Arbitrate Or Litigate: Supreme Court Of British Columbia Reinforces The Potentially Broad Reach Of Arbitration Clauses In Construction Contracts

Construction contracts often include arbitration clauses, providing parties with an alternative path to dispute outside of court. In a recent BC Supreme Court decision, the Court ordered a stay of a lawsuit filed by an owner in favour of arbitration, concluding that although the owner was not technically a signatory to the construction contract containing the arbitration clause, there was an arguable case that the owner could be bound by the arbitration clause.

The case

The dispute arose from the construction of a rental housing development project located in Sooke, British Columbia. Robert Foster and GT Mann Contracting Ltd. (GT Mann) entered into a construction contract, which included an arbitration clause permitting the parties to refer disputes to arbitration following mediation.¹ The project lands were owned by 2197 Otter Point Properties Nominee Ltd., a company for which Mr. Foster was the sole shareholder, director and officer. The owner was not a party to the construction contract.² One month after project completion, GT Mann filed a builder’s lien claim in the amount of CA$3,483,753.36, which was discharged from title by posting a lien bond as security.³ Following an unsuccessful mediation, GT Mann issued three settlement offers, each referencing Rule 9-1 of the Supreme Court Civil Rules, the rule for formal offers.

The owner then filed a lawsuit against GT Mann and its principal claiming damages for breach of contract, fraud, breach of fiduciary duty, breaches of duty of care, negligence and negligent misrepresentation.⁴ GT Mann responded with an application to stay the proceedings citing the contractual agreement to arbitrate construction disputes, and to strike the settlement offer materials which the owner had included in the court record.

Court’s decision

Under Section 7(1) of the Arbitration Act, a court must stay proceedings in favour of arbitration where the applicant establishes an arguable case on four technical prerequisites, as set out by the Supreme Court of Canada in Peace River Hydro Partners v. Petrowest Corporation, 2022 SCC 41 (Peace River Hydro Partners):

1. an arbitration agreement exists;
2. a party to the arbitration agreement has commenced legal proceedings against another party to the agreement;
3. the legal proceedings are in respect of a matter agreed to be submitted to arbitration; and
4. the application is brought timely (i.e., before the applicant takes a step in the proceeding).⁵

The owner argued that because it was not a named party to the contract, no arbitration agreement existed, and that GT Mann had not satisfied the first Section 7(1) prerequisite.⁶ The Court rejected this narrow approach. Applying the broad interpretation of “party” endorsed in Peace River Hydro Partners, Justice Matthews held that there was an arguable case that the arbitration agreement bound the owner.⁷ This arguable case standard reflects the “competence-competence” principle, which gives precedence to the arbitral process. In this case, this meant allowing the arbitrator to determine whether the owner was a party to the contract.

Key factors included:

• the owner’s own pleading that it was the “owner” and a party to the contract;
• the owner’s ownership of the lands that were the subject of the contract;
• the owner’s relationship with Mr. Foster, the owner’s sole shareholder, who was a named party to the contract; and
• a concern that Mr. Foster may have been attempting to avoid arbitration by directing his corporate owner entity to commence proceedings.⁸

The owner argued that issuing formal settlement offers amounted to a step in the proceeding and an election by GT Mann to proceed with litigation rather than arbitration. The Court disagreed. Justice Matthews held that a settlement offer is qualitatively different from litigation steps such as demands for particulars or applications to strike, which engage with the court process. An offer to settle is simply an attempt to resolve the underlying dispute and is equally consistent with resolving it in or out of court. The Court further observed that treating settlement offers as steps in the proceeding would have a chilling effect on settlement, undermining the public policy rationale for without prejudice privilege.⁹

The Court ordered a complete stay of proceedings, including claims against Graeme Mann personally, on the basis that the owner’s claims against GT Mann and Graeme Mann were inextricably interwoven such that an arbitrator must determine them together.¹⁰

Takeaways

The decision highlights the pro-arbitration approach taken by the courts in BC, reinforcing some of the important principles guiding arbitration in construction contracts:

1. Courts adopt a broad interpretation of the term “party” under the Arbitration Act in determining whether a party is arguably bound by an arbitration agreement. An entity connected with a signatory, such as a related company that owns the project lands and pleads it is a party to the contract, may find itself bound by the arbitration agreement.
2. Issuing formal Rule 9-1 settlement offers will not, on its own, amount to a step in the litigation that will jeopardize arbitration agreements
3. Where claims against a defendant are inextricably interwoven with claims that are arguably subject to an arbitration agreement, the court may stay all the claims in favour of arbitration.

Footnotes

1. 2197 Otter Point Properties Nominee Ltd. v GT Mann Contracting Ltd., 2026 BCSC 558 at paras 1, 5, 6. ↩

2. Ibid at paras 1, 11, 58, 61. ↩

3. Ibid at para 8. ↩

4. 2197 Otter Point, supra note 1 at para 10. ↩

5. Ibid at para 14. ↩

6. Ibid at para 53. ↩

7. Ibid at paras 56, 59. ↩

8. Ibid at paras 50-62. ↩

9. Ibid at paras 64-71. ↩

10. Ibid at paras 80-89. ↩

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.