Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2022 ONCA 265, 2024 SCC 20 (40197)

“The buyer was hired to work on a municipal project to remediate flooding, which included the removal and replacement of topsoil for drainage. The buyer contacted the seller, a topsoil provider, to obtain topsoil with a specified composition. The seller provided the buyer with laboratory reports from different topsoil samples taken about six weeks prior, and warned against purchasing the topsoil without updated test results. However, the buyer had already missed project deadlines and urgently wanted delivery of the topsoil so as to avoid the imposition of liquidated damages. The buyer therefore waived its right to test the soil and insisted on immediate delivery. The buyer and seller agreed to add two exclusion clauses to the standard purchase order, which stated that the buyer had the right to test and approve the material before it was shipped, and that if the buyer waived those rights, the seller would not be responsible for the quality of the material once it left its facility. After the topsoil was delivered and placed on the project site, water ponding was noted. Testing revealed that there was substantially more clay in the topsoil than the test results had indicated, and the buyer had to remove and replace the topsoil. The buyer sued the seller for damages, alleging that it did not receive topsoil within the range of compositional properties that had been indicated in the test results.

The trial judge dismissed the buyer’s action. He found that the contract was for a sale of goods by description within the meaning of s. 14 of Ontario’s Sale of Goods Act (“SGA”), which sets out an implied condition that goods must correspond with their description. He further found that the buyer did not get the topsoil it bargained for, because of the variation between the topsoil that was promised and the topsoil that was delivered. However, he found that the exclusion clauses were an express agreement, pursuant to s. 53 of the SGA, to contract out of the implied condition under s. 14 of the SGA, despite the fact that the exclusion clauses did not explicitly mention that they were to oust statutorily implied terms and conditions. The Court of Appeal held that the trial judge erred on three extricable questions of law, by: (1) failing to account for how the implied condition in s. 14 of the SGA relates to the goods’ identity (or description) and not their quality; (2) failing to properly interpret the requirement for explicit, clear and direct language to exclude a statutory condition; and (3) considering the contract’s factual matrix beyond its permissible use in interpreting the exclusion clauses. The Court of Appeal held that the term “quality” cannot include “identity” and that the reference in the exclusion clauses to “quality” was not a reference to the implied condition in s. 14 relating to the goods’ identity. In the court’s view, because the exclusion clauses did not contain words that explicitly, clearly and directly covered the identity of the topsoil, they were insufficient to oust liability under s. 14 of the SGA. The Court of Appeal allowed the appeal and substituted a judgment requiring the seller to pay damages.”

The SCC (6:1) allowed the appeal, restored the trial judge.

Justice Martin wrote as follows (at paras. 1-3, 27-33, 44, 55-57, 60, 73, 75, 84-88, 91-93, 99, 114):

“This appeal concerns a contracting party’s ability to contract out of a statutorily implied condition under the Sale of Goods Act, R.S.O. 1990, c. S.1 (“SGA”). The buyer, Pine Valley Enterprises Inc., claims that the purchased topsoil involved a sale by description and seeks damages because the soil did not correspond to that description. The seller, Earthco Soil Mixtures Inc., says there was no breach of any statutory condition, arguing that the goods not only complied with their description, but also that the parties specifically excluded any such obligation by express written agreement. 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 (s. 53). The parties’ contract contained a clause stipulating that if the buyer chose to waive its right to test the goods, then the seller would “not be responsible for the quality of the material” once it left its facilities (A.R., at p. 201). Because the buyer chose to waive its right to test and approve the goods before they were shipped, the seller claims this clause operates to exclude any statutory condition that the goods must meet certain compositional specifications.

