Algoma Steel Inc. v. Union Gas Limited

Algoma Steel Inc. v. Union Gas Limited [Indexed as: Algoma Steel Inc. v. Union Gas Ltd.]

63 O.R. (3d) 78

[2003] O.J. No. 71

Docket No. C37904

Court of Appeal for Ontario

Weiler, Rosenberg and Feldman JJ.A.

January 17, 2003

Debtor and creditor -- Arrangements -- Appeals -- Standard of appellate review of order made in proceedings under Companies' Creditors Arrangement Act -- Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36. [page79]

Debtor and creditor -- Arrangements -- Set-off -- Equitable set-off -- Legal set-off -- Creditor in proceedings under Companies' Creditors Arrangement Act claiming legal and equitable set-off -- Legal set-off not established -- Equitable set-off established -- Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36.

In 1999, Algoma Steel Inc. ("Algoma") obtained gas under a renewable one-year contract under which it bought gas from a supplier, sold the gas to Union Gas Limited ("Union"), which arranged for its transportation, and then repurchased the gas from Union. Algoma paid for the gas in accordance with Union's rate schedule as approved by the Ontario Energy Board. In 1999, Algoma overpaid for the gas and was entitled to a $2.2 million rebate subject to the Energy Board approving the payment. The Energy Board approved a rebate; however, it ordered the payment to be deferred while certain deferral accounts were reviewed.

In 2000, Algoma changed its relationship with Union and entered into two new contracts with respect to obtaining gas, that is, a gas services contract and an assignment contract. Under this new arrangement, Union assigned to Algoma the right to access gas transportation from TransCanada Pipelines Limited ("TCPL"). Under this new arrangement, Algoma was to pay TCPL directly, but if it failed to pay, then Union was obliged to indemnify TCPL.

On April 23, 2001, Algoma applied for and obtained an order under the Companies' Creditors Arrangement Act ("CCAA"). At the time of the order, Algoma owed Union $461,244 under the 2000 gas services contract, and because Algoma had failed to pay TCPL, Union was liable to indemnify TCPL in the amount of $1,265,934. In the proceedings under the CCAA, Union purported to set off these sums against the amount it owed for the 1999 rebate. It relied upon s. 18.1 of the CCAA, which preserves rights of set-off. On a motion, Farley J. held that Union had not established a claim for legal set-off and could claim an equitable set-off only in relation to the gas services contract. Union appealed.

Held, the appeal should be allowed.

For appeals, for which leave is required under the CCAA, the usual standard of review applies, and the Court of Appeal was required to give deference to the findings of the motions judge even where, as in this case, the decision was based on a paper record. Further, an appellate court should show considerable deference when called on to review inferences from facts. Where, however, the issue concerns the application of a legal standard to a set of facts, the question is one of mixed fact and law and a somewhat less deferential standard of review may be appropriate, although not the standard of correctness required for questions of law.

The immediate appeal concerned both inferences from facts and a question of mixed fact and law. Farley J. was correct with respect to legal set-off but incorrect with respect to equitable set-off. A condition for legal set-off is that the obligations must be debts and Farley J.'s decision that a debt had not been shown turned exclusively on the inferences to be drawn from the undisputed facts. He did not make any palpable or overriding error and his decision was supported by the evidence. The decision about equitable set-off, however was different and there was an error in the application of the test for equitable set-off to the facts. While he recognized that the assignment agreement was integral to the 2000 gas services agreement, Farley J. refused equitable set-off for the amounts owing under the assignment agreement because it was not the same type of contract as the supply of gas by Union. This was not a sufficient reason to refuse equitable set-off given the interrelationship between the two 2000 agreements. There was a close relationship between the 1998 contract and both of the 2000 contracts because they [page80] all, in one way or another, facilitated the supply of gas to Algoma. It would be unjust to allow Algoma to enforce payment of the rebate without taking into account its liability to Union under the assignment agreement which formed an integral part of the arrangement between the parties.

