Overview
Set-off is a legal principle that allows a defendant to reduce or offset amounts owing to a plaintiff by counter-claiming against the plaintiff.[1] Set-off results in the defendant paying less to the plaintiff than it otherwise would as rather than paying the entire debt, it reduces the payment by the amount the plaintiff owes to it.[2] There are three types of set-off recognized in Canadian law: legal (also referred to as “statutory”), contractual, and equitable.[3]
Advancing a successful claim for set-off can be challenging because it is strictly applied by the Canadian courts. There are also three different types of set-off and each type has its own legal principles. This blog post will provide a summary of the law of set-off and how it is applied in Alberta, British Columbia, and Ontario.
Types of Set-off
Legal set-off is the right to set-off mutual debts which can be ascertained with certainty at the time of pleading.[4]
Equitable set-off exists when a party has a claim for a liquidated or unliquidated monetary sum.[5]
Contractual set-off arises where the right to set-off is contained in the contract between the parties.[6]
PART I: LEGAL SET-OFF
General Rules
For legal set-off to apply:
- Obligations between parties must be liquidated debts, known as the “mutuality requirement”;[7]
- Both debts must be mutual cross-obligations (this means that the debts must be cross-claims between the same parties and in the same right); [8]
- Debt assignment terminates mutual cross-claims, making legal set-off invalid; [9] and
- Procedural set-off balances unrelated claims, resulting in a net judgement. [10]
The mutuality requirement of procedural set-off is satisfied because the judgments are owed to one another.[11] Importantly, procedural set-off is not a defence, rather, it is a procedural mechanism that permits one net judgment instead of two.[12] An example of procedural set-off is where an owner is permitted to set-off the value of the contractor’s amount owing, for the owner’s Oilers tickets, against the construction debt.[13]
Relevant Caselaw
Alberta
In 770865 Alberta Ltd. v 1563480 Alberta Ltd., 2018 ABQB 447, the Defendant 1563480 Alberta Ltd. (the “Purchaser”) purchased a restaurant from the Plaintiff.[14] The Plaintiff subsequently brought an action against the Purchaser and the Defendant Conway (the “Defendants”) for the amount owing which had not been paid by the Purchaser.[15] The Court allowed the Defendant Conway’s claim to set-off for the cost of a preparation table for the restaurant against the outstanding amount.[16] The Court also allowed the Purchaser’s claim to set-off for the restaurant revenues owed to the Purchaser against the outstanding amount.[17] The Court applied the doctrine of legal set-off because both parties owed a debt to one another.[18]
See Condominium Corporation No. 0524500 v Andrews, 2015 ABQB 554, for an example of where the Court held that legal set-off did not apply.[19]
British Columbia
In Meszarics v Hart Modular Homes, 2020 BCPC 234, the Plaintiffs purchased a home from the Defendant.[20] The Plaintiffs brought an action for damages they allegedly incurred from delays and misinformation on the Defendant’s behalf, and for deficiencies to the home.[21] The Defendant claimed set-off for the costs it incurred for additional grading and excavation work to move a water line.[22] The Court held that the doctrine of legal set-off did not apply in these circumstances because the parties lacked a mutual debt between them arising under the contract.[23] Essentially, the Court determined that the amount owing to buy the home was separate and distinct from costs incurred by the Defendant to move the water line. Rather than allowing set-off, the Defendant would need to pursue a separate action and obtain a separate judgment against the Plaintiffs.
See also Coffey (Estate) v Coffey, 2014 BCSC 110, for an example of where the Court allowed the legal set-off claim in the context of bankruptcy.[24]
Ontario
In 1587855 Ontario Inc. (c.o.b. Bass Installation) v Contract Glaziers Corp., 2016 ONSC 7934, the Defendant contracted for the Plaintiff’s services and materials on a construction project.[25] The Plaintiff also completed work for the Defendant on another project but the Defendant claimed damages from the Plaintiff alleging that the Plaintiff did not perform the work on the second project.[26] The Defendant asserted its right to set-off under section 12 of the Ontario Construction Lien Act.[27] The Defendant met the requirements under section 12 and the Court permitted the Defendant’s set-off claim.[28]
See also Gowing Contractors Ltd. v Walsh Construction Co. Canada, 2022 ONSC 2192, for an example of where legal set-off could not be applied because the holdback funds owed to a party exceeded what the Defendant sought as security for costs.[29]
Conclusion
These cases highlight that legal set-off is a difficult defence to achieve in all three jurisdictions because it is narrowly applied by the courts. Legal set-off is likely narrowly applied by the courts because such claims can be influenced by statutory requirements, which leaves little room for judicial discretion. The mutuality requirement prevents parties from trying to claim set-off unless the mutually owed amounts are closely connected.
