Dougherty v. Dougherty

89 O.R. (3d) 760

Court of Appeal for Ontario,

O'Connor A.C.J.O., Rosenberg and Feldman JJ.A.

April 22, 2008

Family law -- Domestic contracts -- Marriage contract -- Parties entering into pre-nuptial agreement in 1985 in which they agreed to keep all of their real and personal property separate -- Parties separating after 17-year marriage and wife applying successfully to set aside contract -- Trial judge erring in setting aside contract on basis of misrepresentation by husband that contract had to be signed before marriage in order to be valid -- Misrepresentation not being material and not inducing wife to enter into agreement -- Trial judge erring in setting aside agreement because it did not provide for spousal or child support -- Trial judge erring in setting aside agreement because parties could [page761] not have understood its terms without independent legal advice -- Section 56(4) of Family Law Act not operating retroactively to govern agreements made before Act came into force -- Contract not being invalid because parties contracted out of successor regimes for distribution of property -- Family Law Act, R.S.O. 1990, c. F.3, s. 56(4).

In 1985, one day before their wedding, the parties entered into a pre-nuptial agreement in which they agreed to keep all of their real and personal property separate. The agreement did not deal with spousal or child support. The parties separated after a 17-year marriage, and the wife applied successfully to set aside the contract. The husband appealed.

Held, the appeal should be allowed.

The trial judge erred in holding that courts should be hesitant to enforce domestic contracts. The law is to the contrary. The burden is on the party seeking to escape the effect of the agreement to show that there are grounds for setting it aside. Lack of independent legal advice is a factor for the court to consider along with all the other circumstances. The trial judge erred in setting the contract aside on the ground of a misrepresentation on the part of the husband that the agreement had to be signed before the marriage in order to be valid. 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, and the material misrepresentation must have constituted an inducement to enter the agreement upon which the party relied. The trial judge made no finding that the misrepresentation was material to the wife's decision to sign the contract. In fact, it was always the intention of the parties to enter into a pre-nuptial agreement. The trial judge did not expressly find that the misrepresentation induced the wife to enter into the agreement, and there was evidence contrary to any suggestion of inducement. In view of the trial judge's failure to properly apply the test for misrepresentation, to the extent that his decision depended on that finding, it could not stand.

The trial judge also set aside the agreement because it did not provide for child or spousal support. However, there is no legal basis for setting aside an agreement dealing with property merely because it does not deal with support, especially child support.

The trial judge apparently found as a basis for setting aside the contract that the parties could not have understood its terms without legal advice. However, s. 56(4) of the Family Law Act, which provides in clause (b) that the court may set aside a domestic contract if a party did not understand the nature or consequences of the contract, does not operate retrospectively to govern agreements made before the Family Law Act came into force.

The trial judge found that the necessary financial disclosure had not been made before the agreement was signed. However, there was no evidence that the husband failed to disclose significant assets.

The agreement was not invalid because the parties contracted out of successor regimes for the distribution of property.

APPEAL from the order of Kennedy J. of the Superior Court of Justice, dated October 11, 2006, setting aside a pre-nuptial agreement.

Cases referred to

Beer v. Townsgate I Ltd. (1997), 1997 976 (ON CA), 36 O.R. (3d) 136, [1997] O.J. No. 4276, 152 D.L.R. (4th) 671, 104 O.A.C. 161, 12 R.P.R. (3d) 193, 74 A.C.W.S. (3d) 882 (C.A.); Chandra v. Chandra, 1999 18960 (NL CA), [1999] N.J. No. 101, 45 R.F.L. (4th) 181, 174 Nfld. & P.E.I.R. 136, 87 A.C.W.S. (3d) 1150 (C.A.); [page762] Currey v. Currey, 2002 49561 (ON SC), [2002] O.J. No. 5943, 26 R.F.L. (5th) 28 (S.C.J.); Grant-Hose v. Grant-Hose, 1991 12846 (ON SC), [1991] O.J. No. 314, 32 R.F.L. (3d) 26 (U.F.C.); Gregoric v. Gregoric (1990), 1990 6662 (ON SC), 4 O.R. (3d) 588, [1990] O.J. No. 1692, 39 E.T.R. 63, 28 R.F.L. (3d) 419, 22 A.C.W.S. (3d) 1131 (Gen. Div.); Hartshorne v. Hartshorne, [2004] 1 S.C.R. 550, [2004] S.C.J. No. 20, 2004 SCC 22, 236 D.L.R. (4th) 193, 318 N.R. 1, [2004] 6 W.W.R. 1, J.E. 2004-723, 194 B.C.A.C. 161, 25 B.C.L.R. (4th) 1, 47 R.F.L. (5th) 5, 129 A.C.W.S. (3d) 748; Klinger v. Klinger, [1993] O.J. No. 170, 38 A.C.W.S. (3d) 122 (Gen. Div.); Lay v. Lay (2000), 2000 5669 (ON CA), 47 O.R. (3d) 779, [2000] O.J. No. 985, 184 D.L.R. (4th) 652, 131 O.A.C. 47, 4 R.F.L. (5th) 264, 95 A.C.W.S. (3d) 1098 (C.A.) [Leave to appeal to S.C.C. dismissed [2000] S.C.C.A. No. 369]; Panzer v. Zeifman (1978), 1978 1658 (ON CA), 20 O.R. (2d) 502, [1978] O.J. No. 3456, 88 D.L.R. (3d) 131, [1978] 2 A.C.W.S. 327 (C.A.)