APPEAL from an order made in proceedings under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36.

Cases referred to Cam-Net Communications v. Vancouver Telephone Co. Ltd. (1999), 1999 BCCA 751, 71 B.C.L.R. (3d) 226, 182 D.L.R. (4th) 436, 17 C.B.R. (4th) 26, 2 B.L.R. (3d) 118 (C.A.); Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. and Tsang (1985), 1985 144 (BC CA), 65 B.C.L.R. 31, 20 D.L.R. (4th) 689, [1985] 6 W.W.R. 14, 36 R.P.R. 259 (C.A.), affg (1984), 1984 903 (BC SC), 55 B.C.L.R. 326 (S.C.); Equity Waste Management of Canada Corp. v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321, 40 M.P.L.R. (2d) 107 (C.A.), revg (1995), 22 M.P.L.R. (2d) 167 (Ont. Gen. Div.), supp. reasons (1994), 1995 7182 (ON SC), 22 O.R. (3d) 796, 27 M.P.L.R. (2d) 123 (Gen. Div.); Federal Commerce & Navigation Ltd. v. Molena Alpha Inc., [1979] 1 All E.R. 307, [1979] A.C. 757, 122 Sol. Jo. 843, [1979] 1 Lloyd's Rep. 201 (H.L.), affg on other grounds [1978] 3 All E.R. 1066 (C.A.); Housen v. Nikolaisen, 2002 SCC 33, (2002), 219 Sask. R. 1, 211 D.L.R. (4th) 577, 286 N.R. 1, 272 W.A.C. 1, [2002] 7 W.W.R. 1, 30 M.P.L.R. (3d) 1, 10 C.C.L.T. (3d) 157; Telford v. Holt, 1987 18 (SCC), [1987] 2 S.C.R. 193, 54 Alta. L.R. (2d) 193, 41 D.L.R. (4th) 385, 78 N.R. 321, [1987] 6 W.W.R. 385, 37 B.L.R. 241, 21 C.P.C. (2d) 1, 46 R.P.R. 234 Statutes referred to Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, ss. 13, 18.1 [as am.] Courts of Justice Act, R.S.O. 1990, c. C.43, s. 111 Authorities referred to Palmer, K.R., The Law of Set-Off in Canada (Aurora, Ont.: Canada Law Book, 1993)

James P. Dube, for appellant. Geoffrey R. Hall, for respondent.

The judgment of the court was delivered by

[1] ROSENBERG J.A.: -- This appeal from an Order of Farley J. concerns the application of legal and equitable set-off in the context of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended ["CCAA"]. On April 23, 2001, the respondent Algoma Steel Inc. obtained an initial order under the CCAA. At that time, Algoma was indebted to the appellant Union Gas Limited under two contracts (the "2000 contracts") for gas services in March and April of 2001 amounting to just under $2 million. At the same time, Algoma was entitled to a rebate from Union of approximately $2.2 million plus interest as a result of an overpayment for gas services in 1999. Union sought to set off amounts owed to it by Algoma against the 1999 rebate. [page81] The motions judge held that Union had not established a claim for legal set-off. He held that Union had made out a claim for an equitable set-off but only in relation to one of the contracts in the amount of $461,244. Because of various orders made in the CCAA proceedings, this means that Union must pay the entire amount of the 1999 rebate less the $461,244 and is not entitled to payment of $1,265,934 owed to it under the 2000 contract. Union submits that the motions judge erred in refusing to allow legal set-off and, in the alternative, erred in limiting the scope of equitable set-off.

[2] In my view, the motions judge did not err with respect to legal set-off but did err with respect to equitable set-off. Accordingly, I would allow the appeal with costs.

