Separation Agreements and Financial Disclosure

A Separation Agreement is a contract entered into by both spouses that outlines various rights and obligations arising out of the breakdown of marriage or common law relationship. After parties have separated, a Separation Agreement can be used to decide issues such as custody and access for children, support, and of course, financial matters, to which include: division of property/assets, debts/liabilities, income, and other financial matters.

It is important to note that throughout the process of negotiating a Separation Agreement, each party has a duty to make full and honest disclosure all relevant information. If a party omits information or is dishonest in disclosing information there is a real risk that a court may overturn the Separation Agreement.

What the Courts Say
The Supreme Court of Canada has held that although a Separation Agreement is a legally binding contract, if there has existed improper acts or omissions, or in conflict with enumerated legislative objectives, such an Agreement may be set aside by the Court and an Order may be granted to the wronged party. In the 2009 Supreme Court of Canada’s decision of Rick v. Brandsema, it was made abundantly clear, that where there exists of deceptive acts/omissions, and/or failure to make full and honest financial disclosure, such Agreements may be subject to intervention by the Courts (Rick v. Brandsema, 2009, SCC, 10).

This was a case which involved a married couple who entered into a Separation Agreement during their separation, but prior to divorce, whereby the wife, Nancy Rick, primarily a mother and homemaker, but also a contributor to the family business, sought intervention of the Court, to set aside the Separation Agreement on the grounds of ‘unconscionability’, or to seek a Reapportionment Order under the applicable Family Law Legislation.

At the first level of court, the trial judge found that the Agreement was indeed unconscionable, since the husband, Ben Brandsema, had been well aware of his wife’s mental disorder and disordered thinking, and knowingly took advantage of these vulnerabilities by accepting an Agreement based on what he alone knew to be erroneous financial information. Evidence was produced that led the trial judge to conclude that the husband, knowingly presented misleading financial information at the outset of negotiations, by placing values on the assets of the family business, that were not based on independent valuations; by exaggerating the company’s corporate debt figure; by claiming an inappropriate tax liability in connection with the family business; by significantly under-representing the value of two additional properties in which the parties each had a 50% interest; and, by failing to divulge his misappropriation of spousal funds.

Further evidence showed that the husband had written a cheque to himself from the parties’ joint account for $79, 954.36, to which the wife had no knowledge. He failed to reveal such financial information during negotiations, and did not deposit the money into his own personal accounts until after the agreement and divorce were finalized. In addition, the husband also advanced $154,000.00 to a close friend to hold for him until such time he felt the money could be safely redeemed from his friend and deposited into his own personal accounts.

As such, the trial Court made an Order in favour of the wife, found that the wife should be compensated by an amount representing the difference between the negotiated “equalization payment” and her entitlement under the Legislation.

The husband, however, felt that he had grounds to appeal such findings, and as such, was granted an appeal before the Ontario Court of Appeal. The Court of Appeal disregarded or rejected the factual underpinnings of the trial judge’s legal analysis, finding it questionable at best, that there ever existed a power imbalance, and that the wife’s vulnerabilities either did not rise to the level of “mental incapacity” or were effectively compensated for by the availability of counsel and other professionals.

Following the verdict handed down by the Ontario Court of Appeal, the wife appealed and was granted an appeal to the Supreme Court of Canada, where after careful review, it was concluded that the trial judge’s facts were fully supported by the record. Furthermore, the SCC ordered that the trial judge’s decision to grant the wife a damage award/ or Compensation Order, in the amount of $649,680.00 to be restored. The SCC agreed with the trial judge’s reasoning, noting that “the combination of misleading informational deficits and psychologically exploitative conduct, led the trial judge to conclude that the resulting, significant deviation from the wife’s statutory entitlement (under the Family Law Act), rendered the agreement unconscionable and therefore unenforceable.

Thus the remedy for unconscionability, as decided by the trial judge, was to order the husband to pay the wife an amount representing the difference between the negotiated equalization payment and the wife’s entitlement under the Act.

Summary
This case aims to highlight and set a landmark precedent regarding future cases involving Separation Agreements and financial disclosure. It identifies the duties owed by separating spouses during the process of negotiating and executing such an Agreement for the division of matrimonial assets. The duty is one that is imposed on both separating spouses, to provide full and honest disclosure of all relevant financial information, without the existence of any exploitative tactics or defective disclosure.

In the event that defective disclosure is discovered, the courts will intervene depending on the circumstances of each case. The circumstances can include the extent of the misinformation, and the degree to which it may have been deliberately generated. If exploitative tactics are engaged in during contract negotiations, it is highly likely that the Agreement will not be enforced. The Supreme Court of Canada clearly held in 2003, in the case of Miglin v. Miglin, that “due to the inherent vulnerability of spouses during negotiations, in order to safeguard a separation agreement from judicial intervention, a spouse must refrain from using any exploitative tactics” (Miglin v. Miglin, 2003 SCC 24). Failure to abide by such rules and standards, particularly if the agreement fails to materially comply with the objectives of the governing legislation, could also well result in the agreement being set aside by the Courts.

Thus parties must remember when negotiating a Separation Agreement, to not hide or falsely portray financial information, for the law does not merely suggest the proper way to go about financial disclosure, but rather it imposes a duty to provide any such relevant information, in an honest and non-elusive fashion.

For more information about separation agreements and financial disclosure, or about obtaining a divorce in Ontario, please contact our Toronto divorce lawyer.

NOTICE AND DISCLAIMER: The material posted on this website is for informational purposes only and should not be relied upon as legal advice. If you are in need of legal advice relating to your particular situation it is highly recommended to consult with a lawyer.

Helpful Resources:

Divorce and Separation
Family Justice Services
Child Custody and Access
Spousal Support
Child Support
Division or Equalization of Family Property
Treatment of a Matrimonial Home
Enforcement of Support Payments
Child Protection
Child Adoption

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