Construction Owner Bound By Subcontract Arbitration Clause

Can a construction owner litigate over subcontract warranties in its favour when the subcontract requires “all disputes” under the subcontract to be arbitrated?

In Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc., 2023 ABKB 545, Husky (the project owner) sued a subcontractor to enforce warranties contained in the subcontract between the general contractor and subcontractor. The warranties were for the benefit of Husky as the owner of the property. Husky was not a party to the contract and so considered itself not bound by the arbitration clause in the contract. It sued as a third-party beneficiary of the contract.

The defendant subcontractor applied to strike Husky’s claim based on a mandatory arbitration clause in the subcontract. In the first instance, the applications judge agreed with Husky, concluding the contract could not impose an arbitration burden on a non-signatory. On appeal to the Court of King’s Bench (a hearing de novo), Justice Lema allowed the appeal and struck the claims in contract.

Interpreting the terms of the subcontract, the court found that Husky was bound to follow the contractual dispute resolution provisions (i.e., to arbitrate). In particular, the court referenced the express subcontract provision that all warranties are for the benefit of both the general contractor and Husky, as well as a broad subcontract provision requiring “all disputes” to be resolved by arbitration (although this dispute resolution provision made no express reference to Husky). The court rejected an argument that the arbitration requirement was foisted on Husky. The benefit of the warranty provisions came with the limitation that any related dispute must be resolved by arbitration (“…by seeking to enforce its warranty right, Husky effectively signed on to the accompanying arbitration mechanism and, by extension, became a party to it.”)

The court ordered Husky’s contractual claims to be struck from its Statement of Claim (i.e., the claims to enforce Husky’s warranty rights under the subcontract). The limitation period to arbitrate had passed, so Husky is left with no contractual remedy.

Husky also claimed against the subcontractor in tort (negligence), and the tort claim survives.  Of course, Husky’s rights in tort might not be co-extensive with its rights under the warranty (e.g., limits on the recovery of pure economic loss in tort).

This case provides yet another illustration of the risks associated with the intersection of arbitration agreements and limitations statutes. More significantly, it illustrates a complication associated with the enforceability of subcontractor warranties. I wouldn't have anticipated the conclusion that the owner is bound by an arbitration agreement between contractor and subcontractor.

Husky and Technip have both appealed Justice Lema’s decision to the Court of Appeal.

This article was originally published in the Canadian College of Construction Lawyers Legal Update #165.

2023 ABKB 545 (CanLII) | Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc | CanLII