Court of Appeal Releases Decision on Capacity

On Friday, the Court of Appeal released its decision in Wolfman-Stotland v. Stotland, a case about the mental capacity required to obtain a declaration of irreconcilability. There have been a number of cases like this over the last few years, and I expect that as our population ages, cases on other elder law issues will become increasingly commonplace.

In Wolfman-Stotland, the parties were both in their 90s and each had lived in a separate assisted living facility for several years before the wife commenced proceedings in June 2010. In October 2010, counsel for the wife applied for a declaration, under s. 57 of the Family Relations Act, that the parties had no reasonable prospect of reconciling with one another. Although this declaration is really about protecting property and has nothing to do with separation or qualifying for a divorce, it nevertheless requires to the court to make a conclusion about the wife's intention to end the marriage and therefore about her capacity to form such an intention. The court summarized the issue with this quote from Mental Disability and the Law in Canada by Gerald Robertson:

"Where it is the mentally ill spouse who is alleged to have formed the intention to live separate and apart, the court must be satisfied that that spouse possessed the necessary mental capacity to form that intention."

After discussing the evidence on this point, particular that of a mental health expert, the court cited with approval the discussion of capacity set out in a 1997 case out of Ontario called Calvert v. Calvert:

"Separation is the simplest act, requiring the lowest level of understanding. A person has to know with whom he or she does or does not want to live. Divorce, while still simple, requires a bit more understanding. It requires the desire to remain separate and to be no longer married to one’s spouse. It is the undoing of the contract of marriage.

"The contract of marriage has been described as the essence of simplicity, not requiring a high degree of intelligence to comprehend ...

"There is a distinction between the decisions a person makes regarding personal matters such as where or with whom to live and decisions regarding financial matters. Financial matters require a higher level of understanding. The capacity to instruct counsel involves the ability to understand financial and legal issues. This puts it significantly higher on the competency hierarchy. It has been said that the highest level of capacity is that required to make a will ... While Mrs. Calvert may have lacked the ability to instruct counsel, that did not mean that she could not make the basic personal decision to separate and divorce."

It has always been curious in my view that the mental capacity to enter a marriage should be so low compared to the mental capacity required to leave a marriage; doubtless this is a result of the social and religious stigmata formerly associated with divorce. In any event, on the strength of the expert's conclusion that the wife had the mental capacity to instruct counsel on the financial aspects of the parties' divorce, the court of appeal concluded that the wife also had the capacity to "to form the intention to live separate and apart" and therefore also the capacity to apply for the s. 57 declaration.

Another good case on a related issue is the Supreme Court's 2005 decision in M.K.O. v. M.E.C., which involved the capacity of a party to apply for a divorce where the divorce action is commenced by the party's litigation guardian. This decision is very well written and worth a read. More information about s. 57 declarations can be found in an older post, "The Ins and Outs of Separation."

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Separated with Children Financial Workshop

The Justice Education Society is hosting two workshops in the new year to help parents deal with the legal, emotional, social and financial turmoil of separation. The workshops will deal with:

• becoming financially independent
• dealing with your ex and children about money
• budgeting and debt issues
• child support, spousal support and property divisions issues

The workshops are free. You just need to register ahead of time. Call the society at 604-775-0856 in the lower mainland or at 1-800-775-0856 from elsewhere.

VancouverMonday 21 February 2011, 6:30 to 9:30 pm

Port Coquitlam
Wednesday 23 March 2011, 6:00 to 9:00pm

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The Ins and Outs of Separation... Part IV:Section 57 Declarations

Important Update: The Family Law Act was introduced on 14 November 2011 and contains a number of provisions which are critical to the comments made in this post. See my post "Family Law Act Introduced!" for more information.

