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Canada-specific information concerning the key legal and commercial issues to be considered when drafting a supply of goods contract.
General contract law framework
- What are the requirements under national law for a valid contract to exist? When does an agreement take effect?
The Canadian legal system is based on the common law tradition of the United Kingdom. In this respect, common law principles in Canada, such as those found in the law of tort, contract or property are quite similar to those of the United States and the United Kingdom. Sale of goods and consumer protection legislation varies across the provinces and territories of Canada.
Quebec's legal system evolved from the French civil law system. In Quebec, as a general rule, the civil law system applies to private law matters while the common law system applies to public law situations. Thus, to the extent Quebec is empowered by the Canadian Constitution to make private laws, Quebec uses a civil code, namely, the Civil Code of Quebec (Civil Code).
For a contract to be valid and enforceable under Canadian law, there must be:
- Offer and acceptance.
- A lawful purpose.
An offer is made when one party (the offeror) signifies to the other party (the offeree) its intention to enter into a contract on certain terms. Acceptance occurs when the offeree signifies its willingness to accept the terms offered by the offeror. Once the offer is accepted, value (item or service) has to be exchanged between the parties in order to satisfy the consideration element.
All valid contracts require that the parties have the capacity to understand the terms and nature of the agreement. Parties to an agreement must be able to freely consent to the terms proposed. In Canada, an agreement with the purpose of violating any law is not valid.
A contract or agreement takes effect after the offer has been accepted, assuming all other requirements are fulfilled.
In Quebec, freedom to contract is one of the fundamental principles of civil law. This is established in the Civil Code which emphasizes the importance of intention to contract. Article 1378 of the Civil Code defines a contract as "an agreement of wills" and Article 1386 of the Civil Code states that the exchange of consents can be accomplished either by the express or tacit manifestation of the will of a person.
- Are there any limitations on the legal capacity of a company to enter into a supply of goods contract?
Corporations are creatures of statute, and can therefore enter into agreements if their respective statutes allow for it. Federal corporations and most provincial corporations can enter into agreements without limitations. Additionally, Crown corporations, either federal or provincial, have the capacity to enter into agreements.
- Is it necessary for a contract for the sale of goods to be in writing for it to be valid? Are any formalities necessary?
In general, there is no national requirement for contracts for the sale of goods to be in writing. In Ontario, section 4 of the Sale of Goods Act states that a "contract of sale may be made in writing, either with or without seal, or by word of mouth or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties."
Various pieces of federal and provincial legislation (and in particular, provincial sale of goods legislation) set out that some documents, but not all, must be evidenced "in writing" and signed by the parties to be valid and binding, for example:
- In Alberta, contracts for the sale of any goods of CAD50 or more must be in writing, unless the buyer accepts part of the goods and actually receives that specific part (section 6, Sale of Goods Act, Revised Statutes of Alberta 2000 Chapter S-2).
- Under the Ontario Consumer Protection Act 2002, various types of consumer contracts are only enforceable against a consumer if in writing, see Country Q&A, Consumer contracts: Canada: Question 4 .
There are no other formalities with respect to a contract for the sale of goods, aside from the requirements for the formation of a valid contract.
In Quebec, Article 1385 of the Civil Code provides that a contract is formed by the sole exchange of consents between persons having capacity to contract. Therefore, a contract for the sale of goods does not need to be in writing. The law can, however, require particular formalities in some cases. For instance, there is a requirement to publish a right in the case of instalment sales (Article 1745(2), Civil Code), or in the case of sales with a right of redemption (Article 1750(2), Civil Code).
- How does national law treat acceptance of an offer which attempts to impose new terms?
An acceptance of an offer that attempts to impose new terms will be deemed a counter-offer, not an acceptance. In that event, the original offer is deemed to be rejected and no longer valid.
In Quebec, an acceptance which does not correspond to the offer or which is received after the offer has lapsed does not constitute acceptance as it does not reflect the will of the offeror (Article 1393, Civil Code). It can, however, constitute a new offer if it includes all essential elements of the proposed contract.
- Does national law require that special notice be given of any contract terms for them to be incorporated in a contract?
All terms must be agreed on at or before the time of contracting.
Once the contract has been formed, new terms cannot be incorporated, unless parties to the agreement consent to the new terms.
If a party delivers standard terms on a printed form (such as a ticket or the reverse of a document) containing small print to a customer, the delivering party must provide notice to the customer of the existence of such small print terms. If adequate notice is not provided, those provisions will not become part of the contract. This notice requirement may be satisfied if the parties have had prior dealings.
A party may state in a tender document that the terms of a proposal or an order will be deemed to constitute terms of any contract that results from the tender process. Such a provision will be binding unless the other party objects or amends the terms before the parties enter into a final contract. Additionally, parties need to carefully review the agreement to ensure that any extrinsic terms to be incorporated in the agreement are referenced in the relevant "entire agreement" clause.
If a term in an agreement is unusually onerous, it should be more prominently displayed within the agreement.
General organising principle of good faith and duty of honesty
The Supreme Court of Canada recognised, in a unanimous decision that there is a "general organising principle" of good faith and a duty of honesty in performing contractual obligations. As such, every agreement contains an implied general duty of honesty in contractual performance. This does not impose a duty of loyalty or a general duty of disclosure or require a party to forego advantages flowing from the contract; it is a requirement not to lie or mislead the other about matters directly linked to the performance of the contract. It should be noted that this duty of honesty is a general doctrine of contract law and cannot be waived or displaced by an entire agreement clause.
Duty of fairness in government tendering process
There is an overarching duty of fairness and good faith which applies to the manner in which the parties run the government tendering process. The Government of Canada has an obligation to treat all bidders fairly and equally during the bidding process. This overarching duty subsumes other specific duties, such as the duty:
- To provide proper disclosure.
- To evaluate bids according to the disclosed criteria.
- To reject non-compliant bids.
- To award the contract as tendered.
- Not to provide parties with incomplete information or misdirection in response to questions.
- Not to include concealed preferences that provide unequal or unfair advantage or disadvantage to bidders.
The duty of fairness is implied at common law and can also be found in contract. In addition, further obligations may be found in trade agreements and federal policy.
Duty of good faith: Quebec
In Quebec, good faith is a fundamental principle between the parties to a contract. In fact, good faith is expected from every person in the exercise of their civil rights, which includes the right to contract (Articles 6-7, Civil Code). More specifically, in respect of the formation of contracts, the parties must conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished (Article 1375, Civil Code).
Yes. In certain circumstances, a contract may require that a party use its "best endeavours" to reach the desired outcome. In these circumstances, the party obligated to make the effort must do so in good faith, while taking all reasonable steps to achieve the desired outcome and purpose of the term or agreement.
The term "best efforts" has been held by Canadian courts to require a high level of effort regardless of time, cost, complexity, or business efficacy. Accordingly, the term "commercially reasonable efforts", which may require a lower level of effort, should be considered in the event you represent the supplier.
Under Quebec's civil law, there are two types of contractual obligations, aside from obligations of warranty (see Question 46):
- Obligations of result, which are obligations to achieve a particular result.
- Obligations of means, which are obligations to dedicate a certain amount of effort for a given purpose.
The judge will determine the type of obligation by which a party is bound based on the terms of the contract.
A person may free themselves from their liability for injury caused to another by proving that the injury results from superior force (Article 1470, Civil Code). Such exemption is possible in the case of obligations of means and obligations of results, but is not possible in the case of obligations of warranty.
When a contractor or a provider of services is bound to an obligation of result, it may only be relieved from its liability by proving superior force unless otherwise provided in the contract (Article 2100, Civil Code).
Yes. In Canada, the concepts of "material breach" or "fundamental breach" have been defined and described with some variance. In general, a fundamental or material breach is a breach which goes to the root of the contract and substantially deprives the innocent party of the intended benefit such party was to obtain under the contract. However, some courts have distinguished a material breach from a fundamental breach and found that a material breach does not always go to the root of the contract. The determination of whether a breach is material is a fact-based exercise.
It is not uncommon to set out the meaning of a material breach in a contract, either by defining the term or including a provision which sets out the type of activities which constitute a "material" breach with respect to the contractual relationship in question.
Incorporation of standard terms of business
- How can a seller or buyer incorporate its standard terms of business in its contracts?
Standard terms may be incorporated into a contract by either express or implied terms. A seller or a buyer must ensure that its standard terms form part of the original contract with the other party, because the common law rule is that new contractual terms cannot be introduced after the contract has been formed by offer and acceptance between the parties.
