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Mandatory Arbitration and Incorporation by Reference Clauses: Determining Party Intent

Malcolm Drilling Company Inc. v. The Graham-Aecon Joint Venture[1] is a reminder to contracting parties of the need to craft clear dispute resolution clauses.

During the construction of an odour control treatment facility, Malcolm Drilling Company Inc., the subcontractor on the project, encountered difficulties during drilling and was forced to abandon some of its equipment.

Malcolm Drilling later filed a civil claim in the British Columbia Supreme Court against the general contractor, Graham-Aecon Joint Venture, for the cost of the abandoned equipment valued at $530,000.

Graham sought a stay of proceedings on the basis that the parties were contractually bound to arbitrate project disputes. Malcolm Drilling took the position that arbitration was voluntary, and the parties had the choice of resolution through the Court.

The sole legal issue was whether the dispute resolution clauses in the subcontract mandated arbitration.

The Court found that arbitration was indeed mandated under the subcontract.

To begin its analysis, the Court reviewed the language of both the prime contract and subcontract. The prime contract, between Graham and the Greater Vancouver Sewerage and Drainage District, made clear that arbitration was voluntary and if the parties did not agree to arbitrate, a court of competent jurisdiction in British Columbia could decide the matter. The prime contract also contained a clause requiring all subcontracts to incorporate all prime contract terms.

There was a mirror “incorporation by reference” clause in the subcontract between Malcolm Drilling and Graham suggesting the parties would be bound by the terms of the prime contract. This, however, did not end the Court’s inquiry because the subcontract also contained a stepped progression toward arbitration. That is, the contractor must provide its initial decision in a dispute between the parties and if the parties are dissatisfied with the initial decision, they move on to mediation. Then, if mediation is unsuccessful, one of the parties “shall be entitled to give the other a request to arbitration”. 

The stepped progression in combination with such phrases in the subcontract as “shall be settled as follows” and “shall be entitled to give the other notice of a request to arbitrate” and “the decision of the arbitrator will be final and binding upon the parties” were all viewed by the Court as key indicators of the parties’ intent to make arbitration mandatory.

Despite the use of an incorporation by reference clause in the subcontract and apparent conflict between the prime contract and subcontract in utilizing arbitration, the Court reasoned that the true intent of the parties required further investigation. Ultimately, it was the use of stepped progression dispute clauses which made it clear that arbitration was mandatory in the subcontract.

Furthermore, the Court pointed to the fact that as part of the dispute resolution clauses, Graham was given a peremptory right to refuse arbitration. This right implied that arbitration must be mandatory because if it were not, the peremptory right would have no meaning.

The Court determined there was no actual conflict between the prime contract and the subcontract and the two could be read harmoniously. The dispute clauses in the prime contract allowed the parties to choose whether they wanted to arbitrate, and the subcontract’s dispute clauses were merely an indication of the parties’ agreement to mandate arbitration as allowed under the prime contract.

The Court focused on the structure of the dispute provision in the subcontract as the main basis for its ruling and also reflected upon the evolution of the judiciary’s response to arbitration clauses in contracts. A historic period of “judicial hostility” was eventually replaced by a clear support of and strong deference to arbitration clauses as evidence by the Supreme Court of Canada’s ruling in Seidel v. Telus Communications Inc.[2] Moreover, in British Columbia, the legislature communicated a clear intent in the province’s Arbitration Act that arbitration clauses must be given deference by a court unless it is determined that an arbitration agreement is “void, inoperable or incapable of being performed.”  This is coupled with the competence-competence principle, whereby any jurisdictional issue raised with respect to arbitration agreements must first be decided by the arbitrator.[3]

Taken together, these factors were the turning point for the court in ruling that arbitration was mandatory under the subcontract. The stay of proceedings was therefore granted to Graham.

Malcolm Drilling signals the importance of clear drafting especially as it pertains to dispute resolution clauses.

If it is the parties’ intent to have mandatory arbitration following other dispute resolution steps, they should explicitly state that each step is a condition precedent to the next.  For instance, the contactor must first provide its decision in writing concerning the dispute as a condition precedent to seeking mediation, an unsuccessful mediation is then a condition precedent to arbitration and an arbitrator’s decision shall be final and binding upon the parties.

In Malcolm Drilling, we see the court placing emphasis on the surrounding context and contractual language incorporated by the parties even where an incorporation of reference clause is used. No party should simply rely on boilerplate language but be mindful that courts may look past the incorporation of reference clause to determine “true” intent.  Parties should ensure they are familiar with the incorporation of reference clauses in both the prime contract and subcontract and have a clear means to avoid any apparent or actual conflict between such clauses in addition to the dispute resolution provisions.


[3] Clayworth v. Octaform Systems Inc., 2020 BCCA 117.