In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 (CanLII), the Supreme Court of Canada endorsed a flexible, modern approach to interpreting exclusion clauses in sale contracts governed by Ontario’s Sale of Goods Act, R.S.O. 1990, c. S.1 (the “SGA”).
The appellant and respondent entered an agreement for the purchase and sale of soil with a very specific composition. Before the agreement was executed, the appellant provided a sample of the soil to the respondent and advised that that more samples should be tested before shipment to ensure the soil’s composition matched the required specifications. The respondent required urgent delivery of the soil and waived additional testing. The appellant drafted an exclusion clause in the agreement which acknowledged the respondent’s waiver and stated that the appellant “will not be responsible for the quality of the material” once it was shipped.
Issues arose with the material shipped by the appellant, and the respondent commenced an action seeking damages for the appellant’s breaches of the agreement, including the implied conditions and warranties under sections 14 and 15 of the SGA. The appellant argued that, notwithstanding the fact that these statutory protections were not explicitly excluded, the exclusion clause operated to exclude these implied terms pursuant to section 53 of the SGA:
53 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. [emphasis added]
One of the core issues before the Supreme Court of Canada in this appeal was whether an “express agreement” needed to include specific language to trigger the operation of section 53. The Court acknowledged that explicitly, clearly and directly ousting the protection of a statutory term is “the gold standard for contractual certainty,” and that this drafting technique ought to be encouraged. However, they ultimately held that “there is no requirement for “magic words”” to give legal effect to an exclusion clause.
The Court held that section 53 set out a two-part test for an exclusion clause: that (1) an agreement to vary or negative a right, duty or liability under a contract of sale must exist, and (2) the agreement must be express.
An “express agreement” under section 53 of the SGA must use express and unambiguous language which signals the parties’ intention to override the statute. Silence or omission will be insufficient, and a court cannot imply, impute or infer intention to opt out of the statute based on parties’ presumed intentions. A joint intention must be declared, and the exclusion clause must unambiguously vary or negate the statutorily implied obligation.
Notwithstanding these requirements, the Court held that principles of modern contractual interpretation developed through the common law extended to contracts governed by the SGA. This includes, among other things, a consideration of the words used in the contract, the surrounding circumstances, who the contracting parties are and their level of contracting sophistication to determine the existence of an “express agreement.” Reading the SGA together with these principles, the Court found that its overall goal must be to ascertain whether it was the objective intention of the contracting parties to exempt one party from liability via section 53 of the SGA. As the Court succinctly stated at paragraph 99:
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.” [emphasis added]
Applying this approach, the Court found that the exclusion clause in the parties’ agreement did exempt the appellant from liability under section 14 of the SGA.
For parties to a sale contract governed by the SGA who want to contract out of the Act’s implied conditions and warranties, language which explicitly, clearly and directly ousts its protection will provide the most contractual certainty. If such language is not used, the Supreme Court’s flexible approach from Earthco may still give effect to the parties’ objective intentions. While the best practice may be to remove any ambiguity when drafting exclusion clauses, Earthco confirms that an overly technical approach to construction is not necessary to give them legal effect.
The lawyers at Gilbertson Davis LLP have experience in sale of goods disputes, contract litigation and business law. Please contact us for an initial consultation.
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