It is a truism that arbitration is fundamentally a consensual mode of dispute resolution, meaning that only the parties to an arbitration agreement can be compelled to arbitrate. Something that is somewhat less clear, however, is the extent to which third-party beneficiaries to contracts are able to sue or be sued on such contracts. It is at the intersection of these two issues that a further, compelling question arises - as to what extent third parties to an arbitration agreement can also be compelled to arbitrate in circumstances where they are beneficiaries to the underlying contract.
In that regard, many commentators were somewhat surprised by the decision of the Alberta Court of King's Bench in Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2023 ABKB 545 that a third-party beneficiary to a contract can be bound by the contract's arbitration agreement, given that this conclusion seemingly led to an obligation to arbitrate in the absence of a warrantee's consent.
Recently, though, the Alberta Court of Appeal has provided further guidance (2024 ABCA 369), concluding that the warrantee could not be compelled to arbitrate in the absence of explicit language to that effect. Below, we review the Court of Appeal's decision and highlight its takeaways regarding the foregoing, as well as its commentary on whether contractual privity is a sufficient basis for non-parties to resist arbitration under such agreements.
Brief Factual Background
Husky Oil Operations Limited ("Husky") contracted with Snamprogetti Canada, which later became Saipem Canada Inc. ("Saipem"), for Saipem to be the contractor of an oil sands project (the "Prime Contract"). Saipem, in turn, entered into a contract with Technip Stone & Webster Process Technology, Inc and Technip USA, Inc (collectively referred to as "Technip"), under which Technip agreed to design, manufacture, and deliver steam generator modules for the project (the "Subcontract").
Notably, although Husky was not a party to the Subcontract, Clause PC 9 stipulated that all warranties provided by Technip to Saipem would also extend to Husky:
All warranties given by VENDOR [Technip] shall be given for the benefit of both the PURCHASER [Saipem] and CLIENT [Husky] and the warranties may be enforced by either the PURCHASER or CLIENT through the VENDOR.
When the project entered the commissioning phase, Husky discovered alleged defects in the modules, rending them unsafe and unfit for their intended use. As a result, Husky commenced an action in December 2016, seeking to recover under the warranties provided in the Subcontract. The statement of claim was later amended and served on Technip in November 2017.
Three years later, in October 2020, Husky requested a defence, prompting Technip to bring an application to dismiss or stay the action based on the dispute resolution provisions contained in the Subcontract.
Specifically, subclauses PC 13.2, 13.7, and 13.8 of the Subcontract provided as follows:
PC 13.2: In the event of a dispute between the PARTIES as to the performance of the SUPPLY or the interpretation, application or administration of the PURCHASE ORDER DOCUMENTS, the VENDOR shall perform the SUPPLY as directed by PURCHASER. All disputes between the PARTIES not resolved by the initial decision of PURCHASER's Representative, and all disputes arising out of this PURCHASE ORDER and its performance shall be settled in accordance with this PC 13.
[...]
PC 13.7: GENERAL TERMS AND CONDITIONS FOR PURCHASE ORDER DOCUMENTS - HIGH COMPLEXITY - GTC-COR-MATE-001-E Rev 05 shall be referred to and finally resolved by arbitration under the rules of the International Chamber of Commerce in accordance with the Arbitration Act of Alberta (the "Act").
PC 13.8: All disputes arising out of or in connection with the present PURCHASE ORDER shall be finally settled under the Rules or Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
[The term "PARTIES" was defined to only include the contractor, Saipem, and the vendor, Technip, but not Husky. Additionally, "PURCHASE ORDER" was defined as the contract between Saipem and Technip.]
Technip's application consisted of two main arguments: (1) the Subcontract required that this dispute be resolved through arbitration, as Husky could not benefit from the warranties without also being required to arbitrate under the Subcontract, and; (2) Husky was out of time to invoke arbitration and, as a result, was without a remedy.