The Facts

The relationship between Algoma and Union

[3] The facts are based entirely upon affidavits filed by two employees of Union. Algoma filed no affidavits and did not cross-examine the Union employees. I begin with a summary of the facts that lead to Algoma's entitlement to the $2.2 million rebate. In 1999, Algoma obtained gas on a buy/sell arrangement under which Algoma bought natural gas from a resource supplier (presumably in Western Canada) and sold the gas to Union. Union arranged for the transportation of the gas on its own account and then sold the gas back to Algoma in Ontario when it was needed. In 1999, the relationship between Union and Algoma was governed by a contract commencing November 1, 1998 and terminating on October 31, 1999. This contract was subject to automatic renewal for successive one-year periods. [See Note 1 at end of document]

[4] Under the 1998 contract, Algoma was required to pay for the gas services in accordance with Union's rate schedule as approved by the Ontario Energy Board. These rates are based on many factors including projected costs of gas. If those projections are found to be either too high or too low following the end of a calendar year, Algoma may have either overpaid or underpaid Union. To track actual costs with projected costs, Union established deferral accounts for the various classes of customers. Algoma is in a Rate 100 class. As it happened, in 1999, Algoma and the other Rate 100 customers overpaid and were entitled to a [page82] rebate. However, Union could not repay its customers without approval from the Board. Union therefore made an application to the Board in which it proposed to pay the rebates to the customers. The total rebate for the Rate 100 class is just under $4 million. According to the affidavit of the Union employee, Algoma's share of the rebate "approximates $2.2 million". Algoma is also entitled to interest on the rebate accruing from January 1, 2000 at a rate set by the Board.

[5] In its July 21, 2001 decision, the Board approved Union's proposal. But instead of authorizing immediate payment, the Board directed Union to bring forward the balances in all of the year 2000 deferral accounts for review. In a further decision dated October 16, 2001, the Board directed Union to continue to hold the balances in the deferral accounts until the 2001 and 2002 rates are implemented and 2000 and 2001 deferral balances are disposed of. According to the Union employee's affidavit, this will not affect Algoma's rebate because it is not entitled to share in the 2000 and 2001 deferral accounts. By the time of the hearing before the motions judge, the Board had not yet indicated when Union could pay the rebate to its customers, including Algoma.

[6] I will now deal with the contracts that governed the Union/Algoma relationship when the CCAA orders were made. In 2000, Algoma changed its relationship with Union so that it no longer had a buy-sell arrangement. In October 2000, the parties entered into two new contracts. These contracts may conveniently be referred to as the 2000 gas services contract and the assignment agreement. Both contracts covered almost the same period; from November 1, 2000 to October 31, 2001 for the 2000 gas services contract and November 1, 2000 to November 1, 2001 for the assignment agreement. As a result of the new arrangement, Algoma no longer sold the gas to Union and repurchased it from Union in Ontario. Rather, Union assigned its right to access gas transportation capacity directly from TransCanada Pipelines Limited ("TCPL") through Union's contract with TCPL. Algoma thus paid TCPL directly. Importantly, however, if Algoma failed to pay TCPL for use of gas transportation capacity being accessed by it, Union was required to pay TCPL. Algoma was then required to indemnify Union.

[7] Under the 2000 gas services contract, Union continued to transport the gas from Union's metering station at the TCPL pipeline to the Algoma plant. That contract included this term:

This agreement is contingent upon the TCPL Assignment Agreement which is attached as Schedule D and forms an integral part of this arrangement. In the event either of these agreements terminate, the other agreement shall also terminate, unless agreed to otherwise by the parties. [page83]

[8] As of the April 23, 2001 CCAA order, Algoma owed Union $461,244 under the 2000 gas services contract. Further, because Algoma failed to pay TCPL for gas transportation services obtained by Algoma under the assignment agreement, Union was obliged to indemnify TCPL in the amount of $1,265,934. It is these two amounts that Union seeks to set off against the 1999 rebate. As indicated, the motions judge only allowed Union to set off the former amount.

