The Compact: A new way forward for marriage contracts & cohabitation agreements

The Compact: A new way forward for marriage contracts & cohabitation agreements
If insufficient financial disclosure is the “cancer” of family law, the “heart disease” of our field at present is the frequency with which attacks on marriage contracts and cohabitation agreements are launched — and succeed.

Never before have we seen challenges to these kinds of agreements with such regularity, ferocity, and pervasiveness. The numbers from LawPRO bear out just how common and costly attacks on domestic contracts have become. Recent statistics show of all new claims in the past five years 20 per cent (171) involve attacks on domestic contracts. Even worse, in terms of dollars spent to pay out claims, a whopping 48 per cent went to claims involving attacks on domestic contracts.

It’s gotten so bad that recently a family court judge asked me, with utmost frankness, why, in light of the rather small remuneration involved for these kinds of contracts and the high level of risk of a negligence claim involved, would any of us ever even want to do these kind of contracts?

Marriage contracts and cohabitation agreements are of course “domestic contracts” as that term is defined in the Family Law Act. A court’s ability to set aside a domestic contract is governed by s. 56(4) of the act, which allows a court to set aside a domestic contract (or provision thereof) if a party failed to disclose significant assets or debts at the time the contract was made, a party did not understand its nature or consequences or "otherwise in accordance with the law of contract."

In LeVan v. LeVan, the Ontario Court of Appeal confirmed the “. . . analysis undertaken under s. 56(4) is essentially comprised of a two-part process. 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.”

In light of this rather straightforward structure, why do we have so many cases where these contracts are challenged? In my view, there are five major reasons.

1.    Based on 25 years of experience handling these matters, clients consistently tell me they did not put enough thought and time into their contract because they never thought they would be divorced.

2.    There is no recommended protocol for how to go about doing an agreement the right way.

3.    Many lawyers accept files for “independent legal advice” too eagerly, without ensuring all proper steps and a detailed examination of the proposed terms has taken place and without giving careful thought to the risk they are putting their clients and themselves to future attack and the corresponding ultimate negligence claims.

4.    Lawyers have come to realize there is no real downside to attacking an agreement. Either the attack results in an out-of-court settlement for more money than provided for in the contract, or a court case ensues and at the least the case is bifurcated with a significant amount of disclosure is produced.

5.    Judges. In an effort to give each side a fair opportunity to air their side, they strive to be balanced, which often means ordering significant disclosure even when these contracts are negotiated specifically so financial disclosure will not have to be produced in the future.

The Compact

The combined effect of these factors often leads to a bizarro-world scenario where everything is set up in favour of the person seeking to set aside the agreement, when, in fact, it should be the opposite.

Things should be set up so that absent some very clear and unfair situations, these agreements should be upheld and the message from the bench should consistently echo this. Otherwise, the family court judge’s comment to me makes ultimate sense: why bother even doing them?

This is what gave rise to the “Compact,” a simple set of standard procedures I propose be used in all cases involving marriage contracts and cohabitation agreements. They are nothing more than seven steps to be followed by lawyers retained on these sorts of files. They are:

1.    No work is to be started on a file unless the wedding is at least four months away.

2.    Each party must have his/her own lawyer from the outset, before any negotiations begin.

3.    Each party provides a financial disclosure brief before any negotiations begin.

4.    At least one four-way, without prejudice meeting shall be held.

5.    The lawyers fully report to the clients in writing after the four-way meeting.

6.    A term sheet is prepared and approved before the agreement is drafted.

7.    The agreement is drafted and signed with certain “key clauses.”

The steps are agreed upon before any real work is done on the agreement. Counsel will thus know from the outset how the file will be run and be able to advise the client exactly what happens and when. This will be of great benefit to clients who, at present, have very different experiences depending on the particular practice of his/her lawyer.

The steps are not meant to be substantive, only procedural. The Compact is not about trying to determine what goes into these contracts, only to ensuring that the manner in which they are put together is consistent, fair, and reflects full participation by each side before it is signed.

Key clauses: releases & waivers, summary judgment, and bifurcation

As mentioned, the Compact does not seek to manage the contents of what couples agree to in their contracts; it is only a code designed to strengthen and increase the chances what has been agreed to will be upheld.

