Marriage Contracts - How Sharper then a serpent's tooth ... June 10-09.doc

MARRIAGE CONTRACTS

"How sharper then a serpent's tooth it is to have a thankless child (or spouse)"

Shakespeare, King Lear (almost)

Philip M. Epstein, Q.C. L.S.M.

June 9, 2009

Divorce rates remain consistently high throughout Canada and the Common Law

world and at the same time, people are living longer. As a result of these two phenomena

alone, second and third marriages are becoming common. What is more, second and third

marriages, often occur in the face of the parties having children from the first or second

marriage. While this "Brady Bunch" situation may result in an interesting television sitcom,

there are a host of problems not often contemplated by the parties when they enter into these

relationships. Thus, the death of one of the spouses or a subsequent divorce can play havoc

with the parties’ financial affairs and financially disinherit or significantly financially effect

their children. This paper discusses pre-marital and post-marital contracts as a potential

solution to these problems.

Pre-marital contracts only achieved legitimacy in Ontario in 1976 and the rest of the

country soon followed. Quebec always had a form of marriage contract that was permitted

but it was limited in scope. Today, across Canada with the exception of dealing with custody

rights, future child support and exclusive possession of the matrimonial home the parties can,

by contract, settle any issues that might arise as a result of their marriage breakdown or

death.

Most Common Law countries recognize marriage contracts, although two notable

exceptions are England and Australia. However, even in England recent appellate authority

has made it clear that henceforth English courts will give some weight to pre-marital

contracts although they will not be determinative of the issue. Some of you may wonder

why Paul McCartney did not have a marriage contract. There were two reasons. Firstly, he

stated that they were "anti-romantic" and did not want one and secondly, at the time English

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courts gave them no weight at all. The romance soon died and the ₤30 million that Paul

McCartney had to pay might have caused him to have yearned for the opportunity of a “do

over”.

Although marriage contracts became legally valid in 1976, they did not really come

into their own until 1986 when the Family Law Act was passed and all of the parties assets

were placed on the table for equalization on the Ontario property scheme of equalizing net

family property. Virtually all Common Law jurisdictions divide property in one way or the

other and while all have different approaches and different methods, the ultimate result is

that most of the marital property is equalized. If the property is going to be equalized, there

is a concern amongst those who marry for a second time as to what will happen to their

children of their first marriage. Hence, the desire to protect their assets in some way so that

their children do not suffer financially as a result of the second or even third relationship.

There will also be situations in which parties, getting married for a second time,

bring a marital home into the marriage. Under the Ontario Family Law Act the deduction for

pre-marital property is lost if the pre-marital property is a matrimonial property brought into

the marriage and still exists as a matrimonial home at the time of separation. This is a very

common occurrence in second marriages, particularly amongst older people. Frequently, the

spouse wishes to protect the property in the event the relationship breaks down and, even

more importantly, to maintain the deduction for the value of the property brought into the

relationship.

Quite often there is a family cottage that has sometimes been used for generations.

The parties getting married a second time, if they use that cottage, convert that cottage into a

matrimonial home which affords it the special protections under the Family Law Act and also

causes the loss of the deduction normally afforded. As a result, there is often a desire to

protect the family cottage and make sure it stays within the family.

McCartney v. Mills (2008) E.W.H.C. (FAM) Case F006003721

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If the parties marry and have children of the first marriage and then they have

subsequent children, there is an issue as to whether the non-biological parent stands in the

place of the parent of the child and is liable for child support in the event that the relationship

breaks down or there is a death. The parties will want to know if they can protect themselves

from such a claim and how they might go about it.

This is but a sampling of some of the problems that occur in second marriages and

why there is a growing demand for pre-marital and post-marital contracts.

The Pre-Nuptial Contract

Unlike separation agreements which follow a definite pattern and are largely based on

precedent and boiler plate, marriage contracts are individually tailored to the case at hand.

