Agreements vs. Implied Statutory Conditions: Insights From Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc.

The Supreme Court of Canada in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (Ont.), 2024 SCC 20, clarifies the requirement for exclusionary clauses in the context of implied statutory conditions.

Takeaways

A correctness standard of review arising from the identification of a so-called "extricable error" is rare and uncommon in contractual interpretation cases. The tendency of some appellate courts to frequently find extricable errors is to be resisted. Limiting the situations where extricable errors can be identified has important implications for the certainty of the law of contract and limits the availability of appeals where an appeal right is only available on a question of law.

In relation to the principles of contractual interpretation, the majority in Earthco adopts a more flexible approach to exclusionary clauses generally and to those being invoked to exclude statutory conditions. While Tercon remains the leading case on the enforceability of exclusion clauses, the Court provides helpful guidance in terms of what is required under the first step in the Tercon analysis (where the court must determine whether an exclusion clause applies in the circumstances).

Justice Martin, writing for the majority, held that an exclusionary clause does not require magical words or technical terms, even for concepts that have established legal meanings, such as condition, warranty, identity, or quantity. Whereas the Court of Appeal and Justice Côté, writing in dissent, required "express" or "explicit" reference to the statutory provisions being excluded, the majority only required an "express agreement" and held that this requires that a court is able to reasonably ascertain the parties' intention after reading the words of the contract in light of the factual matrix.

For contracting parties, a valid clause excluding statutory implied conditions pursuant to s. 53 of the Sales of Goods Act (SGA) must, at minimum, make the parties' mutual intention unmistakably evident. It should be clear, definite, plain and direct. This means that silence or omission does not suffice. Explicit language directly ousting an implied condition is optimal but is not a prerequisite.

The law on contractual interpretation, particularly after Earthco, continues to shift away from technical rules of interpretation and towards giving effect to what was agreed to by the parties. Modern contractual interpretation principles, as set out in Sattva, and the consideration of the factual matrix to understand the objective intentions of the parties, will guide this analysis. Earthco also appears, at paragraph 107, to open the door to the consideration of post-contractual or subsequent conduct without a finding of ambiguity, as has been understood to be the case in Ontario (see for example Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912).

Background

Pine Valley Enterprises Inc. is a contractor in the business of constructing municipal parks. Earthco Soil Mixtures Inc. is a topsoil provider. In 2011, the City of Toronto hired Pine Valley to construct a dry pond directing water away from surrounding residential homes. As part of this project, Pine Valley had to purchase topsoil. Before buying topsoil, Earthco gave Pine Valley results of a soil test of R Topsoil. Based on these tests, Pine Valley signed a Purchase Order, which included the following clauses:

6. Pine Valley has the right to test and approve the material at its own expense at our facility before it is shipped and placed.

7. If Pine Valley waives its right to test and approve the material before it is shipped, Earthco Soils Inc. will not be responsible for the quality of the material once it leaves our facility.

Despite the exclusionary clauses, Pine Valley did not test the soil before it was shipped. After the topsoil was spread and graded, the project flooded. The City discovered that the topsoil that was delivered contained more clay than the test result topsoil, which meant that it was less permeable to water. Pine Valley was forced to remove and replace the topsoil. Subsequently, it commenced a claim against Earthco for these costs.

The Ontario Sale of Goods Act ("SGA"), R.S.O. 1990, c. S. 1 at section 14 contains an implied condition:

Nonetheless, the SGA allows parties to contract out of implied conditions:

Procedural history

A. Pine Valley v. Earthco, 2020 ONSC 60

At trial, Pine Valley limited its claim to s. 14 of the Sale of Goods Act. The trial judge found the contract is a "sale by description," and that Earthco's topsoil did not correspond to its description in the contract. A sale by description is a case involving specific goods unseen by the buyer, and where there was no identification other than by description. Earthco promised to Pine Valley that it was selling R Topsoil containing the qualities set out in its test results. Therefore, implied condition set out in s. 14 of the SGA was breached. The bar for correspondence between goods and the description is relatively high. Pine Valley did not get the soil it bargained for. This was not a minor variance.

