Holt v. Telford, [1987] 2 S.C.R. 193

Richard K. Telford and Margaret S. Telford Appellants

v.

Isaac B. Holt and Edith May Holt Respondents

indexed as: holt v. telford

File No.: 19175.

1987: February 27, March 2; 1987: September 17.

Present: Dickson C.J. and Estey, McIntyre, Wilson and Le Dain JJ.

on appeal from the court of appeal for alberta

Actions ‑‑ Pleadings ‑‑ Counter‑claim and set‑off ‑‑ Land swap and exchange of mortgages ‑‑ One of mortgages assigned hence affecting mutuality ‑‑ Whether or not set‑off available, either at law or equity.

This appeal concerns a series of transactions entered into by three parties, the Telfords, the Holts and Canadian Stanley Development Ltd. The Telfords and Canadian Stanley swapped lands of equal value, each party paying the other a different cash sum and each taking back a first mortgage or a second mortgage. Canadian Stanley assigned its mortgage to the Holts, without notifying the Telfords, before the transaction closed. The Telfords were later persuaded to agree to a postponement of the Canadian Stanley mortgage resulting in the priority of that mortgage moving from second to third place on title. The Telfords only learned of the assignment after trying to tender their first payment on the mortgage and finally indicated that a court application for a discharge of the mortgage would be made. Shortly after, the Holts' solicitor demanded the payment then due, plus interest, and filed a statement of claim against the Telfords for the entire amount owing. The claim was based on a clause in the Telford mortgage which provided that upon default of any payment of the principal the whole principal would become payable. The Telfords, after they received notice of the Holts' statement of claim, paid their payment into court and then counter‑claimed for a discharge of mortgage. The trial judge found that (1) the Telfords owed the Holts $150,000, (2) there was no agreement for a set‑off, and (3) the conditions for accelerating the mortgage had been met. The Court of Appeal found that there could be no set‑off because the debt owed by the Telfords under the agreement for sale fell into the category of an unenforceable debt. At issue here is whether or not the Telfords have the right to set‑off the debt owed to them by Canadian Stanley against the Holts' claim.

Held: The appeal should be allowed.

The Telfords are not entitled to legal set‑off because the debts are not mutual. Equitable set‑off, however, is available: the Telfords are entitled to set‑off against the assignee, the Holts, a money sum which arises out of the same contract or interrelated contracts which gave rise to the assigned money sum. The provisions of the Alberta Law of Property Act do not preclude this result.

Set‑off was not available either by agreement or at law. There was no agreement to set‑off because the parties had prepared two separate mortgage documents each of which provided for payments subsequent to the Telfords' initial payment. Statutory set‑off (or set‑off at law) requires the fulfilment of two conditions: that both obligations be debts and that both debts be mutual cross obligations. A set‑off at law was not available to the Telfords because the assignment destroyed mutuality as defined in law.

Equitable set‑off is available where there is a claim for a money sum, whether liquidated or unliquidated, notwithstanding assignment. There is no requirement of mutuality. An individual could (1) set‑off against the assignee a money sum which accrued and became due prior to the notice of assignment, and (2) set‑off against the assignee a money sum which arose out of the same contract or series of events which gave rise to the assigned money sum or was closely connected with that contract or series of events.

The debts which the Telfords are seeking to set‑off did not accrue due before their receipt of the notice of assignment and set‑off, and therefore, can be effected only if the debts arise out of the same contract or closely interrelated contracts. Here, the Telfords and Canadian Stanley "swapped" parcels of land and the mortgages formed part of the consideration for the reciprocal transfers. Given this close connection, the requirements for an equitable set‑off are met.

Section 41 of the Law of Property Act neither creates an unenforceable debt nor extinguishes or satisfies the debt. It merely precludes the remedy by way of a personal judgment against the mortgagor on the covenant. The mortgagee may still pursue the remedy of foreclosure. Both the Telfords and Canadian Stanley, therefore, have enforceable debts. The statute may provide a different range of remedies available to an individual as compared to a corporation. Set‑off, however, does not require either symmetry of remedies or of amounts.

Cases Cited

Considered: Watson v. Mid Wales Railway Co. (1867), L.R. 2 C.P. 593; Newfoundland (Government of) v. Newfoundland Railway Co. (1888), 13 App. Cas. 199; In re Pinto Leite and Nephews, [1929] 1 Ch. 221; Business Computers Ltd. v. Anglo‑African Leasing Ltd., [1977] 1 W.L.R. 578; Canadian Admiral Corp. v. L. F. Dommerich & Co., 1964 CanLII 3 (SCC), [1964] S.C.R. 238; distinguished: Edmonton Airport Hotel Co. v. Crédit Foncier Franco‑Canadien, 1965 CanLII 95 (SCC), [1965] S.C.R. 441; referred to: Renner v. Racz, 1971 ALTASCAD 55, [1972] 1 W.W.R. 109; Freeman v. Lomas (1851), 9 Hare 109; Atlantic Acceptance Corp. v. Burns & Dutton Construction (1962) Ltd., 1970 CanLII 774 (AB SCAD), [1971] 1 W.W.R. 84; C.I.B.C. v. Tuckerr Indust. Inc., 1983 CanLII 302 (BC CA), [1983] 5 W.W.R. 602; Royal Trust v. Holden (1915), 1915 CanLII 374 (BC CA), 22 D.L.R. 660; Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. and Tsang, 1985 CanLII 144 (BC CA), [1985] 6 W.W.R. 14; Aboussafy v. Abacus Cities Ltd., 1981 ABCA 136, [1981] 4 W.W.R. 660; Smith v. Parkes (1852), 16 Beav. 115; Federal Commerce and Navigation Ltd. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066; Hanak v. Green, [1958] 2 Q.B. 9, [1958] 2 W.L.R. 755, [1958] 2 All E.R. 141.