CONTRACTUAL SET-OFF
General Rules
To claim contractual set-off:
- Enforceable contract principles apply (offer, acceptance, consideration, intention to create legal relations, and capacity);[30]
- The contract must not be void due to public policy or illegality; [31] and
- Courts interpret contractual language to determine set-off validity. [32]
Caselaw
Alberta
In KBR Industrial Canada Co. v Air Liquide Global E&C Solutions Canada LP, 2018 ABQB 257, KBR initiated an arbitration against Air Liquide regarding its claim for unpaid invoices and damages arising from Air Liquide’s decision to invoke a contractual clause permitting it to assign the work to another supplier.[33] Air Liquide filed a counterclaim against KBR for the costs it incurred to assign the work to another supplier.[34] Air Liquide advanced a claim to set-off these amounts against any amounts it owed to KBR.[35] The Court upheld the arbitrator’s decision permitting Air Liquide’s set-off claim because it agreed that the language in the contract between the parties clearly and explicitly gave Air Liquide the right to set-off.[36]
See also Condominium Corporation No. 0524500 v Andrews, 2015 ABQB 554, for an example of where the Court held that the Defendants were not entitled to contractual set-off because there was no meeting of the minds.[37]
British Columbia
In 0856464 B.C. Ltd. v TimberWest Forest Corp., 2014 BCSC 2433, the Plaintiffs commenced an action against the Defendant for failing to fulfill their contractual obligation of negotiating in good faith which resulted in the contracts being terminated unlawfully.[38] The Court allowed the Defendant’s claim for contractual set-off on the basis that there was clear and explicit language in the contract that provided for the right to a set-off claim and because the licensing fee at issue was an ancillary contract between the parties.[39]
See also Initiate School of the Canadian Rocky Mountains Ltd. v Wolfenden Ventures Ltd., 2010 BCSC 1673, for an example of where the Court dismissed the Defendant’s claim for contractual set-off due to an issue with assigning a mortgage.[40]
Ontario
In Com Dev Ltd. v Microsat Systems Canada Inc., 2016 ONSC 289, the Plaintiffs filed an action against the Defendant alleging that the Defendant had wrongfully withheld payment and repudiated the contracts after failing to make payments to the Plaintiff. [41] The Court dismissed the Defendant’s claim for contractual set-off because the Defendant refused to pay the Plaintiff for past due invoices to the extent that the Plaintiff went out of business.[42] The Court seemed to incorporate principles of equity into its decision because it also held that because the Defendant’s refusal to pay caused the Plaintiff to go out of business, it would be inequitable to allow the Defendant’s claim for contractual set-off.[43]
See also Wesbell Networks Inc. (Receiver for) v Bell Canada, 2013 ONSC 7814, for an example of where the Court held that the Defendant was entitled to contractual set-off in the context of a lease takeover.[44]
Conclusion
Of the three types of set-off, where a contract between parties provides for the right to contractual set-off, the courts have a broader scope and more discretion to allow a party’s claim for set-off. The courts also seem to rely on equitable principles such as in Com Dev Ltd. v Microsat Systems Canada Inc., 2016 ONSC 289, when determining whether to allow a claim for contractual set-off. The principles of contractual set-off seem to be applied consistently across Alberta, British Columbia, and Ontario.