Statues referred to

Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.), s. 15.1 Family Law Act, R.S.O. 1990, c. F.3, ss. 56(1.1) [as am.], (4), 70(3) Family Law Reform Act, 1978, S.O. 1978, c. 2 Succession Law Reform Act, R.S.O. 1980, c. 488

William R. Clayton, for appellant. Glen R. Carey, for respondent.

The judgment of the court was delivered by

[1] ROSENBERG J.A.: -- On May 31, 1985, the appellant husband and respondent wife entered into a pre-nuptial agreement. They married the following day. Both parties had been married before and had houses over which they wanted to keep separate ownership. After a 17-year marriage, the parties separated and the wife sought to set aside the contract. Following a trial of the issue of whether the marriage contract is valid, Kennedy J. allowed the wife's application and set aside the contract.

[2] In my view, the appeal must be allowed, the judgment set aside and a new trial of the issue ordered.

The Facts

[3] The essence of the marriage contract was that the parties agreed to keep all of their real and personal property separate, including property that they brought into the marriage and that each acquired during the marriage. The agreement did not deal with spousal or child support.

[4] The parties gave conflicting versions of the circumstances under which the marriage contract was signed on May 31, 1985. For example, each claimed the other was the author of [page763] the contract. The trial judge found that the husband had prepared the contract, probably with some assistance from a lawyer, but that it was an amalgam of precedents. The contract was signed at the constituency office of Murray Elston, a lawyer and member of the provincial legislature. Mr. Elston's evidence tended to support the wife's version of events. The trial judge accepted Mr. Elston's evidence and rejected the husband's evidence where it conflicted with the wife's evidence. Mr. Elston testified that he did not provide any legal advice to either party and was essentially there to witness the signatures because of his previous relationship with both of them.

[5] The wife said that she was rushed into signing the contract because the husband told her that it had to be signed before they married. The marriage was to take place the next day and she was busy preparing for the event. She did not read the contract and had not obtained independent legal advice. She testified that she thought the contract dealt only with the homes that each owned. The trial judge found that during the marriage the parties conducted their affairs in accordance with what the wife understood to be the terms of the contract, namely that they would keep their real property separate.

[6] The wife testified that she did not get any financial disclosure from her husband. She was aware that he was employed at Ontario Hydro and was paying into a pension. She adduced no evidence of the existence of any assets that were not disclosed by the husband.

[7] The contents of the marriage contract can be summarized as follows: (1) Background: The parties contemplate marriage and each desires to have their rights and obligations with respect to property during the marriage and after separation determined in accordance with the agreement. (2) Agreement: The parties agree to be bound by the agreement. (3) Separate property: The parties retain sole ownership of their own property free from any claim by the other, including personal property and real estate. (4) Family residence: Each party will pay the expenses in respect of their personal residences. (5) Wills: The parties will maintain valid wills that are consistent with the terms of the agreement. [page764] (6) Property not to be Family Asset: Each party owns or may own with others their own separate property and neither will make a claim to possession of the other's property. (7) The Family Law Reform Act, 1978, S.O. 1978, c. 2: "All rights and obligations of the husband and wife, whether arising during marriage either before or after separation or upon and after divorce or annulment, including the rights and obligations of each of them with respect to: (a) possession of property, and (b) ownership in or division of property, are governed by this agreement which prevails over all provisions of [t]he Family [Law] Reform Act, 1978 or any successor." (8) Release of Rights to and Interest in Property: The parties release and discharge all rights that they have under the Family Law Reform Act or any other legislation or successor legislation, to any property, which the other has or may acquire. (9) Release of Rights to Estate: The parties release rights that they may have under the Succession Law Reform Act, R.S.O. 1980, c. 488, as amended by R.S.O. 1990, c. 26, or any successor legislation in each other's estate. (10) Voluntary Bequests: The parties do not waive any right to receive insurance, pension or similar benefits to which they may be entitled by right of survivorship or to receive gifts. (11) Each party is to be solely liable for any liens or encumbrances against their separate property. (12) Independent Legal Advice: "The husband and wife each acknowledge that he or she: (a) has had independent legal advice; (b) understands his or her rights and obligations under this agreement; and (c) is signing this agreement voluntarily."

