BWA: I want to be your (legally enforceable) sledgehammer (Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc.)

Yael Bienenstock (00:08): Welcome to Breakfast With Appeal, Torys’ quarterly series on the cases you want to know about. We offer our thoughts on the appellate law that's shaping Canadian conversations. Let's dive in.

Andrew Bernstein (00:23): Let's interrupt this public law nerd-fest for a brief private law nerd-fest. We're going to move on to the next case, called Earthco and Pine Alley Enterprises. Nothing, and I really mean nothing—

Jeremy Opolsky (00:35): Pine Valley. There's a typo.

Andrew Bernstein (00:37): Oh. Pine Alley? Pine Valley.

Jeremy Opolsky (00:38): Pine Valley.

Andrew Bernstein (00:39): Ah, there you go. [Laughter] Pine Alley seems like a less pleasant place than a Pine Valley. [Laughter]

Jeremy Opolsky (00:45): It does, it does.

Andrew Bernstein (00:47): This is the Sale of Goods Act, it's the epitome, I would say, of a private law nerd-fest. But audience, stick with us, actually quite interesting. Yael, I once did a Sale of Goods Act case. It involved bad bulk carrots that had turned woody. [Laughter] So I'm excited to hear the drama that might ensue here with this Sale of Goods Act case. Can you set it up for us?

Yael Bienenstock (01:10): Sure. Topsoil. Carrots. They seem to be somewhat related. [Laughter] Or maybe not.

Jeremy Opolsky (01:15): They both taste of dirt. [Laughter]

Yael Bienenstock (01:17): They both involve dirt, for sure. Okay, so Pine Valley was a parks contractor, and they were hired by the city in 2011 to address basement flooding in residential areas of North York. People might be thinking, hmm was that mine? The project included replacing topsoil with a different topsoil, which was supposed to be better for water drainage. And the project also involved a city consultant, and the city consultant was hired to help choose the right topsoil.

And as you'll see, this turns out to be more complicated than one would think. So, Pine Valley kept trying to secure topsoil with the proper specifications, and what that means is the right percentages of sand, silt, and clay. And the city consultant kept rejecting the samples. And what that meant is that there were delays to the project, and that in turn triggered a requirement for Pine Valley to pay liquidated damages, and the amount of liquidated damages was tied to the time of the delay. So all of which is to say, Pine Valley is unhappy and in a rush. So, Pine Valley eventually got in touch with Earthco, a topsoil provider, and they requested information about providing them with the topsoil that meets the very specifications that they want. And Earthco sent over reports about their topsoil and yay!

The city consultant approved two of the samples they sent reports over about, and Pine Valley is very happy about this. Now, as it turns out, and as Pine Valley was well aware, the composition of topsoil changes over time and at the time that the reports were done, the samples were about six weeks old. So, the chemist in me is fascinated by how the composition changes over time. But that is not nearly as fascinating as the Sale of Goods Act.

Andrew Bernstein (02:56): I feel like the answer is microorganisms.

Yael Bienenstock (03:00): Is that right? I was I was just like, how do you shift from sand—okay, never mind.

Andrew Bernstein (03:03): Anyway, okay. [Laughter] If anybody out there knows why topsoil shifts, please send us a line—

Yael Bienenstock (03:09): How you go from sand to clay.

Andrew Bernstein (03:10): Yeah, exactly.

Yael Bienenstock (03:10): Okay, so here, the clock is ticking. The project's already delayed. Pine Valley is trying to avoid or minimize their exposure to liquidated damages. They wanted the topsoil on an urgent basis, and there is an elaborate process that Earthco usually used to make sure that their clients got topsoil that they were looking for with the right specifications.

And Pine Valley is like, “we're just going to take it.” And Earthco warned them: they said there's a chloride test that you need. It's going to take 5 to 7 days to perform. You shouldn't take delivery until we have updated test results. And on October 5th— that date’s actually not relevant—Earthco told Pine Valley, “I think you should wait until the test is done, but if you would like to start shipping at your own risk, please let me know.”

So, Pine Valley decides to go that route and they insisted on immediate delivery. And the Earthco representative, who I think was—seems to be quite savvy actually, who had handled the sale, added two clauses to the contract. And these are clauses that said, first of all, Pine Valley has the right to test and approve the material at its own expense at our facility before it is shipped and placed. Contact so and so to arrange.

