Alberta Court of Appeal confirms equitable set-off as a defence to summary judgment

The Alberta Court of Appeal recently decided in Tempo Alberta Electrical Contractors Co Ltd. v Man-Shield (Alta) Construction Inc.[1] ("Tempo") that a chambers judge erred in finding that a defence of equitable set-off did not raise a genuine issue for trial when determining whether to grant summary judgment. The matter was returned to the Court of King's Bench for trial.

When a matter is set forward for summary judgment, the party instigating summary judgment must prove that there is no defence. The court then considers the case and whether the moving party was able to demonstrate there is no genuine issue for trial.

The Alberta Court of Appeal upheld that equitable set-off is a defence for summary judgment, and the decision turns to whether there is a genuine interest for trial.

Background

The dispute involved a claim by an electrical subcontractor, Tempo Alberta Electrical Contractors Co Ltd. ("Tempo"), against the general contractor Man-Shield (Alta) Construction Inc. ("Man-Shield") for delay costs, unpaid invoices, change orders, and holdback. Man-Shield filed a statement of defence and counterclaim for the consequences of the delay and specifically plead equitable set-off as a defence to the claim.

Tempo filed for summary judgment against Man-Shield, and the applications judge granted partial summary judgment for the initial $678,261.00 claim amount. Man-Shield appealed to the chambers judge and argued that summary judgment was not available to Tempo, in part due to Man-Shield's defence of equitable set-off.

The lower court on equitable set-off as a defence

The chambers judge considered whether summary judgment is appropriate when the defending party pleads that it has an equitable set-off. The lower court distinguished between a "true defence" and a "set off," noting that granting a summary judgment "does not deprive the responding party with the opportunity to prove the set off at trial." (para 50)

The chambers judge acknowledged that Man-Shield's cross-claim for delay damages raised a genuine issue for trial but found that the equitable set-off was not a genuine defence to Tempo's claims. The chambers judge also held that, because of the long length of time from Tempo’s statement of claim, it would be unjust to make Tempo wait even longer for the courts to determine the set off claim.

The Court of Appeal on equitable set-off as a defence

Man-Shield appealed the lower court's decision to the Alberta Court of Appeal. On appeal, the court considered:

1. Whether equitable set-off is a genuine defence to summary judgment;
2. If equitable set-off is a genuine defence, whether Man-Shield's claim for equitable set-off raised a genuine issue for trial; and
3. If there is a genuine issue for trial, whether Man-Shield's appeal should be denied based on the clean hand's principle.

The Alberta Court of Appeal allowed the appeal and found that the lower court erred in failing to find that equitable set-off is a genuine defence to summary judgment. Noting that equitable set-off is distinguishable from procedural set-off, where two unrelated claims are balanced against one another. Equitable set-off is specifically concerned about two related claims where it would be unjust to consider payment from one party without considering the cross-claim. The Court of Appeal cited two prominent Supreme Court of Canada cases[2] that upheld that equitable set-off is a valid defence barring summary judgment.

Further, the Alberta Court of Appeal rejected the lower court's emphasis on Tempo's length of time since filing the statement of claim or what would be a "just" result. The only question is whether the defence of equitable set-off raised a genuine issue requiring a trial – and here, the lower had conceded that Man-Shield’s cross-claim for delay raised a triable issue.

Lastly, the Court of Appeal considered the clean hands principle, which holds that a party cannot claim equitable set-off if it has ‘unclean hands’ or is benefiting from their own default. Often the principle of unclean hands is associated with common categories of fraud, misrepresentation, deceit, or otherwise iniquitous conduct. More importantly, the unclean hands must be connected to the equitable relief sought or the transaction that underlies the equitable relief.

However, in this case, Tempo's only argument for Man-Shield's alleged unclean hands were from the document dump during summary judgment proceedings and alleged breach of trust in relation to lien funds. Both of these situations of alleged unclean hands are not connected to the transaction between the parties under the agreement.

What does this mean?

The decision in Tempo affirms that equitable set-off is a valid defence to a summary judgment application. The question then turns to whether there is a genuine interest for trial based on the record before the court. The stronger the record of a valid set-off, the likelier that the set-off will prevent summary judgment by raising a genuine issue for trial.

If you have any questions about this article or about construction dispute resolution, please contact the authors or a member of Gowling WLG's Infrastructure and Construction Group, or subscribe to our Building Brief newsletter to stay informed.