Published on March 4, 2013
Posted in: Blog
As a general rule, most provincial family law statutes permit spouses to contract out of the outcomes that would result if the division-of-net-family-property provisions of the provincial legislation in question are strictly applied following a marital breakdown. In Ontario, for example, such contracting out is commonly accomplished by the spouses entering into a “marriage contract” (which is one of several types of “domestic contracts” that are explicitly recognized under Ontario’s Family Law Act).
A marriage contract is therefore a practical method for the owner of a private business to attempt to shelter his or her business from the risks described in Part I of this blog article following a marital breakdown. The right to contract out of the division-of-net-family-property provisions of family law statutes is, however, not absolute; the statutory schemes in each province typically contain provisions that permit judicial intervention, but the threshold for such intervention varies from province to province. In general, a marriage contract is more likely to be subject to a judicial override if the results of applying such a contract would lead to a division of family property that is unfair or unconscionable as of the date of division of the family property, having regard to all of the surrounding circumstances at that time (and not just at the time that the marriage contract was entered into). Nevertheless, the relevant provisions of Ontario’s Family Law Act that deal with marriage contracts and the reasons provided by the Supreme Court of Canada in its 2004 decision in the Hartshorne case suggest that the odds of the division-of-net-family-property provisions of a marriage contract being enforceable will be greatly enhanced if:
- the owner spouse makes full financial disclosure to the non-owner spouse before the marriage contract is entered into;
- the non-owner spouse receives independent legal advice before signing the marriage contract; and
- the marriage contract clearly sets out the parties’ intentions and accurately describes and foresees their personal and financial circumstances after it was entered into (such that the outcomes that will result if the terms of the marriage contract are adhered to after the spouses’ marriage breaks down would be considered consistent with what the spouses’ reasonable expectations were at the time they entered into the contract).
The provisions of a marriage contract that deal with the consequences of marital breakdown on the treatment of an owner spouse’s interest in a business will vary depending on the intended outcomes of applying the contract. In the Hartshorne decision, for example, the Supreme Court of Canada suggested that if the marriage contract in issue also deals with support obligations, if all of the preconditions to enforceability described above have been met, a court should be reluctant to interfere with a release by the non-owner spouse of all claims related to the owner spouse’s business if the marriage contract makes clear that the parties intended that (1) support payments to be made to the non-owner spouse following a breakdown of the marriage would greatly exceed the support levels required under the relevant family law legislation, and (2) the “excessive” portion of the support payments was, in effect, intended to compensate the non-owner spouse for agreeing to release his or her claim against the owner spouse’s interest in the business. If, on the other hand, the owner spouse’s more limited goal is simply to protect his or her business against the disruption that may be caused by a breakdown of his or her marriage, then the marriage contract may contain a more limited waiver of rights by the non-owner spouse – such as a covenant on the part of the non- owner spouse never to seek a court order to force the sale of the business, or to have the assets of, or the owner spouse’s interest in the business charged as security for the performance of the owner spouse’s equalization obligations (either of which could trigger defaults under other agreements that the owner spouse or his or her business has entered into with third parties). The marriage contract may serve the even more limited but still valuable purpose of evidencing the non-owner spouse’s agreement that, following a breakdown of the marriage, the owner spouse will be permitted to make any equalization payment that’s related to the increase in the value of the business during the life of the marriage over the ten-year period that’s explicitly contemplated by Ontario’s Family Law Act, rather than in one lump sum payment.
It should be clear from even the brief discussion in Parts I and II of this blog article that entering into marriage contracts and/or partnership or shareholder agreements that contain provisions that address the consequences of a marriage breakdown on a particular business is an effective but imperfect method of mitigating the impact of marriage breakdown on the continued operation and viability of a privately-owned business; such contracts should be viewed realistically – as useful tools that help to manage, rather than entirely eliminate, a specific form of business risk.