Canada: Summary Judgment And The Right To Set-Off Under The Construction Lien Act

Last Updated: November 22 2011
Article by David Debenham, JD, LLM, DIFA, CMA, CPA, CFE

It is not uncommon for a general contractor to carry the same trades from project to project. What happens when a trade is owed money on one project, and the general alleges a sizeable claim with respect to a prior project by way of set-off? That subject arose once again in Total Electrical v. Collège Boréal1.

In this case the Plaintiff ("TES") was an electrical contractor who did work on two projects for the general contractor Tribury Construction (1995) Inc. ("Tribury"). The plaintiff's claim arises out of work done on the second project, a residence at the "Collège Boréal d'Arts" project ("Collège Boréal"). In defence of that claim, Tribury claims a set-off under s. 17 (3) of the Construction Lien Act, which arises from a prior project the parties worked on together, being the "Living with Lakes" project. On a motion for summary judgment brought by TES, Tribury took the position that there are genuine issues which require trial with respect to the amount of set-offs and hence the summary judgment motion should fail.

TES claimed that there is $283,702.03, inclusive of GST, owing on the Collège Boréal contract. Tribury claims that from this amount approximately $10,000 must be deducted to rectify defects and for warranty issues. Tribury did not deny that the balance of the contract on Collège Boréal is $269,215.93 plus GST. Six days after TES completed the Collège Boréal project, and after their work had been certified by the consultant, Tribury advised them that they would not be paying the balance under the Collège Boréal contract, because they were setting-off the balance of the Living with Lakes contract against the Collège Boréal invoice in the amount of $200,402.75. TES did not deny that the question of liability on this set-off raises a triable issue. However, they argue that it would be unfair if their liquidated claim for summary judgment were denied or stayed while the un-liquidated claim for set-off were sent to trial. Put shortly, there was a "battle of the forms" on the Living with Lakes contract, and eventually the parties could never sign a contract. Once TES left the project, Tribury retained a new subcontractor to complete the remaining work for the project, and purports to back-charge TES with the extra cost of the substitute trade. For the next eight months, Tribury did not take any steps to pursue their claim against TES, nor did they communicate with them to articulate the value of the claim they would be making. During those eight months, TES worked on the Collège Boréal project.

Tribury did not contest that the plaintiff is entitled to partial summary judgment for the amount owing on the Collège Boréal contract; and that this entitlement exceeds the amount claimed on the Living with Lakes project. TES took the position that the amount owing under the Collège Boréal project is not in dispute and should be awarded on this motion for summary judgment. TES further submits that equity should prevent Tribury from exercising its right of set-off in relation to the Living with Lakes project. This argument is based on the fact that Tribury sent a letter on November 2, 2009, telling TES that they would be starting a legal action against them. TES argues that, by allowing the bidding process and the work to be done on the Collège Boréal project following that letter, but without taking any legal steps to enforce their rights on the Living with Lakes project, Tribury 'sat in the bushes' while TES detrimentally relied on their representation to commence a legal action. Finally, TES argued that the facts do not support an equitable set-off in that the two projects were completely unrelated and occurred during different time periods. Tribury responded that they have a statutory right of set-off under the s. 17(3) of the Construction Lien Act in the lien action, which permits a payer on a contract to set off the amounts owing on a project against any amounts arising on a separate project. As far as Tribury was concerned, it would be inequitable for it to be obliged to make payment to TES for amounts claimed with respect to the Collège Boréal subcontract without addressing its claims for set-off on the Living with Lakes subcontract. They claim that the two projects are linked in time and in the context of the ongoing relationship between the parties.