The Court’s main task in this case is to set out the proper way to interpret exclusion clauses in contracts for the sale of goods. This involves determining what qualifies as an express agreement under s. 53 of the SGA, as informed by recent cases on the interpretation of contracts and the legal operation of exclusion clauses. The principles 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, apply to the contracts subject to the SGA. These recent restatements of contract law principles give priority to the parties’ intentions in a manner that modifies and relaxes some of the stricter and more technical approaches which found expression in certain prior cases. As this Court stated in Sattva, “the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine ‘the intent of the parties and the scope of their understanding’” (para. 47, citing Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27). All contract terms, including exclusion clauses, “should be given their natural and true construction so that the meaning and effect of the exclusion clause the parties agreed to at the time the contract was entered into is fully understood and appreciated” (Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at p. 510). Ultimately, when courts are faced with applying a combination of s. 53, the principles of contractual interpretation and the law concerning exclusion clauses, it is the objective intention of the parties that must be the paramount consideration.

I conclude that the trial judge made no error of law with respect to the exclusion clauses at issue in the case at bar. In the commercial circumstances of this case, the objective meaning of the parties’ express agreement is that the buyer accepted the risk that the soil would not meet the previously supplied compositional specifications if it failed to test what it knew was an organic and changing substance. The appeal is allowed and Earthco has no liability to Pine Valley.


 

This Court’s jurisprudence firmly establishes that questions of contractual interpretation, which involve questions of mixed fact and law, are ordinarily afforded deference on appellate review. The exception set out in Sattva is for errors on extricable questions of law, which are reviewable on the more exacting correctness standard. It was the purported errors on extricable questions of law identified by the Court of Appeal that enabled it to apply a standard of review of correctness. As I will explain below, the Court of Appeal erred in identifying these as extricable questions of law.

In Sattva, this Court established that contractual interpretation “involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix” (para. 50). Accordingly, deference is owed to the trial judge, who is best placed to make findings as to the nature of the factual matrix, and the predominantly applicable standard of review is palpable and overriding error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 21). The search for an extricable question of law is, in my view, not consistent with Sattva’s holding that the interpretation of contracts and agreements are mixed questions of law and fact and that extricable questions of law will be “rare” and “uncommon” (para. 55; Corner Brook (City) v. Bailey, 2021 SCC 29, [2021] 2 S.C.R. 540, at para. 44). Housen expressly admonished that courts should “be cautious in identifying extricable questions of law in disputes over contractual interpretation” because ascertaining the objective intention of the parties, which is the prevailing goal of contractual interpretation, is an “inherently fact specific” exercise (Sattva, at paras. 54-55, citing Housen, at para. 36). The subsequent tendency of some appellate courts to use Sattva to elevate the standard of review, when it was intended to do the opposite, is to be resisted (the Hon. D. Brown, “Has Sattva spawned an era of less appellate deference?” (2023), 41:4 Adv. J. 26, at p. 27).

Although this Court in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, held that standard form contracts are an exception to Sattva’s ruling that contractual interpretation is generally a question of mixed fact and law, it was nevertheless acknowledged that even in that context, a court can look to “the parties’ reasonable expectations” in order to ascertain the true meaning of a contractual term (para. 95). Consequently, the implication from Ledcor is that where meaningful evidence of the factual matrix does exist and where there is a contract of “utter particularity” due to a unique set of circumstances, the modern contractual interpretation approach from Sattva continues to apply (para. 42, citing Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748, at para. 37).

The facts of this case establish that the contract in question was one of “utter particularity” — indeed, the exclusion clauses at the centre of this appeal were drafted by the seller in response to the buyer’s particular demand for speedy delivery of the goods without additional testing: because the buyer wanted to avoid incurring liquidated damages. Moreover, there were no errors on extricable questions of law. As I explain in greater detail below, the Court of Appeal read Hunter Engineering as requiring certain formalities not set out in s. 53 of the SGA and which are at odds with contemporary principles of contractual interpretation. By classifying the perceived deficiencies as errors of law, the Court of Appeal sought to create general principles of law that would govern the interpretation of all exclusion clauses ousting implied conditions in a contract of sale, while also diminishing the role of the factual matrix in giving meaning to exclusion clauses. 