Statutes and Regulations Cited

Alberta Rules of Court, Alta. Reg. 390/68, s. 93(1).

Insolvent Debtors Relief Act, 2 Geo. 2, c. 22 (U.K.)

Land Titles Act, R.S.A. 1980, c. L‑5, s. 150(1), (2).

Law of Property Act, R.S.A. 1980, c. L‑8, ss. 41(1), 43(1).

Set‑off Act, 8 Geo. 2, c. 24 (U.K.)

Supreme Court of Judicature Act, 1873, 36 & 37 Vict., c. 66, s. 199.3 (U.K.)

Authors Cited

Halsbury's Laws of England, vol. 42, 4th ed. London: Butterworths, 1983.

APPEAL from a judgment of the Alberta Court of Appeal (1984), 1984 ABCA 355, 37 Alta. L.R. 399, [1985] 4 W.W.R. 573, dismissing an appeal from a judgment of Foisy J. Appeal allowed.

D. E. Jermyn, for the appellants.

James P. Low, for the respondents.

The judgment of the Court was delivered by

Wilson J. ‑‑

1. The Facts

This appeal concerns a series of transactions entered into by three parties, the Telfords, the Holts and Canadian Stanley Development Ltd. involving contracts for the sale of land and mortgages. The appeal arises out of an action commenced by the Holts alleging default of payment on a mortgage made by the Telfords to Canadian Stanley ("the Telford mortgage"). The Holts had been assigned the Telford mortgage by Canadian Stanley to secure the balance of the purchase price of a piece of land the Holts had sold to Canadian Stanley.

The Telford mortgage arose out of a real estate trade between the Telfords and Canadian Stanley. The Telfords sold their land (a domestic residence plus 40 acres) to Canadian Stanley. Canadian Stanley sold a parcel of land to the Telfords. The purchase price for the parcel of land sold by the Telfords to Canadian Stanley was $265,000. The purchase price for the piece of land sold by Canadian Stanley to the Telfords was also $265,000.

The transaction between the Telfords and Canadian Stanley required Canadian Stanley to pay the Telfords $165,000 for the Telford land and give a second mortgage back to the Telfords for $100,000 (the "Canadian Stanley" mortgage). The Telfords were to pay Canadian Stanley $115,000 for its parcel of land and give a first mortgage to Canadian Stanley for $150,000. The net effect of the combined transaction was that on closing Canadian Stanley would pay the Telfords $50,000 which the Telfords would use for the purpose of financing the construction of a residence on their new land. The closing date was October 1, 1980.

The transaction between the Telfords and Canadian Stanley was closed effective October 1, 1980 by payment by Canadian Stanley to the Telfords of $47,885.93 and the execution and delivery of the Telford mortgage and the Canadian Stanley mortgage. The payment of $47,885.93 by Canadian Stanley was arrived at by subtracting the down payment owed by the Telfords ($115,000) from the down payment owed by Canadian Stanley ($165,000) plus adjustments.

The interest rate on both mortgages was the same, i.e., 14.75%. The last two payments on each mortgage were also the same both as to amount and time of payment. Each mortgagor had to pay $50,000 plus accrued interest on July 31, 1981 and $50,000 plus accrued interest on January 31, 1982. The only difference was that the Telfords also had to pay $50,000 plus interest on January 31, 1981.

On September 26, 1980 Canadian Stanley assigned the Telford mortgage to the Holts. The Telfords were not notified of this assignment. On November 5, 1980 the Telfords met with Mr. Outhwaite, the Principal Officer and Manager of Canadian Stanley. No mention was made of the assignment of the Telford mortgage. Mr. Outhwaite persuaded the Telfords to agree to a postponement of the Canadian Stanley mortgage. The postponement did not affect the date of payment. It did change the order of priority. The effect of the postponement was that the Canadian Stanley mortgage moved from a second position to a third position on the title to the Telford land.

On November 13, 1980 the Telfords tendered the first payment of $50,886.60 on the Telford mortgage. As is apparent, this tendering occurred well before the agreed January 31, 1981 due date for the first payment. The payment of $50,886.60 was forwarded to Canadian Stanley's solicitor, Beaumont Proctor, along with a letter which stated:

I am enclosing herewith my cheque in the amount of $50,886.60 being the amount required to payout and discharge your clients mortgage on the property. The balance of the $150,000.00 is being offset by the amount owing on your clients mortgage to my client.

The monies are sent in trust that you forward to my office a registerable discharge of mortgage and the duplicate registered mortgage for which I will in turn forward to you a discharge of mortgage for my clients mortgage on your clients property.

On December 1, 1980 Beaumont Proctor returned the $50,886.60 to the Telford's solicitor informing him that they were no longer acting for Canadian Stanley. The firm of Eden and Pirie was now acting for Canadian Stanley. The Telford's solicitor forwarded the $50,886.60 to Eden and Pirie with the same trust conditions attached as previously.

