Introduction
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, the Supreme Court of Canada (SCC) addressed the important question of “just how express does an agreement need to be to oust an implied statutory condition” and thereby exclude liability? Specifically, the SCC considered whether the exclusion clause at issue qualified as an express agreement under s. 53 of the Sale of Goods Act, R.S.O. 1990, c. S.1 (SGA) to contract out of implied statutory protections under the SGA.
The SCC applied the modern approach for contractual interpretation from Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (Sattva), to find that the plain meaning of the exclusion clause and surrounding circumstances made clear that the parties intended to exclude liability by express agreement. The parties had used sufficiently clear and precise contractual language to exclude liability. The SCC relied heavily upon the surrounding circumstances and drew from the parties’ pre- and post-contractual conduct to determine their intentions at the time of contract formation. The SCC held that there are no “magic words” required to exclude contractual liability, including in connection with contracts that are subject to the SGA.
While this case is about the application of an exclusion clause in the context of the SGA, it has broader implications for contract drafting, in particular, the drafting of exclusions clauses, and for how parties conduct themselves at the time of entering into a contract and thereafter. Courts will look to the purpose of the contract and conduct of the parties to inform their contractual interpretation.
Background
The plaintiff, Pine Valley Enterprises Inc. (Pine Valley), had a contract with the City of Toronto to provide topsoil with a specific composition, and was faced with a liquidated damages clause if it did not deliver on time. Pine Valley had difficulty finding a supplier for the topsoil. With time running out, it contacted the defendant, Earthco Soil Mixtures Inc. (Earthco).
Earthco’s normal process is to test a specific batch of soil before shipping to the customer. In this case, Pine Valley wanted the top soil delivered quickly, so Earthco agreed to sell and immediately deliver the topsoil to Pine Valley on the condition that if Pine Valley did not test the topsoil before shipment, Earthco would not be responsible for the quality of the material. The parties inserted into the contract the following exclusion clause:
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.
Subsequent testing indicated that the topsoil did not meet the City’s standards, and Pine Valley was directed to replace the topsoil. This remedial work was completed, and the City claimed liquidated damages from Pine Valley.
Procedural history
Ontario Superior Court
Pine Valley sought CA$700,000 from Earthco on the grounds that the topsoil failed to meet the implied condition in s.14 of the SGA (sale of goods by description). The trial judge found that Pine Valley did not receive topsoil of the composition promised and that Earthco had breached the implied condition under s. 14 of the SGA, but that the exclusion clause applied to exclude liability. Although the clause did not explicitly mention the s. 14 condition, it was clear from the plain meaning of the exclusion clause and surrounding circumstances that Pine Valley deliberately assumed risks associated with the soil quality. The trial judge emphasized that Pine Valley was an experienced purchaser, and aware of the risk it was taking.
Ontario Court of Appeal
The Court of Appeal set aside the trial judgment on the grounds, among others, that the exclusion clause did not contain the explicit, clear and direct language necessary to oust the implied condition of the SGA required under s. 53. The Court of Appeal held that s. 14 related to the identity of the thing being sold, whereas the exclusion clause concerned only the quality of the soil. Because the words of the exclusion clause did not explicitly, clearly and directly cover the identity of the soil, it did not protect Earthco from liability under s. 14 of the SGA.
Analysis
The issue was: what are the legal requirements for an exclusion clause to oust an implied condition under s. 53 of the SGA? More broadly, the SCC considered how exclusion clauses should be interpreted given developments in Sattva and thereafter, which require looking at the surrounding circumstances when interpreting a contract.
The majority decision, written by Justice Martin, set aside the decision of Court of Appeal, and reinstated the trial judgment. The question of Earthco’s liability under s. 14 turned on whether the exclusion clause was an express agreement under s. 53 of the SGA, ousting the application of s. 14. The majority cited Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (Tercon), to explain that the first step in determining the enforceability of any exclusion clause is an assessment of the parties’ intentions.
The majority clarified that the modern approach to contractual interpretation from Sattva applied in determining those intentions: bright line rules of construction are “replaced by a contextual inquiry into what the parties objectively intended based on the text and surrounding circumstance.” (para 73) The Court of Appeal had placed undue emphasis on the explicit language not used in the exclusion clause as opposed to what the language used meant to the parties as informed by the circumstances of the transaction.
The plain meaning of the exclusion clause unambiguously protected Earthco from general defects in the topsoil should Pine Valley fail to test the topsoil. This interpretation was supported by the surrounding circumstances. Earthco advised Pine Valley of the practicality of testing the topsoil before delivery, but allowed Pine Valley to accept delivery of untested soil at its own risk. Pine Valley urgently wanted the soil to avoid paying liquidated damages, and the trial judge made no error in finding that Pine Valley assumed the risk that the topsoil’s composition had deteriorated when it chose not to test before delivery.
The majority concluded at para. 98:
…. Section 53 requires an “express agreement”, not “express language”, and is far removed from setting a legal standard that insists on explicit, clear and direct language which speaks to the legal characterization of the terms at issue. There is no requirement for “magic words”. While the words of the agreement itself are undoubtedly important, Sattva allows a court to read these words with the surrounding circumstances in mind and does not mandate that words be strictly attributed with a singular, prescriptive meaning…
The dissent
The dissenting decision, written by Justice Côté, would have found that the exclusion clause was not an express agreement to oust the protections under the SGA. An express agreement to oust liability requires clear and direct language inconsistent with the implied terms of the statute. The dissenting opinion agreed with the Court of Appeal. The distinction between the identity and quality of the goods in the SGAwas a critical aspect of the commercial setting in which the parties transacted. If the parties objectively intended to oust the implied condition in s. 14 of the SGA, they would have done so using clear and direct language inconsistent with the statutory protection related to the goods’ identity.
Takeaways
This case has broad implications for the interpretation of exclusion clauses and their drafting. Although the case arose under the SGA, the finding that exclusion clauses do not require “magic words” and the heavy reliance on the factual matrix are relevant to contractual interpretation cases broadly.
The main takeaways are that: (1) there are no magic words required to render an exclusion clause enforceable; and (2) the surrounding circumstances including the nature and purpose of the contract and the conduct of the parties play an increasingly important role in contract interpretation generally. The fact that Pine Valley and Earthco did not use the word “identity” in the exclusion clause did not matter. The plain meaning of the exclusion clause and the surrounding circumstances made clear the allocation of risk, and the courts should respect the parties’ objective intentions.
This decision has implications for contract drafting. While parties may not require specific language to exclude liability, a party seeking to limit the application of an exclusion clause should carefully consider the language used and the purpose and nature of the clause and the contract as a whole so that it does not find itself in Pine Valley’s shoes.
Parties should also take care to ensure that their conduct is not inconsistent with positions that they may later need to take. It is clear that the SCC was concerned with aligning the parties’ own decisions and conduct with the outcome of the case. Where parties have behaved in a manner that is inconsistent with their position in litigation, and even with a strict reading of their written agreement, this decision makes clear that such conduct will influence the litigation outcome.
For more information, please reach out to the authors, Chloe Snider and David Elliott.
The authors wish to thank Alex Horbal, Summer Student, for his assistance with this blog.
