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Set-off

1. Legal Set-off
2. Equitable Set-off
3. Contractual Set-off

There are two types of set-off, legal and equitable, and both are normally advanced as defences. They involve the 'set-off' between parties of mutual debts or claims against each other.


1. Legal Set-off

. Canaccord Genuity Corp. v Pilot

In Canaccord Genuity Corp. v. Pilot (Ont CA, 2015) the Court of Appeal set out one of the distinctions between legal and equitable set-off:
[57] In that case, the Supreme Court held that, while legal set-off required mutual debts, equitable set-off could apply where the defendant claimed a money sum arising out of the same contract or series of events that gave rise to the plaintiff’s claim, or was closely connected with that contract or series of events. ...

2. Equitable Set-off

. LV Windows v. 7194145 Canada Ltd.

In LV Windows v. 7194145 Canada Ltd. (Ont CA, 2020) the Divisional Court reviewed the law of equitable set-off:
Issue 4: Does the doctrine of equitable set off apply?

The Law

[28] Section 111(2) of the Courts of Justice Act provides that mutual debts may be set off against each other, even if they are of a different nature.

[29] In 1808059 Ontario Ltd. v. Galaxy Entertainment Inc., 2015 ONSC 1214, at para. 17, the court noted that:
Equitable setoff is an available remedy where a defendant’s cross-claim is liquidated or unliquidated and whether or not it arises out of the same contract. Agway Metals Inc. v. Dufferin Roofing Ltd., [1991] O.J. No. 9, 46 C.P.C. (2d) 133 (Ont. Gen. Div.) aff’d [1994] O.J. No. 3671, 30 C.P.C. (3d) 295 (Ont. C.A.).
[30] In Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, the Supreme Court of Canada set out the following preconditions for the granting of the remedy of an equitable set off:
a) there must be some equitable basis to resist the plaintiff’s claim;

b) the equitable ground must go to the essence of the plaintiff’s claim; and

c) it would be manifestly unjust to enforce the plaintiff’s claim without taking into consideration the defendant’s claim.
See also Spiral Aviation Training Co., LLC v. Canada (Attorney General), 2010 ONSC 2581, at para. 7.

[31] In Canada Trustco Mortgages Co. v. Pierce Estate (2005), 2005 CanLII 15706 (ON CA), 254 D.L.R. (4th) 79 (Ont. C.A.), the Court of Appeal for Ontario held that an equitable set off provides a complete defence to a statutory limitation period.
. Grand Financial Management Inc. v. Solemio Transportation Inc.

In Grand Financial Management Inc. v. Solemio Transportation Inc. (Ont CA, 2016) the Court of Appeal considered the elements of the doctrine of equitable set-off, and when it is subject to limitation periods:
Equitable Set-Off

[92] On the cross-appeal, Grand Financial advances, for the first time, an equitable set-off argument. It submits that it is entitled to set-off against the $175,000 damages at large awarded to Solemio on its counterclaim any amounts owing to it under the Wild Lions Agreement. And, because set-off is a defence and not a claim in itself, Grand Financial contends that, as a defendant to a counterclaim, it was able to raise the defence, and was entitled to do so despite any limitation defence available to Solemio in respect of amounts owing under the Wild Lions Agreement.

[93] In support of the latter submission, Grand Financial relies on the decision of Canada Trustco Mortgage Co. v. Pierce, (2005), 2005 CanLII 15706 (ON CA), 254 D.L.R. (4th) 79, 197 O.A.C. 369 (C.A.), at para. 43, in which this Court adopted the following statement of Lord Denning in Henriksens Rederi AIS v. PHZ Rolimpex, [1973] 3 All E.R. 589 (C.A.), at p. 593:
In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of cross-claim. When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation.
....

[97] Equitable set-off is a defence that is particularly rooted in the circumstances of the individual case. It requires, amongst other things, that the set-off claim go directly to impeach the plaintiff’s demands, the “plaintiff” in this case being Solemio and the “claim” being an award of damages to compensate it for harm suffered as a result of an intentional wrongdoing – the tort of interference with economic relations. To put it another way, the defence requires that the set-off claim be so closely connected to the plaintiff’s demands that it would be “manifestly unjust” to allow the plaintiff (Solemio) to enforce payment without taking into account the set-off claim: see Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at p. 212; Canaccord Genuity Corp. v. Pilot, 2015 ONCA 716 (CanLII), 340 O.A.C. 359, at paras. 55-59; Ang v. Premium Staffing Ltd., 2015 ONCA 821 (CanLII).