They run the gambit from contracts that provide that neither party has any claim whatsoever

in the event of a marriage breakdown or death (we call that the “why get married contract”)

to the contracts that provide detailed support provisions and property provisions and provide

for every contingency arising out of divorce or death. Some contracts run seven pages and

some run thirty seven pages. Some are negotiated over a few weeks and some over many

months. The two most common issues dealt with in a marriage contract are property and

support. We turn to each of these in turn.

Property

The most common form of marriage contract is to exclude certain property from

being included in the division of property under the Family Law Act. It may be the

matrimonial home, an interest in a trust, property received from third parties such as parents

or grandparents by inheritance or gift before the marriage or the business in which one of the

parties is engaged. The parties are free to negotiate any property resolution, including

dealing with the matrimonial home and making it an excluded asset. What the parties may

not do is provide for exclusive possession of the matrimonial home. That is a bit of

paternalism by the Ontario government since one might seriously question why parties ought

not to be able to deal with possession of a matrimonial home, particularly in the absence of

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children and particularly in a freely negotiated agreement. But, for the time being, one

cannot deal with that issue. Everything else, however, with respect to property is on the table

and may be negotiated. Counsel and the parties clearly have to understand the difference

between deductions and exclusions under the Family Law Act and these contracts are not to

be done at the kitchen table or based on a precedent one can buy at a legal stationary store.

These contracts have important and lasting effects and the parties need to consider a host of

potential circumstances. What if the divorce occurs within two or three years of the

marriage? What if it occurs 22 years after the marriage? What if the wife is working at the

time of the marriage and has given up work at the time of separation? Not only will this

impact upon support but, if all property is excluded, the wife will find herself without

support and without a place to live except on a temporary basis. What will happen if one of

the parties dies early on in the relationship? What happens if it is later on in the relationship?

What happens if there are young children living in a home which is proposed to be excluded

by the other party? If the home is to be somehow to be divided, what is the mechanism for

sale? How long does the survivor get to stay in a matrimonial home before it is sold and the

proceeds given to the children of the first marriage? What happens if one of the parties

becomes ill or disabled? Who should have the right to make the substitute health care

decisions or have a power of attorney to deal with the person’s property? And on and on it

goes. The lawyer is required to look into the crystal ball and think of all of the things that

can go wrong since, if all goes right, they will have no need of the contract. There may not

be a divorce but, ultimately, there will be death. The lawyer will have to consider all of the

potential problems that could arise and how these inter-relate to the children of the first

marriage and help the parties work out a solution that they both find satisfactory.

This is a difficult task. The parties are discussing these issues while they are in love

and believe that this new relationship, unlike the last one, will last forever. On the other

hand, one or both may have been burnt by the financial and emotional consequences of the

last breakup. They do not want to experience it again and, accordingly want an inflexible

and rigid contract that provides for certainty and finality if there is a marriage breakup. This

is a difficult task for the lawyer, particularly when the lawyer knows it is somewhat of an

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industry for lawyers to attack marriage contracts when the marriage does break down and

inevitably blame the lawyer who drafted the marriage contract in the first place.

If the lawyer charges a few thousand dollars for a marriage contract, which is

probably high for the average contract then, the lawyer is exposing his insurance deductible

and levy every time he or she drafts one of these agreements. It is another reason why

lawyers face an impossible task in this arena and have an instinctive dislike of these

agreements.

Frequently, the client wants to throw caution to the wind and sign anything and

frequently one of the parties says “no contract, no marriage”. While that does not constitute

duress in law, creating a right to set aside the agreement, it does create enormous pressure on

both the party being asked to sign and the lawyer who is trying to assist.

