No “Magic Words” Required: Supreme Court of Canada Holds Exclusion Clauses Released Seller From Implied Statutory Conditions

On May 31, 2024, the Supreme Court of Canada released its decision in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, which clarifies how contractual exclusion clauses are to be interpreted and when they can release a seller from implied conditions under Ontario’s Sale of Goods Act (the “SGA”).

In a 6-1 decision, penned by Justice Martin, the Supreme Court held the relevant exclusion clauses in the parties’ written contract were valid and negated the defendant’s liability under a condition implied by the SGA that, under an agreement to sell goods by way of a “sale by description”, the goods delivered must correspond with the description given.

In clarifying the test for enforcing exclusion clauses in a sale of goods contract, the Supreme Court held that rigid, formulaic analyses should be avoided and that a clause does not need to include any particular “magic words” to be enforced. The Supreme Court emphasized the importance of interpreting the parties’ objective intentions at the time of contract formation when applying the modern principles of contractual interpretation to the exclusion clause.

Background

The plaintiff, Pine Valley, is a municipal parks contractor that was hired by the City of Toronto on a project that included the removal and replacement of existing topsoil with another topsoil more conducive to proper water drainage. Pine Valley agreed to purchase topsoil from the defendant seller, Earthco, for the original contract price of $66,168.

Earthco provided Pine Valley with lab reports from different topsoil samples taken about six weeks before the purchase and warned against purchasing the topsoil without updated test results. Since Pine Valley had already missed project deadlines, it waived its right to test the soil and insisted on immediate delivery.

After the topsoil was delivered and placed on the project site, water accumulation became an issue. The new testing revealed substantially more clay (which can block drainage) in the topsoil than the earlier tests had indicated.

The City required Pine Valley to replace the topsoil. Pine Valley then sued Earthco for $700,000 in breach of contract damages.

Lower Court Decisions

The core legal issue at trial was whether exclusion clauses in the parties’ agreement ousted a condition implied by the SGA that the topsoil delivered correspond with the seller’s description.

The trial judge found the parties’ agreement was a “sale by description” within the meaning of section 14 of the SGA. This means the statute imposed an implied condition that the goods purchased must “correspond with the description”. The trial judge also found Pine Valley did not get the soil for which it bargained, so there was a breach of the implied condition.

Importantly, however, the SGA, like other such statutes across the country, provides that parties may contract out of any right, duty, or liability that would otherwise arise by implication of law in a contract of sale. In this case, only an “express agreement” could oust the implied condition that the goods purchased must “correspond with the description.” In this respect, the parties’ contract contained the following clauses:

6) [Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed. […]

7) If [Pine Valley] waives its right to test and approve the material before it is shipped, Earthco Soils Inc. [sic]will not be responsible for the quality of the material once it leaves our facility. [emphasis added]

Even though the exclusion clauses in the contract did not explicitly mention statutorily imposed conditions or terms, the trial judge held, relying on the surrounding circumstances of the contract’s formation, that the clauses were nevertheless clear and unambiguous, and served to negate the seller’s liability under section 14 of the SGA. The trial judge held the clauses’ very purpose was to avoid the exact situation that transpired – a customer failed to test the soil and then attempted to hold the seller responsible for a loss due to unsatisfactory soil composition.

Accordingly, the trial judge dismissed the action and held Earthco was not liable to Pine Valley. Pine Valley appealed.

The Court of Appeal for Ontario allowed the appeal and substituted a judgment requiring the defendant to pay the damages quantified by the trial judge.

SCC Decision

The Supreme Court allowed Earthco’s appeal and restored the trial judge’s decision. The primary issue at the Supreme Court was the legal requirements for excluding an implied condition pursuant to section 53 of the SGA.

The Supreme Court explained the SGA must be read in light of the common law principles set out in Sattva (on contractual interpretation generally) and Tercon (on interpreting exclusion clauses), explaining that exclusion clauses in sales contracts are “not categorically distinct or subject to different or stricter rules of construction”.

The first step in applying the Tercon test to this case is to determine whether there is an express agreement between the parties that is sufficient to meet the requirements of section 53. The Supreme Court held that an express agreement under section 53 requires that the parties have “expressly and unambiguously” used language that signals their intention to override the statute – silence or omission is insufficient. A court cannot imply, impute, or infer the parties’ intention to opt out of the statute based on presumed intentions. That said, the requirement is for an “express agreement”, not “express language” and there “is no requirement for ‘magic words”.

To determine whether there is an express agreement, a court must apply the principles of modern contractual interpretation, which involves, among other things, a consideration of the words used in the contract, the surrounding circumstances, and who and how sophisticated the parties are. The overall goal, according to the Supreme Court, is to “ascertain whether it was the objective intention of the contracting parties to exempt one party from statutorily imposed liability” [emphasis added].

If a court finds that an express provision was intended to operate in the circumstances at hand, the provision must be given its full effect unless it is found, at the second and third steps of the Tercon test, respectively, to be unconscionable at the time the contract was made, or contrary to public policy. The Supreme Court explained: “That is because it was the objective intention of the parties and because commercial certainty is best served by the law giving effect to their actual bargain. Searching for the parties’ objective intention furthers that purpose, whereas an overly technical and legalistic interpretation of exclusion clauses does not” [emphasis added].

Final Considerations

This decision shows the practical manner in which courts will be expected to interpret exclusion clauses in sale of goods contracts going forward.

Notably, the majority of the Supreme Court in Earthco did not overturn Hunter Engineering (a 1989 Supreme Court case which held that contracting out of statutory protections “must be done by clear and direct language”, and which case has been cited by hundreds of cases since it was rendered). Rather, the Supreme Court held Hunter Engineering was not binding on the issue at hand. The Supreme Court explained Hunter Engineering should not be read as “binding authority for the general proposition that ‘explicit, clear and direct language’ – a strict, formulaic requirement – must be used”, that it was not meant to establish “universal legal rules or rigid verbal formulas, especially when the parties have agreed to an exclusion clause”, and that the case must be read in light of the evolution towards the “practical, common-sense approach” set out by the Supreme Court in Sattva, Tercon, and their progeny.

Further for information concerning the Supreme Court’s decision, please contact any member of our Dispute Resolution Group.