Contextual Contract Interpretation

The decision of the Supreme Court of Canada ("SCC") in Earthco Soil Mixtures Inc. v Pine Valley Enterprises Inc., 2024 SCC 20, promotes a plain language, contextual approach to contract interpretation. An express exclusion of liability for purchasing topsoil without testing is effective to protect the vendor when the topsoil composition is not as described.

The Facts

Pine Valley Enterprises Inc. (“Pine Valley”) was contracted by the City of Toronto (“the City”) for a flood remediation project requiring the removal and replacement of topsoil for proper drainage. Pine Valley subcontracted with Earthco Soil Mixtures Inc. (“Earthco”) to supply topsoil with the specified composition required by the City. Earthco provided laboratory reports of its topsoil pile from testing done six weeks prior. Earthco warned Pine Valley against purchasing topsoil without further soil testing. Despite the warning, due to time constraints (and potential liquidated damages), Pine Valley requested immediate delivery without further soil testing. Earthco added provisions to the subcontract specifically excluding liability if testing was not completed before Pine Valley took the topsoil.

If [customer] waives its right to test and approve the material before it is shipped, Earthco Soils Inc. will not be responsible for the quality of the material once it leaves our facility.

Following the delivery and placement of the topsoil, water ponding was observed, and subsequent testing revealed substantially higher levels of clay in the topsoil than indicated in the initial reports. Pine Valley sued Earthco for damages claiming it did not receive topsoil consistent with the initial description.

Multiple Appeals

The trial judge determined the contract to be a sale of goods by description, pursuant to s.14 of the Ontario Sale of Goods Act ("SOGA").

S. 14     Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description, and, if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.

The trial judge found that the contract specified the composition of the topsoil and so the implied condition under s.14 was breached. However, the exclusion of liability provisions constituted an express agreement, and the parties validly contracted out of the implied condition - as permitted by s. 53 of the SOGA.

S. 53     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.

Pine Valley appealed. The Ontario Court of Appeal reversed the trial decision and held Earthco liable. The Court of Appeal found that the subcontract did not contain sufficiently explicit, clear, and direct language to override the statutory implied condition. An effective exclusion of liability would require express reference to the implied condition in s. 14 of the SOGA. Further, and in any event, the Court of Appeal found that the exclusion of liability provisions expressly referred to “the quality of the material” whereas Earthco had delivered soil of not just a different quality but a different identity than the soil described in the contract.

On further appeal, the SCC reinstated the original judgment. The Court reasoned that by protecting Earthco from liability, the objective intentions of the parties would be upheld. The word “quality” in the exclusion of liability had to be interpreted in a manner consistent with the surrounding circumstances, despite contrary jurisprudence as to the distinction between “quality” and “identity,” because “the meaning of even legal terms may depend on who the contracting parties are, their relationship to each other and whether they are sophisticated at contracting” (at para 84). In the circumstances, “quality” was to be interpreted in its colloquial and commercial context. Therefore, the SCC concluded the exclusion clause is enforceable, and that Pine Valley’s losses resulted from their “expensive but calculated mistake” (at para 109). To hold Earthco liable for Pine Valley’s mistake would diminish commercial certainty and fairness.

Contracting out of the Sale of Goods Act

The Sale of Goods Act allows that statutory implied terms may be excluded by express agreement. The SCC decision extends the applicability of common law principles to all sale of goods contracts, thereby recognizing the mutual objective intentions of the parties as a paramount consideration for contractual interpretation. The only instance where common law principles do not apply is where they are “inconsistent with the express provisions of the Act” (at para 58). An “express agreement” to override the statutory implied condition requires that “the parties’ joint intention must be declared, and an 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” (at para 98).

There is a distinction between express agreement and express language. While some form of express agreement is required to override the statutory implied condition, there is no magic word, technical term, or “qualitative requirement about the specificity of language” for an exclusion clause to be enforceable. “[C]larity of the language will, however, guide the interpretation of the agreement;” (at para 55) in other words, explicit reference to the statutory provision intended for exclusion is preferred and optimal. But it is not necessarily required.

Identity vs Quality

The SCC affirmed the legal distinction between identity and quality in sale of goods contracts: “while the quality of the goods amounts to a term of the contract, the identity of the goods connotes something that is an ‘essential part’ of the goods themselves” (at para 39). But the Court noted that a strict technical interpretation of the term “quality” may be inappropriate; this term is “often used in general parlance” and is “not exhaustively defined in the [SOGA]” (at para 85). Although the law recognizes a technical distinction between the identity and quality of goods, “courts should not impose a very high, and often unrealistic, burden on contracting parties to be aware of and fully understand the legal characterization and consequences of the words they use” (at para 86).

Practical Takeaways

In essence, because the exclusion of liability was drafted by laypersons and not lawyers and arose in the context of Earthco expressly warning Pine Valley to test the topsoil, it didn’t matter that the exclusion clause omitted express reference to s. 14 of the SOGA, and the term “quality” was to be given a plain language meaning rather than a technical legal one. The objective intention of the parties was that Pine Valley accepted the risk of purchasing the topsoil without testing it.

This case continues the courts’ trend in contractual interpretation of transitioning from a technical approach to a contextual approach focused on the objective intentions of the parties at the time of contract formation. Contracting parties have flexibility to use plain language, as long as the mutual objective intention is clear. Technical legal language may nevertheless provide greater certainty of interpretation, particularly when the contracting parties are sophisticated or legal counsel are involved.

The principles of this case extend to all common law provinces and territories as they all have equivalent exclusion provisions in their respective Sale of Goods legislation (e.g. ss. 15 and 58 of the Alberta Sale of Goods Act) which establish “a framework of rules that in many cases are optional, subject to exclusion by the parties themselves” (at para 40).