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In litigation, a set-off is, most simply, a credit sought by the defendant to be applied against a plaintiff’s claim. Essentially, it is an amount that the defendant claims the plaintiff owes him/her which should be subtracted from any damages claimed by the plaintiff.

In Canadian law, there are two types of set-offs: legal and equitable. Legal set-off is grounded in statute law while equitable set-off derives from the less strict, law of equity

Legal Set-Off

Legal set-off requires two elements:

  1. The two opposing obligations be liquidated debts or money demands which can therefore be ascertained with certainty. Set-off is not available as a defence to a claim for damages. The remedy in that case would be a counterclaim; and
  2. The two obligations or debts must be between the same parties to the litigation.

The statutory foundation for a legal set-off is found within the Ontario Courts of Justice Act in section 111. Note that it deals with a response to an action in debt.

111 (1) In an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant.

(2) Mutual debts may be set off against each other even if they are of a different nature.

Equitable Set-Off

Equitable set-off on the other hand does not require that the two opposing obligations be liquidated or certain. Further, there is no need to establish a strict mutuality. There is, however, a requirement that there be a close connection between the two claims. The close connection is necessary in order to attract the equitable jurisdiction of the court. Finally the availability of an equitable set-off must not create an inequity in itself.

As was said by the Ontario Court of Appeal (OCA) in Algoma Steel Inc. v. Union Gas Ltd.

We have to ask ourselves: what should we do now as to ensure fair dealing between the parties? … This question must be asked in each case as it arises for decision; and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims, which go directly to impeach the plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.

The elements to establish so as to be able to rely on equitable set-off in Canada stem from the Supreme Court of Canada’s (SCC) decision in Holt v Telford. They are as follows:

  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.

Is Set-Off a Defence or a Claim?

This distinction is critically important where a limitation period intervenes.

If, for example, the defendant was sued on a debt but was owed a debt by the plaintiff. The first thought would be a counterclaim. If, however, the defendant’s debt is old, and beyond the date allowed for its enforcement under the relevant limitation period, can it still be used? The answer is no as the cause of action on which the counterclaim is based is now barred by the limitations period. The same would be true of a defence of legal set-off under the statutory scheme set out in section 111 of the Courts of Justice Act.

However, if the defendant can successfully raise the defence of equitable set-off, then no limitation period would prevent them from doing so. This was first established in Ontario by the OCA in the Algoma Steel decision. Following the English cases on the subject, the OCA concluded that equitable set-off is a true substantive defence, and, as with all substantive defences,  can be raised to defend any claim at anytime. This amounts in law to an equitable defence.

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