To maximise the chances of successfully incorporating standard terms in its contracts, and ensure its terms prevail over any competing standard terms which the other party may put forward (the so-called "battle of the forms"), a seller or a buyer will want to bring this to the attention of the other party in pre-contract correspondence and expressly state in any contract that its standard terms will apply to the sale to the exclusion of any other standard terms.
It is possible that standard terms for a business may be incorporated into a contract based on prior dealings between the parties. If standard terms have been used consistently in prior dealings between the parties, it may be reasonable to assume that the same standard terms will govern and apply to a similar transaction in question.
If a party delivers standard terms on a printed form (such as a ticket or the reverse of a document) containing small print to a customer, the delivering party must provide notice to the customer of the existence of such small print terms. If adequate notice is not provided, those provisions will not become part of the contract. This notice requirement may be satisfied if the parties have had prior dealings. Further, if the required notice has been given, a party will be bound by the terms of a small print form once the form is signed.
In Quebec, an external clause is binding on the parties if referred to in a contract. External clauses can include standard terms and conditions (Article 1435, Civil Code).
Yes. The supplier may limit its liability for late delivery or non-delivery to the costs and expenses incurred by the buyer in obtaining substitute goods. Where the limitation of liability is part of the supplier's standard terms, the supplier should make sure to bring such terms to the attention of the other party in pre-contract correspondence.
This is also the case in Quebec, however, there are conditions to meet before any limitation of liability will be effective. The Civil Code prohibits any stipulation under which a party may exclude or limit its liability for material loss caused to another through an intentional or gross fault (Article 1474, Civil Code). This article defines a gross fault as being a fault which shows gross recklessness, gross carelessness or gross negligence. This is a public order provision meaning it cannot be contracted out.
- Can a seller be held liable for pre-contractual misrepresentation?
Yes. In contract law, misrepresentations made before formation of a contract can be categorised as innocent, negligent or fraudulent misrepresentations. These categories can be broadly defined as follows:
- Innocent misrepresentation. An innocent misrepresentation is a statement made which was not known to be incorrect by the party making it.
- Negligent misrepresentation. A party may bring an action in tort for a negligent misrepresentation made during pre-contractual negotiations, where a party has reasonably relied to its detriment on either statements made or a failure to provide relevant information by the other contracting party. The party alleged to have made the misrepresentation must be knowledgeable in the area or have known that the other party was reasonably relying on them. For a successful action, the misrepresentation must be untrue, inaccurate, or misleading and may be implied rather than express.
- Fraudulent misrepresentation. If a party to an agreement engages in fraud the contract is voidable, but not void. To establish fraud, the innocent party must show that a false representation has been made either:
- without belief in its truth; or
The remedies available depend on the type of misrepresentation:
- Innocent misrepresentation. The remedy is the equitable remedy of rescission, which is available where:
- the transaction can, in fact, be undone and the parties put back into their pre-contract positions; and
- the innocent party has moved very quickly.
Innocent misrepresentation does not entitle the party to sue for damages.
- Negligent misrepresentation. If the misrepresentation is sufficiently material, it may void the
contract, or warrant damages, or both. Further, the innocent party can bring an action in tort for negligent misrepresentation.
- Fraudulent misrepresentation. If a party can establish fraud, it may claim rescission or sue in tort for damages for deceit. A court will award damages sufficient to put the party in the position that it would have been in, if the contract had not been made. Silence is insufficient to prove the tort of deceit unless the contract is one of the utmost good faith or where a fiduciary relationship exists between the parties. An intentional suppression of facts may constitute misrepresentation and an active concealment of a fact is equivalent to a positive statement that the fact does not exist.
Determining the manner of representation made, its effect on the contract and any liability and damages flowing from the representation, are dependent on the specifics of the contract in question and factual circumstances of the parties.
In Quebec, the Civil Code introduces the extra-contractual liability regime (Article 1457, Civil Code). A party cannot only be held liable for the failure to comply with contractual obligations, but also in relation to extra-contractual obligations, such as the obligation to conduct oneself in good faith (Article 1375, Civil Code).
Furthermore, error on the part of one party induced by fraud committed by the other party vitiates consent whenever, if it had not been for that error, the party would not have contracted, or would have contracted on different terms (Article 1401, Civil Code).
In such instance, fraud consists of a materiel element (fraudulent artifice, lie or silence) and the intention to cause the error.
The party that falls victim to fraud has the right to apply for annulment of the contract as well as damages or, where it prefers that the contract be maintained, apply for reduction of its obligation equivalent to such damages (Article 1407, Civil Code).
- Can statements made by sales staff or in promotional literature be construed as terms of a contract for which a seller may be held liable?
Yes. Statements made by sales staff or in promotional literature may be considered to be misrepresentations (see Question 11). To effectively exclude all prior agreements and discussions regarding the subject matter of an agreement, it is advisable to include an entire agreement clause in commercial agreements and to ensure that it is broad enough to exclude those types of discussions, statements and materials which the seller or its staff may have had, made or given before executing the agreement. If properly worded, and in the absence of equitable reasons to compel the court to do otherwise, courts will generally uphold entire agreement clauses and find that they effectively exclude certain liability.
In Quebec, while such statements are not themselves terms of a contract, when interpreting a contract, the court must seek the common intention of the parties rather than the literal meaning of the words (Articles 1425-1426, Civil Code). To do so, the court may look at pre-contractual documentation (Ihag-Holding, a.g. v Intrawest Corporation, 2009 QCCS 2699).
- Are parties entering into a contract under any legal obligation of disclosure? Can silence constitute misrepresentation?
As a general rule, parties are not under a duty of loyalty or disclosure when entering into a contract. Unless there is an existing duty of care, statutory duty to disclose, or a fiduciary duty which may arise based on the circumstances, silence by a party is not a representation and therefore not a misrepresentation. There are, however, three important circumstances in which silence or non-disclosure will be analogous to misrepresentation. These situations include:
- Disclosure of true facts creating a misleading impression.
- Active concealment of the truth.
- The duty to disclose where a change in circumstances affects the veracity of a previous statement.
It is also important to recognise misleading statements in negotiations. The term "sales talk" refers to vague or imprecise expressions or statements, usually pertaining to the quality of goods, which should not be relied on. Since such statements should not be relied on by a reasonable person, no action in law arises if they are deemed to be false. That being said, this is not true when the person engaging in "sales talk" has privileged information concerning the subject matter of the transaction.
In Quebec, silence or concealment may constitute fraud (Article 1401(2), Civil Code). Fraud can thus result from the fact that a party was silent on something the other party would have benefited from knowing when the contract was entered into.
Main terms of a supply contract
- Does national law imply any terms into business-to-business contracts for the supply of goods?
Provincial sale of goods legislation can imply various terms in a supply contract, and these terms may differ from province to province. However, it is also possible for parties to disclaim certain implied representations, warranties, and conditions set out in provincial sale of goods legislation by including express provisions in the supply contract.
Terms may also be implied into a contract either by operation of custom or usage which affects parties in the trade, business or market in which the seller and buyer are dealing, or from the surrounding circumstances, as a consequence of which it is reasonable to infer that the parties have impliedly agreed to contract subject to the implied terms.
When goods are bought by description from a seller who deals in goods of that description (whether or not the seller is the manufacturer), the provincial sale of goods legislation provides for an implied warranty of merchantable quality. To be of merchantable quality, the goods must be fit for use in some manner in which goods of the same quality and general character are ordinarily used.
Sale by description
For goods sold by description, there is also an implied condition that the goods will correspond with the description.
Fit for a particular purpose
A warranty or condition of fitness for a particular purpose may also be implied into a contract where each of the following conditions are met:
- The sale of the particular good is within the course of the seller's business.
- The seller has knowledge of the particular purpose for which the goods are required (such knowledge may be implied).
- The buyer relies on the seller's skill and judgment that the goods are fit for the particular purpose.
The onus is on the buyer to prove that the reliance on the seller's skill and judgement was a substantial and effective inducement. Once the implied condition of fitness for the particular purpose is invoked, the goods must be reasonably fit for the purpose made known to the seller. Where there is no identifiable purpose, the assumption is that the buyer required the goods for the ordinary purpose for which they are intended to be used.
Additional implied terms
In each contract of sale, there is also:
- An implied condition that the seller has the right to sell.
- An implied warranty that the buyer will enjoy quiet possession of the goods.
- An implied warranty that the goods will be free from any charge or encumbrance in favour of third parties.