Procedural History
The application was heard in 2022, at which time the applications judge dismissed Technip's arguments and permitted Husky to pursue its warranty claims by way of litigation. The judge held that Husky was not bound to arbitrate under PC 13, as the Subcontract did not expressly state that Husky was required to do so. Moreover, the Court noted that Husky was not privy to the Subcontract, further reinforcing that Husky had no obligation to arbitrate.
This decision was appealed to the Alberta Court of King's Bench, which framed the central issue as whether the warranty rights under PC 9 were independent and free from any limitations and conditions, or whether such rights were limited and could only be enforced through arbitration under PCs 13.7 and 13.8. Ultimately, the Court allowed the appeal and struck the warranty claims based on two findings.
First, the Court ruled that PCs 13.2 and PC 13.8 referred to "all disputes" as opposed to the other dispute provisions referring to disputes between "the parties" (i.e. Saipem and Technip), therefore indicating that PCs 13.2 and 13.8 intended to broadly capture disputes arising from non-parties, such as Husky. Accordingly, the Court concluded that the collective effect of PC 9, PC 13.2, and 13.8 meant that if Husky sought to enforce the warranties under the Subcontract, the dispute had to be resolved through arbitration.
Second, the Court concluded that this interpretation did not impermissibly impose obligations on Husky as a non-party without its consent. The Court referenced Fraser River Pile1, which held in relevant part that "any conditions purporting to limit the extent of the benefit or terms under which the benefit is to available must be clearly expressed."2 Accordingly, the Court concluded that warranty rights were "clearly" limited based on the intentions of the contracting parties, thereby giving Technip the discretion to impose arbitration as a required condition. The Court further determined that by seeking to enforce its warranty rights, Husky had effectively agreed to arbitrate the claims.
Given that arbitration was found to be the appropriate method for resolving the dispute, the Court further determined that Husky had failed to commence arbitration within the two-year limitation period stipulated under s. 3(1) of Alberta's Limitations Act. Since the statement of claim was served in 2017, it was too late for Husky to begin arbitration in 2022. As a result, the Court ruled that Husky's warranty-based claims were also time-barred.
The Decision of the Court of Appeal
Husky appealed, arguing that the chambers judge erred by: (1) determining that the arbitration clauses in the Subcontract applied to Husky; and (2) concluding that Husky had agreed to arbitrate the warranty claims. In response, Technip asserted that the contracting parties' intentions regarding the obligations of a non-party, such as Husky, were valid and enforceable under the Subcontract.
The Court of Appeal allowed Husky's appeal. First, the Court emphasized that arbitration owes its existence to the will of the parties and is a consensual process typically requiring an arbitration agreement.3 The Court acknowledged that an entity connected with a signatory to a contract containing an arbitration agreement could become bound by operation of law, but affirmed that non-signatories (e.g. agents, assignees, receivers) may only assert claims (by operation of law) through or under a signatory, effectively stepping into the contractual shoes of the signatory.4
By contrast, Husky's warranty claim was not made through a signatory. Consequently, the Court concluded that Husky was not a party that was bound by the arbitration agreement in the Contract.
On that point, the Court note the general proposition that contractual privity can be relaxed where non-parties seek to rely on contractual provisions made for their benefit, and that a "principled exception" to privity may apply "dependent on the intention of the contracting parties". On this point, the Court was careful to observe that the intentions of the contracting parties could not "fairly determine what obligations are owed by others", as conferring a benefit on a third party is distinct from purporting to impose an obligation on that third party.
That being said, Technip's argument in this case was somewhat different, in that it did not argue the principled exception to privity imposed upon Husky a free-standing obligation to arbitrate. Instead, Technip argued that the warranty included in the Subcontract (for Husky's benefit) was intended by Saipem and Technip to be subject to the requirement to arbitrate; in other words, Husky had warranty rights that it could exercise, but the exercise of those rights would be conditional upon submitting to arbitration.
On this point, the Court concluded (somewhat ambiguously) that "if it is possible" (emphasis added) to create such a qualified or conditional right, then the requirement to arbitrate must be explicitly stated in the contract in question. Relying on basic principles of contractual interpretation – including reference to surrounding circumstances known to the contracting parties at the time of contract formation – to impose such an obligation would not suffice, because non-parties (such as Husky) would not be aware of those circumstances (unless, for example, the non-party was involved in the negotiation of the contract in question).
