Equitable Set-Off (Limitations)

LV Windows v. 7194145 Canada Ltd., 2020 ONSC 3177 (CanLII)

[28] Section 111(2) of the Courts of Justice Act provides that mutual debts may be set off against each other, even if they are of a different nature.

[29] In 1808059 Ontario Ltd. v. Galaxy Entertainment Inc., 2015 ONSC 1214, at para. 17, the court noted that:

Equitable setoff is an available remedy where a defendant’s cross-claim is liquidated or unliquidated and whether or not it arises out of the same contract. Agway Metals Inc. v. Dufferin Roofing Ltd., [1991] O.J. No. 9, 46 C.P.C. (2d) 133 (Ont. Gen. Div.) aff’d [1994] O.J. No. 3671, 30 C.P.C. (3d) 295 (Ont. C.A.).

[30] In Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, the Supreme Court of Canada set out the following preconditions for the granting of the remedy of an equitable set off:

a) there must be some equitable basis to resist the plaintiff’s claim;

b) the equitable ground must go to the essence of the plaintiff’s claim; and

c) it would be manifestly unjust to enforce the plaintiff’s claim without taking into consideration the defendant’s claim.

See also Spiral Aviation Training Co., LLC v. Canada (Attorney General), 2010 ONSC 2581, at para. 7.

[31] In Canada Trustco Mortgages Co. v. Pierce Estate (2005), 2005 CanLII 15706 (ON CA), 254 D.L.R. (4th) 79 (Ont. C.A.), the Court of Appeal for Ontario held that an equitable set off provides a complete defence to a statutory limitation period.

Cora Franchise Group Inc. v. Watters, 2017 ONCA 286 (CanLII)

[1] The appellant, principal owner of 2176693 Ontario Ltd., a franchisee of the respondent, appeals a summary judgment against him as guarantor of the franchisee’s indebtedness.

[2] The appellant does not dispute the franchisee’s indebtedness or his obligation as guarantor. However, he asserted by way of set-off and sought to assert by way of counterclaim a claim for damages arising from the loss of the potential sale of the franchise which failed to close when the franchisee refused to provide the franchisor with a release as required by the franchise agreement.

[3] The motion judge found that there was no basis for the appellant to assert a set-off and that the franchisee’s claim for damages flowing from the loss of the sale was statute barred.

[4] We see no error on the part of the motion judge.

[5] The franchise agreement explicitly precludes set-off and, in any event, the right to damages asserted is that of the franchisee not the appellant. Moreover, the motion judge did not err including that any claim for damages was barred by the limitation period.

William Watters, et al. v. Cora Franchise Group Inc., 2017 CanLII 63611 (SCC)

The application for leave to appeal from the judgment of the Court of Appeal for Ontario, Number C62520, 2017 ONCA 286, dated March 31, 2017, is dismissed with costs.

Technicore v Mardave, 2016 ONSC 3486 (CanLII)

[43] The proposed amendments to the Defendants’ pleading include the following:

44. Mardave pleads and relies upon s.111 of the Courts of Justice Act, RS.O. 1990, c. C-43.”

[44] That section of the Courts of Justice Act, with my emphasis added, reads as follows:

111(1) Set off - 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) Idem - Mutual debts may be set off against each other even if they are of a different nature.

(3) Judgment for defendant - Where, on a defence of set off, a larger sum is found to be due from the plaintiff to the defendant than is found to be due from the defendant to the plaintiff, the defendant is entitled to judgment for the balance.

[45] The interaction of these provisions of the Courts of Justice Act and the Limitations Act, 2002 is addressed by Section 20 of the Limitations Act, 2002 provides:

“This Act does not affect the extension, suspension or other variation of a limited period or other time limit by or under another Act.”

[46] Without any evidence of late discovery of the items now sought to be raised as justifying a $800,000 counterclaim I am satisfied that the time for bringing such claims expired two years from the certification of Substantial completion in August of 2012. A motion to add a counterclaim brought in January of 2015 is too late.

[47] However, I am satisfied that reaching that conclusion does not prevent the assertion of a set off r. Limitation periods do not appear to apply to set offs as they are not “claims” but traditionally have been regarded as in the nature of equitable defences. The legislature has established the extent of the utility and availability of such defences, not in the Limitations Act but rather in the Courts of Justice Act.

[48] I interpret the provisions of the Courts of Justice Act as permitting claims of the nature sought to be added by the defendant, without any time limitation being applicable, so long as they are asserted only as set off claims.

IX. Disposition

[49] I therefore am not permitting the requested amendment to add a counterclaim as in my view such a claim is clearly statute barred.

