Alberta – Third party beneficiary of contract bound by arbitration clause – #784

In Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2023 ABKB 545, the issue before the Court was whether a third party beneficiary of a contract was bound by the contract’s arbitration clause in a dispute concerning the contractual warranties. The Court answered the question in the affirmative. While the plaintiff was not a party to the contract containing the arbitration clause, it was given rights to enforce certain warranties. Since the plaintiff chose to enforce its third party rights under the contract, it was bound by the contract’s arbitration clause. The plaintiff was required to arbitrate its warranty claims, which were time-barred, as the limitation period had expired. However, the plaintiff’s negligence claims were not arbitrable as they did not arise out of the contract and those claims, which were brought by way of action, were not affected by the expiry of the limitation period to arbitrate.

Background – There was a construction contract between a general contractor and a subcontractor. The plaintiff, Husky Oil Operations Limited, was the project owner and was not a party to the contract, but the contract did contain contractual warranties in its favour. Husky sought to enforce the contractual warranties against the subcontractor and commenced litigation against it related to those warranties, and also in negligence. The defendant, Technip Stone & Webster Process Technology Inc., brought an application for a stay of proceedings and argued that Husky was required to pursue its claims through arbitration.

At first instance, the applications judge agreed with Husky that the contract could not impose an arbitration “burden” on a non-signatory. The dispute resolution provisions, including arbitration, applied only to the parties to the contract. This decision was appealed. 

On appeal, the Alberta King’s Bench reached the opposite conclusion and found that Husky was required to arbitrate its contract warranty claims, but not its negligence claims. In so finding, the court addressed the following issues:

Issue 1 – this case constitutes an exception to the competence-competence principle

The Court first addressed whether it had jurisdiction to decide the stay motion or whether, as a result of competence-competence, the issue should first be decided by the arbitrator. Citing the Supreme Court of Canada’s recent decision in Peace River Hydro Partners Petrowest Corp, 2022 SCC 41, the Court set out the current state of the law on competence-competence: while a challenge to an arbitrator’s jurisdiction should generally be decided at first instance by the arbitrator, the principle is not absolute and a court may resolve such a challenge if the challenge involves a pure question of law, or questions of mixed fact and law requiring only superficial consideration of the evidentiary record. 

The Court found that in this case, the issues involved questions of mixed fact and law and that no more than a superficial consideration of the evidentiary record was needed to decide these issues. As a result, the court had jurisdiction to decide these issues.

Issue 2 – the contract requires arbitration of the warranty dispute

Husky argued that its rights were freestanding and not subject to any associated conditions or limitations imposed by the contract, including the duty to arbitrate disputes over them, as a non-signatory to the contract. Technip argued that its contractual warranty rights were qualified or limited rights that required enforcement via arbitration. In taking up that right, Husky necessarily took up, and agreed to, the associated arbitration “burden”.

The Court found that the issue was about the nature of the rights conferred by the contract on Husky – in other words, this was a question of contract interpretation. The Court noted that some of the dispute-resolution provisions applied only to the “parties” (i.e., the general contractor and subcontractor) and other provisions were not so limited and referred more generally to all disputes arising under the contract (e.g., “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…”). The Court held that by using such contrasting phrases among the various provisions, the latter provisions obviously contemplated a wider scope of disputes than those arising just between the parties to the contract. The contract only created rights for one person beyond the parties, Husky. As a result, the broader provisions that required arbitration of “all disputes” (rather than those that specified “disputes between the Parties”) was “obviously intended to capture the only other potential species of dispute arising from the contract, i.e., disputes arising from Husky’s enforcement of its contract rights, including its warranty rights.”

Therefore, if Husky sought to enforce the warranties given to it by the subcontractor, and the subcontractor disputed Husky’s warranty claim, that dispute must be resolved by arbitration. It would be odd if the contractual parties intended to resolve all of their own disputes by arbitration, including contractual warranty claims by the general contractor against the subcontractor, yet simultaneously intended to leave the door open to litigation by Husky against the subcontractor in relation to the same warranties.

The Court addressed the questions of whether this was imposing a burden on a non-signatory to a contract against its will and violated privity of contract principles? The answer was no. No burdens were “foisted” upon Husky: Husky could pursue its warranty rights or not, in its complete discretion. But if it decided to enforce those warranties, then it had to accept the right with any attaching qualification or limitation, here the restriction to resolving such disputes via arbitration. After reviewing the Canadian authorities on this matter, the court found that it was within the subcontractor’s power to decide the scope or ambit of any rights extended to a third party (i.e., third-party benefits can be qualified or impose limitations). Husky’s attempt to avoid the arbitration clause was characterized by the Court as an attempt to enlarge the right given to it under the contract: “[i]f one voluntarily picks up a stem with thorns, one is also voluntarily, and necessarily, picking up the thorns.” Once Husky decided to enforce its warranty right against the subcontractor, it consented to arbitration of any disputes with respect to them and became a party to the contract’s arbitration mechanism.

