The Supreme Court of Canada's May 31, 2024, decision in Earthco Soil Mixtures Inc v Pine Valley Enterprises Inc, 2024 SCC 20, has done away with the requirement for "magic words" or legalistic drafting to contract out of the default conditions attaching to sales of goods under legislation that applies in most of Canada.
All provinces and territories apart from Quebec have legislation that prescribes default conditions for transactions involving sales of goods. The provisions addressed in Earthco are the implied condition that goods sold by description will correspond with that description (the so-called "identity" of the goods), and implied conditions relating to quality (fitness for purpose and merchantability) where certain pre-requisites apply. Although the legislation permits parties to contract out of those conditions, courts have until now required very precise language to achieve that effect. That was in tension with a general trend in the law over several decades toward plain language and a reduced reliance on legalisms.
The Facts
The facts in Earthco demonstrate how a legalistic approach can work an injustice. Pine Valley was a contractor hired by the City of Toronto to remediate a residential area subject to basement flooding by, among other things, replacing existing topsoil with a better draining alternative. Pine Valley was significantly behind schedule in completing the job, and it contacted Earthco to urgently source an appropriate topsoil only 12 days before the City would start to enforce its rights for liquidated damages. Earthco provided lab reports for three topsoil samples that might satisfy the project requirements, but warned the tests were old and that further testing should be done to ensure the right mix of sand, silt and clay would be achieved. Earthco advised: "I think you should wait until the test is done but if you would like to start shipping at your own risk please let me know". Pine Valley had to get soil placed without delay, so Earthco added an exclusion clause to the supply contract: "Earthco Soils Inc. will not be responsible for the quality of the material once it leaves our facility."
Ultimately, the topsoil placed did not have the right composition to achieve the drainage requirements, and Pine Valley sued Earthco for breach of contract. Its argument was that although the exclusion clause might negate the statutory conditions relating to quality, it did not displace the condition that the topsoil had to correspond with the description in the sample lab reports – even if that description was a statement of presumed quality in the circumstances, and Earthco warned Pine Valley not to rely on it.
The Supreme Court's decision
Since sale of goods legislation permits parties to oust statutory conditions by an "express agreement", the central issue at the Supreme Court was just how express this agreement must be. Must it explicitly refer to excluding "conditions" created by "statute," and must it map onto the distinct legal categories of identity and quality of the goods?
All members of the Supreme Court rejected prior case law requiring express reference to statutory conditions. But Justice Côté, in dissent, argued that statutory legal categories are deemed to be known by contracting parties. As such, she argued that any failure to refer to them expressly in an exclusion clause must be taken as an objective intention to accept the associated conditions. As she said, "ignorance of the law is no excuse."
However, the rest of the court decided otherwise. It held that the developing common law of contract applied to the statutory requirement for an "express agreement". This 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." The majority found that when the words of the exclusion clause added by Earthco were assessed in light of the parties' dealings, they expressed an objective intention that Pine Valley waived all rights to pursue Earthco for any liability resulting from variations in the soil composition.
Earthco's language was effective despite being written by non-lawyers who did not fully appreciate the legislative context:
Earthco and Pine Valley used plain language in their bespoke contractual edits and there is no evidence these clauses were reviewed by legal professionals before the Contract was signed. It is unrealistic to expect these parties to know about the legal distinction between the terms "identity" and "quality" or, for that matter, between "conditions" and "warranties". To further expect the parties to then explicitly include proper legal reference to these terms without knowing the legally significant difference between them is a commercially impractical expectation that takes the focus away from where it should be: how the parties reasonably understood, or ought to have understood, the words they used.
Conclusion
The Supreme Court's decision in Earthco is a welcome change to the law that potentially avoids traps for the unwary. It applies the general principle that words in a contract must be construed, "as they would be understood by the average person ..., and not as they might be by persons versed in the niceties of [the] law", to contracts for the sale of goods. However, buyers and sellers must still be cautious, and clear expression is still to be preferred. For example, an exclusion clause that refers to warranties but not conditions would probably be found wanting, and some of the court's comments suggest better legal precision may be required when the contract is drafted by lawyers. It is obviously less problematic to hold them to higher standard of appreciating the background law.
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