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Set Apart Domestic Contracts Under the Family Law Act

August 19, 2021

Ontario

,

Canada

Issue

In what circumstances can a marriage contract be set aside under section 56(4)(c) of the Family Law Act?

Conclusion

Section 56(4)(c) of the Family Law Act permits a court to set aside a domestic contract in accordance with the law of contract, which includes grounds such as unconscionability, duress, uncertainty, undue influence, mistake and misrepresentation. (Ward v. Ward)

The proper approach on an application to set aside a marriage contract under s. 56(4) of the Family Law Act involves a two step process. First, the party seeking to set aside a marriage contract must demonstrate to the court that one of the listed circumstances within s. 56(4) has been engaged. Second, the court must then consider whether it is appropriate to exercise its discretion in favour of setting aside the agreement or a provision within it. When exercising discretion under this second step, fairness between the parties is a guiding consideration. (Chee-A-Tow v. Chee-A-Tow; LeVan v. LeVan)

This analysis seeks to reconcile two competing principles. First, the public interest in compliance with the legislative scheme, a key objective of which is ensuring the equitable settlement of affairs upon the dissolution of a marriage. Second, the interest in encouraging parties to freely negotiate a final settlement of their family law entitlements as they see fit. Accordingly, a court should be reluctant to interfere with a pre-existing domestic contract unless it is convinced that the agreement does not comply substantially with the objectives of the Family Law Act. (Chee-A-Tow v. Chee-A-Tow)

In considering whether to exercise its discretion to set aside a contract, a court may consider:

(a) whether there had been concealment of the asset or material misrepresentation;

(b) whether there had been duress, or unconscionable circumstances;

(c) whether the petitioning party neglected to pursue full legal disclosures;

(d) whether he/she moved expeditiously to have the agreement set aside;

(e) whether he/she received substantial benefits under the agreement;

(f) whether the other party had fulfilled his/her obligations under the agreement. (Virc v. Blair; Turk v. Turk; Dochuk v. Dochuk)

Unconscionability

Unconscionability, with respect to domestic contracts, focuses on whether there were unconscionable circumstances surrounding the formation of the contract. The circumstances at the time of the drafting and signing of the contract must be considered, not the results or effect of the contract at the time the application is brought to be set aside. (Balsmeier v Balsmeier; Oliver v. Coderre)

Unconscionability in the matrimonial context is not equivalent to unconscionability in a commercial context. (Oliver v. Coderre)

The question to be asked is whether there were any circumstances of oppression, pressure, or other vulnerabilities’, and if one party’s exploitation of such vulnerabilities during the negotiation process resulted in a separation agreement that deviated substantially from the legislation. Examples of inequality in bargaining may include one party being intellectually weaker by reason of a disease of the mind, economically weaker or situationally weaker. However, the mere presence of vulnerabilities will not, in and of itself, justify the court’s intervention. The degree of professional assistance received by the parties will often overcome any systemic imbalances between the parties. (Oliver v. Coderre)

In Chee-A-Tow v. Chee-A-Tow, the Court found that the Separation Agreement deviated substantially from the relevant legislative objectives. Specifically, the Separation Agreement deviates from those objectives by, inter alia, having the wife lose any ownership interest in the matrimonial home to which she contributed for 10 years. The husband took advantage of the wife's lack of sophistication and knowledge about the family finances. By misleading the respondent as to the true nature of the Agreement, the husband exploited the wife’s trust and financial dependency. This imbalance of bargaining power was not overcome through ILA in this case. The negotiations leading to the Agreement were procedurally and substantively flawed. The “bargaining” process was tainted by inaccurate information and false representations. That process, through which the husband took advantage of the wife’s lack of sophistication and financial savvy, resulted in an Agreement that is fundamentally unfair. This unfairness adds further justification for exercising this Court’s discretion to set aside the Separation Agreement.

Undue Influence

In considering undue influence, the court must inquire into whether there was (i) an improvident bargain, and (ii) if so, whether there was inequality in bargaining power. To establish undue influence or inequality in bargaining power, the plaintiff must prove the ability of one person to dominate the will of another, whether through manipulation, coercion, or outright but subtle abuse of power. (Balsmeier v Balsmeier; Oliver v. Coderre)

In Balsmeier v Balsmeier, the husband was 50 years old at the time the parties met and was very wealthy. Prior to the wedding, the parties signed a pre-nuptial agreement. The wife had a lawyer when negotiating agreement. Though the wife may have felt pressured to sign the agreement due to the impending wedding, that was sufficient to find that the husband exerted undue pressue on the wife or subjected her to duress.