Issue 3 – subcontractor not estopped from relying on the arbitration provision

Husky argued that Technip was estopped from relying on the arbitration provision because it did not invoke the dispute resolution process after it received Husky’s warranty claim in 2015 or after it was served with the statement of claim in 2017. This was so despite the ongoing engagement and communication between Husky and Technip regarding the claim.

The Court disagreed. There was no actual representation made to Husky on the subject of the appropriate forum. Husky was responsible for its own decision to start litigation, there was no evidence the subcontractor had attorned to the litigation, and it was not the subcontractor’s responsibility to start arbitration proceedings for Husky. When Husky sought to enforce the contractual warranties, it fell to Husky to start the arbitration proceedings.

Issue 4 – warranty claims are time-barred

The Court found that Husky had not commenced the arbitration within the two year limitation period. More than 7 years had passed since Husky identified the alleged defects and Husky had filed its statement of claim more than 4 years ago. In such circumstances, the proper remedy was for the Court to dismiss rather than stay Husky’s claim. As a result, the Court ordered that Husky’s arbitral claims – the claims anchored in the warranties – must be struck from the action against the subcontractor.

Issue 5 – negligence claims not caught by the arbitration provision

The Court held that the arbitration clause only extended to Husky because it sought to enforce its contractual warranties. But the negligence claim arose under the law of negligence, not the contract. As a result, while some of the contractual terms may have some bearing on the possible existence and breach of a duty of care, that was distinct from the contract being the source of Husky’s negligence claim. The court found that the “all disputes covered” language in the arbitration clause could not extend to the tort claim because Husky was not a party to that contract and did not sign onto the arbitration clause beyond its connection to the enforcement of the contractual warranties. “It cannot fairly be said that, in stepping into the arbitration clause to enforce those warranties, Husky was necessarily or even possibly agreeing to arbitrate its negligence claim against the subcontractor.” As a result, the negligence claim was not arbitrable and was not affected by the expiry of the limitation period to arbitrate.

Contributor’s Notes:

There are three points to note about this case.

First, the Court did not apply the competence-competence principle upon finding that the issues raised only a “superficial consideration of the evidence in the record.” This decision seems close to the line. Many of the issues were resolved on undisputed or evident facts, but the Court still engaged at numerous points with the evidentiary record. After conducting an in-depth review and interpretation of the contract, the court made conclusions about the lack of evidence before it (e.g., it noted that there was no evidencing showing the subcontractor would have extended the warranty right to Husky absent an associated arbitration duty), made findings on the estoppel issue based on the evidentiary record before it, and dismissed the warranty claims as time-barred again based on the evidence before it. On that issue, Husky had argued that not all the relevant facts on the limitation period issue were in evidence and the Court held that Husky had the burden to put forward such evidence via supplementary affidavit on the application and did not do so. 

This decision seems to raise a question of what type of analysis is properly considered “superficial” and what are issues that should be left to the arbitrator. As stated by the Supreme Court of Canada in Uber Technologies Inc. v. Heller, 2020 SCC 16: “The essential question, in our view, is whether the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties.

Second, this case is a reminder that if a matter is properly brought by arbitration, a party which brings an action may well risk the expiry of a limitation period (and vice versa) because it has not brought its proceeding in the right forum. 

Third, this decision provides important clarification for parties negotiating contracts with warranties in favour of a third party. The third party seeking to enforce those warranty rights may be bound by the dispute resolution provision and may be considered to have consented to the arbitration clause even though it is not a party to the contract. This is of course subject to the language used in the contract. If the dispute resolution clause in this case had said disputes between the parties are subject to arbitration, and not all disputes more generally, the result would likely have been different. Commercial parties must be mindful and intentional about the language they use in contracts with such warranties or rights in favour of a third party.

In principle, this sems to strike the right balance. The third party here was not a stranger to the agreement and was seeking to enforce a qualified right so, as the Court found, must accept the qualifications that come with that right, here, the arbitration provision. However, it does raise some questions as to what the practical impact would be in other cases. What if the warranty claims were not time-barred? Would the warranty claims then proceed in arbitration while the negligence claims continue before the courts in the ongoing litigation? Based on this decision, the answer is yes, as the negligence claims are not arbitrable. The practical impact of such a result is now left to be resolved the next time this issue arises in another case.