A Marriage Contract: Why?
This article will be of interest mainly to the non lawyer.
Matrimonial property law in Ontario is governed by the Family Law Act. The Act determines the division of wealth accumulated during the marriage and can apply on three occasions ( each of which may be called the “valuation date”):
- the day of separation;
- the day before death (even if there is a last will and testament); and,
- the day one spouse brings an application to court in the face of a serious danger that the other spouse may improvidently deplete his or her property.
Some couples prefer to write their own “law”. They are permitted to do this in the form of a “marriage contract”.
Scheme of the Act
Subject to some crucial exceptions, what the Act does is equalize, as at the valuation date, the difference in the net worth acquired by each spouse during the marriage. However, note that:
- The Act does not necessarily divide each individual asset fifty – fifty.
- Determining legal ownership (which is something that couples often ignore during their marriage) becomes very important in calculating the effect of the Act.
- The Act examines what you brought into the marriage and what your net worth is on the “valuation date”.
- A matrimonial home owned on the date of the marriage has its entire value divided. In other words, you do not deduct the value of that asset as at the date of the marriage.
- Gifts or inheritances from a third person received after the date of the marriage are also excluded from the calculation.
Contrary to popular belief, the non-title holding spouse obtains no automatic interest in one half of the other spouse’s property. There can be vastly differing results where a spouse buys a matrimonial home worth $250,000.00 the day before the wedding versus the spouse who brings $250,000.00 cash into marriage.
Property laws in Ontario have undergone massive changes in 1978 and then again in 1986. Presently, the Family Law Act is being reviewed; there could be further significant changes in the law – both with respect to property and with respect to support obligations. Having a marriage contract permits a couple to determine what laws will govern them now and in the future. They can do this because the Act permits the couple to substitute their own private contract in place of the Family Law Act. Determining whether the scheme of the Act is one that is appropriate for all purposes and contingencies may require professional legal advice.
Enforcement Procedures in the Act
The Act can have ramifications far beyond the happy couple. Those in business with partners or holding sensitive minority positions in companies may find that the Act’s tentacles could grasp hold of them.
The Act gives to the court very broad powers of enforcement against the assets of a business. These enforcement measures could seriously impair a business’ ability to function smoothly. In other words, if your partner is faced with defending an application under the Act, court sanctioned enforcement and information gathering measures may disrupt the business:
- An asset that was formerly free and clear of all encumbrances, charges, etc. can be charged by court order [section 9 (1) (b)]. Such an asset could naturally include the shares of a business, notwithstanding any requirement in a Shareholders Agreement that the shares cannot be charged.
- Shareholders Agreements often contain provisions limiting or avoiding the issuance of additional shares, the transfer of shares, the reduction of shareholder loan accounts, and the maintenance of certain debt – equity ratios. A court, acting under the broad powers given in sections 9 and 10, may cause a shareholder spouse to violate his or her contractual obligations in order to satisfy payment or security orders under the court order.
- A court could order the sale of an asset, including shares.
- A court could order production of “specified financial information” belonging to a business. A court could order “inspections of specified property”.
- In valuing a person’s interest in a business, the court could conceivably ignore the terms of any “buy – sell” agreement and reach its own conclusion as to the “value” of one’s shares.
- In short, a happily married person can land up with the partner’s spouse as a de facto partner or interferer.
Therefore, one may readily appreciate that the Family Law Act can apply in situations even where the couple remain happily married all their lives. It may be prudent for all partners in closely held corporations and businesses to have valid marriage contracts.
A Valid Contract
The Family Law Act has some very specific guidelines in place in order to ensure that any marriage contract is valid for all purposes. A court can set aside or ignore all or part of a contract if:
- one side failed to disclose significant assets, debts or other liabilities;
- one side did not understand the nature of the contract or the consequences of the contract;
- there was any fraud, duress, or undue influence.
It’s not enough to say, “He didn’t ask about my assets.” It’s not enough to say, “The lawyer did not tell me I had to list all my assets.” The long and short of it is this: If there is not full and complete disclosure, then the contract can be overturned later. Lack of independent legal advice places both sides at the mercy of any future challenge along the lines of incomplete disclosure, understanding the nature of the contract, and being subject to duress or undue influence.
Planning for the worst case scenario
Marriage is intended to be a life-long proposition. One does not intend to get divorced. Even thinking of such a possibility at the outset is down right un-Canadian, antisocial, pessimistic, tempting bad luck and decidedly unromantic. Unfortunately, the fact remains that approximately 50% of Canadian marriages end in separation and divorce. In the event of the death of one spouse, in laws and out laws may challenge the will and be within their legal rights to insist that the surviving spouse apply under the Act and not take under the will. There is, plainly put, lots of room for legal uncertainty.
A properly negotiated and drafted marriage contract is much like a life insurance policy or a will. You don’t want to think of these things. But once you take the plunge and devote the time and effort and expense necessary to properly plan, you complete the tasks at hand and place your documents into the safety deposit box. You will periodically review the documents as life’s responsibilities and challenges necessitate strategic changes.
Planning for the worst case scenario does not mean that you are inviting disaster. We all insure our valuable personal property and most of us insure our lives. That does not mean someone is going to steal our BMW tomorrow or that we are going to, heaven forbid, drop dead next week. We simply take prudent steps to provide for some future possibilities. On this level, a marriage contract is no different from a will, a life insurance policy, a property insurance policy, or a beneficiary designation on an RRSP. It simply makes good business sense.