[50] I am however allowing the other amendments sought to the defence including the proposed paragraph setting out the quantum of the set off now sought. I regard this as paralleling the commonly granted request made by plaintiffs to increase the quantum of damages claimed by them even after the expiry of a limitation period.

Eftimovski v. Faris, 2014 ONSC 2476 (CanLII)

[15] The only such “conflicting decisions” suggested and relied upon by the third party, in support of its Rule 62.02(4)(a) arguments, were two decisions of the Ontario Court of Appeal; two decisions which, TSH says, were binding on Justice Rady and should have precluded at least some of her proffered reasons for dismissing the third party’s motion for summary judgment. In particular:

i. Insofar as Justice Rady felt that application of the relevant limitation period to counterclaims was an open and unsettled question, (based on her use of the definition of “originating process” set forth in the Rules of Civil Procedure to assist with interpretation of the word “proceeding” used in the Limitations Act, 2002, supra), this was said to conflict with the Court of Appeal’s decision in Giglio v. Peters, 2009 ONCA 681 (CanLII), (2009) O.J. No. 3945 (C.A.); and

ii. Justice Rady’s reference to certain circumstances of the case was said to reflect her application of the common law doctrine of “special circumstances”, which in turn was said to conflict with the Court of Appeal’s decision in Joseph v. Paramount Canada’s Wonderland, 2008 ONCA 469 (CanLII), (2008) O.J. No. 2339 (C.A.), confirming that the doctrine did not survive enactment of the Limitations Act, 2002, supra.

[16] I will return to the substantive merit of those suggestions below, when considering whether the third party has satisfied the second branch of the test for granting leave to appeal, set forth in Rule 62.02(4)(b).

[37] In that regard, paragraphs 19-22 of the Court of Appeal’s Giglio decision read, in part, as follows:

The meaning of “proceeding” in s.4 of the Limitations Act, 2002, is a question of statutory interpretation. As with any question of statutory interpretation, context and legislative purpose are paramount considerations. …

Here the word “proceeding” appears in a statute that … seeks to bar stale claims. …

In the light of this context and the statute’s purpose, and in the absence of any definition of “proceeding” in the statute itself, successive panels of this court have turned to the definition of “proceeding” in the Rules of Civil Procedure. Both Feldman J.A. in Meady v. Greyhound Canada Transportation Corp. (2008), 2008 ONCA 468 (CanLII), 90 O.R. (3d) 774 (C.A.), and later Simmons J.A. in Placzek v. Green (2009), 2009 ONCA 83 (CanLII), 245 O.A.C. 220 (C.A.), have held that the word “proceeding” in s.4 of the Limitations Act has the same meaning as “proceeding” in r.1.03 of the Rules of Civil Procedure.

“Proceeding” under r.1.03 refers to the commencement of litigation either by action or application. … Thus, under r.1.03(1):

o “Proceeding” means an action or application; [and]

o “Action” means a proceeding that is not an application and includes a proceeding commenced by statement of claim, notice of action, counterclaim, cross-claim, or third or subsequent party claim. …

[Emphasis added.]

[44] First, as noted above, Justice Rady cross-referenced and incorporated, as a further independent reason for dismissing the motion for summary dismissal of the defendant’s counterclaim, her reasons and decision in relation to the pleading amendment issue. In that regard:

• As a limitation period could not bar assertion of a defence, as confirmed by authorities such as Pierce v. Canada Trustco Mortgage Co. (2005), 2005 CanLII 15706 (ON CA), 197 O.A.C. 369 (C.A.), Justice Rady properly granted leave permitting amendment of the defendant’s pleading to advance a defence of equitable set-off, and the corresponding request for an accounting to determine the merits and extent of that defence.

• No steps were taken to appeal Justice Rady’s decision permitting that amendment. Nor has there been any suggestion, (let alone a formal motion), that the defence of equitable set off is amenable to determination by way of summary judgment. The defence of equitable set off and the issues it raises, (i.e., the merits of the defendant’s claims vis-à-vis the plaintiffs), therefore now will form part of the issues for trial. To use the wording of Rule 20.04(1)(a), there apparently is no dispute that they effectively constitute “genuine issues requiring a trial with respect to a … defence”.

• The defendant’s counterclaim involves and reflects the same issues raised by the defence of equitable set off, and to me it seems somewhat axiomatic that matters already forming genuine issues requiring a trial cannot simultaneously be characterized as issues not requiring a trial. As emphasized by our Court of Appeal in Pipeline Mechanical Services Ltd. v. Metro Capital Management Inc., (2006) O.J. No. 4582 (C.A.), where there is a triable issue in relation to the matters underlying both the claims in a counterclaim and a defence of equitable set off, both should proceed to trial as far as summary judgment is concerned.