The CCAA proceedings

[9] On April 23, 2001, Algoma obtained an initial order under the CCAA. As part of that order, the right of any claimant to assert, enforce or exercise any right of set-off or consolidation of accounts was stayed during the stay period. On November 9, 2001, while the stay period was still in force, Algoma obtained an order to authorize meetings of its creditors to consider its Plan of Arrangement, to establish a process for proving claims and for the subsequent barring of those claims in return for participating in the Plan. Under this order, an unsecured creditor that had not filed a proof of claim was deemed to have filed one in the amount as valued by Algoma. The creditor was then barred from making or enforcing any such deemed claim after December 12, 2001. Union did not file a proof of claim since it took the view that there was no net balance due from Algoma to Union once the 1999 rebate was factored in. Algoma denied that Union was entitled to a set-off and deemed Union's claim to be in the amounts of $461,244 and $1,265,934.

[10] As a result, on November 27, 2001, Union moved before Farley J. for a declaration that its rights of set-off referable to its dealings with Algoma up to April 23, 2001 were not affected by the CCAA proceedings. In this way, it sought to prevent its claims from being deemed to have been the subject of a proof of claim and then deemed to have been barred after December 12, 2001. Union relied upon s. 18.1 of the CCAA, which preserves rights of set-off. I will set out that section in full below.

The Reasons of the Motions Judge

[11] The motions judge noted that a condition for application of legal set-off is that the obligations must be debts, in the sense that they are liquidated amounts. After reviewing the Board rulings and various letters by Union to Algoma, the motions judge concluded that the 1999 rebate was not a liquidated amount. He noted that in the Union employee's affidavit the rebate "approximates $2.2 million". Further communications between Union [page84] and its Rate 100 customers suggested that there might not even be a rebate, depending on the decision of the Board. He therefore held that legal set-off had not been made out.

[12] As to equitable set-off, the motions judge held that the 2000 gas services contract was in substance a continuation of the 1998 contract. He concluded that there was a "close connection sufficient to ground equitable set-off as to the gas supply portion of the October 15, 2000 Agreement vis-à-vis any rebate which is authorized by the Board, but not any monies owing by Algoma to Union as a result of the November 1, 2000 Transportation Agreement". He therefore limited the equitable set-off as indicated above.

Analysis

General principles

[13] Algoma does not dispute that the law of set-off applies notwithstanding the CCAA proceedings. Section 18.1 of the Act makes this clear:

18.1 The law of set-off applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be.

[14] Algoma does, however, submit that set-off claims should be carefully scrutinized where CCAA proceedings are underway because the effect is to give preference to certain creditors. As Rowles J.A. said in Cam-Net Communications v. Vancouver Telephone Co. (1999), 1999 BCCA 751, 71 B.C.L.R. (3d) 226, 182 D.L.R. (4th) 436 (C.A.) at p. 235 B.C.L.R.:

Using, or rather misusing, the law of set-off is one example of how persons with a claim against the company in reorganization might attempt to escape the CCAA compromise. A party claiming set-off . . . realizes its claim on a dollar- for-dollar basis while other creditors, who participated in the CCAA proceedings, have their claims reduced substantially. For this reason, the legislative intent animating the CCAA reorganization regime requires that courts remain vigilant to claims of set-off in the reorganization context.

[15] I accept this principle, but I do not see it as a concern in this case. Union operates within a highly regulated regime and the disposition of the rebate is subject to scrutiny by a specialized tribunal. The amounts owing by Algoma to Union are not in doubt.

[16] There was some dispute between the parties about the standard of review by this court of the decision of the motions judge. Counsel for Union seemed to suggest that because there is [page85 ]no right of appeal in CCAA proceedings and appeals are relatively rare, it was open to this court to review the decision of the motions judge on a standard of correctness even where that decision turned on findings of fact and inferences to be drawn from those facts. In my view, the usual standard of review in appeal proceedings applies and this court is required to give deference to the findings of the motions judge even where, as here, the decision is based on a paper record. The fact that there is no right of appeal and the appeal is only with leave under s. 13 of the Act only reinforces that conclusion. Decisions in the CCAA context must often be made quickly. They are, as in this case, usually made by a judge with considerable expertise in the area who has been managing the CCAA proceedings and is intimately familiar with the context and the issues at stake.

