By John NymanApril 1, 2025
In Earthco Soil Mixtures Inc v Pine Valley Enterprises Inc, 2024 SCC 20 [Earthco], the Supreme Court of Canada (“SCC”) affirmed that common law principles of contractual interpretation apply to exclusion clauses under the Sale of Goods Act, RSO 1990, c S1 [SGA]. While “express agreement” sufficient to oust SGA liability must include an explicit statement of joint intention, it does not require precise legal terminology or “magic words” (Earthco, para 98).
The SCC overturned the Court of Appeal for Ontario (“ONCA”), whose ruling in Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 [ONCA] restricted freedom of contract by requiring tighter conformity with the statutory scheme. However, both the ONCA and the SCC overlooked a pivotal trial-level error that distorted the courts’ reasoning and muddied the scope of the majority decision.
Facts
In October 2011, Pine Valley Enterprises Inc (“Pine Valley”) purchased topsoil from Earthco Soil Mixtures Inc (“Earthco”) for a City of Toronto landscaping contract (Earthco, paras 4-9). The project required topsoil with a specific composition of sand, silt, and clay (Earthco, para 6).
In August 2011, Earthco’s topsoil, called “R Topsoil,” was tested as having an acceptable composition (Earthco, para 6). However, topsoil is an organic substance with properties that may change over time. To account for these changes, Earthco’s customers would normally re-test and approve the soil before delivery (Earthco, para 7).
Despite the risk that the soil’s composition had changed since it was tested in August, Pine Valley purchased R Topsoil without re-testing it (Earthco, para 9). Earthco added two clauses to its standard contract to reflect Pine Valley’s assumption of the risk. Specifically, clause 6 outlined that Pine Valley had a right to test and approve the soil. Clause 7 then stated that if Pine Valley chose to waive this right, Earthco would not be held responsible “for the quality of the material” (Earthco, para 9).
In November 2011, after the topsoil had been placed at the project site, testing revealed that its composition was substantially different from what the August tests had indicated (Earthco, para 11). Pine Valley was required to remove and replace the topsoil and pay damages for the delay in completing the project (Earthco, para 11).
Procedural History
Pine Valley sued Earthco for the losses it incurred (Earthco, para 12). It alleged that Earthco breached an implied condition under section 14 of the SGA to deliver topsoil with the composition indicated by the August tests (Earthco, para 13).
Ontario Superior Court of Justice
The Ontario Superior Court of Justice (“ONSC”) dismissed Pine Valley’s claim (Pine Valley v Earthco, 2020 ONSC 601, para 128 [ONSC]).
Nakatsuru J found that the contract was for a “sale of goods by description” under section 14 of the SGA, which sets out that such contracts contain “an implied condition that the goods will correspond with the description.” There was therefore an implied condition in which Earthco “promised that it was selling R Topsoil which had the qualities set out in the [August] test results” (ONSC, para 100).
However, clauses 6 and 7 of the contract expressly ousted Earthco’s section 14 liability, pursuant to section 53 (ONSC, para 127). Section 53 of the SGA allows parties to contract out of a condition implied by law using several mechanisms, one of which is “express agreement.” An “express agreement” must use “clear and unambiguous” language to exclude liability (ONSC, para 112). Clauses 6 and 7 met this standard, therefore Earthco was not responsible for Pine Valley’s loss.
Court of Appeal for Ontario
The ONCA allowed Pine Valley’s appeal (ONCA, para 70). Writing for a unanimous court, Zarnett J.A. highlighted several legal errors in the trial judge’s decision (ONCA, para 36).
In the ONCA’s view, the trial judge erred by failing to acknowledge the distinction between the “identity” and “quality” of goods under sections 14 and 15 of the SGA (ONCA, para 43). An implied condition under section 14 must relate to the identity of goods (their correspondence with the description), not their quality (their “fitness for purpose” or “merchantability”) (ONCA, para 9). An implied condition relating to quality must instead be implied by section 15 (ONCA, para 9).