Often, supply contracts expressly disapply all representations, warranties, and conditions (including those implied by statute) other than the representations, warranties, and conditions specifically included in the contract. Clear, unambiguous language is necessary to oust any implied statutory warranties. An express term included in a contract of sale which is different than an implied term will not exclude the operation of any implied term unless the express term is inconsistent with the statutory implied warranty.
Duty of good faith
Canadian common law recognises an implied duty of honest performance once a contract has been formed. This is a simple requirement not to lie or mislead the other party about matters directly linked to the performance of the contract. This implied term cannot be waived or displaced by an entire agreement clause.
In some provinces, the type of goods sold may impose other additional terms. For example, in certain provinces there is specific legislation dealing with the sale of farm machinery, which provides greater protection for the buyer of such goods than that provided under the applicable sale of goods legislation.
In Quebec, under the Civil Code, contracts of enterprise or for services provide terms and conditions that will apply unless the contract states otherwise, except for public order provisions that cannot be contracted out. Contracts of enterprise or for services are defined in the Civil Code as those contracts by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds itself to pay (Article 2098, Civil Code).
- In your jurisdiction, what terms may be implied by law in relation to a sale of goods by sample?
For sales by sample, provincial sale of goods legislation generally implies that the goods sold correspond both with the description and the sample provided. As an example, Ontario's Sale of Goods Act provides that a contract of sale is a contract for sale by sample where there is a term in the contract, express or implied, to that effect. In such a contract, there are implied conditions that:
- The bulk will correspond with the sample in quality.
- The buyer will have a reasonable opportunity of comparing the bulk with the sample.
- The goods will be free from any defect rendering them unmerchantable that would not be apparent on reasonable examination of the sample.
Generally, any implied term may be negated or varied by express agreement, by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.
In Quebec, there is no specific provision of the Civil Code for a sample sale. A similar concept is a sale on a trial basis. There is a presumption that the sale of property on a trial basis is made under a suspensive condition. An obligation is subject to a suspensive condition where it is made to depend on a future and uncertain event, suspending such obligation until the event occurs or is certain not to occur (Article 1497, Civil Code). Once fulfilled, the suspensive condition obliges the debtor to perform the obligation as though it had existed from the day on which the debtor was obligated under that condition (Article 1507, Civil Code). In case the trial period is not stipulated in the contract, the condition is fulfilled when the buyer fails to inform the seller of its refusal within thirty days after the property has been delivered (Article 1744, Civil Code).
- What liability exists for breach of an express term of a contract?
Under Canadian law, a breach of contract may entitle the non-defaulting party to remedies available under the terms of the contract, applicable legislation, and common law and equitable principles. Generally, breach of contract by one party will entitle the other party either to an action for damages, or in some circumstances to equitable remedies, including specific performance or an injunction.
More specifically, the breach of a contractual condition will be considered a repudiatory breach. This type of breach entitles an innocent party to three remedies:
- The right to disaffirm, which permits the innocent party to either continue its contractual relations with the breaching party or disaffirm the contract (that is, to end its contractual relations with the breaching party). The innocent party need only communicate an intention to disaffirm the contract. Whether the innocent party elects to affirm or disaffirm the contract, it will have a claim in damages for breach of contract as long as it has incurred a loss.
- Restitution. This remedy should be seen as an alternative to a claim in damages when the innocent party has chosen to disaffirm the contract. Such a remedy makes the value of benefits conferred on the defaulting party available to the innocent party.
In Quebec, if a party fails to perform its obligation fully, properly or without delay, the Civil Code grants the other party a choice of three remedies:
- To force performance of the obligation.
- To obtain the resolution or "resiliation" (in French, résiliation) of the contract or the reduction of its own obligation. Under Article 1606 of the Civil Code, a contract which is resolved is deemed never to have existed, and each party is bound to restore to the other the prestations already received, whereas a contract which is "resiliated" ceases to exist, but only has effect with respect to future obligations.
- Any other measure provided by law to enforce its right to the performance of the obligation, including a claim for damages as equivalent performance of the obligation (Article 1590, Civil Code).
- What liability exists for breach of an implied term of a contract?
The remedy for breach of an implied term is the same as that of an express term (see Question 16).
- Does national law imply any terms into a contract in relation to price? Can a seller increase the price after the contract has been made?
Price is a matter to be contracted between parties, at their discretion. Parties can contract for a set price, a price to be determined in the future or at regular intervals, or a price as set by an agreed upon third party. If the seller wishes to vary the price after the contract has been concluded, there must be an express provision entitling it to do so.
Where the price is not set in the contract, provincial sale of goods legislation will typically require that a "reasonable price" be paid. However, a failure to agree to a price in a contract for the sale of goods may indicate the parties have not yet reached a binding contract. Problems can also arise where parties agree on an "initial price" but then "agree to agree" future price increases without any defined mechanism. Normally, an "agreement to agree" is unenforceable, as it is not sufficiently certain.
Under the federal Excise Tax Act, the price is considered to be exclusive of goods and services tax (GST) and any applicable harmonized sales tax (HST) unless it specifies otherwise. Contracts for the supply of goods should include clear provisions as to whether the following items are to be included in the price or are extra:
- GST/HST, customs duties, and other taxes and duties.
- Delivery and off-loading.
In Quebec, the contract sets out the price which the client binds itself to pay, and such price may not be increased unless the contract provides for potential price increases. Civil law does not provide for a general duty to renegotiate a contract. In some cases, implied duties may be considered incidental to a contract according to its nature (Article 1434, Civil Code). However, as stated by the Supreme Court of Canada in Churchill Falls (Labrador) Corp. v. Hydro-Québec (2018 SCC 46), such duties must not merely enhance the contract, but must fill a gap in its terms. Where there is nothing to suggest that the object of the parties' obligations would be incomprehensible and would have no basis or meaningful effect in the absence of an implied duty to renegotiate the price, the courts cannot require the parties to do so.
Unless otherwise agreed to in the contract, the buyer is obligated to pay the price stipulated in the contract, as well as any expenses related to the deed of sale, in the case of the sale of an immovable (Article 1734, Civil Code), and must pay interest on the sale price from the time of delivery of the property or the expiry of the period agreed by the parties (Article 1735, Civil Code).
The nature of import or export licences are dependent on the type of goods being imported/exported, and are not standardised. Contracts for the sale of goods should specifically address who is responsible for obtaining them. The Canada Border Services Agency provides useful information with respect to commercial importing and exporting requirements for businesses. Parties are free to determine who bears the costs of these licences.
If Incoterms have been incorporated, either the seller or buyer may have obligations to obtain certain licences depending on the specific Incoterms rule stipulated. The Incoterms rules, or International Commercial Terms, are a series of pre-defined shipping and trading terms published by the International Chamber of Commerce. They are widely used in international commercial transactions or procurement processes. These rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods.
Under the federal Excise Tax Act, GST/HST is collected from the party receiving the goods. Therefore, if the contract does not specify, the price is considered to be exclusive of GST/HST. It is common practice for an agreement to provide that the buyer will be solely responsible for the payment of any applicable sales, excise or other taxes, levies or charges imposed by any governmental authority, including GST/HST.
In Quebec, An Act Respecting the Québec Sales Tax has a similar effect with respect to Quebec sales tax (QST). Agreements provide for the same common practice in respect of the QST.
Yes. Unless otherwise agreed by the parties, delivery of the goods and payment of the price are concurrent conditions. The seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the goods.
Nonetheless, legislation stipulates that the parties may agree otherwise. Therefore, the payment may become due at any time stipulated in the terms of the contract, regardless of whether the goods have been delivered. That is, if stipulated in the contract, the seller may fix the moment of payment at any time.
- Does national law imply any obligations into a supply of goods agreement in relation to payment by the buyer?
Provincial sale of goods legislation generally provides that the buyer has a duty to accept and pay for the goods in accordance with the terms of the contract of sale.
If the contract between the parties is silent as to the terms relating to payment, the payment of the price and the delivery of the goods are concurrent conditions; therefore the buyer must be ready and willing to accept and pay for the goods upon delivery.
In Quebec, the buyer must take delivery of the goods sold and pay the price at the time and place of delivery. The buyer is also bound to pay any expenses related to the act of sale (Article 1734, Civil Code).
In some provinces, the sale of goods legislation provides that the seller may recover interest on the price from the date of tender of the goods or from the date on which the price was payable, depending on the circumstances. Additionally, the parties may agree on a set interest rate for late payment charges or a process to determine the applicable interest rate.
The federal Interest Act provides that whenever any interest is payable under an agreement and no rate is fixed by the agreement or by law, the rate of interest is 5% per annum.
