Project Owner Seeks to Bypass Arbitration Clause and Litigate Matter Before the Court

One unique element of construction law litigation is the way subcontractors and other third parties become involved in project disputes. With construction projects having so many moving parts, it is common to see disputes arise between subcontractors and general contractors, or the owners of a property that is being renovated or developed. In some cases, a project contract may require parties to a dispute to pursue arbitration before commencing litigation in the courts.

In a recent case from the Court of King’s Bench of Alberta, a third-party beneficiary of a contract sought to litigate a dispute concerning contractual warranties and bypass the contract’s requirement for “all disputes” to proceed through arbitration.

Beneficiary to a contractual warranty seeks to litigate instead of arbitrate

In the case of Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, Husky Oil Operations Limited (the “plaintiff”) was a beneficiary to a warranty in a construction contract who sought to pursue litigation in order to secure its claim. While the plaintiff was the project owner, the contract in question was only between the general contractor and subcontractor. The subcontractor (the “defendant”) argued that, pursuant to the terms of the contract, the plaintiff was required to pursue arbitration instead of litigation.

The plaintiff claimed that the arbitrator only had jurisdiction over the parties to the contract. In this case, the plaintiff was not a contract party and would not have agreed to a contract that contained an arbitration clause. The plaintiff also called out specific language in the contract that said third parties had no “right, remedy or claim” under the contract unless “specifically set forth.” Finally, the plaintiff claimed that the arbitration clause only applied to the general contractor and subcontractor, and in the alternative, their cause of action was outside of the scope of the contract’s applicability.

The defendant simply argued that the plaintiff chose to enforce its third-party rights under the contract, and therefore, the arbitration clause contained therein should be upheld. However, an application judge ruled in the plaintiff’s favour and the defendant appealed the decision, which brought the matter before the Court of King’s Bench.

Plaintiff argues it is not subject to contractual conditions on limitations

The Court reviewed the application judge’s decision, which focused on the terms of the contract, and found that the dispute resolution provisions contained within the contract only applied to the general contractor and subcontractor. While the plaintiff was referenced in other provisions within the contract, it was not specifically mentioned in the arbitration clause.

The Court first began its analysis by acknowledging that it had jurisdiction to rule on whether or not an arbitrator has jurisdiction. The Court then examined the existence of the plaintiff’s contract rights and found that under the contract, the plaintiff received the right to enforce performance warranties provided by the subcontractor. In looking at the nature of these rights, the Court heard the plaintiff’s arguments that they were freestanding and not subject to any conditions or limitations in the contract, including the need to arbitrate.

Defendant argues plaintiff’s rights are limited to the contract

On the other hand, the defendant argued that the plaintiff’s rights were qualified or limited to the contract. The Court looked at the language of the contract and highlighted several key provisions regarding disputes, including one which stated that:

“All warranties given by [subcontractor] shall be given for the benefit of both the [contractor] and [the plaintiff] and the warranties may be enforced by either the [contractor] or [plaintiff] through the [subcontractor] [PC9] [“PC” is short for “Particular Contractual Condition”]

In the event of a dispute between the Parties [i.e. the general and the subcontractor] as to the performance of the SUPPLY or the interpretation, application or administration of the [contract], the [subcontractor] shall perform the SUPPLY as directed by the [contractor].  All disputes between the parties not resolved by the initial decision of the [contractor’s] Representative, and all disputes arising out of this PURCHASE ORDER and its performance shall be settled in accordance with this PC 13 [i.e. the DISPUTE RESOLUTION / APPLICABLE LAW clause]…. All disputes arising out of or in connection with the present PURCHASE ORDER shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

Court finds some contract provisions apply to the plaintiff

The Court interpreted this to mean that some of the contract’s dispute-resolution provisions only applied to the general contractor and subcontractors, while others were not limited in such a way. The Court wrote that the contract only created rights for one party outside of the general contractor and subcontractors, and that was the plaintiff.

The Court added that “the wider scope of ‘all disputes’ (i.e. than “disputes between the Parties”) was obviously intended to capture the only other potential species of dispute arising from the contract i.e. disputes arising from (the plaintiff’s) enforcement of its contract rights, including its warranty rights.” The Court went on to note that if the dispute resolution clause was intended to apply only to the general contractor and subcontractors, the language would have referred to “disputes between the parties” instead of “all disputes.”

If plaintiff chooses to pursue warranties they must do so in accordance with the terms of the contract

The Court acknowledged that the plaintiff’ did not consent to the limiting provisions in the contract, particularly in relation to arbitration. However, it emphasized that the warranties only exist in the contract, and therefore, while the plaintiff did not have to pursue such warranties, if they choose to do so, they must do so in accordance with the contract’s terms. The Court provided the following analogy to explain its reasoning:

“ If one voluntarily picks up a stem with thorns, one is also voluntarily, and necessarily, picking up the thorns. Once (the plaintiff) decided to enforce its warranty right against the subcontractor, it effectively agreed to arbitration of any disputes over them.”

For these reasons, the Court overturned the application judge’s decision and required the plaintiff to pursue the matter through arbitration in accordance with the terms of the contract.

Contact DBH Law Advice on Construction Disputes and Contract Interpretation

The team of professional construction lawyers at DBH Law have the experience and technical knowledge to provide you with comprehensive legal advice and tailored strategies in order to work towards resolution of a construction-related dispute. We understand that having several parties involved in a construction project can quickly complicate things, particularly when parties do not see eye to eye, which is why we work with clients to quickly and efficiently resolve any issues that may arise. We also help parties resolve contract interpretation disputes to minimize the potential for future litigation. Contact us online or by phone at 403.252.9937 to learn more about how our construction law team can help you.