[98] In addition, the application of equitable set-off is subject to the equitable doctrine of “clean hands”. The courts will not allow a party to set-off “where there [is] an equity to prevent [the party from] doing so; that is to say, where the rights, although legally mutual, [are] not equitably mutual”: In re Whitehouse & Co. (1878), 9 Ch. D. 595, at p. 597; see also Stewart v. Bardsley, 2014 NSCA 106 (CanLII), at paras. 54-61; Saskatchewan Wheat Pool v. Feduk, 2003 SKCA 46 (CanLII), at para. 63; and Kelly R. Palmer, The Law of Set-Off in Canada (Aurora, Ontario: Canada Law Book Inc., 1993), at p. 66. Here, Grand Financial seeks to set off against its contractual claim under the Wild Lions Agreement Solemio’s judgment for damages caused by Grand Financial’s own intentional wrongdoing, albeit a wrongdoing that may have some connection with, or arise from, the issues regarding the Wild Lions Agreement. Whether equitable set-off would be available as a defence in such circumstances is something that would require viva voce evidence and credibility findings made during an assessment focused on that particular issue.
. 1582235 Ontario Limited v. Ontario

In 1582235 Ontario Limited v. Ontario (Ont CA, 2020) the Divisional Court cited the accepted test for equitable set-off:
[43] The leading authority on equitable set-off is the Supreme Court’s decision in Telford v. Holt.[23] In that decision, Wilson J. (who wrote for the court) relied on a decision of the British Columbia Court of Appeal, which extracted the following principles from the English authorities:
(a) “The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands”;

(b) “The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed”;

(c) “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;”

(d) “The plaintiff’s claim and cross-claim need not arise out of the same contract”;

(e) “Unliquidated claims are on the same footing as liquidated claims”.[24]
. 3113736 Canada Ltd. v. Cozy Corner Bedding Inc.

In 3113736 Canada Ltd. v. Cozy Corner Bedding Inc. (Ont CA, 2020) the Court of Appeal made some useful comments on equitable settlement:
[36] Cozy Corner argues that equitable set-off falls outside of this language because it is a defence, not a claim. Equitable set-off is not, for example, precluded by a limitation period the way a claim is: Grand Financial Management Inc. v. Solemio Transportation Inc., 2016 ONCA 175, 395 D.L.R. (4th) 529, leave to appeal refused: [2016] S.C.C.A. No. 183, at paras. 92 to 94.

[37] I would not give effect to this argument. Although equitable set-off is a defence, it is one that arises from the defendant having a “cross-claim” that is closely connected to the plaintiff’s claim: Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at p. 212. It is a way of raising, as a defence, a plaintiff’s liability to take into account a loss it occasioned to the defendant in reduction of the plaintiff’s claim. It is often referred to as a “claim for equitable set-off”: Canada Trustco Mortgage Co. v. Pierce (Estate Trustee of) (2005), 2005 CanLII 15706 (ON CA), 254 D.L.R. (4th) 79 (C.A.), at para. 50, leave to appeal refused: [2005] S.C.C.A. No. 337.
. Ang v Premium Staffing Ltd.

In Ang v. Premium Staffing Ltd. (Ont CA, 2015) the Court of Appeal cited the elements required for equitable set-off to operate:
[8] The motion judge set out the relevant principles governing equitable set-off approved in Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at p. 212:

1. the party relying on a set-off must show some equitable ground for being protected against his 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.
. Canaccord Genuity Corp. v Pilot

In Canaccord Genuity Corp. v. Pilot (Ont CA, 2015) the Court of Appeal outlined the key factors involved in equitable set-off:
[56] In Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, the Supreme Court of Canada recognized equitable set-off as a defence. In that case, it was not disputed that the Telfords owed the Holts $150,000 plus interest under the provisions of their mortgage agreement. The entire amount of the mortgage became due and payable in the event of default, which had occurred. The Telfords argued, however, that they were entitled to set-off the debt owed to them by Canadian Stanley because when they had “swapped” parcels of land with Stanley, the Telford mortgage formed part of the consideration for the reciprocal transfers: p. 215.

[57] In that case, the Supreme Court held that, while legal set-off required mutual debts, equitable set-off could apply where the defendant claimed a money sum arising out of the same contract or series of events that gave rise to the plaintiff’s claim, or was closely connected with that contract or series of events. The Supreme Court noted the following five principles relevant to equitable set-off, at p. 212: (1) The party claiming set-off must show some equitable ground for being protected from his adversary’s demands; (2) that ground must go to the very root of the plaintiff’s claim; (3) the counterclaim must be so clearly connected with the plaintiff’s demand that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the counterclaim; (4) the claim and counterclaim need not arise out of the same contract; and (5) unliquidated claims are on the same footing as liquidated claims.
. Algoma Steel Inc. v Union Gas Ltd.

