SCC Releases New Guidance on Requirements for Exclusion Clauses

The Supreme Court of Canada recently released its highly anticipated decision in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. In a 6-1 decision, the Court clarified the requirements for showing that parties to a contract for the sale of goods have expressly agreed to contract out of a statutorily implied condition under Ontario’s section 53 of the Sale of Goods Act (SGA) and equivalent provisions in other provinces.

Writing for the majority, Justice Martin explained that exclusionary clauses should be considered using modern contractual interpretation principles focusing on the objective intention of the contracting parties. As a result, the term “express agreement” as contemplated in section 53 does not necessarily require the use of “express language” for parties to contract out of statutorily implied conditions.

Background

Pine Valley Enterprises Inc. (Pine Valley) was a contractor remediating a residential area that experienced basement flooding. It subcontracted with Earthco Soil Mixtures Inc. (Earthco) to help replace topsoil at the site urgently pursuant to a purchase order negotiated directly by the parties, without the assistance of counsel (Purchase Order).

Earthco advised Pine Valley to allow time for the topsoil to be tested to confirm its agreed-upon specifications before its delivery, rather than relying on older lab reports. However, Pine Valley wanted the topsoil to be delivered urgently. Earthco, therefore, added two clauses to its standard purchase order to note that Pine Valley “has the right to test and approve the material at its own expense at our facility before it is shipped and placed” and that 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” (Exclusionary Clauses).

After the topsoil was delivered, testing revealed that it did not match the chemical properties specified by the parties in the Purchase Order. Pine Valley sued Earthco for breach of contract, arguing, among other things, that the Exclusionary Clauses did not displace the specific statutory condition under the SGA requiring that the topsoil correspond with the description in the prior lab reports.

Lower Court Decisions

The trial judge dismissed the action, holding that the Exclusionary Clauses constituted an “express agreement” between the parties as contemplated in section 53 of the SGA.

The Court of Appeal unanimously overturned the trial decision, finding that the wording of the Exclusionary Clauses was insufficient to exempt Earthco from liability. The Court of Appeal found that the trial judge failed to properly interpret the meaning of the requirement that explicit, clear and direct language must be used to exclude a statutorily implied condition under the SGA and improperly read the Exclusionary Clauses in broader terms than their actual words based on an improper resort to the factual matrix.

Supreme Court of Canada

A 6-1 majority of the Supreme Court overturned the Court of Appeal, holding that the Exclusionary Clauses constituted an express agreement to contract out of the statutorily implied condition of the SGA. Justice Martin explained that the statutory requirement for an “express agreement” must be informed by modern contractual interpretation principles, with the goal of ascertaining the parties’ objective intention.

Applying these principles, the Court found that the Exclusion Clauses revealed an objective intention by Pine Valley to waive its rights to claim liability from Earthco for variations in the soil composition. Justice Martin explained that the term “quality” in the purchase order cannot be construed in isolation and must be interpreted as the parties reasonably intended and within their commercial context. The Court found that the parties used the term “quality” in the colloquial and commercial senses, not in the legal sense, and understood the term to include the attributes of the soil, including its ultimate composition.

The Court emphasized that the parties were not represented by counsel and could not be expected to know the legal distinction between the terms “identity” and “quality” or between “conditions” and “warranties” as set out in the SGA. In the circumstances, it would be “commercially impractical” to expect the parties to include proper legal reference to these terms and inconsistent with an appropriate focus on the parties’ reasonable expectations.

With this decision, the Court broke from a line of case law supporting the proposition that contracting parties cannot be taken to have expressly agreed to exclude liability arising from the breach of a “condition” by using other words such as “warranty,” and that conditions and warranties implied by sale of goods legislation may only be excluded by explicit language.

Key Takeaways

1. Exclusionary clauses should be considered using modern principles of contractual interpretation focusing on the objective intention of the contracting parties.
2. To qualify as an “express agreement” to contract out of the SGA, parties must have expressly and unambiguously used language that signals their intention to override the SGA.
3. An “express agreement” does not require “express language”; there is no requirement for particular “magic words.”
4. Exclusionary provisions drafted by laypeople may require less precise language than those provisions negotiated by counsel.

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