The Alberta Court of Appeal has confirmed that equitable set-off can be a genuine defence to a summary judgment application. In Tempo Alberta Electrical Contractors Co Ltd v. Man‑Shield (Alta) Construction Inc, 2025 ABCA 310, the Court of Appeal set aside a partial summary judgment granted to Tempo Alberta Electrical Contractors Co. Ltd. (Tempo), a subcontractor, for unpaid amounts it was owed because Man-Shield (Alta) Construction Inc. (Man Shield), the general contractor, pled set-off and counterclaimed for losses related to the same project.
For businesses, this decision is an important reminder that equitable set-off is a true defence that can defeat a summary judgment application where the parties’ claims are inseparably connected.
Background
The dispute arose from the construction of a seniors’ care facility. Tempo, the electrical subcontractor, sought approximately CA$678,261 for unpaid amounts under a subcontract with Man Shield.[1] Man Shield counterclaimed for over CA$2.6 million in delay-related losses and costs arising from allegedly negligent work, and pled equitable set-off as a defence.[2]
Tempo obtained partial summary judgment from an Applications Judge for amounts claimed.[3] The chambers Judge on appeal acknowledged Man Shield’s counterclaim raised a genuine issue for trial, but held that set-off was not a “true defence.”[4] Having found so, the chambers Judge treated Man Shield’s set‑off claim as irrelevant to the summary judgment application and instead noted the “culture shift” favouring “proportionate, timely and affordable procedures” endorsed by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7 (Hryniak). Accordingly, the chambers Judge again awarded partial summary judgment to Tempo.[5]
The Court of Appeal decision
The Court of Appeal held the chambers Judge erred in law by finding that equitable set-off was not a “true defence.”[6] Equitable set-off is available where, among other things, “the transactions or dealings between the parties are so inseparably connected that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim.”[7] The Court of Appeal[8] emphasized that equitable set-off is a defence that can raise a genuine issue for trial and prevent summary judgment; the recent culture shift focusing on litigation efficiency and proportionality did not alter this. [9]
Further, the Court of Appeal rejected the chamber Judge’s reasoning that equitable set-off should not bar summary judgment simply because Man Shield could later prove its set-off claim at trial and receive judgment. Doing so, where the claim and the counterclaim are interrelated, risks unfair and piecemeal litigation, as well as the interim transfer of funds, which courts have repeatedly accepted as valid reasons for rejecting summary judgment.[10]
On the facts at hand, Tempo’s claim and Man Shield’s counterclaim were so “inseparably connected” that it would be unjust to allow Tempo to obtain payment while limiting Man Shield to a damages claim to be determined at a later date.[11]
Clean hands did not bar set‑off
The Court of Appeal also rejected Tempo’s argument that Man Shield did not have clean hands and therefore should be disqualified from relying on equitable set-off as a defence to summary judgment.[12] A party with “unclean hands,” or one whose actions are “tainted by some other form of inequity,” may be barred from asserting equitable set-off. This usually takes the form of dishonesty, fraud, deceit, unconscionability or bad faith. Such misconduct must bear an “immediate and necessary relation” to the transaction at issue, such that granting relief would be unjust.[13] However, where the conduct follows the transaction and arises after the loss crystalized, a “substantive temporal gap” exists that typically will not ground a finding of unclean hands.[14]
The Court of Appeal found no misconduct by Man Shield to bar its defence of equitable set-off and leave no genuine issue for trial.[15] Man Shield’s alleged misconduct—including its “document dump” during the summary judgment proceeding and replacing cash lien funds paid into court with a bond—arose after its dealings with Tempo and were not central to its equitable set-off claim.[16] Similarly, that Man Shield withheld payments was arguably an exercise of its entitlement to set-off the damages it sought in its counterclaim against any payments it may have owed Tempo.[17]
Key takeaways
The Court of Appeal’s decision in Tempo reaffirms that a defence of equitable set-off may be sufficient to defeat a summary judgment application where it raises a triable issue. Where a defendant can establish a clear connection between their cross-claim and the plaintiff’s statement of claim, there is a prima facie indicator that summary judgment would be unjust.[18] Likewise, the “clean hands” principle will bar set‑off only where the alleged misconduct bears a direct and necessary relation to the underlying transaction or the equitable relief sought.
For more information on this topic, please reach out to the authors Kelly Osaka, Brenden Roberts and Gregory Parth.
[1] Para 8.
[2] Para 10.
[3] Para 16.
[4] Para 20.
[5] Para 23.
[6] Para 27.
[7] Para 31.
[8] Citing Scott v Golden Oaks Enterprises Inc, 2024 SCC 32.
[9] Para 27, 34.
[10] Para 35.
[11] Para 40.
[12] Para 42.
[13] Paras 43-44.
[14] Para 46.
[15] Para 50.
[16] Para 50.
[17] Para 54.
[18] Para 40.
