Exclusion Clauses Prevail: Supreme Court Of Canada Defers To Contracts

The Supreme Court of Canada (the "SCC") has clarified when and how companies can contract out of the implied warranties and conditions set out in the Sale of Goods Act (Ontario) ("SGA"). Despite the critical role of implied statutory conditions, parties remain free to opt out of the presumptive provisions of the SGA.

Section 14 of the SGA states that "where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description."¹ Meanwhile, s. 53 of the SGA allows parties to contract out of various implied conditions and warranties. This is often done through an exclusionary clause, where the parties expressly agree to exclude these implied conditions in the agreement for purchase and sale."²

In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc,³ the SCC considered when an exclusionary clause will be considered an express agreement.

Background

In 2011, the City of Toronto hired Pine Valley Enterprises Inc. ("Pine Valley") to complete a municipal project for the City of Toronto, replacing topsoil on the project to prevent flooding.⁴

To complete the project, Pine Valley bought specific composition of topsoil from Earthco Soil Mixtures Inc. ("Earthco").⁵

Six weeks before shipping the topsoil to Pine Valley, Earthco sent Pine Valley lab reports arising from the testing of various samples of topsoil.⁶ Earthco warned Pine Valley that they should obtain updated test results before actually purchasing the topsoil.⁷

The parties signed a purchase and sale agreement and Earthco's team prepared a standard purchase order, adding two specific exclusion clauses:

1. [Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed.
2. 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 [underline added][RC1].⁸

Pine Valley declined to complete further testing.⁹

After the topsoil was delivered and used on the project, water ponding occurred, and Pine Valley was forced to remove and replace the topsoil.¹⁰ Testing revealed that there was substantially more clay in the soil than the pre-contract test results had indicated.¹¹ Pine Valley sued Earthco for breach of contract, among other things, alleging that they did not receive topsoil within the range of compositional properties that had been indicated in the test results.¹²

Procedural History

The trial judge confirmed that the contract was for the sale of goods under s. 14 of the SGA. His Honor found that, although Pine Valley did not receive the topsoil it bargained for, the contract's exclusion clause was valid and constituted "an express agreement" under s. 53 of the SGA.¹³ Accordingly, the trial judge dismissed Pine Valley's action.¹⁴

The Court of Appeal allowed the appeal, set aside the trial judgment, and ordered Earthco to pay damages to Pine Valley. The Court found that the exclusion clause was interpreted overbroadly and was not sufficient to exempt Earthco from liability.¹⁵ In particular, the Court held that the clause only limited liability relating to the soil's quality, not its overall identity.¹⁶ After being ordered to pay damages, Earthco appealed to the SCC.

Does the Exclusion Clause Apply in the Circumstances?

The SCC allowed the appeal by a 6-1 majority, restoring the trial judge's ruling.

The Court applied the three-step analysis for assessing the enforceability of exclusion clauses as set out in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways). The steps of that test are as follows:

1. First, the court must determine if the exclusion clause applies in the circumstances (i.e. whether there is an express agreement between the parties that meets the requirements of s. 53 of the SGA).¹⁷
2. Second, the court must ensure that, at the time the contract was created, the exclusion clause was not "unconscionable," meaning severely unfair or one-sided.¹⁸
3. Third, if the clause is conscionable, a court may still refuse to enforce the clause due to overriding public interest and policy concerns.¹⁹

Justice Martin, writing for the majority, focused most of her decision on the first step of the Tercon test.

Justice Martin began by setting out the principles that courts must follow when determining whether parties have an "express agreement" in accordance with s. 53 of the Act. Those principles are as follows:

1. An express agreement under section 53 must be an agreement to negative or vary a statutorily implied right, duty or liability and must be expressly set out in the contract.²⁰
2. An agreement is "express" when it is made in distinct and explicit terms and not left to inference.
3. Nevertheless, express agreements do not require the parties to use any specific, technical language or "magic words."²¹
4. Instead, a court must reasonably ascertain if there was a meeting of the minds'. This involves examining the words that were employed in the contract in conjunction with the surrounding facts.²²
5. In ascertaining whether there was a meeting of the minds, courts must apply the principles of modern contract interpretation. In particular, they must analyze the exclusion clause in light of its purpose, commercial context, and other surrounding circumstances.

In this case, Justin Martin held that:

• The exclusion clauses exempt the seller from any statutorily imposed liability under s. 14 of the SGA.
• The word "quality" in the exclusion clauses must be interpreted in a manner that is consistent with the surrounding circumstances.
• The buyer was a commercial purchaser with years of experience in buying large quantities of topsoil.
• Both parties were aware of the changing nature of topsoil and that the existing test results were dated.
• The parties were free to negotiate and allocate the risk of not testing the topsoil.
• The buyer was in a rush to receive the topsoil, given the looming threat of liquidated damages.
• The buyer deliberately assumed the risk through its own strategic decision.
• In this commercial context, the parties reasonably intended the word "quality" [RC2] to broadly include the attributes and composition of the soil.²³
• The parties came to an express agreement about the allocation of risk, by using direct, clear, and express language in their contract, which demonstrated that their objective intention was for the buyer to waive its right to pursue the seller for any liability relating to the topsoil.

Accordingly, the SCC upheld the validity of the exclusion clause as an express agreement to contract out of the SGA implied condition and concluded:

Takeaways

When seeking to exclude liability by implementing an exclusion clause, the SCC explains that the "gold standard" is to utilize explicit, clear, and unambiguous language to properly ensure that a business's contractual objectives will be enforced.²⁵

Further, although specific language is not required to constitute an express agreement, if a party seeks to contract out of the SGA, their express agreement must employ direct, unambiguous language that demonstrates their objective intention to contract out of the SGA and to limit liability. In other words, it is important for the exclusionary clause to specify how risk is allocated as between the parties and the scope of damages, if any, recoverable, where there is an issue with the products and/or services rendered.

Footnotes

1 Sale of Goods Act, R.S.O. 1990, c. S.1at s. 14.

2 Ibid at s. 53.

3 Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 Earthco.

4 Earthco supra note 4 at 4.

5 Ibid at 6.

6 Ibid at 7.

7 Ibid at 8.

8 Ibid at 9.

9 Ibid.

10 Ibid at 4.

11 Ibid at 1.

12 Ibid at 12.

13 Ibid at 10.

14 Ibid at 21.

15 Ibid at 23.

16 Ibid 24.

17 Tercon Contractors Ltd. V. British Columbia (Transportation and Highways), 2010 SCC 4 at 122.

18 Ibid.

19 Ibid 123

20 Ibid at 91.

21 Ibid at 104.

22 Ibid at 109.

23 Ibid at 109.

24 Ibid at 75.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024