Jun

26

Prenup | Prenuptial Agreement Forms (Part 2): how can they be challenged?

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to getting a prenuptial agreement, you should seek professional assistance (e.g. make a post on Dynamic Legal Forms). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. We will soon be offering Prenuptial Agreements in our Legal Forms + Video Guides section. You can contact me directly if you need a lawyer.

This is the second of a series of blog posts I’m writing about prenups or prenuptial agreements for Ontario. In the first blog, I discussed what they are, when are they used, and what is required for them to be valid and enforceable. In this blog, I’ll discuss how they can be challenged.

How can a prenup be challenged?
A Prenuptial Agreement can be challenged in various ways relating to the substance (i.e. terms and conditions) of the Agreement or the process in which it was entered into. For more general information about this topic, please refer to the DL Guide entitled “Is My Legal Form Valid and Enforceable?” that comes with each legal form package you purchase. The Ontario Family Law Act also outlines various ways in which these Agreements can be challenged by a party.

To begin, a party can make an application to a court to have a Prenuptial Agreement – in whole or in part – set aside on the basis under section 56(4) that:

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

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

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

In Loy v. Loy, [2008] W.D.F.L. 351, the Ontario Superior Court of Justice reviewed the jurisprudence concerning section 56(4). In that particular case, Mrs. Loy had challenged the validity of a Marriage Contract (which, like a Prenuptial Agreement, is called a domestic contract) which she had entered into. The Court found no grounds to set aside that domestic contract. Here is the Court’s reasoning under section 56(4):

Section 56(4)

174 This section of the Family Law Act gives a court the power to set aside a provision or an entire agreement, if it falls within one of the enumerated categories. Mrs. Loy has submitted that the domestic contract in this case should be set aside due to a lack of financial disclosure and a lack of independent legal advice. She also submits that Mr. Loy pressured her to sign the contract and that she did so under duress. Duress would be a factor the court could consider under section 56(4)(c) as otherwise in accordance with the law of contract.

175 In Hartshorne, (2004), 47 R.F.L. (5th) 5 (S.C.C.), the Supreme Court of Canada reiterated that the approach to be taken in determining the weight to be accorded to an agreement is the two-stage analysis laid out in Miglin, 2003 SCC 24, and, further, that there is no “hard and fast” rule regarding the level of deference accorded to marriage agreements as compared to separation agreements.

176 In Rosen, (1994), 3 R.F.L. (4th) 267 (Ont. C.A.), the Ontario Court of Appeal confirmed that courts do not have a general discretion to set aside contracts that appear to be unfair. It is only where the bargain reaches the level of unconscionability that the contract should be set aside.

177 In LeVan, (2006), 82 O.R. (3d) 1 (Ont. S.C.J.), Backhouse J. held that the proper approach under s. 56(4) is to first determine if a claimant can bring him or herself within one of the enumerated subsections. If the claimant is successful, then it must be determined whether the court should exercise its discretion in favour of setting the contract aside.

Failure to Disclose

178 Under subsection 56(4)(a) if substantial assets or liabilities were not disclosed, then a court has discretion to set aside the agreement. In LeVan, Backhouse J. held that this section places a positive duty on every spouse to make complete, fair and frank disclosure of all financial circumstances before the parties enter into the contract. Notwithstanding this requirement, not every breach will result in setting aside the agreement. Justice Backhouse, relying on Dochuk v. Dochuk, (1999), 44 R.F.L. (4th) 97 (Ont. Gen. Div.) and Demchuk v. Demchuk, (1986), 1 R.F.L. (3d) 176 (Ont. H.C.) set out the factors to be taken into consideration when exercising judicial discretion, including whether:

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

(b) there has been duress, or unconscionable circumstances;

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

(d) the petitioning party moved expeditiously to have the agreement set aside;

(e) the petitioning party received substantial benefits under the agreement;

(f) the other party has fulfilled his or her obligations under the agreement;

(g) the non-disclosure was a material inducement to the aggrieved party entering into the agreement.

