Commercial Litigation and Dispute Resolution Blog

In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, the Supreme Court of Canada (“SCC”) clarified the requirements to contract out of statutory conditions under the Sale of Goods Act, RSO 1990, c S.1 (“SGA”).

The decision may be relevant to exclusion clauses more broadly, including sale of goods legislation in other provinces. The key takeaways are:

• The modern contractual interpretation principles from Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 apply to exclusion clauses, including the need to consider the surrounding circumstances and commercial context.
• Parties must demonstrate an express and unambiguous intention to contract out of statutory-imposed conditions. However, no “magic words” or particular language is required.^[1]

As explained below, this decision is a reminder to business people and lawyers that, while parties enjoy freedom of contract, they must allocate risk carefully and not contract out of statutory protections without a clear understanding of the consequences.

Background

Pine Valley contracted to receive topsoil of a specified composition from Earthco.

However, Pine Valley was in a rush to receive the materials due to the looming threat of liquidated damages that it faced under a separate contract (which required the topsoil for completion).

In that context, the parties added two exclusion clauses to the contract instead of following Earthco’s typical testing process. The exclusion clauses provided:

• Pine Valley has the right to test and approve the material at its own expense at our facility before it is shipped and placed. Please contact [Earthco’s Manager] to arrange.
• If Pine Valley waives its right to test and approve the material before it is shipped, Earthco will not be responsible for the quality of the material once it leaves our facility.^[2]

Prior to the contract, Earthco provided Pine Valley with test results showing that the soil met Pine Valley’s requirements. Both parties knew that these initial tests were from over six weeks prior and the soil’s composition had a tendency to change over time.^[3]

Against Earthco’s warnings, Pine Valley did not exercise its right to test the material before delivery.

The topsoil ultimately delivered by Earthco did not meet Pine Valley’s specifications.

Pine Valley claimed for breach of contract and alleged the topsoil was not within the range of compositional properties indicated in the initial test results.^[4]

Lower Court Decisions

Trial Judge finds sufficient intention to contract out of statutory conditions

At trial, the key issue was whether the exclusion clauses relieved Earthco from liability under ss. 14 and 53 of the SGA.

Section 14 provides that where there is a contract for sale of goods by description, it is contractually-implied that the goods will correspond with the description.^[5] However, s. 53 of the SGA allows parties to contract out of s. 14 by “express agreement”.^[6]

The contract did not explicitly refer to contracting out of the statutory condition in s. 14.

Relying on the surrounding facts and commercial context, the court concluded that the terms were designed to address the exact events that had transpired, and the exclusion clauses demonstrated an intention to contract out of s. 14.^[7]

Ontario Court of Appeal reverses trial decision

The Ontario Court of Appeal reversed the trial decision and found that the contract’s language was not sufficiently “clear, direct, and explicit” to avoid liability under s. 14.

Among other errors, the court held that the trial judge failed to account for the fact that s. 14 relates to the identity of goods rather than their quality, and the contract only referred to Earthco’s responsibility for the quality of the material.^[8]

SCC Decision

In a 6-1 majority, the SCC agree with the trial decision and held that the exclusion clauses demonstrated an “express agreement” to contract out of s. 14.^[9]

Section 53 requires both an “agreement” and that it be “express”. An “express agreement” does not require any particular language or “magic words” to oust liability under the SGA.^[10] As the SCC explained:

• “agreement” requires a meeting of the minds about what rights, duties or obligations provided under the SGA are being varied or negatived by the parties; and
• “express” requires that the parties use explicit terms unambiguously signalling their intention to override the SGA (i.e., it cannot be left to inference).^[11]

In accordance with modern contractual interpretation principles, the courts will look to the factual matrix and commercial context to ascertain what the parties intended the words to mean.^[12] 

The factual matrix played a key role in the Earthco decision. Rather than rely on the legal distinction between “quality” and “identity”, the SCC held that the contract’s use of “quality” needed to be interpreted as the parties reasonably intended.^[13]

In the commercial context of the agreement, there was no unfairness in refusing to find Earthco liable for Pine Valley’s “expensive but calculated mistake”.

The SCC found that Pine Valley knowingly accepted the risk of not testing the soil, and the parties’ objective intention was for the Pine Valley to waive its right to pursue the seller for any liability relating to the topsoil.  Accordingly, Pine Valley could not benefit from statutory protections under the SGA that were inconsistent with this bargain.^[14]

Conclusion

After Earthco, parties and lawyers should pay close attention to drafting express and unambiguous exclusion clauses and to the overriding commercial purpose of the contract.

While there is no requirement for particular “magic words” to constitute an “express agreement” under s. 53, the parties must expressly and unambiguously demonstrate an intention to contract out of statutory terms.^[15] And, if parties do demonstrate such intent, related statutory protections may no longer apply.

^{[1] Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, at para 98 [Earthco].}

^{[2] Earthco, supra note 1 at para 9.}

^{[3] Earthco, supra note 1 at para 7.}

^{[4] Earthco, supra note 1 at para 12.}

^{[5] Sale of Goods Act, R.S.O. 1990, c. S. 1, s. 14.}

^{[6] Similar provisions exist in other provinces’ sale of goods legislation, see for example Alberta’s Sale of Goods Act, R.S.A. 2000, c. S-2 s. 15 and 54; BC’s Sale of Goods Act, R.S.B.C. 1996, c. 410, s. 17 and 69.}

^{[7] Earthco, supra note 1 at para 19.}

^{[8] Quality and identity of goods are legally distinct concepts. The quality of the goods amounts to what is essentially a term of the contract. For example, if the parties had agreed the topsoil was to be a certain colour. Identity, on the other hand, refers to “an essential part” of the goods themselves.[8] For example, in this case, the soil was not the same identity as agreed to because it did not have the correct composition of sand, silt, and clay.}

^{[9] Earthco, supra note 1 at para 100.}

^{[10] Earthco, supra note 1 at para 98.}

^{[11] Earthco, supra note 1 at para 98.}

^{[12] Earthco, supra note 1 at para 65.}

^{[13] Earthco, supra note 1 at paras 104 to 106.}

^{[14] Earthco, supra note 1 at paras 110 to 111.}

^{[15] Earthco, supra note 1 at para 98.}