And next, if Pine Valley waives its right to test and approve the material before it's shipped, Earthco Soils will not be responsible for the quality of the material once it leaves our facility. And Pine Valley agreed to those terms. So, Pine Valley gets delivery of all the topsoil, and it turns out it had too much clay. And this caused water to pond,

it didn't have the drainage characteristics that they needed. The city wasn't happy and made Pine Valley remove it and replace it, and also claimed liquidated damages for the delay. And Pine Valley turned around and sued Earthco. And the question for the court was whether the clauses that were added to the contract were sufficient to oust the application of section 14 of the Sale of Goods Act.

Andrew Bernstein (05:01): I think about section 14 all the time. [Laughter]

Yael Bienenstock (05:03): I know you do. And, and for those of us—

Andrew Bernstein (05:05): Just kidding, Jeremy does.

Yael Bienenstock (05:06): —who may not think about Section 14 of the Sale of Goods Act all the time, what it says is, 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—well, I think that's the important part for this. The trial court dismissed the action, and in the process—I'm not going to go through all the levels of court, but there were some interesting findings of fact.

The trial court held that the testimony of the president of Pine Valley, who testified that he only intended to waive testing for chlorides, was not credible. They accepted the evidence of Pine Valley's project manager, who testified that everybody knows that the composition of topsoil isn’t static, and the president knew this, but he made a business decision to accept the untested topsoil to avoid further delay.

Andrew Bernstein (05:53): David, with that, by way of background, what did the court decide? And most importantly, are these clauses sufficient to oust the implied warranties in the Sale of Goods Act?

David Outerbridge (06:05): So, the Supreme Court held that the exclusion clause that Yael identified was sufficient—is sufficient—to oust the implied warranty under the Sale of Goods Act. And the case turns on a fairly important point for contract drafting when it comes to contracts for the sale of goods. The question is, you know, how explicit do you have to be to oust these deemed or implied statutory warranties?

The Sale of Goods Act says this warranty applies regardless of whether you intended it to or not, but you do have the ability to oust it through express agreement. So, the question is what does express agreement mean? Do you have to say that Sale of Goods Act warranties do not apply, or can you use more general language or language that expresses the intention but doesn't use those words?

And the answer from the Supreme Court was to say, you look at the parties’ actual intentions, you don't look at whether they use technical language of a particular type. And if the agreed intention of the parties, after you look at the words they used in the context in which they use them, is that they didn't intend for there to be warranties of this type, then that's an express agreement to contract out, and the implied warranties under the Sale of Goods Act don't apply.

And what the court decided another way, they essentially preferred practical commercial reality over legal sophistication. If you think about, you know, the vast majority of contracts for the sale of goods are not written by legal scholars or sophisticated legal counsel. They're written by commercial parties who may not know that you have to use precise technical language to oust the Sale of Goods Act.

So the result that the court came to is to say, if you evidence your intention to not have implied warranties in one way or another, that's express enough, you don't have to use that technical language that—you know, using technical language favors the, the well-heeled and those who have Bay Street counsel and a rule that looks at actual intentions is about commercial fairness and about— arguably, is a more egalitarian rule, some would say, a more fair and commercially reasonable result.

Now, the flip side is some people would say that the whole purpose of the Sale of Goods Act in implying warranties is to favor the little guy, because then they don't have to negotiate for these warranties. But if you look at all the different ways in which the Sale of Goods Act can apply, you could have unsophisticated sellers selling to a sophisticated buyer who, you know, the unsophisticated seller doesn't know how to use precise language to—or that they need to use precise language to—oust the warranties, and so the result the court came to—and they said this specifically—was that they view the Sale of Goods Act, although it is in a way, sort of a consumer protective statute, you really have to look at the Sale of Goods Act as part of the commercial world, a world in which freedom of contract is one of the utmost, topmost principles.

The Sale of Goods Act is not meant to be a comprehensive code that determines contractual fairness. It's up to the parties to decide on contractual fairness, and if they intended to not have these warranties, then that's what you enforce.