Having found that Earthco breached s. 14, the question becomes whether the parties agreed to oust the operability of the implied condition described at s. 14, as allowed by s. 53 of the SGA. Tercon is the leading case on the enforceability of limited liability clauses: Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4. While unsophisticated, the language of the exclusionary clauses was plain and unambiguous. Liability for Earthco was meant to be excluded if Pine Valley failed to test and approved the soil before shipping. The parties intended that this document bound the terms and conditions of the sale of soil. The factual matrix indicated that Pine Valley needed the soil on an urgent basis and did not wish to delay for testing.

In applying the Tercon test, the Court determined that the exclusion clause applied to the circumstances. It is settled law that parties in a contract for the sale of goods are entitled to contract out of any implied terms provided for by the SGA. The real question is whether the contractual terms are clear and unambiguous (para. 113). The authorities have taken a strict approach when sellers attempt to rely on exclusionary clauses (para. 114). However, given that this contract was drafted in simple language, the Court was able to ascertain the objective intention of the contracting parties. The parties intended that if the soil failed the testing in Pine Valley's eyes, the soil could be rejected before it left the facility.

The exclusionary clauses clearly and unambiguously oust liability under s. 14 of the SGA for Earthco. The trial judge dismissed Pine Valley's action.

B. Pine Valley Enterprises Inc. v. Earthco Soil Mixtures Inc., 2022 ONCA 265

The Court of Appeal considered the standard of review on the question of law in this case to be correctness. Deference to the trial judge's contractual interpretation is owed unless an extricable question of law from what was initially characterized as a question of mixed fact and law, which was the case at bar. Deference is not owed on these questions. A standard of correctness applies.

The Court of Appeal agreed that there was a breach of s. 14 of the SGA. However, the trial judge erred in law in finding that the exclusionary clauses met the explicit language threshold required to oust the implied condition in the SGA. The language must be explicit, clear and direct. This is borne out by the case law, such as Chabot v. Ford Motor Co. of Canada (1982), 1982 CanLII 2051 (ON SC) wherein the court held that an explicit exclusion of implied warranties does not exclude statutorily implied conditions. The language of an exclusionary clause must refer to the type of legal obligation the SGA implies (para. 56). The exclusionary clauses only specify the quality of goods, whereas s. 14 addresses the identity of goods. The Court drew a similarity between the legal difference between warranties and condition and between identity and quality. The trial judge did not apply the legal distinction as between the quality and identity of the goods. The language of the exclusionary clauses couldn't be expanded by recourse to the factual matrix: see Sattva, at para. 57. It cannot change the exclusionary clause wording from "responsible for the quality" to "responsible for the identity." Therefore, the contract did not explicitly address the implied conditions. The Court of Appeal unanimously allowed Pine Valley's appeal.

C. Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (Ont.), 2024 SCC 20

Martin J., writing for the majority, allowed Earthco's appeal, set aside the Court of Appeal's order and restored the trial judge's judgment, with costs throughout. The Supreme Court of Canada reviewed three issues on appeal.

1. Did the Ontario Court of Appeal make a palpable and overriding error by reviewing the trial judge's decision on a standard of correctness?

The Court reiterated that questions of contractual interpretation, which involve questions of mixed fact and law, are ordinarily afforded deference on appellate review. The exception set out in Sattva is for errors on extricable questions of law, which are reviewable on the more exacting correctness standard. Justice Martin, writing for the majority, cautioned that extricable errors should be rare and that the tendency of some appellate courts to freely find such errors "should be resisted."

Absent such an extricable error, appeal courts should apply a deferential standard of review, even where the analysis necessarily implicates implied statutory conditions. The Court of Appeal erred by holding that there were three extricable errors of law in the case at bar meriting a correctness review.

The majority implied from Ledcor that where there is a contract of "utter particularity" due to a unique set of circumstances, the modern contractual interpretation approach from Sattva continues to apply. The present case was held to establish that utter particularity, where the exclusion clauses were drafted by the seller in response to the buyer's particular demand for speedy delivery of the goods without additional testing.

