Can an indemnity claim be set off against a vendor take-back note?
Only if the contract allows it or the law of set-off applies, so the buyer should not assume it. Check the agreement for a set-off clause and its conditions. In an Ontario debt action, the Courts of Justice Act lets a defendant set off a debt owed by the plaintiff, so the claim’s status matters.
A buyer who owes the seller a vendor take-back note and believes the seller owes an indemnity under the purchase agreement may want to net one against the other. Doing it without a right to do it can put the buyer in default on the note, and where the note is secured, Ontario’s Personal Property Security Act counts failure to pay the secured obligation when due as default. Two questions decide it: does a contract term allow it, and does the law of set-off apply to this claim in this province?
Start with the contract
Read the purchase agreement and the note together. One may allow the buyer to deduct an agreed indemnity amount from sums owing on the note, and may set conditions, such as written notice or a finding that the claim is valid. The other may say payments are due without deduction. If the documents disagree, which one governs is a legal question, so settle the wording before closing.
What Ontario’s set-off provision says
Ontario’s Courts of Justice Act says that in an action for payment of a debt, the defendant may claim, by way of defence, the right to set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant (s.111(1)). Mutual debts may be set off even if they are of a different nature (s.111(2)). If the defendant is found owed more, it is entitled to judgment for the balance (s.111(3)). The section speaks of a debt. Whether an indemnity claim that has not been agreed or decided qualifies is a question for a lawyer. Other provinces have their own rules.
If the seller or buyer goes bankrupt
The federal Bankruptcy and Insolvency Act says the law of set-off or compensation applies to claims made against the estate of a bankrupt, and to actions the trustee brings for debts due to the bankrupt, as if the bankrupt were plaintiff or defendant, except as the Act itself affects a claim for set-off (s.97(3)). If the note has been assigned or given as security, tell your lawyer, because the assignment can change who the buyer is dealing with.
Our comparison of representations and warranties against indemnities shows where an indemnity claim comes from.
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of OntarioGovernmentCourts of Justice Act, R.S.O. 1990, c. C.43
- 02Government of Canada (Department of Justice)GovernmentBankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
- 03Government of OntarioGovernmentPersonal Property Security Act, R.S.O. 1990, c. P.10
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