A "section 57 declaration" is a judicial declaration, pursuant to s. 57 of the Family Relations Act, that a married couple have "no reasonable prospect of reconciliation with each other" and is often made when a couple have started a legal action. This sort of declaration probably seems a bit pointless, and it would be completely pointless except for s. 56 of the act:

• s. 56(1) says that a married spouse is entitled to "an interest" in the family assets when declaration under s. 57 is made
• s. 56(2) says that the interest is "an undivided half interest in the family assets as a tenant in common"

While a couple are married, the legal ownership of their assets is as the asset is owned. If the car is registered in Jane's name, it's Jane's car as far as ICBC, her creditors and her trustee in bankruptcy are concerned. Although s. 56 of the Family Relations Act says that Jane and John are each presumptively entitled to half the value of Jane's car (and s. 65 allows either of them to ask for more than half), the value won't distributed until trial or settlement. The effect of a s. 57 declaration is to divide the legal ownership of the car right away; it crystallizes each spouse's presumptive one-half interest in the family assets until the property is dealt with at trial or settlement.

The legal effect of a s. 57 declaration

As you likely guess, s. 57 declarations can be really important. The declaration:

1. converts the ownership of property spouses own as joint tenants into equal ownership as tenants in common;
2. where property is owned by only one spouse, vests a half interest in each spouse as tenants in common;
3. fixes the pool of property available for distribution between the spouses; and,
4. sets a date for the valuation of the property, including the presumptive termination date of each spouse's interest in the other spouse's pension.

Let me explain the bit about owning property as joint tenants and tenants in common. When two or more people own something as joint tenants, they all own the whole thing. There isn't one-half or one-quarter to point to and say "this part here is mine." When a joint tenant dies, his or her interest simply evaporates and the surviving joint tenants continue to own the whole property. When two or more people own something as tenants in common, however, they each own their individual slices of the pie. They can sell or borrow against their shares of the property as they each see fit, and when a tenant in common dies, his or her interest transfers to his or her estate, to be dealt with according to the tenant's will.

Let me also explain the bit about fixing the pool of property available for division. Although property acquired after the date of a s. 57 declaration often remains the separate property of the spouse who bought it, this isn't the case for property bought with a family asset. In general, if the new property is bought with a family asset, like a new car bought using the family car as a trade-in, the new property will also qualify as a family asset and be subject to division.

When you want a s. 57 declaration and when you don't

You would particularly want a s. 57 declaration if your spouse has lots of creditors who might want to seize your spouse's property or if your spouse is likely going to go bankrupt. Once a s. 57 declaration has been made, a creditor can only take your spouse's half of the family assets and only half will vest in your spouse's trustee in bankruptcy.

On the other hand, might not want a s. 57 declaration if your spouse is likely to die and you and your spouse own valuable assets, like the family home, as joint tenants. If your spouse dies while you are joint tenants, you would continue to own the whole property after your spouse's death; if you have a s. 57 declaration, you will own the property as tenants in common and after your spouse's death, you would keep your half of the property while your spouse's half would go to his or her estate.

The law about s. 57 declarations can be complicated, and you really must speak to a lawyer to get proper advice about when you should be asking for a s. 57 declaration and when you shouldn't.

Update: 9 January 2011

Curiously, I've just bumped into two cases which illustrate the importance of s. 57 declarations, both of which concern pensions.

In Peck v. Peck, the parties separated in 2003 but a divorce action didn't get started until 2009. The wife sought a share of the husband's pension, and the husband argued that her interest in his pension should have ended in 2003 when they separated, not six years later when a s. 57 declaration was made in the divorce action. The court held that there was no reason to depart from the asset division scheme set out in the Family Relations Act and divided the pension as of the 2009 triggering event.

Similarly, in Wong v. Wong, the parties separated in 2005 but a divorce action didn't get going until 2008. At the trial in 2010, the husband asked the court to value his pension from the date of separation, not five years later at the trial. The court held that there was no reason to depart from the usual practice of dividing the pension as of the triggering event. In this case, the triggering event was the divorce trial as there hadn't been an earlier s. 57 declaration.

Update: 13 January 2011

And yet another recent case in a similar vein!

In Johnston v. Johnston, the parties married in 1985 and separated in 2005. The wife received half of the husband's pension accumulating during this period, as well as during the five year period which elapsed between separation and trial as there had been no prior triggering event. (In a somewhat unusual circumstance, the court also awarded the wife a half share of the husband's pension which accumulated during the three years that the parties lived together before marrying.)

Future posts

Separation is a surprisingly broad topic. If there's a topic you'd like me to discuss, please say so in a comment to this post.

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Okay, so there's (probably) a new law coming. Now what?