In dissent, Justice Côté points out that much of the interpretive exercise was actually in reviewing s. 53. The standard of review on questions of statutory interpretation is correctness. The majority appears not to have considered this point in their analysis.

2. When will goods be found to correspond with the description in the context of s. 14 of the SGA?

When goods are sold by description, s. 14 of the SGA provides an implied condition that the goods correspond with their description. By deeming this to be a condition, the SGA provides that correspondence with description is fundamental to the purpose of a contract. The question is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to them on the ground that the failure of the goods to correspond with that part of what was said about them in the contract makes them goods of a different kind from those the buyer had agreed to buy (at para. 39).

3. What are the legal requirements to exclude an implied condition, in the context of s. 53 of the SGA?

Clauses that exclude legal liabilities, including implied statutory conditions, are subject to their own set of legal rules because they raise distinct policy considerations, such as commercial certainty. Tercon sets out three steps to help assess the enforceability of an exclusion clause.

• First, the court must determine whether an exclusion clause even applies in the circumstances, which necessarily depends on an "assessment of the intention of the parties" (para. 122). The modern contractual interpretation principles from Sattva clearly apply to contracts containing exclusion clauses, especially at the first step of the Tercon test.
• If the exclusion clause is found to be valid at the first step, the second step requires a court to consider "whether the exclusion clause was unconscionable at the time the contract was made" (Tercon, at para. 122).
• Third, even if not unconscionable, a court may consider if there is some overriding public policy consideration that outweighs the strong public interest in the enforcement of contracts and if there is, the court may refuse to enforce the otherwise valid exclusion clause (para. 123). When interpreting an exclusion clause, a contextual inquiry must be made as to what the parties objectively intended based on the text and surrounding circumstances.

In considering what is an "express agreement" under s. 53, the majority held that an agreement will be "express" if it is made in distinct and explicit terms and not left to inference. The parties must make their mutual intention unmistakably evident. The exclusion clause must be plainly laid out and contemplated within the agreement at issue. One must be able to point to the contract and say, "that exclusion clause ousts the operation of an implied term of the SGA." However, explicit words are not required. Although language that explicitly, clearly and directly ousts an implied condition is an optimal way to ensure the parties' mutual objectives are being carried out, it is not a binding prerequisite.

Applicable case law mandates a shift away from a method of contractual interpretation "dominated by technical rules of construction" and requires that words be understood in their factual matrix, with the paramount goal of ascertaining the parties' objective intention. While the Court of Appeal cited Sattva, it did not give full effect to its direction that the overriding concern of contractual interpretation is determining the objective intention of the parties. Commercial certainty is best served by the law giving effect to what was actually agreed to by the parties. Searching for the parties' objective intention furthers that purpose (para. 92). The actual words chosen are central to the analysis because this is how the parties chose to capture and convey their contractual objectives. While the language used is central, courts recognize that words are not ends in themselves: they are a means to demonstrate, discern and determine the true intention of the parties. Ultimately, ascertaining the objective intent of the parties involves not only a consideration of the actual words used in a contract but also a consideration of the surrounding circumstances of the contract – often referred to as the factual matrix surrounding the contract.

The exclusionary clauses exempted Earthco from liability under s. 14. Pine Valley and Earthco purposively inserted two express written clauses into their agreement to say that if the buyer waived its right to test and approve the goods, then the seller would not be responsible for their quality. These parties reasonably understood the word "quality" to describe and include all the attributes of the soil. They used the word "quality" in its colloquial and commercial sense, and not in its legal sense. The parties were free to negotiate and allocate the risk of not testing the soil prior to delivery as they saw fit. Pine Valley deliberately assumed the risk that the soil would not meet the project's requirements, and chose not to test or approve the product before delivery simply because it needed the soil fast. In the commercial context of the agreement, there was no unfairness in refusing to find Earthco liable for what the trial judge called Pine Valley's "expensive but calculated mistake."

The trial judge made no palpable and overriding error in his findings of fact. The principles from Sattva were properly applied by the trial judge to support his finding that the parties had an express agreement that Earthco would not be liable for any issues relating to the composition of the soil.

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