An entire litigation industry seems to have unfolded over the past few years; court applications to set aside domestic contracts (a separation agreement, a cohabitation agreement, or a marriage contract), or overriding some of its terms.
The scenario is as follows. A spouse – unhappy with the some or all of the terms of the binding agreement that he or she previously entered into – wants to challenge the agreement and attempt to have it set aside.
Ontario’s Family Law Act (s.56(4)) provides that a domestic contract or any provision in it may be set aside if:
- a party failed to disclose to the other significant assets or debts that existed when the contract was made;
- a party did not understand the nature or consequences of the domestic contract; or
- otherwise in accordance with the law of contract
Further, a court can disregard a domestic contract if it does not accord with the child support guidelines (if, for example, the parties have agreed that the child support payor can pay less than what the guidelines provide).
Of note is that, even if a party is able to prove that one of the three circumstances set out under s.56(4) of the Family Law Act exists, the court must still determine whether or not it is appropriate to exercise its discretion to set aside the agreement.
It is clear that the party who wants to have the domestic contract set aside, has the burden of proving the existence of one or more of the three circumstances.
The three circumstances can be described, as follows:
- 56(4)(a) A party is required to make “full and frank” disclosure of his or her assets and debts, prior to entering into a domestic contract. However, spouses must also use due diligence in regards to financial disclosure. In other words, if a spouse has general awareness of the other side’s assets and debts, that spouse must ask the right questions to “satisfy oneself” as to the values of the assets and debts. That being said, deliberate failure to make full disclosure may give rise to the setting aside of the agreement, depending upon the extent of the defective disclosure.
- 56(4)(b) A party will fail to understand the nature and consequences of a domestic contract if, for example, a spouse demonstrates such a lack of sophistication surrounding financial issues, that he/she has a complete misunderstanding of his/her position and rights. Exerting pressure on one’s spouse is sure to give rise to having the agreement set aside.
- 56(4)(c) The law of contract provides for contracts to be set aside on the basis of unconscionability, undue influence, mistake, repudiation, duress, or misrepresentation. These are explained below:
- Unconscionability – This arises where there is an overwhelming imbalance in the power relationship between the parties. It is best countered by ensuring that both spouses have independent legal representation.
- Undue influence – The court must examine whether, firstly, the agreement was an improvident bargain and, if so, whether there was an inequality of bargaining power.
- Mistake – To be relied upon as a ground for setting aside an agreement, a mistake must go to the root of the contract. This ground examines whether the parties were truly “ad idem” or of the same mind, in regards to the terms of the contract.
- Repudiation – A breach of a term of an agreement may give rise to the agreement being set aside at the request of the other party. Once again, one must look at whether the term breached was a fundamental term of the parties’ agreement.
- Duress – Duress means coercion of one’s free will. There can be no duress without evidence of an attempt by one party to dominate the will of the other party at the time of the signing of the agreement. To prove duress, a spouse must prove that he or she felt compelled to enter the agreement out of fear of actual or threatened harm of some kind.
- Misrepresentation – A misrepresentation must be material, in the sense that a reasonable person would consider it relevant to the decision to enter into the agreement in question. Furthermore, the material representation must have constituted an inducement to enter into the agreement upon which the party relied.
The best antidote to an agreement being set aside, is to ensure that both sides have independent legal representation throughout the negotiation process. Although it does not guarantee that a contract will be upheld, it is clear that the lack of independent legal advice is a significant factor in assessing whether an agreement should be set aside.