By Ty Schmidt – Supervised by Professor Maharaj
Can a company claim equitable set off for moneys owing to another party in cases where the company’s owner is owed funds by the same party under a different agreement? No, says the Alberta Court of Queen’s Bench in the recent summary judgment of Pacific West Systems Suppply Ltd v Kajmowicz, 2022 ABQB 91. Set off requires that the claims must arise out of the same transaction or be closely connected with each other; it is not enough for the claims to merely involve the same parties.
The parties to the dispute included Pacific West Systems Supply Ltd. (“PacWest”), a supplier of construction materials, Zane Kajmowicz, and another construction supply firm named Zed’s Building Supplies Ltd. (“Zed’s”) of which Kajmowicz was the sole shareholder and director. In March 2017, Zed entered into an agreement with PacWest pursuant to which Zed could make purchases through PacWest on credit (the “Credit Purchase Agreement”). Over the next two and a half months, between March 17 and May 1, Zed made purchases under the “Credit Purchase Agreement” totalling $90,847 (the “Accounts Receivable”). Following some difficulties experienced by Zed during the period in which these credit purchases were made, PacWest hired Kajmowicz in May 2017 as an outside sales representative with an agreement to pay Kajmowicz a $100,000 salary as well as a “good faith” payment of $60,000 (the “Employment Agreement”). PacWest’s president Jack Sentla also separately agreed to pay Kajmowicz two instalments of $50,000 due on May 1 and August 1 of 2017 (the “Collateral Agreement”), the first of which was duly paid on that date.
By July 2017, the account receivable owed by Zed’s had still not been paid despite Kajmowicz’ representations that it would be paid down by then. As a result, PacWest proposed an amendment to the Employment Agreement to split the “good faith” payment into three installments of $20,000, and to require the first “good faith” payment to be applied to the Accounts Receivable owed by Zed’s, with the remainder of the Accounts Receivable to be paid by August 15, 2017 (the “Amending Agreement”). The Amending Agreement was agreed to orally by Kajmowicz subject to the payment of the second installment of $50,000 due on August 1 under the Collateral Agreement. The second amount was not paid however, which appears to have led Kajmowicz to commence a claim against PacWest and Sentla for breach of contract with respect to the Employment Agreement and Collateral Agreement, and for PacWest to counterclaim against Zed’s for the Accounts Receivable.
Kajmowicz defended against the counterclaim from PacWest on behalf of Zed’s by arguing inter alia that Zed’s obligation to pay the Accounts Receivable could be equitably set off against the amounts owed to Kajmowicz personally under the Employment Agreement/Amending Agreement and Collateral Agreement. The Court however rejected that argument on the basis that Zed’s was not a party to either of these agreements, and that the circumstances giving rise to the Accounts Receivable were unrelated to these agreements. Zed’s had simply avoided its obligation to pay, and it was not “manifestly unjust” in terms of the test for set-off established by the Supreme Court in Holt v Telford,  2 SCR 193 that Zed’s be made to pay the Accounts Receivable. This decision is a timely reminder that set-off requires more than the mere existence of a crossclaim before set-off will be allowed, even if all of the natural persons involved in the crossclaims are exactly the same.