Additionally, the federal Criminal Code sets out that it is an offence to charge an effective annual rate of interest that exceeds 60% on the credit advanced under an agreement or arrangement. Courts have broadly defined the scope of which costs, fees, and expenses are to be included in the calculation of "interest" under the Criminal Code.
In Quebec, the buyer owes interest on the price from the time delivery of the goods or from the expiry of any period agreed with the seller (Article 1735, Civil Code).
Yes. Generally, provincial sale of goods legislation contemplates two situations in which the seller can sue the buyer for the price of goods:
- Where, under a contract of sale, the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods in accordance with the terms of the contract.
- Where, under the contract of sale, the price is payable on a certain date, irrespective of delivery, and the buyer neglects or refuses to pay.
If the agreement is not subject to the legislation but stipulates a payment date, then the seller may sue for breach of contract in the event the buyer fails to pay the price of the goods by the payment date.
In Quebec, the seller may (by suing the buyer) force performance of the buyer's obligation to pay the price of the goods (Article 1590, Civil Code).
Yes. Canadian law permits three types of set-off: contractual, legal and equitable. Parties are free to negotiate or prohibit any right to set-off in a contract for the sale of goods. If a buyer wishes to have a right of set-off in a contract, it will want to ensure there are clear provisions in the contract entitling it to do so.
Parties are free to include, as a term of the contract, to the right to include or exclude a right to set-off, subject to the bounds of legality and public policy. Generally speaking, in the absence of a contractual term to the contrary, provincial sale of goods legislation provides that if a buyer has accepted the goods, any breach of a condition by the seller can only be treated as a breach of warranty giving the buyer the right to set off such damages against the price of the goods.
Legal set-off is prescribed in certain provincial legislation (for example, in section 111 of the Courts of Justice Act (Ontario)), and requires that the obligations concerned are debts that are mutual cross-obligations. As the court explained in Citibank Canada v Confederation Life Insurance Co. (1996), 37 OR (3d) 226, set-off at law requires: "(1) that the obligations existing between the two parties must be debts, and they must be debts which are for liquidated sums or money demands which can be ascertained with certainty; and (2) both debts must be mutual cross-obligations, i.e. cross-claims between the same parties in the same right." An assignment of the debt will destroy mutuality unless the rights to set-off have accrued between the parties prior to receipt by the debtor of the notice of assignment.
Generally, there is no requirement in legal set-off that the debts be connected in any manner. For example, debts arising under separate contracts between the same parties can be set off against each other.
Equitable set-off is available regardless of whether the parties' obligations are mutual debts, as long as there is some kind of connection between the obligations such that it would be inequitable to proceed without taking the other into account.
The Supreme Court of Canada has set out the considerations for equitable set-off:
- The party relying on a set-off must show some equitable ground for being protected against its adversary's demands.
- The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed.
- A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim.
- The plaintiff's claim and the cross-claim need not arise out of the same contract.
- Unliquidated claims are on the same footing as liquidated claims.
(Holt v Telford,  2 SCR 193.)
Abatement is available at common law where a buyer can show that the goods provided by the seller are diminished in value as a result of the seller's breach. Abatement operates as a defence, not as a set-off, to reduce the price. It is distinct from equitable set-off in that equitable set-off involves damages other than a diminution of the value of the goods.
In Quebec, set-off is called "compensation" and is permitted under Article 1672 of the Civil Code.
- Please state how delivery is defined under the laws of your jurisdiction?
Delivery is generally defined by provincial sale of goods legislation as the voluntary transfer of possession from one person to another.
Parties may stipulate when and to where delivery is to be made, the manner of delivery, when risk of and title to goods pass, and many other terms and conditions. Whether or not the contract provides for these requirements (and if so, the nature and scope of the seller's duty to deliver) are matters to be negotiated between the buyer and seller.
In Quebec, delivery is fulfilled when the seller puts the buyer in possession of the property, or consents to the buyer taking possession of it, and all hindrances from possession are removed (Article 1717, Civil Code).
- Does national law imply any obligations into a supply of goods agreement in relation to delivery of the goods by the seller?
Yes. Unless the parties agree otherwise, provincial sale of goods legislation implies that it is the seller's duty to deliver the goods.
Generally speaking, unless the parties have agreed otherwise, delivery takes place at the premises of the seller. The place that delivery occurs may be prescribed by the inclusion of Incoterms.
If the seller is bound to send the goods to the buyer, and the contract is silent as to the time of delivery of the goods, the seller is bound to send the goods to the buyer within a reasonable time. What constitutes a reasonable time is a question of fact. While the law does imply certain obligations with respect to the delivery of goods by the seller, the parties may stipulate when and to where delivery is to be made, the manner of delivery, when risk and title to goods pass, and many other terms and conditions.
In Quebec, the seller is bound to deliver the goods and to do so in the condition they are in at the time of the sale, with all their accessories (Articles 1716 and 1718, Civil Code). Unless otherwise provided in the contract, delivery expenses are assumed by the seller and removal expenses by the buyer (Article 1722, Civil Code). Finally, the Civil Code provides that a seller having granted a term for payment is not obligated to deliver the goods if the buyer has become insolvent since the sale (Article 1721, Civil Code).
The sale of goods legislation in the common law provinces provides that unless otherwise agreed, a buyer of goods is not bound to accept delivery by instalments. Therefore, if delivery by instalments was not foreseen in the contract, the buyer will not be held to accept the goods so delivered.
Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 7.8 states that the instalments, if any, would be paid for separately. This would mean that, in the event of one or more defective or failed deliveries by the seller, remedies available to the buyer, such as repudiation of the contract or rejection of the goods as a whole, will be determined on a fact-specific basis and may only be available depending on the specific terms of the contract and the surrounding circumstances. If the breach of contract is not considered a material breach going to the root of the contract, it would not relieve the parties from their contractual obligations, but would amount to a severable breach giving rise to a claim for compensation.
In Quebec, the Civil Code does not state any particular provisions for this type of contract. However, if the goods are defective, the buyer would be allowed to ask for the resiliation or resolution (see Question 16) of the contract since the seller failed to perform its obligation (Article 1590, Civil Code).
Yes. Where time is specified in a contract to be "of the essence", a party can strictly enforce the time stipulations in the agreement. The effect is to change deadlines or time-sensitive obligations in the agreement from mere contractual representations to conditions, so that if one party fails to meet a deadline or time-sensitive obligation, the other party may be entitled to treat the agreement as having been repudiated and at an end rather than to sue only for damages or specific performance. If time is not stipulated to be of the essence, the issue is a matter of interpretation (see Question 30).
An express provision providing that time is of the essence in all respects of the contract may be inserted to avoid uncertainty of terms. However, careful consideration should be made before inserting such a provision, as it may be contrary to a party's interests, depending on whether the party is the seller or buyer and whether it is a one-time supply or supply over a period of time. If time is made of the essence in an agreement, it is recommended that the agreement also specify that time continues to be of the essence in connection with any extensions granted under the agreement, to ensure the parties continue to have the benefit of this provision.
On that basis, parties can include a "time is of the essence", or not of the essence, qualifier into any provision of a contract, such as Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 7.4 and clause 11.4/16.2 .
In Quebec, the concept is used but may not be necessary since it is implied in sales contracts. Article 1590 of the Civil Code states that the creditor of the obligation has the right to demand the obligation be performed in full, properly and without delay. In case the performance of an obligation is delayed, the creditor of the obligation is entitled to obtain the resolution or resiliation of the contract (see Question 16).
- In relation to contractual obligations (that is, the buyer paying for the goods and the seller delivering the goods) even if the contract does not expressly state it:
- (a) Is time for performance normally considered to be fundamental to the contract?
- (b) Can a party terminate the contract for failure of the other party to perform the obligations within a specified time?
Provincial sale of goods legislation generally provides that, unless a different intention appears from the terms of the contract, stipulations as to the time of payment are not of the essence. This legislation also generally provides that whether any other stipulation as to time is of the essence of the contract or not depends on the specific terms of the contract.
A condition or warranty under the contract which includes a time stipulation may allow a party to terminate the contract for failure of the other party to perform an obligation within a specified time. Further, if a contract includes a "time is of the essence" clause, then the innocent party can terminate for a material breach if the other party fails to perform within a specified time.
In Quebec, a party is in default by the sole operation of law where the performance of its obligation would have been useful only within a certain time which the party allowed to expire, or where the party failed to perform the obligation immediately despite the urgency of doing so (Article 1597, Civil Code). Additionally, resolution or resiliation of the contract (see Question 16) is possible in case the other party fails to perform the obligation within a specified time (Article 1590, Civil Code).
