A. Types of Domestic Contracts

Author:Julien D. Payne - Marilyn A. Payne

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The following analysis will focus on "domestic contracts" insofar as they have been statutorily defined in Ontario. Even in the absence of statutory provisions, however, married and unmarried cohabitants1are legally entitled to enter into binding and enforceable contracts. In some circumstances, the law restricts the extent to which spouses or unmarried cohabitants can contractually waive rights that would otherwise vest in them pursuant to statute. For example, the splitting of credits under the Canada Pension Plan between divorced spouses cannot be circumvented by a spousal contract or separation agreement, except where provincial legislation specifically permits such contracting out.2In addition, courts are entitled to override the terms of spousal contracts that purport to waive child support rights and obligations.3Domestic contracts, as defined under provincial and territorial statutes in Canada, are formal written contracts signed by the parties and witnessed, whereby married couples and unmarried cohabitants may regulate their rights and obligations during their relationship or on its termination. In Ontario, there are five different kinds of domestic contracts: (1) marriage contracts; (2) cohabitation agreements; (3) separation agreements; (4) paternity agreements; and (5) family arbitration agreements.4

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The right of men and women to enter into agreements or domestic contracts to regulate their affairs is expressly recognized by statute in several provinces and territories5but the legislation is not uniform throughout Canada. Because space does not permit a detailed description of the different provincial and territorial statutes, the following analysis will examine the Ontario legislation, which has provided the precedent for similar legislation in several other provinces. Before doing so, however, it is pertinent to review the judgments of the Supreme Court of Canada in Hartshorne v Hartshorne6and Rick v Brandsema.7Although both of these cases focused on the British Columbia Family Relations Act and that statute has now been superseded by the Family Law Act,8which came into force on 18 March 2013, the reasons for judgment in both cases will continue to strongly influence courts across Canada, including those in British Columbia, with respect to the effect of prenuptial and post-nuptial agreements on matrimonial property rights. The former case dealt with the impact of a marriage contract on an application for spousal property division. While the judgment specifically addresses that particular topic, it also provides insight into how such contracts might be interpreted and applied under statutory property regimes in other provinces and territories. In Hartshorne v Hartshorne, the parties cohabited for twelve and one-half years and were married for nine of those years. It was a second marriage for both of them. They had two children. After the birth of their first child, the wife, a lawyer, withdrew from the practice of law to assume a full-time homemaking and child caregiving role. The husband, also a lawyer, made it clear to her prior to their marriage that he would never again allow his property to be divided by reason of a marriage breakdown. The husband brought assets of $1.6 million into the marriage, which included his law practice, whereas the wife had no assets and was heavily in debt at the time of the marriage. At the husband’s insistence, the spouses executed a marriage agreement declaring the

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parties separate as to property, subject to the wife being entitled to a 3 percent interest in the matrimonial home for each year of marriage up to a maximum of 49 percent. The wife received independent legal advice that the agreement was grossly unfair but signed it with a few amendments, including her right to spousal support. Pursuant to the agreement, the wife was entitled to property valued at $280,000 on the spousal separation and the husband’s entitlement was to property worth $1.2 million. In subsequent divorce proceedings, the husband sought to rely on the agreement to avoid the operation of the statutory property regime in British Columbia while the wife contended that the agreement should be set aside on common law principles or that the distribution of assets should be reapportioned under section 65(1) of the Family Relations Act (BC) because the agreement was unfair. The trial judge concluded that the agreement was unfair and ordered a 60:40 reapportionment of most of the assets, including the husband’s law practice, in favour of the husband. Each spouse was held entitled to a one-half interest in the matrimonial home and contents. This judgment was upheld by a majority judgment (2-1) of the British Columbia Court of Appeal. On further appeal to the Supreme Court of Canada, the husband’s appeal was allowed by a majority of 6-3. In the majority judgment, Bastarache J, with whom McLachlin CJ and Iaccobucci, Major, Arbour, and Fish JJ concurred, formulated the following principles:

1) The primary policy objective underlying the statutory property regime in British Columbia is to achieve fairness.

2) Marriage agreements are expressly recognized by the Family Relations Act (BC) as providing an appropriate means of regulating the division of property upon the breakdown or dissolution of marriage. As a prerequisite to enforceability, however, any such agreement must operate fairly at the time of the property division. Otherwise, judicial reapportionment of the property pursuant to section 65(1) of the Family Relations Act will be available to achieve fairness.

3) To implement the legislative intention, courts must encourage parties to enter into marriage agreements that are fair and to respond to changing circumstances by revisiting and revising their agreements from time to time to ensure continued fairness. Parties should also be encouraged to take personal control over their own financial well-being upon the dissolution of marriage and courts should be reluctant to second-guess the arrangement upon which both spouses reasonably expected to rely. Spouses may choose to structure their financial affairs in a number of ways and it is their prerogative to do so, provided that the legal boundaries of fairness are observed.

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4) The outcome of matrimonial proceedings should reconcile respect for the intentions of the spouses and the assurance of an equitable result.

5) There is no hard and fast rule regarding the judicial deference to be accorded to marriage agreements as compared to separation agreements. In some cases, for example, where a marriage agreement is intended to protect premarital assets or an anticipated inheritance for the children of a prior marriage, marriage agreements may be accorded a higher degree of deference than separation agreements. In other cases, marriage agreements may be accorded less deference than separation agreements because the former type of agreement may be anticipatory and fail to take account of the financial means, needs, or other circumstances of the parties as they exist at the time of the marriage breakdown.

6) In addressing the issue of judicial deference to spousal agreements in the context of property division on marriage breakdown, the court may apply Miglin v Miglin9to support the general legal proposition that some weight should be given to marriage agreements. Miglin v Miglin is also helpful for its general propositions that "a court should be loathe to interfere with a pre-existing agreement unless it is convinced that the agreement does not comply substantially with the overall objectives" of the governing legislation and that the court "must look at the agreement or arrangement in its totality, bearing in mind that all aspects of the agreement are inextricably linked and that the parties have a large discretion in establishing priorities and goals for themselves." Beyond these parameters, however, the Miglin judgment, which deals with the effect of a separation agreement on an application for a support order under the Divorce Act, cannot be directly applied to regulate property distribution on the dissolution of marriage because this would distort the analytical structure provided by the Family Relations Act (BC).

7) In determining whether a marriage agreement is unfair so as to entitle the court to reapportion property pursuant to section 65(1) of the Family Relations Act, the court must determine whether the agreement is substantively fair when the application for reapportionment is made. The essence of this inquiry is whether the circumstances of the parties on their separation were within their...

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