[45] Having regard to such considerations, I am far from persuaded that there is room for “very serious debate” as to the correctness of Justice Rady’s decision permitting the defendant’s counterclaim to proceed to trial on that alternate basis.

Bankruptcy of Kenneth Temple, 2012 ONSC 376 (CanLII)

[22] Can it be said as a result of Tolofson that limitation laws are now to be taken as substantive rather than procedural? In Ontario, that is questionable, as s. 23 of the Limitations Act, 2002, [page381] enacted some eight years after Tolofson, provides: "For the purpose of applying the rules regarding conflict of laws, the limitations law of Ontario or any other jurisdiction is substantive law." Why would the legislature have said that if the limitations law of Ontario was already substantive? Implicit in the language of s. 23 is that for purposes other than applying conflict of law rules, the limitations law of Ontario is not substantive.

[23] But more importantly, it does not follow that even if it can be said that limitation periods in general should now be considered substantive rather than procedural, the obligation, in our case a debt, has been extinguished, at least in Ontario. There are provinces that have enacted provisions in their limitations legislation that expressly provide that upon the expiry of a limitation provision, rights are extinguished. For example, in the British Columbia Limitations Act, R.S.B.C. 1996, c. 266, s. 9 provides

9(1) On the expiration of a limitation period set by this Act for a cause of action to recover any debt, damages or other money, or for an accounting in respect of any matter, the right and title of the person formerly having the cause of action and of a person claiming through the person in respect of that matter is, as against the person against whom the cause of action formerly lay and as against the person's successors, extinguished.

[24] Ontario has enacted no such provision in the Limitations Act, 2002.

[25] If the policy behind limitation periods is to prevent stale claims from being litigated, that policy would not be relevant to situations such as set-off. If there were debts owed between two persons, would set-off be disallowed because one of the debts was older than the applicable limitation period? There would be no policy reason behind such a result. If one of the debts was no longer owed, however, because of an intervening limitation period, disallowing a set-off would be the result.

[26] Another example would be a Cherry v. Boultbee [(1839), 4 My & Cr. 442, 41 E.R. 171] situation, a rule which confers a right analogous to that of set-off. This rule applies to cases where a person obligated to contribute to a fund is entitled to make a claim against that fund. The rule allows the administrator of the fund to require that the person obligated must fulfill the duty to contribute before being allowed to participate in the fund. The theory is that the person obligated satisfies its own claim by receipt of an asset of the fund, i.e., its own indebtedness. See Olympia & York Developments Ltd. v. Royal Trust Co. (1993), 1993 CanLII 8578 (ON CA), 14 O.R. (3d) 1, (1993) O.J. No. 1510 (C.A.) and Paragon Development Corp. v. Sonka Properties Inc. (2009), 2009 CanLII 13627 (ON SC), 96 O.R. (3d) 574, (2009) O.J. No. 1278 (S.C.J.), affd (2011), 2011 ONCA 30 (CanLII), 103 O.R. (3d) 481, (2011) O.J. No. 127 (C.A.). [page382] There would be no policy reason to ignore the rule because a limitation period precluded a claim against the person obligated to contribute to the fund. Indeed, albeit pre-Tolofson, the Supreme Court held in Canada Trust Co. v. Lloyd, 1968 CanLII 95 (SCC), (1968) S.C.R. 300, (1968) S.C.J. No. 16 that the rule in Cherry v. Boultbee applied in spite of a limitation period having expired against the persons obliged to contribute. Hall J. stated [at p. 306 S.C.R.]:

The three directors in question took the moneys and enjoyed the full benefits thereof since 1921. Their situation is analogous to that of a legatee who must bring into account even a statute barred debt before he can claim the legacy left to him in the testator's will.

[27] Tolofson did not deal at all with this kind of a situation, or a situation like a bankruptcy application of the kind before me, and I do not read it as requiring a conclusion that a debt will be extinguished if a suit to enforce a creditor's right to payment is not commenced within an applicable limitation period.

[28] In my view, in Ontario it cannot be said that a debt is extinguished if an action on the debt is not brought within two years of its being due. Rather, the debt continues to be owed. Thus, such a debt can be the basis on which an application for a bankruptcy order can be made. Such a debt can also be the basis for a provable claim by a creditor in a bankruptcy. This would not, of course, preclude an order in a proper case under s. 43(11) of the BIA staying a bankruptcy application if it were inequitable to permit the application for some kind of laches, perhaps of the kind involved in Tynte (Re).

[29] In summary, the Limitations Act, 2002 is not applicable to a bankruptcy application. Moreover, the fact that no suit has been brought on a debt owing to the applicant within two years of the date of the bankruptcy application is no defence to a bankruptcy application based on that debt as the debt continues to be owed.