Third-Party Beneficiary of a Contract Bound by Mandatory Arbitration Clause
Constructive Thoughts Newsletter
November 2023 - 6 min read
The Court had to determine whether an owner, as third-party beneficiary of a subcontract, could litigate contractual warranty claims against a subcontractor, when the subcontract required “all disputes” under the subcontract be arbitrated. The Court determined that the owner was required to arbitrate its warranty claims against the subcontractor, but could continue to litigate its negligence claims against the subcontractor, which did not arise under the subcontract.
In contractual arrangements, a third-party who is not a signatory to the contract may be given certain rights by the contracting parties. This commonly arises on construction projects, where a subcontractor will have warranty obligations to the owner, even though the owner and subcontractor do not have a direct contract with each other. In these circumstances the specific contractual language must be analyzed to determine whether the rights given to the third-party are freestanding, or subject to any associated conditions or limitations imposed by the contract.
In Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc., the Court of King’s Bench of Alberta had to determine whether a third-party beneficiary to a subcontract was barred from litigating to enforce warranty obligations under a subcontract if the subcontract required warranty disputes to be arbitrated.
Husky was the project owner and a non-signatory, third-party beneficiary to a subcontract between its general contractor (Saipem) and its subcontractor, Technip.
Husky commenced litigation by filing a Statement of Claim seeking to enforce certain warranty obligations as against Technip under the subcontract. Husky also advanced separate negligence claims. Husky, in doing so, was attempting to rely on what it argued was the nature of the rights conferred to it under the subcontract. Technip took issue with Husky commencing litigation, arguing that Husky was required to enforce its warranty rights pursuant to the express terms of the subcontract, “all disputes” under the subcontract required arbitration.
The application was initially heard by Applications Judge Prowse. AJ Prowse focussed on the terms of the subcontract, and held that the dispute resolution provisions, including the arbitration provisions, applied only to the contracting parties – i.e. Saipem and Technip. While acknowledging that Husky was referred to in various places in the subcontract, including as the beneficiary of certain subcontractor warranties, AJ Prowse determined that did not extend to any of the dispute-resolution provisions and Husky could proceed with litigating its warranty claim.
Technip appealed AJ Prowse’s decision. Justice Lema heard the appeal, and held that Husky’s warranty claims must be arbitrated, but the negligence claims could still be litigated.
Husky’s Warranty Claims Must be Arbitrated
Neither Husky nor Technip disputed Husky’s right, as a non-signatory of the subcontract, to enforce its warranty rights as against Technip. The issue was the scope of the warranty right conferred by Technip – i.e. whether Husky received a limited or qualified right and was bound to arbitrate any warranty disputes.
Husky took the position that the rights it was conferred under the subcontract were freestanding and not subject to any associated limitations or conditions imposed by the subcontract (in this case the requirement to arbitrate). Further, Husky argued that as a non-signatory of the subcontract, it could not be subject to any burdens or obligations under the subcontract.
Technip took the position that Husky received a qualified or limited contractual warranty right, the specific qualification of limitation being that where a dispute arises, including a warranty dispute, that those disputes are required to be resolved by arbitration. Husky, in taking up the right to enforce the warranty rights it was conferred, agreed to, and was bound by, the associated arbitration burden.
Justice Lema determined that the specific subcontract wording gave Husky certain rights, and that disputes over such rights must be arbitrated. The subcontract was not attempting to impose burdens on Husky without its consent. Rather, it required Husky to arbitrate any warranty dispute with Technip, but only if Husky decided to enforce those warranties by exercising its qualified or limited right. It was Technip’s decision, which was accepted by Saipem through the subcontract, to extend the warranty right to Husky. It was within Technip’s power (as long as it was accepted by Saipem via the subcontract) to decide whether any conditions or terms would attach to Husky’s warranty rights.
Justice Lema found Husky’s position untenable, as it was seeking to strip its warranty-enforcement right from its associated mode of enforcement provision: binding arbitration. Ultimately, Husky was not obliged to proceed to arbitration and did not have any freestanding duty to do so. But if it chose to enforce its warranty rights under the subcontract, it had to do so through arbitration.
Husky Could still Litigate its Negligence Claim
Justice Lema determined that Husky’s negligence claim was not caught by the subcontract arbitration provision, since it arises under the law of negligence. As such, the negligence claim was distinct from the subcontract, and from the contractual warranties that Husky had an obligation to arbitrate. Husky did not sign on to, or otherwise agree to, an all-encompassing arbitration clause that would prevent it from proceeding with its negligence claim. Husky’s sole connection to the arbitration clause was its attempt to enforce contractual warranties it was conferred by the parties to the subcontract.
In obiter, Justice Lema noted the subcontract terms may have some bearing on the existence of a duty of care owed by Technip to Husky, a breach of that duty, or other elements of Husky’s negligence claim.
In this case, since Husky was required to arbitrate its warranty claims, but had not commenced an arbitration against Technip, its ability to arbitrate those claims was barred. However, as Husky’s negligence claim against Technip was independent of the subcontract, it was not arbitrable and thus was not subject to the expiry of the limitation period and could proceed.
This decision demonstrates that the choice of dispute resolution mechanism in a contract can have wide implications on a construction project. Particularly for an owner seeking to enforce warranty claims directly against a subcontractor, determining whether such claims are subject to arbitration or litigation is integral in choosing the proper forum to seek enforcement of those obligations.
If you would like advice on the interpretation and implications of contractual rights as they relate to construction projects, please contact Anthony Burden or Logan Maddin in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Construction Group for guidance and assistance in this area.
Link to decision: Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc., 2023 ABKB 545