Domestic-Contracts-Case-Comment-on-Hartshorne-vdot-Hartshorne

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Davis & CompanyDomestic Contracts:Case Comment onHartshorne v. Hartshorne and S.M.J. v. R.H.C.W.JULY, 2004Grace Choi2800 Park Place666 Burrard StreetVancouver, BCCanada V6C 2Z7Tel: [phone]Fax: [phone]www.davis.ca© Davis & Company, 2004. This paper is the property of Davis & Company. No reproduction of any part of this paper is permitted without the prior permission of the authors.This paper is intended to provide general comments on developments in the law. It is not intended to be a comprehensive review nor is it intended to provide legal advice.Readers should not act on information in the paper without seeking specific advice on the particular matter. Our firm would be pleased to provide additional details or discusshow this information is relevant to a specific situation.© 2004 Davis & Company 1VANCOUVER TORONTO MONTRÉAL CALGARY EDMONTON WHITEHORSE YELLOWKNIFE TOKYODavis & CompanyDomestic Contracts: Case Comment onHartshorne v. Hartshorne and S.M.J. v. R.H.C.W.by Grace ChoiJuly, 2004If you have signed a prenuptial agreement, or are considering signing one, a recent decision by theSupreme Court of Canada may impact how that contract will stand up to a future court challenge. InHartshorne v. Hartshorne, the Court upheld a marriage contract, or “prenup”, between the Hartshornes,despite Mrs. Hartshorne’s claim that the agreement should be set aside due to unfairness. In BC, as inmost other ...

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Domestic Contracts:

Case Comment on

Hartshorne v. HartshorneandS.M.J. v. R.H.C.W.

JULY, 2004

Grace Choi

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© Davis & Company, 2004. This paper is the property of Davis & Company. No reproduction of any part of this paper is permitted without the prior permission of the authors.

This paper is intended to provide general comments on developments in the law.It is not intended to be a comprehensive review nor is it intended to provide legal advice. Readers should not act on information in the paper without seeking specific advice on the particular matter. Our firm would be pleased to provide additional details or discuss how this information is relevant to a specific situation.

V A N C O U V E RT O R O N T OM O N T R É A LC A L G A R YE D M O N T O NW H I T E H O R S EY E L L O W K N I F ET O K Y O

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Domestic Contracts: Case Comment on Hartshorne v. HartshorneandS.M.J. v. R.H.C.W.

by Grace Choi July, 2004

If you have signed a prenuptial agreement, or are considering signing one, a recent decision by the

Supreme Court of Canada may impact how that contract will stand up to a future court challenge.In

Hartshorne v. Hartshorne, the Court upheld a marriage contract, or “prenup”, between the Hartshornes,

despite Mrs. Hartshorne’s claim that the agreement should be set aside due to unfairness.In BC, as in

most other provinces, couples can enter into contracts governing the distribution of assets in the event

of marriage breakdown.Entitlements in these contracts replace the presumptive equal division

provided for in family property legislation, but are subject to modification by the courts if found to be

unfair at the time the property is being distributed.

The Hartshornes, both lawyers, were married for nine years and lived together for twelve.It was a

second marriage for both.Mrs. Hartshorne left the practice of law to care for the couple’s two children,

the second of which was born a few months after their wedding.Before the wedding, Mr. Hartshorne

informed Mrs. Hartshorne that he would never again allow a division of his property (as had occurred

at the end of his first marriage), and asked her to sign a marriage agreement.At the time, Mr.Hartshorne

was bringing approximately $1.6 million in assets into the marriage, while Mrs. Hartshorne was entering

the marriage without substantial assets and in debt.The agreement, drafted approximately one month

before the wedding, specified the parties would be separate as to property, and gave Mrs. Hartshorne

a 3% interest in the matrimonial home for each year of their marriage, to a maximum of 49%.Nine

days prior to the wedding, Mrs. Hartshorne obtained independent legal advice and was advised by her

lawyer that the agreement was “grossly unfair”.She did not want to sign; however, at her husband’s

insistence, Mrs. Hartshorne signed the agreement on their wedding day.

The parties separated in 1998, and in the divorce proceedings Mr. Hartshorne relied on the agreement

to avoid the presumption of an equal division of family assets under the BCFamily Relations Act. The

Act expressly allows for marriage agreements as a method of settling the distribution of property on

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divorce. However,it also states that in order for a domestic contract to be enforceable, the agreement

must be fair.Fairness is to be determined with regard to a number factors set out in theFamily

Relations Act, including: the length of the marriage; how long the parties have lived apart; when

property was acquired or disposed of; whether one spouse acquired property through an inheritance

or gift; and the needs of each spouse to be economically independent and self sufficient.

In its analysis, the Court was concerned with balancing respect for the parties’ intent, as demonstrated

in the agreement, with the need for a fair result.What is significant about this decision is the deference

with which the Court treated the Hartshorne’s marriage agreement.The Court held that once an

agreement has been made, the parties are expected to fulfill their obligations under the agreement

and courts should not “secondguess” those arrangements, particularly where the parties have obtained

independent legal advice.Unfairness is not presumed simply because the contract provides for a

division of assets different from that set out in family property legislation.