Important Update: The Family Law Act was introduced on 14 November 2011. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information.

Readers of this blog, or any local newspaper really, will know that the provincial government is planning on introducing a brand new Family Law Act sometime in 2011 that will revolutionize family law in British Columbia. I've summarized the proposed new Family Law Act in a previous post.

In September, I published another post which talked about how bill becomes a law and how a law comes into force. One of the points I was trying to make was that the Family Law Act described in the government's White Paper (PDF) doesn't have any legal effect at present and may not look anything like the Family Law Act that comes into force, and a result you shouldn't make any decisions on assumptions drawn from the White Paper.

That being said, I was recently consulted by a fellow who wanted a cohabitation agreement. (I have written at length about why cohabitation agreements are a really bad idea under the current law if the point of the agreement is supposed to be about protecting property; read my post on the subject, "Why you DON'T want a cohabitation agreement," before continuing.) This is an important problem because if the new law looks anything like the White Paper's proposal, the property interests of common-law couples and married couples are going to look very different than they do right now and, either way, the dilemma posed by s. 120.1 of the Family Relations Act will no longer exist.

So what do you do now? Frankly, I'm not sure, and any answer is going to involve an awful lot of assumptions.

If the Family Relations Act is replaced and if the new act looks like the White Paper's proposal, lots of things are going to be different:

• common-law couples will have the same property entitlements as married couples
• the value of property brought into the relationship will be excluded from sharing, as well as certain other kinds of property like court awards and inheritances
• property bought with excluded property will also be excluded from sharing
• agreements about property will only be set aside where there is a defect in the agreement or how the agreement was entered into, such as a misunderstanding about the nature of the agreement or a failure to disclose the existence of an asset

In circumstances like this, it's not clear what a marriage or cohabitation agreement about property might accomplish. Perhaps such agreements would more clearly define which assets are excluded from sharing, or address how excluded property will used during the relationship. Perhaps they would attempt to regulate how property acquired during the relationship will be paid for, or how such property would be divided at the end of the relationship.

Whatever winds up happening, the only thing we know for certain is that the Family Relations Act is the law of the land, and this is the law you need to be thinking of when planning a new relationship. We can't say for certain that the Family Relations Act will be replaced; if it's replaced, we don't know what the replacement is going to look like or when it will come into effect. We also don't know how the replacement will deal with relationships that are ongoing when it comes into effect. Will there be an exemption for existing relationships? If the new law applies to existing relationships, will it apply right away or will there be a grace period?

I think that if you are planning on a new cohabiting relationship and need to be absolutely sure about the law that will apply to your relationship, you're best off waiting until the bill passes final reading. Your second best choice would be to have an agreement not about property but an agreement to negotiate an agreement about property when the content of the new law is known.

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Why you DON'T want a cohabitation agreement

Important Update: The Family Law Act was introduced on 14 November 2011 and contains a number of provisions which are critical to the comments I've made in this post. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information. I've also added a new post, "Cohabitation Agreements and the new Family Law Act," about why unmarried couples probably DO want cohabitation agreement.

Questions about cohabitation agreements come up fairly often in my line of work, and it seems that I'm constantly dealing with this one particular issue: how cohabitation agreements do and do not help to protect assets brought into a relationship. This issue's come up yet again, and I thought I'd write about it in a broader context.

People often think they need a cohabitation agreement when they move in with someone in romantic relationship. That's not true; you don't need a marriage agreement when you marry someone and you don't need a cohabitation agreement when you begin to live with someone.

That being said, there are a handful of good reasons why you might want a cohabitation agreement: if you or your partner are bringing children into the relationship; if you or your partner want to ward against the chance of a spousal support claim when the relationship ends; or, if you want to protect the property you're bringing into the relationship. The last reason is the most common reason people want a cohabitation agreement, and while this strategy may work in other provinces, it doesn't work in British Columbia. In fact, it makes things worse. A lot worse.

To be completely clear: you do not want a cohabitation agreement if you live in British Columbia and the agreement is meant to protect property. Here's why.

