By Roy Nieuwenburg, K.C. and Scott Lamb

Exclusion clauses, contractual terms that restrict or limit the rights of a party to a contract, have received consideration by our courts particularly where such clauses place a restriction or limitation on an otherwise available statutory right. In order for an exclusion clause to be valid, the intent of the contracting parties to restrict or limit otherwise available rights must be clear. A recent decision from the Supreme Court of Canada, Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, confirms that parties should approach exclusion clauses cautiously as whether or not the intent of the parties to exclude an otherwise available right may not always be clear.

The foundational case of Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, confirmed that a three-part test is to be followed when assessing the enforceability of an exclusion clause:

• Does the exclusion clause apply? (Is there evidence to show that the parties mutually intended to include an exclusion clause in the contract?)
• If the parties did mutually intend to exclude the otherwise applicable rights, the court will consider if the exclusion clause was unconscionable at the time it was made. If it was, the exclusion clause will not be upheld. The following excerpts from Tercon are instructive:

“[117] As Duff C.J. recognized, freedom of contract will often, but not always, trump other societal values.  The residual power of a court to decline enforcement exists but, in the interest of certainty and stability of contractual relations, it will rarely be exercised.  Duff C.J. adopted the view that public policy “should be invoked only in clear cases, in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds” (p. 7).  While he was referring to public policy considerations pertaining to the nature of the entire contract, I accept that there may be well-accepted public policy considerations that relate directly to the nature of the breach, and thus trigger the court’s narrow jurisdiction to give relief against an exclusion clause.

[118] There are cases where the exercise of what Professor Waddams calls the “ultimate power” to refuse to enforce a contract may be justified, even in the commercial context.  Freedom of contract, like any freedom, may be abused.  Take the case of the milk supplier who adulterates its baby formula with a toxic compound to increase its profitability at the cost of sick or dead babies.  In China, such people were shot.  In Canada, should the courts give effect to a contractual clause excluding civil liability in such a situation?  I do not think so.  Then there are the people, also fortunately resident elsewhere, who recklessly sold toxic cooking oil to unsuspecting consumers, creating a public health crisis of enormous magnitude.  Should the courts enforce an exclusion clause to eliminate contractual liability for the resulting losses in such circumstances?  The answer is no, but the contract breaker’s conduct need not rise to the level of criminality or fraud to justify a finding of abuse.”

• If the exclusion clause is not found to be unconscionable at the time it was made, the court will then consider if there is any overriding public policy consideration that the exclusion clause should not be upheld.

The analysis in Tercon was recently revisited and affirmed by the Supreme Court of Canada in Earthco. In the underlying case, the defendant contractor (Pine Valley) entered into a purchase order with the plaintiff (Earthco Soil), a topsoil provider, to provide topsoil required for the construction of a dry pond in a project being carried out for the City of Toronto. The purchase order contained the following exclusion clauses:

“[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 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.”

These clauses are an exclusion of the implied condition of goods that is imposed by section 14 of the Ontario Sale of Goods Act.

Pine Valley did not test the soil before it was shipped. After the topsoil was used on the project, flooding occurred. In investigating the flooding incident, the City determined that the topsoil supplied by Earthco Soil contained more clay than original test results, making it less permeable to water. As part of the remediation, Pine Valley was forced to remove and replace the topsoil and subsequently commenced a claim against Earthco Soil to recover the costs of such work.

Key to Pine Valley’s claim was the exclusion clauses in the purchase order, as well as the terms of the Ontario Sale of Goods Act. Although the Sale of Goods Act contains a provision (section 14) that confirms there is an “implied condition” that the goods purchased will correspond with any description of made by the seller, the Sale of Goods Act also includes a provision that enables any part to negate or vary any right, duty or liability under the statute by way of agreement.

The trial court that originally heard the case found that the exclusion clause was valid, and that Pine Valley had accepted the risk that the soil delivered by Earthco Soil may not have all met the quality of initial tests. The Court of Appeal of Ontario overturned this decision, finding that the exclusion clause did not contain “explicit, clear and direct language” that was required to exclude a statutory provision and found that the surrounding circumstances of any exclusion clause could not be relied on in the way proposed by the trial court.

In considering whether the purchase order validly excluded the implied condition requirement of the Sale of Goods Act, the Supreme Court of Canada considered the language of the purchase order and the test for validity of an exclusion clause set out in Tercon.

The Supreme Court of Canada confirmed that contracts are to be interpreted using a “practical, common sense approach” (an approach set out in the seminal case of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 633). Using this lens, the Supreme Court confirmed that the approach to be taken when considering the validity of an exclusionary clause is to consider if the parties objective intentions indicate that they intended to negative implied statutory conditions. The objective intention is not necessarily served by taking an “overly technical and legalistic interpretation” of an exclusion clause, but rather the language of the clause and evidence regarding the parties’ intentions.

Applying this analysis to the case before them, the Supreme Court found that the trial judge that had originally heard the case was correct: the parties stated intentions and surrounding circumstances supported the conclusion that Pine Valley clearly accepted the risk that the soil might not be consistent with the test results and, that the exclusion clause was valid.

Takeaways

What does this decision mean for the interpretation and application of exclusion clauses in contracts? The authors suggest the following summary:

• Hard to predict. Although the analysis in Tercon was affirmed by the Supreme Court of Canada in Earthco, the outcome in Earthco was different. In Earthco the exclusion clause was upheld. In Tercon the exclusion clause was not upheld (in a decision where five Supreme Court judges were against upholding the exclusion clause, and four in favour of upholding the exclusion clause). The exclusion clause considered in Tercon read as follows:

“Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim.”

Bottom line – it is and remains hard to predict whether any particular exclusion clause will or will not be upheld.

• The clearer the better. The interpretation of an exclusion clause will necessarily require consideration of the intent of the parties, the language of the clause, and the nature of the right seeking to be excluded by the specific provision. When drafting an exclusion clause, the clearer (i.e. more explicit, vigorous, and obvious) the better.
• In the end, the court’s assessment of the parties’ intentions will govern. The three-part test set out in Tercon, and applied in Earthco, provides structure for the analysis. But the court’s ultimate decision as to whether an exclusion clause should be upheld or is invalid will depend on the circumstances of the contract and the intentions of the parties as established by available evidence.