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Set-off - Equitable (2)

. Gomes v. Da Silva

In Gomes v. Da Silva (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal, here from an order which dismissed a "claim for a resulting trust and grant[ed] the respondents’ claim for partition and sale".

Here the court assesses an equitable set-off issue:
[21] The trial judge found that the defence of equitable set-off was inapplicable on the facts of this case, as the appellant’s claim did not arise out of the same contract or series of events that gave rise to the respondents’ claim, nor was it closely connected with it: Canaccord Genuity Corp. v. Pilot, 2015 ONCA 716, 340 O.A.C. 359, at para. 57, citing Telford v. Holt, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at pp. 211-212. The claim related to work allegedly undertaken before the respondents were even on title, work for which the appellant had never previously sought compensation. The trial judge found the claim for work done before 2012 “ha[d] nothing to do with [the respondents’] right to ask for partition and sale.” Further, given that equitable set-off did not apply, the appellant’s claim was subject to a two-year limitation period, which had expired. We see no error in the analysis or conclusions of the trial judge.
. Scott v. Golden Oaks Enterprises Inc.

In Scott v. Golden Oaks Enterprises Inc. (SCC, 2024) the Supreme Court of Canada dismissed a civil litigation appeal, here where the main question was "how the common law doctrine of corporate attribution should be applied to a “one-person” corporation controlled by its sole officer, shareholder, and directing mind".

Here the court briefly characterizes 'equitable set-off':
[91] Equitable set-off is available on a broader basis than legal set-off. Equitable set-off applies to both liquidated and unliquidated claims and regardless of whether there is mutuality (Holt, at p. 212; Palmer, at p. 5; Judge and Grottenthaler, at p. 99; Honsberger and DaRe, at p. 332; Wood, at pp. 101-2). In considering whether to grant equitable set-off, courts “look at the connection between debts that are sought to be set off against each other. If the connection between the debts is such that it would be unfair or inequitable to stand without set-off, then the courts will permit it” (Honsberger and DaRe, at p. 332 (footnote omitted); see also McElcheran, at p. 44; Judge and Grottenthaler, at pp. 113-14; Palmer, at p. 5; Wood, at pp. 101-2). “Equitable set-off is available if the transactions or dealings are so inseparably connected that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim” (Wood, at p. 102).

[92] The leading case on equitable set-off in Canada is this Court’s decision in Holt, in which Wilson J. affirmed the following summary of the principles governing equitable set-off:
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 . . . .

5. Unliquidated claims are on the same footing as liquidated claims . . . . [Citations omitted.]

(Holt, at p. 212, citing Coba Industries Ltd. v. Millie’s Holdings (Canada) Ltd., 1985 CanLII 144 (BC CA), [1985] 6 W.W.R. 14 (B.C.C.A.), at p. 22, per Macfarlane J.A.)
[93] Canadian courts have recognized a judicial discretion to disallow a defence of equitable set-off when the party invoking the defence does not have “clean hands” or is tainted by some other form of inequity (Palmer, at pp. 66-67; see also Grand Financial Management Inc. v. Solemio Transportation Inc., 2016 ONCA 175, 395 D.L.R. (4th) 529, at para. 98; Stewart v. Bardsley, 2014 NSCA 106, 353 N.S.R. (2d) 284, at paras. 58-59 and 61). This is because “Courts of Equity do not permit parties to gain advantages that accrue to them solely through their own default” (Palmer, at p. 67, citing Re Jason Construction Ltd. (1972), 1972 ALTASCAD 54 (CanLII), 29 D.L.R. (3d) 623 (Alta. S.C. (App. Div.)), at p. 628, per Johnson J.A.). To seek equity’s assistance, “[t]he plaintiff must not only be prepared now to do what is right and fair, but he must also show that his past record in the transaction is clean; for ‘he who has committed inequity . . . shall not have Equity’” (Palmer, at p. 66, citing Snell’s Principles of Equity (28th ed. 1982), by P. V. Baker and P. St. J. Langan, at pp. 32-33). It is also settled that the iniquitous conduct must have an “immediate and necessary relation” to the particular transaction at issue, such that it would be “unjust” to grant relief in light of the conduct; the claimant’s general depravity, for instance, is irrelevant (Snell’s Equity (34th ed. 2020), by J. McGhee and S. Elliott, at p. 96; I. C. F. Spry, The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages (9th ed. 2014), at p. 254; see also Stewart, at paras. 62 and 65; DeJesus v. Sharif, 2010 BCCA 121, 284 B.C.A.C. 244, at paras. 85-86).

[94] Courts have refused to allow equitable set-off in a wide range of circumstances. Examples include when the claimant abused a position of trust within a corporation or was otherwise guilty of corporate misfeasance; wrongfully retained funds or failed to disburse them in contravention of an agreement; or waived payment of their claim (see Palmer, at pp. 67-71). The circumstances in which courts will deny equitable set-off are not “closed or well defined, as undoubtedly the capacity for defendants to act inequitably will continue to grow over time” (p. 67).

....

