Marriage Contracts: Case Law Update

The Ontario Court of Appeal recently addressed financial disclosure and other obligations placed upon parties when entering into a marriage contract, in Butty v. Butty (2009) and Verkaik v. Verkaik (2010). The Appellate Court made clear that if parties do not comply with certain obligations, a marriage contract could be set aside upon marriage breakdown.

Section 56(4) of the Family Law Act describes the situations in which a domestic contract will be set aside by a Court, namely:

(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 cases dealt mainly with the adequacy of financial disclosure, and the parties’ understanding of the nature and consequences of the contract, including whether the parties’ obtained and received proper independent legal advice.

In Butty, the parties agreed to enter into a marriage contract before their wedding. The husband owned a substantial farm property which he wanted to protect in the event of a breakdown in the relationship. Before executing the contract, the husband provided financial disclosure to the wife. However, there were a number of inadvertent errors contained in the husband’s financial disclosure.

Most notably, the husband’s disclosure indicated that the family farm which he owned was one parcel, as opposed to two parcels, as was later discovered. As well, the husband’s mother held an interest in the property; however, the value of his mother’s interest was uncertain when the parties executed the contract.

Factually, the Court found that before the contract was executed, the husband explained to the wife that the purpose of the contract was to exclude all of the farm property from any equalization of net family property. The Court also found that the wife understood the purpose of the contract, and its effect, should the marriage end, and that she was urged to obtain independent legal advice by both the husband and his mother.

At the time of the preparation of the contract, the wife’s first lawyer indicated to the wife that there were apparent uncertainties and inconsistencies within the disclosure and the contract itself, and advised the wife not to sign. However, the wife choose to ignore her lawyer’s advice, hire a new lawyer, and sign the marriage contract, fully aware that there were inconsistencies in the husband’s disclosure. The marriage contract was entered into, and subsequently, the relationship broke down.

As a result of the deficiencies in the husband’s financial disclosure, the wife brought an application to have the marriage contract set aside in order to obtain an equalization payment.
At trial, the contract was set aside and an equalization payment was ordered. However, on appeal, the Ontario Court of Appeal ruled in favour of the husband, and the marriage contract was upheld.

The Court of Appeal held that since the wife was aware of the shortcomings in the husband’s disclosure before execution of the marriage contract, and instead of following the advice of the first lawyer, she choose to fire her lawyer, and proceed with the execution of the contract. As well, the Court held that the wife was aware that she was giving up claims to the husband’s interest in the farm, which was the ultimate effect of the contract, despite any inconsistencies in the husband’s disclosure.

The Court held that as the Wife knew about all of these issues before signing the contract and choose not to pursue them, she could not, at marriage breakdown, attempt to rely on them to set aside the marriage contract.

In Verkaik, the Court of Appeal again dealt with the validity of a marriage contract. Similar to Butty, the husband and wife signed a marriage contract in advance of their wedding.

The contract in question excluded the majority of the husband’s substantial property from any equalization payment that may result upon the breakdown of the relationship. The wife claimed inadequate financial disclosure, among other things, in an Application to have the contract set aside. The contract was upheld at trial, and this time, the wife appealed.

At the time of preparation of the contract, the husband attached a schedule of his assets and their values to the contract. The Court found that, in addition to the husband’s disclosure, the wife had an understanding of the husband’s financial position as she had worked as a bookkeeper and real estate manager for his company. The Court found that the wife understood the consequences of the Agreement; that she would not receive any of the husband’s assets upon divorce.

There was also evidence on which the Court concluded that the wife had obtained legal advice through her employment and had negotiated some of the terms of the contract.

In her Application the wife also claimed that the legal advice that she obtained from a lawyer was not independent. However, the Court rejected this claim. The lawyer had represented the Husband on a number of real estate deals in the past, but the lawyer disclosed this fact and advised the wife that she should obtain her independent legal advice elsewhere. The wife refused and insisted upon receiving the advice from that lawyer.

The Court again held that the wife knew what she was getting herself into by signing the contract, and thus could not now argue that it should be set aside.

It is clear then that where both parties are in a position to understand the consequences of the domestic contract which they are entering into, an Ontario Court is unlikely to set aside a marriage contract. The cases also suggest that where there is uncertainty regarding financial disclosure or other aspects of the process and a party becomes aware of a possible deficiency but chooses not to pursue an investigation or alternative course of action and instead proceeds to sign the marriage contract, that party will be bound by the contract and held to its terms.

It is imperative then that each party should appreciate the “process” and obtain independent legal advice. Each party should also fully understand the contract and the suggestions, if any, made by counsel and thereafter make an informed decision to proceed or not.

As a matter of process, parties should clearly be made aware of the opportunity to obtain independent legal advice by counsel and understand that an Ontario Court is not likely to set aside a marriage contract based upon the argument that he or she was not aware of the meaning or implications of the contract.

It is important to appreciate that these cases, Butty and Verkaik, stand apart from circumstances where a party failed to disclose or materially misrepresented the value of significant assets or where a party interfered with the receipt of independent advice.

Unless the circumstances are such that one party has engaged in inappropriate conduct, a party that is clearly aware of his or her options or possible deficiencies in the process is unlikely to be successful in a challenge to a marriage contract in Ontario. These cases send a clear message that absent unusual circumstances, domestic contracts are to be respected and given deference by Ontario Courts.