The Court set out the process to be used in a consideration of a marriage agreement,and made a

number of significant conclusions.First, the contract will be analysed for fairness by applying the

contract itself to see whether, in fact, unfairness results from the distribution of property as set out in

the contract.All financial entitlements must be recognized, including spousal support and child

support. Next,the various factors mentioned above will be considered in order to determine whether

or not the contract is unfair.At this second step, an important part of the consideration will be how

accurately the parties predicted their future social, financial and family situation when they signed

the contract.Where the parties’ current financial and personal circumstances were anticipated with

accuracy from the beginning, and they actually considered the impact of their decision to sign the

agreement, it will be more difficult to prove unfairness.If the agreement is found to be unfair, the

court can then reapportion the division of assets in a way that is equal in all the circumstances.

Applying these steps to the Hartshornes’ situation, the Court found that the agreement was not unfair.

The parties had accurately predicted how their lives would unfold and this was reflected in the

agreement. Theyhad followed through with their intention to remain separate as to property; and, as

planned, their second child was born and Mrs. Hartshorne decided to stay home and raise the children.

Although she gave up her law practice, thereby postponing her career, the Court found that this was a

decision she had made herself, prior to the marriage, with an understanding of the implications for

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her financial position and personal life.In addition, the Court held that any economic disadvantage

arising from that decision could be compensated through spousal support.

TheHartshornedecision implies that parties who have entered marriage agreements are entitled to rely

on those contracts, unless it can be shown that, in all the circumstances, the agreement is substantially

unfair. Assuch, the decision provides more certainty for parties wishing to use such an agreement to

govern the distribution of property in the event of divorce.However, it is important to note the particular

facts that seem to drive the Court’s decision.First, the Court found it significant that the parties both had

independent legal advice.Second, both parties were lawyers and, as such, had at least some understanding

of the legal ramifications of signing such an agreement.Accordingly, Mrs. Hartshorne may have been

held to a higher standard than will be expected of subsequent plaintiffs.In any event, it seems that

parties seeking to set aside a domestic contract will now face a higher hurdle in demonstrating unfairness.

1 An interesting contrast to theHartshornedecision, is the 2003 BC Supreme Court decision inS.M.J. v. R.H.C.W.

This case concerned a “cohabitation agreement” which, at the end of the relationship, one party claimed was

unfair. Cohabitationagreements can be used by couples who want to live together but do not intend to

marry, and, like marriage agreements, they set out how assets will be dealt with if the relationship ends.

S.M.J.concerned a sixandahalf year relationship between a woman 45 years of age and a man 72 years

of age.SMJ had a fulltime job earning $30,000 per year.RHCW was a businessman who owned and

operated a group of companies that held fishing resorts, marinas and hotel properties in Canada and the

Bahamas. Afterapproximately a year of dating, RHCW invited SMJ to come and live with him in his $2

million home, but specified that she would first have to sign a cohabitation agreement.That agreement

provided that the parties would maintain their own separate property and that, if they separated, SMJ

would be entitled to $5000 cash to cover relocation expenses.SMJ did not object to signing the agreement

and even when she obtained independent legal advice which was critical of the agreement, she was

determined to sign.The couple enjoyed a luxurious lifestyle together, complete with trips to the Bahamas

and an active social life.However, the relationship began to break down, and SMJ eventually moved out.

In 1998, midway through their relationship, a new provision was added to theFamily Relations Act,

which provided that cohabitation agreements could also be reviewed for fairness by the courts.As a

result, despite the existence of a contract, SMJ applied to the court for an order regarding the division

of property and spousal support.

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Justice Boyd of the BC Supreme Court concluded that the cohabitation agreement was unfair.Although

SMJ knew what she was signing and made the informed decision to sign, the agreement was unfair

because it did not include a plan which would provide for any future protection of SMJ’s financial

position. Althoughshe had not suffered any loss in her employment status, the agreement did not

provide her with a share in the family assets or provide any kind of spousal support.As a result, the

agreement was set aside.Justice Boyd held that SMJ was entitled to 30% of the family assets, which

were held to be RHCW’s home and contents, his shareholders’ loan accounts and a vehicle, which

resulted in an award of $961,000.On the issue of spousal support, the judge found that SMJ’s economic

circumstances could not be a basis for a support order, particularly in light of the substantial payment

she received from the division of assets.

The question is, what does this case say about the concern for a balance between certainty of contract

and fairness that seemed to inform theHartshornedecision? First,S.M.J. v. R.H.C.W.was decided three

monthsbeforethe Supreme Court of Canada’s judgment inHartshorne. Ifthe trial judge had had the

benefit of that decision, he may have given more weight to the agreement as evidence of the expectations

of the parties.Just as inHartshorne, one partner brought all of the significant assets to the relationship,

the parties kept their property separate throughout the relationship, and both parties received independent

legal advice.In addition, there was less of an emotional reaction to signing the agreement inS.M.J., as

a wedding was not at stake, and SMJ admitted that she had no problem with signing the contract.

However, inHartshorne, the agreement at least provided forsomedivision of assets, while inS.M.J.,

after a six year relationship, SMJ would have received only $5000.It is difficult to say what a post

HartshorneWhat is fairly certain, however, is that SMJ would have facedcourt would have decided.

more of an uphill battle to have the contract set aside, particularly in light of that fact that circumstances

seem to have played out as predicted at the time the contract was signed.SMJ had not lost her job,

become ill, or faced an unexpected change in circumstances which had not been provided for in the

contract. Ina postHartshorneworld, a court may not have set the agreement aside because it did not

provide for SMJ’s future position, unless a change in circumstances demonstrated that her position

had changed in such a way that rendered the contract unfair.

(Footnotes) 1 [2003] B.C.J. No. 2950 (S.C.) (QL).

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