This case highlights that prudency when drafting or agreeing to an exclusion clause in a purchase agreement is critical. Wording isn't everything - a court will analyze each party's intentions and the facts surrounding the agreement when deciding if an exclusion clause serves to absolve liability. |
Section 14 of the Ontario Sale of Goods Act
("SGA") imposes the term in all
purchase agreements that goods sold will match their description.
However, section 53 of the SGA allows contracting parties
to "choose their own adventure" by contracting out of the
implied term, but only when they expressly agree to do so. But how
stringent is the standard for proving "express
agreement"? How does the specific wording of an exclusion
clause balance against the surrounding circumstances and the
parties' intentions? Finally, how should vendors and purchasers
word exclusion clauses to best protect their interests?
Background
As part of a project for the City of Toronto, Pine Valley contacted Earthco to provide highly specific varieties of topsoil. Earthco had stringent and lengthy testing procedures to ensure that each soil batch perfectly matched each customer's specifications. However, as Pine Valley was already far behind schedule on the project, it needed soil urgently in October 2011 to avoid paying the City liquidated damages. The initial and most recent testing on the specific soil occurred in August 2011. Being an organic compound, topsoil properties can change with time.
Earthco explicitly warned Pine Valley that although they could ship soil before all necessary tests had been repeated, they would only do so at Pine Valley's risk. The agreement for the soil purchase allowed for Pine Valley to test the soil before shipment at its own expense, failing which Earthco would not be responsible for the soil's quality. Specifically, this portion of the agreement read:
6) [Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed. ...
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.
Within two weeks of signing the agreement, Pine Valley had placed all purchased soil on the project site. Unsurprisingly, the soil was deficient and led to water ponding as it had a significantly higher clay content than the premature testing revealed. The City directed Pine Valley to remove the deficient soil and claimed liquidated damages. Pine Valley sued Earthco for breach of contract, alleging that the soil that Earthco provided lacked the compositional qualities indicated in the initial testing.
What the Lower Courts Said
The primary issue before the Ontario Superior Court of Justice was whether the exclusion clauses overrode section 14 of the SGA, which implies the condition that goods match their description. First, the trial judge found that Earthco breached section 14 of the SGA because the soil did not match its description. However, the trial judge went on to consider section 53 of the SGA, which allows a party to override an implied condition under the SGA where the parties expressly agree to contract out of it. Notably, parties can also contract out of statutory liability through conduct or usage binding the parties, neither of which are connected to the actual language used in the exclusion clause. The trial judge determined that the exact purpose of the exclusion clauses was to prevent the situation that occurred, and Pine Valley assumed the obvious risk that the soil would be of incorrect composition.
As such, the trial judge dismissed Pine Valley's claim, ultimately finding that the exclusion clauses were clear and unambiguous, and negated the implied condition under section 14 of the SGA.
The Ontario Court of Appeal (the "ONCA") overturned the trial judge's decision. The ONCA found that the trial judge failed to consider that section 14 of the SGA applied to the identity of goods, whereas the exclusion clauses only referenced the soil's quality. Further, in drafting section 14, the legislature had made a policy decision to include the implied condition in all purchase contracts for a sale by description without the need for parties to negotiate it. Finally, the ONCA found that only "explicit, clear and direct language" can oust a statutory condition, a higher standard that the trial judge applied.
What the SCC Said
In weighing the decisions made by the trial judge and the ONCA, the SCC sided with the trial judge. The SCC stated that the ONCA focused too much on the language of the exclusion clauses and not enough on the surrounding circumstances as well as the parties' intentions. The SCC emphasized that "express agreement" is distinct from "express language", meaning that specific language is not required to indicate agreement, but will inform whether an express agreement was made. In short, the SCC found that "parties must make their mutual intention unmistakably evident" (para 56).
The SCC referenced its prior decision in Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 to state that courts should read contractual clauses in light of the surrounding circumstances, rather than applying a strict and prescriptive analysis of the words themselves. A key circumstance in this case was Pine Valley's rush to obtain soil to avoid paying the City liquidated damages. The trial judge's decision respected the objective intentions of the parties to agree on specific risk allocation in the circumstances. Holding Earthco responsible for the deficient soil would contravene the parties' objective intentions to override the statute.
Ultimately, the SCC found that Pine Valley knowingly accepted the risk that the soil could have been inadequate in a rush to obtain the soil quickly, so Earthco could not be held liable.
However, the decision was not unanimous. Justice Suzanne Côté found that the exclusion clauses did not constitute an "express agreement" under section 53 of the SGA and as such, the exclusion clauses did not oust Earthco's liability within section 14 of the SGA. Justice Côté interpreted the meaning of "express agreement" more strictly and with a higher threshold than the other members of the SCC, similar to the ONCA's interpretation.
Takeaways
As is true in the vast majority of contractual disputes, the parties' objective intentions held within the factual matrix of the contract reign supreme. In this case, the circumstances surrounding the parties' contract and Earthco's exclusion clauses appear to have been given at least as much weight as the wording of the exclusion clauses themselves.
For Vendors
Ensure that exclusion clauses contained in your purchase agreement make no mistake that you and the purchaser expressly agree to contract out of section 14 or other provisions of the SGA. There can be no doubt that you both agree to allocate risk differently than the SGA specifies. Consider including specific wording to that effect. Furthermore, your conduct will inform the applicability of any exclusion clauses, so ensure that your intentions and actions match the contract and any exclusion clauses.
For Purchasers
Be wary of exclusion clauses that suggest that you agree to contract out of statutory requirements. Further, be aware of your intentions when entering into a purchase agreement: if you expressly intend to accept a certain risk, a court will likely find that you are bound to that risk. Given the above case, the facts informing your purchase agreement may be just as important as the wording of the agreement itself.
Notably, although this case arose out of Ontario, identical provisions exist in the Alberta Sale of Goods Act.
Link to Decision: Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20
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