Husky Oil Operations Limited v. Technip Stone & Webster Process Technology Inc.[1]
Summary
This case involves an interesting set of facts in a construction context.
Husky Oil Operations Limited (“Husky Oil”), the project owner, commenced an action against Technip Stone & Webster Process Technology Inc. (“Technip”), one of the subcontractors of Husky Oil’s general contractor.
While that is not at all uncommon, Husky Oil chose to sue Technip as a third party beneficiary under the warranty provisions of the subcontract agreement (the “Subcontract”). The Subcontract contained a contractual provision requiring “all disputes” to be subject to arbitration.
Technip brought an application to stay the action on the basis of this arbitration clause. While the typical response to a stay of this nature is to simply commence an arbitration, the problem in this case is that Husky Oil was past the limitations period to commence an arbitration under the Alberta Limitations Act. Enforcing the arbitration clause against Husky Oil would effectively dismiss Husky Oil’s right to pursue a warranty claim against Technip completely.
Husky Oil argued that it was not a party to the Subcontract and that it did not agree to this arbitration clause.
Nature of Husky Oil’s rights
There was no dispute as to whether Husky Oil had third party rights under the Subcontract. Instead, the issue turned on the nature of Husky Oil’s rights and whether they could only exercise them pursuant to the Subcontract entered into between Technip and the general contractor.
Husky Oil argued that its rights were “freestanding [and] not subject to any associated conditions or limitations imposed by the contract, including a duty to arbitrate disputes over them.” Moreover, as a non-signatory, Husky Oil argued that “it cannot be subjected to any burdens or obligations under the contract.”
Technip argued that Husky Oil’s rights were inherently qualified or limited in nature, particularly where disputes arose, which would require that the warranty right be limited to enforcement via arbitration. Moreover, in seeking to benefit from such a right, Husky Oil “necessarily took up, and agreed to, the associated arbitration burden.”
Husky Oil’s warranty rights – overly limited, or unduly enlarged?
The Court found that Husky Oil was bound by the arbitration clause in the Subcontract.
The Court emphasized that the Subcontract did not impose burdens on Husky Oil without their consent, nor did it oblige Husky Oil to do anything, refrain from doing anything, or affect Husky Oil in any other way. Rather:
- It was within Technip’s power to extend the warranty right to Husky Oil and to decide on the scope of that warranty right.
- Husky Oil chose not to bargain for its rights under the Subcontract.
- Husky Oil chose to accept the limited right given to it by Technip by seeking to enforce the warranty.
- Husky Oil’s obligation to arbitrate any warranty disputes only arose if Husky Oil chose to enforce the warranty.
If Husky Oil chose to exercise this warranty right, then that right was naturally limited by the arbitration requirement:
This is not “foisting an arbitration on Husky” or “violating the sanctity of privity of contracts.” It was Husky’s choice to take up the right given to it by Technip i.e. to seek enforcement of the warranties. That necessarily meant taking up the right with any attaching qualification or limitation – in this case, the restriction to resolving warranty disputes via arbitration.[2]
The Court went further, explaining that if Husky Oil did not want to arbitrate their warranty disputes, they should have never exercised their warranty rights to begin with, but that by seeking to litigate the issue, Husky Oil was effectively “attempting to strip its warranty-enforcement right from its associated mode-of-enforcement (i.e., mandatory arbitration) provision. In other words, Husky is seeking to enlarge the right given to it under the contract.”[3]
Too late to arbitrate?
The fact that the limitation period to commence an arbitration in relation to the warranty had passed had no relevance to the Court’s finding regarding the applicability of arbitration clauses to third party beneficiary claims. The arbitration clause was found to be valid and enforceable. As such, the Court’s determination on the limitations period issue was simply a fact-specific exercise and in this case, Husky Oil was deemed to have failed to commence proceedings within the two year limitation period specified in the Alberta Limitations Act.
It is worth noting that, notwithstanding dismissal of the contractual warranty claim, Husky Oil was still able to pursue Technip for negligence, which did not depend on the terms of the Subcontract. The reference to “all disputes” in this particular arbitration clause was found to be limited only to contractual warranty claims and Husky Oil was not found to have agreed to arbitrate any and all other disputes.
Conclusion
Arbitration provisions are often seen as beneficial in construction agreements; however, as soon as disputes are in the air, it is extremely important to review these terms and properly assess what notice and limitation periods may apply.
As a result of Husky Oil v. Technip Stone, third-party beneficiaries would be wise to assume that their rights are subject to any contractual dispute-resolution clauses applying to warranty rights. Third party beneficiaries should therefore be aware of any limitations deadlines that may require them to commence arbitration proceedings, in order avoid the same fate as Husky Oil did in this case.
Miller Thomson LLP would be happy to assist in identifying any limitations deadlines and recommended next steps that may arise.
We leave you with some parting words from Justice Lema’s decision:
“If one voluntarily picks up a stem with thorns, one is also voluntarily, and necessarily, picking up the thorns. Once [a third party beneficiary] decides to enforce its warranty right against the subcontractor, it effectively agrees to arbitration of any disputes over them.”
[1] Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc., 2023 ABKB 545, online: <https://canlii.ca/t/k0cxp>
[2] Ibid at para 36.
[3] Ibid at para 39.
