Alberta Court of King's Bench determines that, by enforcing warranties in a subcontract to which it was not a party, the owner became subject to the subcontract's arbitration clause.

Facts

Husky was the beneficiary of the subcontractor's warranties under a construction contract between Husky's contractor and Technip, the subcontractor. The central issue in this case was whether Husky, a third-party beneficiary of a subcontract, could litigate contractual warranties in its favour when the contract required "all disputes" under the subcontract to be arbitrated instead.

Husky argued it was not required to arbitrate these sub-contractual warranties because it was not subject to the subcontract's arbitration clause. Husky was not a party to that subcontract, was not referred to in the subcontract's arbitration clause and was advancing a claim in negligence that fell outside the scope of the subcontract's arbitration clause.

Technip argued that arbitration was required because Husky chose to enforce its third-party rights under the subcontract and such rights could only be enforced through arbitration. Technip argued that Husky "cannot sever the benefit of the contract from its associated burden."

Decision

The first instance Application Judge found that the dispute resolution provisions of the contract, including arbitration, applied only to the general contractor and subcontractor, not to Husky. Husky was able to enforce the subcontract's warranties, but was not subject to the subcontract's dispute resolution clause.

On appeal, the Alberta Court of King's Bench reached a different conclusion. It held that:

  1. Husky was required to arbitrate its contractual warranty claims.
  2. Husky was not required to arbitrate its negligence claims, as they did not arise out of the subcontract.

The Court's decision hinged upon the wording of the subcontract's arbitration clause. That clause stated that "[A]ll disputes arising out of or in connection with the present Purchase Order shall be finally settled" by arbitration. By contrast, other dispute resolution clauses – such as a mandatory mediation clause – referred to disputes "between the parties" to the subcontract. The Court held that, in using the language "all disputes," the arbitration provision contemplated a wider scope of disputes than those "between the parties," including those disputes arising out of Husky's enforcement of its warranty rights.

The Court rejected Husky's concern that the arbitration requirement was "foisting an arbitration" on a non-party to a contract. Rather, the court held that Husky's right to the contractual warranty only existed in tandem with the obligation to arbitrate. A third-party, the Court said, cannot take the benefit of an agreement while avoiding the procedural burdens associated with that agreement.

Further, the Court explored a number of additional considerations for recognizing a third-party right subject to arbitration, including its consistency with the whole of the agreement and commercial efficacy concerns. The Court recognized the inconsistency in having all disputes arising from the contract be resolved through arbitration while carving out a specific exception only for Husky as a third-party against the subcontractor. Additionally, the Court recognized that the arbitration requirement did not impose an undue inconvenience or burden on Husky as the contract specified that the arbitration was to take place in Calgary.

Finally, the court found that Husky's negligence claim was not caught by the arbitration provision as this claim did not arise from the contract. 

Analysis

The ABKB's decision highlights that much depends on the scope and wording of a contract and in particular its arbitration clauses. The wider the arbitration clause, the likelier the clause may encompass non-parties to the contract. Key, however, is that Husky intended to enforce the subcontract's warranties but avoid the subcontract's arbitration clause; the Court held that non-parties to a contract who attempt to enforce that contract's benefits may subject themselves to that contract's arbitration clause.

Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2023 ABKB 545

With thanks to Naomi Austin for her assistance.