In a letter dated December 16, 1980 Eden and Pirie informed the Telford's solicitor that the Telford mortgage had been assigned to the Holts. Various negotiations ensued. On January 29, 1981 the Telford's solicitor indicated that if the matter was not resolved by February 6, 1981 he would proceed with a court application for a discharge of the mortgage. On February 2, 1981 the Telfords, for the first time, heard from the representatives of the Holts. The Holt's solicitor demanded the payment of the $50,000 plus accrued interest. The Telford's solicitor asked Eden and Pirie to return the $50,886.60. The funds were refunded on or about February 19, 1981.

The Holts filed a Statement of Claim against the Telfords on March 13, 1981 for $150,000 plus interest. Their claim for the entire amount was based on clause 3 of the Telford mortgage which provided that upon default of any payment of the principal the whole principal would become payable as if the time frame stipulated for the payment of such principal had expired.

After the Telfords received notice of the Holt's statement of claim they paid the $50,886.60 into court.

2. The Courts Below

(1) The Trial

The Holts in their statement of claim asked for the total amount due under the assigned mortgage ‑‑ $157,375. The Telford's counter‑claim stated that, having paid the $50,000 plus interest into court, they were entitled to a discharge of the mortgage. The trial judge decided that the Telfords owed the Holts $150,000 plus interest. He made an order for sale with a redemption period of one year.

The trial judge held that no notice of the transfer of mortgage was given to the Telfords as required by s. 150(2) of the Land Titles Act, R.S.A. 1980, c. L‑5, until the statement of claim was served in the action in March of 1981 and that the Holts therefore took the mortgage subject to the state of accounts existing between the Telfords and Canadian Stanley as of the date of service of the notice. He then considered whether there was a right of set‑off in existence at that time. First, he concluded that there was no agreement to set‑off between the Telfords and Canadian Stanley. In reaching this conclusion he considered the oral evidence of the events leading up to the execution of the mortgage and subsequent documentation. He found that the Telfords believed that, after payment of the sum of $50,000 plus interest due on January 31, 1981, the remaining payments due on the Telford and Canadian Stanley mortgages would set each other off. However, the documents in the two transactions were not drafted so as to provide for a set‑off. Each mortgage provided for two payments subsequent to the January 31, 1981 payment. A right of set‑off does not arise until the debt or payment on each mortgage becomes due and payable. It follows that there was no enforceable agreement to set‑off between the parties.

Further, the Telford mortgage was made by the Telfords in their personal capacity as mortgagors and, pursuant to the Law of Property Act, R.S.A. 1980, c. L‑8, s. 41(1), the personal covenant is not enforceable as a debt against them. The Canadian Stanley mortgage on the other hand is a mortgage made by a corporation and the personal covenant is enforceable as a debt against the corporation when such debt becomes due and payable under s. 43(1) of the Law of Property Act. The fact that there never was any enforceable debt against the Telfords would, in the trial judge's view, preclude any right of set‑off in law.

The trial judge found the Holts' claim for $150,000 plus interest well‑founded. Clause 3 of the Telford mortgage provided that on default of payment of the principal or interest or any money thereby secured, the whole principal should become payable as if the time frame stipulated for the payment of such principal had expired. The Telfords made a conditional payment in advance of the due date for such payment. The condition attached was that a registerable discharge of the mortgage would be forwarded to the Telfords. Since this condition was never met, payment was not made and the Holts were free to accelerate payment of the entire mortgage.

(2) The Alberta Court of Appeal

Lieberman J.A. (for the majority)

The majority stated that the issue on the appeal was not whether there was an agreement for a set‑off but whether in the circumstances of this case there could be a set‑off between the mortgages in question. This issue was governed by the earlier decision of the Alberta Court of Appeal in Renner v. Racz, 1971 ALTASCAD 55, [1972] 1 W.W.R. 109. For a court to direct the set‑off of one debt against another, both debts must be enforceable by action at the time the set‑off is directed.

The debt owed by the Telfords under the agreement for sale fell into the category of an unenforceable debt. This was how a mortgage debt was characterized by the Supreme Court of Canada in Edmonton Airport Hotel Co. v. Credit Foncier Franco‑Canadien, 1965 CanLII 95 (SCC), [1965] S.C.R. 441. Therefore, the Telford's claim for set‑off could not succeed.

Kerans J. A. (dissenting)

Kerans J. A. followed the dissenting judgment in Renner. He agreed that a debtor cannot set‑off an unenforceable debt of his creditor against a debt of his to the creditor which the creditor can enforce. This would be to permit the debtor to, in effect, enforce his unenforceable debt. But Kerans J.A. held that the converse was not true. A creditor who could enforce his debt should be allowed to set it off against a debt owing by him which he could not be forced to pay by personal action. Kerans J.A. found that that was the situation here.

3. The Issue

It is not disputed that under the provisions of the Telford mortgage the Telfords owe the Holts $150,000 plus interest. The Telfords submit, however, that they have the right to set‑off the debt owed to them by Canadian Stanley against the Holts' claim. Their first argument is that the parties agreed to create a right of set‑off. Agreement, express or implied, may confer such a right: see Freeman v. Lomas (1851), 9 Hare l09, at p. 114. Whether there is agreement or not is, however, a matter of evidence. The trial judge concluded that there was no such agreement in this case. He said:

What then was the state of accounts as it existed as at the date of service of the statement of claim? Was there in fact a right of set‑off in existence as at that time? Assuming that the oral evidence adduced as to what transpired prior to the execution of Exhibit 18 [the agreement of sale of the Telford land] and subsequent documentation, does not offend the Parol Evidence Rule, a point which was not brought up nor argued, I am of the view that there was not such a right of set‑off and that the plaintiffs should succeed.

