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Marriage Contracts in Ontario

4/26/2017

Today, the number of people getting divorced is steadily rising – recent statistics show about 48% of first marriages end in divorce.  Understandably, if you are getting married, you may want to imagine that the marriage will last and that a marriage contract is unnecessary. A marriage contract is commonly called a prenuptial agreement, or a “pre-nup” by laypeople. Although you may not understand the need for a marriage contract, it is sometimes imperative to think about the consequences of the martial relationship coming to an end.

1. Reasons to Negotiate a Marriage Contract

A marriage contract is a legal agreement between two married people, or two people who intend to be married. There are many reasons why a couple may agree to a marriage contract, but generally, the following reasons are the most common:

1.    A marriage contract can be used to make arrangements for dividing property brought into the marriage and property earned during the marriage that is different than the default equal division of property rules.  In addition to this, an agreement can be used to make special arrangements about particular matters, such as partnerships or corporations in which one/both parties may have an interest.

2.    If a party is substantially wealthy, or has an asset that is increasing in value, that party might want to have the other party to agree to not divide that property or to avoid having to account for the increase in the value of existing property. This increase in value will normally have to be divided with the other party, but a marriage contract can avoid the equalization.

3.    A marriage contract can be used to establish, limit or completely avoid the payment of spousal support in the event that the martial relationship comes to an end.  Alternatively, the other party may want to limit the amount and/or duration of any spousal support to be paid upon separation.

The legal authority for a marriage contract is provided for in section 52 of the Family Law Act, as follows:

Marriage contracts

52. (1) Two persons who are married to each other or intend to marry may enter into an agreement in which they agree on their respective rights and obligations under the marriage or on separation, on the annulment or dissolution of the marriage or on death, including,

(a) ownership in or division of property;

(b) support obligations;

(c) the right to direct the education and moral training of their children, but not the right to custody of or access to their children; and

(d) any other matter in the settlement of their affairs.  R.S.O. 1990, c. F.3, s. 52 (1); 2005, c. 5, s. 27 (25).

Rights re matrimonial home excepted

(2) A provision in a marriage contract purporting to limit a spouse’s rights under Part II (Matrimonial Home) is unenforceable.  R.S.O. 1990, c. F.3, s. 52 (2).

Overall, a marriage contract can be prepared for couples who are planning to get married, or for people who are already married.  The parties may agree on a set of rights and obligations in the event of separation, annulment, divorce or death. 

The most common reason why one spouse insists on a marriage contract is because they already own a home before the marriage, and in the event of a divorce or separation, they would like to avoid dividing the value of the home with the other party. Normally, when one spouse brings property into a marriage, the value of the property is deducted from the calculation of Net Family Property, and not divided in the equalization payment. However, s.4(1) of the Family Law Act defines “net family property” to include the value of a matrimonial home in the calculation of an equalization payment, even if the person owns the home before the marriage, as such:

“net family property” means the value of all the property, except property described in subsection (2), that a spouse owns on the valuation date, after deducting,

(a) the spouse’s debts and other liabilities, and

(b) the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage, after deducting the spouse’s debts and other liabilities, other than debts or liabilities related directly to the acquisition or significant improvement of a matrimonial home, calculated as of the date of the marriage; (“biens familiaux nets”)

To avoid the division of the value of a matrimonial home that one spouse owned before the date of marriage, the parties can agree in the marriage contract to provide the spouse that owns the home with a deduction in the calculation of his or her Net Family Property for the value of the matrimonial home at the date of marriage or separation (so they would be ‘contracting out’ of the definition of net family property in s.4(1) of the Family Law Act).

The overall effect is that, if the parties were to separate and a divorce application is commenced, then the spouse that owned the home before the marriage would not divide the value of the matrimonial home with the other party.

The parties could also agree that if the matrimonial home were to increase in value during the marriage, which is very common, then the spouse that owned the home before the marriage does not have to divide the increase in the value of the matrimonial home with the other party.

2. Restrictions on Marriage Contracts

One of the most important restrictions on a marriage contract is provided at s.52(2) of the Family Law Act, as seen above, which is that the contract cannot limit a spouse’s rights in the matrimonial home found in Part II of the Act. These rights include the right of possession (e.g. to occupy and live in the home) and the right to nullify any sale or mortgage of the home made without the other spouse’s knowledge.

Additionally, s.52(1)(c) of the Family Law Act provides that the right to custody or access to the children cannot be decided in a marriage contract. The case law on marriage contracts indicates that such a provision is simply regarded as the past intention of the parties at the time the contract was made in relation to the issues of custody or access. In the event of a divorce or separation of the two parties, the provisions of a marriage contract with respect to the child may be disregarded for the best interest of the child, as provided in section 56(1) of the Family Law Act:

Provisions that may be set aside or disregarded

Contracts subject to best interests of child

56. (1) In the determination of a matter respecting the education, moral training or custody of or access to a child, the court may disregard any provision of a domestic contract pertaining to the matter where, in the opinion of the court, to do so is in the best interests of the child.  R.S.O. 1990, c. F.3, s. 56 (1); 1997, c. 20, s. 10 (1)

The right of custody or access to a child of the marriage is always decided according to the “best interest of the child” analysis under s.16 of the Divorce Act, despite what the marriage contract may provide on those issues.

