Explicit, Clear, and Direct: The ONCA Limits Freedom of Contract in Pine Valley Enterprises Inc. v Earthco Soil Mixtures Inc.
The Ontario Court of Appeal (“ONCA”) has cracked down on consumer contracts.
In Pine Valley Enterprises Inc. v Earthco Soil Mixtures Inc., 2022 ONCA 265 [Pine Valley], the ONCA affirmed that there is a high standard to be met if parties wish to contract out of statutory conditions in the Sale of Goods Act, RSO 1990, c S.1 [SGA]. In particular, contracts must be explicit, clear, and direct if they wish to exclude liability for goods which do not match their descriptions or are of insufficient quality. This means that express reference to statutory conditions is preferred, or at minimum, express reference to the obligations therein. Critically, the identity and quality of goods are conceptually distinct – exclusionary clauses must precisely target one or the other, or both.
This explicit, clear, and direct standard bears on the concept of freedom of contract, and reflects the ONCA’s attempt to preserve legislative supremacy. The Supreme Court of Canada (“SCC”) has granted leave to appeal in this case, and it is likely the court will more explicitly address and work through this tension.
Pine Valley Enterprises Inc. (“Pine Valley”) entered into a contract with Earthco Soil Mixtures Inc. (“Earthco”) for the purchase and sale of topsoil (Pine Valley, para 1). The contract was within the meaning of s. 14 of the SGA, which provides that where goods are sold by description, it is an implied condition that the sold goods correspond with that description (Pine Valley, para 2; SGA, s. 14). The contract included two provisions (the “Exclusionary Clauses”), which stipulated the following:
[Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed. Please contact Richard Outred [an Earthco representative] to arrange.
If [Pine Valley] 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. (Pine Valley, para 17, emphasis added)
Pine Valley did not exercise the right described above, and later found that the topsoil did not meet the specifications, namely composition requirements, for its project (Pine Valley, para 1). Pine Valley sued Earthco for breach of contract, alleging that Earthco had failed to provide a product matching its description pursuant to s. 14 of the SGA (Pine Valley, para 2).
The trial judge held that while Earthco breached the implied condition in s. 14 of the SGA, Pine Valley had contracted out of a blanket application of this condition through the Exclusionary Clauses (Pine Valley, para 6). Although other cases held that explicit derogation from statutory conditions is required to negate liability, the trial judge did not adhere to this standard because the contract was drafted in “very simple language” (Pine Valley, para 29). The trial judge found that the Exclusionary Clauses were clearly aimed at or intended to preclude Earthco’s liability for any issues with the soil that could be prevented by Pine Valley’s exercise of the right to test (Pine Valley, para 31). By failing to exercise its right to test the topsoil, Pine Valley was thereby excluded from holding Earthco liable (Pine Valley, para 6).
The ONCA allowed an appeal from Pine Valley and overruled the trial decision (Pine Valley, para 8). The ONCA agreed that pursuant to s. 53 of the SGA, parties can contract out of the implied condition in s. 14 of the SGA, but held that such an agreement must include “explicit, clear, and direct language sufficient to oust liability” (Pine Valley, para 7, emphasis added).
The ONCA held that in this case, the Exclusionary Clauses did not meet this high standard of explicitness (Pine Valley, para 10). This is because for one, the Exclusionary Clauses refer only to material quality, rather than descriptiveness or identity which underpins s. 14 (Pine Valley, para 10). The ONCA emphasized the difference between identity and quality, the former being addressed in s. 14 of the SGA and the latter being an entirely different concept addressed in s. 15 (Pine Valley, para 38). The identity of a good can be framed broadly and encompass both low-quality and high-quality versions (Pine Valley, para 40). For the purposes of s. 14, therefore, quality is irrelevant (Pine Valley, para 40). One of the trial judge’s errors, according to the ONCA, was conflating ss. 14 and 15 (Pine Valley, para 43). The trial judge identified the soil composition requirements as going to the identity of the goods, found the improper composition to be indicative of a breach of that description, and yet found the Exclusionary Clauses to preclude liability for that breach despite them including language of “quality” rather than “identity” (Pine Valley, para 47).
