The Supreme Court of Canada’s recent decision in Earthco Soil Mixtures Inc v Pine Valley Enterprises Inc. [1](the “Earthco Decision”) provides clarification for parties seeking to limit or contract out of statutorily implied obligations under Ontario’s Sale of Goods Act (“SGA”).[2] More specifically, the Earthco Decision elaborates on the requirement of an “express agreement” under section 53 of the SGA[3] for an enforceable exclusion clause of a statutory obligation thereunder. Given that similar sections are contained in each of the provinces’ Sales of Goods Acts (except Quebec), the decision has general applicability throughout Canada.

Background

Pine Valley Enterprises Inc. (“Pine Valley”) was contracted by the City of Toronto (the “City”) to address flooding in a residential area. This project involved the removal and replacement of topsoil in the area for enhanced water drainage. Pine Valley purchased soil from Earthco Soil Mixtures Inc. (“Earthco”), a large topsoil provider. Pine Valley needed soil with a specific composition as stipulated by the City. Earthco ordinarily provided a multi-stage, 4-6 week testing process to ensure the soil was of suitable composition for its customers, given the organic and changing nature of the product. However, Pine Valley was in a rush to obtain the soil as they were behind schedule, and sought immediate delivery. As a result, Pine Valley declined Earthco’s recommended multi-stage testing process and went ahead with purchasing the soil, notwithstanding its knowledge that the soil had not been tested in the previous six weeks and Earthco’s statement that purchasing the soil without testing would be “at [their] own risk.”[4]

Earthco’s sales manager added two bespoke clauses to the contract for sale with Pine Valley, which were the subject of the ensuing litigation:[5]

Clause 6: The buyer had the right to test and approve the soil before being shipped; and

Clause 7: If the buyer waived this right, the seller was not responsible for the quality of the material once it had been shipped. [italics added]

(collectively, the “Clauses”).

The soil was delivered and used, but it was ultimately deemed insufficient for Pine Valley’s project. Testing done after delivery revealed that the soil had a substantially higher composition of clay than was shown in the test results from six weeks prior. Pine Valley was forced to remediate the work and was assessed liquidated damages by the City for the consequent delays.

Procedural History

Pine Valley commenced a claim against Earthco for damages, claiming the soil was not within the range of compositional properties that had been indicated by Earthco’s earlier test results. In this respect, Pine Valley argued that Earthco breached the statutorily implied condition imposed under section 14 of the SGA that in a contract for sale of goods by description, the goods must correspond to that description. Earthco defended the claim, arguing that the Clauses, considered in light of the factual matrix between the parties, constituted a sufficiently clear and “express agreement” – as required by section 53 of the SGA – to oust the condition implied by section 14 and shield them from liability for the damages claimed.

The Trial Judge concluded that the Clauses clearly and unambiguously excluded Earthco from liability under section 14 of the SGA. In arriving at this conclusion, the Trial Judge relied heavily on the factual matrix, particularly the fact that Pine Valley waived its right to test the soil and confirm its composition in its “rush”, contrary to Earthco’s recommendations and warnings. The parties’ inclusion of the Clauses in their contract was a deliberate shifting of risk to Pine Valley and their very purpose “was to avoid the exact situation that transpired.”[6]

The Ontario Court of Appeal reversed the trial decision, finding that the Clauses were not “explicit, clear and direct” enough (as required by section 53 of the SGA) to effectively oust the implied obligation to sell goods corresponding to their description. Since the Clauses did not refer to any statutory conditions or the identity of the goods being sold, they were not clear enough to negate the condition implied by section 14 of the SGA. The Court of Appeal held that the Trial Judge impermissibly used the contract’s factual matrix to override the express words of the Clauses.[7]

The Question Before the Supreme Court

The crux of the disagreement between the parties (and between the Trial Judge and Court of Appeal, for that matter) is how specific the language used in an exclusion clause must be in order to satisfy the requirement of an “express agreement” under section 53 of the SGA and effectively negate liability for an obligation imposed or implied by the SGA. The Supreme Court of Canada (the “SCC”) was thereby tasked with clarifying the standard prescribed by section 53 of the SGA.[8] In so doing, the SCC also provided important guidance as to the appropriate approach to interpreting such exclusion clauses in contracts governed by the SGA.

The majority of the SCC (with one Justice in dissent) accepted that Earthco had indeed satisfied the requirements of section 53 of the SGA by the language used in Clauses 6 and 7 and thereby immunized themselves from liability for failing to deliver soil that corresponded to its description (in breach of the implied condition under section 14 of the SGA).

What is Required of an Enforceable Exclusion Clause under the Sale of Goods Act?