Support

Frequently, husbands who have been burned in a previous break up want to ensure

that if their new relationship breaks up, they will not be obliged to pay support. It may well

be that at the time of the agreement the parties are both working and self-sufficient. If they

separated that day, there would be no support but, if they stay together for a reasonable

length of time and the wife, for whatever reason, gives up her job and is unemployed at the

time of the break up and has perhaps sacrificed career choices at the request of the husband

or otherwise, upholding the support provision may well render the wife financially

compromised or even destitute. Hence, the Supreme Court of Canada in Miglin

has made it

clear that an agreement that releases support may not always be effective. If the agreement

was not signed in unimpeachable circumstances and if it did not meet the objectives of the

Divorce Act at the time of execution, then it may well fail the stage one Miglin test and open

the door for support. If there has been a change of circumstance that is so dramatic that it

was beyond the contemplation of the parties at the time of separation under the stage two test

Miglin v. Miglin [2003] 34 R.F.L. 5th 185

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of Miglin, the waiver of support may also be set aside. Thus, clients entering into support

agreements need to understand that the further they depart from the objectives of the Divorce

Act i.e., the more rigid and inflexible the support provisions, the more risk they run, the

court will override the support provisions of the agreement. Justice Mossip, an experienced

family judge, did precisely that in Pollard v. Pollard

. She found that the parties negotiated

in unimpeachable circumstances and there was full and complete financial disclosure but, in

releasing spousal support at a time when the wife could not really become self-sufficient, the

agreement failed to meet the objectives of support under the Divorce Act and was set aside.

Simply put, there is no finality in family law with respect to support obligations.

Even as recently as last week, a court refused to dismiss a spousal support claim brought by a

wife 33 years after a divorce. While that does constitute some sort of record, it also makes it

clear that the support door is never closed and, while agreements may be carefully drafted to

try to prevent this eventuality, there still remains a narrow window of opportunity for the

court to intervene if the agreement does not meet the objectives of the Divorce Act. Put in

other words, an agreement that provides too good a deal for one of the parties, may well be

set aside.

Financial Disclosure

In determining whether the agreement was negotiated in unimpeachable

circumstances, there are really two central issues. The first is whether one of the parties took

advantage of any vulnerability of the other side. Negotiating a marriage contract with a

vulnerable party is a dangerous proposition and while independent legal advice will usually

overcome any vulnerabilities, it may not necessarily always do so. See for example Rick v.

Brandsema

. Parties have to be particularly cautious in negotiating marriage contracts to

ensure that the other side has full opportunity to consult a competent family lawyer and that

the party is not rushed or pressured into signing an agreement. For this reason, it is unwise in

Pollard v. Pollard, May 2009, Mossip J., unreported.

Rick v. Brandsema [2009] S.C.C. No. 10

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the extreme to prepare marriage contracts and tender them weeks or days before the

wedding. Parties thinking about a marriage contract need to do so months before the

wedding and give the lawyers ample opportunity to negotiate so that no one can say that they

were pressured into making concessions in the agreement. Secondly, and of fundamental

importance to the validity of a marriage contract is full, complete, fair and honest financial

disclosure. Financial disclosure is mandated in Ontario under s. 56(4) of the Family Law

Act and this provision cannot be waived. While this does not mean that it is necessary for the

parties to go out and get business valuations and appraisals, it does mean that the parties have

to set out with a reasonable degree of specificity their income, their assets and their

liabilities. The most exhaustive discussion of this theme occurs in LeVan v. LeVan

and is

repeated in short form in Rick v. Brandsema. There is a remaining controversy as to

whether there is an obligation to value excluded assets that are intended to be excluded in the

contract as opposed to identifying them. The Court of Appeal in LeVan was silent on this

point but the courts below have universally decreed that it is not only necessary to identify

the assets but also necessary to put a value on them. That seems to make eminently good

sense because what is the point of telling the other party that one holds shares or property

without putting some value on it. The purpose of financial disclosure is to tell the other side

what you have so that they can understand what they may well be giving up in a marriage

contract. A party cannot understand what you might have as a result of a description of your

assets without some value. As we said, the valuation exercise does not require expert advice

but, it does require the party making the disclosure to act reasonably. The failure to do so in

both LeVan and Rick v. Brandsema were fatal, both on the support and the property

provisions of the contracts.

