A Magic of Its Own: SZK’s Win at the Supreme Court of Canada Regarding the Contractual Interpretation of Statutory Exclusion Clauses

It had been long understood that if contracting parties wish to contract out of statutory implied conditions, pursuant to statutes such as the Sale of Goods Act (Ontario) (the “SGA”), they could only do so through the use of “explicit, clear and direct” language. Now, after the Supreme Court of Canada’s (“SCC”) ruling in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, the SCC has affirmed that contracting parties can exclude statutory implied conditions through more flexible express agreement informed by modern principles of contractual interpretation from decisions such as Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”) and Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (“Tercon”).

We are also very pleased to note that Spetter Zeitz Klaiman PC’s Mark Klaiman and Ian Klaiman represented the successful appellant in this landmark ruling at the SCC, the first SCC case to consider the SGA in over 30 years.

Background

Pine Valley Enterprises Inc. (“Pine Valley”), a municipal parks contractor, entered into an agreement with Earthco Soil Mixtures Inc. (“Earthco”) for the urgent delivery of topsoil for their project site. Due to the urgency of Pine Valley’s topsoil request, the company waived its right to test the topsoil and insisted on immediate delivery. Owing to the urgency and the waiving of testing, Pine Valley and Earthco’s topsoil agreement added clauses reflecting their pre- contractual discussions, including a clause which provided that, “Earthco Soils Inc. would not be responsible for the quality of the material [the topsoil] once it leaves Earthco’s facility.”

Pine Valley later determined that the topsoil did not meet its compositional expectations, and it sued Earthco for damages, claiming that Earthco breached its contract.

Lower Court Rulings

The trial judge at the Ontario Superior Court of Justice found that the contract was for a sale of goods by description within the meaning of s. 14 of the SGA, which sets out an implied condition that goods must correspond with their description. He further found that Pine Valley did not get the topsoil it bargained for because of a variation between the topsoil which was promised and the topsoil that was delivered. However, the lower court dismissed Pine Valley’s action, finding that the exclusionary clauses formed an express agreement between Pine Valley and Earthco to oust the implied condition under s. 14, in accordance with s. 53 of the SGA (which provides an express agreement or the course of dealing by contractual parties can vary or neutralize a contractual right, duty, or liability arising under the SGA). Pine Valley appealed the trial judge’s ruling and the Ontario Court of Appeal allowed the appeal, concluding that the trial judge erred on certain extricable questions of law: (i) by failing to take into account how implied conditions under s. 14 of the SGA relate to the identity of the goods rather than the quality of goods; (ii) by failing to properly interpret the “explicit, clear and direct language” requirement for statutory exclusions; and (iii) by interpreting the exclusion clauses and their surrounding circumstances more broadly than the actual words of the exclusion clauses. The Court of Appeal held that the reference to the term “quality” in the exclusionary clause, was not a reference to the implied condition in s. 14 of the SGA relating to the topsoil’s “identity” and, therefore, was not sufficiently “explicit, clear and direct” to oust liability under s. 14. Earthco appealed the Court of Appeal’s decision to the SCC.

SCC Decision

The SCC 6-1 majority rejected the decision of the Court of Appeal and held that modern, flexible principles of contractual interpretation from SCC decisions such as Sattva and Tercon applied in this matter. In applying Sattva and Tercon, the SCC found that although section 53 of the SGA requires express agreement, section 53 of the SGA did not require Earthco to use ‘express language’ or particular “magic words”, such as “condition” or “identify”, to nullify its liability under section 14 of the SGA. Instead, contracts should be interpreted by considering the text of the contract and the surrounding circumstances of a contract with the ultimate goal of understanding the parties’ objectives at contract formation. The SCC majority explained that the Court of Appeal had incorrectly focused on the lack of explicit language in the exclusion clause instead of what contextual circumstances informed Earthco and Pine Valley to use the language in the exclusion clause.

Ultimately, the SCC determined that Pine Valley and EarthCo formed an express agreement to exclude liability under section 14 of the SGA.

Conclusion

To contract out of implied conditions under the SGA, contracting parties must expressly agree to override the SGA. However, that express agreement can be articulated in more adaptive ways, tailored to the objective intentions of the contracting parties, and their surrounding circumstances. This landmark SCC decision opens the door for contracting parties across Canada to use boutique language, to opt out of the implied conditions and warranties in the SGA, and possibly other similar statutes, without relying on ‘magic’ words to do so.

Congratulations to Mark Klaiman and Ian Klaiman on a spectacular win at our country’s highest court!

If you have any questions regarding this decision or how this decision may impact your business, please do not hesitate to contact Mark Klaiman and/or Ian Klaiman at mklaiman@szklaw.ca and iklaiman@szklaw.ca.