With Strings Attached? Alberta Court of Appeal Issues New Guidance About Whether Non-Parties to a Contract Can Be Compelled to Arbitrate

In a recent decision, Husky Oil Operations Limited v. Technip Stone & Webster Process Technology Inc., the Alberta Court of Appeal provided guidance about whether a non-party to a contract can be bound to arbitrate disputes about a contractual benefit provided to it. The Court of Appeal determined that, to make this possible, the contracting parties must make that requirement clear and explicit.

The decision of the Court of Appeal underscores the importance of party consent to arbitrate and that the obligation to arbitrate will generally not be imposed in the absence of that consent.

Background

The appellant, Husky Oil Operations Limited (Husky), retained a general contractor to construct parts of an oil sands facility near Fort McMurray, Alberta. The general contractor subcontracted with Technip Stone & Webster Process Technology, Inc. and Technip USA, Inc. (Technip) to complete a portion of the work. The subcontract included a contractual warranty for the benefit of Husky and the general contractor. The subcontract also provided a mandatory arbitration provision that referred all disputes to arbitration. Husky was not a party to the subcontract. After Husky allegedly discovered defects in Technip’s work, it filed a Statement of Claim in the Alberta Court of Queen’s Bench (as it was then) against Technip for breach of warranties and negligence in manufacture.

Technip brought an application to dismiss or stay the action because Husky was obligated to resolve its dispute by arbitration. The Applications Judge dismissed the application, holding that Husky was not bound to arbitrate because it was not a party to the contract, and the arbitration provision did not state that Husky must pursue warranty claims by arbitration.

Technip appealed to a Justice of the Court of King’s Bench. The Justice allowed the appeal, determining that although some parts of the dispute resolution provisions were limited by reference to “the Parties,” the reference to “all disputes” in the final clause of the dispute resolution provision was wider in scope and intended to capture disputes about warranty claims.

The Justice also found that the requirement to arbitrate was not an imposition of a contractual obligation on a non-party without consent. Instead, the requirement to arbitrate was a condition attaching to a contractual benefit, being the warranty. On that basis, the Justice determined that Husky was required to arbitrate the warranty dispute, but that it was out of time to do so. As a result, the warranty claims in Husky’s Statement of Claim were struck. Husky appealed this decision to the Court of Appeal.

The Court of Appeal Decision

The Court of Appeal reviewed the doctrine of privity of contract and observed that, generally, a contract cannot confer rights or impose obligations except on the parties to it, but the doctrine may be relaxed when contracting parties provide an express or implied stipulation that the benefit of a provision is to be shared with a non-party. The Court also noted that while contractual intention can fairly determine what contractual benefits are shared with non-parties, contractual intention cannot determine what obligations third parties owe to the contractual parties.

The Court of Appeal declined to rule on whether or not it was possible for contractual parties to impose an obligation to arbitrate on a non-party. The Court did, however, explain that if it was possible to do so, the requirement to arbitrate must be manifest and expressed in clear and explicit language. The Court explained that relying on principles of contractual interpretation to find the obligation would not be enough because the non-party would not have been involved in the formation of the contract and would not have knowledge of the intentions of the parties at the time of contract formation.

On this basis, the Court of Appeal allowed the appeal. The Court concluded that the contract did not provide clear and explicit language that required Husky to enforce warranty claims by arbitration. Husky was therefore entitled to pursue its warranty claims by litigation.

Key Takeaways

The Court of Appeal’s decision clarifies that arbitrations should not be lightly imposed on non-parties to an arbitration agreement. While the Court was skeptical about whether arbitration could be imposed on a non-party at all, it was clear that nothing less than a clear and express arbitration provision would be necessary to bind a non-party to arbitration. This decision sets a strict but clear requirement for including non-parties to an arbitration obligation.

For more information, please contact the authors or any other member of our Arbitration group.