Main Street
Winnipeg, Manitoba
R3C 3G8
Telephone: 204-983-1894
Email: melanie.gustafson@grainscanada.gc.ca