There is no doubt that the defendants believed that after payment of the sum of $50,000 plus interest due on January 31st, 1981, the remaining payments due under Exhibits 7 [Telford mortgage] and 17 [Canadian Stanley mortgage] would set each other off. This result they felt would be a logical consequence of the two transactions in question.

However, the documents on the two transactions were drafted in such a way that it was never certain that a right or [sic] set‑off would or could arise. A number of contingencies could possibly arise before the right of set‑off if any ever existed could be triggered. Firstly, the right of set‑off does not arise until the debt or payment on each mortgage becomes due and payable. This was not to occur until firstly the $50,000 payment plus interest due on Exhibit 7 on the 31st of January, 1981 had been paid and secondly, until each of the payments for $50,000 plus interest on each mortgage due July 31st, 1981 and January 31st, 1982 had become due, and this is assuming no intervening factors such as an assignment of either Exhibit 7 or Exhibit 17 with proper notice or seizure under a writ or other such type of event would occur.

The Alberta Court of Appeal stated that whether there was an agreement to set‑off was not at issue on the appeal. The Telfords testified that on an occasion prior to the execution of the documents and an occasion subsequent to the execution of the documents Canadian Stanley orally agreed that upon the payment by the Telfords of $50,000 the mortgages would be off‑set. This testimony was extremely sketchy. The written agreement, on the other hand, is clear. The parties did not prepare a simple straightforward mortgage from the Telfords to Canadian Stanley for $50,000. Instead, they prepared two separate mortgage documents each of which provided for payments subsequent to the Telfords' payment of $50,000. In these circumstances I think the trial judge was correct in finding that there was no agreement to set‑off.

In the absence of such an agreement the Telfords must demonstrate that they have a right of set‑off at law or a right of set‑off in equity.

(1) Set‑off at Law

Set‑off at law originally arose from two statutes: the Insolvent Debtors Relief Act, 2 Geo. 2, c. 22 (U.K.), and the Set‑off Act, 8 Geo. 2, c. 24 (U.K.) These statutes were repealed but their effect was preserved in subsequent legislation. In the Rules promulgated under the Supreme Court of Judicature Act, 1873, 36 & 37 Vict., c. 66 (U.K.), the following was included:

199.3 A defendant in an action may set‑off, or set up by way of counterclaim against the claims of the plaintiff, any right or claim, whether such set‑off or counterclaim sound in damages or not, and such set‑off or counterclaim shall have the same effect as a cross‑action, so as to enable the Court to pronounce a final judgment in the same action, both on the original and on the cross‑claim. But the Court or a Judge may, on the application of the plaintiff before trial, if in the opinion of the Court or Judge such set‑off or counterclaim cannot be conveniently disposed of in the pending action, or ought not to be allowed, refuse permission to the defendant to avail himself thereof.

In Alberta the relevant provisions are found in the Alberta Rules of Court. Rule 93 of the Alberta Rules of Court, Alta. Reg. 39068, reads as follows:

93. (1) A defendant may by way of counterclaim against the plaintiff's claim or cause of action set up any claim or cause of action by the defendant either against the plaintiff alone or one or more of several plaintiffs or against the plaintiff and another person whether a party to the action or not.

(2) All matters which might be pleaded by way of set‑off shall if it is desired to set the same up in the action, be pleaded by way of counterclaim.

(3) A counterclaim has the same effect as a cross‑action so as to enable the court to pronounce a final judgment in the same action both on the original and on the counterclaim.

(4) The counterclaim shall be conjoined and pleaded with the statement of defence.

(5) A defence to counterclaim shall be conjoined and pleaded with the reply.

The Alberta Court of Appeal discussed the relevant Alberta legislation in Atlantic Acceptance Corp. v. Burns & Dutton Construction (1962) Ltd., 1970 CanLII 774 (AB SCAD), [1971] 1 W.W.R. 84. At page 90 Allen J.A. stated:

Rule 95 contains provision enabling the court to direct a counterclaim to be excluded or tried separately if it cannot be conveniently disposed of in the same action. Thus it would appear that there are no essential differences in principle between the English R. 199.3 quoted above and our Rules dealing with the same subject matter.

It would therefore seem that decisions of English courts on the question of enforceability of claims sought to be set off by a defendant against a claim of a plaintiff may still be helpful in resolving the problems faced in this case and in dealing with the first question propounded above we find some assistance from certain cases to which I will now refer.

The English common law interpretation of the statutory right of set‑off is neatly summarized in Halsbury's Laws of England, 4th ed., vol. 42, para. 421:

421. Nature of the right. The right conferred by the Statutes of Set‑Off was a right to set off mutual debts arising from transactions of a different nature which could be ascertained with certainty at the time of pleading. Thus, no legal set‑off could exist against a claim which sounded in damages, nor could a claim which sounded in damages be set off at law against a plaintiff's claim. The fact that a claim was framed in damages precluded the raising of a set‑off at law, notwithstanding that the claim might have been differently framed in a way which would have permitted such a set‑off. Where a claim for a liquidated debt was joined by a plaintiff with a claim for damages, set‑off at law might only be pleaded in defence to the former claim. Set‑off at law operates as a defence.

