In a welcome decision for commercial sale transactions in Ontario, the Supreme Court of Canada ("SCC") has recently clarified the requirements for a valid and enforceable exclusion clause in a contract of sale to exempt the seller from an implied condition under the Ontario Sale of Goods Act (the "Act"): Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20.
The City of Toronto hired the plaintiff Pine Valley Enterprises Inc. ("Pine Valley") for a flooding remediation project, which included the removal and replacement of topsoil to improve drainage. Pine Valley contacted the defendant Earthco Soil Mixtures Inc. ("Earthco") to source topsoil containing a contractually specified composition. As part of the negotiations, Earthco provided laboratory results from different topsoil samples taken about six weeks prior, but specifically warned Pine Valley against purchasing topsoil without updated test results. Already having missed project deadlines and facing potential financial penalties under the contract with Toronto, Pine Valley insisted on immediate delivery. In the circumstances, Earthco and Pine Valley accordingly agreed to add two exclusion clauses to the contract of sale: 1) Pine Valley had the right to test and approve the topsoil before it was shipped; and (2) If Pine Valley waived that option, Earthco would not be responsible for the quality of the material once it left Earthco's facility.
Once the topsoil had been delivered and placed at the project site, unexpected water ponding occurred. New testing of the delivered topsoil revealed that it had substantially more clay in its composition than anticipated in the original test results. After Pine Valley was required by Toronto to remove and replace the topsoil, it sued Earthco for damages, alleging that it had not received topsoil with the proper composition.
The trial judge dismissed Pine Valley's action. The trial judge confirmed that the sale of the topsoil was for a sale of goods by description under s. 14 of the Act, thereby automatically incorporating an implied condition that goods must correspond with their description. It was confirmed that Pine Valley did not get the topsoil for which it bargained, since there was a material difference between the topsoil promised and the topsoil delivered. However, the trial judge determined that the exclusion clauses met the definition of an "express agreement" under s. 53 of the Act, which allows parties to contract out of the s. 14 implied condition. As such, Pine Valley's claim was dismissed on the basis that the exclusion clauses were an express agreement to contract out of or vary the implied condition. It did not matter that the parties did not explicitly mention that the exclusion clauses were added to the contract to meet the purposes of s. 53 of the Act.
On appeal by Pine Valley, the Ontario Court of Appeal reversed the trial decision and substituted a judgment for damages in favour of Pine Valley, holding that the wording in the exclusion clauses was insufficient to exempt Earthco from s. 14 liability.
On further appeal by Earthco, the SCC ruled 6-1 to allow the appeal. In the majority opinion, Justice Martin considered the sufficiency of the express agreement under s. 53 of the Act. The SCC held that to be sufficient, the agreement must expressly contract out of or vary a statutorily implied right, duty or liability and must be expressly set out in the contract of sale. In determining what constitutes an express clause, courts are directed to refer to the principles of contract interpretation and the law related to exclusion clauses, with the overriding consideration being the objective intention of the parties.
Applying their analysis to the Pine Valley claim, the SCC concluded that the objective intention of the parties to include the express agreement in the contract of sale meant that if it elected not to test and approve before delivery what was known as an organic and changing substance, Pine Valley had knowingly accepted the risk that the delivered topsoil would not have the same quality or composition as the originally tested topsoil.
The SCC's decision is significant guidance for businesses engaged in commercial sales, where the description of the goods, including such factors as quality or composition, is an implied condition of sale under the Act. If a business is unsure that it will be able to deliver the goods in accordance with the implied condition, then it should consider including an express agreement into the contract of sale to contract out of or vary the implied condition. Doing so by express agreement may help protect the seller from potentially costly litigation thereafter. Getting timely legal advice on such express agreements beforehand is a crucial step in protecting your company's business interests.
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