2021 MBCA 58, 2021 MBCA 58

Citation: Ernst & Young Inc v Shilo Farms Ltd , Date: 20210607 2021 MBCA 58 Docket: AI20-30-09405 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Holly C. Beard Madam Justice Jennifer A. Pfuetzner Madam Justice Janice L. leMaistre BETWEEN : ernst & young inc., in its capacity as ) R. A. McFadyen Court-Appointed Receiver of KELLER & ) for the Appellant SONS FARMING LTD. and KELLER ) (via videoconference) HOLDINGS LTD. and the partnership ) carrying on business under the firm name ) R. W. Schwartz and and style ELK HAVEN FARMS, ) A. E.

Verhaeghe ) for the Respondent (Plaintiff) Appellant ) (via videoconference) ) - and - ) Appeal heard: ) December 2, 2020 shilo farms ltd. ) ) Judgment delivered: (Defendant) Respondent ) June 7, 2021 COVID-19 NOTICE: As a result of the COVID-19 pandemic and pursuant to r 37.2 of the MB, Court of Appeal Rules , MR 555/88R , this appeal was heard remotely by videoconference.

On appeal from 2019 MBQB 173 PFUETZNER JA [ 1 ] This appeal arises out of a dispute between the plaintiff, Ernst & Young Inc., in its capacity as the court-appointed receiver (the receiver) of both Keller & Sons Farming Ltd. (KSF) and Keller Holdings Ltd. (KH), and the defendant, Shilo Farms Ltd. (Shilo). KSF, KH and Shilo each owned neighbouring farmland and were involved in potato farming.

At different times, each leased land from the other, and the terms of those arrangements led to the claims brought by each of the parties after KSF and KH went into receivership. [ 2 ] The receiver claimed that certain amounts were owing from Shilo to KSF and KH, as well as to Elk Haven Farms, the latter being a partnership between KSF and KH (Elk Haven), pursuant to the arrangements between the parties. [ 3 ] Shilo counterclaimed, asserting that KSF owed it substantial funds for unpaid land rent and that Shilo was entitled to set off those amounts against anything that Shilo was ordered to pay. [ 4 ] As will be explained, the trial judge allowed two of the receiver’s primary claims (for unpaid rent and for unpaid easement payments), but dismissed a third claim for the reimbursement of the cost of crop inputs.

The trial judge dismissed Shilo’s claim for a set-off for rent owing to it. [ 5 ] The receiver appeals the dismissal of its claim for reimbursement of the cost of crop inputs, saying that the trial judge failed to consider its unjust enrichment claim. Shilo’s cross appeal disputes the trial judge’s decision to allow the receiver’s claims for unpaid rent and easement payments and to deny its claim for a set-off. Background [ 6 ] In order to provide the necessary context to the issues raised in this appeal, I will review the commercial relationship

between the parties in some detail. [ 7 ] Prior to entering into receivership in the fall of 2015, KSF, KH and Elk Haven (collectively, the Keller entities) ran a commercial potato farming operation on more than 6,000 acres of land in southwestern Manitoba. KSF and KH were controlled by Mark Keller. At the relevant times, Shilo also operated a commercial potato farming enterprise on more than 9,000 acres of neighbouring land.

Shilo was controlled by Rodger Johnson (Johnson), who had hired Wayne Delong (Delong) as Shilo’s general manager. [ 8 ] In December of 2007, KSF and Shilo entered into an easement agreement under which KSF allowed Shilo to locate a subterranean irrigation pipe and hydro lines under KSF’s land in order to service Shilo’s land. The easement agreement provided for an initial payment of $10,000 and annual payments thereafter of $5,000 from Shilo to KSF. Only the initial payment was made under the easement agreement—no annual payments were made. [ 9 ] Shilo began leasing its farmland to KSF in or about 2007 or 2008.

In July of 2013, KSF and Shilo continued this arrangement and entered into a lease under which KSF leased Shilo’s 9,000 acres of land for a term of three years (the Shilo lease). Under the Shilo lease, the rent for the 2014 crop year was $2,900,000, plus applicable taxes, payable in full no later than October 1, 2014. KSF defaulted, leaving $1,567,500 owing to Shilo by the end of the 2014 crop year. [ 10 ] KSF and KH, in turn, leased some of their own land (and sublet some of the land KSF leased from Shilo) to Elk Haven, which carried out potato farming operations.

