Ruling 6-1 (Côté J. dissenting) on May 31, 2024, the top court allowed the appeal of seller Earthco Soil Mixtures Inc. and overturned a 2022 Ontario Court of Appeal decision that had required the appellant to pay $350,386 in damages to the respondent purchaser, Pine Valley Enterprises Inc., for supplying topsoil that turned out not to meet contractually agreed-on specifications for the soil’s composition: Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20.
The Court of Appeal found Earthco liable, despite two exclusion clauses the parties had agreed to, and added to a standard purchase order that said Earthco would be exempted from liability for the quality of its soil if Pine Valley waived its rights to test and approve the material before it left Earthco’s facility. Because it was in a rush to get the soil, Pine Valley did waive those rights: Pine Valley Enterprises Inc. v. Earthco Soil Mixtures Inc., 2022 ONCA 265.
In restoring the trial judge’s judgment dismissing Pine Valley’s lawsuit, Justice Sheilah Martin held for the majority that the trial judge below did not err in law when he determined that the exclusion clauses exempted Earthco from liability under s. 14 of the SGA — which implies a condition in contracts that goods sold “by description” must correspond with their description.
SCC Justice Sheilah Martin
She concluded that the objective meaning of the parties’ express agreement was that Pine Valley accepted the risk that the composition of the topsoil would not meet its previously supplied specifications if it failed to test the provided soil, which it knew was an organic and changing substance.
Justice Martin’s majority judgment clarifies the proper approach to interpreting exclusion clauses under s. 53. She ruled that what qualifies as an “express agreement” under s. 53 is informed by recent Supreme Court case law on the interpretation of contracts and the legal operation of exclusion clauses, and which case law contains restatements of contract law principles that “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.”
Her judgment also clarifies when different standards of appellate review apply to lower courts’ contractual interpretations, i.e., how much, if any, deference is owed?
Justice Martin held that the mere fact that interpreting a contract requires a court to consider a statutory provision in its analysis does not automatically mean that appellate courts should apply the correctness standard (which is applicable to reviewing “extricable questions of law”).
Rather she specified that “even where the analysis necessarily implicates implied statutory conditions,” the general rule set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, applies to appellate courts’ review of contractual interpretations that involve questions of mixed fact and law — thereby attracting the deferential “palpable and overriding error” standard of review.
“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,” Justice Martin stipulated.
She ruled that the court of appeal below was “in error” in this case when it derogated from the principles of appellate review set out in Housen v. Nikolaisen, 2002 SCC 33, and Sattva.
By erroneously classifying the perceived deficiencies of the trial judge’s reasons below as involving extricable questions of law rather as questions of mixed fact and law subject to a deferential standard of review, “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.” Justice Martin observed. 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.”
The outcome of Pine Valley’s breach of contract lawsuit turned on whether the two exclusion clauses amounted to an “express agreement” to oust liability for breach of the SGA’s implied condition that goods must correspond with their description.
Pine Valley, a municipal parks contractor, waived its rights to approve and test the soil before it left Earthco’s facility because the contractor had already missed deadlines on a flooding remediation project with its own customer, the City of Toronto, which was trying to stop basement flooding in North York.
Pine Valley’s remediation project involved the removal and replacement of topsoil for drainage. Because Pine Valley wanted to avoid having to pay $500 per day in liquidated damages to the city, it insisted that Earthco immediately deliver the new soil, only to discover after the topsoil was put in place that there was water “ponding.”
Soil testing subsequently revealed that there was substantially more clay in the topsoil than there had been in different Earthco topsoil samples that had been tested six weeks earlier. Earthco gave Pine Vally those earlier lab reports but warned its customer against taking later delivery of the topsoil without getting updated test results.
Ultimately, the City of Toronto required Pine Valley to remove and replace the topsoil, and Pine Valley sued Earthco, alleging that the defendant did not provide topsoil within the range of compositional properties that had been indicated in the test results.
The trial judge held that the Earthco-Pine Valley contract was for a “sale of goods by description” and that Pine Valley did not get the topsoil it bargained for because of the variation between what was promised and delivered. However, he dismissed the plaintiff’s action on the basis 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 that goods must correspond with their description.
This was so despite the fact that the contract’s exclusion clauses did not explicitly state that they were ousting the statutorily implied terms and conditions.
The trial judge found that Pine Valley’s waiver of testing meant it deliberately assumed the risk that the soil would not meet the contract’s specifications.
