Can I offset what I owe under a contract against what the other party owes me?

Yes. Ontario procedural law allows a defendant who is sued for a debt or damages to raise a set-off — applying a cross-claim against the plaintiff to reduce or extinguish the amount owed. If the amount owed to you exceeds what is claimed against you, the net result can be a judgment in your favour.

Legal set-off (or independent set-off) requires both debts to be ascertained or liquidated amounts owed between the same parties in the same capacity. It is most clearly available where both claims flow from separate dealings.

Equitable set-off is broader: it allows a defendant to set off a connected claim even if the cross-claim is unliquidated, provided it is so closely connected to the plaintiff's claim that it would be unjust to enforce the plaintiff's claim without considering it.

In practice, if you owe a supplier $10,000 under one contract and they owe you $7,000 for breach of a related supply contract, raising a set-off (or a formal counterclaim) in their lawsuit against you is an important defensive move. If you are the plaintiff and the defendant has a genuine cross-claim, factor that into your litigation strategy. Either way, raising set-off or a counterclaim at the appropriate stage of proceedings is critical.