At this time, Elk Haven was an equal partnership between KSF and R.D. Offutt Company (RDO), a third party. [ 11 ] In the fall of 2014, Elk Haven applied crop inputs to the land it was farming in preparation for the 2015 growing season. The receiver claims the inputs had a value of over $839,000 (the 2014 crop inputs). [ 12 ] On April 1, 2015, Shilo terminated the Shilo lease for non-payment of rent. [ 13 ] On April 6, 2015, Elk Haven redeemed RDO’s 50 per cent partnership interest for half of the net book value of the partnership, being just over $1.6 million.

The funds owing to RDO were paid in full by Elk Haven by July 6, 2015. Upon RDO leaving the Elk Haven partnership, KH became a partner. [ 14 ] Elk Haven generated an invoice dated April 14, 2015 made out to Shilo for a portion of the 2014 crop inputs in the amount of approximately $688,000. The invoice was not delivered to Shilo until after the receiver was appointed. [ 15 ] Due to KSF’s ongoing financial difficulties, KSF and Shilo agreed that Shilo would take over the potato farming operations on their collective land.

Accordingly, on May 1, 2015, they entered into a lease whereby KSF and KH leased all their land and equipment to Shilo for the 2015 farming season (the KSF lease). The effect of the termination of the Shilo lease and entering into the KSF lease was that Shilo farmed all of the land previously farmed by Elk Haven and to which Elk Haven had applied the 2014 crop inputs. [ 16 ] The annual rent under the KSF lease was $750,000, plus GST, with half payable on signing and half payable on October 1, 2015. Importantly, the KSF lease contained, in

article 1.2, a provision that “[a]ll [r]ent shall be paid without any deduction or abatement on any account whatsoever.” [ 17 ] The land subject to the KSF lease had an irrigation system; however, it was not functioning in April of 2015 and needed repairs. KSF and KH were unable to pay for the repairs. Because of the importance of irrigation for potato crops, Shilo paid for the repairs.

By May 6, 2015, Shilo had paid nearly $90,000 to fix the irrigation system, including an invoice in the amount of USD 50,530.55 that was paid by Shilo on May 1, 2015, the same date as the KSF lease. [ 18 ] Shilo paid the first rental instalment in full to KSF under the KSF lease as follows: $225,000 on May 4, 2015 and $168,750 on May 8, 2015 (being a total of $375,000, plus GST of $18,750). Shilo made its final rent payment of $133,254.44 on October 1, 2015, leaving a balance of $260,495.56 unpaid. [ 19 ] On October 8, 2015, the receiver was appointed by the Court in respect of KSF and KH.

Trial Proceedings [ 20 ] The receiver filed a statement of claim against Shilo seeking unpaid rent of $260,495.56 under the KSF lease; the sum of $42,000 on account of annual payments under the easement agreement; and, on behalf of Elk Haven, the sum of $839,191.49 in respect of the 2014 crop inputs, as well as interest and costs. [ 21 ] Shilo defended the claims on the following bases: that it had a right of legal or equitable set-off of the unpaid rent still owing to it by KSF against any amounts it may be ordered to pay to KSF or KH; that it paid for the irrigation system repairs, which were the responsibility of KSF, and KSF agreed Shilo was entitled to set off those costs against the final rent payment under the KSF lease; that the easement payments were waived during the time that KSF was farming Shilo’s land; and that Shilo never agreed to pay Elk Haven for the 2014 crop inputs and was not liable at law or in equity to Elk Haven. [ 22 ] In its counterclaim, Shilo claimed rent owing under the Shilo lease and reasserted that it had a right of set-off against any amounts for which it may be found liable to the receiver or to Elk Haven.

Decision of the Trial Judge [ 23 ] The trial judge allowed the receiver’s claim against Shilo for unpaid rent under the KSF lease, finding that “the evidence [did] not support a collateral . . . or other agreement that Shilo would be entitled to exercise a right of set-off in respect of the money owed to it under the Shilo [l]ease” (at paras 41-42). Moreover, he found that “the express wording of the [KSF lease] preclude[d]

a set-off of the nature being advanced by [Shilo]” (at para 42). The trial judge also found that “the evidence establishe[d] that the cost of getting the [irrigation] system operational was simply assumed by [Shilo] to ensure that the land could be farmed” (at para 43).