Analysis

(1) Courts should respect domestic contracts

[8] In my view, the trial judge erred in his approach to this case. He made a number of errors that require that his judgment be set aside. For example, he held as follows at para. 66:

The [Family Law Act R.S.O. 1990, c. F.3] allows parties to enter into contracts for the purpose of arranging their affairs but the Court should be hesitant to enforce these. [page765]

[9] However, the law is to the contrary. In Hartshorne v. Hartshorne, 2004 SCC 22, [2004] 1 S.C.R. 550, [2004] S.C.J. No. 20, at para. 9, Bastarache J., speaking for the majority, said this:

The authorities generally agree that courts should respect private arrangements that spouses make for the division of their property on the breakdown of their relationship. This is particularly so where the agreement in question was negotiated with independent legal advice. (Emphasis added)

[10] And again, at paras. 36 and 67 of the same case:

Conversely, in a framework within which private parties are permitted to take personal responsibility for their financial well-being upon the dissolution of marriage, courts should be reluctant to second-guess the arrangement on which they reasonably expected to rely. . . . . .

Once an agreement has been reached, albeit a marriage agreement, the parties thereto are expected to fulfill the obligations that they have undertaken. A party cannot simply later state that he or she did not intend to live up to his or her end of the bargain . . . . However, in a framework within which private 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. (Emphasis added)

[11] In this case, the trial judge accepted the wife's evidence that she did not have independent legal advice. Nevertheless, there is no presumption that the courts will be hesitant to enforce a pre-nuptial agreement. The burden is on the party seeking to escape the effect of the agreement to show that there are grounds for setting it aside. The lack of independent legal advice is a factor for the court to consider along with all the other circumstances.

(2) The husband misrepresented when the contract must be signed

[12] Regrettably, the trial judge's reasons for setting aside the contract are far from clear. He appeared to identify several grounds for setting it aside. First is the husband's misrepresentation that to be valid the agreement had to be signed before the marriage. The trial judge said this at para. 68:

He is the one who told her that it had to be signed before the marriage or it would not be valid. This is misrepresentation.

[13] This misrepresentation is of concern because it imposed a time pressure upon the wife. However, in contract law, a misrepresentation must be material in the sense that a reasonable [page766] 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 1658 (ON CA), 20 O.R. (2d) 502, [1978] O.J. No. 3456 (C.A.) and Beer v. Townsgate I Ltd. (1997), 1997 976 (ON CA), 36 O.R. (3d) 136, [1997] O.J. No. 4276 (C.A.).

[14] In this case, the trial judge made no attempt to apply the law respecting misrepresentation and in particular made no finding that this misrepresentation was material to the wife's decision to sign the agreement.

[15] Moreover, some of the trial judge's findings immediately after this part of his reasons suggest that this misrepresentation by the husband was not material, that it was always the intention of the parties to enter into a pre-nuptial agreement. For example, the trial judge said this at paras. 69-72:

The applicant knew and understood that she was signing an agreement to keep her real estate separate from her husband's and vice versa.

She has some knowledge about marriage breakdown because she supported the respondent who had a similar experience with his first marriage and separation. Also Mrs. Dougherty assisted her husband [in] champion[ing] the cause of male spouses in marriage breakdown situations, by composing and writing letters on her husband's behalf to members of Parliament.

Mr. Dougherty was a member of a group called Fathers for Justice.

Letters to various members of Parliament which he and Mrs. Dougherty wrote were made exhibits and they reflect the couple's special interest in this area of the law.

[16] Further, the wife testified that they had discussed entering into a marriage contract even before they talked seriously of marriage. There was never any question that they would enter into such an agreement. As she said, "If Mr. Dougherty wanted to have a marriage contract, I wasn't in objection with that because I did have a house with a similar sentimental value." Indeed, the parties had discussed the need to have the agreement signed before the wedding less than a week prior to their attendance at Mr. Elston's office. The wife was expecting to sign the contract very soon thereafter.