Correlative to the seller's duty to deliver the goods is the buyer's duty to accept them. Delivery, including approval and acceptance of goods, is governed by each provincial sale of goods legislation. However, as a general rule, under Canadian law parties are free to define the terms of their agreement. The parties may therefore expressly contract out of the provisions of the applicable provincial acts dealing with delivery and achieve certainty of terms and results by addressing all aspects of the sale and delivery of goods in clear and unambiguous terms in their contract.
Where a contract does not provide expressly for actions that constitute acceptance, provincial legislation generally stipulates that a buyer is deemed to have accepted the goods when the buyer:
- Intimates to the seller that the goods have been accepted.
- Does any act in relation to the goods which is inconsistent with the ownership of the seller.
- After the lapse of a reasonable time, retains the goods without intimating to the seller that the buyer has rejected them.
Refusal or failure by the buyer to accept delivery may be a breach of contract, entitling the seller to sue the buyer for damages for non-acceptance or even treat the contract as repudiated. Where the contract is repudiated, the seller would have a right to resell the goods and claim damages.
For example, in Ontario, the legislation provides that where the buyer refuses to take delivery of the goods, the buyer is liable for the loss occasioned as a result of the refusal, and for a reasonable charge for the care and custody of the refused goods. Therefore, a seller would be entitled to invoice the buyer for the safe storage of the goods.
Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 7.6 and clause 11.3 would be permitted.
In Quebec, where the buyer fails to accept delivery of the goods, the seller may consider the sale resolved if the buyer is in default by operation of law, or if the buyer fails to perform its obligation within the time allowed in the demand, putting the buyer in default (Article 1740, Civil Code). In Quebec, the Civil Code provides for two modes of termination of a contract, resolution and resiliation (see Question 16).
Where time is of the essence, time-sensitive obligations in the supply contract are effectively converted from mere contractual representations to conditions; should one party fail to meet a deadline or time-sensitive obligation, the other party may be entitled to treat the agreement as having been repudiated and at an end. Therefore, when time is of the essence and the seller is late in delivering the goods, the buyer may be entitled to reject the goods and terminate the contract.
Where the agreement does not expressly make time of the essence, the effect of a delay will be a matter of interpretation depending on the specific terms of the contract and the surrounding circumstances. In certain cases, time may be determined to be of the essence based on, for example, the nature of the goods involved or the circumstances of delivery. An agreement may specifically set out the remedies available to a buyer against the seller for a delay in delivery. A buyer wishing to have certainty regarding the remedies available to it for a delay in delivery will want to include clear and unambiguous provisions in the contract, setting out the consequences for failing to meet a deadline or time-sensitive obligation.
Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 7.5 would be permitted in Canada.
In Quebec, where the seller fails to deliver the goods, the buyer may consider the sale resolved if the seller is in default by operation of law or if the seller fails to perform its obligation within the time allowed in the demand, putting the seller in default (see Question 16).
- Under what circumstances does national law permit a buyer to reject goods? Can the right to reject be lost?
In Canada, the law provides the buyer an opportunity to examine previously unexamined goods and reject them. Generally, where goods are delivered to the buyer that have not been previously examined, the buyer will not be deemed to have accepted the goods until there has been a reasonable opportunity for examining them for the purpose of ascertaining whether they are in conformity with the contract. Therefore, the buyer has the right to inspect and reject goods when they are not in conformity with the terms and conditions of the contract.
However, the right to reject will generally be lost in the following circumstances:
- The buyer indicates to the seller that the goods are accepted.
- The buyer, subsequent to delivery, does any act in relation to the goods that is inconsistent with the ownership of the seller.
- A reasonable period of time lapses after delivery without the buyer indicating to the seller that it refuses the goods.
In contracts for the delivery of equipment, parts or raw materials, it is common and recommended that the contract include express provisions detailing the buyer's inspection and testing rights. It is also common practice to specify a time limit for the buyer's right to reject and a notice of rejection requirement. If a contract specifically sets out an applicable acceptance and rejection process for the buyer, then the right to reject will be lost once the specified process is completed.
In Quebec, a seller is bound to deliver the quantity specified in the contract, and in case it is unable to do so, the buyer may obtain resolution of the sale if the difference causes it serious injury (which can include prejudice or a loss of any type) (Article 1737, Civil Code). If the buyer ascertains that the goods are defective, it must give notice in writing to the seller within a reasonable time after discovering it or after the seller could suspect the seriousness and extent of the defect (Article 1739, Civil Code). The seller can then address the issues, or the buyer can ask for a reduction of its corresponding obligations or for the resiliation or resolution of the contract (see Question 16).
- Does national law allow a seller to provide tolerance limits, permitting the seller to deliver less (or more) than the contract quantity?
Provincial sale of goods legislation generally provides that where the seller delivers a lesser quantity than that contracted for, the buyer may reject the goods; however, should the lesser quantity be accepted, the buyer is to pay for them at the agreed upon rate. Should the seller deliver more than contracted for, the buyer may reject the excess and, in some provinces, the buyer may reject the entire delivery. If the goods are accepted, they will be purchased at the agreed upon rate.
However, the legislation also provides that the statutory provisions relating to the delivery of the wrong quantity of goods is subject to any usage of trade, special agreement or course of dealing between the parties. Therefore, a clause that stipulates tolerance limits in a supply contract is permitted.
In Quebec, where the seller delivers less than the contract quantity, Article 1737 of the Civil Code states that the buyer may obtain a reduction of the price without having to meet any conditions. If this situation causes the buyer serious injury (which can include prejudice or a loss of any type), then it may obtain resolution of the sale. If the seller delivers more than the contract quantity, the buyer is bound to pay for the excess or return it to the seller.
Transfer of title and risk of the goods is governed by applicable provincial sale of goods legislation and is substantially uniform across the common law provinces.
Parties may expressly contract out of the provisions of the provincial legislation dealing with delivery and achieve certainty by addressing all aspects of the sale and delivery of goods in their contract.
The United Nations Convention on Contracts for the International Sale of Goods has been ratified by Canada and implemented by legislation nationally and in each of the provinces. The Convention will apply to international sales of goods transactions to which it is, by its terms, applicable unless expressly excluded by contract.
Incoterms, if incorporated into a contract for the sale of goods, provide comprehensive default rules for when risk passes (see Question 19 for a discussion of Incoterms). However, they do not provide for the transfer of ownership. This should be expressly provided for in the contract.
The issue of when title passes does not depend on the legal character of the goods. Conversely, the legislation is clear that the transfer of property in goods depends on whether the goods are specific, ascertained, unascertained, existing, or future.
Generally, risk will pass at the same time as title, and title usually passes with delivery. Risk in goods is distinct from title and it is, therefore, possible to separate when title and risk will pass. Time of transfer of title and risk affects the rights and obligations of the parties in connection with the total or partial loss, damage or destruction of the goods, unless there is an express or implied agreement otherwise. The legislation provides that, unless otherwise agreed by the parties, such as through the inclusion of an Incoterm, the goods remain at the seller's risk until title is transferred to the buyer. However, when title is transferred, the goods are at the buyer's risk whether or not delivery of the goods is made to the buyer. Where delivery is delayed through the fault of the buyer or seller, the goods are at risk of the party at fault as regards any loss that might not have occurred but for such fault.
Time of transfer
Where there is a contract for the sale of goods, title in them is transferred to the buyer at such time as the parties to the contract intend. If no contrary intention is expressed by the parties, title will pass on the execution and delivery of the contract. Transfer of title is thus not necessarily dependent upon payment of the purchase price, nor on delivery of the goods, unless such is the expressed or implied intention of the parties.
The legislation specifically provides that, for the purpose of ascertaining the intention of the parties, the focus will be on the terms of the contract, the conduct of the parties and the circumstances of the case. This language is deliberately vague to allow the parties and any court which has to decide this question considerable latitude.
The intention of the parties must be finalised before or when the contract is made, if it is to govern the transaction. When the intention of the parties cannot be determined, the legislation becomes the default. The legislation lays down certain rules for ascertaining the intention of the parties.
The rules adopted by the sale of goods legislation to determine the time of transfer of title to the goods are very complex, and frequently turn on very subjective factors, making it difficult to accurately predict the outcome of a litigated issue. It is recommended that contracts for the sale of goods expressly provide for the time of transfer of property in the goods and at which party's risk the goods remain.
A seller is able to separate the passing of title and the passing of risks in the goods as set out in Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 9.1 and clause 9.2 . An agreement should clearly set out the time at which title passes from the seller to the buyer.
