Ontario's Sale of Goods Act1 ("SGA") implies several conditions in contracts for the sale of goods. However, parties can contract out of any such implied condition imposed by the SGA if they so choose. In Earthco Soil Mixtures Inc v Pine Valley Enterprises Inc, 2024 SCCA 20, the Supreme Court of Canada clarified the contractual language required to displace provisions of the SGA.
In this case, a majority of the Supreme Court allowed the appeal and restored the judgment of the trial judge, finding that the parties had contracted out of certain implied conditions under the SGA.
Background: The case began with a contract between the City of Toronto and Pine Valley Enterprises ("Pine Valley") to address flooding in the North York region in 2011. Among other things, the project required replacing the existing topsoil with topsoil more conducive to water drainage. The contract required Pine Valley to substantially complete the topsoil replacement by October 15, 2011. After that date, Pine Valley would have to pay $500 per working day to the City until the project was completed.
On October 3, 2011, Pine Valley contacted Earthco Soil Mixtures Inc. ("Earthco") about purchasing soil that met the City's compositional requirements for water drainage. Pine Valley viewed and tested an Earthco soil sample that was six weeks old. Although the sample appeared to satisfy the City's compositional specifications, it would normally have undergone further testing prior to delivery, as its properties could change over time. Pine Valley had the right to test and approve the soil before it was shipped and placed.
However, with the looming performance deadline approaching, Pine Valley decided to waive its right to test and approve the soil, despite warnings from Earthco that it would be at their own risk. The standard purchase agreement was modified to include a clause stating that if Pine Valley Waives its right to test and approve the soil, Earthco "will not be responsible for the quality of the material" once it leaves their facility (the "Exclusion Clause").
The soil on arrival had more clay than the older results indicated. The City was not satisfied, directed its removal, and charged Pine Valley liquidated damages for the delay. Pine Valley then sued Earthco, claiming that the soil they received did not match the properties indicated in the test results.
At trial, Pine Valley attempted to rely on section 14 of the SGA, which provides that every contract for the sale of goods "by description" includes an implied condition that the goods will correspond with the description. Pine Valley argued that the soil it received did not correspond with its description (because it did not have the correct compositional properties), in breach of the implied condition under section 14 of the SGA.
The Trial Judge's Decision: the Trial Judge found that the parties, through the Exclusion Clause, had expressly agreed to contract out of the implied condition at section 14 of the SGA. As such, the Court found that Earthco was not liable to Pine Valley, and dismissed Pine Valley's claim.
Under section 53 of the SGA, parties can, "by express agreement," contract out of any implied duty, right, or liability under the Act (there are other means to do so, but this case concerned only express agreement). The Trial Judge found that the Exclusion Clause was such an "express agreement". Although the Exclusion Clause did not explicitly mention statutorily implied conditions or terms, it was nevertheless clear and unambiguous, and served to negative any liability of Earthco for failing to deliver soil that corresponded to its description. Pine Valley appealed to the Ontario Court of Appeal.
The Ontario Court of Appeal's Decision: the Court of Appeal allowed the appeal, set aside the trial judgment, and substituted a judgment requiring Earthco to pay damages to Pine Valley.
The Court of Appeal articulated the standard for ousting an implied condition under the SGA as requiring the parties to "explicitly, clearly and directly" agree to its exclusion. The Court found that this standard had not been met in this case: section 14 related to the identity of the goods sold, not their quality. As the Exclusion Clause only purported to exclude liability for the "quality" of the soil (but not its "identity"), the clause was insufficient to oust liability under section 14 of the SGA.
Earthco sought and was granted leave to appeal to the Supreme Court of Canada.
The Supreme Court's Decision: a majority of the Supreme Court allowed the appeal and restored the judgment at trial, finding that the Exclusion Clause ousted the implied provision under section 14 of the SGA.
The Supreme Court found that the Court of Appeal erred in "fixating" on the precise language required to negative liability. In the majority's view, this was not consistent with the modern approach to the interpretation of exclusion clauses, which involves a contextual inquiry into what the parties objectively intended based on the text and the surrounding circumstances.
The Supreme Court found that an "express agreement" to contract out of the SGA does not require "magic words." That means it does not require legal terms of art (like "condition") or express reference to the provision in question (e.g., "section 14 of the SGA does not apply to this agreement"). Though the contract's words are important, they are only a signal of the parties' intention. The word "agreement" in section 53 is crucial, signaling that what matters is not specific language, but a meeting of the minds.2
An express agreement requires the parties to "have expressly and unambiguously used language that signals their intention to override the statute."3 This means that "silence or omission does not suffice. Nor can the court imply, impute or infer intention to opt out of the statute based on parties' presumed intention."4. In short, the standard is that "One must be able to point to the contract and say, "that exclusion clause ousts the operation of an implied term of the SGA."5
The Supreme Court found that the Ontario Court of Appeal erred in taking the word quality to be a term of art, despite it not being a specific legal term. Considering "quality" in the full commercial context, the parties reasonably understood it to include all attributes of the soil including its ultimate composition. The majority considered Pine Valley was experienced in soil buying, aware of the changing nature of the topsoil, and that it was "unrealistic to expect these parties to know about the legal distinction between the terms 'identity' and 'quality' or, for that matter, between 'conditions' and 'warranties'."6
Justice Côté wrote dissenting reasons, in which she would have upheld the judgment of the Court of Appeal and found the Exclusion Clause did not apply. In Justice Côté's view, an "express agreement" should require clear and direct "language inconsistent with the terms the legislature sought to imply in the contract."7 She noted that while other provisions require looking at the "circumstances of the case", section 14 does not. The exclusion clause in this case should have referenced "identity", not "quality" as the terms are not in her view interchangeable.
Key Takeaways:
- In this case, the very purpose of the Exclusion Clause was to avoid a situation where Pine Valley failed to test soil purchased from Earthco and then attempted to hold Earthco responsible for a loss due to unsatisfactory soil composition (which is in fact what transpired). In finding that the Exclusion Clause ousted the implied condition in section 14 of the SGA, the Supreme Court has affirmed that parties to commercial agreements are free to allocate risks between them as they see fit and to contract out of the provisions of the SGA through express agreement, regardless of the specific words used.
- The intentions of the parties govern in determining whether an "express agreement" to contract out of the SGA, as required by section 53, has been reached. This involves an interpretation of contractual terms in full context and in all of the surrounding circumstances.
- Exclusion clauses under section 53 do not necessarily require reference to the SGA provision they intend to contract out of. Rather, the parties' intention must be clear. There are no "magic words".
Footnotes
1. RSO 1990, c S.1.
2. At paras 57-58.
3. At para 98.
4. At para 98.
5. At para 99.
6. At para 106.
7. At para 143.
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