Because clauses 6 and 7 referred to the “quality” of the topsoil, they could not exclude Earthco’s liability under a condition implied by section 14, which must relate to identity (ONCA, para 59). To qualify as an “express agreement” pursuant to section 53, an agreement must be “explicit” and “clear and direct” (ONCA, para 49). On this standard, however, a clause referring only to the “quality” of goods cannot exclude liability for the identity of goods. A court cannot use the contract’s factual matrix to “overwhelm the text” by changing the meaning of the words (ONCA, paras 62-63).
Issue
At issue before the SCC were the legal requirements for excluding an implied condition pursuant to section 53 of the SGA (Earthco, para 26).
Decision
Writing for the majority, Martin J ruled that clauses 6 and 7 were sufficient to exclude Earthco’s liability for breaching the condition implied by section 14 of the SGA.
In the majority’s view, the ONCA erred in finding that the trial judge’s decision contained extricable questions of law (Earthco, para 27). The ONCA’s approach was inconsistent with Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 [Sattva], which held that contractual interpretation is a question of mixed fact and law in which extricable questions of law are “rare” (Earthco, para 28, quoting Sattva, para 55). Notwithstanding that the SGA is a statute and statutory interpretation is a question of law, the common law pertaining to contractual interpretation is “purposefully incorporated” into SGA provisions (Earthco, para 60).
Additionally, the majority stressed that “magic words” are not required to give effect to an exclusion clause under section 53 of the SGA (Earthco, para 98). The phrase “express agreement” means an explicit agreement made using words and not left to inference (Earthco, para 56). It does not, however, require the use of specific language (Earthco, para 55). Clauses 6 and 7 thus constituted an express agreement to exclude Earthco’s liability under the condition implied by section 14. The word “quality” was intended in the circumstances to refer to the soil’s composition (Earthco, para 104).
The conclusion that clauses 6 and 7 ousted Earthco’s liability is also supported by the test for exclusion clauses in Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4 [Tercon]. According to Tercon, an exclusion clause should be given effect if the parties intended it to operate in the circumstances that occurred (Earthco, para 97). Since the facts in Earthco met this requirement, the majority found that Earthco was not liable (Earthco, paras 103, 109).
In a solo dissent, Côté J put forward a textualist argument which largely conformed with the ONCA’s line of reasoning. She stressed that Sattva requires contractual interpretation to remain “grounded in the text” (Earthco, para 159, quoting Sattva, para 57). Further, parties must be assumed to know their legal rights and duties under the SGA, therefore contractual terms must be attributed precise legal meanings pursuant to the statute (Earthco, paras 162-63). In this context, the word “quality” cannot be expanded to include the identity of the soil (Earthco, para 181). Therefore, clauses 6 and 7 did not exclude Earthco’s liability pursuant to section 53.
Analysis
Both the ONCA’s and the SCC’s reasoning was distorted by their failure to address a pivotal error at the trial level: the trial judge incorrectly classified the implied condition as having been implied by section 14 of the SGA. As a result, the case represents a missed opportunity to clarify the principles for interpreting mutually dependent contractual terms.
Groundwork: the original error
The trial judge reasonably found that the contract contained an implied condition to sell “R Topsoil which had the qualities set out in the [August] test results” (ONSC, para 100). However, he erred in finding that this condition was implied by section 14 of the SGA, as he failed to consider section 15.
Section 14 only ensures that the goods sold “are, as far as their identity is concerned, the goods described” (ONCA, para 40). In this respect, Earthco only promised that the soil was topsoil from the R topsoil pile. Since the parties understood that soil with the same identity (topsoil from the R topsoil pile) could have changed composition between August and October, any promise about its composition at the time of sale could not have been a promise about identity.
The implied condition found by the trial judge referred to the soil’s composition. Therefore, it could only have been implied by section 15. The soil’s composition at the time of sale had to do with whether it was “fit for […] purpose” (SGA, s 15), not its identity. “[F]itness for purpose” falls under “quality,” which section 15 governs (ONCA, para 9).
If the trial judge had properly classified the implied condition as one of quality (section 15) rather than identity (section 14), neither the ONCA nor Côté J could have found that the exclusion clause failed to refer to it explicitly. Nonetheless, no appellate judge recognized the error. At the ONCA, Earthco did not contest it (ONCA, para 43). Earthco did raise the point at the SCC, but neither Martin J nor Côté J was persuaded to intervene in this part of the trial judge’s decision (Earthco, paras 114, 167-68).