Similarly, the trial judge found Shilo liable for the unpaid amounts under the easement agreement (see para 50). [ 24 ] As to the receiver’s final claim on behalf of Elk Haven for the 2014 crop inputs, the trial judge did not accede to the receiver’s argument that he should order reimbursement to Elk Haven based on a “general understanding among farmers that when crop inputs are applied in fall by one party, but another party then farms the land in a subsequent crop year, the latter party is obligated to reimburse the former party for those costs” (at para 46).

Rather, he found that “the parties intended the written contract to govern their actions and determine their rights and obligations” (at para 47). He went on to conclude, “[g]iven the ongoing and interconnected business relationship between the parties involved in the Shilo [l]ease and the subsequent [KSF lease], the only sound conclusion in [his] opinion [was] that there was no agreement that [Shilo] would be responsible for [that] expense” (at para 49).

While the trial judge was clearly aware of the receiver’s argument that Elk Haven was entitled to recover the 2014 crop inputs on the basis of the doctrine of unjust enrichment (see para 36), he made no mention of that argument in his analysis or decision.

Issues on Appeal and Cross Appeal [ 25 ] There are four issues raised by the parties: one on the appeal and three on the cross appeal. [ 26 ] On the main appeal, the receiver says that the trial judge erred in dismissing the Elk Haven claim for the 2014 crop inputs without conducting any analysis of the unjust enrichment claim or the evidence supporting this claim.

The receiver maintains that the trial judge’s reasons are inadequate, but that this Court has all the evidence before it on the record required to adjudicate and grant this claim. [ 27 ] Shilo’s first issue on the cross appeal is whether the trial judge erred in finding that there was no agreement that the irrigation system on the KSF land would be operational before the start of the 2015 crop season and in failing to find that the cost of any repairs would be KSF’s responsibility. [ 28 ] Next, Shilo says that the trial judge erred in failing to conduct an analysis of the evidence showing that payments under the easement agreement were not owing between 2007 and 2014 while KSF was farming Shilo’s land. [ 29 ] Finally, Shilo submits that the trial judge erred in how he dealt with its claims for set-off.

First, Shilo argues that he erred in failing to find a collateral agreement between the parties entitling Shilo to set off, against any amounts otherwise payable by it, the $1,567,500 owing to it under the Shilo lease. Next, Shilo maintains that the trial judge erred in finding that the evidence did not support a collateral agreement entitling it to set off the costs it incurred in repairing the irrigation system against rent payable by it under the KSF lease.

Finally, Shilo asserts that the trial judge erred in failing to consider whether it could rely on the doctrine of equitable set- off in respect of any of the amounts it was ordered to pay to the receiver. Analysis Unjust Enrichment Claim for Crop Inputs [ 30 ] The doctrine of unjust enrichment applies where a plaintiff can show: (

a) that the defendant was enriched; (

b) that the plaintiff suffered a corresponding deprivation; and (

c) that the enrichment and corresponding deprivation occurred in the absence of a juristic reason (see Moore v Sweet , 2018 SCC 52 at para 37 ). This principled framework for assessing unjust enrichment claims developed in order to allow claims to succeed that previously would have failed for not falling into recognized categories of recovery (see paras 36-37). [ 31 ] What the principled framework and the recognized categories of recovery have in common is to prevent a defendant from retaining a benefit at a plaintiff’s expense where it would be unjust for the defendant to retain it.

Circumstances where retention by the defendant would be unjust have also been described as being “against all conscience”; “a benefit which justice does not permit one to retain” (at para 35); “the existence of some injustice in permitting the defendant to retain the benefit” (at para 36); and “circumstances where justice and fairness require one party to restore a benefit to another” (at para 38). [ 32 ] While the parties do not agree on the value or amount of the benefit and corresponding deprivation, there is no real dispute that Shilo was enriched and Elk Haven was deprived when Elk Haven paid for the 2014 crop inputs on Shilo’s land and on the KSF and KH land that was subsequently farmed by Shilo under the KSF lease.