In order to further bolster these agreements, a few extra clauses are recommended for inclusion in every contract. These clauses are consistent with leading precedents in three Supreme Court of Canada family law cases: Hartshorne v. Hartshorne, Miglin v. Miglin, and Hryniak v. Mauldin.

In Hartshorne, the court further observed that parties are expected to fulfill the obligations they undertake in an agreement; it is not open for one to simply later state that he or she did not intend to live up to his or her end of the bargain.

While it is true that in some cases agreements that appear to be fair at the time of execution may become unfair at the time of separation, depending on how the parties’ lives have unfolded, in a framework where parties are permitted to take personal responsibility for their financial well-being upon the dissolution of marriage, courts should be reluctant to second-guess their initiative and arrangement, particularly where independent legal advice has been obtained.

Since the key question thus becomes whether the operation of the agreement will prove to be unfair (or “unconscionable” in Ontario) in the circumstances present at the time of separation, the following clause is recommended for all contracts:

As required by the Supreme Court of Canada in the case of Hartshorne v. Hartshorne, in preparing this agreement Selma and Rick have discussed with each other and their solicitors their notions of fairness and the circumstances under which the terms of this agreement were negotiated.

They agree and acknowledge that the terms of this agreement are presently fair and will always be seen by them to be fair in the future, regardless of what happens to either of them, and regardless of how their lives unfold after the execution of this agreement.

Neither Selma nor Rick will attempt to have this agreement or any provision thereof set aside in the future on the grounds that their lives or financial arrangements unfolded differently than either had anticipated.

In Miglin, the SCC made it clear that a finding that an agreement is satisfactory at stage one does not end the inquiry. The court must assess whether circumstances have changed in ways that the parties may not have contemplated, whether the agreement is still in compliance with the objectives of the Divorce Act or whether enforcing the agreement in the circumstances as at marriage breakdown would lead to a situation that the court cannot condone.

Yet it is precisely for this reason why couples often want a cohabitation agreement or marriage contract with full releases and waivers — to insulate themselves from the myriad financial possibilities that could result had the parties not opted to decide for themselves how things will look upon separation.

For these reasons, and specifically because s. 33(4) of the Family Law Act provides that a court may set aside a provision for support or a waiver of the right to support in a domestic contract and may determine and order support in an application although the contract contains an express provision excluding its application if the provision for support or the waiver to support results in “unconscionable” circumstances, every agreement containing full releases and waivers should contain the following language to ensure the court exercises its discretion in favour of not interfering with the contract.

Finally, in the event that notwithstanding the above-noted clauses, an attack is brought to set aside a contract or part of it, the following clause, consistent with the principles in the ground-breaking case of Hyryniak v. Mauldin released last year, should be included to give the defending party (and the court) the tools required to stop the claim from proceeding very far:

In the event Selma or Rick ever challenges this contract or a part of it in court for any reason, the challenging party hereby consents to an order on motion by the defending party dismissing such claim with costs. The parties agree that such a motion shall be brought and granted by way of summary judgment and without the requirement of a case conference under the Family Law Rules or any successor amendments made thereto.

Selma and Rick understand that a motion for summary judgment dismissing such a claim means that no genuine issue for trial exists. Selma and Rick, once again, understand that the terms of this agreement are final and non-variable and that they both fully expect to adhere to such terms regardless of the circumstances they find themselves in in the event of a separation, regardless of how such separation may come to pass.

Finally, bifurcation. Nothing riles a client who thought his contract was impervious to attack like receiving a letter from an expert seeking a laundry list of financial disclosure dating back from prior to marriage — except, perhaps, a judge who orders it.

If the terms of the Compact are followed, allegations of unfairness, duress, and lack of disclosure will hopefully become a thing of the past. Further, when the suggested key clauses noted above in respect of Hartshorne, Miglin, and Hryniak are added in, it is hard to fathom a situation that will cry out for redress from the court.

However, in the unlikely event a contract negotiated by way of the Compact is ever challenged in court and the motion for summary judgment fails, all such contracts should contain a “bifurcation” clause which guarantees that in the event of a challenge, the issue of the validity of the contract shall be split and tried first — bifurcated — from the other claims (spousal support and/or equalization).

For more detailed commentary on the other steps in the Compact click here.

Brahm D. Siegel is a partner at Nathens Siegel LLP in Toronto and a certified specialist in family law by the Law Society of Upper Canada.

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