The persistence of the trial judge’s error throughout the appeals formed the backdrop for distinct defects in the majority’s and Côté J’s decisions, as discussed below.
Mixture Messages: ambiguous scope of the exclusion clause
While the majority decision affirmed valuable contract law principles and rendered justice for the parties, it did not clearly explain its ruling on the proper scope of the exclusion clause. Addressing this defect would have required acknowledging the trial judge’s misclassification of the implied condition, which the majority declined to do (Earthco, para 114).
The majority used a variety of terms to describe the exclusionary scope of clauses 6 and 7. Martin J wrote that Earthco was protected from “any statutorily imposed liability under s. 14 of the SGA” (Earthco, para 100), “liability for any defects” (para 103), “liability for any percentage-based compositional deficiency” (para 104), and “the risk that the soil would not meet the Project’s requirements” (para 108). Given that these phrasings are not identical, what exact liability was excluded?
One interpretation suggests that clauses 6 and 7 excluded Earthco’s liability under any condition implied by section 14 of the SGA. But this interpretation cannot be correct, since the clauses were only intended to cover the soil’s composition. If Earthco had breached an implied condition unrelated to the soil’s composition, such as by delivering soil from a pile other than the R Topsoil pile, clauses 6 and 7 would not have ousted its liability.
In my view, the correct interpretation limits the scope of the exclusion clause to the implied condition that the topsoil “had the qualities set out in the [August] test results” (ONSC, para 100). In other words, clauses 6 and 7 excluded liability only for the specific condition identified by the trial judge. However, Martin J’s statements offer no certainty that this limited interpretation is what the majority had in mind when rendering its judgment.
Uneven Terrain: asymmetrical standards of review
The implied condition identified by the trial judge was inextricably linked with the section 53 exclusion clause. Nonetheless, the ONCA and Côté J interpreted the two terms using different standards of review. Regarding the implied condition, Côté J insisted that there were no extricable questions of law (Earthco, paras 167-70), while the ONCA did not scrutinize it as it was not challenged at the time (ONCA, para 43). In contrast, both Côté J and the ONCA determined that the trial judge made extricable errors of law regarding the applicability of the exclusion clause (Earthco, para 173).
The majority missed an opportunity to rule that this kind of asymmetrical treatment is inappropriate when interpreting mutually dependent terms. The section 14 implied condition and the section 53 exclusion clause cannot be interpreted apart from each other:
First, the exclusion clause served only one purpose, which was to exclude liability under the implied condition. Thus, the meaning of the exclusion clause, and whether it constituted an “express agreement” as required by section 53 of the SGA, must be interpreted in conjunction with the implied condition.
Similarly, the implied condition can only be defined with reference to the exclusion clause. This flows from the objective theory of contract: since the implied condition was not expressly written into the contract (the contract “only refer[red] to soil”) (ONSC, para 100), courts must interpret it through provisions that the parties did objectively include. Clauses 6 and 7 were objectively included in the contract. Arguably, they were also the most important clues to the proper content of the implied condition.
Applying different standards of review to the implied condition and the exclusion clause is not only counterintuitive, but also contributed to the ONCA’s and Côté J’s misrepresentation of the underlying agreement. Clauses 6 and 7 were intended to fit hand in glove with the precise condition that Earthco breached. However, applying asymmetrical standards of review severed their legal effects. By reading the exclusion clause, but not the implied condition, against the statutory framework of the SGA, the ONCA and Côté J created a false impression that the two terms spoke to different things.
Conclusion
Earthco should have stood for the proposition that mutually dependent contractual terms should be reviewed on the same standard if appellate courts seek to intervene in their interpretation. Because neither the ONCA nor the SCC recognized this principle, the trial judge’s error in classifying the implied condition distorted the appellate courts’ reasoning.
Despite its flaws, however, the majority decision should add certainty to most contractual relationships, especially those involving less sophisticated parties. By affirming Sattva and Tercon’s emphasis on intentions over legal precision, the SCC allowed access to predictable contract liability unencumbered by “magic words.”
This article was edited by Donya Tamehi.