Understanding Manufacturing Agreements

By: Danielle Leroux

A liquor manufacturer in British Columbia is not just governed by the rules set out in the Liquor Control and Licensing Act and their Terms and Conditions. The Liquor Distribution Act requires all BC manufacturers to enter into a Manufacturer’s Agreement issued by the BC Liquor Distribution Branch (LDB).

This agreement deals with issues such as product registration, allowable customers, reporting sales, remitting money on sales, and record keeping.

“The regulations for BC manufacturers are unique.”

There are six agreements based on the type of manufacturer. It is the responsibility of the manufacturer to familiarize themselves with the terms and conditions of their particular agreement.

The regulations for BC manufacturers are unique in this sense. “In other places you would see rules set out in the applicable law, like the Liquor Control and Licensing Act, but in BC we have a split structure,” says wine lawyer and consultant Mark Hicken. “Because of the statutory monopoly at the wholesale level, quite a lot of the rules are imposed by contract as part of the LDB’s manufacturing agreements. It can be quite confusing for people who aren’t familiar with the system.”

Types of Manufacturing Sales Agreements

The LDB breaks down the six types of manufacturing sales agreements as follows:

  1. Land-Based Winery: produces and sells wine, cider, mead, or sake products made from 100% BC agricultural products. These are traditionally smaller wineries.
  2. Commercial Winery: produces and sells wine, cider, mead, or sake products and does not qualify as a land-based winery.
  3. Brewery: produces and sells beer and malt-based products.
  4. Brewpub: has a liquor primary attached that produces and sells beer and malt-based products via a pipeline.
  5. Craft Distillery: produces and sells spirit products made from 100% BC agricultural products using traditional distilling techniques.
  6. Commercial Distillery: produces and sells spirit products and does not qualify as a craft distillery. It may also produce spirit-based refreshment beverage products.

All manufacturers are allowed to direct deliver except for commercial distilleries which can only deliver to their own manufacturer on-site store.

Strict Product Criteria

Land-based wineries and craft distilleries must adhere to certain criteria when it comes to how their products are produced.

For instance, land-based wineries must use 100% BC grown and produced grapes, fruit, honey, or rice and have a minimum of two acres of grapevines and/or fruit orchards, or 2.5 acres of rice paddy if they produce sake.

A minimum of 25% of the grapes, fruit, honey, or rice used in production must be from the acreage and bee colonies owned or leased by the manufacturer. The winery must use traditional wine, cider, or sake making techniques and can only use product acquired from other land-based wineries, not commercial wineries.

Craft distilleries must ferment and distill all product at their licensed establishment using 100% BC agricultural products.

If their total annual production is less than 50,001 litres per year, it is mark-up free, and no remittance is required to the government. If total annual production is greater than 50,000 litres per year but less than 100,001 litres, a mark-up/remittance must be paid.

Production of spirit-based refreshment products or other highly processed products are not permitted by craft distilleries. The use of neutral grain spirits in the production of any product is also not permitted.

Distributor and Regulator

The LDB acts a distributor and quasi-regulator of the agreements.

“There are all kinds of rules and conditions associated with the different categories of manufacturing agreements,” says Hicken. “People have to be very aware of what the rules are, and you have to make sure you look at those agreements carefully. I have seen situations in the past where people haven’t really paid attention to important rules that are there, and they haven’t complied.”

There have been some changes over the last few years that have simplified rules, specifically those applicable to commercial wineries. Hicken notes he has seen a lot of interest from land-based wineries to convert to commercial wineries in recent years for various reasons.

While licensee retail stores and liquor primaries are not subject to the manufacturing agreements, the agreements do dictate what a manufacturer can do in terms of delivery, distribution, and pricing.

Impact of Crop Devastation

In a report commissioned by Wine Growers BC, Cascadia Partners found that the recent climate-change related freeze events in December 2022 resulted in devastating short-term and long-term effects on BC’s wine grape crops. This calls into question the strict land-based winery crop requirements.

“Initial forecasts following the freeze event showed a potential crop reduction of 39 to 56%. Following budbreak, our industry-wide research concluded that our worst fears were realized with a 54% reduction in 2023 and 45% of total planted acreage suffering long-term irreparable damage,” says Miles Prodan, President and CEO of Wine Growers BC.

The report suggests there will be $133 million in direct revenue lost to the BC wine industry and over $200 million in indirect economic revenue lost to suppliers, liquor stores, restaurants, etc.

“The BC wine industry is appealing for additional support.”

The BC wine industry is appealing to both provincial and federal governments for additional support efforts including a dedicated AgriRecovery grant to support crisis relief, additional funding for the Perennial Crop Renewal Program, and aligning the provincial crop insurance program to cover future unique climate-change related events.

In a recent CEO Update, Prodan shared Wine Growers BC is also requesting the modernization of the provincial licensing and sales agreement policy including temporary reduction in 25% owned/leased grapes and 4,500 litre/year requirements.

Hicken adds, “At the moment there is some concern in the Okanagan about some of these rules because of the freeze that happened last year. If there is a 50% reduction in crop and you’re required to use 100% BC fruit, that becomes challenging. There is going to be quite a bit of discussion about these kinds of rules in the next little while.”