ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-11-425998
DATE: 20150608
B E T W E E N:
MSI SPERGEL INC. in its capacity as
Maya Poliak for the Plaintiff
Court appointed receiver of Trentfab Inc.
Plaintiff
- and -
X-ACT SYSTEMS INC.
Steven Baldwin, for the Defendant
Defendant
Judgment
D.L. Corbett J.
[1] The plaintiff, the receiver of Trentfab Inc., moves for summary judgment against the defendant, X-Act, for payment under a manufacturing contract. For the reasons that follow, judgment is granted as sought.
[2] In June 2009, Trentfab was retained by X-Act to manufacture a waste composter for a price of $210,000, plus GST. X-Act, in turn, contracted to sell the composter to a an ultimate purchaser, Oakwood Dairy LLC, for a purchase price of about US $240,000.
[3] Trentfab manufactured the composter and installed it in late December 2009.
[4] X-Act was paid in full for the composter on December 31, 2009.
[5] X-Act has not paid Trentfab under its contract.
[6] X-Act does not dispute its obligations under its contract with Trentfab, but claims legal or equitable set-off against the contract price.
[7] X-Act’s claims to set-off fall into two categories:
(a) claims in connection with prior contracts with Trentfab in 2005 and 2006; and
(b) contingent future claims under the warranty that applies to the composter sold to Oakwood, since Trentfab is now insolvent and unable to honour warranty claims.
[8] X-Act’s set-off claims must fail for the following reasons.
The 2005 and 2006 Contracts
[9] X-Act contracted with Trentfab three times for manufacture of equipment for customers of X-Act:
(i) in May 2005, for the “Alaska Composter”;
(ii) in October 2006, for the “Greenwood Composter”; and
(iii) in December 2009 for the “Oakwood Composter”, the machine that is the subject-matter of this claim for payment.
[10] X-Act asserts claims in connection with the Alaska and Greenwood Composters, and seeks to set off those claims against what it owes Trentfab for the Oakwood Composter.
[11] The issues in respect to the Alaska and Greenwood Composters were known to X-Act at the time it entered into the contract for the Oakwood Composter on June 17, 2009. Indeed, there were extensive settlement discussions and negotiations about these issues prior to the execution of the Oakwood Composter contract.
[12] X-Act paid a deposit for the Oakwood Composter of $21,000 plus GST on June 24, 2009.
[13] Legal set-off arises where there are mutual debts for liquidated amounts.[^1] X-Act’s claims in respect to the Alaska and Greenwood Composters are not liquidated claims; they are unliquidated claims. Legal set-off is not available for them.
[14] The principles that apply to equitable set-off are:
(a) The party relying on a set-off must show some equitable ground for being protected against the adversary’s demands.
(b) The equitable ground must go to the very root of the Plaintiff’s claim.
(c) 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.
(d) The Plaintiff’s claim and the cross-claim need not arise out of the same contract.
(e) Unliquidated claims are on the same footing as liquidated claims.[^2]
[15] Equitable set-off does not arise on the facts of this case. X-Act and Trentfab entered into the Oakwood contract in the knowledge of the dispute in respect to the Alaska and Greenwood Composters. X-Act agreed to pay Trentfab for the Oakwood Composter, knowing that it had unresolved claims respecting the prior two machines. There is no equitable basis upon which X-Act should be protected from Trentfab’s claim in those circumstances.
[16] X-Act’s claim does not go to the very root of the plaintiff’s claim. It has nothing to do with the plaintiff’s claim. It is in respect to distinct contracts and claims that are unrelated. Although it is not necessary, under the test stated in Algoma Steel, that the claims arise under the same contract, they still must be linked in a manner that would make it unjust for the plaintiff to enforce the Oakwood claim without regard to the Greenwood and Alaska claims. There is no such basis here.[^3]
[17] As Justice Ground put it:
… it is settled law that a party may not maintain a set-off claim based upon rights it may have arising from a contract to purchase different goods, under a different contract, at a different time, from the same vendor.[^4]
Warranty Claims
[18] This is a motion for summary judgment. Both sides are required to “put their best foot forward”.[^5] X-Act has not proved that Trentfab provided a manufacturer’s warranty. It asserts claims in respect to the Alaska and Greenwood Composters but has not proved manufacturer’s warranties in respect to those machines.
