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Statutes and Regulations - Contracting-Out. Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc.
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (SCC, 2024) the Supreme Court of Canada allows an appeal on the contractual and statutory interpretation of the "right, duty or liability" exception provision of the Sales of Goods Act [SGA s.53].
Here the court considers the contractual-excepting of statutory protections (where they are allowed, unlike RTA and consumer CPA in which they are barred by non-waiver provisions):I. Introduction
[1] This appeal concerns a contracting party’s ability to contract out of a statutorily implied condition under the Sale of Goods Act, R.S.O. 1990, c. S.1 (“SGA”).[1] The buyer, Pine Valley Enterprises Inc., claims that the purchased topsoil involved a sale by description and seeks damages because the soil did not correspond to that description. The seller, Earthco Soil Mixtures Inc., says there was no breach of any statutory condition, arguing that the goods not only complied with their description, but also that the parties specifically excluded any such obligation by express written agreement. The SGA, like other such statutes across the country, provides that parties may contract out of any right, duty or liability that would otherwise arise by implication of law in a contract of sale (s. 53). The parties’ contract contained a clause stipulating that if the buyer chose to waive its right to test the goods, then the seller would “not be responsible for the quality of the material” once it left its facilities (A.R., at p. 201). Because the buyer chose to waive its right to test and approve the goods before they were shipped, the seller claims this clause operates to exclude any statutory condition that the goods must meet certain compositional specifications.
[2] The Court’s main task in this case is to set out the proper way to interpret exclusion clauses in contracts for the sale of goods. This involves determining what qualifies as an express agreement under s. 53 of the SGA, as informed by recent cases on the interpretation of contracts and the legal operation of exclusion clauses. The principles in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, apply to the contracts subject to the SGA. These recent restatements of contract law principles 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. As this Court stated in Sattva, “the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine ‘the intent of the parties and the scope of their understanding’” (para. 47, citing Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27). All contract terms, including exclusion clauses, “should be given their natural and true construction so that the meaning and effect of the exclusion clause the parties agreed to at the time the contract was entered into is fully understood and appreciated” (Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426, at p. 510). Ultimately, when courts are faced with applying a combination of s. 53, the principles of contractual interpretation and the law concerning exclusion clauses, it is the objective intention of the parties that must be the paramount consideration.
[3] I conclude that the trial judge made no error of law with respect to the exclusion clauses at issue in the case at bar. In the commercial circumstances of this case, the objective meaning of the parties’ express agreement is that the buyer accepted the risk that the soil would not meet the previously supplied compositional specifications if it failed to test what it knew was an organic and changing substance. The appeal is allowed and Earthco has no liability to Pine Valley.
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IV. Issues
[26] The primary issue on this appeal is what the legal requirements are for excluding an implied condition pursuant to s. 53 of the SGA.
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[40] Despite the importance of implied statutory conditions, parties remain free to take their contracts outside the presumptive provisions of the sale of goods legislation. While the legislature made a policy choice that the starting point is that buyers should receive these statutory protections, by enacting s. 53, the legislature also expressly allowed parties to contract out of certain provisions of the SGA. Section 53 is clear, expansive, and lies at the core of the case at bar: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. A similar provision appears in all of the common law provincial and territorial equivalents of the SGA, and it clearly shows “that the Act was never designed to be comprehensive and inward-looking”; rather, it establishes a framework of rules that in many cases are optional, subject to exclusion by the parties themselves (M. G. Bridge, The Sale of Goods (4th ed. 2019), at p. 7).
[41] The co-existence of implied conditions and s. 53 demonstrates that in enacting the SGA, the legislature did not have a singular purpose in mind — but rather, dual purposes of both protecting buyers and safeguarding freedom of contract. If the parties are silent on the issue, a statutory condition like s. 14 will be implied into their dealings, but if the parties wish, they may allocate their risk accordingly and contract out of whichever presumptive provisions they so choose. These dual purposes are to be balanced and should be approached more like a rebuttable presumption than a general rule with a limited exception. In the final analysis, if any primacy is to be given, the legislature has privileged private ordering over statutory prescription.
[42] In assessing what qualifies as an express agreement under s. 53, the scope of exclusion clauses — like clauses 6 and 7, and the impact of such clauses on otherwise legally enforceable obligations, one must first understand how the law governing the sale of goods is subject to various legal rules from different sources. While subject to a host of statutory provisions in the SGA, a sale of goods is also an agreement that sits within the general common law of contracts. Section 57(1) of the SGA expressly provides that “except in so far as they are inconsistent with the express provisions of [the] Act”, “[t]he rules of the common law, including the law merchant, . . . continue to apply to contracts for the sale of goods”. For example, general common law principles about contractual interpretation, offer and acceptance, agency, the legal treatment of exclusion clauses, unconscionability and other limits or doctrines grounded in equity, continue to apply to a contract of sale. Thus, on its own terms and as a general rule, the SGA mandates that it be interpreted in conjunction with current contract law principles.