Thus, as was stated by the British Columbia Court of Appeal in C.I.B.C. v. Tuckerr Indust. Inc., 1983 CanLII 302 (BC CA), [1983] 5 W.W.R. 602, at p. 604, statutory set‑off (or set‑off at law) "requires the fulfilment of two conditions. The first is that both obligations must be debts. The second is that both debts must be mutual cross obligations". The claim in this case is a debt. The major hurdle the appellant faces is the requirement of "mutuality".

How has this mutuality requirement been interpreted by the courts? In Royal Trust v. Holden (1915), 1915 CanLII 374 (BC CA), 22 D.L.R. 660 (B.C.C.A.), the British Columbia Court of Appeal discussed the meaning of the phrase "mutual debts" at pp. 662‑63:

The expression "mutual debts" is somewhat hard to understand according to the old cases, but when we see in the ancient and approved form of plea given in Bullen v. Leake, 3rd. ed., 682, viz.: ‑‑

That the plaintiff, at the commencement of the suit was and still is indebted to the defendant in an amount equal to the plaintiff's claim ...

we are relieved to find that "mutual debts" mean practically debts due from either party to the other for liquidated sums, or money demands which can be ascertained with certainty at the time of pleading ‑‑ per Kennedy, L.J., in Bennett v. White, [1910] 2 K.B. at 648, 79 L.J.K.B. 1133.

It seems that under this definition any assignment would destroy mutuality and hence destroy the possibility of set‑off at law. This was the view taken by the British Columbia Court of Appeal in Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. and Tsang, 1985 CanLII 144 (BC CA), [1985] 6 W.W.R. 14, at pp. 28‑29:

None of the authorities cited by the appellant is applicable to the case before us and none of them detracts in any way from the authority of the Nfld. case. Each of them is an example of a set‑off at law. In such cases the assignment of a debt prevents fulfilment of the requirement that the debts sought to be set off against each other must be mutual. Once a debt is assigned, it is owed to a third party and the debts are no longer mutual cross‑claims: see C.I.B.C. v. Tuckerr Indust. Inc., 1983 CanLII 302 (BC CA), 46 B.C.L.R. 8, [1983] 5 W.W.R. 602 at 605, 48 C.B.R. (N.S.) 1, 149 D.L.R. (3d) 172 (C.A.).

Since there was an assignment in this case, it appears that a set‑off at law is not available to the Telfords. It is necessary, therefore, to decide whether a set‑off is available in equity.

(2) Set‑off in Equity

The distinction between set‑off at law and set‑off in equity was canvassed by the British Columbia Court of Appeal in C.I.B.C. v. Tuckerr Indust. Inc., supra, at p. 605:

Such a set‑off has its origin in equity and does not rest on the statute of 1728. It can apply where mutuality is lost or never existed. It can apply where the cross obligations are not debts.

Equitable set‑off is available where there is a claim for a money sum whether liquidated or unliquidated: see Aboussafy v. Abacus Cities Ltd., 1981 ABCA 136, [1981] 4 W.W.R. 660 (Alta. C.A.), at p. 666. More importantly in the context of this case, it is available where there has been an assignment. There is no requirement of mutuality. The authorities to be reviewed indicate that courts of equity had two rules regarding the effect of a notice of assignment on the right to set‑off. First, an individual may set‑off against the assignee a money sum which accrued and became due prior to the notice of assignment. And second, an individual may set‑off against the assignee a money sum which arose out of the same contract or series of events which gave rise to the assigned money sum or was closely connected with that contract or series of events.

The first case to consider is Watson v. Mid Wales Railway Co. (1867), L.R. 2 C.P. 593. In that case the assignees of a Lloyd's bond sued the makers of the bond in the name of the original bondholder. The makers sought to set‑off arrears of rent due from the original bondholder which had accrued due since the notice of the assignment under a lease entered into prior to the notice of assignment. The question was whether a debtor had, in equity, a right to set‑off against the assignee of his debt, a debt to him from his original creditor, which has accrued due subsequent to the notice to him of the assignment. The three judges, in separate reasons, answered that a debtor had no right to set‑off in such a case. Montague Smith J. said at pp. 600‑601:

If the debt sought to be set off in an action brought on behalf of the assignee of a debt had existed at the time of the transfer, equity would not interfere to restrain the legal set‑off which the parties had. But here, at the time of transfer and notice, no debt existed to be set off. It is said that if debts are accruing mutually under independent contracts, neither of which is due at the time of the transfer, the right of set‑off exists, if at the time of action brought upon one of them the liability of the other has ripened into a debt actually due. But the time to be looked at is, not the time of action brought, but the time when the transfer was made and notice given, and the rights of parties must be determined by the state of things then existing.

However, each judge made it clear that the answer would be different in a case where "the two transactions were in some way connected together so as to lead the Court to the conclusion that they were made with reference to one another" (p. 598). For example, Bovill C.J., referring to Smith v. Parkes (1852), 16 Beav. 115, expressed the view at p. 598 that:

. . . the decision went on the footing that both debts arose out of the same partnership dealings and transactions, and were inseparably connected together. That case, therefore, is not applicable to the one before us, where the transactions appear entirely separate, and where we have no allegation or statement from which we can infer any connection to have existed.