[17] The trial judge also did not expressly find that the misrepresentation induced the wife to enter into the agreement and there was evidence contrary to any suggestion of inducement. For example, Mr. Elston, whose evidence the trial judge accepted, testified that both parties appeared to come to the office voluntarily. They appeared attentive to what they were doing while there and appeared to take the signing seriously. [page767] He had no concerns that either party was uncomfortable about signing the document. On cross-examination, the wife testified that she went to Mr. Elston's office voluntarily and that she could have chosen not to go if she did not wish to as no one "twisted [her] arm" or forced her. She further admitted that at the time of the signing she did not make any statement to the effect that she did not wish to sign, nor did she express concern or a desire for more time.

[18] The real complaint by the wife appears to be that she understood that the contract would only deal with their real estate whereas the agreement provides that all of the parties' real and personal property would be kept separate. However, this misunderstanding flowed from her failure to read the contract, or to read it carefully. It is not apparent how it can be said that the husband's misrepresentation as to timing vitiated her ability to understand the contents of the contract. She may have been distracted about the upcoming marriage and may have felt rushed, but she nevertheless had the opportunity to read the contract.

[19] In view of the trial judge's failure to properly apply the test for misrepresentation, to the extent that his decision depended on that finding, it cannot stand.

(3) The contract does not provide for child or spousal support

[20] The second basis for setting aside the agreement appears to be that the agreement did not provide for child or spousal support. The trial judge said this at paras. 78, 155, 158 and 167:

Common sense dictates that the applicant would not have left her work and raised her family's only child had she known that the agreement which she signed did not provide for support in any eventuality. She simply did not understand the agreement. . . . . .

As further evidence of this lack of care is the fact that the marriage contract is not exhaustive and does not provide for the eventuality of children. It is certainly reasonably foreseeable that there could be children of this union despite preventative measures. . . . . .

A child, Steven, was born and the parties both have had to encroach upon their own assets to provide for proper child support. The parties suggest that these assets were to be protected by the agreement. The contract is therefore not suitable for the change of circumstances. . . . . .

I find in the circumstances that it cannot be said that the parties had an informed understanding of what they signed. It further was unsuitable to [page768] the purposes and interests of the parties in many ways, [for] example, child support, spousal support and equalization.

[21] However, there is no legal basis for setting aside an agreement dealing with property merely because it does not also deal with support, especially child support. This agreement does not preclude the wife from applying for spousal and child support. In fact, an agreement that is unfair when considered solely from the point of view of the division of property may be acceptable when spousal and child support is considered: see Hartshorne at paras. 51 and 64. In any event, the terms of a domestic contract cannot override the court's jurisdiction with respect to child support: see s. 15.1 of the Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.), and s. 56(1.1) of the Family Law Act.

[22] If the trial judge set aside the contract because it did not deal with child and spousal support, he erred. For this reason as well, the judgment cannot stand.

(4) The parties did not understand the terms of the contract

[23] The trial judge also appears to have found as a basis for setting aside the contract that the parties could not have understood its terms without legal advice. He stated at para. 160:

It is not reasonable or practical for the parties to have understood this agreement without legal advice. The parties have limited education.

[24] This finding raises the question of the application of s. 56(4) of the Family Law Act, which sets out the grounds for setting aside a domestic contract under that Act:

56(4) 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. (Emphasis added)

[25] However, I agree with Granger J. in Gregoric v. Gregoric (1990), 1990 6662 (ON SC), 4 O.R. (3d) 588, [1990] O.J. No. 1692 (Gen. Div.) that s. 56(4) does not operate retrospectively to govern agreements made before the Family Law Act came into force: see also Klinger v. Klinger, [1993] O.J. No. 170, 38 A.C.W.S. (3d) 122 (Gen. Div.) and Currey v. Currey, 2002 49561 (ON SC), [2002] O.J. No. 5943, 26 R.F.L. (5th) 28 (S.C.J.). Section 56(4)(b) is broader than the common law [page769] grounds for setting aside a contract, such as non est factum or unconscionability.

[26] The findings of the trial judge would not support setting aside the contract on common law grounds such as non est factum, duress or unconscionability. While the failure to understand the nature of the contract would be a basis for setting it aside at common law, the trial judge made no such finding. The wife knew she was signing a pre-nuptial agreement dealing with property. See Grant-Hose v. Grant-Hose, 1991 12846 (ON SC), [1991] O.J. No. 314, 32 R.F.L. (3d) 26 (U.F.C.) and Chandra v. Chandra, 1999 18960 (NL CA), [1999] N.J. No. 101, 45 R.F.L. (4th) 181 (C.A.).