179 In Baxter v. Baxter, (2003), 41 R.F.L. (5th) 23 (Ont. S.C.J.), similar to LeVan, a list of factors relevant to the court’s discretion in setting aside an agreement due to lack of financial disclosure was enumerated:

1. Whether the funds existed at the time of the signing of the agreement;

2. Whether the party seeking to set aside on this basis knew the facts were different than originally stated but decided not to inquire further about details, or neglected to pursue full legal disclosure;

3. Whether there was concealment or misrepresentation;

4. Whether there was duress, or unconscionable circumstances;

5. Whether the non-disclosure was material; how important would the non-disclosed information have been to the negotiations;

6. Whether the agreed-upon terms are reasonable and fair; would they have been different had all the facts been known;

7. Whether the request to set aside is made expeditiously.

Examples of Cases Decided Under s. 54(4)(a)

180 In Baxter, the husband had disclosed the existence of shares to his wife during settlement negotiations, and provided a valuation of the shares as of the date of separation; however, he did not disclose that they had been sold for $2.95 million post-separation. Justice Olah held that while the sale would not effect the net equalization payment, it was relevant to the determination of child and spousal support. In light of the provision in the minutes of settlement that the division of property and quantum of child support were “inextricably intertwined”, the agreement was set aside for non-disclosure.

181 In LeVan, the husband had deliberately failed to disclose his income and assets and misrepresented the purpose and extent of the contract to the wife. Additionally, the husband had interfered in the wife’s receipt of independent legal advice. Because of the cumulative weight of all the factors, Backhouse J. exercised her discretion to set aside the marriage contract.

182 In Armstrong v. Armstrong, [2007] W.D.F.L. 255 (Ont. C.A.), the Ontario Court of Appeal reversed the trial judge’s findings with respect to disclosure. The Court held that the wife was aware of the husband’s assets and had as much ability to value them as he did, therefore there was no ground upon which to set aside that part of the agreement.

183 The financial disclosure in the Loy marriage contract was not detailed and contained only estimates as to “global net worth” for each party. However, Mrs. Loy did not seek further disclosure, which, in fact, would have indicated that Mr. Loy had overestimated his worth in the agreement.

184 The Applicant did not suggest she would not have signed the marriage contract if she had more complete financial disclosure. I accept the Respondent’s submission that such a position would not make sense given the fact that more complete disclosure would have revealed that the Applicant had significantly underestimated her net worth while the Respondent had significantly overestimated his. The Applicant cannot rely on her own failure to provide accurate disclosure to set aside the contract. The Respondent disclosed his income.

Independent Legal Advice

185 The Family Law Act does not require independent legal advice a prerequisite to the formation of a domestic contract, nor is it a requirement at common law: Somerville v. Somerville, [2005] W.D.F.L. 1957 (Ont. S.C.J.). Rather, independent legal advice is closely related to s. 56(4)(b), under which a marriage contract may be set aside if a party did not understand the nature or consequences of the contract.

186 In Hartshorne, the Supreme Court of Canada noted that:

[i]ndependent legal advice at the time of negotiation is an important means of ensuring an informed decision to enter an agreement.

187 In Atkinson v. Atkinson, [1990] W.D.F.L. 1135 (Ont. H.C.), Ross J. stated that:

in reference to the significance of independent legal advice…what must be considered is whether the parties freely and willingly entered into the bargain.

Examples of Cases Decided Under s. 54(4)(b)

188 In Settle-Beyrouty v. Beyrouty, (1996), 24 R.F.L. (4th) 318 (Ont. Gen. Div.), the parties executed a marriage contract and each acknowledged receipt of independent legal advice. The wife alleged in her application for support that she did not respond truthfully when asked by the respondent’s lawyer whether she had obtained independent legal advice. She submitted that, as she did not receive independent legal advice, she did not understand the consequences of the marriage contract. Justice Dunnet held that courts should be loathe to set aside an agreement where a spouse did not avail himself or herself of the opportunity for independent legal advice. According to Dunnet J., the wife was intelligent, articulate and well-educated. She [was] employed in a responsible position. I have no doubt that she was aware of the nature and contents of the contract and she understood them.

189 In Keough v. Keough,(2005), 248 Nfld. & P.E.I.R. 165 (N.L. T.D.), the Newfoundland and Labrador Supreme Court determined that an agreement concerning the matrimonial home resulted in inequity for the husband, since it excluded him from having any interest in the property. The husband had been given an opportunity to seek independent legal advice but decided not to pursue it. The Court upheld the agreement since the husband signed of his own free will and understood the nature and consequences flowing from the contract.

190 Mrs. Loy was familiar with domestic contracts and the role that legal advice should play in executing them, since she had signed an agreement with the aid of a notary public in her first marriage. Further, as mentioned above, there was no urgency in signing the contract as a wedding date had not been set, the parties were living in different countries and her immigration status had not been resolved. Mrs. Loy is an educated, intelligent woman who would have understood the seriousness of the agreement. Although she had the means and time to seek legal advice, she chose not to. As held in Beyrouty, a court should be loathe to set aside a domestic contract where a party chose not to seek independent legal advice.

