Canada: Explicit, Clear And Direct Language Must Be Used To Contract Out Of The Sale Of Goods Act

The decision rendered by the Ontario Court of Appeal in Pine Valley Enterprises Inc. v Earthco Soil Mixtures Inc. 2022 ONCA 265 provides a cautionary tale for those drafting contracts for the purchase and sale of goods in Ontario that are looking to contract out of the statutory conditions contained within the Sale of Goods Act R.S.O 1990, c. S.1 ( the "SGA").

In Ontario, commercial transactions involving the sale of goods are governed by the SGA. The SGA contains provisions that prescribe the formation of contracts, as well as ascribing certain allocations of risk. One such example is Section 14 of the SGA, the provision that lies at the heart of the decision in Pine Valley, which establishes an implied condition to all contracts for sale of goods by description, that the goods being sold will correspond with the description given to them by the vendor.

The Ontario Court of Appeal was tasked with determining whether an exclusion clause was effective in opting out of Section 14 of the SGA. Pine Valley Enterprises Inc. ("PVEI") had purchased "R Topsoil" from Earthco Soil Mixtures Inc. ("Earthco"). R topsoil was to be of a specific composition to fit specifications that PVEI needed to properly fulfill a contract. After taking delivery and using the topsoil, it became apparent that the topsoil was not the proper composition, and at their own expense, PVEI removed the topsoil and replaced it. They then commenced an action against Earthco to recover their costs of removal and replacement.

Earthco argued that it was not responsible for providing the wrong topsoil as there was an exclusion clause in the contract for purchase and sale that stated that if PVEI waived its right to test the goods before taking delivery, then Earthco was not responsible for the quality of the product. PVEI had not tested the product, therefore Earthco claimed they were protected from liability by the exclusion clause.

The Trial Judge ruled in favour of Earthco, stating that although the sale was a sale by description, the exclusion clause protected it from liability. PVEI appealed the decision. The Court of Appeal accepted the appeal, and reversed the decision of the trial judge.

The Court of Appeal stated that the Trial Court had correctly identified that the sale contemplated in the contract was a sale by description, and not by quality. Under the SGA, this meant that the vendor had to deliver the goods as described by the contract, and the identity of the goods had to match that description. The Court of Appeal then went on to state that the Trial Judge had erred in deeming the exclusion clause as effective in contracting out of Section 14 of the SGA. The exclusion clause read as follows:

The Court of Appeal determined that the exclusion clause was not effective in opting out of Section 14 of the SGA. The exclusion clause made mention to the quality of the goods and not the description or identity of the goods. Since the contract was one by description, and Section 14 of the SGA provides protection for parties that receive goods that do not match the description they are given in the contract, the exclusion clause did not apply.

Earthco also argued that while the language may not have been clear, the intention of the parties was to insulate Earthco from liability if the goods were not what PVEI expected. The Court of Appeal refused this line of reasoning. The Court of Appeal warned that broad exclusionary language is not sufficient in limiting liability under the SGA. The exclusion clause must use explicit, clear and direct language to exclude a statutory condition implied into a sale agreement by the SGA, and at a minimum, must refer to the specific type of legal obligation that the parties wish to include. For example, an exclusion clause that makes reference to warranties, rather than statutory conditions, will not be explicit enough to opt out of the SGA. The Court of Appeal stated that the legal meaning of explicit, clear, and direct language in this context meant, at the very least, that the language must refer to the type of legal obligation implied by the SGA—reference to a different type of obligation would not suffice. The exclusion clause in dispute did not meet this criteria.

In addition, the Court of Appeal went on to explain the method that courts should use when looking at the factual matrix of a contract in situations such as this—when trying to determine if a statutory condition prescribed by the SGA has been contracted out of. The Court stated that, although the goal of contractual interpretation is to glean the objective determination of the intention of the parties based on the language used in light of the factual matrix, that determination in the context of opting out of a statutory condition had to proceed on the basis that in a sale by description, the parties are legislatively deemed to have the intention to include the statutory condition as to identity over and above any other obligations to each other that they may have included in their agreement. It is not enough for the language in light of the factual matrix to indicate in some sense that the seller wants to be responsible only in certain circumstances.

This decision tells a cautionary tale for contract drafters. Parties will only be deemed to have opted out of statutory conditions in the SGA if they use clear and direct language, and specifically mention the type of statutory protection they are opting out of. Any exclusion clauses that fall short of these standards will not be given the benefit of the doubt through broad interpretation of the factual matrix of a contract.

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