The primary issue of contention at both trial and on appeal was whether it was unjust for Shilo to retain the benefit. [ 33 ] As previously mentioned, the unjust enrichment claim was put forward by Elk Haven as an alternative to its assertion that the trial judge ought to imply an agreement that Shilo would pay Elk Haven for the value of the 2014 crop inputs, consistent with the general practice of farmers.

In respect of the primary claim, the trial judge found (at para 47): I am not prepared on the basis of the evidence in this case to apply a general agreement not found in the express terms of the [KSF] [l]ease and apply it to the circumstances of this case. On the evidence before me, I found in the context of [the claim for unpaid rent] that the parties intended the written contract to govern their actions and determine their rights and obligations .

I see no reason now to adopt a contrary position . . .. . . . [emphasis added] [ 34 ] Shilo argues that the trial judge’s conclusion here is essentially the juristic reason given to deny recovery under the unjust enrichment claim—that is, there was a written contract intended to govern the relationship between the parties and it was executed by Mark Keller, the directing mind of all of the Keller entities.

While this argument is compelling, the difficulty is that the lack of reference in the trial judge’s analysis to the unjust enrichment claim leaves it a matter of speculation as to whether this was his conclusion. Despite the parties’ detailed written arguments addressing Elk Haven’s unjust enrichment claim for the 2014 crop inputs and

the trial judge’s

summary of the receiver’s and Shilo’s positions at paras 36 and 38 of his reasons, he conducted no analysis of the unjust enrichment claim. [ 35 ] There is no question that there is a duty upon trial judges to provide adequate reasons in order to justify and explain the result, inform the losing party why he or she lost and permit effective appellate review (see R v Oddleifson (JN) , 2010 MBCA 44 at para 30 ; and Dovbush v Mouzitchka , 2016 ONCA 381 at paras 20-23 ).

Equally uncontroversial are the propositions that judges are presumed to know the law and that their reasons must be read in the context of the issues raised and the arguments made at trial. However, because the trial judge’s reasons do not allow for effective appellate review, no deference is owed to his effective dismissal of the unjust enrichment claim, although deference is owed to his factual findings, absent palpable and overriding error. [ 36 ] Accordingly, I will consider the claim anew; however it can be disposed of briefly.

I am persuaded by Shilo’s argument that the juristic reason why Shilo should retain the benefit of the 2014 crop inputs is that Shilo, KSF and KH intended the KSF lease to govern their relationship going forward. At the time the KSF lease was executed, the parties were aware that Elk Haven had made the 2014 crop input expenditures. However, Elk Haven had made no claim for reimbursement and the Elk Haven invoice for the 2014 crop inputs had not been provided to Shilo.

It does not accord with the reasonable expectations of the parties, as expressed in the KSF lease in light of the surrounding circumstances, to find that Shilo should reimburse Elk Haven for the 2014 crop inputs. [ 37 ] The receiver makes the point that Elk Haven was not a party to the KSF lease and could not have insisted on reimbursement of the 2014 crop inputs as part of that arrangement.

This is true; however, the fact is that, by the time the KSF lease was negotiated, Elk Haven was in the process of redeeming RDO’s interest so that it would become a partnership between only KSF and KH (both controlled by Mark Keller).

Considering all of the circumstances, including that Elk Haven did not send the invoice for the 2014 crop inputs to Shilo and Johnson’s evidence that he would not have signed the KSF lease if he thought Shilo would be responsible for the 2014 crop inputs, it is not unjust or against all conscience for Shilo to retain the benefit of the 2014 crop inputs. [ 38 ] As a result, I would dismiss the claim for unjust enrichment and the main appeal.

Irrigation System Repairs [ 39 ] I will address together Shilo’s claims that there was an agreement that the irrigation system on the KSF land would be operational before the start of the 2015 crop season at KSF’s expense and that a collateral agreement existed entitling Shilo to set off the costs it incurred in repairing the irrigation system against rent payable under the KSF lease. [ 40 ] Shilo submits that the trial judge ignored the uncontroverted evidence of Johnson and Mark Keller that they had an understanding that KSF would cover the costs to ensure that the irrigation system was operational when the parties entered into the KSF lease.

