Can A Non-Party to a Contract Be Required to Arbitrate? Alberta Court Says Yes

Can A Non-Party to a Contract Be Required to Arbitrate?  Alberta Court Says Yes

Ordinarily, third, or non-parties to a contract are not bound by its provisions.  However, there are exceptions, as evidenced by a recent decision from the Court of King’s Bench in Alberta in the matter of Husky Oil Operations Limited v. Technip Stone & Webster Process Technology Inc., 2023, ABKB 545.  In this case, the Court determined that if a third party intended to benefit from certain contract provisions, namely warranty, then the third party would also be bound by any terms and conditions relating to that warranty, including an obligation to arbitrate.

Background:

In this matter there was a contract between a general contractor (‘GC’) and Technip Stone & Webster Process Technology Inc. (‘Technip’).  Husky Oil Operations Limited (‘Husky’) was the project owner, and thus, the beneficiary of the end product and warranty provisions as set out in the contract between Technip and the GC.  This contract contained a dispute resolution clause that required ‘all disputes’ to be arbitrated. 

Husky attempted to litigate both enforcement of the contractual warranties and a claim of negligence.  Husky argued, that as a third-party, it was not bound by the contractual provision requiring arbitration of disputes.

Unsurprisingly, Technip disagreed, and applied to strike Husky’s claim.  Central to Technip’s argument was that Husky could not sever the benefits of the contract, in this case the third-party warranties, from the obligations, namely the requirement to arbitrate disputes.

Issues

The application judge found that though Husky was referenced several times in the contract between Technip and the general contractor, he found that the dispute resolution provisions did not apply to Husky. 

Upon review, Lema, J. disagreed, and instead found that Husky was obligated to arbitrate the warranty issues.  In his decision, he addressed several key issues:

First, he found that the court had jurisdiction to determine the arbitrator’s jurisdiction in this matter, citing Peace River Hydro Partners v. Petrowest Corp, 2022 SCC 41.

Turning to the contractual interpretation, he found that Husky was entitled to enforce its third-party contractual rights; this was not disputed by Technip.  The issue then became a determination of the scope of Husky’s rights and their applicability in this situation.  

On one hand, it was found that the contract contemplated a wide range of disputes, which in theory, would be covered by the dispute resolution clause.  If the dispute were between the general contractor and Technip, then the interpretation would be straightforward: unresolved disputes would be subject to arbitration.

However, the question then became to what extent, if any, that third parties such as Husky would be bound by those same provisions.  In his analysis, the judge found that the dispute resolution provision would apply to Husky because it was a named end-client, however, that it would not apply to any other third parties.

No Burdens Without Consent

The judge expanded upon his analysis, essentially stating that Husky was free to accept or decline the warranty provisions, however, that it could not ‘cherry-pick’ language within the contract.

“The general-subcontractor contract did not oblige Husky to do anything or refrain from doing anything or otherwise affect Husky.  It did require Husky to arbitrate any warranty disputes with Technip but only if Husky decided to enforce those warranties – i.e. only after Husky decided to exercise its limited or qualified warranty right – and disputes arose.”

In other words, if Husky wanted to benefit from the warranty, then they were bound to accept its terms and conditions, including the requirement to arbitrate.  If Husky declined the warranty terms, they would, in theory, be free to litigate warranty claims except that there would now be no warranty to litigate against.

Warranty Window & Negligence Claim

Though Husky was obligated to arbitrate its warranty dispute, it was also found that the warranty period had elapsed, thus making the warranty claim a nullity.  However, the judge was also careful to note that Husky’s claim in negligence as against Technip fell outside the ambit of the warranty language, thus freeing Husky to proceed on those grounds.

Summary

If a contract provides certain rights and benefits to a third party, then the third party is advised to familiarize themselves with any rights, obligations or risks that flow to them from the contract.  Dispute resolution clauses, including process (e.g. mediation, arbitration), jurisdiction and limitations should be subject to careful review.  As in this case, limitation periods may expire before any type of action can be heard.

In the words of the judge: ‘If one voluntarily picks up a stem with thorns, one is also voluntarily, and necessarily, picking up the thorns.’  In short, avoid the thorns if you can, and if you need to pick up the stem, then take steps to protect yourself.