'Paramount consideration' is objective intention of the contracting parties: court
The Supreme Court of Canada has clarified how a contract’s exclusion clause can release a seller from implied obligations under Ontario’s Sale of Goods Act (SGA).
In a decision released Friday morning, the court’s majority found that where parties expressly set forth the agreement in a contract, they can negate or vary a statutorily implied right, duty, or liability. The most important consideration is the objective intention of the parties, said Justice Sheilah Martin, who wrote the reasons for the majority. The principles of contractual interpretation and the law around exclusion clauses must inform the determination of what qualifies as an express agreement, she said.
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, the SCC’s ruling was 6-1. The majority found that the exclusion clauses subject to the dispute were valid.
“In the context of contract and statutory requirements, I think that the court has sent a clear message that you're not going to ignore, at least from the sale-of-goods perspective, the contractual intention of the parties,” says Mark Klaiman, a lawyer at Lipman, Zener & Waxman and counsel for Earthco.
“They want to continue to support the notion that a when you're interpreting a contract, the intention of the parties is paramount.”
In her reasons, Martin said that the law governing the sale of goods "is subject to various legal rules from different sources." These include statutory provisions in the SGA and the general common law of contracts. A sale of goods must also be “interpreted in conjunction with current contract law principles.”
The SGA infuses contracts for the sale of goods with various rights, duties, and liabilities. For example, under s. 14, the SGA introduces an implied condition that goods match their description. Not every aspect of the goods must match the description, said Martin, only those “which identify the subject matter of the sale.” The question, she said, is whether the buyer could reasonably refuse to accept the goods because the failure of that aspect of the delivered goods to correspond to what was promised in the contract makes the goods “of a different kind from those the buyer had agreed to buy.”
Parties are also free to exempt their contracts from the presumptive provisions of the SGA. Section 53 states: “Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.”
To qualify for the “express agreement” branch of s. 53, the agreement to vary or negate a liability must be expressed in “distinct and explicit terms” in the contract of sale, and “not left to inference.” Martin adds that the caselaw mandates that contractual interpretation focus on words understood in their factual matrix rather than technical rules of construction. The “paramount goal” is finding the parties’ “objective intention.”
Exclusion clauses have their own set of legal rules. The case, Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, provides a three-step process to assess an exclusion clause’s enforceability. First, the court determines whether it applies in the circumstances, which involves an assessment of the parties’ intentions and whether the clause is an express agreement that is sufficient according to the standards in s. 53. If valid at step one, step two involves considering whether the clause was unconscionable when made. In the third step the court determines whether any overriding public policy consideration outweighs the public interest in the enforcement of contracts. If there is one which does, the court can refuse to enforce the clause.
The dispute in the case arose from a purchase of topsoil. Pine Valley Enterprises Inc., a landscape development and construction company, bought 3,678 cubic yards of topsoil from Earthco Soil Mixtures Inc. for use in a municipal project for the City of Toronto.
Their contract included a provision whereby Pine Valley could test the soil prior to shipment. If Pine Valley waived this right, Earthco was not responsible for the quality of the material. Earthco gave Pine Valley laboratory reports with topsoil samples six weeks before shipment.
Once the soil was delivered and used in the project, Pine Valley discovered its composition differed from the initial samples, which resulted in "water ponding." They tested it and found it contained more clay than was present in the initial samples. Pine Valley removed and replaced the topsoil. They sought compensation, but Earthco said they were not responsible because Pine Valley waived its right to test the topsoil before shipment.
Pine Valley had waived its right to test because it was behind on project deadlines and needed the topsoil shipped immediately. The two parties had agreed to add two exclusion clauses to the contract stating that if Pine Valley waived its right to test and approve the topsoil, Earthco would not be responsible for the material’s quality once it left the facility.
Pine Valley sued Earthco, losing initially but winning at the Court of Appeal. The trial judge found that under the SGA, the contract was a “sale by description” and the product delivered fell short of what they had agreed. But the judge said their exclusion clauses allowed them to contract out of the implied condition, as they were express agreements under s. 53 of the Act.
The appeal court allowed Pine Valley’s appeal finding that the exclusion clauses did not exempt Earthco from liability.
Vito Scalisi acted for Pine Valley. He is a certified specialist in construction law practising in Concord, Ont. Scalisi says his team was pleased to see their position reflected in the dissent from Justice Suzanne Côté.
“The ruling will be significant in interpreting the Court’s prior decisions in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69,” he says.
Côté would have dismissed the appeal. She said the “clear and direct language” in the contract limited the exclusion of liability to “defects of quality” and cannot be expanded to capture “any defects relating to the identity of the soil.”