Moreover, Shilo submits that the trial judge failed to give effect to the evidence of Mark Keller that he agreed to Shilo setting off the irrigation system expenses against the rent payable under the KSF lease, which had the effect of amending the terms of the KSF lease. [ 41 ] As both of these issues involve questions of fact and mixed fact and law, they are reviewed for palpable and overriding error. [ 42 ] A trier of fact is entitled to accept all, part or none of the evidence of any particular witness.

While the testimony of Mark Keller and of Johnson both supported Shilo’s position that KSF agreed to be responsible for the irrigation repairs and to allow Shilo to set off those expenses against rent payable under the KSF lease, it can be presumed that the trial judge rejected this evidence. Judges are not required to comment on every aspect of the evidence they have heard and specifically accept or reject it.

Having said that, this evidence was highly relevant to a live issue at the trial and it would have been preferable for the trial judge to have specifically adverted to it. [ 43 ] Nonetheless, I am not convinced that he made any palpable and overriding error in dismissing Shilo’s claims as there was ample evidence to support his findings that there was no “agreement that the irrigation system would be fully operational and that if it was not, [Shilo] was entitled to set-off the amount it expended on the capital improvement to the system to ensure that the land was ‘under water’” and that “the cost of getting the system operational was simply assumed by [Shilo] to ensure that the land could be farmed” (at para 43). [ 44 ] First, as found by the trial judge, the cost of the irrigation system repairs “was relatively small in relation to the entire expenditures involved in this farming initiative and it was not an issue that the parties decided to address in the [KSF] [l]ease despite having specifically done so in the course of their prior relationship” ( ibid ) under the Shilo lease.

In addition, the evidence of Delong established that Shilo made a payment of more than USD 50,000 for irrigation repairs on May 1, 2015, the date the KSF lease was signed, which contained a specific term that “[a]ll [r]ent shall be paid without any deduction or abatement on any account whatsoever.” Moreover, the first rent instalment was paid in full (in two tranches on May 4, 2015 and May 8, 2015) without any deduction for the expenditures of nearly $90,000 that Shilo had made by that time. [ 45 ] This evidence all supports the trial judge’s findings.

A different judge may not have come to the same decision on the evidence and it would have been helpful for the trial judge to have specifically addressed Mark Keller and Johnson’s evidence on these points. However, the trial judge was entitled, on the record, to decide as he did and I would dismiss this ground of appeal. Easement Agreement [ 46 ] Shilo maintains that the trial judge did not properly assess Johnson’s evidence supporting the fact that the annual fee under the easement agreement was not payable during the years that the Keller entities farmed Shilo’s land.

Shilo submits that there was nothing to refute this evidence. However, Johnson’s limited evidence on this point is equivocal at best and consists only of the following question and answer in direct examination: . . .

Q What was your arrangement with Mr. Keller in respect of payments due under that easement agreement? A Well, when he was renting the farm from us why would we pay him and him turn around and pay us back?

He was renting the farmand he was giving the benefit of the pipeline so obviously we didn’t pay rent when he was farming the farm from ‘07 ‘til whenever ‘14. . . . [47] Mark Keller was called as a witness by Shilo at trial, yet gave no evidence in respect of the easement agreement. [48] In my view, the trial judge made no palpable and overriding error in declining to draw the inference urged upon him byShilo that there was an agreement between KSF and Shilo that the easement payments were waived while the Keller entities werefarming Shilo’s land.

Shilo’s Claims for a Set-Off [49] The last issue raised by Shilo is whether it has the right to set off any amounts owing to it by KSF or KH against anyamounts that it has been ordered to pay to the receiver. As ordered by the trial judge, and confirmed on appeal for the reasons set outabove, Shilo owes the receiver $260,495.56 in respect of rent under the KSF lease and $42,000 in respect of payments under theeasement agreement, plus prejudgment and postjudgment interest on both sums.

As the trial judge found that Shilo had acceptedresponsibility to pay for the irrigation system repairs, the only amount owing to Shilo which it can set off against its liabilities is KSF’sunpaid rent of $1,567,500 under the Shilo lease. [50] Shilo argues that the trial judge erred in finding that Shilo could not exercise any rights of set-off. It maintains that thetrial judge’s reasons are inadequate, in that he did not address the doctrine of equitable set-off in any material way, and it is not possibleto discern why he found that it did not apply.