This derogation from the principles of appellate review laid down by this Court in Housen and Sattva was in error. The question of whether contracting parties came to an “express agreement” under the SGA involves a statutory component; however, where the parties’ contract is in writing, as in this case, it will largely be based on the consideration of the specific written agreement between the parties, the words expressly employed to oust the liability and the surrounding circumstances. Accordingly, an express agreement capable of satisfying s. 53 might not look the same for different sets of parties and is likely to vary depending on who the contracting parties are and what their circumstances are. The inevitable variation between parties’ circumstances means it would be of no use to prescribe a rigidly uniform description of what an express agreement must contain in every instance. This also means that findings by triers of first instance with respect to the factual matrix against which a given contract is struck will continue to be significant when a clause ousting a statutory condition is at issue.

Further, the mere fact that the contractual interpretation in this case involves a consideration of a statutory provision does not automatically mean that a review must be on a correctness standard. While it is the statute that prescribes the requirement for an express agreement, it is still the common law of contracts that informs what an express agreement must look like for a specific set of parties. As a result, the interpretive approach must be flexible enough to account for the parties’ varying commercial circumstances and it follows that the appropriate standard of review must be that of palpable and overriding error, even where the analysis necessarily implicates s. 53 and implied statutory conditions. Thus, it was both the substance of the Court of Appeal’s statements with respect to the perceived deficiencies in the trial reasons and how the Court of Appeal elevated those statements into binding legal requirements in all cases that, in my respectful view, led it into error.

In conclusion, the standard of review for appellate courts concerning the “express agreement” requirement under s. 53 does not deviate from the general rule set down by this Court in Sattva — questions of mixed fact and law remain susceptible to a deferential standard of review, even where the analysis necessarily implicates implied statutory conditions. While errors on extricable questions of law, if properly identified, can be the basis for correctness review, reviewing courts should approach the task of identifying such errors cautiously, and with an eye towards the relative competencies of trial and appellate courts. However, as I explain below, the Court of Appeal did not identify errors on extricable questions of law that justified the application of the standard of review of correctness.



…to determine whether Earthco was exempted from liability in relation to its sale of soil to Pine Valley by express agreement under s. 53, this Court must consider not only the relevant provisions of the SGA but also the current common law relating to contracts, including the modern principles of contractual interpretation and the legal treatment of exclusion clauses.


 

Some confusion has arisen about what it means for an agreement to be “express” under s. 53. Some think “express” speaks to specific language that must be used to remove the parties from the SGA. I do not think that is the correct approach. The term “express” qualifies the word “agreement” and is directed to how that agreement must be made. Express does not define what the agreement must say or the required level of clarity of specific contractual clauses. Because s. 53 requires an “express agreement”, and not the use of “express language”, it does not constitute, let alone call for, a qualitative requirement about the specificity of language that is needed to vary or negative an otherwise applicable legal liability. While s. 53 insists that the agreement must be express, it imposes no prerequisite about the precision of the words used to manifest such an agreement. The clarity of the language will, however, guide the interpretation of the agreement.

In terms of how the agreement is made, it will be “express” if it is made in distinct and explicit terms and not left to inference. In contrast with the other available avenues to oust the SGA contemplated by s. 53, an express agreement cannot be implied, inferred or imputed from conduct. Neither silence nor omission will suffice. The agreement must be clearly communicated: for the purposes of s. 53 of the SGA, something that is express must be declared in terms and set forth in words (Black’s Law Dictionary (6th ed. 1990), at p. 580; see also Black’s Law Dictionary (11th ed. 2019), at p. 726). The parties must make their mutual intention unmistakably evident. The parties must not be ambiguous or dubious and should be clear, definite, plain and direct. Thus, the “express” component of an express agreement means that the exclusion clause must be plainly laid out and contemplated within the agreement at issue. It must have “been specifically mentioned” (G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at p. 433).

The “agreement” part of s. 53 is often the crux of the matter and it requires a meeting of the minds about what rights, duties or liabilities are being changed and how they are being varied or negatived. The terms of that agreement must also be certain and mutually agreed upon.



