The Dangers of Unequal Bargaining Power

This case involved a summary motion judgement, whereby the applicant sought to set aside a separation agreement. Summary judgments are a way to dispose of an action without a trial, and can provide a cheaper and faster alternative to a full trial. On a motion for summary judgement, the applicant attempts to persuade the court that there is no genuine issue requiring a trial and that a judgement should be granted on a summary basis.

Generally, it is unusual for a court to set aside a domestic contract or separation agreement by way of a summary judgement. In this case however, the facts were overwhelmingly in favour of the wife. The Court was consequently satisfied that the agreement in question had no chance of being upheld because the bargaining power was demonstrably unequal, making the agreement unconscionable.

Background

The parties, Mr. and Ms. Butler began living together in 1979. They were married in 1982 and raised two children (both adults now). The couple jointly owned their home. Throughout their relationship and after, Mr. Butler worked on the automotive assembly line at Honda Canada. Ms. Butler assumed the role of a traditional stay-at-home mother; she maintained the home, cared for and raised the children, and had no substantial paid employment over the last 26 years.

The parties separated in August 2013. Soon after, Mr. Butler presented Ms. Butler with a (completely one-sided) separation agreement. The terms of this agreement included Ms. Butler giving up an equalization payment of approximately $150,000, transferring her interest in the matrimonial home, giving up the right to share in Mr. Butler’s pension, and accepting only $40,000 in lieu of what would have been indefinite spousal support of at least $2,500 every month. Ms. Butler did not seek independent legal advice, and relied entirely on her husband’s advice to her that because she left the marriage and had not worked outside the home during the marriage, she was not entitled to anything.

She signed the agreement a few days after, but Mr. Butler did not execute the agreement at that time. The parties then embarked on an attempted reconciliation. The reconciliation broke down after four or five months, and Mr. Butler then signed and executed the agreement.
Any delay caused by Mr. Butler not immediately executing the agreement was irrelevant to the formal validity of the separation agreement. The real issue in this case was whether the provisions of the Family Law Act (FLA) and contract law could render the separation agreement invalid.

ANALYSIS

Pursuant to section 56(4) of the FLA, a court may set aside a separation agreement (and any other domestic contract) or a provision in it if: either party failed to disclose significant assets, debts, or liabilities; either party did not understand the nature or consequences of the domestic contract; or otherwise in accordance with the law of contract.

An analysis under section 56(4) is comprised of a two-part process. The court must first consider whether the party seeking to set aside the agreement can demonstrate that one or more of the circumstances set out within the provisions have been engaged. The court must then consider whether it is appropriate to exercise its discretion in favour of setting aside the agreement.

Whether the circumstances set out in section 56(4) of the FLA have been engaged?

Non-Disclosure

In this case, the assets held by the parties were simple and obvious; there was nothing in the evidence to suggest that there had ever been any concealment or lack of transparency with respect to financial disclosure. The Court relied on a finding from Quinn v. Epstein Cole LLP (2007), 87 O.R. (3d) 184 (affirmed 2008 ONCA 662), that formal disclosure is not always necessary because general awareness of the other party’s assets can be sufficient to uphold the validity of an agreement. On this matter, the Court concluded that there was no merit to any complaint regarding non-disclosure. The Court was satisfied that although Mr. Baker was primarily responsible for the family’s finances, Ms. Butler was generally aware of their financial circumstances at separation.

Unconscionability

Courts have stressed the importance of respecting parties’ right to decide what constitutes mutually acceptable and equitable sharing for themselves. This contractual autonomy however, depends on the integrity of the bargaining process.

Courts have recognized that negotiations following the disintegration of a spousal relationship take place in a uniquely difficult and emotional context. As such, spouses are obligated to refrain from using exploitive tactics. Although utmost good faith is not required when negotiating separation agreements, the Court in Miglin v. Miglin, 2003 SCC 24, stated that parties ought not to exploit or take advantage of one another’s vulnerabilities.

Judicial intervention therefore, may be justifiable where there are circumstances of oppression, pressure, or other vulnerabilities during the negotiation process, and one party unconscionably exploits these vulnerabilities. Such dealings fail to comply with the general objectives of the FLA and consequently need not be legally enforced. The test for unconscionability does not involve a weighing of the end result, but rather an assessment of whether a party was taken advantage of due to their unequal position or bargaining power.
Regardless, parties are expected to use due diligence in ascertaining the facts underlying their agreements; they cannot fail to ask the correct questions and then rely on unconscionability or a lack of disclosure. Separation agreements will be set aside only where the party is found to have been unable to protect themselves (either where they were preyed upon or otherwise unable to understand the circumstances of the agreement because of the other party’s actions).

In this case, the Court found that Ms. Butler demonstrated a lack of sophistication – she was completely unaware of her actual rights. Although Mr. Butler was not acting vindictively, he exerted his will over Ms. Butler and was in a demonstrably stronger bargaining position than her. She “threw herself on his mercy” and his telling her what do within that context represented a pressure on her will that left her disadvantaged and unable to freely decide and negotiate for herself. The court found that Mr. Butler had engaged in predatory behavior, was out to protect his own self-interest, and further exploited Ms. Butler’s vulnerabilities.

Lack of Independent Legal Advice

Lack of independent legal advice is not fatal to an agreement and is not by itself determinative of the validity of a separation agreement. Generally, courts enforce agreements arrive at between parties.

In this case however, the separation agreement was found to be grossly improvident despite the fact that Ms. Butler failed to seek independent legal advice. The Court found that the lack of independent legal advice created an “unsurmountable obstacle” for Ms. Butler because it robbed her of the minimum information she needed in order to effectively and fairly resolve the financial aspect of her separation. Her inability to appreciate and understand the statutory scheme dealing with spousal support, joint property, and the process of equalization was held to make the agreement unconscionable and thereby invalid.

Whether the court ought to exercise its discretion to set aside the agreement?

As perLevan v. Levan, 2008 ONCA 388, once a court has found one of the statutory preconditions to exist, it is then entitled to exercise its discretion to set aside an agreement by considering the fairness of the contract as a whole.

In considering the fairness of the agreement in this case, the court found that it was grossly unfair and improvident. Ms. Butler was made to give up her substantial compensatory spousal support claim in exchange for a small lump sum, she received no recognition of her joint ownership in the matrimonial home, and her net family property equalization claim was denied. When the unfairness of this contract was viewed against the backdrop of her lack of legal advice, her unsophistication, and Mr. Butler’s acting in self-preservation, the court held that the agreement must be set aside.