Alberta Court finds non-party bound to arbitrate when enforcing contractual warranties

In Husky Oil Operations Limited v. Technip Stone & Webster Process Technology Inc, and Technip USA Inc., 2023 ABKB 545, the Alberta Court of King’s Bench found that a beneficiary of contractual warranties may be bound to arbitrate disputes arising from those contractual warranties, even though not a party to that contract.

The Court determined that third-party beneficiaries of a contract can choose to enforce their rights, but that by taking up these contractual rights they also take up the associated contractual burdens. As a result, by failing to arbitrate within the contractual time period, the beneficiary's right to dispute the warranties had expired.

Background

The plaintiff, Husky Oil Operations Limited (Husky), was the project owner. There was a contract between the general contractor and Technip Stone & Webster Process Technology Inc. (Technip), a subcontractor (the Contract). Husky was the beneficiary of contractual warranties provided by Technip set out in that Contract. The Contract included a clause requiring that "all disputes" be referred to arbitration.

Husky filed a claim in court seeking to enforce its third-party rights under the warranties and advancing claims in negligence. Technip applied to strike the claim based on the arbitration clause.

At first instance, the application judge found that the dispute resolution provision could not be extended to non-parties. Technip appealed the decision of the application judge, and a de novo application proceeded in the Court of King's Bench.

The Court’s decision

The Court decided that Husky was bound to arbitrate the contractual warranties. The Court reasoned that Husky could not sever the benefits of the contract (the contractual warranties) from the associated burden (arbitration). Husky's contractual warranty rights were limited by the duty to arbitrate. However, Husky's negligence claim was not captured by the requirement to arbitrate.

Interpretation of ‘all disputes’

The Court noted that the Contract included dispute resolution provisions that applied only to the “Parties”. However, the phrase “all disputes” was used in other provisions and thus contemplated a wide scope of disputes. In particular, the Court held that the phrase “all disputes” captured all the potential disputes arising from the Contract, including disputes arising from Husky’s enforcement of its warranty rights.

The Court interpreted the contractual warranty provisions and the dispute resolution provisions together to conclude that, if Husky enforces its contractual warranties, the dispute must be resolved by arbitration.

No imposed burdens without consent

The Court considered issues arising from privity of contract and consent, but concluded that the Contract did not impose any burden on Husky without its consent. Rather, the warranty rights were merely limited or qualified; once Husky decided to enforce its warranty rights against Technip, it agreed to arbitrate any disputes arising over them.

The Court cited Fraser River Pile & Dredge Ltd v. Can-Dive Services Ltd, [1999] 3 SCR 108, for the premise that contractual benefits conferred on third parties can be limited or qualified, but any condition that limits or qualifies such benefits must be expressly stated. The Court noted that the Contract met this requirement as it clearly expressed the requirement that any dispute arising from the contractual warranties must proceed via arbitration.

The Court also considered when contractual burdens may be imposed on non-parties. In particular, the Court relied on Peace River Hydro v. Petrowest Corp., 2022 SCC 41, to conclude that if Husky could not assign its warranty rights or transfer them to a receiver or trustee free of the arbitration obligation, then Husky should not exercise its warranty rights free of that obligation, either.

As a result, the Court found that

• Husky accepted the duty to arbitrate as a consequence of receiving contractual benefits
• Husky was bound by the arbitration agreement if it sought to enforce its warranty rights

Impact of limitations

As a result of this decision, Husky's claim arising from the contractual warranties was out of time as it failed to commence arbitration proceedings within the limitation period set out in the Limitations Act.

Husky had communicated with Technip about the alleged defects in 2015 and had filed its statement of claim in 2017. Because Husky was required to arbitrate those warranty claims, and it had been more than five years since those claims arose, Husky's right to commence arbitration was extinguished. However, Husky's claims in negligence, which did not arise from the contractual warranties, were not covered by the arbitration clause and were not out of time.

Takeaways

Third parties that benefit from rights as a non-parties to a contract should carefully review the dispute resolution provisions in the contract and assess whether they could be bound by an arbitration provision in the contract. In particular, where a third party seeks to enforce a contractual right under a contract that contains a dispute resolution provision that applies to all disputes, that party may be obligated to arbitrate the dispute.

This decision serves as a reminder that if a matter is properly brought by arbitration, a party that 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.

The application of arbitration obligations on a third party depended heavily on the interpretation of this particular contract. In light of this decision, when drafting and negotiating arbitration clauses, parties should give careful consideration to what parties, and what kinds of disputes, the dispute resolution provisions are intended to capture.

In addition, parties should carefully consider whether the dispute resolution mechanisms in the contract may necessitate bifurcated or overlapping proceedings, which could lead to expending additional costs and resources. A carefully drafted dispute resolution mechanism can avoid such a result.