[97] In essence, the appellants did not come to court with clean hands because their wrongful conduct was at the heart of their claim for set-off, thus disentitling them from the benefit of the defence of equitable set-off (see Strellson AG v. Strellmax Ltd., 2018 ONSC 1808, 62 C.B.R. (6th) 328, at para. 43). This is a sufficient basis to dismiss this ground of appeal.
. Espartel Investments Limited v. Metropolitan Toronto Condominium Corporation No. 993

In Espartel Investments Limited v. Metropolitan Toronto Condominium Corporation No. 993 (Ont CA, 2023) the Court of Appeal briefly states the doctrine of equitable set-off:
[38] In general terms, the doctrine of equitable set-off allows a defendant to “set-off” damages, in some cases, on the basis of a closely connected crossclaim against the plaintiff: Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at p. 212. ...
. Inuksuk I (Ship) v. Sealand Marine Electronics Sales and Services Ltd

In Inuksuk I (Ship) v. Sealand Marine Electronics Sales and Services Ltd (Fed CA, 2023) the Federal Court of Appeal considered a lawsuit in maritime law, where - amongst other interesting things - one 'arrests' ships, and once security is paid, they are released again.

In these quotes the court considers 'equitable set-off', here advanced as a defence (and also in the alternative, in case the court was wrong):
[60] ... Despite my serious reservations about this argument, I will simply follow the reasoning proposed by the appellants as they recognized that it was essential to their thesis that the jurisprudential criteria for establishing equitable set-off be met.

[61] In Telford, in the context of assignment of mortgages, the Supreme Court of Canada endorsed the test for equitable set-off outlined by the British Columbia Court of Appeal in Coba Industries Ltd. v. Millie’s Holdings (Canada) Ltd. (1985), 1985 CanLII 144 (BC CA), 65 B.C.L.R. 31, 20 D.L.R. (4th) 689 (C.A.) [Coba Industries]:
1. The party relying on a set‑off must show some equitable ground for being protected against his adversary's demands: Rawson v. Samuel, [1841] Cr. & Ph. 161, 41 E.R. 451 (L.C.).

2. The equitable ground must go to the very root of the plaintiff's claim before a set‑off will be allowed: [Br. Anzani (Felixstowe) Ltd. v. Int. Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 W.L.R. 451, [1979] 2 All E.R. 1063].

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: . . . [Fed. Commerce and Navigation Co. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066].

4. The plaintiff's claim and the cross‑claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div. Ct.); Br. Anzani.

5. Unliquidated claims are on the same footing as liquidated claims: Nfld. v. Nfld. Ry. Co., [1888] 13 App. C. 199 (P.C.)].

(Telford at 212, citing Coba Industries) [underline added]
[62] In The Didymi, our Court, exercising its jurisdiction over a maritime matter, adopted the same approach a few months before Telford. This Court applied the principles from Fed. Commerce, also known as The Nanfri (particularly in passages later expressly referred to in Telford at pp. 213-214), which, in its view, were in harmony with the principles set out in Coba Industries.
On the authorities already referred to, a right of equitable set-off relies on much more than the mere existence of a cross-claim. As Lord Denning put it in The Nanfri in a passage already recited, it is only "cross-claims that arise out of the same transaction or are closely connected with it" and "which go directly to impeach the plaintiff's demands" such as to render it "manifestly unjust to allow him to enforce payment without taking into account the cross-claim" that may be the subject of an equitable set-off.
(The Didymi at 410–11)

[63] Thus, equitable set-off requires the cross-claim to go to the very root of the plaintiff’s claim; only cross-claims that go directly to impeach the plaintiff’s claim meet the test. It is because of the nature of this connection that equity cannot countenance separating them: to do so would be manifestly unjust.
. Golden Oaks Enterprises Inc. v. Scott

In Golden Oaks Enterprises Inc. v. Scott (Ont CA, 2022) the Court of Appeal considered the operation of equitable set-off in a bankruptcy context:
(b) The trial judge did not err in law in applying the test for set-off under s. 97(3) of the BIA.

[62] The appellants argue that the amounts they have been ordered to repay in interest payments should be set off against the principal amounts of their outstanding loans to Golden Oaks. The appellants base their argument on the doctrine of equitable set-off.

[63] According to the appellants, the trial judge erred because she did not permit the appellants to have the amounts they invested as principal in Golden Oaks set off against the interest to be repaid by virtue of the unjust enrichment claim. The appellants do not appeal the trial judge’s finding that legal set-off was unavailable to them and base their arguments on appeal instead on the trial judge’s finding that equitable set-off did not apply either.

[64] I am not persuaded by these submissions.

[65] The trial judge’s conclusion rejecting these arguments at trial, correctly in my view, was set out in two brief paragraphs, 549 and 550:
Equitable set-off arises “where there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off”: King Insurance, at para. 15.

In my view, the defendants’ argument for equitable set-off is simply a repackaging of their net loser argument and their argument for notional severance. In King Insurance, Cumming J. observed that “because the effect of set-off is to prefer one creditor over the general body of creditors (inasmuch as the effect is to give the setting‑off creditor a full recovery of the amount set-off), the permissible set-off [under s. 97(3)] is confined within narrow limits”: King Insurance, at para. 21. I agree. I have already considered the defendants’ submissions on the equities in the context of the juristic reason analysis.



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Last modified: 29-10-24
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