Duress

Duress involves a coercion of the will of one party or directing pressure to one party so they have no realistic alternative but to submit to the party. Equity recognizes a wider concept of duress including coercion, intimidation or the application of illegitimate pressure. Further, there can be no duress without evidence of an attempt by one party to dominate the will of the other at the time of the execution of the contract. (Balsmeier v Balsmeier; Oliver v. Coderre)

Misrepresentation

In contract law, a misrepresentation must be material in the sense that a reasonable person would consider it relevant to the decision to enter the agreement in question. In addition, the material misrepresentation must have constituted an inducement to enter the agreement upon which the party relied. (Oliver v. Coderre)

Consensus Ad Idem

For parties to be bound in a contractual relationship, there must be a manifest meeting of the minds or consensus ad idem on all the essential terms of what that relationship will be. (M.S. v. I.S.)

Law

Section 56(4) of the Family Law Act, RSO 1990, c F.3 provides:

56(4) Setting aside domestic contract
A court may, on application, set aside a domestic contract or a provision in it,

(a) if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;

(b) if a party did not understand the nature or consequences of the domestic contract; or

(c) otherwise in accordance with the law of contract.

The Court of Appeal of Ontario, in LeVan v. LeVan, 2008 ONCA 388 (CanLII), endorsed a two-stage approach to the application of s. 56(4) of the Family Law Act as follows:

[51] The analysis undertaken under s. 56(4) is essentially comprised of a two-part process: Demchuk v. Demchuk (1986), 1 R.F.L. (3d) 176 (Ont. H.C.). First, the court must consider whether the party seeking to set aside the agreement can demonstrate that one or more of the circumstances set out within the provision have been engaged. Once that hurdle has been overcome, the court must then consider whether it is appropriate to exercise discretion in favour of setting aside the agreement. This approach was adopted and applied by the trial judge in this case.

In Ward v. Ward, 2011 ONCA 178 (CanLII), the Court of Appeal for Ontario stated that grounds that would justify a court setting aside a domestic contract pursuant to s. 56(4)(c) include the following contractual concepts:

[21] Section 56(4)(c) of the FLA permits a court to set aside a domestic contract "in accordance with the law of contract", which [page407] counsel agree would include grounds such as unconscionability, duress, uncertainty, undue influence, mistake and misrepresentation. In addition to the common law grounds, ss. 56(4)(a) and (b) permit a court to set aside a domestic contract in the face of significant non-disclosure or where a party "did not understand the nature or consequences of the domestic contract".

In Virc v. Blair, 2014 ONCA 392 (CanLII), the Ontario Court of Appeal set out the following factors to determine whether to set aside an agreement or provision in it, as follows:

[31] At para. 20 of her reasons, the motion judge identified the test for setting aside a domestic contract, that is, the two-step process contemplated by s. 56(4) of the FLA and described by this court in LeVan v. LeVan, 2008 ONCA 388, 90 O.R. (3d) 1, at para. 51: does one of the s. 56(4) circumstances apply and, if so, is it appropriate for the court to exercise its discretion to set aside the contract? In considering whether to exercise discretion, at para. 21, she applied Dochuk v. Dochuk (1999), 1999 CanLII 14971 (ON SC), 44 R.F.L. (4th) 97 (Ont. C.J.), noting that a court may consider:

- a concealment of assets or material misrepresentation;

- duress or unconscionable circumstances;

- whether the moving party neglected to pursue full legal disclosure;

- whether the moving party moved expeditiously to have the contract set aside;

- whether the moving party received substantial benefits under the contract;

- whether the respondent fulfilled his or her obligations under the contract;

- whether the non-disclosure was a material inducement to entering into the agreement and its importance to the negotiations.

[...]

[51] The applicable test to set aside a separation agreement is found in s. 56(4) of the FLA,which provides:

A court may, on application, set aside a domestic contract or a provision in it,

(a) if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;

(b) if a party did not understand the nature or consequences of the domestic contract; or

(c) otherwise in accordance with the law of contract.

A domestic contract includes a separation agreement.

[52] In LeVan, at para. 51, this court held that s. 56(4) comprises a two-stage analysis:

(i) Can the party seeking to set aside the agreement demonstrate that one or more of the s. 56(4) circumstances is engaged?