…the common law pertaining to agreements, contractual interpretation and exclusion clauses does not serve to “fill gaps” in the statute but, instead, is better viewed as being purposefully incorporated into the SGA. No improper conflation between the interpretative approaches to legislation or contracts arises when, as here, the statute calls for reliance upon governing common law principles. Such principles include the modern approach to contractual interpretation and, if the parties intended to exclude or negative something like an implied statutory condition, the three-step approach to exclusion clauses in Tercon will also apply. According to the terms of s. 53 and these cases, the objective intention of the parties will be the paramount consideration, which will be determined by the words used and the surrounding circumstances.



…when interpreting an exclusion clause, like the express agreements contemplated under s. 53, “bright-line rules of construction are infrequent” and have been replaced by a contextual inquiry into what the parties objectively intended based on the text and surrounding circumstances (Black, at p. 164). Courts can review such clauses for unconscionability and may refuse to enforce the exclusion clause if there is an overriding public policy reason that outweighs the public interest in the enforcement of contracts (Tercon, at para. 123).



Language that explicitly, clearly and directly ousts a protection that the legislature has presumptively bestowed on a party to a contract is an optimal way to ensure the parties’ mutual objectives are being carried out. As a drafting technique, it is the gold standard for contractual certainty and its presence is to be encouraged. However, with respect, this approach should not be elevated into a binding prerequisite, the absence of which would not only create a stand-alone error of law, but would lead to the inapplicability of an express exclusion clause at the first step of the Tercon test. In the case at bar, this binding prerequisite would lead to the non-enforceability of the exclusion clauses because the parties did not expressly refer to conditions or to identity to demonstrate their intention to contract out of s. 14 of the SGA.


 

Conditions should be distinguished from warranties “unless there is something in the context to displace the presumption that [those terms were] intended to carry [their] technical meaning” (Rosenberg v. Securtek Monitoring Solutions Inc., 2021 MBCA 100, 465 D.L.R. (4th) 201, at para. 98, citing S. K. Lewison, The Interpretation of Contracts (7th ed. 2021), at p. 284). The cardinal principle requiring courts to interpret a contract in accordance with the parties’ objective intention allows space for what the parties objectively intended those terms to mean. The contracting parties may not have intended to invite the legal ramifications that can accompany the usage of particular terms and thus a strict enforcement of the legal distinction may not always be in keeping with the parties’ objective intention. Thus, a consideration of the surrounding circumstances necessarily means that the words used by the parties cannot always be interpreted in a uniform way because the meaning of even legal terms may depend on who the contracting parties are, their relationship to each other and whether they are sophisticated at contracting.

The same rigour applied to the distinction between warranties and conditions need not be extended to a term like “quality”, which is often used in general parlance. The term “quality” is not exhaustively defined in the SGA and is less likely to be thought of as a word that carries with it a similar significant legal meaning, especially when used by individuals contracting without legal assistance.

The law continues to recognize a distinction between the identity and qualities of goods, but courts should not impose a very high, and often unrealistic, burden on contracting parties to be aware of and fully understand the legal characterization and consequences of the words they use to express themselves. In some circumstances, sophisticated parties negotiating through lawyers may know all about the legally significant differences between conditions and warranties, and between identity and quality. However, in many situations, such a rigid and rigorous review may thwart the parties’ objective intention, especially when their words have different meanings and admit of multiple interpretations. In Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, this Court held that words in a contract must be given their ordinary meaning “as they would be understood by the average person . . ., and not as they might be perceived by persons versed in the niceties of [the] law” (para. 21, citing National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029, at p. 1043 (emphasis added)).

Further, the logic underlying the proposition that the terms “conditions” and “warranties” are presumed to carry their established legal meaning is actually significantly weaker when applied to the terms “identity” and “quality”. Unlike “conditions” and “warranties”, the terms “identity” and “quality” will generally not be applicable to most contracts and they also do not form a substantial part of the entire structure and basis of the SGA. While a considerable portion of the SGA is premised on the distinction between “conditions” and “warranties”, the relevance of the distinction between “identity” and “quality” is confined to the applicability of s. 14. The demarcation between a good’s “identity” and a good’s “quality” is not so easily discernible, arises from the case law and is not even mentioned in the SGA. Finally, the term “quality” is used frequently in everyday conversation such that it has a much wider and more colloquial meaning as compared to the terms “conditions” and “warranties”.

