On May 31, 2024, the Supreme Court of Canada released its highly anticipated decision in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 (“Pine Valley”), clarifying how contracting parties can exclude conditions of sale implied under Ontario’s Sales of Goods Act, R.S.O. 1990, c. S.1 (“SGA”).

Summary

• Despite the importance of implied statutory conditions, section 53 of the SGA permits parties to vary or negative obligations imposed by the SGA, including by express agreement.
• Pine Valley confirms that for there to be an “express agreement” there must be (i) an agreement to vary or negative a right, duty or liability under a contract of sale and (ii) that agreement must be express.
  • The “agreement” part is often the crux of the matter and requires a meeting of the minds about what rights, duties, or liabilities are being changed and how they are being varied or negatived.
  • The term “express” qualifies the word “agreement” and is directed to how that agreement must be made. It does not define what the agreement must say or the required level of specific contractual clauses. An agreement will be express if it is made in “distinct and explicit terms and not left to inference”.
• The principles of contractual interpretation (i.e., Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”) and the law around exclusion clauses (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (“Tercon”), must inform the determination of what qualifies as an express agreement. The applicable case law mandates a shift away from an interpretation dominated by technical rules of construction, and reinforces that the interpretation of exclusion clauses in contracts for sales of goods must be understood in their factual matrix, with the paramount goal of ascertaining the parties’ objective intention.

Background

Pine Valley Enterprises Inc. (“Pine Valley”) was hired to work on a municipal project to remediate flooding. Pine Valley contacted Earthco Soil Mixtures Inc. (“Earthco”), a topsoil provider, to obtain topsoil with a specified composition for the project. Earthco provided Pine Valley with laboratory reports from different topsoil samples taken six weeks prior and warned against purchasing the topsoil without updated test results. However, Pine Valley had already missed some project deadlines and insisted on immediate delivery, waiving its right to test and approve the soil before it was shipped.

The parties agreed to add two exclusion provisions (the “Exclusionary Clauses”) to the standard purchase order, which stipulated that:

[Pine Valley] has the right to test and approve the material at its own expense at [Earthco’s] facility before it is shipped and placed.

If [Pine Valley] waives its right to test and approve the material before it is shipped, Earthco will not be responsible for the quality of the material once it leaves [Earthco’s] facility.

After the topsoil was delivered, it was found that the topsoil did not meet the specified composition for the project and had to be removed and replaced. Pine Valley sued Earthco, alleging that the soil delivered by Earthco breached the implied condition under s.14 of the SGA that the goods must correspond with their description.

The Trial Decision

The trial judge dismissed Pine Valley’s action, finding that s. 14 of the SGA governed the transaction as a “sale by description”. The trial judge ultimately found that Pine Valley did not get the topsoil it bargained for, but that the Exclusionary Clauses were an “express agreement” pursuant to s.53 of the SGA, which allows parties to contract out of the implied condition under s.14. Despite the fact that the contract did not explicitly mention statutorily imposed conditions or terms, the trial judge found that the Exclusionary Clauses were nevertheless clear and unambiguous and Earthco was not liable under s.14 of the SGA. In reaching this conclusion, the trial judge drew heavily on the circumstances surrounding contract formation in evaluating the parties’ intentions (i.e., Pine Valley was in a rush to receive the soil; was an experienced purchaser of soil that knew test results for the soil were dated; and knew that soil composition can change over time).

The Decision of the Ontario Court of Appeal

The Ontario Court of Appeal reversed the trial judge’s decision, and substituted a judgment requiring Earthco to pay damages to Pine Valley. The Court of Appeal held that the wording of the Exclusionary Clauses was insufficient to exempt Earthco from liability under s.14 of the SGA. Specifically, the Court held that the term “quality” cannot include “identity” and that the reference in the Exclusionary clauses to “quality” was not a reference to the implied condition in s. 14 relating to the goods’ identity. According to the Court of Appeal, as the Exclusionary Clauses did not contain words that explicitly, clearly, and directly covered the identity of the topsoil, they were insufficient to oust liability under s.14 of the SGA.

The Supreme Court Decision

In a 6-1 decision, the Supreme Court of Canada (the “Court”) allowed the appeal and restored the trial judge’s judgment. The Court held that the trial judge did not err in finding that the Exclusionary Clauses worked to insulate Earthco from liability because to hold otherwise would have defeated the parties’ intention.

Noting that the law governing the sale of goods is subject to “various legal rules from different sources”, including the general common law of contracts, the Court ruled that a court must not only consider the relevant provisions of the SGA, but also the modern principles of contractual interpretation and the legal treatment of exclusion clauses.

The Court held that to qualify under the “express agreement” branch of s. 53, there must be “both an agreement to vary or negative a right, duty or liability under a contract of sale, and that agreement must be express”. While the Court acknowledged that the words of the agreement are important, Sattva allows a court to read these words with the surrounding circumstances in mind and does not mandate any “magic words” or that words be strictly attributed with a singular, prescriptive meaning. According to the Court, to have an effective express agreement that satisfies s.53:

“[T]he parties’ joint intention must be declared, and an exclusion clause must unambiguously vary or negative the statutorily implied obligation, based not only from the words of the contract itself, but also from an analysis of the surrounding circumstances”.

The Court confirmed that exclusion clauses, including those under s. 53 of the SGA, are subject to their own set of legal rules. The Court reviewed the three-step process set out in Tercon, to help assess the enforceability of an exclusion clause:

1. The court must determine whether an exclusion clause applies in the circumstances, which depends on an assessment of the intention of the parties. It is at this step where a court should determine whether there is an express agreement between the parties that is sufficient to satisfy the requirements of s.53 of the SGA.
2. If the exclusion clause is found valid at the first step, the second step requires a court to consider whether the exclusion clause was unconscionable when made.
3. Even if not unconscionable, the court may consider whether any overriding public policy consideration outweighs the public interest in the enforcement of contracts.

Applying the foregoing approach, the Court held that the Exclusionary Clauses exempt Earthco from any statutorily imposed liability under s. 14 of the SGA.  The word “quality” in the Exclusionary Clauses had to be interpreted in a manner that was consistent with the surrounding circumstances. The Court found that, while the Court of Appeal had cited Sattva in its decision, it did not give full effect to its direction that the overriding concern of contractual interpretation is determining the objective intent of the parties. In this case, Pine Valley was a commercial purchaser with years of experience purchasing topsoil; both parties were aware of the changing nature of topsoil and that the existing test results were dated; Pine Valley was in a rush to receive the topsoil and deliberately assumed the risk through its own conscious strategic decision. To allow Pine Valley to claim liability against Earthco for variations in the soil composition, would fail to give effect to the parties’ objective intentions at the time of the contract’s formation. According to the Court, this would amount to a rejection of the principles of modern contractual interpretation post-Sattva and Tercon.

Justice Côté, the lone dissenter, would have dismissed Earthco’s appeal as the Exclusionary Clauses did not qualify as an “express agreement” under s. 53 of the SGA. Specifically, Justice Côté reasoned that the “clear and direct language chosen by the parties” in the Exclusionary Clauses limited the exclusion of liability to “defects of quality” and could not be expanded to cover defects “relating to the identity of the soil”.

Implications of the Decision

Pine Valley draws on the Court’s prior decisions in Sattva and Tercon to reinforce that the contractual intention of parties will not be ignored in the sale-of-goods context. The decision highlights the Court’s trend of rejecting a technical approach to contractual interpretation and ousting reliance on “magic words”. In determining whether parties agreed to exempt any liability under the SGA, the objective intention of the parties will be paramount.

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