(ii) If so, is it appropriate for the court to exercise its discretion to set aside the agreement?

[53] In my view, although the motion judge recognized this test, she erred in its application for the following reasons.

In Dochuk v. Dochuk, 1999 CanLII 14971 (ON SC), the Court set out the following criteria as a guide for the exercise of the court's discretion:

[18] In Demchuk (supra), Clarke L.J.S.C. observed that how the Court will exercise its discretion whether to set aside a separation agreement pivots on the facts of each case. His Honour set out the factors that he took into account. These included:

(a) whether there had been concealment of the asset or material misrepresentation;

(b) whether there had been duress, or unconscionable circumstances;

(c) whether the petitioning party neglected to pursue full legal disclosures;

(d) whether he/she moved expeditiously to have the agreement set aside;

(e) whether he/she received substantial benefits under the agreement;

(f) whether the other party had fulfilled his/her obligations under the agreement.

[19] In an annotation to Underwood (Ont. Div. Ct.) (supra) at page 363 Professor Macleod suggests that a Court should consider whether the non-disclosure was a material inducement to the aggrieved party entering into the agreement; in other words; how important the non‑disclosed information would have been to the negotiations. I adopt this as another factor.

The Court of Appeal for Ontario inTurk v. Turk, 2018 ONCA 993 (CanLII), approved the criteria set out in Dochuk v. Dochuk as a useful guide for the exercise of the court's discretion to set aside a separation agreement:

[15] Furthermore, the finding of significance, as the trial judge correctly stated, is only the first step in a s. 56(4) analysis: Virc v. Blair, 2014 ONCA 392, 119 O.R. (3d) 721, at para. 52. Once a party seeking to set aside a separation agreement has established that s. 56(4)applies, the court must still determine whether it should exercise its discretion to set aside the agreement. The criteria set out in Dochuk v. Dochuk (1999), 1999 CanLII 14971 (ON SC), 44 R.F.L. (4th) 97 (Ont. Gen. Div.), at paras. 18-19, provide a useful guide for this exercise of discretion. Although the trial judge did not proceed to this further step, and did not need to given her finding that s. 56(4) was not engaged, her conclusion on that question would be obvious from her treatment of the various Dochuk factors. In particular, her findings concerning the absence of duress and the substantial benefits that the appellant received under the Separation Agreement indicate that the trial judge would not have exercised her discretion to set aside the agreement.

In Oliver v. Coderre, 2021 ONSC 4102 (CanLII), Piccoli J. set out the test for unconscionability with respect to domestic contracts under s. 56(4) of the Family Law Act as follows:

[103] Unconscionability, with respect to domestic contracts, focuses on whether there were unconscionable circumstances surrounding the formation of the contract. The circumstances at the time of the drafting and signing of the contract must be considered, not the results or effect of the contract at the time the application is brought to be set aside. Section 33(4) of the FLA is an exception to this, as it permits a court to order or vary spousal support where a valid and subsisting domestic contract results in unconscionable circumstances.

[104] Unconscionability in the matrimonial context is not equivalent to unconscionability in a commercial context. As stated in Miglin v. Miglin, 2003 SCC 24, [2003] 1 S.C.R. 303, at para. 82:

… There is a danger in borrowing terminology rooted in other branches of the law and transposing it into what all agree is a unique legal context. There may be persuasive evidence brought before the court that one party took advantage of the vulnerability of the other party in separation or divorce negotiations that would fall short of evidence of the power imbalance necessary to demonstrate unconscionability in a commercial context between, say, a consumer and a large financial institution.

[105] The question to be asked is whether there were “‘any circumstances of oppression, pressure, or other vulnerabilities’, and if one party’s exploitation of such vulnerabilities during the negotiation process resulted in a separation agreement that deviated substantially from the legislation” (see Brandsema, at para. 44).

[184] Examples of inequality in bargaining may include one party being intellectually weaker by reason of a disease of the mind, economically weaker or situationally weaker. However, the “mere presence of vulnerabilities will not, in and of itself, justify the court’s intervention. The degree of professional assistance received by the parties will often overcome any systemic imbalances between the parties” (see Miglin, at para. 82).

[185] The court should not “presume an imbalance of power in the relationship or a vulnerability on the part of one party, nor should it presume that the apparently stronger party took advantage of any vulnerability on the part of the other”. There must be evidence to conclude that “the agreement should not stand on the basis of a fundamental flaw in the negotiation process. Recognition of the emotional stress of separation or divorce should not be taken as giving rise to a presumption that parties in such circumstances are incapable of assenting to a binding agreement” (see Miglin, at para. 82).

