Set-Off as a Defence to a Contract Claim in Ontario

Someone is suing you, or threatening to, over money they say you owe under a contract — but you think it runs the other way, at least partly. Maybe they still owe you for a separate invoice, never returned a deposit, or caused you a loss connected to the same deal. Ontario law has a tool for exactly this situation: a set-off defence.

Set-off lets a defendant net a genuine debt the plaintiff owes them against the amount the plaintiff is claiming, so only the balance — if any — is actually owed. It is not a phrase you can drop into a letter and expect to work on its own. It has to rest on a real, provable debt, and it has to be raised the right way.

This article explains what set-off means, when it can apply, how it differs from filing your own counterclaim, and the practical steps for raising it if you are already facing — or expecting — a claim.

What "Set-Off" Means in Plain Language

Set-off is essentially netting. If two people owe each other money arising from their dealings, the law allows the smaller debt to be applied against the larger one, so only the difference changes hands.

A simple example: a contractor claims $10,000 for unpaid work, but the client separately paid for materials the contractor never delivered. If that materials debt is real and provable, it can be set off against the contractor's claim, shrinking what the client actually has to pay.

When Set-Off Can Apply

Not every "but they owe me too" situation qualifies. Generally, set-off works best when:

• The debts run between the same two parties, in the same capacity — a debt owed to your company usually cannot be set off against a claim made against you personally, and vice versa.
• The debt you're relying on is a genuine, quantifiable obligation, not a vague complaint or an unproven claim you're still trying to establish.
• It is already payable, or closely connected to the same transaction or relationship as the claim against you.
• It can apply whether the dispute is headed to Small Claims Court or the Superior Court of Justice — the underlying idea is the same, though how you plead it differs slightly between the two.

Set-Off vs. a Counterclaim

People often confuse set-off with counterclaiming, but they do different jobs — and you can often use both together.

If your competing debt is worth more than what you're being sued for, a counterclaim is usually the better vehicle — set-off alone can only bring the plaintiff's claim down to zero, not put you in a position to collect the excess.

How to Raise Set-Off Properly

Once you're served with a claim, the clock starts running. A defendant served in Ontario generally has 20 days to serve and file a defence; 40 days if served elsewhere in Canada or the United States; and 60 days if served outside Canada and the U.S. Set-off needs to go into that defence — it is not something you can raise for the first time much later without difficulty.

Before you file, gather what supports the debt you say is owed to you: invoices, contracts, correspondence, proof of payment or non-delivery, and any calculation showing how you arrived at the amount. A set-off that is specific and documented carries far more weight than a general assertion that "they owe me too."

Common Pitfalls

• Missing the defence deadline while you gather your set-off evidence — file on time and refine the details afterward if needed.
• Relying on an unrelated debt that has nothing to do with the same relationship or transaction.
• Treating set-off as automatic. It has to be pleaded and, ultimately, proven — a court will not assume it exists.
• Confusing set-off with simply refusing to pay because you're frustrated with the other side. There has to be a real, quantifiable debt behind it.

Frequently asked questions