Can I deduct a damages claim from vendor take-back payments?

A buyer who thinks the seller breached the purchase agreement, perhaps through a misstated warranty, may be tempted to pay less on the note and call the difference damages. The risk is lopsided. If the buyer is wrong, the note is in arrears and the seller has the remedies the note and its security give. If the buyer is right but did it the wrong way, the buyer may still have handed the seller a default to point to.

Steps before any deduction

1. Read the note for any wording about payment without deduction, and the purchase agreement for any right to deduct.
2. Write down the claim: what was breached, which clause, and what you say it cost.
3. Give the seller written notice in the form the agreement requires.
4. Keep paying the amount you do not dispute, if the note allows it, unless a lawyer advises otherwise.

What a short payment can trigger

Under Ontario’s Personal Property Security Act, where a debtor is in default under a security agreement, the secured party has the rights and remedies in the agreement and in the Act’s default Part (s.59(1)). The Act defines default as failure to pay the secured obligation when due, or an event that makes the security enforceable under the agreement’s terms. A seller who holds security over the assets you bought can therefore treat a short payment as a default if the documents say so.

The clock on your own claim

Ontario’s Limitations Act, 2002 says that, unless the Act provides otherwise, a proceeding shall not be commenced after the second anniversary of the day the claim was discovered (s.4). The Act also sets out when a claim is discovered (s.5). A deduction from the note is not a proceeding, so ask a lawyer whether and when to start one. Ontario’s Courts of Justice Act lets a defendant in an action for payment of a debt claim, by way of defence, set-off of a debt owed by the plaintiff to the defendant (s.111(1)). Ask a lawyer whether your claim qualifies.

If the seller also wants to know where it stands, see what a seller can do if a buyer stops paying.