Piccoli J. set out the test for undue influence with respect to domestic contracts under s. 56(4) of the Family Law Act as follows:

[109] In considering undue influence, the court must inquire into whether there was (i) an improvident bargain, and (ii) if so, whether there was inequality in bargaining power: see Hyldtoft v. Hyldtoft (1991), 1991 CanLII 12868 (ON SC), 33 R.F.L. (3d) 99, at paras. 26–28 (Ont. Gen. Div.). To establish undue influence or inequality in bargaining power, “the plaintiff must prove the ability of one person to dominate the will of another, whether through manipulation, coercion, or outright but subtle abuse of power” (see Segal v. Qu (2001), 2001 CanLII 28201 (ON SC), 17 R.F.L. (5th) 152, at para. 59 (Ont. S.C.)).

Piccoli J. set out the test for duress with respect to domestic contracts under s. 56(4) of the Family Law Act as follows:

[124] Duress is described in Toscano v. Toscano, 2015 ONSC 487, 57 R.F.L. (7th) 234, at para. 72, as follows:

Duress involves a coercion of the will of one party or directing pressure to one party so they have no realistic alternative but to submit to the party (see Berdette v. Berdette (1991), 1991 CanLII 7061 (ON CA), 81 D.L.R. (4th) 194 at para. 22 (Ont. C.A.)). Equity recognizes a wider concept of duress including coercion, intimidation or the application of illegitimate pressure.

[125] Further, “there can be no duress without evidence of an attempt by one party to dominate the will of the other at the time of the execution of the contract” (see Ludmer v. Ludmer, 2013 ONSC 784, 33 R.F.L. (7th) 331, at para. 53).

[126] To prove duress, the Husband must show that he was compelled to enter into the Agreement out of fear of actual or threatened harm of some kind. There must be credible evidence demonstrating that he was subject to intimidation or illegitimate pressure to sign the Agreement: see Ludmer at para 53.

[127] When the party alleging duress has received ILA and had a meaningful opportunity to review the domestic contract, courts are less likely to make a finding of duress: see Balsmeier v. Balsmeier, 2016 ONSC 950, at paras. 121–22, 153; Ludmer at paras 55–58.

Finally, Piccoli J. set when a dometic contract can be set aside under s. 56(4)(c) of the Family Law Act due to misrepresenation:

[129] In contract law, a misrepresentation must be material in the sense that a reasonable person would consider it relevant to the decision to enter the agreement in question. In addition, the material misrepresentation must have constituted an inducement to enter the agreement upon which the party relied: see e.g. Panzer v. Zeifman (1978), 1978 CanLII 1658 (ON CA), 20 O.R. (2d) 502 (C.A.) and Beer v. Townsgate I Ltd. (1997), 1997 CanLII 976 (ON CA), 36 O.R. (3d) 136 (C.A.); see also Pearson v. Poulin, 2016 ONSC 3707, at para. 74 (in the context of a divorce consent): “In order to succeed on misrepresentation and mistake, the Applicant must show, on the balance of probabilities, that the Respondent misrepresented to her the value of his pension and this misrepresentation induced her to sign the Divorce Consent to her detriment”.

In M.S. v. I.S., 2021 ONSC 3715 (CanLII), the Court laid out the test under s. 56(4) of the Family Law Act on whether the domestic contract should be set aside because there was no consensus ad idem:

[85] For parties to be bound in a contractual relationship, there must be a manifest meeting of the minds or consensus ad idem on all the essential terms of what that relationship will be: Holly Downs Developments Inc. v. 1428508 Ontario Ltd., 2014 ONSC 1628.

[86] Whether there was consensus ad idem is determined at the time of formation, on an objective standard. The question is “whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract.”: G.H.L. Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Carswell, 2006) at p. 14.

[87] The burden of proof is on the party seeking to prove the existence of the contract – in this case, I.S.

[88] In determining whether there is consensus ad idem, the court may consider the parties’ conduct leading up to and following the conclusion of the agreement.

