Simon's Megalomaniacal Legal Resources

Set-off - Equitable (2)

. Invoice Payment Systems Corp. v. The Block Inc.

In Invoice Payment Systems Corp. v. The Block Inc. (Ont Div Ct, 2025) the Ontario Divisional Court partly allowed an appeal, here brought against a finding that the defendant (plaintiff by counterclaim) "was entitled to a set-off for damages ... in an amount that was greater than the amount of the underlying lien claims. The judgment meant the plaintiffs, IPSC and Nikom Construction, were jointly and severally liable to pay the Block $325,824.41.".

Here the court considered an issue of 'equitable set-off', and the set-off provision of s.17(3) of the Construction Act:

Set-off and counterclaim

[25] The Block claimed set-off as a defence to both lien claims and counterclaimed against Nikom Construction for the costs associated with Nikom Construction’s repudiation of the contract.

[26] The trial judge found that The Block was entitled to rely on set-off under s. 17(3) of the Construction Act and equitable set-off as a defence to both lien claims. He found that the fact Nikom Construction assigned its invoices to IPSC should not prevent The Block from being able to set-off its damages against any amount owing to IPSC. To this effect, the trial judge stated at para. 112 that “it would be unjust for The Block to have to pay to IPSC in full for the amount of Nikom's invoices, while not being able to set-off against those amounts for any incomplete work, deficiencies or damages caused by Nikom.”

[27] The trial judge then found that The Block mitigated its damages by re-tendering to complete the work Nikom Construction left unfinished and to correct deficiencies in the work. The Block’s costs to remedy Nikom Construction’s repudiation exceeded the value of the original contracts with Nikom Construction such that that there was $325,824.41 still owing to The Block.

[28] From these findings, the trial judge allowed the counterclaim in part. This resulted in the order that the plaintiffs pay the amount of $325,824.41 to The Block.

....

Issue 2: Did the trial judge err in finding IPSC liable for damages to The Block?

[41] The appellant addresses this ground of appeal in two separate but inter-related ways. First it submits that the trial judge erred in awarding damages against IPSC when The Block only counterclaimed against Nikom Construction. Second, it submits that the trial judge erred in setting off more than the value of IPSC’s lien and awarding compensation to The Block for the entire extent of the damages caused by Nikom Construction.

[42] The first submission can be readily dealt with. It is undisputed that The Block only counterclaimed in damages against Nikom Construction. However, The Block did plead set-off against both Nikom Construction and IPSC. When the trial judge’s reasons are read fairly and holistically, he did not grant an alleged counterclaim for damages against IPSC. Rather, the trial judge made the order that he did under the rubric of a set-off.

[43] This then brings me to the discussion of whether the trial judge erred in doing so.

[44] The appellant submits that Nikom Construction only assigned IPSC the benefits of the contract. They argue that assignment of a contractual benefit does not make an assignee liable in contract absent an express agreement providing for liability and that s. 111 of the Courts of Justice Act, R.S.O. 1990, c. C.43, which allows for set-off claims to exceed the underlying claims, does not apply to assignees of contractual rights. Moreover, in the alternative, they argue that the principles underlying equitable set-off or statutory set-off under the Construction Act result in The Block’s set-off claims against IPSC being limited to the amount IPSC received from Nikom Construction.

[45] The respondent argues they are entitled to statutory set-off under s. 17(3) of the Construction Act and equitable set-off. They argue the statutory set-off is broader than equitable set off and that it would be patently unfair to deny The Block the benefit of the statutory set-off, despite no direct contract between The Block and IPSC, as IPSC claimed the benefit of the statute as a lienholder. The respondent submits that equitable set-off also applies because the claims arise from the same series of transactions and failure to allow set-off would be unjust. They state that holding otherwise would run contrary to the purpose of the Construction Act and allow contractors to circumvent liability by assigning invoices mid-project.

[46] To begin the analysis, legal set-off does not apply. Although the trial judge made a reference to it, his decision, for good reason, does not rely upon it. Section 111(3) of the Courts of Justice Act, which expressly authorizes awards to the defendant when the set-off is greater than the original claim, does not apply in the case at bar because there is no mutuality of debts: Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193; Algoma Steel Inc. v. Union Gas Ltd. (2003), 2003 CanLII 30833 (ON CA), 63 O.R. (3d) 78 (C.A.), at paras. 23-24.

[47] Although the reasons are brief and it is not explicit, the trial judge appears to have applied both equitable set-off and set-off as found within s. 17(3) of the Construction Act.

[48] The appellant does not contest the application of set-off by the trial judge. The core complaint is that the trial judge erred by awarding more than what was claimed by IPSC, in effect making IPSC liable for damages committed by Nikom Construction in the absence of any counterclaim against it by The Block.

[49] Equitable set-off arises when there are cross obligations which are so closely connected or related that it would be inequitable to permit one party to enforce its obligation without permitting a set-off to the other: Canada Trustco Mortgage Co. v. Sugarman (1999), 1999 CanLII 9288 (ON CA), 179 D.L.R. (4th) 548 (Ont. C.A.). Put simply, “it would be unjust to permit one party to enforce payment without taking into account the commitment flowing the other way”: Architectural Millwork v. Provincial Store, 2015 ONSC 4913, 51 C.L.R. (4th) 25, at para. 60, aff’d 2016 ONCA 320, 51 C.L.R. (4th) 42.

