Executive Summary: Key Legal and Evidentiary Issues

• The appeal focused on whether equitable set-off is a genuine defence to summary judgment in a construction contract dispute.

• The chambers judge’s grant of partial summary judgment was challenged due to unresolved counterclaims for delay damages and set-off.

• The Court of Appeal held that equitable set-off is a substantive defence that can preclude summary judgment if it raises a genuine issue for trial.

• The “clean hands” principle was considered but found not to bar Man-Shield’s reliance on equitable set-off based on the record.

• The chambers judge was found to have erred in not recognizing the triable issue raised by the set-off defence and in applying the “just result principle.”

• The appeal was allowed, the partial summary judgment was set aside, and the matter was remitted to the Court of King’s Bench for trial.

Facts of the case

Tempo Alberta Electrical Contractors Co. Ltd. and Tempo Alberta Contractors Co. Ltd., carrying on business as Tempo Electrical Contractors Co. Ltd. (“Tempo”), and Man-Shield (Alta) Construction Inc., carrying on business as Man-Shield (Alta) Construction (“Man-Shield”), became involved in litigation arising from the construction of the Shepherd’s Garden Heritage condominium (the “Heritage Condominium”). In May 2014, Man-Shield was hired by Shepherd’s Care Foundation as the general contractor. Tempo provided a quotation of $3,028,560.00 for electrical work, and in July 2014, the parties entered into a subcontract for the electrical work.

The Heritage Condominium was completed in 2017 after a delay of 45 weeks. Responsibility for the delay and damages is contested, and both parties agreed a trial is necessary to resolve these issues. Tempo claims Man-Shield owes $678,261 for outstanding payments under the subcontract, broken down as $188,733.15 in progress invoices, $366,845.13 as a 10% holdback, and $122,682.12 in change orders. Tempo registered a builders’ lien in February 2017 for the holdback amount and filed a Statement of Claim for $678,261. Man-Shield filed a Statement of Defence and a Counterclaim for $2,675,000 for delay, alleged negligent work, and damages from an allegedly invalid lien, asserting equitable set-off as a defence.

Tempo later initiated another action, consolidated with the first, claiming $2,788,056.46 for amounts owing and damages from the delay. A second builders’ lien was registered in June 2017 for $1,142,323. Shepherd’s Care settled Tempo’s second lien claim by paying $1,199,439.15 into court as security, which was then discharged, and Shepherd’s Care assigned its rights to the lien funds to Man-Shield.

In May 2020, Man-Shield was allowed to replace the lien funds with a lien bond, a decision upheld on appeal. However, the Court of Appeal later determined that section 22 of the Prompt Payment and Construction Lien Act imposed a statutory trust on the lien funds and ordered Man-Shield to pay $678,407.88 into court as security for Tempo’s claim for outstanding payments. Man-Shield did not comply, and Tempo’s application to have Man-Shield held in contempt was dismissed due to Man-Shield’s negative financial position, a decision recently upheld on appeal.

Summary judgment application and decision below

Tempo applied for summary judgment for $678,261 for outstanding payments under the subcontract. An applications judge granted partial summary judgment. On appeal, Man-Shield argued that summary judgment was not available because: (a) Tempo charged for work under change orders not approved by Man-Shield; (b) Man-Shield was entitled to off-setting payments for “chargebacks” for work performed to complete or remediate Tempo’s delayed and deficient work; and (c) Man-Shield had a cross-claim for damages caused by Tempo’s delayed and deficient work, characterized as an equitable set-off.

The chambers judge cited Weir-Jones for the summary judgment principles and concluded that Tempo’s claims were owing for work performed under change orders. She found no genuine issue for trial regarding Man-Shield’s entitlement to “chargebacks” due to lack of notice and opportunity to remediate as required by the subcontract. The judge found some merit to Man-Shield’s claim for damages but decided that the set-off claim did not prevent partial summary judgment, reasoning that a set-off is not a “true defence” and that summary judgment would not deprive Man-Shield of the opportunity to prove its set-off at trial. The judge invoked the “just result principle,” citing the passage of six years since the Statement of Claim and the questionable evidence of Man-Shield’s claims, and awarded summary judgment to Tempo for the outstanding charges, leaving the claims for delay damages for trial.

In a subsequent decision, the chambers judge declined Tempo’s claim for solicitor-client costs, finding that Man-Shield’s substitution of the lien bond and use of the lien funds did not justify enhanced costs, and that Man-Shield’s disorganized document submission was inferred to have been done to obfuscate rather than clarify the issues.

Policy terms and legal principles discussed

The appeal raised three issues: (1) whether the chambers judge erred in law by holding that equitable set-off was not a genuine defence to summary judgment; (2) whether Man-Shield’s claim for equitable set-off raised a genuine issue for trial; and (3) whether the appeal should be denied based on the clean hands principle.

The Court of Appeal held that the chambers judge erred in law by finding that Man-Shield’s claim to equitable set-off was not a “true defence.” The Court cited Supreme Court and appellate authority confirming that equitable set-off is a defence that may raise a genuine issue for trial and preclude summary judgment. The Court found that the chambers judge did not address the nature of the set-off or the relevant authorities and did not have the benefit of the Supreme Court’s subsequent decision in Scott, which confirmed that equitable set-off applies to liquidated and unliquidated claims.

The Court also found that Man-Shield’s claim for equitable set-off raised a genuine issue for trial, as the chambers judge herself found that adjudication of the merits was necessary and that there was not sufficient confidence in the record to summarily resolve the issue of set-off. The Court held that the issues of delay, responsibility, and consequential losses were so closely connected to Tempo’s claim for payment that it would be unjust to allow Tempo to realize on the outstanding payments while Man-Shield’s counterclaim remained to be determined at a future date.

On the clean hands issue, the Court found that Tempo failed to demonstrate wrongful conduct by Man-Shield that would disentitle it from the benefit of the defence of equitable set-off. The alleged misconduct, including the “document dump” and actions regarding the lien funds, arose after the commercial dealings and did not have the necessary connection to the transaction at issue. The Court found no findings of dishonesty, fraud, deceit, unconscionability, or bad faith in the original transaction or dealings.

Ruling and overall outcome

The Court of Appeal concluded that the chambers judge erred in finding that Man-Shield’s defence of equitable set-off did not raise a genuine issue for trial. The appeal was allowed, the partial summary judgment was set aside, and the claim and counterclaim were returned to the Court of King’s Bench for trial. No specific amount was finally awarded to either party at this stage, as the substantive issues must be determined at trial.