No need to say the magic word: Supreme Court lowers threshold for exclusionary clauses in contracts

Buyers and sellers of goods can contract out of statutory warranties and other inferred legal obligations by “express agreement”¹. When drafting and interpreting exclusion clauses, contracting parties want to know: how “express” does the agreement need to be? The Supreme Court of Canada provided an answer in Earthco Soil Mixtures Inc v. Pine Valley Enterprises Inc². The Court’s decision also provides important guidance on the standard of review for contractual interpretation.

What you need to know

• “Clear and direct” language for exclusion clauses is not the standard. An “express agreement” is one that expresses an unambiguous intention to deviate from statutory protections—it cannot be implied, but it does not require “magic words”. The Court’s former requirement of “clear and direct” language for exclusion clauses no longer applies.
• Discerning the objective intentions of the parties is central to contractual interpretation. Overly technical interpretations, divorced from the factual matrix, risk overriding the parties’ intentions. While the surrounding circumstances cannot override the text of a contract, the text cannot be considered alone in interpreting an exclusionary clause.
• Deference is owed to lower courts’ contractual interpretations. Even where the contract provisions are to be interpreted in the context of statutory protections, courts should be deferential to the trial judge’s interpretation. Appellate courts should not unnecessarily look for opportunities to conduct a correctness review of a trial judge’s decision.

The background of the dispute

The Sale of Goods Act (the SGA) in Ontario, and equivalent legislation in all Canadian jurisdictions, provides statutory protections to buyers of goods by implying conditions into their contracts with sellers. Section 14 of the Ontario SGA, for example, includes an implied condition that goods sold by description will match that description³. Parties can contract out of these implied conditions under section 53 of the SGA, but they must do so by “express agreement”⁴.

The facts

Pine Valley Enterprises bought topsoil from Earthco Soil Mixtures for a flooding remediation project that required specific soil composition. Earthco provided lab results of samples but encouraged Pine Valley to retest the soil before it shipped. The contract contained an exclusion clause stating that, because Pine Valley waived its right to test, Earthco would not be responsible for the soil’s quality. Pine Valley declined to test because it was facing an urgent project deadline. Once the soil was applied, it became clear that its composition did not meet specifications, and Pine Valley was required to replace it. Pine Valley then sought damages from Earthco for breach of contract⁵.

The decisions below

The trial judge held that the parties had expressly agreed to exclude the implied statutory condition: Pine Valley—an experienced soil purchaser—knew that soil composition changes over time and deliberately assumed that risk⁶.

The Ontario Court of Appeal disagreed, identifying three errors in the trial judge’s analysis. First, the exclusion clauses waived liability for the soil’s quality, not its identity, and therefore did not oust the implied condition that the soil’s composition must match its description. Second, the clause’s language was insufficiently “clear and direct” because it failed to mention the identity of the soil or the specific statutory condition. Third, the trial judge expanded the words of an exclusion clause beyond their meaning by relying too heavily on the factual matrix. The Court of Appeal characterized these errors as extricable questions of law, reviewable on a correctness standard, meaning that the Court was not required to defer to the trial judge’s interpretation⁷.

The Supreme Court’s decision

In a 6-1 decision, the Supreme Court allowed the appeal and held that the exclusion clauses relieved Earthco from liability. In doing so, the Court clarified the appropriate standard of review when an appeal court reviews a trial judge’s interpretation of a contract and explained that the requirement for “express agreement” does not demand specific language.

No “magic words” or “clear and direct” language required to oust implied conditions

The Court of Appeal had relied on a Supreme Court of Canada case, Hunter Engineering, for what had been understood as the settled law that an exclusion clause—including the derogation from a statutory protection—required clear and direct language.

The Supreme Court rejected this approach. Instead, the Court emphasized the need for interpretive flexibility in discerning the parties’ objective intentions⁸. Since the Court’s decision in Sattva, Canadian contract interpretation has steadily moved away from technical rules of construction, toward a more flexible approach that considers words’ meaning in the context of their factual matrix. The Court of Appeal’s insistence on highly specific language pushed against this jurisprudential tide⁹.

Section 53 of the SGA requires “express agreement” to deviate from statutory protections, not “express language”. The parties must unambiguously use language that signals an intention to override the statute but are not required to use “magic words”. Moreover, exclusion clauses do not require the “clear and direct” language described in Hunter Engineering. The presence of words excluding liability shows that the parties’ intention is “express”¹⁰.

Although the language of an exclusion clause is important, “words are not ends in themselves: they are a means to demonstrate, discern and determine the true intention of the parties”¹¹. Overly technical and legalistic interpretations risk thwarting the parties’ actual agreement¹². Words in a contract should therefore be given their ordinary meaning, as they would be understood by the average person¹³. Although language that explicitly ousts a legislative protection is the “gold standard for contractual certainty” and is “to be encouraged”, it should not be “elevated into a binding prerequisite”¹⁴.

The Court concluded that Pine Valley and Earthco had reached an “express agreement” to exclude liability. Pine Valley, an experienced purchaser of soil facing an urgent deadline, accepted the risks of declining to test the soil¹⁵. In drafting the exclusion clauses, the parties had used the word “quality” in its colloquial sense—to describe all attributes of the soil, including its composition. Expecting the parties to use technical legal terms would be a “commercially impractical expectation”¹⁶. Therefore, explicit reference to “conditions” or “identity” was not required¹⁷.

Lower court’s interpretation owed deference

The Supreme Court continued its trend of emphasizing deference for review of a trial court’s contractual interpretation. It disagreed with the Court of Appeal that there were extricable questions of law warranting correctness review. Rather, the question of whether there was “express agreement” to exclude liability was reviewable on the deferential standard of palpable and overriding error¹⁸.

While statutes are always interpreted on a non-deferential (i.e., correctness) standard, the Court explained that correctness review is not automatically required when contracts implicate statutory provisions or protections. Although the “express agreement” requirement in the SGA is statutory, the trial judge’s view of what constitutes “express agreement” in the specific circumstances necessarily involves consideration of the factual matrix of the specific contract. It is therefore entitled to considerable deference¹⁹.

The Court reiterated that reviewing courts should be cautious in identifying extricable questions of law. The recent tendency in appellate courts to increasingly identify extricable questions of law “is to be resisted”²⁰.

Practical implications

Although exclusion clauses are an important tool parties can use to allocate risk, disagreements about their scope often arise when things go wrong. The Court’s decision in Earthco increases the likelihood that broadly drafted exclusion clauses will successfully oust statutorily implied conditions. This could have ramifications beyond the Sale of Goods Act, affecting the interpretation of exclusion clauses related to other Acts that permit parties to contract out of certain statutory protections—including under limitations statutes and corporate law statutes²¹.

Moving forward, courts interpreting exclusion clauses will consider the ordinary meaning of the words the parties chose, in the context in which they were chosen. Contracting parties are not expected to use specific jargon or terms of art to give effect to their intention to allocate risk, even if it would have added clarity for them to do so. Parties should therefore consider reviewing their contracts for unnecessary legal jargon.