Sale of goods law is a “specialized branch” of contract law.[9] Sale of goods statutes, which are essentially uniform across the provinces (except Quebec), imply conditions and warranties into all sales contracts for the protection of buyers, likely to redress the historical injustices perpetrated by strict applications of the “buyer beware” principle.[10] Parties remain free to contract out of, or limit, these conditions and warranties, as stipulated by section 53 of the SGA. This case discussed the following three statutorily implied conditions: (1) fitness for purpose, (2) merchantability, and (3) correspondence with description. These three conditions are distinct in that they have separate applications, play different roles, and protect different interests.[11] These differences became important because of the specific language used in Clause 7 of the contract.

Clause 7 only referred to the “quality” of the goods sold and made clear that Earthco would not be liable for damages arising from the “quality” of the soil. Per the case law distinguishing between these three statutorily implied conditions, there is a difference between “traits that go to the identity of the goods (which pertains to description), and those which go to the quality of the goods (which pertains to merchantability and fitness for purpose)”.[12] Based on these technical legal distinctions, the Court of Appeal reasoned that if the parties intended to oust the specific statutory condition of correspondence with description, the parties ought to have explicitly referred to the “‘condition’ that involved the ‘identity’ of the goods” in the exclusion Clause 7, not just quality (which more clearly refers to the other statutory conditions of merchantability and fitness for purpose).[13]

Although the SCC agreed that the SGA distinguishes between the quality and identity of goods for the purposes of the three implied conditions, it did not agree that section 53 of the SGA was “only satisfied” if the exclusion clause used the specific words “condition” and “identity” to oust the implied condition of correspondence with description under section 14.[14]  The SCC reasoned that requiring such a standard for exclusion clauses is overly “rigid, narrow, legalistic and technical to the point of requiring ‘magic words’ to yield particular legal results,” which is antithetical to the modern approach to contract interpretation that focuses on discerning the objective intent of the specific parties in context.[15]

The SCC held that the phrase “express agreement” in section 53 of the SGA does not mandate that certain “express language” be used in order to effectively vary or negative a legal liability such as in section 14.[16]  Rather, the word “express” in section 53 refers to how the agreement is made, not what specific words or language must be used in the clause.[17]  An “express” agreement is one that is distinct, explicit, clearly communicated, declared in terms and set forth in words. It cannot be implied, inferred or imputed, and silence or omission will not suffice. Further, “express” exclusion clauses are not “ambiguous or dubious and should be clear, definite, plain and direct” and “specifically mentioned.”[18]

The word “agreement” in section 53 requires a “meeting of the minds” between the parties about what liabilities are being changed or negatived.[19] The reference to “agreement” in the SGA invokes the “common law principles concerning the formation, interpretation and enforcement of contracts.”[20] In the context of exclusion clauses, this includes the three-step approach to their enforceability from Tercon,[21]as well as the modern contractual interpretation principles from Sattva.[22] This modern approach to contractual interpretation moves away from technical and formalistic doctrines in favor of discerning the objective intention of the parties.[23] Although the language of a contract is “central” to the interpretation exercise, those words must be interpreted consistent with the surrounding circumstances (or factual matrix) known to the parties at the time of contract formation.[24] The SCC stressed that words are not immutable or an “ends in themselves”; rather, they “are a means to demonstrate, discern and determine the true intention of the parties.”[25] Thus, the SCC reiterated that the meaning of words used in a contract is “what the parties using those words against the relevant background would reasonably have been understood to mean.”[26]

Accordingly, the question of whether contracting parties came to an “express agreement” under section 53 of the SGA requires a court to ascertain “how the words [in the exclusion clause] were reasonably understood by the parties” in question[27] and whether, when considered in their factual matrix, they evinced an objective, mutual intention to oust liability in the circumstances. The SCC made the following crucial remarks regarding the standard an exclusion clause must meet under section 53 of the SGA and how courts should approach interpreting such clauses, which merit repetition in full:[28]

[A]n express agreement capable of satisfying s. 53 might not look the same for different sets of parties and is likely to vary depending on who the contracting parties are and what their circumstances are. The inevitable variation between parties’ circumstances mean it would be of no use to prescribe a rigidly uniform description of what an express agreement must contain in every instance. This also means that findings by triers of first instance with respect to the factual matrix against which a given contract is struck will continue to be significant when a clause ousting a statutory condition is at issue.

