In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc.,1the Supreme Court of Canada recently clarified the requirements for showing that parties to a contract agreed to allocate risk or exclude any of the statutorily implied condition under provincial sale of goods statutes.
At issue in this case was s. 14 of the Ontario's Sale of Goods Act2 ("SGA"), which imposes an implied condition in all sale of goods contracts that the goods will correspond with their description. However, parties can contract out of an implied condition under the SGA by "express agreement", per s. 53 of the SGA. Such clauses are called "exclusion clauses".
Justice Martin, for the majority, explained that there are no magic words that must be used in an agreement to contract out of an implied condition in the SGA. Instead, determining whether the parties have agreed to an exclusion clause requires determining the parties' objective intentions from the language used in the contract and the commercial context.
Background
Pine Valley Enterprises Inc. ("Pine Valley"), a municipal parks contractor, was hired by the City of Toronto for a project to remediate flooding. Pine Valley in turn contracted with Earthco Soil Mixtures Inc. ("Earthco") to obtain topsoil with a specified composition.
The contract between Pine Valley and Earthco gave Pine Valley the right to test and approve the topsoil before it was shipped, but Pine Valley could choose to waive its right to test and approve the topsoil. If Pine Valley chose not to test and approve the topsoil, then Earthco would not be responsible for the "quality of the material" once it is shipped (the "Earthco Exclusion Clauses").
Since Pine Valley was in a rush to meet project deadlines, decided to waive its right to test the soil and agreed to immediate delivery. Pine Valley received and used the topsoil for the project, but discovered it had a higher clay content than expected. As a result, Pine Valley had to replace the topsoil, as the higher clay content made the topsoil ineffective at preventing flooding.
Pine Valley sued Earthco for damages, alleging that Earthco violated the implied condition in the SGA the goods must correspond to their description (s. 14) because the topsoil did not have compositional properties within the range indicated in earlier tests.
Lower Court Decisions
The trial judge dismissed Pine Valley's claim, finding that the Earthco Exclusion Clauses were an "express agreement" to exclude the implied condition in the SGA. Although the agreement did not explicitly reference s. 14 of the SGA, the contract nevertheless clearly provided that Pine Valley deliberately assumed the risk that, if Pine Valley did not conduct any tests prior to delivery, the topsoil may not meet its quality specifications.
The Court of Appeal for Ontario overturned the trial decision. It held that the Earthco Exclusion Clauses lacked clear and explicit wording to contract out of the implied condition that goods must correspondent to their description (s. 14).
The Supreme Court of Canada's Majority Decision
The Supreme Court of Canada restored the trial judge's decision, finding that the Earthco Exclusion Clauses were an "express agreement" to contract out of the implied condition that goods must correspond to their description in s. 14 of the SGA. Therefore, if Pine Valley chose not to test or inspect the topsoil, Pine Valley accepted the risk that the topsoil may not meet specifications.
Justice Martin, for the majority of the Court, explained that statutes for the sale of goods are not exhaustive or comprehensive codes. They should not be applied rigidly. Statutory rules from sale of goods legislation should be interpreted in light of the law as it stands in the present day, and in particular, in light of modern contractual interpretation rules as set out in Sattva Capital Corp v Creston Moly Corp.3 and Tercon Contractors Ltd. v British Columbia (Transportation and Highways)4.
The SGA requires an "express agreement" to exclude any implied conditions (or other rights or entitlements in the SGA) from a contract, but not "express language". Determining whether a contract includes an "express agreement" is informed by modern principles of contractual interpretation and the law of exclusion clauses. The paramount consideration must be the parties' objective intentions.
To oust an implied term in the SGA, an "express agreement" must have unambiguous language showing the parties' intention to override or vary the SGA. This means that silence or omission will not suffice, and courts cannot infer an intention to contract out of a statute based on conduct. However, there is no specific language or magic words that need to be used.
The majority of the Court found that the Earthco Exclusion Clauses had sufficiently clear language to show an objective intention to override the SGA and exclude Earthco from any liability under s. 14 if Pine Valley chose not to inspect the topsoil. The Court held that the parties purposely agreed that Pine Valley had the right to waive its right to test and approve the topsoil, and that if Pine did so, Earthco would not be responsible for the "quality" of the topsoil once it left its facility. The Court found that "quality" must be interpreted in the context of the entire contract and within its commercial context. The parties intended "quality" to describe and include all soil attributes, including its ultimate composition.
Accordingly, the parties came to an "express agreement", using direct, clear and express language in their contract, which demonstrated their objective intention for Pine Valley to choose to accept responsibility for any defects in the topsoil's composition.
The surrounding circumstances were also critical to the Court's conclusion. Pine Valley was a commercial purchaser with years of experience buying topsoil, and the parties were free to negotiate and allocate the risk of not testing the topsoil (and they did). Pine Valley made a conscious and strategic decision not to test the topsoil and, in doing so, assumed the risk.
Justice Coté's Dissent
Justice Coté dissented. In her view, although Pine Valley had waived its right to test the soil, it had not waived its right to receive the soil it had bargained for. Justice Coté found that the parties had not made a sufficiently "express agreement" to contract out of the implied condition in s. 14 of the SGA.
Key Takeaways
The Supreme Court of Canada's decision demonstrates the Court's aversion to an overly technical approach to contractual interpretation. Instead, well-established and purposive contractual interpretation principles extend to contracts for the sale of goods. This requires courts to look to the words used in the contract and the surrounding circumstances at the time the contract was formed to determine the objective intention of the parties.
Contracting parties are free to allocate risks of liability through an express agreement and to contract out of the provisions of the SGA. No magic words are needed to exclude one party's risk of liability or implied terms under the SGA. However, silence or omissions are insufficient, and courts will not infer or imply such a term based on the parties' conduct. Parties should use language that explicitly, clearly and directly excludes statutory protections to show their objective intention to exclude such liability.
Finally, Courts will give more leeway to non-lawyers. Therefore, exclusion clauses drafted by lawyers may require more precise language than those drafted by non-lawyers.
The Supreme Court of Canada's decision will have broad implications beyond Ontario, as all provinces and territories, except Quebec, have equivalent provisions in their sale of goods legislation.
For a further discussion of the implications arising from this case, be sure to listen to our episode of the "Appealing Briefs" podcast here.
Footnotes
1. Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20
2. Sale of Goods Act, R.S.O. 1990, c. S.1.
3. Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53.
4. Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2010 SCC 4.
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