Clear and Explicit Contractual Language Required to Impose Arbitration on Third-Party Beneficiaries

December 20, 2024

Written By David Wahl, Vasilis Pappas, Chris Petrucci, Artem Barsukov, Siobain Quinton and Valeria Palacio

The Alberta Court of Appeal in Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2024 ABCA 369 recently held that parties attempting to impose an arbitration requirement on third-party beneficiaries of a contract that contains an arbitration clause must make the obligation to arbitrate clear and explicit in the contract.

The Facts

Husky Oil Operations Limited (Owner) engaged a general contractor (Contractor) to undertake a construction project (Project). The Contractor thereafter engaged a subcontractor (Subcontractor) to undertake certain work on the Project pursuant to a subcontract agreement between the Contractor and the Subcontractor (Subcontract). The Owner was not a party to the Subcontract.

However, the Subcontract provided that all warranties given by the Subcontractor were extended to the Owner. The Subcontract expressly stated that "[a]ll warranties given by [Subcontractor] shall be given for the benefit of both the [Contractor] and [Owner] and the warranties may be enforced by either the [Contractor] or [Owner]", thereby making the Owner a third-party beneficiary to the warranties provided by the Subcontractor in the Subcontract.

The Subcontract also contained a dispute resolution provision, which provided that "[a]ll disputes arising out of or in connection with the present [Subcontract] 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".

Subsequent to the execution of the Subcontract, an issue arose on the Project, and the Owner sought to enforce its warranty rights against the Subcontractor pursuant to the Subcontract as third-party beneficiary. However, rather than doing so through arbitration in accordance with the dispute resolution provision in the Subcontract, the Owner instead commenced litigation against the Subcontractor in the Alberta Court of King's Bench.

The Owner advanced an action for both breach of warranties and negligence, arguing that it was not bound by the arbitration clause in the Subcontract because it was a non-signatory. The Subcontractor agreed that the Owner had a warranty right under the Subcontract but disagreed that the Owner could enforce that right without doing so through arbitration as stipulated in the Subcontract.

The Decisions Below

Initially, the Applications Judge sided with the Owner, finding that the arbitration provision in the Subcontract applied only to disputes between the Contractor and the Subcontractor, and permitted the Owner to proceed with all its claims in the courts.

However, on appeal, a Justice of the Alberta Court of King's Bench reached the opposite conclusion. The Court found that the Owner was bound by the arbitration provision and struck the Owner’s warranty-based claims, but allowed its negligence claims to proceed in the courts.

The Alberta Court of Appeal Decision

The Owner appealed the striking of its warranty claims and the Subcontractor cross-appealed, arguing that the negligence claims must also proceed by arbitration and that these claims should have been struck as well. The Alberta Court of Appeal sided with the Owner and dismissed the cross-appeal, overturning the decision of the Court of King’s Bench and permitting the Owner's claims to proceed in the courts. 

Consensual Nature of Arbitration

As the starting point of its analysis, the Court of Appeal emphasized that arbitration is a creature of consent. Except where arbitration is mandated by statute, the Arbitration Act, RSA 2000, c A-43 expressly requires that there be an arbitration agreement by which two or more persons agree to submit a matter in dispute to arbitration.

The Court’s Power to Determine the Question

As we discussed in one of our previous blog posts, Alberta Court Articulates Important Exceptions to the Kompetenz-Kompetenz Principle and the Scope of Arbitration Clauses, ordinarily, the question of whether an arbitration agreement applies to a particular dispute, or, put differently, whether an arbitral tribunal has jurisdiction to hear the dispute, is determined by the arbitral tribunal itself, pursuant to the so-called kompetenz-kompetenz principle. In this case, the Court of Appeal found that it was appropriate for the courts to determine the jurisdictional question, notwithstanding the kompetenz-kompetenz principle, because the necessary legal conclusions could be drawn from the undisputed facts. In doing so, the Court of Appeal followed the exceptions established by the Supreme Court of Canada in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, Uber Technologies Inc v Heller, 2020 SCC 16, and Seidel v TELUS Communications Inc, 2011 SCC 15.

Privity of Contract and Imposed Obligations

The Owner was not a signatory to the Subcontract. The Court of Appeal noted that while it is possible for a non-party connected to a contract to become bound by the contract by operation of law, the Supreme Court recently stated 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”. In this case, the Owner did not claim through or under either signatory. Instead, it claimed directly under the terms of the Subcontract that expressly extended to it the benefit of certain warranties.

Under the doctrine of privity of contract, a contract typically cannot confer rights or impose obligations on any person except the parties to it. The Court of Appeal noted that the doctrine of privity can be relaxed where non-parties seek to rely on contractual provisions that are made for their benefit. The basis for the principled exception is the express or implied stipulation by the contracting parties that the benefit of the clause will also be shared by the non-party. On the other hand, the Court of Appeal noted that the law has little interest, outside the law of tort, in imposing obligations on those who have not agreed to them.

In this case, the Subcontractor argued that the warranty benefit conferred on the Owner under the Subcontract by virtue of the principled exception to privity was intended by the contracting parties to be conditional on the obligation to arbitrate.

The Court of Appeal did not agree. The Court held that to be binding on a third party, an obligation, such as a requirement to arbitrate, must be expressed in clear and explicit language. This was not the case in the Subcontract.

Relying on the principles of contractual interpretation to establish the existence of an obligation that binds third parties is not enough. This is particularly so where, as here, the third party (i.e., the Owner) was not involved in the negotiations and was therefore unaware of the circumstances known to the parties or the intentions of the parties at the time of formation of the contract. Further, this is particularly so where, as here, the effect of the obligation to arbitrate was to deprive the Owner of its ability to access the courts.

Key Takeaways

Arbitration is a creature of consent. Any party seeking to enforce an arbitration clause against a third-party beneficiary to a contract must ensure that the requirement for third-party beneficiaries to arbitrate is articulated in clear and explicit language in the contract. The principled exception to privity of contract allows for parties to confer a benefit on a person who is a stranger to their contract. However, if the parties wish to confer a qualified benefit, they must use explicit and clear language to do so.

This case reinforces the importance of obtaining expert advice when determining the appropriate forum to enforce a right. Commencing litigation when arbitration is the appropriate forum can result in an otherwise meritorious claim being statute-barred when a limitation period expires before an arbitration is commenced. Finally, this case also reinforces the importance of drafting robust arbitration clauses that are clear and unambiguous in their scope.

To discuss your specific case and to receive tailor-made advice about the appropriate forum to enforce a third-party contractual right, or to craft a robust arbitration clause, please contact the Bennett Jones International Arbitration group.

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