Shilo asserts that the provision in the KSF lease stating that all rent shall be paid withoutany deduction or abatement on any account whatsoever does not oust equitable set-off. [51] As a preliminary matter, I am not convinced that the trial judge made any palpable and overriding error in finding thatthere was no collateral agreement entitling Shilo to set off the rent owing to it under the Shilo lease against any amounts otherwisepayable by it. [52] I will now address the question of whether the trial judge erred in his consideration of the doctrine of equitable set-off. [53] With respect to the unpaid rent under the KSF lease, the trial judge found that there was no collateral agreementbetween the parties to set off amounts owing between them and that the express wording of

article 1.2 of the KSF lease precluded aclaim for set-off. The trial judge did not specifically address whether

article 1.2 of the KSF lease ousts equitable set-off. [54] In respect of the easement agreement, the entirety of the trial judge’s analysis states (at para 50): . . . The only substantive defence advanced by [Shilo] in respect of this claim is the defence of set-off.

For the reasons provided inrespect of [the claim for unpaid rent under the KSF lease], I would similarly dismiss the argument of [Shilo] and find that the [receiver]is entitled to recover the amount being advanced in respect of this claim. [55] In essence, the trial judge adopted the same reasoning as he did for dismissing the set-off argument relating to the rentowing under the KSF lease. The trial judge’s finding that there was no collateral agreement allowing for set-off in respect of theeasement agreement is unassailable.

However, the problem here is that, unlike the KSF lease, there is nothing in the express wording ofthe easement agreement that would otherwise preclude a claim for set-off. [56] In addition, in respect of both the unpaid rent under the KSF lease and the unpaid easement payments, the trial judge didnot consider whether the doctrine of equitable set-off applied. This doctrine was specifically argued by Shilo as a basis for relief in thealternative to a finding of a collateral agreement.

Unfortunately, since the trial judge’s reasons do not address this argument, one cannotdetermine, for purposes of appellate review, why it was rejected. As a result, no deference is owed to the trial judge’s decision and I willconsider whether equitable set-off is available in respect of the unpaid rent under the KSF lease and the easement agreement payments. [57] As argued by Shilo before both the trial judge and on appeal, the leading case in Canada on equitable set-off is Holt vTelford, (SCC), [1987] 2 SCR 193.

In that case, the Supreme Court of Canada cited, with approval, the followingpassage from Coba Industries Ltd v Millie’s Holdings (Canada) Ltd (1985), (BC CA), 20 DLR (4th) 689 at 696-97(BCCA), describing the requirements to establish equitable set-off (at p 212): . . . 1. The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands: Rawson v.Samuel, [1841] Cr. & Ph. 161, 41 E.R. 451 (L.C.). 2. The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed: . . . (Br. Anzani (Felixstowe)Ltd. v. Int.

Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 W.L.R. 451, [1979] 2 All E.R. 1063).

3. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiffto enforce payment without taking into consideration the cross-claim: . . . (Fed. Commerce and Navigation Co. v. Molena Alpha Inc.,[1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066). 4. The plaintiff’s claim and the cross-claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div. Ct.);Br. Anzani. 5. Unliquidated claims are on the same footing as liquidated claims: (Nfld. v. Nfld. Ry. Co., [1888] 13 App.

C. 199 (P.C.)). . . . [emphasis added] [58] Equitable set-off may also be set up against the receiver of a creditor (see PIA Investments Inc v Deerhurst LtdPartnership, (ON CA), 2000 CarswellOnt 3019 at para 32 (CA)). This Court has previously noted that equitable set-off can apply where a right exists for a liability already incurred at the time of the assignment, but only to actions instituted by the trusteefor the recovery of debts due to the bankrupt, as opposed to actions to liquidate assets of the bankrupt’s estate (see Collins (Keith

