The Supreme Court of Canada Provides Guidance on Interpreting Exclusion Clauses
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, the Supreme Court of Canada restored an Ontario Superior Court of Justice decision concerning a dispute between a buyer and seller regarding the specific composition of topsoil. The buyer assumed the risk when purchasing the topsoil without testing it and the exclusion clause agreed upon by the parties intended to protect the seller from liability. In making its decision, the Supreme Court of Canada shed light on the interpretation of exclusion clauses and provided clarity for parties seeking to contract out of a statutorily implied condition under the Ontario Sale of Goods Act (“SGA”).
Background
The buyer, Pine Valley Enterprises Inc. (“Pine Valley”), had contracted with Earthco Soil Mixtures Inc. (“Earthco”) for the supply of topsoil to use in a project for the City of Toronto. Pine Valley signed a contract for what was described as “Screened topsoil with extra Organics added” and Pine Valley insisted on immediate delivery.
The contract included two specific clauses in respect of the testing and delivery of goods that provided:
- a) Pine Valley has the right to test and approve the material prior to shipment; and
- b) If Pine Valley waives its right to test and approve the material prior to shipment, Earthco will not be responsible for the quality of the material once it leaves the facility.
Pine Valley did not test the topsoil before the material was shipped. After delivery of the topsoil, the testing revealed that the topsoil was significantly different from earlier test results. The City of Toronto was not satisfied with the construction of the project and directed Pine Valley to remove and replace the topsoil it had purchased from Earthco.
Pine Valley sued Earthco for breach of contract. Pine Valley claimed that the purchased topsoil involved a sale by description and sought damages because the soil did not correspond to that description. Earthco argued there was no breach of any statutory condition, asserting that the goods not only complied with their description, but also that the parties specifically excluded any such obligation by express written agreement.
The Superior Court of Justice
The trial judge found that this was a sale by description within the meaning of s. 14 of the SGA – which implies a condition in contracts that goods sold by description must correspond with their description. The trial judge found it was clear that Pine Valley did not get the soil it bargained for because there was a significant compositional variation between the soil that was promised and the soil that was delivered. Thus, there was a breach of the implied condition under s. 14 of the SGA that the goods must correspond with their description.
However, upon turning to s. 53 of the SGA, the trial judge found that the specific clauses in the contract were clear and unambiguous, which served to oust Earthco’s liability under s. 14 of the SGA. The trial judge noted that Pine Valley’s waiver of testing meant it deliberately assumed the risk that the soil would not meet the required specifications. As such, the trial judge dismissed Pine Valley’s action.
The Court of Appeal
Pine Valley appealed the trial judge’s decision, and the Court of Appeal allowed the appeal requiring Earthco to pay damages to Pine Valley.
The Court of Appeal found that there was no language in the exclusion clauses that clearly and explicitly referred to any statutory conditions or to the identity of what was being sold, rather the language of the exclusion clauses only disclaimed liability for the quality of the soil. Since the clauses did not contain words that explicitly covered the identity of the soil, they were insufficient to oust liability under s. 14 of the SGA.
The Supreme Court of Canada
Earthco appealed to the Supreme Court of Canada. The appeal was allowed, and the trial decision dismissing Pine Valley’s action was restored.
The primary issue on this appeal was what the legal requirements were for excluding an implied condition pursuant to s. 53 of the SGA. To be sufficient for the purposes of s. 53 of the SGA, an express agreement must be comprised of an agreement to negative or vary a statutorily implied right and such an agreement must be expressly set forth within the parties’ contract. The determination as to what qualifies as an express agreement must also be informed by principles of contractual interpretation and the law concerning exclusion clauses, and the paramount consideration must be the objective intention of the parties.
The court found that the trial judge made no error of law with respect to the exclusion clauses. The objective meaning of the parties’ express agreement was that the buyer accepted the risk that the topsoil would not meet the previously supplied specifications concerning its composition if it failed to test what it knew was an organic substance.
The Supreme Court of Canada noted that the “question to be asked for the purpose of s. 14 is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to them on the ground that the failure of the goods to correspond with that part of what was said about them in the contract makes them goods of a different kind from those the buyer had agreed to buy.” In this case, the exclusion clauses exempt the seller from any statutorily imposed liability under s. 14 of the SGA.
Takeaway
The Supreme Court of Canada provided clarification on the requirements for an exclusion clause in a contract to exempt a seller from an implied condition under the SGA. This involves considering the surrounding circumstances when interpreting the terms of a contract of sale and ascertaining the parties’ objective intention.
This decision serves as a reminder that when contracting for the sale of goods, the parties should consider whether they mutually agree upon exclusion clauses that exempt the seller from liability and if so, such an agreement must be expressly set forth within the contract.