The Matrimonial Home

We have mentioned above the problems that can be created by a matrimonial home in

light of the legislation. Parties to a marriage contract need to carefully address this issue,

LeVan v. LeVan 2008, 51 R.F.L. (6th) 237 C.A. – Leave to appeal to S.C.C. refused, 2008, CarswellOnt 6207

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particularly when there are young children who want to remain in the home and where there

may be children of another relationship who want to receive the proceeds that if this second

relationship breaks down. On the other hand, the non-titled spouse who lives and works on

the house, wants to ensure that he or she acquires some interest in the property over time,

particularly if they too are in the workforce and are contributing to the financial upkeep,

mortgage and taxes on the home. Parties often agree on a formula, which gives one of the

parties a percentage interest in the home for each year of the relationship. Whatever method

one uses, the parties need to delineate with certainty what happens on marriage break down

or death and provide for occupation rights that are appropriate as well as delineating the

financial obligations to maintain the property.

In Loco Parentis

It is a common occurrence that a party entering into a relationship in which the other

party already has children does not want to be placed in a position where if there is a

breakdown in the relationship, he or she might be liable for child support. This problem has

been created by how the Child Support Guidelines have been interpreted and, in particular,

by the Supreme Court of Canada case of Chartier v. Chartier

. It seems relatively clear that

the parties cannot contract out of the obligation to support children with whom one has

become in loco parentis. However, an agreement that sets out that the parties do not intend

the other party to be in loco parentis may be of some minor assistance when the court has to

address all of the factors that determine whether one of the parties has stood in the place of a

parent. There is no effective way of solving this problem and one can only put a band-aid on

it. However, even a discussion of this issue should help the parties because it will tell the

parties what they must do to avoid being found in the place of a parent or, what the

consequences are of being in the place of a parent, should they fall into that category.

Chartier v. Chartier, 1999, 1 S.C.R. 242

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Death

While the parties may want to contemplate, with great specificity, what will happen

upon divorce, it may well be that far different results should occur upon the death of one of

the parties. After all, there is a huge difference between the unhappy breakdown of a

relationship and the death of one spouse while the parties were happily married. Marriage

contracts are a perfect vehicle for allowing parties to set out what will happen upon the death

of the other spouse and, in many respects are more important than a Will. While a Will is an

essential document for the parties to consider and sign, the Family Law Act overrides a Will

and allows a surviving party to elect to take their equalization right under the Family Law Act

or what they are left in a Will. Hence, the primacy of a pre-marital contract over a Will, and

the necessity for the parties to consider this in the discussion of their affairs. A pre-marital

contract may deal with a host of issues, including substitute decision makers, power of

attorney, life insurance, possession of the home and financial arrangements. The parties

should not be satisfied that their other spouse has promised to protect them in a Will and a

pre-marital contract may often help avoid the nasty fight between a surviving spouse and the

deceased children and other extended family, not to mention the deceased first wife.

Post-Marital Contracts

There is nothing that can be done in a pre-marital contract that cannot be done in a

post-marital contract. The danger with a post-marital contract is that one is never entirely

sure of the motives of the parties and whether one is attempting to obtain a post-marital

contract and then use it for an immediate separation. Post-marital contracts are thus

negotiated perhaps a little more adversarially since there is some concern about the use to

which it will be put. Nevertheless, parties who are older, remarried and have not considered

doing a marriage contract and are just learning about its advantages, may wish to consider a

post-marital contract simply to deal with the vexing issues that are outlined above. The

public in Ontario really understands very little about the Family Law Act, the impact of title

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or ownership, how equalization works, the importance of valuation date, the obligations on

death under the Succession Law Reform Act and a host of other family law issues. If clients

learned more about these issues or they come to learn about them through education or their

own lawyer, they may understand the need for post-marital contracts that are engendered

without any improper motives. They would be created simply out of a desire to properly

protect their assets for their natural children or at least have a mechanism for sharing the

assets between their children and their new spouse. Thus, avoiding an unpleasant and

unseemly fight after their death. We recommend you discuss these issues with your clients

who might already be married and believe they have solved all of their financial issues that

will arise upon death by having left a Will.

Children who do not benefit in a Will from a deceased parent as a result of the step

parent taking the bulk of the deceased's estate are quick to litigate and seek their due.

Marriage contracts that carefully consider the future are a potential solution to this problem.