{"id":40298,"date":"2025-10-22T16:35:10","date_gmt":"2025-10-22T20:35:10","guid":{"rendered":"https:\/\/www.millerthomson.com\/?p=40298"},"modified":"2025-11-13T14:51:16","modified_gmt":"2025-11-13T19:51:16","slug":"equitable-set-off-and-clean-hands-what-albertas-latest-court-of-appeal-decision-means-for-construction-claims","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/construction-and-infrastructure-law\/equitable-set-off-and-clean-hands-what-albertas-latest-court-of-appeal-decision-means-for-construction-claims\/","title":{"rendered":"Equitable set-off and clean hands: What Alberta\u2019s latest Court of Appeal decision means for construction claims"},"content":{"rendered":"\n

In Alberta\u2019s fast-moving construction sector, disputes over payment delays and project performance can escalate quickly. A recent Alberta Court of Appeal decision in Tempo Alberta Electrical Contractors Co Ltd v Man-Shield (Alta) Construction Inc<\/a><\/em>[1]<\/strong><\/em><\/a> <\/strong>clarifies two key principles that often collide in construction litigation: equitable set-off and the clean hands doctrine.<\/p>\n\n\n\n

For construction law practitioners, this case provides useful guidance for when equitable set-off can serve as a valid defence to summary judgment.<\/p>\n\n\n\n

What was the dispute between Tempo and Man-Shield about?<\/h2>\n\n\n\n

Tempo Electrical Contractors Co Ltd. (\u201cTempo<\/strong>\u201d) was retained by Man-Shield (Alta) Construction (\u201cMan-Shield<\/strong>\u201d) to perform electrical work under a subcontract valued at over $3 million related to the construction of a facility in Edmonton, Alberta.[2]<\/a> The project experienced a 45-week delay, and both parties alleged responsibility for the resulting costs.[3]<\/a> Tempo claimed $678,261 in unpaid amounts under the subcontract[4]<\/a> and Man-Shield counterclaimed for $2.675 million, citing damages from delay and deficiencies in Tempo\u2019s work.[5]<\/a> Thereafter, Tempo initiated a second action claiming $2.788 million for unpaid amounts and delay damages. Man-Shield pleaded an equitable set-off as a defence to that claim.[6]<\/a><\/p>\n\n\n\n

A lien was registered in June 2017, which was discharged by the owner of the project by paying funds into court and who in turn assigned its rights to Man-Shield.[7]<\/a> In 2020, Man-Shield obtained court approval to substitute the lien funds with a bond. Tempo appealed, and the chambers judge upheld the decision.[8]<\/a><\/p>\n\n\n\n

On further appeal, the Alberta Court of Appeal found that the lien funds were subject to a statutory trust in favour of Tempo under section 22 of the Prompt Payment and Construction Lien Act.[9]<\/a><\/em> The Court of Appeal ordered that Man-Shield pay the $678,407.88 into court within 90 days as security for Tempo\u2019s claim for the outstanding payments.[10]<\/a> More details are available in Miller Thomson\u2019s article: Can cash paid into Court be substituted with lien bond after project completion: Alberta Court of Appeal clarifies<\/em><\/a>.<\/em><\/p>\n\n\n\n

Man-Shield did not pay the funds into court, prompting Tempo to apply to have Man-Shield held in contempt. The contempt application was dismissed, however, as Man-Shield\u2019s negative financial position provided a reasonable excuse for its failure to pay the funds into court. This dismissal was recently upheld by the Alberta Court of Appeal.[11]<\/a><\/p>\n\n\n\n

Decision now under Appeal \u2013 Tempo Alberta Electrical Contractors Co. v Man-Shield Construction Inc<\/a><\/em>, 2023 ABKB 444[12]<\/a>\u00a0<\/h2>\n\n\n\n

This latest decision concerns an appeal of a partial summary judgment award in favour of Tempo. An applications judge granted Tempo partial summary judgment in the amount of $678,261 for unpaid subcontract amounts. The decision was appealed to a chambers judge.[13]<\/a> On appeal, Man-Shield argued, among other things, that summary judgment was not available because it had an equitable set-off claim for its delay damages.[14]<\/a><\/p>\n\n\n\n

The chambers judge found that Man-Shield\u2019s set-off claim was not a \u201ctrue defence\u201d and awarded Tempo partial summary judgment.[15]<\/a> The court emphasized that determination of whether there was a valid set-off claim was not necessary to determine whether summary judgment was available. The decision did not consider whether Man-Shield\u2019s set-off claim was equitable or procedural.[16]<\/a> Instead, the court cited the \u201cculture shift\u201d toward more efficient legal processes over conventional trials and relied upon the \u201cjust result principle\u201d to conclude that delaying payment to Tempo due to Man-Shield\u2019s \u201cquestionable\u201d claims would not achieve a just result.[17]<\/a> Man-Shield\u2019s claim for delay damages was deferred to trial.[18]<\/a><\/p>\n\n\n\n

How did the Alberta Court of Appeal interpret equitable set-off?<\/h2>\n\n\n\n

The Court of Appeal overturned the chambers judge\u2019s decision, confirming that equitable set-off is a genuine defence to summary judgment. It emphasized that the culture shift toward litigation efficiency does not override the need to fairly adjudicate valid defences.[19]<\/a> The Court of Appeal also found that there was an \u201cinseparable connection\u201d between Tempo\u2019s claim for outstanding payments and Man-Shield\u2019s claim for project delays, and it would be \u201cunjust to allow Tempo to realize on the outstanding payments under the Subcontract while Man-Shield would be limited to a damages claim against Tempo to be determined at a future date\u201d.[20]<\/a><\/p>\n\n\n\n

Does the clean hands doctrine still apply in payment disputes?<\/h2>\n\n\n\n

The Court of Appeal also considered whether Man-Shield\u2019s conduct barred its equitable set-off defence under the clean hand\u2019s doctrine, citing Scott v Golden Oaks Enterprises Inc<\/em><\/a>.[21]<\/a> In Scott<\/em>, the Supreme Court of Canada held that equitable relief may be denied where misconduct has an \u201cimmediate and necessary relation\u201d to the transaction. set off this test, the Court of Appeal found that Man-Shield\u2019s alleged misconduct (substituting lien funds with a lien bond, asserting set-off by withholding payments under the subcontract and disorganized litigation conduct) lacked the requisite connection set out in Scott<\/em>. As no fraud or unconscionability was tied to the transaction itself (unlike the fraudulent scheme in Scott<\/em>), Man-Shield was not disentitled from asserting equitable set-off.[22]<\/a><\/p>\n\n\n\n

Key takeaways<\/h2>\n\n\n\n

This decision provides important guidance for practitioners navigating construction law disputes. The Court of Appeal reaffirmed that:<\/p>\n\n\n\n