[43] Accordingly, sale of goods law is best seen as “a specialized branch of the general law of contract” from which statutory prescriptions are not sealed off (Bridge (2019), at p. 1). Sale of goods Acts were never intended to be exhaustive or comprehensive codes; they ought not to be applied too rigidly or to the exclusion of the freedom of parties to contract within the general limits of the law (pp. 7-8; see also K. C. T. Sutton, “The Reform of the Law of Sales” (1969), 7 Alta. L. Rev. 130, at p. 130). As a result, the sale of goods “cannot be studied in isolation from the rest of contract law” and the statutory rules stemming from sale of goods legislation must be related to the law of contract as a whole (K. P. McGuinness, Sale & Supply of Goods (2nd ed. 2010), at §1.17). Such legislation must be interpreted in light of the common law as it stands from time to time and in the present day (Koubi v. Mazda Canada Inc., 2012 BCCA 310, 352 D.L.R. (4th) 245, at para. 72; see also McGuinness, at §1.14).
[44] Thus, to determine whether Earthco was exempted from liability in relation to its sale of soil to Pine Valley by express agreement under s. 53, this Court must consider not only the relevant provisions of the SGA but also the current common law relating to contracts, including the modern principles of contractual interpretation and the legal treatment of exclusion clauses.
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C. Section 53 and Express Agreements
[45] At the centre of this appeal is the following question: just how express does an agreement need to be to oust an implied statutory condition? As a contract with the added dimension of falling under the purview of the SGA, a contract for the sale of goods is “a contract lying beside a statutory obligation which represents [the legislature’s] policy statement” (see Armak Chemicals Ltd. v. Canadian National Railway Co. (1991), 1991 CanLII 7334 (ON CA), 3 O.R. (3d) 1 (C.A.), at p. 17; see also Hall, at pp. 179-80 and 336-37). Does the fact that the state has provided buyers with presumptive statutory protections also mean there are special rules of law that govern the interpretation of exclusion clauses under s. 53? Is a more express agreement, with specific language over and above that which may otherwise meet the standards set out in s. 53, Sattva and Tercon, required?
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[48] While the law draws distinctions between conditions and warranties, and the quality of goods under ss. 13 and 15 and their identity under s. 14, I do not accept that s. 53 is only satisfied if parties who agreed to an exclusion clause use the words “condition” and “identity” to oust the implied condition of correspondence with description. Applicable case law mandates a shift away from a method of contractual interpretation “dominated by technical rules of construction” and requires that words be understood in their factual matrix, with the paramount goal of ascertaining the parties’ objective intention (Sattva, at para. 47; cf. C.A. reasons, at para. 55).
[49] In this next section, I articulate what amounts to an express agreement under s. 53, address the various propositions argued before us, and comment on the opinions expressed by the Court of Appeal. In the final section of the judgment, I apply the relevant principles to clauses 6 and 7 of the sales Contract at issue.
(1) Section 53 of the Sale of Goods Act
[50] Section 53 of the SGA permits parties to vary or negative statutorily imposed obligations. To ascertain what words or actions take the parties outside of the SGA involves a question of statutory interpretation. This calls for a reading of the text of s. 53 “in [its] entire context and in [its] grammatical and ordinary sense harmoniously with the scheme of the [SGA], the object of the [SGA], and the intention of [the legislature]” (Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at para. 21, citing E. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87).
[51] The text of s. 53 is broad and permissive: it provides that any right, duty or liability arising by implication of law may be altered by the parties. This includes s. 14 and the other implied conditions concerning the state or condition of the goods. It also expressly contemplates that the parties may not only vary any right, duty or liability, for example by adding to them, but that they may also “negative” or exclude them entirely. The ability of the parties to bargain away the presumptive protections in the implied conditions under the SGA represents an explicit policy choice by the legislature and can be compared with certain consumer protection legislation, in which selected implied conditions have been elevated to the status of mandatory provisions. In Ontario, for example, in a consumer contract, any term purporting to negate or vary any implied condition or warranty under either sale of goods or consumer protection legislation is deemed void (Consumer Protection Act, 2002, S.O. 2002, c. 30, Sch. A, s. 9(3); see also Schnarr v. Blue Mountain Resorts Ltd., 2018 ONCA 313, 140 O.R. (3d) 241, at paras. 75-81; Consumer Protection Act, R.S.A. 2000, c. C-26.3, s. 2(1); Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2, s. 3).
[52] Thus, among the circumstances s. 53 was intended to address was the exact scenario of parties wanting to remove the presumptive statutory protections given to buyers. There are no surprises here — the legislature definitely understood that some parties may want to contract out of the implied conditions and bargain accordingly. The text, scheme and objectives of the SGA all illustrate that the legislature not only specifically contemplated this scenario but that it unmistakably permitted parties to do so.