In Chee-A-Tow v. Chee-A-Tow, 2021 ONSC 2080 (CanLII), the Court set out the two-stage approach under s. 56(4) of the Family Law Act as follows:

[92] The Court of Appeal for Ontario has repeatedly endorsed a two-stage approach to the application of s. 56(4), as articulated by Clarke L.J.S.C. in Demchuk v. Demchuk (1986), 1986 CanLII 6295 (ON SC), 1 R.F.L. (3d) 176 (Ont. H.C.):

(1) the party seeking to set aside must demonstrate that one of the circumstances listed under s. 56(4) has been engaged;

(2) if so demonstrated, the court must then consider whether it is appropriate to exercise its discretion in favour of setting aside the agreement: see, LeVan v. LeVan, 2008 ONCA 388, 90 O.R. (3d), at para. 51, leave to appeal refused, [2008] S.C.C.A. No. 331; Faiello, at para. 20.

[93] Under this approach, the party seeking to escape the effect of the agreement bears the burden to demonstrate there are grounds for setting it aside: Doughtery v. Doughtery, 2008 ONCA 302, 89 O.R. (3d) 760, at para. 11.

[94] This analysis seeks to reconcile two competing principles. First, the public interest in compliance with the legislative scheme, a key objective of which is ensuring the equitable settlement of affairs upon the dissolution of a marriage: FLA, Preamble. Second, the interest in encouraging parties to freely negotiate a final settlement of their family law entitlements as they see fit: Aly v. Halal Meat Inc. et al., 2013 ONSC 1313, 13 B.L.R. (5th) 209, at para. 353.

[95] Accordingly, a court should be reluctant to interfere with a pre-existing domestic contract unless it is convinced that the agreement does not comply substantially with the objectives of the FLA and the Divorce Act: Miglin v. Miglin, 2003 SCC 24, at paras. 45-46.

The court set out the test for unconscionabiity under s. 56(4)(c) of the Family Law Act as follows:

Unconscionability

[109] The concept of unconscionability in the context of the execution of domestic contracts is broader than in the common law of contract: Miglin, at para. 82; Tadayon v. Mohtashami, 2015 ONCA 777, 341 O.A.C. 153, at para. 28. As put by the Supreme Court in Miglin, at para. 82:

There is a danger in borrowing terminology rooted in other branches of the law and transposing it into what all agree is a unique legal context. There may be persuasive evidence brought before the court that one party took advantage of the vulnerability of the other party in separation or divorce negotiations that would fall short of evidence of the power imbalance necessary to demonstrate unconscionability in a commercial context between, say, a consumer and a large financial institution.

As such, where there are circumstances of oppression, pressure, or other vulnerabilities and evidence of one party’s exploitation of such vulnerabilities during the negotiation process, with the result that the domestic contract deviates substantially from the legislation, s. 56(4)(c) may be engaged: Miglin, at paras. 81-83; Rick, at para. 44; Tadayon, at para. 29.

[110] For instance, in Rick, the Supreme Court upheld the trial judge’s finding that a separation agreement was unconscionable. The husband in that case knowingly exploited the wife’s fragile emotional and mental state during negotiations that were tainted by misleading financial information stemming in part from the husband’s deliberate non-disclosure: at para. 63.

[111] Although the wife in Rick had ILA, she was unable to make use of it because of her vulnerabilities and the seriously flawed bargaining process: at paras. 60-62. Abella J. affirmed the trial judge’s finding that the agreement deviated substantially from the relevant legislative objectives, rendering it unconscionable and therefore unenforceable: at para. 63.

The court set out the test for duress under s. 56(4)(c) of the Family Law Act as follows:

Duress

[112] Duress is a sub-category of unconscionability. The party seeking to establish duress must show they were subject to pressure by the other party which rendered them unable to freely decide and left them with no realistic alternative but to agree: Stott v. Merit Investment Corp. (1988), 1988 CanLII 192 (ON CA), 63 O.R. (2d) 545, at para. 48, leave to appeal refused, [1988] S.C.C.A. No. 185; and Glazer v. Hill, 2019 ONSC 809, at para. 38.

[113] However, not all pressure, economic or otherwise, constitutes duress sufficient to make an agreement unenforceable. It must have two elements: (i) pressure that the law regards as illegitimate (ii) applied to such a degree as to amount to a “coercion of the will”: Taber v. Paris Boutique & Bridal Inc., 2010 ONCA 157, at para. 9; and Glazer, at paras. 37-39.

[114] Even where ILA is received, duress may be established through evidence that a party feels he or she has no realistic choice but to sign due to a power imbalance with the other party: Aly, at para. 4

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