B.C. – incorporation by reference of arbitration agreement a question of intent not category of contract – #194

In MRC Total Build Ltd. v. F&M Installations Ltd., 2019 BCSC 765, Madam Justice Shelley C. Fitzpatrick determined that it was arguable that parties to one contract intended to incorporate by reference the arbitration provisions set out in another contract.  Relying on the actual wording of the contract between the parties, Fitzpatrick J. identified the court’s role as discerning the intention of the parties. She resisted applying a technical rule to interpreting contracts or categorizing contracts into one type or another as a proxy for intention.  Once the court finds that it is arguable that such an intention exists, and absent the arbitration agreement being incapable of being performed, the court must refer the matter to the arbitrator for determination.

MRC Total Build Ltd. (“MRC”) and B.C. Hydro entered into a construction contract on July 18, 2016 to upgrade one of B.C. Hydro’s substations (“Prime Contract”).  MRC and F&M Installations Ltd. (“F&M”) then entered into an August 10, 2016 subcontract to provide civil construction services (“Subcontract”).  The Subcontract defined itself as comprising it and various schedules including the Prime Contract between MRC and B.C. Hydro.

Section 6 of the Subcontract expressly stated that “[t]he Prime Contract, associated drawings and specifications for the scope of work are attached in Schedule I and form part of this Subcontract Agreement.”  Section GC.12 of the Prime Contract, entitled “Disputes”, set out a process for dispute resolution culminating in binding arbitration.

Design problems arose during the summer of 2017 resulting in delays under both the Prime Contract and the Subcontract and leading to disputes between (i) MRC and B.C. Hydro under the Prime Contract and (ii) MRC and F&M under the Subcontract.

In October 2018, due to unresolved issues between MRC and F&M, MRC left the work site and filed court litigation against F&M claiming damages under the Subcontract or, in the alternative, a remedy for unjust enrichment or quantum meruit.

F&M applied for a stay of the court litigation under section 15(1) of B.C.’s Arbitration Act, RSBC 1996, c 55.  Fitzpatrick J. referred the three (3) prerequisites set out by the B.C. Court of Appeal in Prince George (City of) v. A.L. Sims & Sons Ltd., 1995 CanLII 2487 (BC CA) for a stay under section 15(1):

(i) a party to an arbitration agreement has commenced legal proceedings against another party to the agreement;

(ii) the legal proceedings are in respect of a matter agreed to be submitted to arbitration; and,

(iii) the application is brought before the applicant takes a step in the proceeding.

Fitzpatrick J. noted that precedent established that the court did have a role in determining if an arbitration agreement existed but only a limited one.  Sum Trade Corp. v. Agricom International Inc., 2018 BCCA 379 at paras 26, 29 and 39-40 established the approach that only in “clear” cases will the court hearing a stay application rule on the existence of the arbitration agreement.  This principle, she noted, applied to both the scope and the applicability of the arbitration agreement.

Absent a finding by the court under section 15(2) that the arbitration agreement was void, inoperative or incapable of being performed, the stay was mandatory.

MRC resisted the stay, arguing that there was no arbitration agreement between it and F&M and, if the court did fine one, it was incapable of being performed.

Fitzpatrick J. at paras 23-29 introduced her analysis by grounding it in the wording of the contractual provisions in issue, excerpting key provisions in the Prime Contract and Subcontract.

[31] MRC submits that it is clear that the arbitration provisions under the Prime Contract were not incorporated into the Subcontract. MRC further submits that such a conclusion is possible from only a review of the documents themselves. To the contrary, F&M says that it is clear that the requirement to arbitrate in the Prime Contract had been incorporated into the Subcontract. At the very least, F&M says it is “arguable” and the issue should be left for the arbitrator.

F&M referred to cases in which an arbitration clause in one contract had been incorporated by reference into another: Sum Trade Corp. v. Agricom International Inc.; Rettinger v. Loof, [1998] B.C.J. No. 313 (S.C.); Mussche v. Voortman Cookies Limited, 2012 BCSC 953; and, One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 BCCA 67.

MRC did not dispute the concept applied in the cases cited by F&M but disputed its application to the facts before Fitzpatrick J.   MRC argued that the cases cited by F&M addressed only general contract provisions but no construction contracts.  The case submitted by MRC supported MRC’s argument that incorporation by reference “of an arbitration clause from a prime contract into a subcontract can only be accomplished by distinct and specific wording and not just a general reference to the prime contract”.

Fitzpatrick J. referred to Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., [1996] O.J. No. 29 (Ont. Gen. Div.) at paras. 11-15 as an illustration of a court applying MRC’s argument to the facts before it.  She noted the Ontario court had focused on identifying the “manifest intention of the parties”.  Having done so, Fitzpatrick J. also noted that Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.has been followed by other courts in Canada but has not been considered in British Columbia”.