[53] Section 53 also specifies how parties may exempt themselves from statutory liability: “. . . by express agreement or by the course of dealing between the parties, or by usage . . . .” These three separate routes to exemption illustrate the intended breadth of s. 53 and convey that, at its core, s. 53 is concerned with the parties’ intention to remove themselves from the application of certain SGA provisions — however that intention is conveyed. The parties are free to contract out of any such obligations, whether by words, conduct or usage; not only can their intention be communicated in multiple ways, the latter two are based on actions, conduct and commercial custom. According to recognized principles of statutory interpretation, these three clauses inform each other (see Rizzo, at paras. 21 and 36; see also British Columbia (Attorney General) v. Le, 2023 BCCA 200, 482 D.L.R. (4th) 20, at para. 160). Given this inter-relationship, when assessing what qualifies as an “express agreement”, it is important to remember that s. 53 permits parties to contract out of the SGA in ways that are not tied to language at all.
[54] To qualify under the “express agreement” branch of s. 53, there must be both an agreement to vary or negative a right, duty or liability under a contract of sale, and that agreement must be express. These two elements, though referenced together as part of a composite phrase, are conceptually distinct and necessarily involve different considerations.
[55] Some confusion has arisen about what it means for an agreement to be “express” under s. 53. Some think “express” speaks to specific language that must be used to remove the parties from the SGA. I do not think that is the correct approach. The term “express” qualifies the word “agreement” and is directed to how that agreement must be made. Express does not define what the agreement must say or the required level of clarity of specific contractual clauses. Because s. 53 requires an “express agreement”, and not the use of “express language”, it does not constitute, let alone call for, a qualitative requirement about the specificity of language that is needed to vary or negative an otherwise applicable legal liability. While s. 53 insists that the agreement must be express, it imposes no prerequisite about the precision of the words used to manifest such an agreement. The clarity of the language will, however, guide the interpretation of the agreement.
[56] In terms of how the agreement is made, it will be “express” if it is made in distinct and explicit terms and not left to inference. In contrast with the other available avenues to oust the SGA contemplated by s. 53, an express agreement cannot be implied, inferred or imputed from conduct. Neither silence nor omission will suffice. The agreement must be clearly communicated: for the purposes of s. 53 of the SGA, something that is express must be declared in terms and set forth in words (Black’s Law Dictionary (6th ed. 1990), at p. 580; see also Black’s Law Dictionary (11th ed. 2019), at p. 726). The parties must make their mutual intention unmistakably evident. The parties must not be ambiguous or dubious and should be clear, definite, plain and direct. Thus, the “express” component of an express agreement means that the exclusion clause must be plainly laid out and contemplated within the agreement at issue. It must have “been specifically mentioned” (G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at p. 433).
[57] The “agreement” part of s. 53 is often the crux of the matter and it requires a meeting of the minds about what rights, duties or liabilities are being changed and how they are being varied or negatived. The terms of that agreement must also be certain and mutually agreed upon.
[58] The existence, extent and meaning of the statutory term “agreement” will also be determined by reference to the common law principles concerning the formation, interpretation and enforcement of contracts. While this Court is required to interpret s. 53 according to the rules of statutory interpretation, the statute itself also calls upon us to interpret s. 53 with reference to the common law of contracts. By choosing the word “agreement”, a term left undefined in the SGA yet widely known in the law, the legislature reinforces the relevance of the common law principles of contract and invites their use. In addition, the statutory term “agreement” must be read harmoniously and in the context of the statute as a whole. This includes s. 57(1) which clearly states that, unless “inconsistent with the express provisions of [the] Act”, the rules of the common law as they exist from time to time apply to contracts for the sale of goods. Section 53 does not, by express provision or otherwise, preclude recourse to the common law to give meaning to the term “express agreement”. Interpreting s. 53 against the backdrop of contemporary contract law jurisprudence is also consistent with the general purpose and scheme of the SGA, which is built upon an inter-relationship between the SGA and the common law of contracts and which situates the former squarely within the latter.
[59] In Bank of England v. Vagliano Brothers, [1891] A.C. 107 (H.L.), Lord Herschell set out the proper approach for the interpretation of a codifying statute (pp. 144-45), and while the essence of this approach significantly curtailed the ability of courts to go outside the code to resolve interpretative difficulties, the approach was not literally followed by the courts (McKendrick, at para. 10.01). Professor McKendrick notes that examples can be found of cases where the courts have had regard to pre-1893 case law when interpreting the Sale of Goods Act, 1893 and that, “in more recent times, the courts have been more creative or liberal in their interpretation of the legislation and refused to allow it to ‘fossilize the law’: see, for example, Ashington Piggeries” (para. 10.01, fn. 3 (emphasis added)).
