Requirements for (Potentially) Binding Third Parties to an Arbitration Clause
By Josh Hobbs and Linda Jensen
The Alberta Court of Appeal decision in Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc[1] provides useful commentary on the unresolved question of whether a contractual clause requiring dispute resolution via arbitration can bind a third party to the contract. Although the Court was not required on the facts to settle the question — and expressly declined to do so — the Court identified circumstances that would be necessary for a third party to be bound to arbitrate. The Court’s reasons will be of interest to contract drafters.
In Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, the Alberta Court of Appeal allowed the appeal of a decision striking the appellant Husky’s warranty claims against an equipment supplier. The Court found that Husky was not bound by an arbitration clause contained in the contract between the supplier and Husky’s general contractor, even though its entitlement to the warranty claim arose from that contract.
Husky had retained the general contractor for the engineering, procurement and construction of a steam-assisted gravity drainage oil sands project. The general contractor contracted with the supplier for the design, manufacture, fabrication and delivery of ten steam generator modules for the project. The contract for supply of the steam generators included a clause stipulating that all warranties given by the supplier were for the benefit of both the general contractor and Husky and could be enforced by either of them.
The contract contained an arbitration clause requiring that “[a]ll disputes arising out of or in connection with the present PURCHASE ORDER shall be finally settled under the Rules or Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
In first instance, the applications judge had held that by taking up the warranty under the contract, Husky was bound to all aspects of the contract, including the arbitration provisions. On appeal, the Court held that Husky was not bound to proceed by arbitration. The reason boiled down to how the arbitration clause had been worded.
Clear and Explicit Language
The Court noted that there was no prior authority directly determining whether contracting parties can contractually bind a true non-party to arbitration, although some decisions have circled around the issue.[2]The Court found it unnecessary to decide that question for purposes of the appeal but nonetheless opined on the conditions that would be required. Key among them is clear contractual language.
In the Court’s view, “[i]f it is possible to [bind a third party], the requirement to arbitrate must be manifest. It must be expressed in clear and explicit language.”[3] The arbitration clause at issue was inadequate to meet that criterion, as it did not clearly and expressly state a requirement for Husky to pursue the warranty claim by arbitration, and competing interpretations of the application of the arbitration clause were reasonably available on the face of the contract. One interpretation bound Husky to arbitrate. The other interpretation altogether precluded Husky from compelling arbitration. The requirement to arbitrate was accordingly not expressed in clear and explicit language.
The consequence of failing to phrase the obligation to arbitrate in clear and explicit language was that “the non-party may choose litigation to enforce the benefit they have been conferred without realizing the contracting parties intended mandatory arbitration.”[4]
Overcoming Privity of Contract
The Court noted that while the doctrine of privity of contract can be relaxed where third parties seek to rely on contractual provisions made for their benefit, that exception is dependent on the intention of the parties. As a result, “[r]elying only on the principles of contract interpretation to find the obligation [to arbitrate] is not enough”[5] because third parties are not expected to have knowledge of the parties’ circumstances, intentions, and understandings leading up to the formation of the contract in question.
In addition to finding that the language of the arbitration clause was insufficient, the Court also observed that there was no evidence to suggest that Husky was involved in negotiations leading to the formation of the contract, nor evidence that it had any knowledge of the intentions of the contracting parties or their understanding. It is not clear from the decision whether the Court considered this to be an additional factor that might influence whether a third party should be bound, even where the arbitration clause contains explicit language, or alternatively whether evidence of a third party’s involvement in the negotiations or awareness of the contracting parties’ intentions could bridge the gap where the requirement to arbitrate is not expressed in clear and explicit language.
Conclusion
The Husky decision stops short of definitively answering whether a third party can be bound to arbitration absent their consent but emphasizes that any ability to do so would, at the very least, be contingent on the use of clear and explicit language to that effect in the arbitration clause. It also suggests that the extent of the third party’s involvement in discussions or negotiations prior to finalizing the contract may be a relevant factor. The decision provides important guidance to contracting parties looking to strengthen the argument for imposing an arbitration obligation on a non-party.
[1] 2024 ABCA 369 [“Husky”].
[2] See eg T Co Metals LLC v Federal Ems (Vessel), 2012 FCA 284; Landex Investments Company v John Volken Foundation, 2008 ABCA 333.
[3] Husky at para 31.
[4] Husky at para 32.
[5] Husky at para 31.
Josh Hobbs is a lawyer specialized in legal research and written advocacy. He provides services to multiple firms in Calgary and is regularly engaged by Bottom Line Research and Communications as one of its legal research consultants.
Linda Jensen is the principal and lead lawyer at Bottom Line Research and Communications, providing legal research and writing services to lawyers, corporations, and other agencies across Canada since 1993.