PART II: EQUITABLE SET-OFF
General Rules
To claim equitable set-off, the claimant must satisfy the following principles:
(1) The party relying on a set-off must show some equitable ground for being protected against their adversary’s demands;
(2) The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed;
(3) 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;
(4) The plaintiff’s claim and the cross-claim need not arise out of the same contract; and
(5) Unliquidated claims are on the same footing as liquidated claims.[45]
A defendant’s claim will not constitute equitable set-off unless it is closely connected with or directly impeaches the plaintiff’s claim.[46] There is no mutuality requirement for equitable set-off.[47]
Caselaw
Alberta
In 770865 Alberta Ltd. v 1563480 Alberta Ltd., 2018 ABQB 447, the Court applied the doctrine of equitable set-off because it was satisfied that the Defendants’ third-party revenue claims to the restaurant required protection against the Plaintiff’s demands.[48] The Defendant’s claims went “to the root” of the Plaintiff’s claim because the Defendant’s claims concerned the exact business the Plaintiff sold to the Defendant and the implications of that sale.[49] The Court held that the Defendant’s claims were clearly connected with the Plaintiff’s claims such that it would be unjust to allow the Plaintiff to force the Defendant to pay the Outstanding Amount without considering the Defendant’s claims.[50]
See also SemCanada Crude Co. (Re), 2009 ABQB 252, for an example of where the Court held that the claimant was not entitled to an equitable set-off because there was no evidence to show that there was a close connection between the contracts or transactions at issue.[51]
British Columbia
In Dahl (Re), 2018 BCSC 889, the Court replaced Ms. Dahl and appointed Ms. Kearns as the sole executrix.[52] Ms. Kearns learned of Ms. Dahl’s misappropriation and claimed the right to equitably set-off the misappropriated funds against Ms. Dahl’s residual interest in the deceased’s estate.[53] The Court held that Ms. Kearns was not entitled to equitable set-off because the equities were no longer between the parties given that the rights of the creditors in the bankruptcy arose.[54] The Court also held that sections 97(3) and 121(1) of the Bankruptcy and Insolvency Act must be read together to produce the interpretation that section 97(3) only applies to claims against the bankrupt’s estate that existed on or before the date of bankruptcy.[55]
See Meszarics v Hart Modular Homes, 2020 BCPC 234, for an example of where the Court held that the doctrine of equitable set-off did not apply because the Defendant made a gratuitous payment to a third-party company.[56]
Ontario
In GSI Environment Inc. v Ottawa (City), 2013 ONSC 4158, the Court allowed the City’s claim of equitable set-off because the claims arose from the same contract and were so closely connected that it would be considered unjust to enforce GSI’s claims without considering the City’s counterclaim.[57] The Court further held that equitable set-off was warranted because the City’s counterclaim went to the root of GSI’s claim.[58] The Court found that the equitable ground was the fact that GSI performed its contractual obligations for months before raising an issue with part of the agreement and then failed to provide the City with any realistic opportunity to rectify the situation.[59]
See also Thyssenkrupp Elevator (Canada) Inc. v 1147335 Ontario Inc., 2015 ONSC 503, for an example of where the Court dismissed the Appellant’s set-off claim because it lacked evidentiary support.[60]
Conclusion
These cases highlight that the courts have more discretion and scope to apply equitable set-off compared to legal set-off. These cases also highlight that because of the discretionary nature of granting a claim for equitable set-off, the claimant has a high evidentiary burden, especially with proving the equitable ground and clear connection requirements. It seems that the Alberta courts especially focus on the clear connection requirement. The principles of equitable set-off appear to be applied consistently across Alberta, British Columbia, and Ontario, subject to the different factual circumstances arising in each case where set-off is claimed.
Properly advancing a claim of set-off can have significant implications in litigation. By advancing a strong set-off claim a Defendant has increased leverage in the litigation and it can save legal costs by not having to commence a separate action. However, it is important to carefully consider whether set-off will be allowed and which type of set-off applies as incorrectly pleading set-off could result in the inability to advance the claim at all if limitation periods are missed. Please contact one of our lawyers at Whitelaw Twining if you have any questions or are involved in litigation where set-off is at issue.
Written by Jeremy Ellergodt with contribution from summer student Tayla Basawa.
[1] Thomson Reuters, “Setoff” (last visited 26 July 2023), online: <practicallaw.thomsonreuters.com> [https://ca.practicallaw.thomsonreuters.com/6-382-3817?transitionType=Default&contextData=(sc.Default)]; Holt v Telford, [1987] 2 SCR 193; 37 BLR 241.
[2] Thomson Reuters, “Set-Off in Commercial Contracts” (last visited 26 July 2023), online: <practicallaw.thomsonreuters.com> [https://ca.practicallaw.thomsonreuters.com/8-619-3885?transitionType=Default&contextData=(sc.Default)].