3. Setting aside a Marriage Contract

In the event of a marital breakdown, one party may choose to attempt to “set aside,” or nullify, a marriage contract. Section 56(4) of the Family Law Act outlines when a court may set aside an entire agreement, or single provisions in a marriage contract:

Setting aside domestic contract

(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.  R.S.O. 1990, c. F.3, s. 56 (4).

In the Ontario Court of Appeal decision of LeVan v. LeVan, 2008 ONCA 388, leave to appeal to the Supreme Court refused, [2008] S.C.C.A. No. 331, the Court of Appeal set out a two-part test to determine whether a domestic contract, such as a marriage contract, should be set aside under s.56(4) of the Family Law Act:

“First, the court must consider whether the party seeking to set aside the agreement can demonstrate that one or more of the circumstances set out within the provision have been engaged. Once that hurdle has been overcome, the court must then consider whether it is appropriate to exercise discretion in favour of setting aside the agreement.”

This section of the Family Law Act focuses on the issue of unconscionability and the circumstances in which a marriage contract was formed. For example, if one party failed to disclose significant assets, debts or liabilities when the contract was made, or one party did not understand the consequences of the agreement, a court may decide to set aside the contract.

The general law of contract also applies here, so allegations of fraud, misrepresentation, duress, mistake, and undue influence may also be used to set aside a marriage contract.

The current case law in Ontario is replete with examples of individuals attempting to set-aside a marriage contract. The most common reason is that the other party did not disclose a significant asset, debt, or liability when the contract was made. Proper financial disclosure is absolutely key for a marriage contract to survive the test of time. Each party must know the exact financial circumstances of the other party at the time the agreement was made.

Another common allegation is that one party did not understand the consequences of the marriage contract, or that the party was forced to signed the agreement under duress or undue influence.

4. The Compact: New Standard Steps to Negotiate a Marriage Contract

A fellow family law lawyer in Ontario, Brahm Siegel, developed a set of guidelines in order to avoid the common problem of marriage contracts being challenged once the parties separate. This set of standard steps is called the Compact. In developing the Compact, Mr. Siegel attempted to eliminate the possibility of a party successfully setting aside a marriage contract in the future. These procedural steps are put in place in order for the contract to be consistent, fair, and to ensure that the terms reflect full participation by each side before the contract is signed. 

Currently, some family law lawyers in Ontario, including myself, will refuse to work on a marriage contract until both parties agree to adhere to all or most of the Compact procedure. In my opinion, family law and divorce lawyers in Ontario are all indebted to Mr. Siegel for developing a standardized procedure to negotiate a marriage contract.

Below are Mr. Siegel’s seven steps for negotiating a marriage contract:

1.    No work is to be started on a file unless the wedding is at least four months away.

2.    Each party must have his/her own lawyer from the outset, before any negotiations begin.

3.    Each party provides a financial disclosure brief before any negotiations begin.

4.    At least one four-way, without prejudice meeting shall be held.

5.    The lawyers fully report to the clients in writing after the four-way meeting.

6.    A term sheet, or list of important clauses, is prepared and approved of before the agreement is drafted.

7.    Finally, the agreement is drafted and signed with certain “key clauses”.

5.  McCain v. McCain - Marriage Contracts must be Fair and Provident, Now and in the Future

One of the reasons that Mr. Siegel developed the Compact is because of the impact of the high-profile case of McCain v McCain. The consequences of this case sent many family law lawyers into a state of panic. One of the parties in McCain v McCain was the heir to the McCain Foods Canada corporate empire. Needless to say, a person that happens to be extremely wealthy would benefit from insisting on a marriage contract.

However, there were many key problems with how the marriage contract in McCain v McCain was negotiated and ultimately drafted and signed. We can see from the McCain v McCain case that a marriage contract is only as good as the process that was used to create it, which is why Mr. Siegel developed the Compact.

The facts underlying the case of McCain v. McCain are certainly explosive. Christine and Michael McCain were married for thirty years. Fifteen years into their marriage, Michael’s father insisted that the married couple get a marriage contract. In the event that the two refused, Michael’s father said he would disinherit Michael since his father wanted to protect the family assets and business interests.

In the marriage contract in McCain, Christine McCain agreed to waive her rights to an equalization of property and spousal support in return for a lump sum payment of $7 million dollars, and title to the matrimonial home. That is certainly not a small amount of money, except for one thing: Michael McCain’s net worth at the time of separation was approximately $500 million dollars. Not the best deal for Christine McCain.

This case demonstrates that problems with the procedure of how a marriage contract was negotiated may lead to the agreement being set aside, and also that an agreement that was once fair and enforceable may become unfair and unenforceable over time.

