Dividing Family Property on Separation: Can Your Agreement Be Set Aside

BC’s Family Law Act starts with the presumption that family property and family debt should be divided equally between spouses upon marital breakdown. But the Family Law Act also allows spouses to contract out of the equal division regime and resolve property matters on their own by negotiated agreement. Often this is done in advance in a cohabitation or prenuptial agreement. And on separation, parties sometimes contract out of a strictly equal division scheme.

The courts retain a supervisory power over agreements made between domestic partners. This means that if one party becomes unhappy with how an agreement affects them later, a court will hear those complaints. A judge can rewrite the agreement and change its terms if it is found to operate unfairly. Unfairness happens when one person gains economic benefits that are significantly greater than the other party receives in light of the roles adopted during the relationship and how the finances worked between them.

When will the courts enforce your negotiated agreement or alternatively, when will the court set it aside and change its terms? Are there steps you can take to ensure your agreement is legally binding? When one person challenges an agreement later, going back for more, it can be very draining emotionally and
financially to defend it. In today’s article, we will look at a recent Supreme Court of Canada decision that clarified some key issues relating to how the courts should approach domestic contracts.

In today’s article, we will look at a recent Supreme Court of Canada decision that clarified some key issues relating to how the courts should approach domestic contracts.

What is a domestic contract?

Private agreements between people who share their personal lives are known as “domestic contracts.” A domestic contract is an agreement between spouses designed to organize some aspect of their affairs, be it child support, custody, spousal support, or family property division. A domestic contract may arise at the beginning of, during, or at the end of the relationship. All of these contracts are open to challenge later.

What makes a valid domestic contract?

The Family Law Act in BC says that a domestic contract must be in writing, signed by both parties, and witnessed to exempt family property from equal distribution under the statute. It also states, among other things, that an agreement can be set aside by the court if one spouse failed to make proper financial disclosure, or if a spouse did not understand the nature or consequences of the agreement.

What if an agreement to divide property fails to meet those requirements?

How will the courts treat an agreement that does not meet those formal requirements? That was the issue in Anderson v. Anderson, 2023 SCC 13, a case recently decided by the Supreme Court of Canada. On the facts in that case, the Court found the parties’ home-made separation agreement was binding and enforceable despite the husband’s complaint 2years later that it was signed quickly and without legal advice or disclosure.

Diana and James Anderson were married for three years. They separated on May 11, 2015. This was not the first marriage for either party and both came into the marriage with considerable assets, including houses, vehicles, personal property, RRSPs and pensions. They had no children. 

On July 19, 2015, the parties met with two friends, who brought the couple together to discuss the possibility of reconciliation. It soon became clear that reconciliation was not a possibility. At the end of the meeting, the parties executed an agreement, prepared by the wife, dividing the family property. It was witnessed by their two friends. There was no financial disclosure between the parties and neither party had the benefit of independent legal advice before signing. While the wife recommended that the husband “think it over and talk to a lawyer”, he declined and signed immediately.

The agreement was simple: it provided that each party was to keep the property held in their name and give up all rights to the other’s property, except for the family home they purchased together and the household goods. 

Husband challenges separation agreement

After the agreement was signed, the parties appeared to consider their affairs to be resolved as shown by their actions. The husband retrieved his furniture from the family home and cashed in some of his RRSPs, and the wife reconvened the truck to the husband and sold a trailer she used with the husband during the marriage pursuant to the agreement. The husband’s conduct led the wife to believe that the matter of property division had been resolved, so she did not apply for property division in her divorce petition in December 2015. 

On May 5, 2017, nearly 17 months after the wife filed her petition and nearly 2 years after the agreement was signed, the husband took procedural steps open to him to challenge the terms of the property division. . The husband claimed that enforcing the agreement would be unfair because the parties did not engage in formal financial disclosure or consult legal counsel before signing the agreement. The trial court found the agreement was not fair and substituted different property division terms for the ones in the initial separation agreement. The wife argued at the Court of Appeal and then at the Supreme Court of Canada that the initial agreement should not be changed..

