Non-disclosure case sends mixed messages: Shinehoft
By Judy van Rhijn, AdvocateDaily.com Contributor
Shinehoft, principal of Shinehoft Law, points to a recent Ontario Court of Appeal (OCA) case in which the husband failed to disclose assets. The OCA refused to set aside the Superior Court’s decision in the husband’s favour and ordered the wife to pay the husband’s costs on appeal.
“The takeaway is that it’s a big risk to try and set a separation agreement aside,” she says.
According to the decision, the parties in the OCA case negotiated property settlement, child support and spousal support through a long course of mediation where both parties were legally represented. The husband agreed to pay $10,000 per month in child and spousal support, and the wife made an equalization payment of $181,578.
The wife later discovered that the husband failed to disclose various interests in family businesses, payments he received on a shareholder loan, and capital income he received from the sale of shares by a corporation he controlled, it states.
She attempted to set aside the separation agreement under s. 56(4) of the Family Law Act which states that a court “may, on application, set aside a domestic contract or a provision in it if a party failed to disclose to the other significant assets … existing when the domestic contract was made."
Shinehoft says non-disclosure is a perennial problem.
“We all work on a very theoretical assumption that everyone is going to be honest and try to put forward all of their financial information, but you really never know,” she says. “Even the lawyers only know as much as their client advises them unless they find something in one of the documents.”
It is standard practice for lawyers to advise their clients of the existence of s. 56(4) and the risk that an agreement can be overturned if there is non-disclosure, says Shinehoft.
“That’s what section 56(4) is all about,” she says. “We try to make our separation agreements as ironclad as possible, but the parties know that anyone has a right to challenge it, or ask the courts to take a look at the agreement.”
Shinehoft warns her clients that when it has been properly negotiated — and lawyers have been involved — there will be a high threshold for the court to get involved or set the agreement aside.
“I always tell them that even if there is a misrepresentation, courts are loathe to get involved and overturn a privately negotiated contract because it defeats the purpose of having it,” she says.
“The whole point about private contracts is that the parties are specifically agreeing to get out of the system that was set up by the government," Shinehoft says.
"Some people have different reasons for settling — whether they want peace of mind or to finish it faster. If we can show there was a process, and there wasn’t any pressure or undue influence, it will be really hard to get a court to change it.”
Justice Carolyn J. Horkins of the Superior Court found that the husband’s non-disclosure was blameworthy and that the assets were considerable, but they were not “significant” in the sense required by s. 56(4) because the wife had obtained a very favourable settlement.
She found the child and spousal support far exceeded what the wife would have achieved at trial, and the husband made substantial concessions in the mediation, leaving out deductions and loans on his side and valuable personal property on her side. In fact, the trial judge found that the assets in question did not affect equalization or support.
Shinehoft says the OCA examined all the evidence.
“There seems to be quite a bit of money that he didn’t disclose, but the wife did really well and got a favourable settlement,” she says. “Even if the husband should have his wrist slapped for not providing that information, the court decided, with all the other factors, it was not a reason for them to change the terms.”
According to the decision, “While incomplete disclosure rightfully attracts the risk that an agreement might be set aside, s. 56(4) makes it clear that failure to disclose even a significant asset does not necessarily attract that consequence.”
While Shinehoft says the court approached the case correctly, she is concerned about the message the judgment sends.
“It might cause people to think the husband got away with it,” she says. “The wife didn’t do anything wrong. She had the right to apply to the court. That’s why the clause is there. If something material was left out, it should be looked at because maybe she wouldn’t have settled the way she did if she knew about it.”
The wife was also ordered to pay the husband’s costs on the appeal.
“The costs are a bit harsh,” says Shinehoft. “It’s like a double penalty. Not only did he not have to provide his information, but he also gets money for it. The wife wouldn’t have needed to bring it to the court in the first place if he hadn’t misrepresented.”
She’s concerned the decision may embolden people to not disclose assets and may put a dampener on attempts to use the section.
“What’s the incentive for people to do full disclosure? I think in certain cases, if the facts were different, maybe he would have been penalized and they would have overturned the agreement," Shinehoft says.
"The only real protection is knowing that you don’t know how a court will react. There’s always a risk they will overturn it.”
Shinehoft would like to see further clarification on how serious a misrepresentation has to be before the courts will get involved.
“That’s where it still stays a bit grey,” she says. “When does the court consider it significant enough to overturn?”
However, Shinehoft is pleased that the court gives guidance to the examination of the agreement.
“It’s good that the Court of Appeal has touched on this because now we have a more up-to-date idea of how the court will treat this section. This particular case tells me that a court will look at the entire process and settlement. They won’t look at it in a compartmentalized way, separating child support, spousal support and property.”
She sees this as approval for a global approach to negotiations.
“It’s OK for us to mix things because you may end up getting more in one area than another,” says Shinehoft. “Not everyone’s going to get 100 cents on the dollar. That’s why it’s a negotiation.”