In Quebec, risk of ownership passes on delivery and the seller continues to bear the risks until delivery is made (Article 1456 al. 2, Civil Code). On the other hand, the title passes on exchange of consents at the time the sale contract is entered into (Article 1708, Civil Code).
Yes, the transfer of title in goods may be effected according to the intention of the parties. Therefore, the parties can elect by contract to transfer title post-delivery. If the buyer fails to pay for the goods after they have been delivered, then the seller may sue the buyer depending on the terms of the agreement. The sale of goods legislation sets out remedies that do not affect possession of or title in the goods. The remedies are intended to provide the seller with a claim against the buyer for damages to compensate for the loss by reason of the buyer's breach. Under the sale of goods legislation, the seller can only bring an action for the price where the buyer wrongfully neglects or refuses to pay for the goods according to the contract. Further, no action for the price can be brought unless title to the goods has passed to the buyer, or the contract stipulates that the price is payable on a certain day irrespective of delivery.
In Quebec, the buyer's failure to make a payment when due constitutes a breach of contract since it is a failure to perform the obligation on time. The seller can therefore request resiliation or resolution of the contract (Article 1590, Civil Code) (see Question 16).
As a general rule, under Canadian law parties are free to define the terms of their agreement, including how and when title will transfer. Therefore, the seller can and likely would prefer to retain title to the goods until payment is made in full. However, retention of title creates a security interest for the seller that should be perfected under the relevant personal property security legislation in force in each of the provinces other than Quebec to be enforceable against third parties.
In Quebec, in the case of an instalment sale, the seller reserves ownership of the property until full payment of the sale price is made. A reservation of ownership with respect to a movable property acquired for the operation of an enterprise needs to be published within 15 days in order to be set up against third persons (Article 1745, Civil Code). (See Question 58.)
In Canada, there are no statutory provisions prohibiting parties from including a clause in a contract such that a supplier could enter a buyer's premises to recover goods where a buyer has not paid for them in accordance with the terms of the applicable contract. It is therefore uncertain whether this type of clause would be enforceable in Canada. Recovery of goods would only be enforceable against third parties if it arises from a security interest in the goods perfected under the relevant personal property security legislation in the provinces other than Quebec (see Question 37).
In Quebec, it is possible for the seller to take back the goods sold (Article 1749, Civil Code). However, if the reservation of ownership required publication under Article 1745 of the Civil Code and was not published, the seller may take the property back only if it is still in the hands of the immediate buyer, in its existing condition and subject to the rights and charges with which the buyer may have encumbered it.
If the reservation of ownership was published late, the seller can only take the property back if it is still in the hands of the immediate buyer, unless the reservation was published before the sale of the property by that buyer. In that case, the seller can take back the property in its existing condition, but subject only to the rights and charges with which the immediate buyer may have encumbered it at the time of the publication and which had already been published.
The sale of goods legislation provides that in the event of insolvency of the buyer, the seller has a right to stop the goods in transit after the seller has parted possession with them. However, this remedy is falling out of favour given the potential liability of the seller if the buyer is not in fact insolvent at the time the seller exercises this right and repossesses the goods. The sale of goods legislation does not provide the right for a seller to enter into the buyer's premises to recover the goods.
However, the provincial personal property security legislation does allow an unpaid seller, who has a security interest, to take possession of the collateral by any legal remedy available, subject to the rights of another secured party with a higher priority under the legislation. The applicable provincial legislation should be reviewed if a seller is looking to perfect or rely on a security interest in goods. (See Question 37.)
The federal Bankruptcy and Insolvency Act allows an unpaid seller that has delivered goods to a buyer to access and repossess the goods at the supplier's own expense, provided that the proper notice has been provided and that the goods were delivered within 30 days before the buyer becoming bankrupt.
It is therefore unclear how Canadian courts would interpret and whether they would enforce such clauses.
Under Canadian contract law, parties are free to negotiate express provisions with regards to termination rights, with or without notice (which usually is required to be in writing). As such, the parties can terminate the agreement for all of the reasons set out in Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 16 .
It is important to address in commercial contracts all obligations and rights of both parties during the period between the date of the notice of termination and the actual date the contract is terminated, as well as the effect of termination and whether or not there are any continuing obligations following termination (for example, requirement to pay for work performed or services provided before the contract was terminated, transition support and assistance post-termination, transfer of assets and licensing of intellectual property rights on termination, and non-disclosure of confidential information).
The commercial agreement should also address required notice periods, costs of termination, and applicable timelines. For example, parties are free to include a "honeymoon period", during which no party is permitted to exercise any termination rights without paying liquidated damages or a termination fee to the other party.
Situations can arise where parties intentionally breach their contract so as to terminate it. Termination in these circumstances, especially when such conduct is directed at unfair profit seeking, may attract punitive damages against such parties.
Common termination rights found in commercial agreements include:
- Termination by mutual consent.
- Termination for material breach.
- Termination for breach.
- If time is of the essence in the contract, termination for late performance.
- Termination due to bankruptcy, insolvency, cessation of business, liquidation and receivership events.
- Termination for convenience, without cause, typically on sufficient notice.
It is not uncommon for sellers to include a right of termination in the event that there is a change in control of the buyer. This right is normally included when a seller is concerned about ending up in a business arrangement with a competitor after a change in control.
Sellers may also include a right to terminate where the contract in question is no longer economically feasible. Such a termination provision is often included in supply arrangements which are for an indefinite duration. Contracts for indefinite or ongoing supply of goods often also explicitly allow for termination for convenience rights subject to a notice period.
Additionally, if a contract is to be performed over time but does not specify when it is to come to an end, the consensus view in Canada is that there is no presumption of perpetuity, or that the presumption is so weak as to be virtually irrelevant. A court facing the question of whether a contract is perpetual or terminable on reasonable notice will look to the entire context of the contract and the parties' relationship, in order to ascertain objectively and accurately the intentions of the parties. A factor that militates in favour of a finding of permanence is the existence of provisions allowing termination in specific circumstances but not generally, as this leads to the inference that a right to terminate outside the specified circumstances was not intended. Alternatively, a factor militating in favour of a finding of the ability to terminate on reasonable notice is a contract involving trust and confidence and the delegation of authority.
In Quebec, termination by resiliation or resolution is one of the possible remedies in case a party fails to perform its obligation in full, properly and without delay (Article 1590, Civil Code) (see Question 16).
- To what extent does national law permit the use of terms which limit or exclude the liabilities of a party to a business-to-business contract for the sale of goods? Consider in particular the following and Standard document, Supply of goods agreement: Cross-border: clause 14 :
- Excluding or limiting liability with respect to a breach of an express contract term.
- Excluding or limiting liability with respect to a breach of an implied contract term for example, description, quality, fitness for purpose title.
- Excluding or limiting liability for a particular type of loss, for example, death or personal injury.
- Setting out an overall cap on liability (see Standard document, Supply of goods agreement: Cross-border: clause 14.2(b) .
- Restricting remedies or imposing procedural and evidential restrictions.
- Excluding or limiting liability for defective products under product liability laws.
- Excluding or limiting liability for misrepresentation (if applicable).
- Excluding or limiting liability to third parties.
Generally speaking, courts will uphold exclusion or limitation of liability clauses that are clearly drafted and unambiguous and brought to the attention of the party against whom the exclusion or limitation will be exercised, if there is no inequality of bargaining power and there are no other equitable considerations between the parties, or public policy concerns. Fraud or unconscionability will generally be sufficient grounds for courts not to enforce contractual provisions that restrict liability due to public policy.
Notwithstanding the above, courts will generally always strictly construe limitation of liability provisions. As a result, it is imperative that a limitation of liability clause be clearly drafted for it to be found enforceable.
In Quebec, the Civil Code regulates limitation and exclusion of liability (Article 1474, Civil Code). It prohibits the exclusion or limitation of liability for material injury caused to another through an intentional or gross fault and for bodily or moral injury caused to another.
Contracting parties are generally free to limit the scope of their liability, and both exclusion of liability clauses and limitation of liability clauses are generally enforceable, subject to equitable and public policy considerations and certain other limited exceptions.
Canadian courts will apply a three-part test for determining when a limitation or exclusion of liability clause will be upheld:
- Does the limitation or exclusion clause apply to the facts?
- Is the clause itself unconscionable and therefore unenforceable?
- Should the clause be voided due to public policy considerations?
