For Richer or Poorer: Duty to Disclose in Separation Contracts

On February 19th, the Supreme Court of Canada (“SCC”) released its decision in Rick v Brandsema, 2009 SCC 10 [Rick], in which it clarifies some issues arising out of an earlier SCC decision, Miglin v Miglin, [2003] 1 SCR 303 [Miglin].

Background

Berend Brandsema and Nancy Rick were married in 1973. Together they established a dairy farm, Brandy Farms Ltd, of which Brandsema and Rick were equal shareholders; over time, they acquired other assets, all including part of the family property. After twenty-nine years of marriage, they divorced in 2002. Prior to divorce, they signed a separation agreement, the validity of which was the issue in this case.

During negotiations, it was clearly expressed that the parties intended to divide their assets equally. At trial, however, it was revealed that Brandsema had deliberately presented misleading financial information to his wife and the mediator; he had exaggerated the corporate debt of Brandy Farms, significantly underrepresented the value of certain assets, and failed to disclose funds totalling almost $250,000.

Furthermore, the trial judge found that Brandsema had taken advantage of the fact that Rick was suffering from a mental instability throughout the negotiations, which hindered her ability to understand the negotiation and legal processes. The trial judge therefore concluded that the agreement was unconscionable, and awarded to Rick the difference between the negotiated equalization payment and the amount to which she was entitled under the BC Family Relations Act, RSBC 1996, c 128.

In reversing the trial judge’s findings of fact and credibility in relation to the extent to which Rick’s understanding was affected by her mental instability (see 2007 BCCA 217), the BC Court of Appeal (“BCCA”) stated that while “[t]he wife was a troubled woman . . . it is clear that she knew what she was doing” (para. 52). It added that any vulnerabilities that the wife may have had were compensated for by the availability of professional assistance, referring to Miglin:

[83] Where vulnerabilities are not present, or are effectively compensated by the presence of counsel or other professionals or both, or have not been taken advantage of, the court should consider the agreement as a genuine mutual desire to finalize the terms of the parties’ separation and as indicative of their substantive intentions. Accordingly, the court should be loathe to interfere. In contrast, where the power imbalance did vitiate the bargaining process, the agreement should not be read as expressing the parties’ notion of equitable sharing in their circumstances and the agreement will merit little weight.

The SCC Decision

Writing for a unanimous court, Abella J. allowed the appeal and restored the order made by the trial judge. On the significance of the presence of professional assistance with respect to the vulnerability of one party to a separation contract, Abella J. justified the court’s finding by drawing on Miglin:

[61] [Miglin] indicates that when vulnerabilities have been compensated for by the presence of professionals, the agreement should be respected. This is an important observation. Given that vulnerabilities are almost always present in these negotiations, the parties’ genuine wish to finalize their arrangements should, absent psychological exploitation or misinformation, be respected. One way to help attenuate the possibility of such negotiating abuses is undoubtedly through professional assistance. But exploitation is not rendered anodyne merely because a spouse has access to professional advice. It is a question of fact in each case.

In the present case, Abella J. explained, the trial judge had concluded that Rick’s vulnerabilities were not compensated for by professional assistance, because her emotional and mental condition rendered her unable to make use of it. As the trial judge’s findings of fact were fully supported by the record, the BCCA should not have rejected them.

The lesson to take from this case is that the deliberate failure to make full financial disclosure when entering into a marriage or separation contract may result in a court finding that the contract is unconscionable and therefore unenforceable. (An example of a similar situation in the context of a marriage contract was seen in LeVan v LeVan, 2008 ONCA 388, leave to appeal refused 2008 CanLII 54724).

To be sure, Abella J. did qualify her finding, noting that “[w]hether a court will, in fact, intervene will clearly depend on the circumstances of each case, including the extent of the defective disclosure and the degree to which it is found to have been deliberately generated[; i]t will also depend on the extent to which the resulting negotiated terms are at variance from the goals of the relevant legislation” (para 49). Nevertheless, Rick makes clear that there is a duty on separating spouses to provide full and honest disclosure of all relevant financial information “to protect the integrity of the result of negotiations undertaken in these uniquely vulnerable circumstances.”