Andrew Bernstein (08:49): Okay. Jeremy, you love this case. You love it so much that next week you're doing a one-hour webinar for people who think that merely 20 minutes on the Sale of Goods Act is not enough. So, give us a sneak preview [Laughter] but don't give it all away. What's so important here?

Jeremy Opolsky (09:06): You should come next week. I think there are three high-level takeaways from this. The first is the standard of review. Second is overruling of engineering and the last is the primacy of, of context, or as I like to call it, the death of contractual certainty. [Laughter] So let's talk about each of these a little bit. I will say that—

Andrew Bernstein (09:24): Are you pro-death of contractual certainty or anti-death? [Laughter]

Jeremy Opolsky (09:27): I'm never, I’m never pro-death of anything. And so, I did represent an intervening in the Chamber of Commerce of Canada in this appeal, because we thought it was, despite being about dirt, an important case. And I still think it's an important case. So, starting with the standard of review, beginning in Sattva in 2014, the Supreme Court of Canada has greatly narrowed the ability of appellate courts to review contracts for correctness.

You need to show inextricable error of law, which the Supreme Court of Canada said was rare. But since then, courts of appeal have pushed back. They have found such errors and the Supreme Court has had to revise the standard from rare to uncommon. And the Supreme Court of Canada held in a separate case called Ledcor, that there was a whole separate standard: that work cases were precedential, is they were standard form, they should be reviewed for correctness.

So, there's a real tension in the law that kind of came to a head in Earthco, and this case kind of slams that window for correctness shut. It finds that even where there's a statutory standard—because this is a statutory standard of what constitutes an express agreement—even when you're talking about a derogation from that statute and therefore how the statute applies—which you would think is precedential, I thought it was precedential—it's still a question of mixed fact and law, and therefore it's a palpable and overriding standard.

There is extreme deference to the trial court. Now, you might say that's fair. You might say what David did, which is this is just favoring sort of contractual freedom, but it also means in a lack of precedent, none of these cases should be precedential as to the effect that contractual language has, which I'll get to in my certainty piece as to why that's bad.

Secondly, Hunter Engineering is overruled. We had this case called Hunter Engineering that most people in most textbooks had read to require a clear and express language. Explicit language—as another court case found in the Court of Appeal held here—to derogate from a statutory standard. Not just a Sale of Goods Act or a Limitations Act. The OBCA, with respect to, you know, a shareholders agreement. If you're going to derogate from a statute, you need to do so clearly, not just with some words on a page.

And the Supreme Court found that express and clear and direct language is welcome. [Laughter] It's great if you do it, but it's not necessary and you can derogate in the full appreciation of the context. The last thing I will say is the profusion of the factual matrix, which Sattva again embodied. We saw the same thing in Corner Brook, which overruled centuries of, of specific doctrine on releases. As Justice Martin says, now there are no magic words, there are no bright line rules of construction.

It is purely a contextual approach. You look at these specific parties in these specific circumstances, with these specific words, and what an objective party would think in those contexts. Again, the primacy, they might say, of contractual freedom and case-specific fairness. But case-specific fairness has a dark side, a downside, which is contractual certainty, and what it does is it says when you say you have no bright line rules for construction, it means that for solicitors and litigators looking at the text of a contract, there's very little comfort in what it means.

I put to you, if you write a contract in 1985 and then you assign it in 1995, and you litigated it in 2005, who knows what those people were doing in 1985? Probably not working, and some of them might be dead. [Laughter] And you can no longer rely on those words itself. It's all factual matrix, all context, all the time. But, uh, great case.

Andrew Bernstein (12:59): [Laughter] Yael, you're in the middle of a case right now involving tricky contract interpretation issues. How will Earthco affect you?

Yael Bienenstock (13:05): Well, [laughter] what Jeremy just said will affect me because it goes from 2008 to 2024. And you know, I'm dealing with the issues that Jeremy talked about. But I think that the factual matrix aspect of this case is extremely important. And the affirmation of Sattva and the importance of what was going on at the time of the contract and what were the facts, is, is going to be really important for everybody.

In terms of supply contracts in particular, I mean, certainly what this case says is you've got to pay attention to the Sale of Goods Act and think about its implications. Think about whether your goods are satisfying the Sale of Goods Act. And if not, do you want to contract out of them? I know it seems like you don't need the certainty that you used to use, but it is welcome and probably good practice.

