The Alberta Court of Appeal recently released an important construction law decision recognizing equitable set-off as a true defence to a summary judgment application.
In Tempo Alberta Electrical Contractors Co Ltd v Man-Shield (Alta) Construction Inc, 2025 ABCA 310, the Court of Appeal set aside the lower court's decision to award the plaintiff partial summary judgment, holding that equitable set-off is a true defence that may give rise to a genuine issue for trial. The Court of Appeal held that summary judgment cannot be granted if a valid defence, counterclaim or claim for set-off exists. It confirmed that the defence of equitable set-off in summary judgment applications is available where transactions or dealings between parties are so inseparably connected that it would be manifestly unjust to allow a plaintiff to enforce payment without accounting for the defendant's cross-claim.
Background
This dispute arose from a construction project initiated in May 2014, where Shepherd's Care Foundation hired the defendant, Man-Shield, to be the general contractor (GC) for the construction of a seniors' care facility, the Heritage Condominium. In July 2014, the GC subcontracted the plaintiff, Tempo (Subcontractor) to perform most of the electrical work for the project (Subcontract).
Although completed in 2017, the project faced a 45-week delay which led to contested liability over damages and outstanding payments. The Subcontractor commenced an action against the GC for almost C$680,000 in outstanding payments under the Subcontract. The GC counterclaimed for C$2,675,000 in damages, alleging that the Subcontractor's delayed performance caused the resulting damages. As part of its counterclaim, the GC pleaded equitable set-off.
The Lower Court's Decision
The chambers judge granted the Subcontractor partial summary judgment in the sum of C$678,261 for outstanding payments. While the chambers judge noted that there was some merit to the GC's counterclaim which raised a genuine issue for trial, she concluded that the GC had no true defence to the summary judgment application. The chambers judge did not decide whether the GC was entitled to set-off for damages, but nonetheless granted summary judgment.
The Court of Appeal's Ruling
The Court of Appeal held that the chambers judge erred in concluding that the GC's claim to an equitable set-off was not a true defence and set aside the decision. It held that equitable set-off is a defence that may raise a genuine issue for trial and preclude summary judgment.
Key Legal Principles
The Court of Appeal relied on the Supreme Court of Canada's decisions in Holt v Telford (1987) and Scott v Golden Oaks Enterprises Inc (2024), which outline the principles governing equitable set-off:
- The party relying on set-off must show some equitable ground for being protected;
- The equitable ground must go to the very root of the plaintiff's claim;
- A cross-claim must be so clearly connected with the plaintiff's demand that it would be manifestly unjust to allow the plaintiff to enforce payment without considering the cross-claim;
- The plaintiff's claim and cross-claim do not need to arise from the same contract; and
- Unliquidated claims are on the same footing as liquidated claims.
The key factor in this decision is that equitable set-off is available if the transactions or dealings between the parties "are so inseparably connected that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim."
The Burden of Proof
This decision affirms that the party moving for summary judgment must prove both the factual elements of the case and the absence of a genuine issue requiring a trial. If the moving party is the plaintiff, it must also prove that there is no true defence. The decision was set aside because the Subcontractor was unable to meet this burden by failing to demonstrate that no genuine issue arose about equitable set-off as a defence to the claim.
The Culture Shift in Hryniak
The Court of Appeal also clarified that the culture shift towards litigation efficiency and proportionality as advanced in Hryniak v Mauldin does not override the fundamental principles of equitable set-off as the lower court argued. In Alberta, courts recognize that equitable set-off may preclude summary judgment where the defence or counterclaim raises a genuine issue for trial.
The Clean-Hands Doctrine
Citing Scott, the Court of Appeal explained that a party seeking equitable set-off may be denied relief where it comes to the court with unclean hands or where its actions are tainted by some other form of inequity. This doctrine is rooted in the principle that a party seeking equity cannot profit from its own wrongdoing, and that granting relief for wrongful conduct that has an immediate and necessary relation to the transaction at issue would be unjust.
If the wrongful conduct is not at the heart of the claim for set-off, a court will not find that the party is barred from relief. In this decision, the Court of Appeal held that the Subcontractor failed to demonstrate wrongful conduct by the GC that would disentitle it from a defence of equitable set-off. Specifically, the Court of Appeal did not find that document dumping during the proceedings and an alleged breach of trust amounted to the type of conduct typically present in cases involving unclean hands such as dishonesty, fraud, deceit, unconscionability or bad faith.
Conclusion
Tempo confirms that a valid defence of equitable set-off may prevent summary judgment and parties should carefully evaluate potential defences of equitable set-off before seeking summary judgment.
If you have any detailed questions or require tailored advice on how this case might affect your project, please contact one of the members of our Construction Law practice group.
