Anonymised, illustrative composite. The purchase agreement gave the buyer a set-off right; the note the buyer's own lender required said it was payable “absolutely and unconditionally”. A real Ontario statute creates a default set-off defence — and the buyer's own timing put it outside that statute too.
At a glance
A buyer financed part of a $2,050,000 asset purchase with a $600,000 vendor take-back note from the seller, repayable over five years, subordinated and postponed to the buyer's senior lender as a condition of that lender's own financing. The purchase agreement, negotiated between buyer and seller, gave the buyer the right to set off any “Losses finally determined or agreed” under the indemnity against “any amounts otherwise payable to the Seller under this Agreement or any Ancillary Agreement, including the Vendor Note”.
The note itself was a separate document, drafted primarily by the senior lender's counsel to satisfy the postponement agreement's own requirements, and it said the opposite of what the buyer expected: principal and interest were payable “absolutely and unconditionally, free and clear of any set-off, counterclaim or deduction of any kind”. Nothing in the note referred back to the purchase agreement, the indemnity, or the set-off clause the parties had negotiated in the main agreement.
At month 11, the buyer discovered a $95,000 liability the seller's representations had not disclosed. Rather than paying the note on schedule and pursuing the indemnity claim as a separate matter, the buyer's own view of the set-off clause led it to simply stop making the monthly VTB payments, treating the missed instalments as self-executing recovery. The seller, whose ability to sue on the note was itself restricted by the postponement agreement with the senior lender while the buyer remained current on the senior debt, could not immediately sue — but once a payment default under the note became clear, the postponement's own carve-outs let the seller pursue the buyer directly for the missed instalments.
Missed VTB payments over four months totalled $41,600 in principal and interest, against the $95,000 claim the buyer believed it was entitled to set off. The gap between the two numbers was itself a problem: the buyer had stopped paying before establishing the claim was “finally determined or agreed” at all, which is what its own set-off clause required before it could be exercised.
Ontario does have a real, on-point statute here, and it was worth checking rather than assuming the field was unstatutory: the Courts of Justice Act, s.111, codifies a default legal set-off defence. Subsection (1) provides that “in an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant”, and subsection (2) allows “mutual debts” to be set off “even if they are of a different nature”.
Two features of s.111 kept it from rescuing the buyer, independent of what either document said. First, it is a defence — something raised inside an action the plaintiff has already brought — not a licence to withhold payment unilaterally in advance of one. Second, it requires an actual debt owed by the plaintiff to the defendant, which courts have long read as a liquidated or readily ascertainable sum, not a merely asserted and disputed liability. The buyer's $95,000 claim, at the moment it stopped paying, was neither: it had not been finally determined or agreed under the SPA's own clause, and it was not yet a “debt” owed by the seller in the sense s.111 requires.
Like equitable set-off, statutory set-off under s.111 can be excluded by clear contrary language, and the note's “absolutely and unconditionally, free and clear of any set-off, counterclaim or deduction of any kind” is exactly that kind of language. So even once the $95,000 claim had been finally determined, a court would still have had to ask whether the note's own clean, free-standing wording — drafted independently of the purchase agreement, for the senior lender's benefit — excluded set-off against it specifically. Nothing in the note referred back to the SPA's set-off clause, so it was read on its own terms.
The seller obtained judgment for the missed VTB payments plus interest under the note's own terms. The buyer's $95,000 indemnity claim survived as a separate matter under the purchase agreement — it was not extinguished — but the buyer now had to pursue it as an ordinary claim rather than as a self-executing deduction, while also owing the seller the missed payments and costs on the note action. Neither the SPA's own set-off clause nor the CJA's default statutory defence had ever actually been available to the buyer at the point it stopped paying, because the underlying claim was not yet a determined debt under either route.
Paying the note as scheduled and pursuing the $95,000 claim separately would have cost the buyer nothing beyond ordinary litigation expense on a claim it may well have won on the merits. Self-help instead converted a good indemnity claim into a payment default the buyer had to defend, on top of the underlying dispute — the worse of both positions rather than either one.
The tell was in who drafted the note and why, and in when the buyer acted. The note came out of the senior lender's requirements, reviewed by the buyer's financing counsel for compliance with the postponement agreement, and was never cross-checked against the remedies the buyer's transaction counsel had negotiated in the purchase agreement itself. And the buyer stopped paying the moment it discovered the liability, not once it had been established as a debt — jumping ahead of the precondition built into its own negotiated clause, and of the precondition built into the CJA's own default rule.
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