Tribury argued that the case of C & A Steel (1983) Ltd. v. Tesc Contracting Co., 2 ("C & A Steel") sets out the law regarding the scope of s. 17(3) of the Construction Lien Act. In C & A Steel, the court noted that s. 17(3) of the Construction Lien Act, and noted that the statutory right of set-off in the Act is broader than an equitable set-off. That provision specifically provides that, apart from the determination of holdback, "in determining the amount of a lien there may be taken into account the amount that is, as between a payer and the person the payer is liable to pay, equal to the balance in the payer's favour of all outstanding debts, claims or damages, whether or not related to the improvement." 3Nevertheless that court in C & A Steel went on to examine the criteria for an equitable set-off4 and found that in "the circumstances of the dealing between these parties" the equitable criteria was satisfied and the defendant was entitled to assert its claims by way of equitable set-off. In particular, given the relationship and dealing between the parties, it appeared that both parties have in effect treated their respective obligations and claims as a running account and withheld payments acknowledged to be owing because of unresolved competing claims.

In the TES case, there was no evidence that relationship between the parties that might suggest that they had a practice or understanding that there was a 'running account' between them with respect to different projects. It made no commercial sense for TES to work for Tilbury for a further eight months if TES thought Tribury would hold back payment as leverage in the Living with Lakes dispute. There was no evidence of any past practice between the parties. Tribury could not explain why it maintained silence on this issue for eight months. At no time prior to this motion did Tribury provide any evidence in support of its claim for damages. It is reasonable to infer from the evidence that the parties did not treat their respective obligations and claims as a "running account" as was the case in C & A Steel.

The facts in this case do not resemble the situation or circumstances that existed in C & A Steel. Consequently, the equities are also different. Rule 20 exists to provide a summary procedure whereby litigants may have judgment for claims for which there is no need for a trial to resolve an issue. This lawsuit involves two entirely different claims. According to the plaintiff, the commercial relationship between the parties was to treat each project separately. With respect to the Collège Boréal claim, the plaintiff demonstrated and the defendant conceded that the work was done and the amount of the claim is not contested. With respect to the Living with Lakes claim, the defendant has not provided any evidence to allow either the plaintiff or this court to assess the claim. It is undisputed that there is a question of liability and likely damages; but to date, those damages remain a complete mystery. It would be inequitable to hold up the payment on the Collège Boréal project while Tribury continues to delay advancing its claim on the Living with Lakes project. Here, it would be unjust to deny the plaintiff relief under a summary procedure designed for this very purpose where Tribury has lead no evidence that the parties had a past commercial relationship that treated their respective obligations as a running account, particularly where the defendant has declined to put its best foot forward and where the plaintiff's case is conceded.

Does this case stand for the proposition that the defendant was not able to rely on the claim for set-off because it did not raise a genuine issue for trial? Did the court draw an analogy with Rule 20.08 and simply refuse a stay? Or does the decision restrictively interpret ss.17(3) of the Construction Lien Act to cases involving "running accounts" between parties working on several projects or once? Time will tell. To date, the cases where s.17(3) have been applied have involved "an inextricable intertwining of the factual matrix between the claims upon which summary judgment is sought and those relating to the set-off." Such that "the set-off claimed flows from the same relationship as the claim itself." and evidence that has demonstrated that "the defence of set-off is not so weak as to refuse to justify postponing payments to [the plaintiff].5. When we have a case with a strong claim for set-off in relation to wholly separate projects such as the one in Total Electrical v. Collège Boréal we will truly find out if s.17(3) is broader in its application than the equitable defence of set-off.

Footnotes

1 2011 ONSC 4586

2 [1998] CanLII 14682 (ON SC)

3 The combined effect of ss.21 and 17(3) of the Construction Lien Act is to ensure subcontractor liens are a charge against the whole of the amount owed by the owner to the contractor under the contract, with the owner entitled to set off claims against the contractor in calculating the overall obligation, provided, however, that set-off claims cannot be applied to reduce the owner's obligation below the amount of the basic holdback created in s. 22. And so it goes for the contractor's holdback on down the construction pyramid.

4 (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.

This article was originally published in the Ontario Bar Association in November 2011.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

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David Debenham, JD, LLM, DIFA, CMA, CPA, CFE
 
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