An approach requiring the strict and unwavering application of a legally established distinction between terms is also inconsistent with case law that has held, for example, that goods sold “as is” oust the statutorily implied conditions even though they do not refer to “conditions” or the defining feature of the implied condition at issue, like “identity”, or “fitness” or “merchantability” (see Moldenhauer v. Alberta Powersports Inc., 2009 ABPC 118, at paras. 33-37 and 48 (CanLII); Conners v. McMillan, 2020 BCPC 230 (CanLII), at paras. 67-68). These cases also underscore how s. 53 requires only an express agreement and not express language.


 

Section 53 does not say that express language referring to specific legal terms is necessary to capture the parties’ intention to oust legal liabilities under the SGA. In this context, an express agreement means that a court is able to reasonably ascertain the parties’ intention after reading the words of the contract in light of the factual matrix. Sattva and Tercon give priority to the parties’ objective intention and promote a more flexible approach better suited to assessing whether, and the extent to which, parties intended to negative implied statutory conditions. This is so because sometimes buyers and sellers may seek to displace all such conditions, or may select among them. They may replace them with other contractual terms or remove them entirely. The ousting of the statutory protection may be absolute or only arise conditionally when something else, like inspection, was not done. Further, the SGA and s. 53 apply to a broad spectrum of contract types, from those dealing with millions of dollars’ worth of equipment as in Hunter Engineering, to the simple sale of a used bicycle taking place in a seller’s backyard. This range of circumstances and sophistication in contracting must be duly accounted for when interpreting a sale of goods contract. A proper application of the principles from Sattva and Tercon account for the varying contracting scenarios that can arise between different sets of parties.

If an express provision in a contract protects a party and the court concludes the provision was intended to operate in the circumstances which have occurred, the provision is to be given full effect. That is because commercial certainty is best served by the law giving effect to what was actually agreed to by the parties. Searching for the parties’ objective intention furthers that purpose, whereas the overly technical and legalistic interpretation of exclusion clauses does not. In conclusion, because s. 53 requires an express agreement and s. 57(1) confirms the applicability of the common law as it exists from time to time, the principles from Sattva and Tercon extend to contracts for the sale of goods. While recognizing the need to balance protections for parties, freedom of contract and commercial certainty, exclusion clauses in sales contracts are not categorically distinct or subject to different or stricter rules of construction. The SGA must be read as a whole and while the legislature wanted to provide presumptive protections to parties, it also expressly allowed parties to opt out entirely from the implied statutory conditions. The “express agreement” contemplated by s. 53 of the SGA is to be interpreted and applied accordingly.



In sum, any express agreement sufficient for the purposes of s. 53 must be comprised of an agreement to negative or vary a statutorily implied right, duty or liability and such an agreement must be expressly set forth within the parties’ contract. One must be able to point to the contract and say, “that exclusion clause ousts the operation of an implied term of the SGA”. 



Before concluding, I note an alternative argument advanced by the seller before this Court, but not before the Court of Appeal, that the sale between Earthco and Pine Valley was not in fact a sale by description and consequently, the failure to supply soil with the specified percentages of sand, silt and clay was not a breach of s. 14 but rather a breach of a contractual promise relating to the quality of the goods, which fell squarely within the scope of the exclusion clauses (see C. Bangsund, “Two Wrongs Don’t Make a Right: A Case Comment on Pine Valley Enterprises Inc. v. Earthco Soil Mixtures Inc.” (2023), 67 Can. Bus. L.J. 476, at p. 499). While Pine Valley does not object to this Court addressing this new argument, I nevertheless decline to do so in light of my ultimate conclusion that the exclusion clauses were sufficient to exempt Earthco from liability under s. 14 of the SGA.”