[17] This court and the Supreme Court of Canada have variously described the standard of appellate review. In Equity Waste Management of Canada Corp. v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321, 40 M.P.L.R. (2d) 107 (C.A.) at p. 336 O.R., Laskin J.A. wrote as follows:

Therefore, although the entire record before a trial judge or a motion judge consists of documentary or written evidence, as it does in this case, the judge's factual findings are entitled to deference on appeal. What standard of deference applies in such a case? It is not easy to articulate a standard less deferential than "manifest error" but falling short of "correctness". I suggest that it may simply be a matter of weight or emphasis, or that, plausibly, a uniform standard of appellate review should be applied to a trial judge's findings of fact, whether the evidence is entirely oral, entirely documentary or, more typically, a combination of the two.

What is important for this appeal is the kind of error that justifies intervention by an appellate court. An error of law obviously justifies intervention. An appellate court may interfere with a finding of fact if the trial judge or motion judge disregarded, misapprehended, or failed to appreciate relevant evidence, made a finding not reasonably supported by the evidence, or drew an unreasonable inference from the evidence.

[18] More recently the Supreme Court in Housen v. Nikolaisen, 2002 SCC 33, [2002] SCC 33, 211 D.L.R. (4th) 577, discussed at some length the standard of appellate review where the appellate court is called upon to review inferences from facts. The court concluded that the standard is one of considerable deference. Iacobucci and Major JJ. described the standard at para. 23 as follows:

We reiterate that it is not the role of appellate courts to second-guess the weight to be assigned to the various items of evidence. If there is no palpable and overriding error with respect to the underlying facts that the trial judge relies on to draw the inference, then it is only where the inference-drawing process itself is palpably in error that an appellate court can interfere with [page86] the factual conclusion. The appellate court is not free to interfere with a factual conclusion that it disagrees with where such disagreement stems from a difference of opinion over the weight to be assigned to the underlying facts.

(Emphasis added)

[19] On the other hand, where the issue concerns application of a legal standard to a set of facts, the question is one of mixed fact and law and a somewhat less deferential standard may be appropriate, although not the standard of correctness required for questions of law. This was described as follows at para. 28:

However, where the error does not amount to an error of law, a higher standard is mandated. Where the trier of fact has considered all the evidence that the law requires him or her to consider and still comes to the wrong conclusion, then this amounts to an error of mixed law and fact and is subject to a more stringent standard of review: Southam, supra, at paras. 41 and 45. While easy to state, this distinction can be difficult in practice because matters of mixed law and fact fall along a spectrum of particularity. This difficulty was pointed out in Southam, supra, at para. 37:

. . . the matrices of facts at issue in some cases are so particular, indeed so unique, that decisions about whether they satisfy legal tests do not have any great precedential value. If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would not have any great value as a precedent. In short, as the level of generality of the challenged proposition approaches utter particularity, the matter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact. See R. P. Kerans, Standards of Review Employed by Appellate Courts (1994), at pp. 103-108. Of course, it is not easy to say precisely where the line should be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future.

(Emphasis added)

[20] It seems to me that this appeal concerns both inferences from facts and a question of mixed fact and law. The motions judge's decision about the application of legal set-off turned exclusively on the inferences to be drawn from the undisputed facts in the affidavits. His decision that Union had not shown the rebate as a debt was fact specific. Although Union argues that the motions judge overlooked important facts and misapprehended certain facts, I am not persuaded that the motions judge made any palpable or overriding error. To the contrary, I am satisfied that his decision is supported by the evidence.

[21] The decision about equitable set-off is somewhat different since it involves application of a legal standard to a set of facts. As such, it is a question of mixed law and fact. While the assessment by the motions judge is entitled to deference, I am [page87] nevertheless of the view that the motions judge erred in his application of the test for equitable set-off to these particular facts.

