The Supreme Court of Canada (the Court) recently granted leave to appeal in Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (Pine Valley).1 This is a rare instance of the Court granting leave to appeal in a commercial matter and will be the first consideration of sale of goods legislation by the Court in over 30 years. The judicial approach to contractual interpretation has evolved considerably during this time and Pine Valley presents the Court with a valuable opportunity to clarify how these evolved doctrines specifically apply in a sale of goods context.
This case centres around the sale of topsoil under a simple purchase order contract. It engages the distinction between the quality of goods and their very identity in the context of what it means for goods to "correspond with the description" in a sale of goods contract. It also addresses the manner in which contracting parties can exclude conditions of sale implied under uniform sale of goods legislation. The specific Ontario Sale of Goods Act (the Ontario SGA)2 provisions at issue, which imply a condition that sold goods will "correspond with the description in the contract" (Section 14) while allowing parties to exclude this condition by "express agreement" (Section 53), have analogues across Canada. The Court's ultimate decision should therefore be of interest to businesses across Canada.
Case background
In 2011, Pine Valley Enterprises Inc. (Pine Valley) tested a sample for "RTopsoil" and subsequently bought 3,678 cubic yards of the same from the respondent, Earthco Soil Mixtures Inc. (Earthco), for use in a Toronto drainage project.
The sale contract between Pine Valley and Earthco contained a clause allowing Pine Valley to test the soil directly prior to shipment. This provision stated that Earthco's liability for the "quality of the shipped material" was excluded if Pine Valley waived pre-shipment inspection.
Having tested a sample of "RTopsoil" prior to purchasing, Pine Valley waived its right to test prior to shipment. Earthco delivered topsoil from the same batch that produced the sample. After delivery and installation, Pine Valley discovered that the composition of the delivered topsoil differed significantly from the sample initially reviewed. Due to this difference, which apparently arose due to natural variations in quality within the batch of topsoil sampled and delivered, the "RTopsoil" delivered did not meet City of Toronto specifications and had to be removed and replaced.
Earthco disclaimed responsibility on the basis that Pine Valley's waiver of its right to test the topsoil prior to shipping amounted to an "express agreement" under Section 53 of the Ontario SGA to exclude the implied condition that the delivered topsoil would match the sale description. Pine Valley brought an action against Earthco under the Ontario SGA claiming that the delivered soil breached the implied condition under Section 14 of the Ontario SGA that it "correspond with the description" in the contract, and that the exclusion of liability for its "quality" did not apply.
Trial decision3
The trial judge found that Section 14 of the Ontario SGA governed the transaction as a "sale by description," and that the description in this case included the qualities and composition of the test sample relied upon by Pine Valley.
However, the trial judge went on to hold that the difference between the sample and the delivered topsoil was one of "quality." Pine Valley had waived Earthco liability for quality when it opted not to test the topsoil prior to shipment. Earthco's liability was therefore excluded. In reaching these conclusions, the trial judge relied heavily on the circumstances surrounding contract formation in evaluating the intentions of the parties.
Court of Appeal Decision4
The Ontario Court of Appeal (ONCA) reversed this decision, holding that Pine Valley's claim was valid. It agreed with the trial judge that the contract was a "sale by description" subject to the implied condition of correspondence with description under Section 14 of the Ontario SGA, and that the goods delivered did not correspond to the description. However, the ONCA reversed the trial judge on the effect of the exclusion of Earthco liability for "quality," holding that it did not apply to override the implied condition of correspondence with description in these circumstances. Its approach emphasized the wording in the Ontario SGA as well as the importance of implied conditions in sale of good legislation, rather than the circumstances surrounding formation of the contract which had been the focus of the trial judge.
The ONCA began its analysis by endorsing the historic interpretation that the "sale by description" wording in Ontario SGA Section 14 relates to the identity of the goods rather than simply their quality. However, it reasoned that contracting parties may identify the goods to be sold as generally or as specifically as they wish, including specifying quality characteristics as part of the identity of the goods. The composition of the test sample soil was held to be not only an aspect of quality but part of the very identity of the goods sold. As such, the exclusion of liability for "quality" was ineffective.
The second principle the ONCA relied on was that contractual language excluding or waiving rights that are otherwise held must be explicit, unambiguous, and direct. The "express agreement" requirement to waive implied conditions in Section 53 of the Ontario SGA was held to reinforce this principle.
Finally, the ONCA stressed the importance that must be ascribed to the legislature's choice to legislatively imply conditions into all sale of goods agreements without any requirement that the purchaser request or negotiate for their inclusion.5
The ONCA held that the trial judge failed to recognize the importance of the Ontario SGA implied conditions which must be superimposed on other interpretative doctrines, including the fundamental principle that "the words of the written contract be considered in light of the factual matrix."6 The ONCA acknowledged that the parties could have expressly contracted out of Section 14 of the Ontario SGA by using sufficiently explicit language – but held that they did not do so. The exclusion of liability for "quality" was insufficiently explicit, clear, and direct in the circumstances to exclude characteristics that identified the product being sold.
Conclusion and takeaways
In Pine Valley, the Supreme Court of Canada will have an opportunity to provide guidance on interpreting and applying sale of goods legislation, including the potential exclusion of conditions implied in such legislation. It will do so against the backdrop of contract law principles that have evolved considerably over the past 30 years both in terms of proper interpretative approach7 and the treatment of exclusion clauses.8 Updated guidance from the Court is likely to be important to a broad scope of businesses involved in the sale of goods or dependent on purchased goods as key business inputs.
Pending the Court's decision, contracting parties may wish to review contracts and precedents to ensure that they are clear in identifying the goods to be supplied, and in excluding liability for specific defects or qualities in goods supplied. Express reference to sale of goods legislation in these areas may advance clarity in terms of how conditions implied by legislation, and any exclusions or limitations of those conditions, are construed in the event of a dispute.
Footnotes
1. 2023 CanLII 6109 (SCC) ("Pine Valley")
2. RSO 1990, c S.1.
3. Pine Valley v. Earthco, 2020 ONSC 601.
4. Pine Valley Enterprises Inc. v. Earthco Soil Mixtures Inc., 2022 ONCA 265 ("Pine Valley, ONCA").
5. Pine Valley, ONCA at para 67.
6. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para 50 ("Sattva").
7. See Sattva.
8. Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4.
About Dentons
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.
