In Mujtaba v. Yasin, 2020 ONSC 2554, Justice Emery addressed the two types of set-off: legal set-off and equitable set-off.
Legal set-off is provided for in section 111 of the Courts of Justice Act, which states: “in an action for payment of a debt, the defendant may, by way of defence, claim the right of set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant”.
Legal set-off requires the satisfaction of two conditions where parties to an action allege competing obligations against one another. The first condition is that both obligations must be debts, so that the claims are liquidated in nature. The second condition is that both debts must be mutual cross-obligations.
Equitable set-off is available where the claim for money is either liquidated or unliquidated. There is no requirement of mutuality. However, the party claiming equitable set-off must show that the damages arose out of the same contract or series of events that gave rise to the amount claimed or was closely connected with the contract or series of events in issue.
For equitable set-off to succeed as a defence, the defendant must lead evidence that the two obligations are so closely connected that it would be unconscionable if the court did not permit set-off to apply to non-debtor obligations, such as unliquidated claims, against amounts at issue in the action.
When a defendant wishes to claim set-off, it must specifically plead it in the statement of defence.