[3] A. Robert Anderson, Thomas Gelbman & Benjamin Pullen, “Recent Developments in the Law of Set-off” (last visited 26 July 2023), online: <www.osler.com/uploadedFiles> [https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjVpby726yAAxWZMDQIHR9vBFgQFnoECAoQAQ&url=https%3A%2F%2Fwww.osler.com%2FuploadedFiles%2FOur_People%2FProfiles%2FG%2FRecent%2520Developments%2520in%2520the%2520law%2520of%2520Set%2520off.pdf&usg=AOvVaw1e_HHBNB37F2-q5B16Odmp&opi=89978449] at 5.
[4] Ibid at 17.
[5] Abacus Cities Ltd. v Aboussafy, 1981 ABCA 136 at paras 23, 32, 40.
[6] Anderson, supra note 5 at 5.
[7] Condominium Corporation No. 0524500 v Andrews, 2015 ABQB 554 at para 31 [Andrews].
[8] Ibid.
[9] Ibid.
[10] Neptune Coring (Western) Ltd. v Sprague-Rosser Contracting Co, 2018 ABQB 883 at para 21.
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] 770865 Alberta Ltd. v 1563480 Alberta Ltd., 2018 ABQB 447 at paras 3-4 [770865 Alberta Ltd.].
[15] Ibid at para 6.
[16] Ibid at para 10.
[17] Ibid at para 10.
[18] Ibid at para 39.
[19] Andrews, supra note 9 at para 38.
[20] Meszarics v Hart Modular Homes, 2020 BCPC 234 at para 1 [Meszarics].
[21] Ibid.
[22] Ibid at para 136.
[23] Ibid at para 140.
[24] Coffey (Estate) v Coffey, 2014 BCSC 110 [Coffey].
[25] 1587855 Ontario Inc. (c.o.b. Bass Installation) v Contract Glaziers Corp., 2016 ONSC 7934 at para 1.
[26] Ibid at para 2.
[27] Ibid at para 3.
[28] Ibid at para 46.
[29] Gowing Contractors Ltd. v Walsh Construction Co. Canada, 2022 ONSC 2192.
[30] Anderson, supra note 5 at 5.
[31] Ibid.
[32] Ibid.
[33] KBR Industrial Canada Co. v Air Liquide Global E&C Solutions Canada LP, 2018 ABQB 257 at paras 5, 7.
[34] Ibid at para 7.
[35] Ibid.
[36] Ibid at paras 36-40.
[37] Andrews, supra note 9 at para 47.
[38] 0856464 B.C. Ltd. v TimberWest Forest Corp., 2014 BCSC 2433 at para 1.
[39] Ibid at paras 409, 415.
[40] Initiate School of the Canadian Rocky Mountains Ltd. v Wolfenden Ventures Ltd., 2010 BCSC 1673 at para 31.
[41] Com Dev Ltd. v Microsat Systems Canada Inc., 2016 ONSC 289 at para 2.
[42] Ibid at paras 184-185.
[43] Ibid at para 184.
[44] Wesbell Networks Inc. (Receiver for) v Bell Canada, 2013 ONSC 7814 at para 11.
[45] Andrews, supra note 9 at para 34.
[46] Coffey, supra note 26 at para 37; Cam-Net Communications v. Vancouver Telephone Co., 1999 BCCA 751 at para 44.
[47] Thyssenkrupp Elevator (Canada) Inc. v 1147335 Ontario Inc., 2015 ONSC 503 at para 10 [Thyssenkrupp].
[48] 770865 Alberta Ltd., supra note 16 at para 134.
[49] Ibid at para 135.
[50] Ibid.
[51] SemCanada Crude Co. (Re), 2009 ABQB 252 at para 18.
[52] Dahl (Re), 2018 BCSC 889 at para 6.
[53] Ibid at paras 7, 10.
[54] Ibid at paras 26, 32.
[55] Ibid at paras 30-31.
[56] Meszarics, supra note 22 at paras 141-142.
[57] GSI Environment Inc. v Ottawa (City), 2013 ONSC 4158 at paras 82-83.
[58] Ibid at para 83.
[59] Ibid.
[60] Thyssenkrupp, supra note 49 at paras 24-27.