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Set-off - Contractual. 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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