Newfoundland (Government of) v. Newfoundland Railway Co. (1888), 13 App. Cas. 199 (P.C.), is the seminal case on the right to set‑off debts arising under the same or inter‑related contracts. The court construed the contract before it in that case and concluded that (1) each claim by the railway to a grant of land from the Newfoundland government was complete at the time the construction of the railway section which was the quid pro quo for the grant was completed and (2) upon the completion of construction of each section a proportionate part of the government subsidy became payable for the specified term subject to the condition of continuous efficient operation. On July 15, 1882 the railway assigned the southern division of the railway to another company. On April 20, 1886 the railway, according to the contract, should have been completed. It was not completed. The government, therefore, ceased making the requisite payments. The assignee made a claim for these payments. The government of Newfoundland counterclaimed for unliquidated damages against the assignees of the railway company. Their Lordships stated at pp. 212‑13:

The present case is entirely different from any of those cited by the plaintiffs' counsel. The two claims under consideration have their origin in the same portion of the same contract, where the obligations which gave rise to them are intertwined in the closest manner. The claim of the Government does not arise from any fresh transaction freely entered into by it after notice of assignment by the company. It was utterly powerless to prevent the company from inflicting injury on it by breaking the contract. It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counter‑claim by the other party in respect of the rest of the contract, which may be burdensome. There is no universal rule that claims arising out of the same contract may be set against one another in all circumstances. But their Lordships have no hesitation in saying that in this contract the claims for subsidy and for non‑construction ought to be set against one another.

It is hardly necessary to cite authorities for a conclusion resting on such well‑known principles. Their Lordships will only refer to Smith v. Parkes 16 Beav. 115] not so much on account of the decision as for the sake of quoting a concise statement by Lord Romilly of the principle which governed it. He says, "All the debts sought to be set off against the defendant Parkes are debts either actually due from him at the time of the execution of the deed" (this was the deed by which the third party who resisted the set‑off was brought in) "or flowing out of and inseparably connected with his previous dealings and transactions with the firm." That was a case of equitable set‑off, and was decided in 1852, when unliquidated damages could not by law be the subject of set‑off. That law was not found conducive to justice, and has been altered. Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment.

The court found that the government was entitled to set‑off their counter‑claim against the assignees' claim since the claim and counter‑claim had their origin in the same portion of the same contract and the obligations which gave rise to them were closely intertwined.

In In re Pinto Leite and Nephews, [1929] 1 Ch. 221, the question was whether a trustee was entitled to set‑off the debt of 15,000 which became due after receipt of the notice of assignment. The court held that although the liability existed at or before the date of the notice of assignment, yet as that debt had not then accrued due, it was not debitum in praesenti and therefore was not a debt which the trustee was entitled to set‑off. Clauson J. stated at p. 233:

It is, of course, well settled that the assignee of a chose in action ... takes subject to all rights of set‑off which were available against the assignor, subject only to the exception that, after a notice of an equitable assignment of a chose in action, a debtor cannot set off against the assignee a debt which accrues due subsequently to the date of notice, even though that debt may arise out of a liability which existed at or before the date of the notice; but the debtor may set off as against the assignee a debt which accrues due before notice of the assignment, although it is not payable until after that date.

And at p. 236 he further stated:

. . . when the debt assigned is at the date of notice of the assignment payable in futuro, the debtor can set off against the assignee a debt which becomes payable by the assignor to the debtor after notice of assignment, but before the assigned debt becomes payable, if, but only if, the debt so to be set off was debitum in praesenti at the date of notice of assignment.

Clauson J. then went on to add at p. 236:

In order to prevent any misunderstanding I ought to make it clear that it is not suggested that the debt assigned and the liabilities sought to be set‑off against it, are so connected as to bring the case within the authorities of which the case of Government of Newfoundland v. Newfoundland Ry. Co. is typical.

In Business Computers Ltd. v. Anglo‑African Leasing Ltd., [1977] 1 W.L.R. 578 (Ch. D.), the defendant owed the plaintiff 10,587 in respect of two transactions for computers bought by the defendant and sold on hire purchase to third parties. Under a third transaction the plaintiff manufactured a computer for its own use, sold it to the defendant, and by a hire purchase agreement leased it back. The plaintiff became insolvent and a receiver was appointed on June 17, 1974. By June 17 the defendant was entitled under a condition of the hire purchase agreement to terminate that agreement. It did not do so. On July 31 the receiver repudiated the agreement. On August 8 the defendant accepted the repudiation. It sold the computer and claimed a sum in excess of 32,000 as damages under another condition of the hire purchase agreement. Templeman J. reviewed the relevant authorities and concluded at p. 585:

The result of the relevant authorities is that a debt which accrues due before notice of an assignment is received, whether or not it is payable before that date, or a debt which arises out of the same contract as that which gives rise to the assigned debt, or is closely connected with that contract, may be set off against the assignee. But a debt which is neither accrued nor connected may not be set off even though it arises from a contract made before the assignment.

He found that in this case the debt was neither accrued nor connected.

There was, accordingly, no right of set‑off.

In Canadian Admiral Corp. v. L. F. Dommerich & Co., 1964 CanLII 3 (SCC), [1964] S.C.R. 238, this Court affirmed the rule that a debt which has accrued due before a notice of assignment is received may be set off against the assignee. In that case an assignee sought to claim money from a corporation. The corporation sought to set‑off a debt owed to it by the assignor. This debt had accrued due prior to the notice of assignment. The Court allowed the set‑off stating at p. 240: "There is no doubt as to the general rule. The debtor has as against the assignee the same right of set‑off as he would have had against the assignor at the time at which he receives notice of the assignment".

Thus, cases involving debts that arise from the same contract or closely inter‑related contracts form an exception to the general rule. In these cases a debt arising out of the contract or closely inter‑related contracts may be set‑off against the assignee even if the debt accrues due after the notice of the assignment. The issue in our case therefore turns on whether the debt assigned and the liability sought to be set‑off against it were so connected as to fall within the principle of the Newfoundland Railway case.