[60] Based on these principles of statutory interpretation, the common law pertaining to agreements, contractual interpretation and exclusion clauses does not serve to “fill gaps” in the statute but, instead, is better viewed as being purposefully incorporated into the SGA. No improper conflation between the interpretative approaches to legislation or contracts arises when, as here, the statute calls for reliance upon governing common law principles. Such principles include the modern approach to contractual interpretation and, if the parties intended to exclude or negative something like an implied statutory condition, the three-step approach to exclusion clauses in Tercon will also apply. According to the terms of s. 53 and these cases, the objective intention of the parties will be the paramount consideration, which will be determined by the words used and the surrounding circumstances. At paras 66-92 the Court expands the below summarizing argument:D. Summary of the Proper Approach to Interpreting Exclusion Clauses Under Section 53 of the Sale of Goods Act
[93] In conclusion, because s. 53 requires an express agreement and s. 57(1) confirms the applicability of the common law as it exists from time to time, the principles from Sattva and Tercon extend to contracts for the sale of goods. While recognizing the need to balance protections for parties, freedom of contract and commercial certainty, exclusion clauses in sales contracts are not categorically distinct or subject to different or stricter rules of construction. The SGA must be read as a whole and while the legislature wanted to provide presumptive protections to parties, it also expressly allowed parties to opt out entirely from the implied statutory conditions. The “express agreement” contemplated by s. 53 of the SGA is to be interpreted and applied accordingly.
[94] It is at the first step of the Tercon test where a court should determine whether there is an express agreement between the parties that is sufficient to meet the requirements of s. 53. To do so, a court must apply the principles of modern contractual interpretation, which involves, 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. The overall goal is to ascertain whether it was the objective intention of the contracting parties to exempt one party from statutorily imposed liability as permitted by s. 53.
[95] Courts tasked with deciding whether implied statutory conditions have been excluded from a contract will seek to ascertain the objective intention of the parties as manifested by the words chosen and the surrounding circumstances (Sattva, at para. 47). A flexible approach, focused on the objective intention of the parties, will allow courts to give effect to the parties’ bargain while taking into account the nature of the contract and the contracting parties, what the parties would have reasonably understood their words to mean and to ensure the parties’ objective intention is not thwarted by strict rules of interpretation and to control for unfairness by unconscionability and public policy considerations.
[96] As the prevailing goal of contractual interpretation is to ascertain the objective intent of the parties, this necessarily requires a decision-maker to refer to the surrounding circumstances of a contract while at the same time ensuring that the surrounding circumstances do not “overwhelm the words of [the] agreement” (Sattva, at para. 57). This is so because using a “sterile textual analysis of a contract’s language without regard to the surrounding circumstances . . . is apt to lead to indeterminacy and brings a significant risk of inaccurate results” (Hall, at p. 30). A consideration of the surrounding circumstances in this respect necessarily means that the words used by the parties cannot always be interpreted as having a meaning that has been well established in law. The meaning of the words used can largely depend on who the contracting parties are, their relationship to each other and their degree of contracting sophistication. The principles emerging from Sattva require this interpretive flexibility to account for the varying contracting scenarios that can arise between different sets of parties.
[97] If the contract, by express provision, protects a party by ousting implied statutory terms and the court thinks the provision was intended to operate in the circumstances which have occurred, the provision is to be given full effect unless it is found, at steps two and three of the Tercon test, respectively, to have been unconscionable at the time the contract was made or if there are overriding public policy concerns that would compel a court to refuse to enforce it. That is because it was the objective intention of the parties and because commercial certainty is best served by the law giving effect to their actual bargain. Searching for the parties’ objective intention furthers that purpose, whereas an overly technical and legalistic interpretation of exclusion clauses does not.
[98] An “express agreement” under s. 53 requires that the parties have expressly and unambiguously used language that signals their intention to override the statute. This means that silence or omission does not suffice. Nor can the court imply, impute or infer intention to opt out of the statute based on parties’ presumed intention. Section 53 requires an “express agreement”, not “express language”, and is far removed from setting a legal standard that insists on explicit, clear and direct language which speaks to the legal characterization of the terms at issue. There is no requirement for “magic words”. While the words of the agreement itself are undoubtedly important, Sattva allows a court to read these words with the surrounding circumstances in mind and does not mandate that words be strictly attributed with a singular, prescriptive meaning. It simply requires that any intention of the parties to exclude the SGA be grounded in the text, if the contract is a written one. To have an effective express agreement that satisfies s. 53, the parties’ joint intention must be declared and the exclusion clause must unambiguously vary or negative the statutorily implied obligation, based not only from the words of the contract itself, but also from an analysis of the surrounding circumstances (Sattva, at paras. 58-61).
[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”.
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