The British Columbia Family Relations Act treats married and unmarried couples very differently when it comes to property. For married couples, the act says they should both have an equal share of all of the family assets, regardless of who owns the asset or whether it was brought into the relationship or bought afterward, and most assets will qualify as family assets. For unmarried couples, including common-law couples, the act says nothing at all; unmarried couples are expressly excluded from the parts of the FRA that divide property. Unmarried couples are limited to making property claims under the law of trusts, and that usually produces results that are far, far less generous than the equal split married couples get under the FRA.

In summary...

1. Married Couples: The Family Relations Act presumes that each spouse gets half of all the assets, and almost all assets wind up being part of the pool of assets that get divided. Although this presumption can be challenged, most of the time the assets are split equally or near-equally.

2. Unmarried Couples: The parts of the Family Relations Act that deal with the division of assets don't apply to unmarried couples. Unmarried couples can only make claims against each other's property under the law of trusts, and those claims are tough to prove and hardly ever result in a division close to the division that would have resulted if the couple had been married

This is where s. 120.1 of the Family Relations Act comes into things.

Under s. 120.1, the parts of the FRA that divide property between married couples apply to agreements between unmarried couples that deal with property and would be a marriage agreement had the couple been married. Making things worse, under s. 65 the court has the express authority to order a division of assets other than a marriage agreement calls for if it thinks the terms of the marriage agreement are unfair... and what's unfair? Often a division of assets that is different than the equal split prescribed for married couples.

In other words: if an unmarried couple make a cohabitation agreement about property, the rules about property division for married couples apply to the agreement and the court can divide property using the standards that apply to married couples.

Now, instead of the crappy trust law claims an unmarried couple would have had to suffer through in making a claim to divide assets, the couple have all the benefits of the rules that apply to married couples, including the presumption that a fair division of assets is an equal division of assets. This is hardly the effect most unmarried couples assume a cohabitation agreement is going to have; instead of protecting their assets from division, the agreement has exposed the assets to a potential claim which is much worse than the claim that would have been available without the agreement! A bit counterintuitive, isn't it?

Important Update: The Family Law Act was introduced on 14 November 2011 and contains a number of provisions which are critical to the comments I've made in this post. See my posts "The Early and Unlamented Deaths of ss. 90 and 120.1: Government takes quick action on parental support and unmarried persons' property agreements" and "Family Law Act Introduced!" for more information. I've also added a new post, "Cohabitation Agreements and the new Family Law Act," about why unmarried couples probably DO want cohabitation agreement.

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Supreme Court of Canada Releases Important Decision

On 19 February 2009, the Supreme Court of Canada released its judgment in Rick v. Brandsema (2009 SCC 10), a case about the duty of honesty and fair play spouses owe to each other when they are negotiating a separation agreement.

The court's judgment in this case follows the reasoning it established six years earlier in Miglin v. Miglin (2003 SCC 24), a case about separation agreements and spousal support. In Miglin, the court decided that the rules about commercial contracts shouldn't apply to separation agreements because of

"the particular ways in which separation agreements generally and spousal support arrangements specifically are vulnerable to a risk of inequitable sharing at the time of negotiation and in the future"

which largely result from the unique negotiating environment of separation agreements, an environment of

"intense personal and emotional turmoil, in which one or both parties may be particularly vulnerable."

As a result, the court held that not only must the spousal support provisions of an agreement be fair in themselves, they must be negotiated in a scrupulously fair manner, without either spouse being subject to "circumstances of oppression, pressure or other vulnerabilities."

In Rick, the court took this line of reasoning a bit further, and decided that agreements must also be negotiated with full and complete financial disclosure:

"A duty to make full and honest disclosure of all relevant financial information is required to protect the integrity of the results of negotiations undertaken in these uniquely vulnerable circumstances [of separation]. The deliberate failure to make such disclosure may render the agreeement vulnerable to judicial intervention where the result is a negotiated settlement that is substantially at variance from the objectives of the governing legislation."

The "objectives of the governing legislation" might be the objectives of a spousal support order, as set out in the Divorce Act, or it might be the presumption of an equal entitlement to share in family assets, as set out in the Family Relations Act.

