AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:
The Supreme Court of Canada issued a decision at the end of May, 2024 in a
case about topsoil. Of course, the case
was not only about topsoil. Topsoil just
happened to be the subject matter of the contract at the heart of the dispute
between the parties. The Supreme Court
chose to hear the case because it involved important questions about contracts
for the sale of goods and the statutory conditions that are implied through
legislation to form part of those contracts.
With the exception of Quebec, all Canadian provinces and territories
have a statute governing the sale of goods that is modelled on a 19th-century
law from the United Kingdom – the Sale of
Goods Act, 1893. That UK legislation codified common law
(judge-made, non-statutory) that had developed in the English courts throughout
the 19th century. Passed down
to Canadian law were three implied obligations that certain sellers of goods
can owe to buyers related to the characteristics or properties of the goods sold
even though the contract between seller and buyer might not mention the
obligations: 1) fitness for purpose (that where the buyer makes known to the
seller the particular purpose for which the goods are to be used, the goods
will be reasonably fit for the purpose); 2) merchantability (that the goods
sold by description will be of “merchantable” or reasonable quality and fit for
sale in the usual course of trade); and, 3) correspondence with description
(that goods sold by description will match the seller’s description of the
goods).
According to the Supreme Court in its recent decision, those implied
obligations were likely imposed by judges to relieve buyers from the harsh
effect of the law of “caveat emptor” (buyer beware) that left all of the risk
related to the characteristics or properties of the goods on the buyer where
the contract was silent on those matters.
In Ontario, the Sale of
Goods Act contains the three implied obligations of fitness
for purpose, merchantability and correspondence with description and makes them
implied “conditions” rather than “warranties”.
Contractual terms are “conditions” where they are fundamental to the
contract: breach of a condition would give the buyer the right to reject the
goods from the seller. Contractual terms
that are not fundamental to the contract are “warranties”: breach of a warranty
would give the buyer a claim for damages but would not entitle the buyer to
reject the goods. Where a condition is
breached, the buyer would actually have the option to reject the goods or keep
the goods and sue for damages (as if a warranty had been breached).
In the case that went to the Supreme Court, the issue was whether or
not the parties to a contract for the supply of topsoil had “contracted out” of
the implied condition in the Sale of
Goods Act that the goods sold by description correspond with
the description. Parties don’t have to
leave the implied conditions in place – they can use express language in their
agreement to say that the implied conditions will not apply.
The buyer in the case was engaged by a municipality to remediate
flooding in an area, which involved the removal and replacement of
topsoil. The buyer needed topsoil with a
specific composition in order to provide the drainage required to solve the
flooding problem. The topsoil was
sourced from the seller on the basis of the seller’s description, which
included laboratory reports based on topsoil samples taken six weeks prior to
the eventual delivery of the soil.
Although the seller warned that updated test results should be obtained,
the buyer had missed project deadlines and wanted immediate delivery of the
soil to avoid paying damages to the municipality. The seller and the buyer agreed to go ahead
with the transaction and delivery of the soil, but with exclusions of implied
conditions. The buyer would have the
right to test and approve the topsoil before it was shipped to the site, but if
the buyer waived that right the seller would not be responsible for the quality
of the topsoil once it left the seller’s facility.
It turned out that the topsoil delivered had substantially more clay
content than indicated by the earlier test results. The soil didn’t drain the way it was supposed
to and ponding developed on the project site, forcing the buyer to remove the
topsoil and replace it with new topsoil that would drain properly. The buyer sued the seller for damages
claiming that the seller failed to deliver topsoil that had the composition of
the soil shown in the test results that had been provided.
The majority of the
members of the Supreme Court (there was one dissenting opinion) sided with the
seller, finding that the parties had contracted out of the implied “correspondence
with description” condition in the Sale of Goods Act. Although the exclusion language used by the
seller and buyer in their contract referred to “quality”, which is arguably
something different than the matching of “identity” between the description of
the soil (the test results) and the soil as delivered, the Supreme Court found
that the buyer had chosen deliberately to assume the risk of not having further
testing carried out on the topsoil before delivery. The use of the word “quality” in the
exclusion clause didn’t allow the buyer to avoid the objective intention of the
exclusion clause – that the seller was not to be held liable for any claim
relating to the topsoil.
Read the decision at: 2024 SCC 20 (CanLII).