[19] In any event the evidence of warranty claims in respect to the Oakwood Composter is insufficient to ground a set-off claim. X-Act’s customer has paid in full for the composter. The machine had been in use for more than four years. There is no evidence that the customer has asserted claims against X-Act, and no evidence that X-Act has paid any such claims.
[20] The contingency of a future warranty claim is no more than speculative. Four years after delivery, with no written manufacturer’s warranty, the contingency is remote. It is not a basis upon which X-Act can refuse payment under its contract with Trentfab.[^6]
[21] This claim is put in context by Trentfab’s insolvency. In simple terms, X-Act argues that the equities favour its set-off claims because Trentfab will not be able to pay any judgment in future. If Trentfab was solvent and continuing to carry on business, there is no tenable argument that X-Act could withhold payment as security for contingent future warranty claims. The claim does not somehow become tenable because Trentfab has become insolvent.
Allegation of Waiver and Settlement
[22] X-Act alleges that Trentfab’s Director of Operations, Mr Guy, settled these claims by advising X-Act not to pay for the Oakwood Composter.
[23] Guy’s employment with Trentfab ended in November 2009.
[24] The conversations in which Mr Guy allegedly advised X-Act not to pay Trentfab took place after Mr Guy’s employment ended. He had neither actual nor apparent authority to resolve claims between Trentfab and X-Act and certainly no authority to agree that X-Act would not have to pay for the Oakwood Composter.
[25] In any event, I take this as no more than imprudent advice provided by Mr Guy based on his understanding of Trentfab’s imminent financial collapse. It does not raise an issue requiring oral testimony. A departed employee cannot give away his insolvent employer’s assets, and both Mr Guy and X-Act can be taken to understand this rather basic point.
Conclusion and Order
[26] There shall be judgment for the plaintiff as sought, with interest in accordance with the Courts of Justice Act. Bills of costs have been filed. If the parties cannot agree on costs then the plaintiff shall deliver brief written submissions by June 22, 2015, and the defendant shall deliver responding submissions by June 30, 2015. Counsel may extend this schedule by agreement provided that all costs submissions reach me no later than July 31, 2015.
D.L. Corbett J.
Released: 20150608
COURT FILE NO.: CV-11-425998
DATE: 20150608
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
MSI SPERGEL INC. IN ITS CAPACITY AS Court appointed receiver of Trentfab Inc.
- and –
X-ACT SYSTEMS INC.
JUDGMENT
D.L. Corbett J.
Released: 20150608
[^1]: Courts of Justice Act, RSO 1990 c. C.43, s.111.
[^2]: Algoma Steel Inc. v. Union Gas Ltd. (2003), 2003 30833 (ON CA), 63 O.R. (3d) 78, paras. 28-29 (Ont. CA).
[^3]: See the language of Lord Denning, M.R., in Federal Commerce & Navigation Co. v. Molena Alpha Inc., as quoted in Algoma Steel, ibid., para. 29.
[^4]: Fasco Motors Ltd. V. General Refrigeration Inc., [1988] O.J. No. 1752, para. 8 (Ont. Gen. Div.). See also Cuddy Food Products v. Puddy Bros. Ltd., [2002] O.J. No. 3181 (Ont. SCJ), per Lane J.; Erie Meat Packers v. Export Packers Co. Ltd. (1980), 1980 1920 (ON CA), 39 OR (2d) 97 (CA).
[^5]: Hryniak v. Mauldin, 2014 SCC 7; Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, paras. 24-34.
[^6]: Re Thomas Electric Co. (1981), 39 CBR (NS) 20, paras. 8-15 (Ont. SC – Bktcy).