191 The position of the parties at the date of separation is not a significant departure from the reasonable expectations each party would have had at the time the contract was negotiated. I find that Mrs. Loy’s lack of employment is not related to the marriage or the separation but is of her own choosing. No explanation was provided as to why she has not become certified in Canada or why she cannot undertake employment of any kind.

Financial Disclosure

192 Under s. 56(4)(a), an entire contract may be set aside if a party has failed to disclose significant assets. Although the disclosure in the marriage contract was not detailed, Mrs. Loy did not seek further disclosure. In fact, Mr. Loy overestimated his net worth in the agreement; therefore, this argument is not persuasive.

193 Under s. 56(4)(b), an entire contract may be set aside if a party did not understand its’ nature or consequences. Mrs. Loy argues that she did not receive independent legal advice and, hence, could not understand the contract. However, Mrs. Loy is an intelligent, educated, businesswoman who had previous experience with marriage contracts in her native South Africa. Although she may not have been familiar with Canadian law, she did not seek independent legal advice and signed the contract freely. A court should be loathe to set aside a contract when a party did not avail herself of independent advice.

194 The Applicant knew what she was doing when she relocated herself and her children to Canada. She knew the income she was giving up by leaving the two businesses behind. The Applicant has not attempted to explain why she is not able to earn any income at all. She was able to persuade a bank to loan her money to purchase two condominiums during the marriage without any financial assistance or backing from Mr. Loy.

In Loy v. Loy, Mrs. Loy also challenged the validity of the domestic contract on the basis of section 33(4) of the Family Law Act. That section says that a Court may set aside a provision for support or a waiver of the right to support in a Prenuptial Agreement and may set support:

(a) if the provision for support or the waiver of the right to support results in unconscionable circumstances;

(b) if the provision for support is in favour of or the waiver is by or on behalf of a dependant who qualifies for an allowance for support out of public money; or

(c) if there is default in the payment of support under the contract at the time the application is made.

Once again, however, the Court disagreed with Mrs. Loy and found no reason to set aside the provision of support in the domestic contract before it. Here is the Court’s reasoning with respect to section 33(4):

Section 33(4)

162 Section 2(10) of the Family Law Act provides that a contract is determinative of the rights between the parties unless the Act provides otherwise. Section 33(4) is one of the ways that the Act “provides otherwise”. Under this section, a court may not set aside an entire agreement; rather, only a provision for support or a waiver of the right to support may be overruled. Since s. 33(4) is concerned only with support, the property arrangement in the agreement cannot be altered [footnote: In fact, if the domestic contract is held to be valid (i.e. not set aside), then a court cannot alter the property provisions since there is no power to do so in the Family Law Act].

163 The relevant subsection in this case is s. 33(4)(a), that is, “the provision [...] results in unconscionable circumstances”.

164 Scheel v. Henkelman, (2001), 52 O.R. (3d) 1, 11 R.F.L. (5th) 376 (Ont. C.A.), a decision of the Ontario Court of Appeal, discussed several important aspects of s. 33(4)(a). First, the Court of Appeal held that the section is directed only to unconscionable circumstances and not entire agreements:

The use of the phrase “results in” in s. 33(4)(a) means that the subsection is not directed to unconscionable agreements, but to unconscionable results of a provision waiving support. An agreement which was fair and reasonable when it was signed, may, through circumstances that occur in the future, result in unconscionable circumstances at the time of a support application.

165 The Court discussed the meaning of “unconscionable” in the subsection. Adopting the discussion of the Ontario High Court in Newby v. Newby, (1986), 56 O.R. (2d) 483 (Ont. H.C.), it was held to mean “shocking to the conscience of the Court”. The factors to be considered in determining whether unconscionable circumstances have resulted are:

(a) the circumstances surrounding the execution of the agreement, including the fact that each party was represented by competent counsel, the absence of any undue influence, the good faith and the expectations of the parties;

(b) the results of the support provisions of the agreement, including any hardship visited upon a party; and

(c) the parties’ circumstances at the time of the hearing including their health, employability and ability to maintain their life-style.

Also, blameworthy conduct may be considered by the Court.

Examples of Cases Decided Under s. 33(4)(a)

166 In Scheel, the applicant woman was living on a meagre monthly pension following the breakup of her 11-year Prenuptial with the respondent, who had assets approaching $3 million. The Court of Appeal held that it was clear the woman was enduring significant economic hardship and that the man had the ability to support her. Give the relative circumstances of the parties, it would be shocking to the conscience to require the woman to live on her modest pension. The Court awarded the woman monthly, indefinite support.