In Algoma Steel Inc. v. Union Gas Ltd. (Ont CA, 2003) the court set out the following basics for equitable set-off:
[26] Equitable set-off is available where there is a claim for a sum whether liquidated or unliquidated. In Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, 41 D.L.R. (4th) 385, at pp. 211-12 S.C.R., pp. 398-99 D.L.R., Wilson J., speaking for the court, approved a statement of the applicable principles for equitable set-off found in Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. and Tsang (1985), 1985 CanLII 144 (BC CA), 20 D.L.R. (4th) 689, 36 R.P.R. 259 (B.C.C.A.) at pp. 696-97 D.L.R. Those principles can be summarized as follows:

1. The party relying on a set-off must show some equitable ground for being protected against the adversary's demands.

2. The equitable ground must go to the very root of the plaintiff's claim.

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. [page89]

5. Unliquidated claims are on the same footing as liquidated claims.
. Harvey Kalles Real Estate Limited v. Sochaczewski

In Harvey Kalles Real Estate Limited v. Sochaczewski (Ont CA, 2008) the court set out the elements of equitable set-off:
[32] The requirements for establishing equitable set-off are set out in Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193 where Justice Wilson observed the following:
a. The party relying on the set-off must show some equitable ground for being protected against his adversaries' demands.

b. The equitable ground must go to the very root of the Plaintiff's claim before a set-off will be allowed.

c. 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.

d. The Plaintiff's claim and the cross-claim need not arise out of the same contract.

e. Unliquidated claims are not on the same footing as liquidated claims.

3. Contractual Set-off

. Baylin Technologies Inc. v. Gelerman

In Baylin Technologies Inc. v. Gelerman (Ont CA, 2021) the Court of Appeal considered the contrast between legal and equitable set-off on the one hand, and contractual set-off on the other:
[66] I begin by noting that in Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, Wilson J. confirmed, at p. 204, that legal set-off requires mutual debts. Similarly, Wilson J. held, at p. 206, that equitable set-off is only available in respect of “money sums”. These observations have been noted with approval in the few cases that actually deal with non-monetary claims, including Dresser Industries Inc. v. Vos (1985), 1985 CanLII 1482 (AB QB), 60 A.R. 226 (Master), a case cited in argument by the respondent.

[67] If Baylin was asserting legal or equitable set-off, it does not appear that such a right could be maintained since the concepts of “debt” and “money sums” do not appear to be broad enough to include share certificates or the shares themselves. While shares represent intangible property with value, as Kevin McGuinness concludes in Canadian Business Corporations Law, 3rd ed. (Toronto: Butterworths, 2017), at §18.388, shares of a corporation do not themselves constitute debt obligations owed to the shareholder. The relationship between the corporation and the shareholder is not one of debtor/creditor. He also concludes, at §18.42, that shares are not a “sum of money”. I am prepared to accept, for the purposes of this appeal, that those conclusions are correct.

[68] However, Baylin does not assert legal or equitable set-off. Rather, it asserts a contractual right of set-off arising from section 8.8 of the APA. Contractual rights of set-off are not limited by the requirements of debts and money sums. On this point, Kelly Palmer, in The Law of Set-Off in Canada (Aurora: Canada Law Book, 1993), at p. 263, notes that the normal rules of set-off such as mutuality, liquid debts and connected debts do not apply and that the parties are free to contract for whatever result they wish. He concludes that “agreements to set-off which would, aside from the agreement, not be granted relief due to the absence of the requirements of set-off, will be upheld”.

[69] This view, that the technical requirements of legal and equitable set-off do not apply to contractual set-off, finds support in certain comments of the Supreme Court of Canada in Caisse populaire Desjardins de l'Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94. Although the primary issue in that case was whether the agreement between the parties constituted a security interest for purposes of s. 244(1.3) of the Income Tax Act, Rothstein J., at para. 22, commented on contractual compensation or set-off, stating:
Contractual compensation achieves a similar goal to legal compensation or legal or equitable set-off, the discharge of mutual debts. However, contractual compensation achieves this goal through mutual consent. It provides the contracting parties with a self-help remedy that avoids the technical requirements of legal compensation or legal or equitable set-off: see J.-L. Baudouin and P.-G. Jobin, Les obligations (5th ed. 1998), at para. 981, and K. R. Palmer, The Law of Set-Off in Canada (1993), at pp. 263-64. Both a contract providing for a right of compensation in Quebec and a contract providing for a right of set-off in the common law provinces are to be interpreted by a court in a manner that gives effect to the intentions of the parties as reflected in the words of the contract. [Emphasis added.]
[70] I see no reason in principle why the “money sum” rule should be treated any differently from other technical legal or equitable set-off requirements such as mutuality, liquid debts and connected debts, none of which apparently apply in the contractual set-off context. Accordingly, in my view, the parties to a contract are free to contract for the set-off of money’s worth or property. Put simply, a contract can override legal and equitable set-off principles.

[71] The question then is whether section 8.8 of the APA accomplishes that result. I believe that it does. The principles of contractual interpretation are well-known. They were recently summarized by the Supreme Court of Canada in Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 444 D.L.R. (4th) 77, at para. 74:
This Court has described the object of contractual interpretation as being to ascertain the objective intentions of the parties (Sattva, at para. 55). It has also described the object of contractual interpretation as discerning the parties’ “reasonable expectations with respect to the meaning of a contractual provision” (Ledcor, at para. 65). In meeting these objects, the Court has signalled a shift away from an approach to contractual interpretation that is “dominated by technical rules of construction” to one that is instead rooted in “practical[ities and] common-sense” (Sattva, at para. 47). This requires courts to read a contract “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract” (ibid.).


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