(5) There was no financial disclosure

[27] The trial judge also found that the necessary financial disclosure had not been made before the agreement was signed. He said this at para. 162:

It is the finding of this court that there was no reasonable financial disclosure between the parties when the contract was entered into in the nature of that contemplated by the Statute. The fact that the applicant knew about the existence of a Hydro pension does not mean that she had a full actuarial appreciation of its value, and further, that she may have had a significant interest in it. (Underlining in original, italics added)

[28] The difficulty with this finding is that there was no evidence that the husband failed to disclose significant assets. As the trial judge pointed out, the wife knew that the husband had a pension from his employer but there was no evidence that the wife had a significant interest in it.

[29] The trial judge's finding that the wife "may" have had a significant interest in the pension that was not disclosed was not sufficient to prove that the husband failed to disclose "significant assets".

(6) The parties released their property rights under successor legislation

[30] The trial judge was also concerned with paras. 8 and 9 of the agreement where the parties release the rights they may have in the other's property and estate. The trial judge said this at para. 165:

It is the finding of this court that the parties could not have understood the full effect and impact of Paragraphs 8 and 9 of the agreement. This release specifically discharges the parties' rights that they may have or acquire under the laws of any jurisdiction and releases any rights they may have in succeeding statute provisions in Ontario, and I find it difficult to understand that such a deprivation could be valid in the circumstances of this case. (Underlining in original) [page770]

[31] In my view, this holding is inconsistent with s. 70(3) of the Family Law Act and this court's decision in Lay v. Lay (2000), 2000 5669 (ON CA), 47 O.R. (3d) 779, [2000] O.J. No. 985 (C.A.). There is nothing in the Family Law Reform Act, the Family Law Act or any other legislation that prevents the parties from contracting out of successor regimes for distribution of property.

[32] To the contrary, s. 70(3) specifically contemplates that the parties may do so and provides as follows:

70(3) A separation agreement or marriage contract that was validly made before the 1st day of March, 1986 and that excludes a spouse's property from the application of sections 4 and 8 of the Family Law Reform Act, being chapter 152 of the Revised Statutes of Ontario, 1980, (a) shall be deemed to exclude that property from the application of section 5 of this Act; and (b) shall be read with necessary modifications.

[33] Like this case, Lay concerned a domestic contract entered into under the Family Law Reform Act. Paragraphs 4 and 5 of the agreement in Lay provided as follows [at para. 6]:

4. Separate Property

The wife will retain sole ownership, control and enjoyment of the Property free from any claim by the husband.

5. The Family Law Reform Act (Ontario)

All rights and obligations of the husband and the wife, whether arising during marriage either before or after separation, or upon and after divorce or annulment, including the rights and obligations of each of them with respect to: (a) possession of the Property; and (b) ownership in or division of the Property,

are governed by this agreement which prevails over all provisions of the Family Law Reform Act (Ontario) or any successor.

[34] This court held that that paras. 4 and 5 of the contract in Lay were sufficiently clear to oust the property regime in the successor legislation, the Family Law Act, in accordance with s. 70(3) of that Act. The agreement in this case contains a clause that is virtually identical to para. 5 of the Lay agreement.

[35] Speaking for the court at para. 16, Abella J.A. held as follows:

The essence of this contract is that the defined property was to be the wife's alone for all purposes, regardless of any provisions of the Family Law Reform Act or any successor legislation. The husband contracted out of any claim to a share in this property. It is difficult to see how the parties could have made their intentions clearer that the property was to be exempt from [page771] any otherwise applicable matrimonial property regimes, including the one set out under ss. 4 and 8 of the Family Law Reform Act.

[36] In the same way, paras. 8 and 9 of the agreement are valid contractual terms that reflect a clear intention to exempt all property from the legislative grasp of the Family Law Reform Act, the Succession Law Reform Act or any successor legislation.

Disposition

[37] In light of the trial judge's error in his application of the law of material misrepresentation and the other errors, the trial judge's judgment cannot stand. Unfortunately, because of these errors and the lack of findings of fact untainted by the errors, it is not open to this court to come to its own conclusion about whether the contract should be set aside. Accordingly, I would allow the appeal, set aside the judgment and order a new trial of the issue. The appellant is entitled to his costs of the appeal which I would fix at $8,000 inclusive of GST and disbursements. I would leave it to the judge hearing the new trial to dispose of the costs of the first trial.

Appeal allowed.