The Supreme Court of Canada & the Validity of Domestic Contracts: The Hartshorne Decision

With respect to deference to domestic contracts, courts have struggled to achieve a balance between the freedom of parties to structure their personal affairs with the need to ensure equitable rights and obligations upon the breakdown of the relationship. In the 2003 decision in Miglin, the Supreme Court of Canada addressed the proper weight which should be given to Separation Agreements when one is applying to vary such an Agreement (see “A Final Agreement is Likely Final”). More recently, the issue of deference to domestic contracts was again before the Supreme Court in Hartshorne, in the context Marriage Contracts.

Marriage Agreements are entered into at the outset of a relationship. As such, they provide a means to protect assets and inheritance which a spouse would otherwise have a potential entitlement to at the breakdown of the marriage. However, at the breakdown of the relationship such arrangements may also fail to reflect the circumstances of the party and their roles during the marriage.

The Hartshorne’s were married for nine years, and cohabited for three years prior to marriage. Both were lawyers and the wife was employed at the husband’s firm. They began living together in 1985. Following the birth of their first child in 1987, Ms. Hartshorne left legal practice and remained in the home as the full-time care giver for the child. They were married in March of 1989, a second marriage for each of them. Later that year, their second child was born. The wife remained in the home as the children’s primary caregiver until the parties separated in January of 1998.

Prior to the marriage, the husband’s assets were valued at $1.6 million and the wife held no assets entering into the marriage with a large amount of debt. At the husband’s insistence, the couple entered into a Marriage Agreement which stipulated that the parties would be separate as to property. The wife was entitled to a 3 percent interest in the matrimonial home, for every year that they were married, up to a maximum of a 49% interest.

Both parties obtained independent legal advice with respect to the Marriage Agreement. The wife signed the agreement despite her lawyer’s indication that the agreement was unfair. In addition, the lawyer suggested that the courts would likely set the Agreement aside if there was a breakdown of the marriage.

Hartshorne was decided under British Columbia’s FRA which provides for judicial intervention with respect to a domestic contract where the contract is found to be “unfair”. During divorce proceedings the husband sought to rely on the provisions of the Marriage Agreement, while the wife argued that there was no valid Marriage Agreement, and if there was found to be a valid Agreement, it was unenforceable as it was entered into under duress. Further, in the alternative, she argued that the Marriage Agreement was unfair and, pursuant to the FRA, and as such there should be a reapportionment of the assets.

At trial, it was held that while the contract was not unconscionable, neither was it entered into under duress, the Agreement was “unfair”. The Agreement did not adequately address the sacrifices that the wife had made, giving up her career to care for the children, and the contract did not provide for entitlement to pension or retirement savings. As such, the trial judge ordered the matrimonial home, and its contents, be divided equally. Additionally, a 60/40 division of the remaining family assets in favour of the husband”which included his law practice”was ordered. The British Columbia Court of Appeal subsequently affirmed this decision.

The Supreme Court of Canada disagreed.

In interpreting B.C.’s “fairness” standard the Court commented that it must consider whether the relevant provisions of the Agreement reflect parties original intentions given the current surrounding circumstances, and whether the new circumstances where reasonably anticipated by the parties. In addition, courts should consider whether the agreement reflects the objectives of the relevant legislative provisions of the Act in light of the personal choices of the parties and the overall circumstances including other entitlements under the Agreement.

On the facts, the arrangements between the Hartshornes were consistent with the original intentions of the parties “that is to remain independent of each other with respect to property. Furthermore, it was found that child support and spousal support entitlements under the Agreement addressed the economic disadvantages the wife would face as a result of her child care responsibilities.” As such, the Agreement was consistent with the Act.

In addition, the independent legal advice that the wife obtained prior to entering into the Agreement indicated that the Agreement was “grossly unfair” and that in the event of a breakdown of the marriage, pursuant to the FRA, she would have a prima facie right to an equitable distribution of the property. The Supreme Court made it clear that the wife could not, at the breakdown of the relationship, rely on the fact that she believed the provisions to be unfair and unenforceable at the time she entered into it, in order to persuade the court to disregard the Agreement.

Given the aforementioned findings, the Supreme Court held that the Marriage Agreement was fair under the FRA, and as was enforceable. The Court was reluctant to interfere with an individuals choice to enter into such agreements and structure their own affairs, stating, “…courts should respect private arrangements that spouses make for the division of their property on the breakdown of their relationship particularly where the agreement in question was negotiated with independent legal advice.”

This decision was made under B.C. legislation which provides for a much lower standard for judicial intervention with respect to Marriage Agreements then Ontario legislation. However, in light of this decision, it seems apparent that courts will be reluctant to interfere with Marriage Agreements in so much as the provisions and the surrounding circumstances are consistent with the parties’ intentions and they reflect the objectives of Ontario legislation in light of all the surrounding circumstances and entitlements.

In accordance with this decision, it is advisable that parties obtain independent legal advice to ensure that they fully appreciate the legal consequences of the Agreements they are entering into, and the impact they may ultimately have, personally and financially.

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