Equitable Set-Off: Claim of Mutual Debts Owed

Construction disputes are often comprised of competing claims for delay, non-payment, deficiencies, and the like. Where one party to these dispute pleads set-off or mutual debts, it can prevent a party from achieving what would otherwise be a speedy resolution through summary proceedings. This can be frustrating for the other party who may feel their claim is simple; for example, in cases of non-payment under a written contract where the work has been clearly performed.

In Tempo Alberta Electrical Contractors Co Ltd v Man-Shield (Alta) Construction Inc., 2025 ABCA 310 (“Tempo v Man-Shield”) the Alberta Court of Appeal clarified that the defence of equitable set -off is a true defence that can give rise to a genuine issue requiring a trial, thereby precluding the ability to obtain a quick judgment through summary proceedings.

The case surrounds the construction of a seniors’ care facility in Edmonton, Alberta that took place between 2015 and 2017. Man-shield, the general contractor, subcontracted Tempo for most of the electrical work on the project; however, the project was delayed for approximately 45 weeks. Because of this, when Tempo commenced an action seeking $678,261.00 from Man-shield for withholding payments, Man-shield filed a defence and counterclaimed for $2,675,000.00 alleging Tempo caused the delays which triggered damages suffered by Man-Shield. Within their defence, Man-shield pled equitable set-off. Tempo thereafter brought an application for summary judgment, arguing that there was no genuine issue for trial and no true defence to their claim for the withheld payments. In particular, Tempo argued that Man-shield’s claim for set off was not a defence and therefore there was no issue which required a full trial.

In the Court of King’s Bench, the chambers judge agreed with Tempo and granted partial summary judgment against Man-shield for withholding the payments. The chambers judge made no determination with respect to the set-off defence pled by Man-shield; but nonetheless concluded that there was no true defence to the summary judgement application. Man-shield then appealed the chambers judge’s decision to the Court of Appeal.

On appeal, the Alberta Court of Appeal held that the chambers judge made an error in concluding that Man-shield’s claim to equitable set-off was not a true defence. In doing so, the Court made the following key findings:

• Substantive Defence, Not a Mere Set-Off: The Court confirmed that equitable set-off is a substantive defence to a claim, not just a procedural or arithmetic set-off. A well-founded equitable set-off claim can defeat a summary judgment application.
• Burden on Moving Party: A plaintiff seeking summary judgment must prove no genuine defence exists. In the immediate case, Tempo failed to establish the absence of a defence – Man-Shield’s equitable set-off raised a bona fide issue for trial.
• Anchored in SCC Precedent: The Court of Appeal relied on Supreme Court of Canada authority (Holt v Telford, 1987 and Scott v Golden Oaks, 2024 SCC 32) in reaffirming that equitable set-off, where applicable, bars a plaintiff from quick recovery.

It is important to note that pleading equitable set-off does not guarantee it will automatically prevent summary judgment. The Court of Appeal in Tempo underscored that the set-off pleading party must establish that their claim is inherently connected to the underlying claim if they seek to rely on set-off as a bar to quick judgment.

Because equitable set-off is grounded in fairness, the Court of Appeal also clarified that courts should withhold set-off as a form of relief if a party that has itself committed misconduct that is egregious and integral to the transaction in question. That is, the “clean hands” doctrine applies. As applied to this case, Tempo had argued that Man-shield’s conduct met this bar because they 1) substituted lien holdback funds with a bond (that Tempo said gave rise to trust concerns); and 2) engaged in litigation by ambush by producing a large volume of documents (that is, by engaging in a “document dump”). The Court disagreed and found that these issues were not sufficiently connected to the underlying payment dispute to justify stripping Man-shield of its set-off defence.

Understanding how equitable set-off functions is critical for parties to complex construction disputes. General contractors, subcontractors, owners, and their counsel should look to the Alberta Court of Appeal’s decision in Tempo v Man-Shield when evaluating their ability to obtain or resist summary judgment.

The lawyers at McLennan Ross have extensive experience in all manner of construction disputes and frequently advises the firm’s clients regarding set-off and other defences available to them. If you are curious about the effect of Tempo v Man-Shield on your business, contact any member of McLennan Ross Construction Law Practice Group