To boil all this down, the cumulative effect of Miglin and Rick is that agreements must be negotiated with procedural fairness (fairness in the conduct of the negotiations) and must ultimately reflect substantive fairness (conformity with any relevant legislative goals) or court may set aside or vary an agreement:

1. The freedom of spouses to negotiate a fair settlement at the conclusion of their marriage depends on the integrity of the bargaining process.

2. The integrity of the bargaining process is at risk when a spouse pressures or manipulates the other spouse, or takes advantage of the vulnerability or weakness of the other spouse, to acheive a good deal. (Miglin)

3. The integrity of the bargaining process is at risk when a spouse fails to make full and complete financial disclosure. (Rick)

4. The integrity of the bargaining process can also be jeopardized simply by the stressful emotional circumstances of separation. (Miglin and Rick)

5. The court will intervene where the bargaining process was flawed and the terms of the agreement are at odds with the objectives of the Divorce Act or the Family Relations Act.

The court's summary is perhaps best:

"[T]he more an agreement complies with the statutory objectives, the less risk that it will be interfered with. Imposing a duty on separating spouses to provide full and honest disclosure of all assets, therefore, helps ensure that each spouse is able to assess the extent to which his or her bargain is consistent with the equitable goals in modern matrimonial legislation, as well as the extent to which he or she may be genuinely prepared to deviate from them.

"In other words, the best way to protect the finality of any negotiated agreement in family law, is to ensure both its procedural and substantive integrity in accordance with the relevant legislative scheme."

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Supreme Court Releases Decision on Property Claims, Separation Agreements and Indepedent Legal Advice

The Supreme Court has recently released its decision in Giebelhaus v. Giebelhaus, a case in which the husband asked the court to divide property, in the face of a separation agreement he had signed on the subject, under s. 65 of the Family Relation Act. As usual, I'm not so much interested in the particular facts of the case as I am in the court's review of the law.

The court reviewed two important decisions, J.K.T. v. A.J.T., a recent case of our Supreme Court, and Hartshorne v. Hartshorne, a 2004 case of the Supreme Court of Canada. In J.K.T., the court outlined the principles to be considered on applications under s. 65:

[88] ... the onus is on the party seeking to vary the agreement to establish that it is unfair; fairness is not to be equated with equality or near equality. ... 

[89] ... in relation to the division of family property, that such a division may have to be unequal in order to be fair. ... 

[90] ... the question of fairness in family property matters ought not to be approached from a commercial perspective. It is necessary to examine whether the agreement reached was actually fair. ... 

[91] ... s. 65 of the FRA does not permit the Court to set aside agreements; it only authorizes reapportionment on the basis of unfairness.

The court then quotes Hartshorne for the basic test to determine the fairness of marriage agreements (important bits in bold):

[47] ... in determining whether a marriage agreement operates unfairly, a court must first apply the agreement. In particular, the court must assess and award those financial entitlements provided to each spouse under the agreement, and other entitlements from all other sources, including spousal and child support. The court must then, in consideration of those factors listed in s. 65(1) of the FRA, make a determination as to whether the contract operates unfairly. At this second stage, consideration must be given to the parties’ personal and financial circumstances, and in particular to the manner in which these circumstances evolved over time. Where the current circumstances were within the contemplation of the parties at the time the Agreement was formed, and where their Agreement and circumstances surrounding it reflect consideration and response to these circumstances, then the plaintiff’s burden to establish unfairness is heavier. Thus, consideration of the factors listed in s. 65(1) of the FRA, taken together, would have to reveal that the economic consequences of the marriage breakdown were not shared equitably in all of the circumstances. This approach, in my view, accords with the underlying principle of the FRA, striking an appropriate balance between deference to the parties’ intentions, on the one hand, and assurance of an equitable result, on the other.

The court in Giebelhaus then applied the first stage of the Hartshorne test to see what the parties would be left with under their separation agreement and concluded that the husband would be left with assets totalling $130,265 while the wife would receive, including the family home, assets totalling $242,564.

