Accurately Disclosing All Financial Assets Before Entering into a Marriage Contract Is Essential
In one of his excellently written decisions, Justice Pazaratz addressed the consequences of a failure to accurately disclose assets when entering into a marriage contract.
The History of the Former Spouses
The former spouses were married for approximately ten years prior to separating. They have two children: an 11-year old daughter, and a 7-year old son.
Following their separation, they continued to live together in the matrimonial home and shared temporary joint custody of the two children. The matrimonial home is located on a 151-acre property. There is another home on that property where the husband’s mother resides.
The Marriage Contract
The largest issue between the former spouses was property division. Two months before they married, the parties had signed a marriage contract that solely addressed property (mostly the 151-acre piece of land owned by the husband).
After the separation, the wife sought to have the marriage contract set aside, arguing, among other things, that there had been inadequate disclosure and misapprehension of facts.
The husband sought to have the contract upheld, seeking to have the equalization obligation significantly limited.
Two Pieces of Property
What neither party realized was that rather than being one large property, the 150-acre property was actually two separate pieces of property, both owned by the husband. This fact did not arise until the final day of a fairly lengthy trial.
All along, the parties had understood that there were two homes, with two municipal addresses. One of the homes was on a larger parcel of land, separated from the smaller parcel by what had repeatedly been described as a “hydro right of way”. However, at every stage of the proceedings, the land had been described as a single property by both the parties and the various lawyers who had dealt with the property over the years. One of the lawyers had even described the property as “non-severable.”
This was accepted as common knowledge for the duration of the trial, until a real estate appraiser, who was the very last witness, testified. The appraiser had prepared two appraisals to ascertain the value of the 151-acres:
- One for a 126-acre parcel of farmland where the mother-in-law was living; and
- Another for a 25-acre parcel of farmland where the former spouses had resided, and continued to live post-separation.
Justice Pazaratz asked the appraiser why he had prepared two appraisals. The appraiser answered “because they are two separate properties”. This was the first time either party, their lawyers, or the judge had heard of this. Nine witnesses had already testified, none of which had identified the property as anything other than one piece of land.
The appraiser clarified that after he was retained to appraise what had been described to him as one 150-acre piece of land, he realized that the property was actually two separate parcels divided by a hydro corridor. The hydro corridor was not a right of way (as originally noted), but a separate strip of land that was actually owned by the hydro company, therefore separating the land into two independent parcels that happened to be owned by the same person (i.e.- the husband). The appraiser noted that the pieces of land were as separate and “independently marketable” as though they had been two different houses in two different cities.
It turns out that the appraiser had actually brought this to the attention of the husband’s trial lawyer (different from the lawyer who had helped the husband with the marriage agreement), long before the trial even began. Unfortunately, not only did the trial lawyer fail to pass this information on to the wife’s trial lawyer, but throughout the trial, he knowingly advanced the proposition that the property at issue was a single, non-severable piece of land.
While the husband’s trial lawyer argued that the property issue was “at most” a “miscommunication” and that nothing turned on whether the husband had owned one property or two, Justice Pazaratz noted that this was actually central to the interpretation of the marriage contract. In 1996 when that contract was signed, the parties believed that there was a single 151-acre parcel of land owned by the husband.
Marriage Contract Interpretation
The wife’s application to set aside the marriage contract relied on s. 56(4) of the Family Law Act, which gives the court the power to set aside either part of, or the entirety of, a marriage contract in specific circumstances:
56(4) A court may, on application, set aside a domestic contract or a provision in it,
(a) if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;
(b) if a party did not understand the nature or consequences of the domestic contract; or
(c) otherwise in accordance with the law of contract.
Justice Pazaratz noted the critical importance of the disclosure requirements in family law. Indeed, the case law is clear: proper disclosure requires both parties to disclose the value of their assets. Spouses have a positive duty to make complete, fair, and frank disclosure of all financial circumstances before entering into a contract.
Justice Pazaratz identified two fundamental questions that had to be asked in this case:
- Was the disclosure provided in 1996 (before the marriage contract was signed) accurate and complete?
- If there was non-disclosure, to what extent would the undisclosed information have been material to the negotiation of the marriage contract and the final agreement?
Justice Pazaratz noted:
There can be little doubt the [husband’s] disclosure in 1996 was neither accurate nor complete. Some of this may have been through inadvertence. As it turns out, neither the [husband] nor his [original] lawyer…knew the [husband] owned two severable properties rather than a single parcel of 151 acres.
But the majority of the inaccurate disclosure set out in the marriage contract…must be attributed to either advertence from the [husband’s] perspective, or a woeful lack of precision on the part of [his original lawyer].
The husband’s trial lawyer argued that even if the husband’s disclosure had been inaccurate, the wife had “every opportunity to protect herself” because she had obtained independent legal advice.
On this note, Justice Pazaratz stated that:
…I agree that on the face of it, this should provide an extra layer of assurance, particularly since the Family Law Act does not actually require independent legal advice as a pre-requisite to a domestic contract. But the quality of a lawyer’s advice is based upon the quality of the information the lawyer is given. If both the [husband] and [his original lawyer] unwittingly gave [the wife’s lawyers] inaccurate information, a fundamental issue arises as to the extent to which (a) her lawyers were able to give proper advice, and (b) the [wife] was in a position to make a truly informed decision.
Justice Pazaratz went on to say:
The problem, of course, lies in [the husband’s trial lawyer’s] self-serving assumption that even if the [wife] had known the true facts – individually and/or cumulatively – she still would have signed exactly the same contract. It is obviously difficult to speculate about what people likely would or wouldn’t have done if they’d known the true facts. But it is reasonable to presume that the magnitude of the misrepresentation bears at least some relationship to its materiality. You cannot really give up rights unless you know what you are giving up. And you can only know what you are giving up if the other side makes full, complete, and accurate financial disclosure.
Justice Pazaratz ultimately concluded that the marriage contract had failed to meet the disclosure requirements under the Family Law Act. This non-disclosure was “material to the property determinations which were the one and only purpose of the marriage contract”. Overall, the inaccuracies in the contract were so serious that they completely undermined the factual basis for the agreement.
Justice Pazaratz stated:
It would be manifestly unfair to allow a party seeking to uphold a contract to suppress potentially damaging information, and then gain an advantage from that distortion of the evidence.
Justice Pazaratz agreed with the wife’s position that the marriage contract should be set aside due to material misrepresentation. At the time that the contract was drafted and signed, the wife and her lawyer had been misled into believing there was only one property.
Ultimately, Justice Pazaratz ruled that the wife was permitted to proceed with her equalization claim.
This decision was appealed, and later reversed by the Court of Appeal, which we will address in next week’s blog.
In the meantime, if you have questions about complex property division, call us at 519.973.1500 or contact us online. Many of our clients are referred to us by former and current clients, as well as by lawyers, accountants, and other professionals.