I have found no judgment of this Court in which an equitable set‑off was permitted on the Newfoundland Railway principle. Nor was any cited to us. However, in Coba Industries, supra, the British Columbia Court of Appeal applied the Newfoundland Railway case to the following transaction. The respondents bought a commercial property from one Polacco. The interim agreement provided for a second mortgage to be given to Polacco and for Polacco to lease the premises from the respondents for a period of three years. During the lease the respondents were to make second mortgage payments of approximately $5,000 to Polacco and Polacco was to make monthly payments of approximately $10,000 to the respondents. Post‑dated cheques were exchanged. Polacco almost immediately assigned his second mortgage to the petitioner and endorsed over all of the respondents' cheques. Shortly thereafter Polacco defaulted on his lease payments. The mortgage went into default and the petitioner commenced foreclosure proceedings. The respondents successfully applied for a declaration that they were entitled to an equitable set‑off against amounts owing under the mortgage to the petitioner. The petitioner's appeal was dismissed. Macfarlane J.A. reviewed the English authorities and drew from them the following principles at p. 22:

1. The party relying on a set‑off must show some equitable ground for being protected against his adversary's demands: Rawson v. Samuel, [1841] Cr. & Ph. 161, 41 E.R. 451 (L.C.).

2. The equitable ground must go to the very root of the plaintiff's claim before a set‑off will be allowed: [Br. Anzani (Felixstowe) Ltd. v. Int. Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 W.L.R. 451, [1979] 2 All E.R. 1063].

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: . . . [Fed. Commerce and Navigation Co. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066].

4. The plaintiff's claim and the cross‑claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div. Ct.); Br. Anzani.

5. Unliquidated claims are on the same footing as liquidated claims: Nfld. v. Nfld. Ry. Co., [1888] 13 App. C. 199 (P.C.)].

Macfarlane J.A. found that although the mortgage and lease were separate documents evidencing two different legal relationships and did not refer to one another, and although the amounts payable and the payment dates were totally different in each document, the evidence disclosed that the lease payments were intended by the parties to be the source of the funds required to satisfy the mortgage payments. This was why the term of the lease exceeded the term of the mortgage and the amounts payable under the lease exceeded the amounts falling due on the mortgage. In view of the connection between them the differences in the two documents were immaterial.

The English Court of Appeal decision in Hanak v. Green, [1958] 2 Q.B. 9, [1958] 2 W.L.R. 755, [1958] 2 All E.R. 141, on which Macfarlane J.A. placed substantial reliance for the inter‑related obligations principle involved an action by the plaintiff against the builder for failure to complete the construction of a house. The builder counter‑claimed or claimed by way of set‑off on a quantum meruit for extras outside the purview of the contract. The Court of Appeal held that the defendant had an equitable set‑off which totally defeated the plaintiff's claim. Because of the close relationship between the dealings which gave rise to the respective claims, equity would not permit one of them to be insisted upon without taking the other into account. The Newfoundland Railway case was followed.

Macfarlane J.A. relied also on the English Court of Appeal decision in the Federal Commerce case, [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066, where charterers of a vessel were held entitled to deduct from hire by way of equitable set‑off claims which they had against the shipowners. The case is interesting because Lord Denning indicates in the course of his reasons that it is no longer necessary since the merger of law and equity to probe the technicalities of the common law of set‑off. He said [[1978] 3 All E.R. 1066] at p. 1078:

Over l00 years have passed since the Supreme Court of Judicature Act 1873. During that time the streams of common law and equity have flown together and combined so as to be indistinguishable the one from the other. We have no longer to ask ourselves: what would the courts of common law or the courts of equity have done before the Supreme Court of Judicature Act 1873? We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? (see United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All E.R. 62 at 68, [1977] 2 W.L.R. 806 at 811‑12] per Lord Diplock). 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.

The Court held that it would be unfair for the creditor to be paid his claim without allowing the debtor to raise an equity against the creditor in the form of his own claim to the extent it had been held to be well‑founded.

I return now to the facts of this case in order to determine the effect of the notice of assignment on the Telfords' claim for set‑off. Section 150 of the Land Titles Act, R.S.A. 1980, c. L‑5 identifies the pre‑requisites for an effective assignment of a mortgage. Section 150 states:

150 (1) Any contract in writing for the sale and purchase of any land, mortgage or encumbrance is assignable notwithstanding anything to the contrary therein contained, and any assignment of any such contract operates according to its terms to transfer to the assignee therein mentioned all the right, title and interest of the assignor both at law and in equity, subject to the conditions and stipulations contained in the assignment.

(2) Nothing in this section shall be deemed to affect any rights at law or in equity of the original vendor or owner of the land, mortgage or encumbrance, until notice in writing of the assignment has been either sent to him by registered mail or served on him in the way process is usually served, and the notice mentioned in section 134 shall be deemed to be such notice.

