Simon's Megalomaniacal Legal Resources

Set-off - Equitable (2)

. 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.