For some newlyweds, the existing law may be just fine For others, the law may present problems for the couple themselves, their extended families, and even for their business partners. There can be a need for a properly drafted marriage contract even if the couple spend their entire lives together. It is prudent to consult a lawyer who is experienced in family law well before the wedding day in order to determine whether you need a marriage contract.
ADDENDUM: JUNE 24, 2004
This page is the most frequently searched page on my web site. It would appear that there is a great deal of interest in marriage contracts. I wrote the above text during the early 1990’s. In that article, I explained some of the basic concepts and some of the legal factors that one should examine when considering whether or not to enter into a marriage contract. In light of changes in the case law and in light of my further experience since the early 1990’s, It is appropriate now to add some further words to my previously expressed musings.
The Supreme Court of Canada has recently (March 26, 2004) released its decision in a case called, Hartshorne. This case comes from British Columbia where statutory authority is given to set aside marriage contracts where the division of property in the contract would be “unfair” after having regard to certain factors as described in the B.C. Family Relations Act. The Supreme Court of Canada has emphasized the importance of requiring people to stick to the deal that they themselves crafted. Granted, there will be some scenarios where a marriage contract could be set aside but the thrust of the SCC judgment is that it will now be much more difficult to do so.
Ontario as well has statutory provisions that would allow a court to set aside not just marriage contracts, but separation agreements as well. However, the test in the Ontario statute is not nearly as permissive as in British Columbia. Therefore, it might be reasonable to assume that those who enter into Ontario marriage contracts will be in an even more favourable position. In Ontario, the legislature invites a court to set aside a domestic contract (ie. marriage contract, separation agreement, cohabitation agreement between non married individuals) where there was:
- lack of proper financial disclosure;
- a lack of understanding of the nature or consequences of the contract; or
- a common law ground for setting aside: duress, fraud, undue influence, mistake, repudiation. If the contract itself was unconscionable, then the law of contract would permit such a contract to be set aside.
Further, another section of the Family Law Act [s. 33(4)] allows the court to set aside a support provision or the waiver of support in any domestic contract (and that includes a marriage contract) under certain enumerated circumstances.
In Ontario, mere “unfairness” would not likely be sufficient to defeat a marriage contract that had been negotiated and signed with financial disclosure, full understanding, and no common law impediments to its enforcement.
Of course, there have been many cases in the courts where one side has tried to set aside the marriage contract. Some dissatisfied spouses have succeeded; some have not. It will be interesting to see just how Hartshorne will be applied in Ontario. Where the record of negotiations and financial disclosure is adequately recorded (usually in a lawyer’s file), then we bolster the chance that the marriage contract will ultimately be respected. In other words, in the process of negotiating a marriage contract, we would want to make sure that we have a record of the following:
- full financial disclosure;
- evidence that each side knew what he/she was getting into;
- no common law ground for setting aside the contract.
Why have a lawyer?:
It follows from the above that in order to have the best possible chance of upholding a marriage contract, it is essential that each side have his/her own lawyer who will fully explain to the client the legal requirements in the negotiation and execution of the contract. Also, the lawyer will create the written record that will clearly demarcate compliance with all statutory and common law requirements to uphold the marriage contract.
In short – an independent lawyer (for each side) who fully understands the laws applicable to marriage contracts is in my view a necessary prerequisite before spending money on the negotiation, preparation and ultimate signing of a marriage contract.
I have found that there are two main scenarios under which someone will likely want to have a marriage contract. (1) At least one person has been through a divorce previously and wants to provide protection against untoward financial repercussions should this new marriage break down. (2) At least one person has significantly greater assets that he/she is bringing into the marriage. Often, those assets have been accumulated by the person’s family and it is often the family (parents) who insist on there being a marriage contract. Securing the proper negotiation and signing of a marriage contract in these circumstances represents a type of ‘insurance policy’ for the future. While no lawyer can absolutely guarantee that a court in the future will abide by the terms of this ‘policy, at least when you have a lawyer you are maximizing the chances that the ‘insurance will be effective against any later attack.
I am frequently asked: How much will it cost? I am aware that there are Ontario lawyers out there who will do a marriage contract, acting for both sides in the process, and charge $750.00 or even less. It follows from what I have written above, that a lawyer who acts for both sides is just asking to be sued later if one side attacks the contract. In my law practice, I do not under any circumstances undertake an assignment to represent both sides. This does not mean that the negotiation and drafting of a marriage contract is an adversarial process. Far from it! Rather, the process should be cooperative and collaborative between the two lawyers involved. But each lawyer must watch out for the rights and responsibilities of his/her own client while endeavouring to constructively address the legitimate concerns of the other side.
In conclusion, the sort of marriage contract brief that I typically accept will have one or more of the following characteristics:
- At least one side will have more than nominal assets.
- At least one side will be entering into a second marriage.
- At least one side will want to protect assets derived from his/her parents or family.
- Both sides will be relatively sophisticated in their understanding of the rights and responsibilities to be assumed in marriage and upon any marriage breakdown.
- Both sides will recognize that in order to have a legally enforceable marriage contract that there will be an expenditure of legal fees in order to achieve the desired results.
Gene C. Colman
Revised May 5, 2005