According to the ONCA, this compounded with another error, which was a failure to recognize the high standard of explicitness required (Pine Valley, para 56). After referring to several cases on the issue, the ONCA ruled that:
The parties did not cite any case where the SGA implied conditions were excluded by language that lacked a reference to “conditions” and “statutory”. But even if other language could suffice, it is clear from the cases that the legal meaning of explicit, clear, and direct language in this context means at the very least that the language must refer to the type of legal obligation the SGA implies – reference to a different legal obligation will not suffice. (Pine Valley, para 56, emphasis added)
In other words, express derogation from the legal obligation in question is required – implied intentions are insufficient. In this case, the Exclusionary Clauses do not refer to s. 14 of the SGA (Pine Valley, para 10). To meet the standard, they would have had to refer to s. 14 of the SGA, or at the minimum, to the implied condition that goods match their description. Unlike the trial judge, the ONCA was not satisfied that the level of sophistication in a contract is relevant (Pine Valley, para 57). Regardless of whether simple or complex language is used, the requirement for explicitness remains (Pine Valley, para 57).
Identity Versus Quality: Splitting Hairs or a Necessary Distinction?
A common-sense reading of Pine Valley might lead one to question the ONCA’s distinction between identity and quality. However, this is likely due to the factual matrix rather than an error in reasoning. In this particular case, it is difficult to see how identity and quality can be kept conceptually distinct. The composition of topsoil is a matter of identity, but such composition is presumably chosen by the buyer on the basis that its quality is most suitable. If the soil is of the correct composition, how could it be of poor quality? Soil is soil, and composition seems central to identity and quality. With respect to other goods, however, the distinction is clearer. For example, the sale of a canoe can only be affected properly if a canoe is delivered. A kayak will not suffice, irrespective of how high quality the kayak may be. Conversely, the sale of a boat more generally is a matter of descriptiveness and can include any vehicle that is capable of traversing through water. However, even if this condition is met, a boat can be of poor quality if, for example, it is full of holes.
The ONCA’s decision goes beyond the context of soil and reflects the underlying legislative intent behind distinguishing the two concepts. Ss. 14 and 15 of the SGA are distinct for a reason. Identity and quality are different, and it can be that goods match one criterion but not the other. For this reason, any exclusion of liability must correspond to the actual breach that has occurred. If parties contract out of the identity requirement, this cannot be extended to issues of quality. Similarly, parties cannot be excluded from liability for incorrectly described goods based on an exclusionary clause pertaining to quality.
Legislative Supremacy or Freedom of Contract
Putting aside the technical distinction between identity and quality, which is plainly rooted in law, Pine Valley is fascinating because it reveals a tension between legislative supremacy and freedom of contract. The explicit, clear, and direct language required to oust statutory liability under the SGA restricts parties’ freedom to contract out of these provisions.
In this case, it does not seem unreasonable to assert, as the trial judge did, that the parties’ actual intention was to oust all liability for the soil if Pine Valley failed to test it. After all, the difference between the identity and quality of topsoil seems trivial. Why would Earthco include Exclusionary Clauses which only provide it partial protection? Further, why would Pine Valley read the Exclusionary Clauses as giving it the residual opportunity to hold Earthco liable for soil issues if it failed to exercise its right to test? These questions point to a common-sense understanding of the parties’ likely intentions.
However, the explicit, clear, and direct requirement indicates that from the ONCA’s perspective, the implied conditions in the SGA are inherently desirable and any freedom to contract out of them must be exercised in a particular fashion. This is a divergence from the general principle in contract law that an attempt must be made to give effect to parties’ intentions, even if implicit. This should be viewed with wariness as it may undermine parties’ legitimate expectations regarding the nature and outcomes of their consumer contracts.
The SCC’s ruling in Pine Valley should be hotly anticipated, given the high-level tension between legislative supremacy and freedom of contract underlying the case. The ruling is also timely given that it comes on the heels of Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41, where the SCC similarly addressed the tension between freedom of contract and bankruptcy and insolvency law. That decision was discussed here. In any event, it will be valuable to have a more fulsome and authoritative comment on Pine Valley from Canada’s highest court.