In view of the foregoing, the Court held that the chambers judge erred in not considering the importance of mutual consent when contracting parties attempt to impose obligations on non-parties. Consequently, the Court allowed the appeal, thus permitting Husky to pursue its warranty claims through litigation.
Commentary
Despite the relative brevity of the Court of Appeal's decision, Husky Oil nevertheless provides an important clarification on the intersection between the rights of third-party beneficiaries and the ability to compel arbitration.
On the one hand, the result of Husky Oil should arguably come of no surprise insofar as the basis of arbitration lies in its consensual nature; without their consent, a party should presumably not be compelled to arbitrate. As the Court observed, it would be unfair to obligate non-parties – who are not privy to the arbitration agreement – based solely on the intention of the contracting parties, as this lacks the consent that arbitration requires. As a result, the outcome in this case seems intuitively correct.
That being said, readers may find Husky Oil unsatisfying insofar as the Court of Appeal declined to definitively resolve the question of whether it is possible to impose an obligation to arbitrate on a non-party in the absence of their consent. The manner in which Technip framed the issue is perhaps instructive in that respect, insofar as Technip characterize it not as a matter of imposing a free-standing obligation on Husky, but rather the granting of a conditional or qualified right (i.e. Husky was entitled to enforce its warranty rights if it agreed – after contract execution – to submit to arbitration). In that regard, Technip's position was not a significant expansion of arbitration into the domain of tort, but rather an issue of contractual interpretation.
However, it is not still not clear what the contractual basis for such an obligation would be, though, given the fundamental fact that the third party is not a party to the agreement in question. Arguably, the Court's reasoning suggests that Technip's position – if accepted – would amount to the third party effectively 'opting in' to the arbitration agreement contained within the underlying contract; however, this would then raise the issue of whether the other party (e.g. Saipem) would be entitled to participate in the arbitration. Alternatively, Husky's warranty rights could perhaps be construed as creating an implied collateral warranty (i.e. a contract) directly between Husky and Technip; in this case, uncertainty would arise as to whether the rules of procedure stated in the underlying arbitration agreement would also apply to the implied collateral warranty. This latter form of contractual relationship is more common in construction industry of the United Kingdom, due to the elimination in the 1990s of parties' ability to make tortious claims for economic loss. 5
For construction industry participants, however, the foregoing may be somewhat academic as a result of the manner in which rights and obligations are flowed down from the prime contract to the subcontracts. As readers will appreciate, prime contracts often create warranty rights in favour of the owner, and requires those warranty rights to be flowed down into the relevant subcontract(s) – along with the scope of work pertaining to the specific class of work involved - such that the owner is essentially a third-party beneficiary under the subcontract(s) in question. As well, the subcontract(s) typically incorporate the prime contract by reference and give the prime contract precedence over the subcontract in case of a conflict of terms. Under this fact pattern, it is difficult to envision a scenario in which a sub-contractual warranty provision would withstand scrutiny in the face of a conflict with the equivalent prime contract provision.
As a result, it is unclear how relevant Husky Oil may be to members of the construction industry, although it is entirely possible that similar language might arise. Consequently, we await to see if future decisions will offer a more definitive ruling on the possibility of compelling non-parties to arbitrate under agreements to which they are not privy.
Footnotes
1 Fraser River Pile & Dredge Ltd v Can-Dave Services, [1999] 3 SCR 108
2 Fraser River Pile & Dredge Ltd v Can-Dave Services, [1999] 3 SCR 108 at para 41.
3 Husky Oil Operations limited v Technip Stone & Webster Process Technology Inc, 2024 ABCA 369 at para 21.
4 Ibid at para 24.
5 Abbey Healthcare (Mill Hill) Ltd (Respondent) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Appellant), [2024] UKSC 23 at para 2, citing Murphy v Brentwood District Council [1991] 1 AC 398.
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