The Telfords did not receive any notice of assignment in compliance with the provisions of this statute until the Holts filed their notice of statement of claim. The date of notice of assignment was accordingly March 13, 1981. Under the original schedule of payments the only debt which accrued due prior to March 13, 1981 was the January 31, 1981 payment of $50,000 from the Telfords to Canadian Stanley. The debts which the Telfords are seeking to set‑off did not accrue due before the date of the notice of assignment. Thus, the debts can be set‑off only if the Telfords can demonstrate that they arise out of the same contract or closely inter‑related contracts. In my view, the Telfords have succeeded in demonstrating this. In essence, what happened here was that the Telfords and Canadian Stanley "swapped" parcels of land. The Telfords bought land from Canadian Stanley and gave a mortgage to Canadian Stanley but they also sold land to, and received a mortgage from, Canadian Stanley. The mortgages were entered into on the same date. The purchase price for both parcels was the same, namely $265,000. Except for the January 31, 1981 payment, the payments under the two mortgages were on the same dates and for the same amounts. It is these two latter payments under the Canadian Stanley mortgage and the Telford mortgage that the Telfords seek to set‑off against each other. Because the Telford mortgage and the Canadian Stanley mortgage are part of the land exchange deal, being part of the consideration for the reciprocal transfers, they are, in my view, closely connected and meet the requirements for an equitable set‑off. They were made with reference to one another. It would be unfair to enforce only one side of the land exchange agreement.

However, the Telfords have one more obstacle to overcome, namely the view expressed by the Alberta Court of Appeal that their debt was unenforceable and could not be set‑off for that reason. In reaching this conclusion the majority of the Court of Appeal followed their own earlier precedent in Renner v. Racz, supra. In Renner the Court considered the Alberta Law of Property Act, R.S.A. 1980, c. L‑8. Section 41(1) of that Act states:

41(1) In an action brought on a mortgage of land, whether legal or equitable, or on an agreement for the sale of land, the right of the mortgagee or vendor is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage or cancellation of the agreement for sale, as the case may be, and no action lies

(a) on a covenant for payment contained in the mortgage or agreement for sale,

(b) on any covenant, whether express or implied, by or on the part of a person to whom the land comprised in the mortgage or agreement for sale has been transferred or assigned subject to the mortgage or agreement for the payment of the principal money or purchase money payable under the mortgage or agreement or part thereof, as the case may be, or

(c) for damages based on the sale or forfeiture for taxes of land included in the mortgage or agreement for sale, whether or not the sale or forfeiture was due to, or the result of, the default of the mortgagor or purchaser of the land or of the transferee or assignee from the mortgagor or purchaser.

Section 43(1) states:

43(1) Sections 41 and 42 do not apply to a proceeding for the enforcement of any provision.

(a) of any agreement for sale of land to a corporation, or

(b) of a mortgage given by a corporation.

The Court of Appeal, in interpreting these sections, made reference to this Court's judgment in Edmonton Airport Hotel Co. v. Credit Foncier Franco‑Canadien, supra, and, in particular, to the Court's observation that the predecessor section to s. 41 created "an unenforceable debt". The Alberta Court of Appeal concluded therefore that in a case where the debt was a mortgage debt and where, because of the statute, an action on the personal covenant was not available, the court could not order set‑off. It could not order set‑off because there was no enforceable debt.

With respect, I must disagree with this interpretation of the Edmonton Airport Hotel case. This Court's comment in that case must be viewed in context. In Edmonton Airport Hotel a guarantor had given a personal guarantee in respect of a mortgagor's indebtedness. The guarantor argued that any guarantee of any mortgage indebtedness is void under the terms of the statute as an indirect method of attempting to impose personal liability under the mortgage. The Court disagreed since the guarantor was not (and could not be) the mortgagor. In the course of its reasoning the Court said at pp. 444‑45:

As to the guarantee, Superstein submitted that he was under no liability as guarantor since there was no debt owing by the principal debtor. He said that the effect of sec. 34(17)(a) was to render it impossible that there should be any debt owing by the hotel company. The simple answer is that the hotel borrowed money from Credit Foncier on the security of land and chattels. This borrowing was neither illegal nor ultra vires and gave rise to a debt. Swan v. Bank of Scotland (1836), 10 Bli. NS 627] does not apply. It was a case of illegality. But here, sec. 34(17) is a procedural limitation. There was a borrowing and there was an unenforceable debt which will not disappear by the terms of s. 34(18) until a vesting order is made.

In my view, the Court was emphasizing that enforcing the guarantee was not equivalent to enforcing a mortgagor's personal covenant. The reference to the unenforceable debt was simply a reference to the fact that a mortgagor's personal covenant for payment is unenforceable under the terms of the statute. Section 41 does not create an unenforceable debt. Section 41 does not extinguish or satisfy the debt. It merely precludes the remedy by way of a personal judgment against the mortgagor on the covenant. The mortgagee may still pursue the remedy of foreclosure. Therefore, both the Telfords and Canadian Stanley have enforceable debts. It is true that pursuant to the statute a different range of remedies is available to an individual from that available to a corporation. Set‑off does not however require either symmetry of remedies or of amounts.

4. Conclusion

In summary, the Telfords are not entitled to legal set‑off because the debts are not mutual. The Telfords are entitled to equitable set‑off because they are entitled to set‑off against the assignee, the Holts, a money sum which arises out of the same contract or inter‑related contracts which gave rise to the assigned money sum. The provisions of the Alberta Law of Property Act do not preclude this result.

The appeal is allowed. The balance due on the Telford mortgage is the sum of $50,886.60 and, upon the payment of that amount by the Telfords to the Holts, the Order for Foreclosure should be vacated or set aside and the mortgage expunged from the title. The appellants should have their costs both here and in the courts below to be withheld from the said sum of $50,886.60.

Appeal allowed with costs

Solicitor for the appellants: D. E. Jermyn, Calgary.

Solicitor for the respondents: James P. Low, Calgary.