In Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2024 ABCA 369, the Court found that a non-signatory beneficiary under a contract was not bound by an arbitration agreement contained in it. The Court found the arbitration agreement did not contain the “clear and explicit language” it deemed necessary to bind the non-signatory.
Background – The relevant facts are simple. The Appellant entered into an agreement with a contractor to engineer, procure and construct a steam-assisted gravity drainage oil sands project. The Appellant’s contractor entered into a sub-contract with one or both of the Respondents for the design, manufacture, fabrication and delivery of 10 steam generator modules for the project.
The contact explicitly extended to the Appellant all warranties given by the Respondent(s) to the contractor. It also contained a dispute resolution provision containing a multi-tier dispute protocol, including an arbitration agreement. The dispute resolution provision’s opening language stated, in part, that: “All disputes between the PARTIES not resolved by the initial decision of PURCHASER’s Representative [a previous dispute resolution step], and all disputes arising out of this PURCHASE ORDER and its performance shall be settled in accordance with this [dispute resolution protocol]”.
The ultimate arbitration provision read as follows: “All disputes arising out of or in connection with the present PURCHASE ORDER shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” Of note, the arbitration clause does not refer only to disputes between the “PARTIES”.
The Appellant made a warranty claim against the Respondents. It filed a statement of claim in the Court of King’s Bench. After some discussion, the Appellant demanded a defence. The Respondent(s) instead brought an application to dismiss or stay the Appellant’s action based on the arbitration agreement.
Decisions below – The Application Judge dismissed the application. He found that the contact did not expressly require the Appellant to pursue its claim in arbitration, and that the Appellant was not a party to the contract. The Respondents appealed to a Chambers Judge.
The Chambers Judge allowed the appeal. For the Chambers Judge, the question was whether the Appellant’s warranty rights under the contract were freestanding, or whether they were subject to other obligations under the contract (including the dispute resolution provision).
He found the Appellant’s warranty claims were subject to arbitration. The Chambers Judge reasoned that although some of the dispute resolution’s scope applied only to “the PARTIES”, the language was broader than that. Specifically, the language stating “all disputes” arising out of the purchase order at issue was not limited to the parties. He also found that requiring the Appellant to arbitrate did not amount to imposing arbitration on it absent consent. He reasoned that it was up to the Respondents to make the Appellant’s access to the warranties subject to the obligation to arbitrate.
Court of Appeal – The Court found the Chambers Judge erred in law.
Before addressing whether the arbitration agreement bound the Appellant, the Court satisfied itself that it was appropriate to consider the matter in the first instance under the competence-competence framework set out in Dell Computer Corp v Union des consommateurs, 2007 SCC 34v [Dell] and Uber Technologies Inc v Heller, 2020 SCC 16 [Uber]. Since the underlying facts were undisputed, the Court agreed with the Chambers Judge that the jurisdictional question was a mixed question of fact and law requiring only a superficial review of the record.
Turning to the jurisdiction question, the Court first cited the Supreme Court of Canada’s decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41 [Peace River] for the proposition that “all non-signatories, whether they are agents, trustees in bankruptcy, receivers, or assignees, may claim only through or under a signatory, upon stepping into its contractual shoes” [Peace River, para. 113].
Despite recognizing that the Appellant was not claiming through or under a signatory (but rather in its own right as a third party beneficiary), it went on to consider whether the privity of contract doctrine ought to be relaxed in this case to require the Appellant to arbitrate. The Court recognized the privity doctrine “can be relaxed where non-parties seek to rely on contractual provisions made for their benefit”.
The heart of the Court’s reasoning is in paragraphs 31-33, which I set out in full:
“[31] If it is possible to do so, the requirement to arbitrate must be manifest. It must be expressed in clear and explicit language. Relying only on the principles of contract interpretation to find the obligation is not enough. That is because contract interpretation considers in part “circumstances known to the parties at the time of formation of the contract” and determines “the intent of the parties and the scope of their understanding” (Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at para 47), whereas non-parties will not be aware of those circumstances, intentions and understandings.
[32] If the obligation to arbitrate is not clear and explicit, the non-party may choose litigation to enforce the benefit they have been conferred without realizing the contracting parties intended mandatory arbitration. By the time the contracting party raises the obligation to arbitrate, it may be too late for the non-party to change tracks.