167 In Mongillo v. Mongillo, 2007 CarswellOnt 2731 (Ont. S.C.J.), a recent case concerned with s. 33(4)(a), Wood J. determined that the circumstances at the time of application were not so extreme as to be unconscionable. Even though the wife was unable to earn any significant amount of money due to ongoing health problems and had been influenced by the husband’s father during the negotiations, the waiver of spousal support had not caused the degree of hardship that one would expect. Indeed, the wife had received a gift of one-half the value of a home from the husband’s father and the option was available to free up this capital. Justice Wood also reiterated that simply because unforeseen circumstances have caused hardship to one party does not mean that a properly negotiated domestic contract shall be overridden by s. 33(4). A review of Scheel and Desramaux v. Desramaux, (2002), 216 D.L.R. (4th) 613 (Ont. C.A.) (wife forced to live on savings as she was limited to baby-sitting to support herself. The agreement for time-limited support was premised on the assumption that she would be self-sufficient within five years, which was unrealistic and had not occurred) led Wood J. to conclude that:

In each of these decisions, the Court of Appeal took into account the present circumstances of the parties. In each case, it also clearly took into account in [sic] the conduct of the parties while they were together and subsequent to their separation. In each case, the party seeking support was destitute or close to it, and the party from whom support was sought lived an affluent lifestyle and had amassed significant assets. As well, in each case, the court found some element of blameworthiness in the conduct of the party from whom support was sought.

168 The provision waiving support in the Loy marriage contract is not “shocking to the conscience of the Court”. The parties had both been married before and both had children from their first marriage. Each party was a successful business person and financially independent. The first factor to evaluate is the circumstances surrounding the execution of the agreement. Both parties had the opportunity to obtain independent legal advice prior to signing the contract; there was no interference by Mr. Loy with Mrs. Loy’s ability to obtain this advice. Mrs. Loy claims to have been pestered by Mr. Loy to sign the agreement; however, she must have realized there was no urgency in signing as a wedding date had not been set, the parties were living in different countries and her immigration status had not been resolved. Mrs. Loy had previous experience with domestic contracts and is an educated, intelligent woman who would have understood the seriousness of the agreement. She had the means to seek legal advice and chose not to, for whatever reason.

169 The financial circumstances of Mrs. Loy at the time of hearing are not clear. She states she has not looked for work or received any income other than the temporary spousal support since separation. She provided no explanation for why she cannot seek some employment. She has not taken any steps since separation to become certified as an accountant in Canada since separation. She has taken no steps in Canada to upgrade except for two night courses at Wilfred Laurier University in 1999. She testified she is continuing in her correspondence program and has nearly completed a Bachelor’s degree in Management. This degree will be her third post-secondary education program. Yet, she offers no explanation as to why she cannot secure employment. In fact, she stated in cross-examination that she has not made any efforts to seek employment since the separation in February 2005.

170 The circumstances that Mrs. Loy claims have resulted in financial hardship to her cannot be described as unforeseen. She knew what she was doing when she left South Africa to live in Canada with her children. Mrs. Loy’s net worth at the time of separation was $881,212.00. She had the financial ability to purchase two condominiums during the marriage without any financial contribution from Mr. Loy. She was able to persuade a bank to finance these purchases. She is not destitute.

171 I find that there is no blameworthy conduct on the part of Mr. Loy with respect to the execution of the contract. He did not place undue duress upon Mrs. Loy. I am satisfied that Mr. Loy and Mr. Lang did everything they could to direct Mrs. Loy to seek independent legal advice. I accept the evidence of Mr. Lang that he urged Mrs. Loy to seek independent advice from an Ontario lawyer, being aware that she had a sister who practiced law in South Africa. Mrs. Loy’s evidence is not credible. She states that she did all that she could to retain a lawyer familiar with Ontario law. Her efforts did not have to stop after she signed the contract. She did not marry Mr. Loy until 5 months after the contract was signed. If there was something in the contract she did not understand when she signed it she had a lot of time to obtain the advice or information she needed before she married Mr. Loy. As an educated and experienced businesswoman Mrs. Loy would know the importance of a contract. Whether or not she understood Canadian law is not as significant as the fact that she certainly would know that she was signing a document that impacted on her future rights and obligations.

172 I accept Mr. Loy’s evidence that there was no urgency to the signing of the contract in February 1997.

173 There is no evidence to suggest the parties were not equal bargaining partners or that one preyed upon the other.

written by admin \\ tags: , , , , , ,

Comments on this entry are closed.