But if you don't, there certainly is room for both sides, I think more wiggle room for both sides, given the importance of the factual matrix, to argue that somebody has contracted out of the Sale of Goods Act, or vice versa. There's just a lot more wiggle room for both sides if you disagree with what has occurred.

Jeremy Opolsky (14:03): But Andrew, let me make one last plug [laughter] for my seminar next Tuesday with one of our corporate colleagues, where we'll unpack this a lot more and talk about the implications for standard terms in your commercial contracts and, and what this case really means. And maybe about dirt, but it's pretty important, nonetheless. [Laughter]

Andrew Bernstein (14:19): Okay. Well, I just want to read out an explanation provided by our alumni, Azma Faizi, who is—

Yael Bienenstock (14:28): A scientist.

Andrew Bernstein (14:29): —a scientist, very brilliant scientist, and who used to work with Yael and I all the time on complicated patent cases. So thank you, Azma. As a soil ages, it gradually starts to look different from its parent material. That's because soil is dynamic. Its components—mineral water, air, organic matter and organisms—constantly change. Some components are added, some are lost, some move in place to place in the soil, and some components are transformed into others. I just want to say I feel vindicated. [Laughter] Microorganisms.

Yael Bienenstock (14:56): Your microorganisms.

Andrew Bernstein (14:58): Yes.

Jeremy Opolsky (14:58): Azma gets mug.

Yael Bienenstock (14:59): And things moving around—

Andrew Bernstein (15:01): Yes.

Yael Bienenstock (15:02): That makes sense—

Jeremy Opolsky (15:03): Mug-worthy?

David Outerbridge (15:04): Definitely mug-worthy. [Laughter]

Andrew Bernstein (15:04): So, thank you very much, Azma, as always.

Yael Bienenstock (15:05): We were all dying of curiosity. [Laughter]

Andrew Bernstein (15:08): Yeah, exactly. Jeremy, our alum Melody Burke has a question. Hey, Melody. Thanks for writing in. It sounds like Earthco specifically added this exempting language, given the context. Do we think this interpretation approach—i.e., not being specific and express—is still enough to exempt the Act would apply for a standard form, or did the fact that this language was bespoke impact the view that the parties agreed to this? That’s a good question.

Jeremy Opolsky (15:31): I mean, I mean, it is a great question. I think the fact that it was bespoke is important to escape the Ledcor standard. And they would say, well, the parties had turned their minds somewhat to this, despite decades of case law that says you need to refer to conditions to opt out of the Act. I think if you had a truly standard form contract, you'd fall into the Ledcor exceptions, and they would consider what was the appropriate approach on a correctness standard.

But the correctness sentence is focused on the standard form. And to the extent there is factual matrix that applies to the industry itself, I think it would be applicable. And what the court would say is there are no magic words. We have to look at the purpose of this contract and say what this contract intended to include or exclude.

And I would think that it's fair that, going forward, that you don't need to use the word condition to opt out of the conditions.

Andrew Bernstein (16:19): I'm just going to say that we're like one second away from a rule in which the microorganisms contained in the paper of the contract might change the components of the contract from one year to the next. And I'm going to go on the record with a prediction here, which is that 20 years from now, we're going to see this era of—I'm going to say extreme deference to trial judges’ interpretations of contracts—as a mistake that needs to be corrected. I think we've pretty much hit an area where, you know, what the contract means depends on the length of the trial judge’s foot. And I think we're going to, we're going to look back on this era and think it's a mistake.

Jeremy Opolsky (16:54): Can I make a plug, Andrew, which is for a paper you wrote a little while ago about mixed fact in law and the justifications for appellate standards. And I think what your paper says is there aren't a whole lot of justifications that stand up. And if you have a chance, it's a, it's a short but good paper.

Andrew Bernstein (17:09): That about wraps up our conversation. Before we go, I want to remind our listeners that they can find the webinar version of this edition of Breakfast With Appeal, along with previous episodes on torys.com, and that our BWA program is eligible for one substantive hour of continuing professional development. Thanks again for joining us and take care.