[33] That is what the appellant says happened here. There is no evidence before us to suggest the appellant was involved with the negotiations leading to the formation of the contract, or that it had any knowledge of the intentions of the contracting parties or their understanding.”
In the result, the Court found that the Chambers Judge “failed to consider the importance of mutual consent and the unique difficulties that arise when contracting parties attempt to impose an obligation on a non-party”. It determined that the contract’s language did not clearly and explicitly require the Appellant to arbitrate its warranty claims.
The Court allowed the appeal, allowing the Appellant to pursue its claim in court.
Contributor’s Notes
This decision provides insight into how (at least on bench of) the Court of Appeal of Alberta conceptualizes consent to arbitrate, which it rightly noted is essential for contract-based arbitration. The Court’s competence-competence analysis is also worth some consideration. I will discuss these issues and close with a comment on the specifics of the Court’s analysis in this case.
First, the Court took a somewhat restrictive approach to what it means to consent to an arbitration agreement. Although the case law in Canada on this point is less developed, there are some authorities, both here and abroad to look to. But before doing that, it is important to address an error the Court made in reading Peace River that appears to have informed its restrictive approach.
The Court cited Peace River paragraph 113 for the proposition that “all non-signatories, whether they are agents, trustees in bankruptcy, receivers, or assignees, may claim only through or under a signatory, upon stepping into its contractual shoes”. But the Supreme Court was not affirming this statement as legally correct. On the contrary, it was explaining why it rejected the Receiver’s submission to that effect. Here is paragraph 113 in full:
“[113] The Arbitration Act does not define the term “party”. I acknowledge that the reference to a person claiming through a party to an arbitration agreement was removed from the stay provision in domestic arbitration legislation. But if this Court accepted the Receiver’s proposed interpretation, no non‑signatory could ever be a party to an arbitration agreement under the Arbitration Act. This is because all non‑signatories, whether they are agents, trustees in bankruptcy, receivers, or assignees, may claim only through or under a signatory, upon stepping into its contractual shoes. Such an interpretation would plainly undermine these foundational contractual doctrines. I see nothing in the legislative record or the text of the Arbitration Act to indicate that the legislature intended to change or displace the common law in such a radical manner.” [Emphasis added].
I acknowledge that the Court of Appeal still went on to consider whether the arbitration agreement bound the Appellant. However, it is difficult to understand why it cited Peace River paragraph 113 (correctly or incorrectly) if not to make the point that we were in truly exceptional territory here.
It is important to note that Peace River was not an omnibus decision intended to exhaustively treat the subject of non-signatories and arbitration agreements. It dealt with the question of when an entity claiming through or under a signatory, in that case a receiver, becomes “bound as a ‘party’ by operation of law” [Peace River, para. 105]. But there are other non-signatory theories, such as estoppel, alter ego and group of companies, under which the non-signatory does not claim under or through a signatory. The throughline cutting across all of these non-signatory theories is implied consent through words or conduct.
Coming to other authority on when a third party beneficiary may be bound to arbitrate, there is substantial jurisprudence from outside Canada. Approaches differ, particularly as to the extent to which the arbitration agreement’s language must demonstrate an intention that the third party beneficiary be bound. For example, in Iraq v. ABB AG, 769 F.Supp.2d 605, 614-15 the Court refused to allow the non-signatory Republic of Iraq to invoke an arbitration agreement between the United Nations and an oil company created pursuant a humanitarian aid program. The Court found the “plain language” of the arbitration agreement did not name Iraq such that it could not demand arbitration under the agreement. Other U.S. courts have taken a more permissive approach [See for example: Tractor-Trailer Supply Co. v. NCR Corp., 873 S.W.2d 627 (Mo. Ct. App. 1994)]
Much has been written on this topic internationally, and I will not cover it in any greater detail here [See for example: Gary B. Born, International Commercial Arbitration (Third Edition) §10.02(F); Stavros Brekoulakis, ‘Chapter 24: The Various Forms of ‘Consent’ in International Arbitration’, in Stefan M. Kröll, Andrea Kay Bjorklund, et al. (eds), Cambridge Compendium of International Commercial and Investment Arbitration, s. 24.2.2]. International authority aside, some Canadian case law recognizes bases for requiring non-signatories to arbitrate, even when they are not claiming through or under a signatory.