Courts will also generally strictly construe exclusion and limitation of liability provisions; and the more serious the breach, the more strictly the courts will interpret a clause that seeks to limit or exclude liability. Public policy will also not allow parties to hide behind exclusion or limitation of liability clauses in cases of outright fraud. While there is no explicit "reasonableness test" in Canada, evidence of good faith and reasonableness will help to ensure enforcement of an exclusion or limitation of liability clause.
In a breach of contract action in a common law province, a non-breaching party is entitled to recover damages that were, at the time of the contract, reasonably foreseeable or reasonably contemplated if a breach was to occur. Reasonably foreseeable and reasonably contemplated damages include not only those damages which are to be expected in the ordinary course of business, but also those damages arising from special circumstances which were previously communicated to the breaching party. Therefore, these could include both "direct" and "indirect" damages.
"Direct" damages can be generally described as those damages that follow immediately from the act done, or that arise naturally or ordinarily from the breach of contract. They are damages which, in the ordinary course of human experience, can be expected to result from the breach. "Indirect" damages are those that do not arise naturally or ordinarily from the breach, or those that could not have been expected to result from the breach.
Given that the prevailing approach by Canadian courts focuses on whether or not damages were foreseeable, there can be a disconnect between the manner in which a court will award damages and the general commercial understanding of the "direct" damages and "indirect", "incidental", "special" or "consequential damages".
It is common practice for parties to list specific items which they deem to be indirect, special, incidental or consequential, such as loss of profits. While recent case law in other jurisdictions has found that lost profits can be characterised as both direct and indirect, this reasoning has not yet been widely adopted in Canada. Generally, Canadian case law suggests that loss of profits is characterised as an indirect or consequential loss. However, a recent Alberta case found that lost profits may be either direct or indirect losses depending on the context, indicating that this approach may become more widely adopted in the common law provinces.
In Quebec, loss of profits can be a direct loss. Injury (which can include prejudice or a loss of any type) must be certain and assessable to be taken into account in awarding damages (Article 1611, Civil Code). A party is liable only for the damages that were foreseen or foreseeable at the time the obligation was contracted. Even where the failure to perform the obligation proceeds from intentional or gross fault, the damages include only what is an immediate and direct consequence of the non-performance (Article 1613, Civil Code). Damages compensate a party both for the amount of the loss sustained and also for the profit of which it has been deprived.
Health Canada regulates consumer products in Canada under the Canada Consumer Product Safety Act (CCPSA). A "consumer product" is defined under the legislation as a product, including its components, parts or accessories, that may reasonably be expected to be obtained by an individual to be used for non-commercial purposes, including for domestic, recreational and sport purposes, and includes its packaging.
The CCPSA has reporting obligations in the event of an incident with respect to a consumer product. An "incident" includes, but is not limited to, a defect or characteristic that may reasonably be expected to result in an individual's death or serious adverse effects on their health, including a serious injury. A person who manufactures, imports or sells a consumer product for commercial purposes must provide the federal Minister of Health with all information in their control related to any incident within two days after the day that they become aware of an incident, and to provide a report within ten days.
Also note that there are other regulated industries in Canada which may also create notification obligations upon the supply of defective goods.
Warranties and indemnities
The use of the term "warranty" is ambiguous in Canada. Provincial legislation defines a warranty as an agreement with reference to goods that are the subject of a contract of sale but collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. A term in a contract may in substance be a warranty although referred to as a condition. Similarly, a term may be a condition although it is referred to as a warranty. Therefore, it is recommended that parties clearly set out any conditions or warranties directly in their agreement rather than relying on the implied terms of the sale of goods legislation.
In the common law provinces, the laws governing indemnification provisions remain, for the most part, unregulated by legislation and are found principally in the decisions of courts on the disputes that have been brought before them. Indemnity provisions are frequently included in agreements where a party may suffer losses as a result of the conduct of the other party. Indemnification provisions allow the parties to override the common law in a number of ways, such as broadening or narrowing the scope of recovery that would normally be available under common law or to set out procedural elements.
There are no indemnities implied by sale of goods legislation in Canada. Indemnities may be implied by a court as a matter of construction and interpretation of the contract and intentions of the parties. Express indemnity provisions such as the ones in Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 12 would be enforceable subject to other issues such as unconscionability or rules of construction.
In Quebec, no distinction is made between protection by warranty and protection by indemnity. The seller is bound to warrant the ownership and quality of the property. These warranties exist by operation of law and do not need to be stipulated in the contract of sale (Article 1716, Civil Code). With some exceptions, it is however possible for the parties to add to the obligations of legal warranty, to diminish its effects or to exclude it altogether in their contract (Articles 1732-1733, Civil Code). Civil law also requires the seller to warrant that the goods are free of latent defects at the time of the sale (Articles 1726-1731, Civil Code).
Obligations of warranty are obligations to provide a specific and determined result even with respect to force majeure events. Because the obligation of warranty is notably burdensome, the parties' will to create it must be clear (Banque Laurentienne du Canada c. Parc d'amusement Deux-Montagnes Inc., 2006 QCCA 1581).
In commercial agreements, an IP infringement indemnity would generally be negotiated between the seller and buyer, since the buyer will want assurances that it is not exposing itself to undue liability by purchasing or licensing IP from the seller. Further, IP infringement indemnities are typically limited to third party claims (that is, claims where the buyer is pursued by a third party for infringement even though it was the seller who sold or licensed the IP to the buyer). IP infringement indemnities are normally limited to third party claims because the third party is, by its nature, not a party to the agreement. The third party claiming the infringement would typically bring a direct claim for infringement against the seller (and possibly the buyer) under Canadian legislation governing patents (the Patent Act), copyright (the Copyright Act) and trade marks (the Trade-marks Act), which all contain infringement remedies.
In Quebec, a claim can be made under the regime of extra-contractual liability (see Question 12).
In Canada, a plaintiff is not entitled to compensation for losses that could have reasonably been avoided. It is not acceptable for a plaintiff to simply wait until getting to court and then request full repayment for all its losses; it must act to alleviate or mitigate the loss and attempt to find alternative ways to accomplish its goals. This mitigation principle is intended to ensure that the defendant is treated fairly and is not required to pay more than its actions dictate.
In Quebec, the party bound to make reparation for an injury (which can include prejudice or a loss of any type) is not liable for any aggravation of the injury that the indemnified party could have avoided (Article 1479, Civil Code). Jurisprudence has however set some limits to this obligation; it is an obligation of means and not an obligation of result (see Question 7). The intensity of the obligation will depend on the circumstances of the case and the judge will assess each case individually.
Yes. The parties are free to contract between themselves, and to set out express remedies in a contract for repairing or replacing goods rather than providing a buyer with a refund as set out in the first option of Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 8.2 .
The parties should draft clear and unambiguous terms which set out what remedies will or will not be available for a buyer with respect to a breach of warranty.
In Canada, the parties are generally free to negotiate the pre-conditions to be satisfied before the buyer may avail itself of the contractual remedies or any exclusions to the warranties.
However, note that if the parties are looking to oust any implied statutory warranties, they must use clear and unambiguous language. An express term included in a contract of sale will not exclude the operation of any term implied by the applicable sale of goods legislation unless the express term is "inconsistent with the statutory implied warranty". The nature and extent of the pre-conditions to be satisfied before the customer can avail itself of the contractual remedies may be relevant in determining whether the implied statutory warranties are excluded.
Yes. Sellers are able to exclude their liability for failure to comply with warranties as set out in Standard document, Supply of goods agreement: Cross-border: clause 8.3 . Clear and unambiguous language must be used to do so. An express term included in a contract of sale will not exclude the operation of any term implied by the applicable sale of goods legislation unless the express term is "inconsistent with the statutory implied warranty".
A buyer can be prevented from claiming damages for breach of warranty so long as the exclusion clause applies to the facts, the clause is not unconscionable and there are no public policy considerations which would lead to the clause being voided.
As an example, the Supreme Court of Canada has held that the following words were sufficient to explicitly and unambiguously oust the statutory warranties (Hunter Engineering Co v Syncrude,  1 SCR 426):
"The other provisions of this paragraph represent the only warranty of the seller and no other warranty or conditions, statutory or otherwise shall be implied."
The explicit reference to the statutory warranty was deemed crucial by the court and served to prevent the application of the sale of goods legislation to the contract in dispute. This suggests that the language in the first option of Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 8.2 ("statutory or otherwise") would be sufficient to override the statutory warranties.
In Quebec, the Civil Code allows the parties to exclude legal warranties (Article 1732, Civil Code). However a seller cannot exempt itself from liability for its personal acts or omissions. Also, a seller cannot exclude or limit its liability unless it has disclosed the defects of which it was aware or could not have been unaware of and which affect the rights of ownership or the quality of the goods (Article 1733, Civil Code).
