Incorporation of Arbitration Clauses by Reference: A Cautionary Tale

Written By Vasilis F.L. Pappas, Romeo Rojas and David J. Wahl

The British Columbia Supreme Court in MRC Total Build Ltd. v F&M Installations Ltd., 2019 BCSC 765 [MRC Total Build] recently considered an application by a general contractor to stay proceedings commenced by a subcontractor and refer the matter to arbitration where the relevant subcontract between them did not contain an express arbitration clause, but instead generally incorporated by reference the prime contract between the general contractor and the owner into the subcontract.

In particular, the prime contract contained a mandatory arbitration clause, as well as a provision requiring the general contractor to incorporate by reference all terms and conditions of the prime contract into all subcontracts. The relevant subcontract included a clause stating that the "Prime Contract, associated drawings and specifications for the scope of work are attached in Schedule I and form part of this Subcontract Agreement." However, while the subcontract expressly referenced a number of provisions of the prime contact, it did not expressly reference the arbitration provisions in the prime contract.

The court found that the threshold for a court to refer a matter to arbitration is that it is at least "arguable" that there is a valid and binding arbitration agreement between the parties. It found that while courts may consider whether an arbitration agreement exists, only in "clear" cases will it be appropriate for courts to rule on the existence of an arbitration agreement, and that it is otherwise for arbitral tribunals to rule on whether there is a valid and binding arbitration agreement. The court also noted that the British Columbia Court of Appeal (BCCA) in One West Holdings Ltd. v Greata Ranch Holdings Corp., 2014 BCCA 67, had previously upheld an arbitrator's decision that a general reference within an "entire agreement" clause to a separate agreement containing an arbitration clause was sufficient to create an arbitration agreement between the parties in that case. As a result, in the MRC Total Build case, the British Columbia Supreme Court stayed the court proceedings and referred the matter to arbitration.

This case highlights the importance of clearly setting out at the contract drafting stage the dispute resolution mechanism agreed by the parties, particularly when the parties desire to have their disputes resolved by arbitration. Failing to clearly and unequivocally express the parties’ intent to resolve their disputes by arbitration can, at best, lead to uncertainty and unnecessary costs and delay while the courts or the arbitrator determine whether the parties have agreed to arbitrate. At worst, it can lead to a determination that there is not a valid arbitration agreement. If that determination is made early in the process, the parties' dispute can then be referred to be determined by the courts. If that determination is made after an arbitration has been carried out—such as in enforcement proceedings—the successful party in the arbitration may find itself with an award in its favour that is unenforceable.

If a statutory limitations period expires while these jurisdictional issues are being worked out, in certain jurisdictions a party may find itself barred from pursuing any legal remedies. All of these issues can be avoided, or at least minimized, through carefully considered and drafted dispute resolution provisions, exercising particular care when such provisions are being incorporated by reference. Arbitration specialists should be consulted whenever such dispute resolution provisions are being contemplated to ensure that the parties will have a valid and binding arbitration clause that is current to recent developments in the law.

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