Legal set-off

[22] Section 111 of the Courts of Justice Act, R.S.O. 1990, c. C.43 provides the statutory framework for legal set-off. Subsections (1) and (2) provide:

111(1) In an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff's claim a debt owed by the plaintiff to the defendant.

(2) Mutual debts may be set off against each other even if they are of a different nature.

[23] The only question on the application of legal set-off in this case was whether the rebate was a debt for the purpose of s. 111. Union accepts that debt means a liquidated sum and argues that the rebate is a liquidated sum because the amount is ascertainable and, save for interest, can neither increase nor decrease. Union submits that the amount is ascertainable and fixed because the Board has accepted its proposal for calculating the amount of the rebate. It also relies on the affidavit evidence that Algoma's share of the rebate for Rate 100 customers will be unaffected by the adjustments for the years 2000 and 2001 deferral accounts.

[24] The motions judge, however, was not prepared to draw that inference from the affidavit evidence. He relied upon the fact that Union only provided an estimate of the rebate and his reading of the Board decisions that did not explicitly state that Algoma or any of the other customers would receive a rebate. He also relied upon Union's own communications to its Rate 100 customers that suggested the amount of the rebate was not fixed. In his submissions, counsel for Algoma pointed out a number of facts upon which the decision by the motions judge could rest and that could support the inferences drawn. Counsel pointed out that to overturn the decision of the motions judge, this court would have to be satisfied of the following:

(1) That it was appropriate to sever off the interest part of the rebate, since the rate had not yet been set by the Board.

(2) That no significance should be attached to the use of the term "approximate" in the Union employee's description of the amount of the rebate. [page88]

(3) That no significance should be attached to the fact that Union had not provided an exact figure for the amount of the rebate.

(4) That the communications by Union to Algoma and its other customers concerning the uncertainty of the amount of the rebate had no significance.

(5) That there is no significance to the fact that the Board continues to prevent Union from releasing the rebate to Algoma; put another way, that the Board has no good reason for holding up disposition of the rebate.

(6) That the amounts of the rebates cannot change as a result of events in 2002.

[25] I am not prepared to say that the motions judge's decision disclosed a palpable and overriding error. Since his decision is supported by the evidence, the evidence supplied by Union itself, this aspect of the appeal must be dismissed.

Equitable set-off

[26] Equitable set-off is available where there is a claim for a sum whether liquidated or unliquidated. In Telford v. Holt, 1987 18 (SCC), [1987] 2 S.C.R. 193, 41 D.L.R. (4th) 385, at pp. 211-12 S.C.R., pp. 398-99 D.L.R., Wilson J., speaking for the court, approved a statement of the applicable principles for equitable set-off found in Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. and Tsang (1985), 1985 144 (BC CA), 20 D.L.R. (4th) 689, 36 R.P.R. 259 (B.C.C.A.) at pp. 696-97 D.L.R. Those principles can be summarized as follows:

1. The party relying on a set-off must show some equitable ground for being protected against the adversary's demands.

2. The equitable ground must go to the very root of the plaintiff's claim.

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. [page89]

5. Unliquidated claims are on the same footing as liquidated claims.

[27] In one way or another the first three principles, but particularly the third, are in issue in this case. Put shortly, is the 1999 rebate from the 1998 gas services contract so clearly connected with the amounts owing under the 2000 assignment agreement that it would be manifestly unjust to enforce payment of the rebate without taking into account the amounts owing under the assignment agreement? The motions judge recognized that the assignment agreement was integral to the 2000 gas services agreement, but he refused equitable set-off for the amounts owing under the assignment agreement because it was not the same type of contract as the supply of gas by Union. In my view, this was not a sufficient reason to refuse equitable set-off given the interrelationship between the two 2000 agreements.