Justice Greer in McCain v McCain posed the question of how Christine could have possibly refused to sign the agreement under the circumstances. Although she received legal advice of her own, Christine had little knowledge about her husband’s financial affairs at the time and had no way of knowing what she was giving up by signing the agreement. She successfully argued that she experienced psychological distress and duress by her father-in-law threatening to disown her then husband unless she signed the agreement. She thought that her husband, Michael, would leave her and divorce her unless she signed the agreement.

Justice Greer of the Superior Court of Justice held that the contract was not enforceable in a long-term marriage such as in the case of the McCain’s thirty-year marriage, and the contract was simply “unfair, improvident and unconscionable in the circumstances of the case.” Even if the agreement was fair when it was signed, over time it had become unconscionable because the husband had acquired immense wealth after the agreement was made (again, he was worth approximately $500 million dollars at the time of separation).

Given the lack of financial disclosure, as well as the duress by her father-in-law, the Court held that Christine could not have foreseen what her future financial situation would have been by agreeing to waive spousal support. The distressing circumstances of the contract's negotiation and execution, the improvident result for the wife, and the husband's new wealth were sufficient to set aside the spousal support provisions of the contract.

Christine was awarded $175,000.00 per month in interim spousal support, and the husband was ordered to pay the mortgages on the wife’s properties. This was the highest award of interim spousal support in Canadian legal history at the time. The wife was to be made beneficiary of the husband’s life insurance policies and covered under the health, medical and dental plans. The parties were to continue making full financial disclosure.

Many family law lawyers in Ontario, including myself, have reservations about the court holding that the agreement in McCain was unconscionable because it was “improvident,” meaning, in these circumstances, that the agreement did not provide enough property or money to one side to be considered “fair” or “conscionable.” The very reason why many clients hire a family law lawyer for a marriage contract is precisely for the agreement to be ‘improvident’ to one party, most commonly so that one spouse does not receive spousal support or the default 50/50 division of property as contemplated by the Family Law Act and the Divorce Act. Many may ask why they would even bother hiring a family law lawyer in order to create a marriage contract that must be “fair and provident”? Most people insisting on a marriage contract want the exact opposite.

Nevertheless, after the decision in McCain v. McCain, not only does a marriage contract need to be carefully thought out, it must be “fair and provident” both at the time the agreement was made and in the future. This case best demonstrates the importance of the time and effort needed to carefully negotiate a marriage contract in order to avoid any future attempts to set aside the agreement.

6. Are Marriage Contracts Enforceable?

Again, when following the steps of the Compact as developed by Braham Siegel, many of the problems that arose in the McCain v McCain case are simply avoided. Many recent decisions of the Superior Court of Justice demonstrate that if proper steps are taken, then a marriage contract will be upheld as valid and enforceable even if the agreement is challenged in court.

For instance, in the recent case of Balsmeier v. Balsmeier, [2016] O.J. No. 667, the parties had met on an online dating website, and had an “on-again, off-again” relationship. Eventually, they were engaged to be married, and decided to make a marriage contract before the wedding. The contract provided that there would be no equalization of net family property if the parties were to divorce, but the husband had agreed to pay $6,000.00 per month in spousal support for 36 months. The agreement also provided that the husband would transfer 10% of the equity in his home to his wife if their marriage lasted to their fifth anniversary. The couple had a chaotic marital relationship and they separated after about three years of marriage.

The wife in Balsmeier argued that the marriage contract should be set aside on all of the grounds set out in s.56(4) of the Family Law Act, and she requested additional spousal support than the amount provided for in the agreement.

Justice Fryer of the Superior Court of Justice upheld the marriage contract and dismissed the wife’s arguments as lacking a proper evidentiary basis. The wife in Balsmeier had extensive experience dealing with contracts during the course of her employment, as she had sucessfully run two different businesses and described herself as having “excellent negotiation skills” and “sophisticated business acumen.” However, the wife asserted that these negotiation skills only applied to her business life, and not to her personal life. Overall, court held that the wife’s claim that she did not understand the consequences of the marriage contract was contradictory and lacking credibility. The court noted that the wife had obtained independent legal advice from an experienced family law lawyer before signing the marriage contract.

Justice Fryer held in Balsmeier that there was no evidence of either inadequate financial disclosure, misrepresentation, unconscionable circumstances, duress, or undue influence surrounding the negotiation of the agreement. The court held that the agreement was not improvident, and that the spousal support provisions of the agreement were superior to the Spousal Support Guidelines for a marriage of a short duration. Finally, Justice Fryer held that there would be no substantive unfairness that would arise from enforcing the agreement. As such, the marriage contract was held to be valid and binding, and the wife’s claim to set aside the agreement was dismissed.

If you require assistance with a case involving a marriage contract, then please send me an e-mail at lutfallah@flbarrister.com in order to set-up a free initial 30-minute consultation. After hearing your story, I hope that I could provide you with legal representation at an affordable rate.


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