Fitzpatrick J. cited two (2) other cases referred to by MRC and which applied Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.: Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172 which Fitzpatrick J. noted also “framed the discussion as a determination of the intentions of the parties” and Nodricks Norsask Seeds Ltd. v. Dyck Forages & Grasses Ltd., 2014 MBCA 79

In contrast to the case law cited by MRC, Fitzpatrick J. determined that the wording agreed to by MRC and F&M in their Subcontract at section 6 defined their “Contract” to include the Subcontract and the Prime Contract.

The Prime Contract, associated drawings and specifications for the scope of work are attached in Schedule I and form part of this Subcontract Agreement.”

Fitzpatrick J. declined to add to this conclusion an argument made by F&M which created a circular argument.

[47] F&M also places some reliance on GC.4.14(f)(ii) that requires that F&M incorporate the terms of the Prime Contract into any subcontracts. To some extent, this begs the question as to whether that was done in the Subcontract, the seminal question here.

That said, she did accept that GC4.14(f)(ii) of the Prime Contract did more than just ask the parties to attach the Prime Contract as a schedule to their Subcontract “only for reference purposes” as MRC argued.  She held that it was arguable that the reference to the Prime Contract did more that assist in setting out the scope of work and that the reference to the Prime Contract in the Subcontract contained no limitation as to what was incorporated.

Fitzpatrick J. conceded that the Subcontract contained no express and specific provision requiring arbitration or a specific reference to the arbitration provisions on the Prime Contract.  However, she resisted treating Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. as “an appropriate interpretive approach in discerning the intention” of the parties.

First, Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. had not been followed “by any court” in B.C. and it “and the others that followed it are not binding on this Court”.

Second, Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., Sunny Corner Enterprises Inc v. Dustex Corporation and Nodricks Norsask Seeds Ltd. v. Dyck Forages & Grasses Ltd. had been decided before Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53.

Having excerpted paras 47-49 of Sattva Capital Corp. v. Creston Moly Corp., Fitzpatrick J. wrote that “arguably” Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. is a “technical rule” to interpret construction contracts and “is no longer appropriate”.  She reiterated that the cases cited by both parties “start from the proposition that the fundamental role of the Court is to discern the intention of the parties in terms of the scope of their agreement”.

Fitzpatrick J. resisted creating special rules of interpretation for construction contracts.

It is arguable that Dynatec, Sunny Corner, Nordricks and other cases that followed them do not rely on any principled basis to interpret construction contracts or arbitration clauses differently. I am not aware of any case law or authority on general contractual interpretation principles that support the argument that arbitration clauses are dealt with any differently than any other clauses, or that construction contracts are dealt with differently from any other contracts. Nor is there anything to suggest that such clauses and contracts are immune from the contractual interpretation principles as set out in Sattva.

Unable to conclude that it was “clear” that the parties had not agreed to submit their disputes under the Subcontract to arbitration, she held that it was appropriate for the arbitrator do determine the matter.  The arbitrator could “undertake the interpretation exercise in light of the authorities, including Sattva, and consider the appropriate evidence”.

MRC then argued that the arbitration agreement is “incapable of being performed” and, under section 15(2) of the Arbitration Act, the court should not grant a stay. MRC submitted that, based on the wording of the Prime Contract, only BC Hydro or F&M could initiate arbitration.  As such, MRC, not being one of the two parties to the Prime Contract, could not issue the notice required under the Prime Contract to initiate settlement discussions and meetings necessary as precedents to the arbitration.

Fitzpatrick J. disagreed.  She began her analysis with Prince George (City) v. McElhanney Engineering Services Ltd. which, at para. 35, held that “incapable of being performed” was more than “mere difficulty or inconvenience or delay in performing the arbitration”.

[65] However, I agree with F&M that MRC’s narrow interpretation of GC.12 is questionable. The provisions in GC.12.2-12.6 involve matters specific to BC Hydro and F&M. Each are required to appoint Representatives, who receive any Dispute Notices and then undertake settlement discussions and meetings. Arguably, none of those provisions could apply to the Subcontract without any corresponding appointment by F&M and MRC of a “Representative” under the Subcontract.

[66] However, leaving that issue aside, GC.12 does not require that the Dispute Notice and settlement process necessarily take place. It is simply an option. GC.12.7 provides that, if that settlement process does not take place, the unresolved dispute will be referred to arbitration upon written notice being given by either party.

At para. 68, she held that the arbitration procedure in the Prime Contract could be interpreted such that references to the parties to the Prime Contract could be read as being references to the parties in the Subcontract.

Because it was “arguable” whether the parties were incapable of undertaking the arbitration process, Fitzpatrick J. held again that it was appropriate that the arbitrator consider that matter first.

Fitzpatrick J. concluded that MRC was entitled to its costs of the proceeding in any event of the cause.