[28] Kelly R. Palmer in The Law of Set-Off in Canada (Aurora, Ont.: Canada Law Book, 1993) traces the evolution of the doctrine of equitable set-off from a very strict test in which the "claim raised in set-off had to impeach the title of the plaintiff's claim" [at p. 89] to a somewhat more flexible approach based upon fairness. The leading cases describing, in some fashion, the more modern test are Coba Industries; Telford and Federal Commerce & Navigation Ltd. v. Molena Alpha Inc., [1978] 3 All E.R. 1066 (C.A.) (affirmed on other grounds at [1979] 1 All E.R. 307, [1979] A.C. 757 (H.L.)).

[29] It seems to me that a very helpful test is set out in a passage from the reasons of Lord Denning in Federal Commerce at p. 1078 All E.R. and which was quoted with apparent approval by Wilson J. in Telford at pp. 213-14 S.C.R., p. 400 D.L.R.:

We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? . . . This question must be asked in each case as it arises for decision; and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.

(Emphasis added)

[30] In my view, there is such a close connection between the 2000 gas services contract and the 2000 assignment agreement, that the amounts owing on them cannot be severed for [page90 ]the purposes of equitable set-off. The assignment agreement is attached as a schedule to the 2000 gas services contract and in the event either of the agreements terminates, the other terminates, unless otherwise agreed to by the parties. The parties agreed in the 2000 gas services contract that it was "contingent upon" the assignment agreement and that the latter formed an integral part of the latter. Accepting the correctness of the motion judge's determination that the 1998 and 2000 gas services contracts exhibit a sufficient degree of connection to justify equitable set-off, it seems to me that it would be manifestly unjust to allow Algoma to insist on payment of the rebate arising under the former without allowing Union to set-off all the amounts owing under the 2000 arrangement.

[31] The relationship between the parties under the 2000 contracts is different than the relationship under the 1998 contract but they are in a sense nothing more than a successor arrangement to accomplish what had been done under the 1998 contract. Admittedly, under the 2000 assignment agreement, the underlying relationship was between TCPL and Union. Union only became entitled to collect from Algoma because Algoma failed to pay the charges that TCPL was entitled to collect from Union. Under the agreement, Algoma agreed to indemnify Union in those circumstances. However, there is a close connection between the 1998 contract and both of the 2000 contracts because they all, in one way or another, facilitate the supply of gas to Algoma.

[32] A helpful example is Coba Industries, which was approved by Wilson J. in Telford. Palmer describes the facts of Coba Industries at p. 133 of his text:

Hp entered a sale and leaseback of property with the defendant, in the course of which Hp obtained a second mortgage over the property and granted a lease to the defendant. The lease payments were calculated to be sufficient to cover the mortgage payments. Hp assigned the mortgage to the plaintiff who notified the assignment to the defendant. When Hp fell into arrears on the lease, the defendant ceased making mortgage payments. The plaintiff sued for foreclosure, and was met with a claim for set-off.

[33] Macfarlane J.A., writing for the court in Coba Industries, found several facts that established the close connection necessary for equitable set-off. He wrote at p. 700 D.L.R.:

I think this evidence demonstrates that, from the outset, it was at the heart of any liability on the part of [the defendant] that [Hp] provide and assure payments under the leases sufficient to satisfy payments from time to time under both mortgages. [page91]

[34] The 1998 contract and 2000 agreements exhibit this kind of connection. Given that the motions judge found that it would be manifestly unjust not to permit Union to set off the amounts owing on the 2000 gas services contract, I conclude that it would be manifestly unjust to allow Algoma to enforce payment of the 2000 rebate without taking into account its liability to Union under the assignment agreement, which formed an integral part of the arrangement between the parties.

Disposition

[35] Accordingly, I would allow the appeal with costs on a partial indemnity basis. In accordance with the written submissions of the parties, costs are fixed at $33,111.29.

Order accordingly.

Notes

Note 1: Although not stated explicitly in the affidavits, it appears that the contract did renew for a further year.