Triangular (or cross-affiliate) set-off has been at issue recently in the Companies' Creditors Arrangements Act (Canada) (CCAA) proceedings with respect to SemCAMS ULC (SemCAMS) (and certain other of its Canadian affiliates). In one application, SemCAMS successfully challenged Nexen Marketing's (Nexen) attempts to effect triangular set-off where Nexen lacked a contractual right to do so.
Nexen Marketing was a party to a number of agreements with SemCAMS and certain of its affiliates:
- a Crude Petroleum Purchase Contract with SemCAMS under which Nexen purchased condensate (Condensate Agreement);
- a GasEDI Base Contract for Sale and Purchase of Natural Gas with SemCAMS under which either party could be purchaser or seller but where Nexen had always been the purchaser (Gas Agreement);
- a crude oil purchase contract with SemCanada Crude Company (SemCanada Crude) under which Nexen was both the purchaser and seller of crude oil (SemCanada Crude Agreement); and
- a natural gas purchase and sale agreement with CEG Energy Options Inc. (CEG Energy) under which Nexen was both the purchaser and seller of gas (CEG Gas Agreement).
Nexen had obtained a parental guarantee from SemGroup L.P. (a U.S. parental entity of SemCAMS and its affiliates now subject to Chapter 11 proceedings in the U.S.). Nexen however did not have any contractual rights of set-off in respect of affiliate obligations under any of the agreements and had not entered into a master netting agreement with SemCAMS or any of it affiliates.
SemCAMS (and certain of its affiliates, including SemCanada Crude and CEG) were granted CCAA protection in July, 2008. Based on the July 25 and August 25, 2008 settlement dates, Nexen owed SemCAMS a combined $1.2 million under the Condensate Agreement and the Gas Master Agreement. Nexen had refused to pay SemCAMS on both of the settlement dates. In the first instance, Nexen purported to set-off its obligations against amounts owed to Nexen by SemCanada Crude and CEG under the SemCanada Crude Agreement and CEG Gas Agreement, respectively (and for amounts owing for estimated legal fees incurred in relation to the recovery of debt by Nexen owed by a number of SemCAMS' affiliates, including SemCanada Crude and CEG). In the second instance, Nexen purported to set-off its obligation against amounts owed to Nexen by SemCanada Crude for July 2008 sales under the SemCanada Crude Agreement. SemCAMS brought an application to recover the amounts from Nexen (plus interest).
Nexen asserted that it had an equitable right of set-off, arguing that the SemGroup of companies, headed by the U.S. parent company SemGroup, L.P., operated as a "single enterprise". Madam Justice Romaine of the Court of Queen's Bench of Alberta heard arguments from both parties and granted SemCAMS' application, ordering Nexen to pay the $1.2 million to SemCAMS, plus interest.
In her written reasons1, Madam Justice Romaine set-out the five-part test for equitable set-off from the Supreme Court of Canada's decision in Holt v. Telford, namely that:
- the party relying on a set-off must show some equitable ground for being protected against its adversary's demands;
- the equitable ground must go to the very root of the plaintiff's claim;
- a cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross claim;
- the plaintiff's claim and the cross-claim need not arise out of the same contract; and
- unliquidated claims are on the same footing as liquidated claims.
Madam Justice Romaine's reasons largely focused on the third part of this test, noting that the close connection required the claim and the cross-claim to arise either from the same contract or "series of events". Madam Justice Romaine found that neither was present, as SemCAMS' claims arose under separate agreements (i) made with separate corporate entities, (ii) negotiated during separate time periods, and (iii) made for different purposes. The Court also rejected Nexen's argument that the purchase and sale of "similar products" in the same months created a close connection.