Separation Agreements: Full Disclosure and Fair Dealing

The Supreme Court of Canada in Rick v. Brandsema has recently clarified the law regarding what is and isn't fair in the negotiation and contents of a separation agreement.

The SCC headnote found at Canlii gives an excellent summary (the numbers in square brackets being the relevant paragraph of the SCC judgment; the hyperlinks are by the author of this blog):

The parties married in 1973 and separated in 2000. During their 29 years together, they had five children and acquired a dairy farm in which they were equal shareholders, as well as other real property, vehicles and RRSPs. The parties were intermittently represented by lawyers and also used the services of mediators during their negotiation of a separation agreement. Approximately a year after their divorce, the wife sought to set aside the agreement on the grounds of unconscionability or, in the alternative, a reapportionment order under s. 65 of British Columbia’s Family Relations Act.

The trial judge found that the agreement was unconscionable because the husband had exploited the wife’s mental instability during negotiations and had deliberately concealed or under‑valued assets. This resulted in the wife receiving significantly less than her entitlement under the Act, despite the fact that it was the parties’ express intention to divide their assets equally. As a result, the trial judge made an order awarding the wife an amount representing the difference between the negotiated equalization payment and the amount she was entitled to under the Act. The Court of Appeal disagreed with the trial judge’s conclusions about the extent of the wife’s vulnerabilities and concluded that, in any event, they were effectively compensated for by the availability of counsel. [The wife appealed that BCCA decision to the Supreme Court of Canada and won.]

[...]
The singularly emotional environment that follows the disintegration of a spousal relationship means that the negotiation of separation agreements takes place in a uniquely difficult and vulnerable context. Special care must therefore be taken to ensure that the assets of the former relationship are distributed through a process that is, to the extent possible, free from informational and psychological exploitation. Where exploitation results in an agreement that deviates substantially from the objectives of the governing legislation, the resulting agreement may be found to be unconscionable and, as a result, unenforceable. [1] [44] [47]

While parties are generally free to decide for themselves what bargain they are prepared to make, decisions about what constitutes an acceptable settlement can only authoritatively be made if both parties come to the negotiating table with the information they need to consider what concessions to accept or offer. This requires that there be a duty on separating spouses to provide full and honest disclosure of all relevant financial information in order to help protect the integrity of the negotiating process. This duty not only anchors the ability of separating spouses to genuinely decide for themselves what constitutes an acceptable bargain, it helps ensure the finality of agreements. An agreement negotiated with full and honest disclosure and without exploitative tactics will likely survive judicial scrutiny. [45‑49]

Whether defective disclosure will justify judicial intervention, however, will depend on the circumstances of each case, including the extent of the misinformation and the degree to which it may have been deliberately generated. [49]

There is no reason to disturb the trial judge’s conclusion that the separation agreement was unconscionable. His findings about the husband’s defective disclosure and exploitation of his wife’s known mental vulnerabilities, support the conclusion. Although in some cases professional assistance will effectively compensate for vulnerabilities, in this case the trial judge concluded that the wife’s mental instability left her unable to make use of such assistance. [2] [6] [27-28] [31] [36] [58‑60] [62]

The husband’s failure to make full and honest disclosure, his knowledge that the negotiations were based on erroneous financial information, as well as his exploitation of what he knew to be his wife’s profound mental instability, resulted in a negotiated equalization payment that was $649,680 less than the wife’s entitlement under the Family Relations Act. In these circumstances, the trial judge was entitled to award this amount to compensate the wife for the loss caused by the unconscionable bargain. [6] [27-28] [31] [53] [63] [69]