Equitable set-off principles applied to separate but connected contracts

Pursuant to Master Sale and Purchase Agreement (MSPA) A Ltd. sold its commercial port assets to and leased to P Ltd. real property upon which port was located (Port Transaction). Consideration paid to A Ltd. under MSPA totaled US$171.5 million, of which US$150 million was funded in cash through loan from GIP to P Ltd. (GIP Loan), US$19.8 million was paid by Promissory Note (Note) given by P Ltd, and US$4.2 million in cash by P Ltd. directly. Note was assigned with closing of Port Transaction and indirect parent company (EGFL) of both A Ltd. and P Ltd. became obligor under Note, and P Ltd. was released of its obligations. Upon maturity of Note, it was never paid. Other agreements were made between A Ltd. and P Ltd. on same day including Cargo Handling Agreement (CHA) to which P Ltd. committed to provide port services to A Ltd.. A Ltd. ceased payments under CHA and advised that no other payments would be made since its lenders would not approve its budget which contemplated payments to P Ltd. while amount due to A Ltd. under Note remained outstanding. P Ltd. defaulted under GIP Loan. P Ltd. moved for orders resuming payments but were denied on basis that it was premature to decide motions before availability and quantum of A Ltd.’s entitlement to equitable set-off was determined. In oppression proceeding, it was held that Port Transaction was prejudicial to, and unfairly disregarded interests of A Ltd. and it was ordered that Port Agreements be amended to provide A Ltd. with right to terminate them following satisfaction in full in respect of GIP Loan. A Ltd. brought motion for declaration that any amounts owed under Note were set-off against amounts owed to P Ltd. under CHA. Motion granted. Applying equitable set-off principles lead to finding that A Ltd. was entitled to set-off its obligation to P Ltd. under CHA against payments not made to it by EGFL under Note. EGFL controlled both A Ltd. and P Ltd. and entire Port Transaction, as found in oppression proceeding was driven by EGFL. While Note, its assignment to EGFL and CHA were separate contracts, they were all made pursuant to MSPA on same day and were connected. In circumstances, to require A Ltd to make payments to P Ltd. under CHA would be manifestly inequitable.

Essar Steel Algoma Inc. et al Re (2017), 2017 CarswellOnt 12528, 2017 ONSC 3930, Newbould J. (Ont. S.C.J.).