The court then applied the second stage of the Hartshorne test to see whether the separation agreement was fair in light of the factors set out in s. 65(1) of the Family Relations Act. This is what s. 65(1) says:

If the provisions for division of property between spouses under section 56, Part 6 or their marriage agreement, as the case may be, would be unfair having regard to

(a) the duration of the marriage, 

(b) the duration of the period during which the spouses have lived separate and apart, 

(c) the date when property was acquired or disposed of, 

(d) the extent to which property was acquired by one spouse through inheritance or gift, 

(e) the needs of each spouse to become or remain economically independent and self sufficient, or 

(f) any other circumstances relating to the acquisition, preservation, maintenance, improvement or use of property or the capacity or liabilities of a spouse,

the Supreme Court, on application, may order that the property covered by section 56, Part 6 or the marriage agreement, as the case may be, be divided into shares fixed by the court.

Considering the length of the parties' 14 year marriage, the needs of each spouse to become or remain economically independent and self sufficient, and the general s. 65(1)(f) catch-all factor, "any other circumstances relating to the capacity or liabilities of a spouse," the court concluded that the separation agreement was unfair and its division of assets therefore "outside of a reasonable range." The court awarded the husband a further $45,000, leaving him with $175,265 and the wife with $197,564... not exactly an equal division but significantly better than the original agreement.

There was, however, one other wrinkle in this case: the husband had obtained independent legal advice in signing the agreement — a fact relied on by the wife in her defence of the agreement. The husband claimed the advice he received was in adequate and that, as a result, he did not fully understand the wife's financial circumstances when he made the decision to sign the separation agreement.

This gave the court the opportunity to discuss the meaning and necessary content of independent legal advice when executing family law agreements (cites omitted):

[44]         The meaning of independent legal advice in the family law context was well described by Pitfield J. in Gurney v. Gurney, 2000 BCSC 6:

[29]      In the family law context, providing independent legal advice must mean more than being satisfied that a party understands the nature and contents of the agreement and consents to its terms. The solicitor should make inquiries of the party so as to be fully apprised of the circumstances surrounding the agreement. The party should be advised of his or her legal rights and obligations in relation to the subject matter of the agreement and advised of the consequences associated with a refusal to sign. The solicitor should offer his or her opinion on the question of whether it is appropriate for the party to sign the agreement in all of the circumstances. It is only with that kind of advice that the party can make an informed decision about the advisability of entering into the agreement as opposed to pursuing some other course. ...

[45] In Bradshaw v. Bradshaw, 2011 BCSC 1103, which refers to Gurney, the Court summarized the principles concerning independent legal advice in the family law context as follows:

[49] Independent legal advice, in the family law context, is important because it ensures that the spouses are fully aware of their statutory and common law rights and obligations. It safeguards against one spouse taking unfair advantage of another and redresses or at least minimizes disparity of bargaining power between them... In Gurney, Pitfield J. found that "the lack of independent legal advice in this case is not fatal and the agreement should not be set aside because of its absence" (at para. 30). Indeed, the absence of independent legal advice will not, by itself, invalidate an agreement ... Nor will the receipt of independent legal advice automatically cure or neutralize one or both spouses' vulnerabilities; in other words, it will not protect an otherwise invalid or unfair contract ...

[46] I return to s. 65(1)(f) and the factors of the capacities or liabilities of a spouse. I have found the claimant did not have an accurate understanding of the respondent’s income as he had no idea of the value of her pensions. ... In the words of Bradshaw, he was not "fully aware" of his rights and obligations. When these facts are taken into account, I conclude the agreement is unfair. The respondent received the matrimonial home and retained all her pensions. She gave up little. The claimant gave up much. In the result, the statute permits the Court to divide the property appropriately.

The lesson from Giebelhaus for counsel is simple:

• ensure you understand the circumstances surrounding the agreement;
• advise the client as to his or her rights and obligations in relation to the topics covered in the agreement;
• advise the client as to the consequences of not signing the agreement; and,
• give the client your opinion as to whether it is appropriate for the client to sign the agreement in all of the circumstances.

The lesson for parties seeking independent legal advice is more important:

• not having legal advice will not necessarily let you out of an agreement you have signed; however,
• having legal advice will not leave you stuck with an invalid or unfair contract, especially if the advice you got was substandard.

In other words, although ensuring that your spouse gets independent legal advice will help to prevent your spouse from claiming "I didn't know what I was doing" to get out of an agreement, if the agreement is fundamentally bad or unfair, all the legal advice in the world won't bullet-proof your agreement.

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