Supreme Court of Canada digs into the dirty business of exclusion clauses

Last week, the Supreme Court of Canada shed light on the interpretation of exclusion clauses in Earthco Soil Mixtures Inc. v Pine Valley Enterprises Inc.¹  Although the decision focussed on exclusions from statutory conditions under the Sale of Goods Act, RSO 1990, c S.1 (SGA), the analysis is relevant to the interpretation of exclusion clauses generally.

The case concerned a dispute between a buyer and a seller of bulk topsoil of a specific composition. The sale agreement provided the buyer with a right to test and approve the topsoil before it was shipped but additionally provided that the seller would not be responsible for the quality of the topsoil if the buyer waived its inspection right. As the buyer was late on delivering its project, the buyer declined to inspect the topsoil before it was shipped. The buyer used the topsoil in its project only to discover later it included substantially more clay than was specified. The topsoil had to be removed, which added cost and delay to the buyer’s project and subjected the buyer to damages. 

Suing the seller for damages, the buyer alleged the seller breached a statutory condition under s. 14 of the SGA pursuant to which goods sold “by description” must correspond with their description. The seller relied on a contractual exclusion as its principal defence.

Lower courts

At the trial level,² the judge held the sale was “by description” but the buyer and seller had contracted out of the statutory condition through their express exclusion clause, consistent with s. 53 of the SGA. The buyer’s claim was therefore dismissed.

At the Ontario Court of Appeal,³ the buyer’s appeal was allowed and judgment was entered against the seller. The trial judge was found to have erred on three questions of law. First, the trial judge failed to consider that the implied condition under s. 14 of the SGA relates to the identity of the goods in question, not their quality. Second, the trial judge improperly found that the parties contracted out of the SGA’s statutory condition in the absence of sufficiently explicit, clear and direct language. Lastly, the trial judge erred by expanding the contractual exclusion beyond its terms by relying on the “factual matrix” (i.e., the contract’s surrounding circumstances). 

The Supreme Court’s decision

The Supreme Court of Canada majority granted the seller’s appeal and restored the trial judge's decision. It held the buyer had agreed to accept the risk of any defects in the composition of the topsoil. 

In reaching its conclusion, the majority re-affirmed a prior decision⁴ in which it held that contractual interpretation is generally an issue of mixed fact and law. The written words of a contract are rightly interpreted in light of the factual matrix. The priority is determining the parties’ intentions, even for contracts subject to the SGA. No “magic words” or “specific legal terms” must be used in a sale agreement to contract out of a statutory condition under the SGA. An exclusion clause should not be given an overly technical or legalistic interpretation.

The majority held that the Ontario Court of Appeal put too much emphasis on the language that was not used in the sale agreement, instead of determining the parties’ intentions from the language they did use and the commercial context. There is no extraordinary standard of “explicit, clear and direct language” to meet when contracting out of a statutory condition under s. 53 of the SGA. The parties clearly intended to protect the seller from liability for any defects in uninspected topsoil, even though s. 14 of the SGA was not specifically referenced in their exclusion clause. The buyer knew the allocation of risks and made its own strategic decision to not inspect the topsoil before it was shipped. No unfairness results from applying the exclusion clause in that commercial context.

A single Supreme Court of Canada judge dissented. In her view, the parties did not make a sufficiently “express agreement” to oust the statutory condition under s. 14 of the SGA, as required by s. 53. She would have dismissed the seller’s appeal and upheld the Ontario Court of Appeal's decision.

Key takeaways

The Supreme Court of Canada’s majority decision is significant to the interpretation of sale agreements, exclusion clauses and contracts generally. It continues a trend in Supreme Court of Canada jurisprudence—not always followed in lower courts—favouring the purposive and pragmatic interpretation of all contractual terms, without undue technicality. No “magic words” are required for parties to exclude the application of statutory conditions under the SGA, nor to exclude a party’s liability for specific (or all) risks. The focus should always be on the parties’ true intentions, which will generally require not only evaluating the strict contractual language, but also the surrounding factual matrix.

The authors would like to thank Patrick Smith, summer student, for his contribution to preparing this legal update.