Earthco Found to have Sufficiently Exempted Themselves from Liability

Applying the above principles, the SCC determined that the Clauses in Earthco’s contract of sale were effective at ousting the application of section 14 of the SGA and exempting Earthco from liability to Pine Valley.  The parties’ custom-made exclusion Clauses were plainly meant to protect Earthco from liability “for any defects should Pine Valley fail to test and approve the topsoil before shipping.”[29]

With respect to the use of the word “quality” in Clause 7, the SCC held that the term must be interpreted in the particular commercial context at hand and with a view to the parties’ knowledge at the time of contract formation. When these parties exempted liability for the “quality” of the soil, they were using the word “in its colloquial and commercial sense,” not in its legal sense, and referring to the composition of the soil.[30] In other words, the parties’ use of the word “quality” was not intended to draw a fine legal distinction between the statutorily implied conditions pertaining to quality (merchantability and fitness for purpose) versus identity (correspondence with description).[31] Moreover, the parties were both sophisticated purchasers of soil, who readily understood the changing nature of the product and the importance of having up to date tests to affirm the soil’s compositional quality.[32] Finally, Pine Valley’s extreme “rush” to receive the soil caused it to make a deliberate and strategic decision to take the risk of delivery without testing, with full knowledge that waiving this testing right would relieve Earthco of any liability for the quality (i.e., composition) of soil actually delivered.[33]

Thus, the commercial context and the particular surrounding circumstances of this contract all supported the finding that the parties’ true, overarching, and objective intention was for the Clauses to protect Earthco from any liability arising from a failure to deliver soil of the composition described (in breach of section 14 of the SGA).

Practical Takeaways

The SCC’s decision in Earthco emphasizes the importance of situating the words of an exclusion clause within the factual matrix of the bargain in order to discern what the particular parties objectively meant or understood by those words. What “quality” meant to these parties may well differ from its meaning to different parties in a different commercial context and set of circumstances. Further, the SCC confirmed that the modern approach to contractual interpretation that places primacy on uncovering the particular parties’ objective intent applies with equal force to exclusion clauses that limit or oust statutorily implied conditions under sale of goods legislation. An exclusion clause in the sale of goods context need not include certain or specific language or “magic words” in order to constitute an enforceable exclusion of a statutory obligation thereunder.  Thus, when drafting contracts, it is important to clarify the intentions of both parties and clearly codify those intentions in the contract in order to avoid contractual disputes.

Miller Thomson’s Commercial Litigation group is experienced in a variety of disputes and is always mindful of conducting litigation in a cost-effective and efficient manner. If you require assistance or advice in this area, please reach out to our legal team.

[1] Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 at para 4 [Earthco].

[2] Sale of Goods Act, R.S.O. 1990, c. S.1, ss 14, 53 [“SGA”].

[3] Section 53 of Ontario’s SGA reads: “Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.” [Emphasis added]

[4] Earthco, supra note 1 at paras 7-9.

[5] Earthco, ibid at para 9.

[6] Earthco, ibid at paras 18-20.

[7] Earthco, ibid at paras 24-25.

[8] See Footnote No. 3.

[9] Earthco, supra note 1 at para 43.

[10] Earthco, ibid at para 35.

[11] Earthco, ibid at paras 35, 37.

[12] Earthco, ibid at para 39.

[13] Earthco, ibid at para 46.

[14] Earthco, ibid at para 48.

[15] Earthco, ibid at para 47.

[16] Earthco, ibid at para 55 (emphasis in original).

[17] Earthco, ibid at para 55.

[18] Earthco, ibid at para 56.

[19] Earthco, ibid at para 57.

[20] Earthco, ibid at para 58.

[21] Earthco, ibid at paras 70-71, citing Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 [Tercon] at paras 122-123.  The three-part test is summarized as follows. First, the court must interpret the exclusion clause to determine if it applies in the circumstances, which is a search for intent using the general rules of contract interpretation. Second, the Court must consider whether the exclusion clause was unconsionable at the time of contract formation. Third, even if the clause is not unconscionable, the Court may consider if there is some overriding public policy consideration that outweighs the strong public interest in enforcement of contracts, which may lead to non-enforcement of an otherwise valid exclusion clause.

[22] Earthco, ibid at paras 61-65, 72, citing Sattva Capitol Corp v Creston Moly Corp, 2014 SCC 53 [Sattva].

[23] Earthco, ibid at para 61.

[24] Earthco, ibid at paras 63-64.

[25] Earthco, ibid at para 64.

[26] Earthco, ibid at para 64, citing Sattva at para 48.

[27] Earthco, ibid at para 61.

[28] Earthco, ibid at para 31 (emphasis added).

[29] Earthco, ibid at para 103.

[30] Earthco, ibid at para 104.

[31] Earthco, ibid at para 106.

[32] Earthco, ibid at para 105.

[33] Earthco, ibid at paras 107-108.