In CE International Resources Holdings LLC v. Yeap Soon Sit, 2013 BCSC 1804, the British Columbia Supreme Court enforced an arbitral award against a third party found to be a signatory’s alter ego. The Court enforced the award based on the tribunal’s finding that the non-signatory “had knowingly accepted the benefits of both contracts, including their respective arbitration clauses, and was estopped from avoiding arbitration under those clauses” [CE International Resources, para. 34; see also: DNM Systems Ltd. v. Lock-Block Canada Ltd., 2015 BCSC 2014].
The Court of Appeal’s narrower approach evidences its view that a non-signatory suing for benefits arising under a contract is insufficient to bind the non-signatory to an arbitration agreement contained in that contract. In fairness to the Court, it appears to have been advised that “there is no authority directly determining whether or not contracting parties can contractually bind a true non-party to arbitration” [para. 30]. Perhaps the Court will look upon the matter differently if ever asked to consider the broader approach supported by (admittedly non-binding) Canadian and international authority.
Second, on competence-competence, the Court agreed with the Chambers Judge that it was appropriate to decide the jurisdictional question. It found the question was one of mixed fact and law requiring only a superficial review of the record because “the necessary legal conclusions can be drawn from undisputed facts” [para. 23]. This is right in line with the Dell/Uber framework.
In Uber, the Court elaborated on what it meant by “answering questions of fact entails a superficial examination of the documentary proof in the record”, which was the formulation in the companion case to Dell, Rogers Wireless Inc. v. Muroff, 2007 SCC 35, para. 11. The Court in Uber clarified that a “superficial” review is one where the Court may daw the necessary conclusions “from facts that are either evident on the face of the record or undisputed by the parties” [Uber, para. 36].
As this case demonstrates, Uber really dulls the teeth of Dell’s so-called “rule of systematic referral to arbitration” [Dell, para. 84]. Disputes involving widely used standard form contracts or boilerplate provisions will also erode “systematic referral” since the factual matrix tends to play an even less prominent role in interpreting those agreement [Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, para. 24]. I make no comment here on whether this is good or bad.
There are certainly reasonable arguments for and against a robust application of competence-competence. All I am suggesting is that we speak honestly about what the test really is when the rubber meets the road. Because right now, the test is anything but systematic in referring jurisdiction and contract validity challenges to the arbitral tribunal.
Third, and finally, the Court’s reasoning is a little bit hard to follow. It concludes that the question of whether a non-signatory is bound cannot be a pure question of contact interpretation as the non-signatory may not be aware of the factual matrix or the parties’ intentions and understandings. This is fine so far as it goes. But then why the focus on clear and explicit language in the contract? Those are not the non-signatory’s words, and it could in principle have been unaware of them at the time of contract formation.
On the other hand, the Court’s observation that there was no evidence showing the Appellant was involved in the contract negotiations, or knew of the parties intent or understanding, seems quite relevant to finding implied consent to arbitrate under the arbitration agreement. This is somewhat analogous to the implied consent mechanism known as the “group of companies” doctrine. First popularized in an ICC Award, the doctrine is a means of finding that a non-signatory member of a signatory’s corporate group consented to arbitrate via its participation in negotiating, performing or terminating the contract [Dow Chemical co. v. Isover Saint Gobain, ICC No. 4131. Interim Award 23 Sept 1982, 9 Ybk. Comm. Arb 131 (1984)].
Here, the absence of evidence that the Appellant knew at the time of formation that its right to invoke the warranties could be subject to an arbitration agreement must be relevant to whether the Appellant consented. From the Court’s reasons, it is unclear whether the Respondents sought evidence of whether the Appellant knew about the contact’s terms, including the dispute resolution clause, at the time the contract was formed.
Given the Court’s insistence on clear and explicit language binding the Appellant, that evidence might not have made a difference. Still, this is an open question considering the Court saw fit to mention this lack evidence in its reasons. At a minimum, if the Appellant’s awareness of the terms was contested, the Court might have referred the question to the arbitral tribunal, finding that answering it required more than superficial review of the record. We shall never know.