[50] The leading case on equitable set-off is Holt v. Telford, which sets out the five principles that underlie equitable set-off at p. 212. See also Scott v. Golden Oaks Enterprises Inc., 2024 SCC 32, 497 D.L.R. (4th) 1, at para. 92.

[51] As previously noted, the application of those principles is not seriously in dispute here. In other words, the trial judge did not err in setting off what The Block owed to IPSC as a lienholder.

[52] Section 17(3) of the Construction Act also deals with set-off in determining the value of a lien. It states:

(3) Subject to Part IV, in determining the amount of a lien under subsection (1) or (2), there may be taken into account the amount that is, as between a payer and the person the payer is liable to pay, equal to the balance in the payer’s favour of all outstanding debts, claims or damages related to the improvement or, if the contractor or subcontractor, as the case may be, becomes insolvent, all outstanding debts, claims or damages whether or not related to the improvement.

[53] The rights of set-off recognized by s. 17(3) of the Construction Act are wide-ranging and broad: McGuinness, Construction Lien Remedies in Ontario, 2nd ed. (Toronto: Carswell, 1997), at pp. 218-219; C & A Steel (1983) Ltd. v. Tesc Contracting Co. Ltd. (1998), 1998 CanLII 14682 (ON SC), 39 O.R. (3d) 155 (Gen. Div.).

[54] Although equitable set-off and s. 17(3) set-off operate differently, they overlap more than they diverge as s. 17(3) set-off is of an equitable nature: McGuinness, at pp. 218-19.

[55] In my opinion, although the issue was left undecided in 13736 Canada Ltd. v. Cozy Corner Bedding Inc., 2020 ONCA 235, 150 O.R. (3d) 83, at para. 54, I find that a set-off in these circumstances whether under equity or s. 17(3) of the Construction Act cannot be greater than the lien. This arises from the nature of set-off and the wording of s. 17(3).

[56] Equitable set-off is a defence, not a counterclaim, that is available when the defendant has a claim of set-off closely connected to the plaintiff’s claim: P.I.A. Investments Inc. v. Deerhurst Limited Partnership (2000), 2000 CanLII 16819 (ON CA), 20 C.B.R. (4th) 116 (Ont. C.A.), at para. 32. The authors in R. Meacher, D. Heydon, and M. Leeming, in Equity: Doctrines and Remedies, 4th ed. (Sydney: Butterworths, 2002) summarize the concept of set-off and how it compares to a counterclaim at p. 1074 in the following manner;

A set-off is said to exist when a defendant, in answer to a plaintiff’s claim, is able to plead successfully that a countervailing claim which he has against the plaintiff absolves him, wholly or partially, from liability to the plaintiff. It is to be distinguished from a counter-claim, in that a counter-claim is never a defence to a plaintiff’s claim but an entirely independent action brought by a defendant against a plaintiff although in the same proceedings. A counter-claim must be used offensively; it cannot be used defensively. But a set-off, like an estoppel, and in the same limited sense, is a shield, not a sword. [Footnotes omitted.]

[57] For this reason, equitable set-off, as a substantive defence rather than a counterclaim, is not precluded by a limitation period, even if that is a bar to a counterclaim: Canada Trustco Mortgage Co. v. Pierce (2005), 2005 CanLII 15706 (ON CA), 254 D.L.R. (4th) 79 (Ont. C.A.), at paras. 43-46, leave to appeal refused, [2005] S.C.C.A. No. 337; World Financial Solutions Inc. v. 2573138 Ontario Ltd., 2025 ONSC 3111, at para. 59.

[58] Relevant to the issue before me, in Cozy Corner Bedding Inc., at para. 37, Zarnett J.A. described equitable set-off thusly:

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. 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". [Citations omitted.] [Emphasis added.]

[59] Authorities have rejected the use of equitable set-off as a sword rather than a shield when it is raised. In Toronto Kosher v. Windward Drive Holdings, 2011 ONSC 4398, at para. 61, in an application dealing with the assignment of a commercial lease, Belobaba J. described this argument as “a strikingly novel proposition” that “ask[ed] the court to transform equitable set-off from a shield into a sword and in doing so to ignore the numerous breaches of due process and fair hearing that would follow if the assignee was not only bound by the equities but was exposed to liability on the entire amount of a judgment even after the lease ended and set-off was no longer available”.

[60] Similarly, in Tri-Lag Corp. v. York Region District School Board, 2017 ONSC 1523, 3 L.C.R. (2d) 298, at para. 31, the court followed Toronto Kosher and agreed that this argument amounted to “ignor[ing] the well-established case law and allow[ing] [the defendants] to use set-off as a ‘sword’ rather than as a ‘shield’ … The use of set-off in this way would be to bestow a damages windfall in circumstances that would be unfair and inequitable.”

[61] Lastly, the result is no different if the set-off provision found in s. 17(3) is considered. While the ambit of the subsection is broad, it is not unconstrained. Subsection 17(3) explicitly limits its operation to “determining the amount of the lien.” The value of a lien is limited by the section that creates it to the price of the services and materials that have been supplied by the lien claimant: McGuiness, at pp. 212-213. Under s. 17(3), the value of the lien that is set-off by a balance of outstanding debts, claims, or damages owing that is greater than the lien, can only reduce the lien to nil in the absence of a counterclaim and cannot result in an award against the lienholder: Sundance Development Corp. v. Islington Chauncey Residences Corp., 2023 ONSC 5239, at para. 220.

[62] Accordingly, the trial judge erred in making an award against IPSC and I would grant this ground of appeal.

. 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.