CANADA Trends and Developments Contributed by: Laura Bevan, Craig Ferris KC, Anna Paczkowski and Catherine Whitehead, Lawson Lundell LLP
No “Magic Words” for Exclusion Clauses in Sale of Goods Contracts In the Earthco case, the SCC applied the mod- ern approach to the interpretation of contracts to an exclusion of liability clause for the sale of goods, in particular where those clauses inter- act with statutorily implied terms, in this case Ontario’s Sale of Goods Act (the “SGA”). In 2014, the SCC articulated the “modern approach” to contractual interpretation in Sat- tva Capital Corp v Creston Moly Corp (the “Sat- tva case”). As described in the Sattva case, “the interpretation of contracts has evolved towards a practical, common-sense approach not domi- nated by technical rules of construction. The overriding concern is to determine ‘the intent of the parties and the scope of their understand- ing’”. The issue in the Earthco case was whether the parties had effectively contracted out of the con- dition implied into contracts for the sale of goods in Ontario by Section 14 of the SGA that goods must correspond with their description. Pine Valley contracted to receive topsoil of a specified composition from custom topsoil provider, Earthco, who would typically deliver soil to a customer only after it was specifically approved, partly because topsoil is an organ- ic substance with properties that may change over time. However, Pine Valley was in a rush to receive the soil to avoid having to pay liquidated damages under a separate contract. Pine Valley and Earthco agreed to add two exclusion clauses that provided: • Pine Valley had the right to test and approve the material at its own expense at Earthco’s facility before it was shipped and placed; and
• if Pine Valley waived its right to test and approve the material before it was shipped, Earthco would not be responsible for the quality of the material once it left Earthco’s facility. The topsoil provided contained more clay than prior test results had indicated. Pine Valley was required to remove and replace the topsoil and incurred liquidated damages for failing to com- plete the project by the date required. Pine Valley sued Earthco for breach of contract, alleging it did not receive topsoil with the compositional properties it bargained for. The trial judge found that the exclusion clauses exempted Earthco from liability under Section 14 of the SGA, which “implies a condition into contracts for the sale of goods by description that the goods will correspond with the descrip- tion that was given”. To oust this implied term, Section 53 of the SGA requires an “express agreement”. Even though the contract did not expressly refer to statutorily imposed condi- tions or terms, the trial judge found that based on the surrounding context of the agreement, the exclusion clauses were inserted “to avoid the exact situation that transpired”. The Ontario Court of Appeal allowed the appeal, set aside the trial judgment, and substituted a judgment requiring Earthco to pay damages to Pine Valley, finding that the high standard for ousting Section 14 required the parties to “explicitly, clearly and directly” agree to its exclu- sion, which the Court of Appeal concluded was not done. In a 6-1 majority, the SCC found that the trial judge had not erred and concluded that “the objective meaning of the parties’ express agree- ment” was that “the buyer accepted the risk that
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