Supreme Court of Canada rules that separation agreement is binding

The Supreme Court found the agreement was binding. There were no concerns with the agreement’s fairness in this case; it was short and uncomplicated and reflected the intention of the parties to divide property in a specific manner. . Although lack of independent legal advice and absence of formal disclosure can often undermine informed choice, these facts were not troubling here because the husband could not point to any resulting financial harm he suffered because of the absence of those safeguards. In short, the bargaining process was fair and the economic terms were also fair in light of the circumstances of this particular marriage.

Family law agreements are unique

The Anderson decision clarified how the courts should approach domestic contracts in dividing family property. As a starting point, the Supreme Court clarified that a domestic contract should generally be encouraged and supported by courts, absent a compelling reason to alter its terms later. . This deference is appropriate when we consider the values of self-sufficiency, autonomy, and finality. Even though courts are in the best position to determine the fairness of any contract, including domestic contracts, there is sometimes a compelling benefit to resolving matters privately. After a relationship ends, it is best if matters are resolved quickly. Continued litigation long after the separation is stressful and expensive, with unpredictable results.

At the same time, the emotional complexities of family dynamics make negotiation over personal affairs very different from business transactions. The negotiation environment is fraught with emotional stress. Both parties are unsettled and even paralyzed in the other aspects of their lives like work, health, and
other relationships. . When these matters go to court, Judges must review family law agreements with a view to balancing the tension between striking the best deal that you can for yourself and concerns of economic fairness. This is not an easy exercise for anyone, but a settlement-oriented family law lawyer can help you strike that balance in a domestic agreement that will be upheld if the unthinkable happens and your former partner challenges it in court.

Safeguards to prevent unfair agreements!

The best way to rest assured that your agreement will not be changed by the court is to make sure that that each person is fully aware of the current financial position of the other.

Disclosure which means exchanging copies of banking documents and asset values in advance of any agreement is critical in family law. This guards against one party taking unfair advantage in the bargaining process. . However, the Anderson case tells us that a lack of disclosure, on its own, will not necessarily call for judicial intervention. A court will be more likely to intervene, however, where one person hides the true values of the things they own. Uneven access to information is always a red flag during the negotiation process.

A family lawyer will make sure that you have all the information you need before you sign any agreement. In the Anderson case, the home-made agreement stood the test: some don’t.

Why was the domestic contract binding in Anderson v. Anderson?

In the Anderson case, the lack of disclosure did not result in financial unfairness to either party. While the parties may not have known of the precise value of each other’s assets and liabilities at the date of separation, neither party concealed important information or otherwise misled the other. Too many relationships are still based on inequality. But this was not one of them. The husband could not show that he would have received a better settlement if he had insisted on reviewing all banking documents and obtaining third party appraisals. Neither party was vulnerable to the other. The wife did not exploit the husband in the bargaining process.

The Family Law Act provides guidance as to what is a fair allocation of finances when a relationship breaks down. Although parties can choose to depart from the formula which guides the courts in dividing finances, it is only a limited departure from this formula that will withstand a later challenge by one party. The Anderson case is an example of a “fair enough” home-made agreement.

Take home point from the SCC’s decision in Anderson v. Anderson

This case is a property division case where there are no children. The parties were both relatively sound economically and aware of each other’s financial position. The Supreme Court of Canada has said that in these circumstances, parties are more free to make agreements between them without the protections of independent legal advice and extensive documentary disclosure.

Few family issues are like this. Most cases involve child support and spousal support. These are the cases where there is an unfair power balance and a risk of one party taking unfair advantage. The courts will still intervene as they should when an agreement operates so unfairly as to call into question the values on which the Family Law Act is based. At its heart, the values are that one party should not emerge from a personal relationship with anything but a fair allocation of finances that reflects the roles each party had during their time together.