The Ontario Court of Appeal unanimously allowed Pine Valley’s appeal and awarded damages against Earthco that the trial judge quantified at $350,386 (Pine Valley had claimed damages of $700,000). In the appeal panel’s view, the exclusion clauses did not oust liability under s.14 of the SGA because they lacked wording that explicitly, clearly and directly referred to any statutory conditions or to the identity of what was being sold; the language of the contract’s exclusion clauses only disclaimed liability for the quality of the soil.
Justice Martin ruled that to be sufficient for the purposes of s. 53 of the SGA, an “express agreement” must comprise an agreement to “negative” or vary a statutorily implied right, duty or liability and such an agreement must be expressly set out in the parties’ contract. “The determination as to what qualifies as an express agreement must also be informed by principles of contractual interpretation and the law concerning exclusion clauses, and the paramount consideration must be the objective intention of the parties. In the instant case, the trial judge made no error of law with respect to the exclusion clauses at issue,” she held.
She also ruled that the standard of review for appellate courts concerning the “express agreement” requirement in s. 53 of the SGA does not deviate from the general rule 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.
In dissent, Justice Suzanne Côté argued Earthco’s appeal should be dismissed because the exclusion clauses did not qualify as an “express agreement” within the meaning of s. 53 of the SGA to exclude the seller’s liability for a breach of the implied condition in s.14 that goods sold by description will correspond with their description. An exclusion clause is not an express agreement under s. 53 with regard to a particular implied condition “if it requires deviating from the text of the contract to determine what the surrounding circumstances would deem the parties to have written, instead of interpreting the meaning of the words actually used by the parties,” Justice Côté reasoned. “The clear and direct language chosen by the parties in the exclusion clauses limited the exclusion of liability to defects in quality within the meaning of s.15 of the SGA, and could not be expanded to cover any defects relating to the identity of the soil.”
Mark Klaiman of Toronto’s Spetter Zeitz Kleiman, who with his co-counsel and son Ian Klaiman represented the successful appellant Earthco, told Law360 Canada that “the biggest takeaway is that prior to this case, the Supreme Court had been moving in a direction, because of Sattva and other cases that followed, that contractual interpretation was really guided by the party's intentions. ... And the Court of Appeal, unfortunately, took a very narrow technical view of the words ‘express agreement,’ following an older line of cases that basically almost said that you have to use the words ‘We’re exempting liability under the Sale of Goods Act.’ And the Supreme Court of Canada said, ‘No, modern contractual interpretation requires the courts to investigate and determine what the parties intended, and not only intended as to what they contracted for but what they wanted to exclude from their agreements, in terms of liability.’”
Ian Klaiman, Spetter Zeitz Klaiman
Vito Scalisi of Scalisi Barristers in Concord, Ont., who with Dylan Bal represented Pine Valley, told Law360 Canada that “while the result was not one we expected, we are pleased to see our position reflected in Justice Côté’s dissent.”
Scalisi predicted the judgment “will be significant in interpreting the court’s prior decisions” in Sattva and Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4.
Jeremy Opolsky, Toronto’s Torys
He noted the court continued its trend in Sattva and Cornerbrook to reject a technical approach to contractual interpretation, ousting any reliance on “magic words.”
“The court’s focus on what parties, particularly less-sophisticated parties, meant instead of what technical language they use, may give comfort to small and medium businesses that they will not be expected to use specific jargon or terms of art in their contracts,” Opolsky suggested.
He added that with respect to standard of review, the majority decision has the most extensive treatment of the standard of review on questions of contractual interpretation, perhaps since Corner Brook in 2021. “The court continued to limit the role of appellate review in contractual interpretation; it emphasized that correctness review, stemming from extricable errors of law, will be rare and uncommon,” he advised.
While the Court of Appeal below had opened the door to a broader correctness review when the question of contractual interpretation interacts with a statutory provision, “the majority of the Supreme Court of Canada firmly shut it here,” he said. This contrasts with the argument of the Chamber of Commerce, which argued that greater openness to use a correctness approach, where the result will be precedential and relevant to future parties, would provide much-needed guidance to businesses of all sizes and more certainty to how their contracts would be interpreted by courts in the future.
“The court’s insistence on limiting the availability of correctness review will limit the scope of guidance on these issues,” Opolsky predicted.
Photo of Supreme Court of Canada Justice Sheilah Martin: SCC Collection
If you have any information, story ideas or news tips for Law360 Canada, please contact Cristin Schmitz at cristin.schmitz@lexisnexis.ca or call 613-820-2794.