G) Ltd vMcKenzie, 2005 MBCA 35 at paras 31-32). [59] It is the third element of the Holt test that is often at issue in claims for equitable set-off. The

article byRobert Anderson, Thomas Gelbman & Benjamin Pullen, “Recent Developments in the Law of Set-off” in Janis P Sarra, ed, AnnualReview of Insolvency Law 2009, 2009 ANNREVINSOLV 1 (online: WL Can (date accessed 27 May 2021)) (the Annual Review 2009article) states (at pt 1.III.C): . . . A review of the recent jurisprudence reveals that the elements of the equitable set-off test are generally not at issue, with the exception ofthe third element. Indeed, very little consideration has been given to the other elements of the test. There are generally two overridingconcerns when a party asserts equitable set-off: (

a) the close-connection or interconnectedness of the cross claims; and (

b) whether itwould be manifestly unjust not to allow set-off. . . . [emphasis added] [60] The authors of the Annual Review 2009

article are of the view that, “where only two parties are involved in a potentialset-off, it may well be easier to meet the test for equitable set-off. In such cases, the Court will examine the relationship between theparties, as well as the connectedness of the transactions” (at pt 1.III.C.ii). [61] It is accepted in Canadian jurisprudence that parties can contract out of equitable remedies, including the right of set-off. For a helpful

summary of the applicable principles, see Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 at para97. [62] I will now turn to consider whether Shilo has made out a case for equitable set-off of the rent owed to it under the Shilolease against either the unpaid rent under the KSF lease or the easement payments. [63] The question of the unpaid rent under the KSF lease can be disposed of briefly. The trial judge found that the languageof

article 1.2 of the KSF lease precluded a claim for set-off. This finding was open to him and, as parties can contract out of equitableremedies, it applies equally to claims for legal set-off and equitable set-off. I would not accede to this argument. [64] As for the easement payments, there is no similar provision in the easement agreement that could be interpreted as theparties contracting out of set-off rights.

Is equitable set-off available on the facts of this case? [65] The primary issues are whether the debts arise out of the same contract, or closely related contracts, and whether itwould be manifestly unjust not to allow set-off. Here, the debts do not arise out of the same contract—the Shilo lease and the easementagreement are separate; however, they are connected. The easement agreement was entered into in 2007 to allow Shilo to place asubterranean irrigation pipe and hydro lines under certain KSF land to support farming on Shilo’s land.

Five years later, the Shilo leasewas entered into as a successor agreement to previous similar arrangements under which KSF leased all of Shilo’s land and equipment.

Ifind that there is a close connection between the two contracts, both entered into by Shilo and KSF and designed to facilitate the farmingof potato crops and sharing of land by Shilo and the Keller entities. [66] In my view, it would be manifestly unjust to permit the receiver to collect the easement payments from Shilo withoutpermitting Shilo to set off what is owed to it by KSF under the Shilo lease, particularly given the discrepancy between the amounts owedand the fact that Shilo may not recover its debt as an unsecured creditor under the receivership.

Refusing to permit set-off wouldeffectively result in enforcement of only one of the contracts between the parties and, considering the contracts were closely connected

long-term agreements, this would be unfair. This result is consistent with the guidance provided in the

article by Michelle Grant, Vicki Tickle & Lance Williams , “Is That My Receivable?” in Janis P Sarra, ed, Annual Review of Insolvency Law 2016 , 2016 ANNREVINSOLV 8 (online: WL Can (date accessed 2021 May 27) ) regarding the o bjective of set-off in the bankruptcy context: “ The object of set-off is to avoid the perceived injustice to a person who has had mutual dealings with a bankrupt of having to pay in full what he owes to the bankrupt while having to rest content with a dividend on what the bankrupt owes him or her” (at pt 8.III.2). [ 67 ] Finally, both the debt under the Shilo lease and the debt under the easement agreement accrued prior to the receivership so that equitable set-off is not thereby precluded. [ 68 ] As a result, I would allow the cross appeal in connection with the easement agreement.

Conclusion [ 69 ] For these reasons, I would dismiss the appeal and would allow the cross appeal in part: Shilo may set off against the amount ordered payable in respect of the easement agreement, as well as prejudgment interest and postjudgment interest on that sum, the amount owing to Shilo under the Shilo lease. [ 70 ] As Shilo successfully defended the appeal and was partially successful on its cross appeal, it shall have its costs in this Court under the tariff. JA I agree: JA I agree: JA