Yes. However, the implied warranties set out in the sale of goods legislation are not expressly time limited and will extend to latent defects. While there is no specific time limit imposed in the relevant legislation sections, Canadian courts have held that the implied statutory warranties are not to be held indefinitely. Rather, the implied warranty will only extend for a reasonable time past the date of purchase. The length of an implied warranty will depend on the specific goods sold and their expected life span. Each case will therefore turn on its own facts and the nature of the goods themselves.
Assuming that the contract does not specifically exclude the implied statutory warranty, it will continue to apply past the date of the contractual warranty, depending on the expected lifespan of the product. Therefore, a supplier's warranty could apply to any repair or replacement goods supplied by the seller, subject to any explicit language in the contract excluding the application of the implied warranties.
Since the concept of "force majeure" is not embedded in common law as a principle of law, it must be expressly set out in the contract. Therefore, if there is no force majeure clause in the contract, it is possible that a party will not be relieved of its contractual obligations by virtue of an event beyond its control.
A force majeure clause must clearly enumerate the description of specific events which the parties deem to constitute or be a "force majeure". In the event that a force majeure clause uses broad language, there is a risk that courts may interpret any ambiguity against the drafter, resulting in an event being found or not found to fall within the relevant clause. It is useful to set out whether a "force majeure" event will suspend or excuse a party's performance and whether the parties will have a right to terminate the contract as a result of an extended event. It is also common for force majeure clauses to set out the obligations of the parties to perform certain actions during and after the "force majeure" event.
In Quebec, the Civil Code defines "force majeure" as being an unforeseeable and irresistible event, including external causes with the same characteristics (Article 1470 second paragraph, Civil Code). Force majeure can constitute a defence for both obligations of means and obligations of result (see Question 7).
- Is it common to have an "entire agreement" clause (under which, typically, a seller excludes liability for any representations or warranties made during the course of negotiations that are not included in the agreement) as set out in Standard document, Supply of goods agreement: Cross-border clause 17.4 ? Are there any circumstances in which an entire agreement clause may be unenforceable?
Yes. It is common to include an entire agreement clause to identify what documents, agreements and schedules form part of the final agreement; an entire agreement clause can act to nullify the effect of other documents. An entire agreement clause is intended to reinforce the parol evidence rule (that is, a rule of contractual construction which states that extrinsic evidence cannot be used to vary the terms of a written contract) and be an express statement of the parties' agreement not to go outside the terms of the written agreement.
An entire agreement clause is useful in preventing arguments of collateral contracts or the existence of extrinsic terms of the agreement. However, it will not prevent a court from imposing duties arising out of the general principle of good faith performance, including, in particular, the duty of honest performance. The duty of honest performance requires the parties to be honest with each other in relation to the performance of their contractual obligations. While it is recommended that an entire agreement clause be included in an agreement, caution should be exercised as the enforceability and interpretation of these clauses continues to evolve.
In Quebec, the jurisprudence has traditionally recognised the validity of "entire agreement" clauses. Courts can however set such clauses aside under certain circumstances, such as in cases of fraud or misrepresentation (Ihag-Holding, a.g. v Intrawest Corporation, 2009 QCCS 2699).
- Do supply contracts give rise to any competition law issues in your jurisdiction?
Yes. Today, restraints on freedom of contract are most commonly seen in situations of fraud, restrictive covenants and competition law rules. The federal Competition Act is a quasi-criminal statute which prohibits agreements which prevent or lesson competition substantially.
Examples of such agreements include price fixing, market allocation and controlling output. An individual or corporation which has entered into an agreement which has lessened or is likely to prevent or lessen competition substantially may be prosecuted under criminal or civil provisions. Successful prosecution under the criminal provision may result in an indictable offence which carries a prison term and/or significant monetary fines. Under the civil provision, the Commissioner of the Competition Bureau has broad authority to prohibit any agreement not yet entered into or take any other necessary action.
Yes. It is not uncommon for a supplier to ask for a minimum purchase commitment from the customer in a supply agreement.
- Are there any compliance obligations on either party under your local laws in relation to the supply of goods?
Beyond laws of general applicability, including provincial business corporations statutes, business name acts, federal and provincial tax statutes and privacy legislations, there are no specific compliance obligations created by or solely related to the agency relationship.
Depending on the nature of the agency and the activities to be performed by the agent, it would be recommended to include a representation and warranty of the agent that it shall be in compliance with all applicable laws, including:
- The Corruption of Foreign Public Officials Act.
- Customs Act (Canada).
- The Customs Tariff (Canada).
- Export Act (Canada).
- The Export and Import Permits Act (Canada).
- The United Nations Act (Canada).
- The Special Economic Measures Act (Canada).
- The Special Import Measures Act (Canada).
- The Criminal Code (Canada) provisions relating to exports and economic sanctions, and all of the regulations thereunder.
- The Defence Production Act (Canada).
- The Controlled Goods Regulations.
In Quebec, the general law applying to contracts of supply of services is the Civil Code (Articles 2098-2129, Civil Code). Further, in the case of a supply of services to Quebec government bodies, the Act respecting contracting by public bodies applies to public contracts between a public body and a contractor who is a legal person established for a private interest, a general, limited or undeclared partnership or a natural person who operates a sole proprietorship (Article 1, Act respecting contracting by public bodies).
- How does this agreement need to be executed in order to ensure that it is valid and enforceable? Does it need to be registered with any authority in your jurisdiction?
An agreement must be executed and delivered to be enforceable. Delivery includes the act of physically giving the agreement to the other party or parties, and may include any conduct by which a party indicates an intention to be bound by the agreement.
Electronic execution and delivery
Provincial electronic commerce legislation recognises the validity of electronic signatures. Parties can expressly agree that delivery of the agreement or its executed counterparts by facsimile, email or other functionally equivalent means of transmission constitutes valid and effective delivery. Additionally, parties may require the prompt physical delivery of the original signed agreement, without limiting the effectiveness of the signed counterparts or copies delivered by electronic means.
Corporations do not need seals to create valid agreements. However, in some situations parties will still affix a seal to ensure a proper attestation of an agreement, which is a declaration that the execution of the agreement has been witnessed or sealed. The use of a seal eliminates the need for other consideration and can make a contract a specialty contract (which may mean a longer limitation period). A "specialty contract" generally means a contract entered into as a deed under seal. A seal is evidenced by either:
- A corporate seal.
- A red seal.
- Circling the mark "l/s" for individual or "c/s" for corporations in ink.
Different execution formalities
Different entities have different execution formalities:
Execution / Signature
Use "by" over "per"
XYZ Partnership by its partners [or one partner if partnership agreement gives authority to sign]
MNO Limited Partnership, by its general partner, MNO Corporation
Limited Partnerships can be described in the header either as "MNO Limited Partnership by its general partner, MNO Corporation" or "MNO Corporation as general partner for and on behalf of MNO Limited Partnership" or "MNO Limited Partnership" [as long as it signs correctly]
ABC Trust, by its trustee, ABC Corporation
Similarly, a trust can be described in the either as "Trust by its trustee" or "Trustee, as trustee for and on behalf of Trust" [as long as it signs correctly]
The execution of a supply contract does not need to be witnessed.
Generally speaking, a supply agreement does not need to be registered with a regulatory body in Canada. However, registration of a financing statement under the relevant Personal Property Security Act (PPSA) in a common law province may be required if the supply contract creates a security interest for the purposes of the PPSA.
In Quebec, in the case of an instalment sale, the reservation of ownership with respect to any movable property acquired for the service or operation of an enterprise can be set up against third persons only if it has been published with the Registre des droits personnels et reels mobiliers, a register of published rights other than with respect to immovable property, within 15 days of the sale (Article 1745, Civil Code).
- Are there any clauses in the supply of goods agreement that would not be legally enforceable or not standard practice in your jurisdiction?
- Are there any other clauses that would be usual to see in the supply of goods agreement and/or that are standard practice in your jurisdiction?
Since the supplier and buyer may not be available at the same time or place, the supply agreement could provide for the execution of the agreement in counterparts and the delivery of each signed counterpart by email, fax or other electronic means of transmission (see Standard document, Supply of goods agreement (with contract details cover sheet): Cross-border: clause 17 ). For example:
"This agreement may be executed and delivered by the parties in one or more counterparts, each of which will be an original, and each of which may be delivered by facsimile, e-mail or other functionally equivalent electronic means of transmission, and those counterparts will together constitute one and the same instrument."