Triangular (or cross-affiliate) set-off has been at issue
recently in the Companies' Creditors Arrangements Act
(Canada) (CCAA) proceedings with respect to SemCAMS ULC (SemCAMS)
(and certain other of its Canadian affiliates). In one application,
SemCAMS successfully challenged Nexen Marketing's (Nexen)
attempts to effect triangular set-off where Nexen lacked a
contractual right to do so.
Nexen Marketing was a party to a number of agreements with
SemCAMS and certain of its affiliates:
a Crude Petroleum Purchase Contract with SemCAMS under which
Nexen purchased condensate (Condensate Agreement);
a GasEDI Base Contract for Sale and Purchase of Natural Gas
with SemCAMS under which either party could be purchaser or seller
but where Nexen had always been the purchaser (Gas Agreement);
a crude oil purchase contract with SemCanada Crude Company
(SemCanada Crude) under which Nexen was both the purchaser and
seller of crude oil (SemCanada Crude Agreement); and
a natural gas purchase and sale agreement with CEG Energy
Options Inc. (CEG Energy) under which Nexen was both the purchaser
and seller of gas (CEG Gas Agreement).
Nexen had obtained a parental guarantee from SemGroup L.P. (a
U.S. parental entity of SemCAMS and its affiliates now subject to
Chapter 11 proceedings in the U.S.). Nexen however did not have any
contractual rights of set-off in respect of affiliate obligations
under any of the agreements and had not entered into a master
netting agreement with SemCAMS or any of it affiliates.
SemCAMS (and certain of its affiliates, including SemCanada
Crude and CEG) were granted CCAA protection in July, 2008. Based on
the July 25 and August 25, 2008 settlement dates, Nexen owed
SemCAMS a combined $1.2 million under the Condensate Agreement and
the Gas Master Agreement. Nexen had refused to pay SemCAMS on both
of the settlement dates. In the first instance, Nexen purported to
set-off its obligations against amounts owed to Nexen by SemCanada
Crude and CEG under the SemCanada Crude Agreement and CEG Gas
Agreement, respectively (and for amounts owing for estimated legal
fees incurred in relation to the recovery of debt by Nexen owed by
a number of SemCAMS' affiliates, including SemCanada Crude and
CEG). In the second instance, Nexen purported to set-off its
obligation against amounts owed to Nexen by SemCanada Crude for
July 2008 sales under the SemCanada Crude Agreement. SemCAMS
brought an application to recover the amounts from Nexen (plus
Nexen asserted that it had an equitable right of set-off,
arguing that the SemGroup of companies, headed by the U.S. parent
company SemGroup, L.P., operated as a "single
enterprise". Madam Justice Romaine of the Court of Queen's
Bench of Alberta heard arguments from both parties and granted
SemCAMS' application, ordering Nexen to pay the $1.2 million to
SemCAMS, plus interest.
In her written reasons1, Madam Justice Romaine
set-out the five-part test for equitable set-off from the Supreme
Court of Canada's decision in Holt v. Telford, namely
the party relying on a set-off must show some equitable ground
for being protected against its adversary's demands;
the equitable ground must go to the very root of the
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
the plaintiff's claim and the cross-claim need not arise
out of the same contract; and
unliquidated claims are on the same footing as liquidated
Madam Justice Romaine's reasons largely focused on the third
part of this test, noting that the close connection required the
claim and the cross-claim to arise either from the same contract or
"series of events". Madam Justice Romaine found that
neither was present, as SemCAMS' claims arose under separate
agreements (i) made with separate corporate entities, (ii)
negotiated during separate time periods, and (iii) made for
different purposes. The Court also rejected Nexen's argument
that the purchase and sale of "similar products" in the
same months created a close connection.
1. SemCanada Crude Company (Re), 2009 ABQB
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