Arbitration of Multi-Party Disputes, Vol. 4 No. 4

Arbitration of Multi-Party Disputes

It is probably fair to say that disputes are an integral part of construction projects. Most are settled through negotiation or mediation. Some, however, end up before a judge or an arbitrator.

For obvious reasons, many parties prefer arbitration to litigation, particularly for the determination of disputes of a technical nature. Most construction contracts therefore contain arbitration clauses, pursuant to which the parties agree to arbitrate, rather than litigate, their disputes.

Another fact of life in the construction industry, however, is the involvement of different parties and different contractual relationships. These relationships raise important issues to be considered in the context of arbitration clauses in contracts.

Where a dispute arises between Owner and Contractor, for example, it often also involves a Consultant. If the Owner claims against the Contractor for delay, the Contractor may want to show that the Consultant caused the delay. The contract between the Owner and the Contractor may provide for arbitration of their dispute. The contract between the Contractor and the Consultant may also provide for arbitration of their dispute. However, there is usually nothing in either of these two arbitration clauses to ensure that all three parties will be involved in the same arbitration proceeding. Of course, where the contract between the Contractor and the Consultant does not have an arbitration clause, the Contractor cannot force the Consultant to arbitrate at all - so the same problem arises.

That often leaves a Defendant in arbitration proceedings in a difficult position.

In its arbitration with the Owner, to use the simple example above, the Contractor may be unable to properly defend the claim without the assistance of the Consultant. The Contractor will also be unable to flow any liability it may have to the Owner through to the Consultant in the arbitration, because the Consultant is not a party to the arbitration between the Owner and the Contractor.

In its arbitration with the Consultant, the Contractor may be unable to prove its claim against the Consultant without the assistance of the Owner, who will probably be reluctant to assist the Contractor.

The Contractor may be forced to take different, inconsistent positions in the two arbitrations. In defending against the claim of the Owner, the Contractor may want to deny that there was any delay or liability to the Owner, while in the arbitration of its claim against the Consultant, the Contractor will have to allege and try to prove that there was delay and that it has some liability to the Owner, for which the Consultant should indemnify it.

The Contractor's claim against the Consultant is usually contingent upon the result of its arbitration with the Owner. Until it has been decided that it is liable to the Owner, it will not have a claim for indemnity from the Consultant. However, the wording of its agreement with the Consultant may require notice and perhaps even commencement of arbitration proceedings against the Consultant before the conclusion of the arbitration between the Owner and the Contractor.

In a recent Alberta case, Man-Shield (Alberta) Construction Inc. v. Calgary Board of Education, the contractor commenced arbitration proceedings against the owner. The owner wanted to seek indemnification from the architect, who in turn intended to seek indemnification from the engineer. On the basis of the arbitration clauses in the respective agreements, the court found that the owner could compel the architect to arbitrate any dispute between the owner and the architect in a different arbitration, but had no right to compel the architect to participate in the arbitration between the owner and the contractor. The architect had no arbitration agreement with the engineer and could not compel the engineer to arbitrate.

Section 6 of the Alberta Arbitration Act allows the court to intervene in arbitration proceedings only to assist the arbitration process, to enforce the arbitration agreement, to enforce an arbitration award and "to prevent manifestly unfair or unequal treatment of a party to an arbitration agreement". In Man-Shield, the court stayed the arbitration between the contractor and the owner on the "unfair or unequal treatment" basis, to allow legal proceedings involving all the parties, to proceed.

This, however, will not apply in every case. Section 7 of the Alberta Arbitration Act provides that, except in very limited circumstances, the court shall stay a court proceeding in respect of a matter to be submitted to arbitration upon application by another party to the arbitration agreement. The BC Commercial Arbitration Act has a similar provision ("…the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed".)

In our example above, the Owner and the Contractor may compel each other to arbitrate their dispute. If either of the two commences legal proceedings, the other may apply to stay those proceedings and the court shall (or must) grant the stay. If the Contractor wants to involve the Consultant in its arbitration with the Owner, both the Owner and the Consultant could simply refuse, because the court will not compel someone, who is not a party to an arbitration agreement, to participate in arbitration proceedings.

Any party to an arbitration agreement can therefore effectively prevent court proceedings, where the dispute is covered by an agreement to arbitrate, and can refuse to participate in a multi-party arbitration - unless the arbitration clauses in the various agreements have been very carefully worded.

In circumstances, such as construction projects, where multi-party disputes can reasonably be anticipated, the prudent option may be not to agree to arbitrate at all, unless there is some certainty that all the potential parties to the dispute agree - and can therefore be compelled - to participate in the same arbitration.

Rinus de Waal is Associate Counsel and the Head of the Construction Practice Group in the Calgary office of Fasken Martineau DuMoulin LLP. He can be reached at 403-261-5350 or by email at rdewaal@cgy.fasken.com.