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Setting Aside a Domestic Contract or Separation Agreement



Introduction:

I do a lot of separation agreements and domestic contracts. Clients often ask me if what they are signing is absolutely final and if it can be challenged at a later point in time. I tell them that it depends on the case. Clearly such a contract or agreement may be set aside if the circumstances demand it. What exactly does the court look for in order to set aside such an agreement?


Section 56 (4) of the Family Law Act states as follows: “SETTING ASIDE DOMESTIC CONTRACT - A court may, on application, set aside the 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. R.S.O. 1990,c.F.3, s.56 (4).” This section provides that a domestic contract may be set aside if one of the parties fail to make full financial disclosure. Even if the contract is valid according to general principles of the law of contract, it may still be set aside under section 56 (4) (a) if a party has failed to disclose significant assets or liabilities.[1] It is a discretionary provision, as it provides that a court may set aside a domestic contract on the basis of the three criteria set out in section 56 (4).

A 2003 case by Justice Olah in Baxter v Baxter, 2003 CanLII 1992 provides appropriate guidance.


The judge provides the following factors as guidance:


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

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 (Demchuk);


3. Whether there was concealment or misrepresentation (Demchuk);

4. Whether there was duress, or unconscionable circumstances (Demchuk);

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

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 (Demchuk).

[7] In Francis v. Baker (1997), 1997 CanLII 12242 (ON SC), the court refused to set aside the parties' separation agreement on the basis of lack of financial disclosure, even though the husband acquired a large amount of money shortly after the separation. The wife had no proof that the money existed at the time of separation or when the agreement was signed. At that time, the husband prepared a statement of net worth for the bank and did not disclose other assets. However, the case at bar is distinguishable as the sale of the shares took place prior to the signing of the separation agreement, such that the funds were available at that time.

[8] In Dochuk v. Dochuk (1999), 1999 CanLII 14971 (ON SC), the court held that a person seeking to set aside a contract on the basis of non-disclosure must prove that an omission was material and operative. In this case, although the husband had failed to disclose significant details about his retirement savings during the negotiations of the parties' separation agreement, the court refused the wife's application to have the agreement set aside. The court held that the undisclosed assets would not have made any difference in negotiations. The facts of the Dochuk case were such that the wife did have some knowledge of the existence of the pension plan, but did not pursue disclosure as she wanted to follow strict a timeline. She needed a settlement as quickly as possible in order to be free of a mortgage and other liabilities.

[9] In Demchuk v. Demchuk (1986) 1986 CanLII 6295 (ON SC), the court held that non-disclosure does not necessarily render the agreement inoperative. The court applied general principles of contract law to find that a mistake, misrepresentation or actionable non-disclosure only affects the validity of the contract where it is material and operative. In this case, the respondent wife argued that the separation agreement should be rescinded or amended on the basis of the provisions of section 56 (4). She argued that the husband failed to disclose his pension and deferred profit-sharing plan at the time of the making of the agreement. The court found as a fact that, in the course of negotiations, the wife had knowledge of the pension and deferred profit-sharing plan, and was informed by her solicitor that she could obtain full financial disclosure on application to the court. However, the wife elected to reject that advice, preferring to settle all outstanding issues out of court. Here, as the non-disclosure did not amount to an "inducement", the contract remained valid. This case is similar to the case at bar, in that the wives in both instances had knowledge of the asset in question. However, in Demchuk the wife specifically rejected the opportunity to obtain full financial disclosure about the pension plan. Demchuk is distinguishable from Baxter, where the wife believed that she had full knowledge of the value of her husband's shares when she signed the agreement.

Applying the above principles, Justice Olah indicated that in that case, "I believe that the failure to disclose the sale of the shares and the sale price does constitute a material non-disclosure. While it is true, as argued by the husband, that the sale took place two years after the date of separation, and therefore may not be relevant to the net equalization payment, the sale still, nonetheless, resulted in income to the payor and therefore, at the very least, was relevant to the determination of child and/or spousal support."

[11] Further, the minutes of settlement state that the provisions dealing with child support and those dealing with the division of property are "inextricably intertwined". Accordingly, it would not be possible for the court to simply set aside those provisions dealing with child support without disrupting the balance of the agreement.

[12] The Family Law Rules, as well as the Family Law Act contemplate that custody, access, support and property agreements, as well as minutes of settlement relative to these issues are contracts of utmost good faith. Although there may not be a general duty to disclose all in bargaining before entering minutes of settlement on issues of custody, access, child support and property, there are mandatory statutory and rule disclosure requirements in respective of these issues to which parties must strictly adhere. The husband had a positive obligation to disclose in advance of the execution of the minutes of settlement.

[13] In light of the above, the entire agreement and the order is set aside.

Analysis:

The lesson is very simple. If one of the parties does not fully disclose all finances, that means that party is putting the other party at a serious disadvantage financially because you’re pulling the wool over their eyes in not being transparent with them. This has consequences. The most serious consequences is to set aside the agreement. In other words, be honest, open and transparent about all your finances. Do not hide anything. Invariably you will be found out at a later point in time.


At Shankar Law, we are happy to assist and guide you through whatever challenges you have in your spousal and matrimonial life. We work in three counties: Huron, Bruce, and Grey and span several cities (Southampton, Kincardine, Goderich, Wiarton, Hanover, Dundalk, Walkerton, Meaford, Markdale, Chatsworth), through our 3 locations in Port Elgin, Wiarton and in Owen Sound.


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