19 February 2011

Supreme Court of Canada Clarifies Unmarried Property Claims

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.

The Supreme Court of Canada has just released an important decision updating the law on property claims brought by unmarried parties. The decision caps a recent trend to expand the meaning of "juristic reason" in the context of unjust enrichment claims and clarifies the calculation of compensation where unjust enrichment is found; along the way the court revokes the application of the resulting trust in resolving domestic property claims.

Kerr v. Baranow is a joint decision released on two appeals, the eponymous case from British Columbia and Vanasse v. Seguin out of Ontario. Before I can talk about the importance of the decision, I first need to explain the basic law about property claims flowing from unmarried relationships. Bear with me.

The Property Rights of Unmarried Couples

The domestic relations legislation of most provinces treats married couples differently than unmarried couples when it comes to property. In British Columbia, the Family Relations Act gives married couples a presumptive half interest in all of the assets when they split up. Unmarried couples are excluded from this part of the act, and as a result the only things both parties have a presumptive entitlement to are the assets that they own together. When an asset isn't jointly owned, the non-owning person usually has to jump through a bunch of hoops to establish a legal interest in the asset.

Non-owners usually establish a claim to property owned someone else through the law of trusts, by proving the existence of an express trust, a resulting trust or a constructive trust. An express trust happens when the parties agree that although one person will be the legal owner of a property, the other person will be the beneficial owner of the property. A resulting trust happens when the conduct of the parties gives rise to the assumption that they meant a trust relationship to exist.

A constructive trust is a bit different. A constructive trust is a trust relationship imposed by the court as a remedy for a party's unjust enrichment. Constructive trusts are the most common way unmarried persons obtain a legal interest in property owned by someone else.

Trust claims are often difficult to prove and the legal issues can be very complicated, especially when the claims of one person seem to be offset by the claims of the other person. Making things worse, the results of successful claims usually pale in comparison to what the result would have been had the couple been married.

Unjust Enrichment

To establish that a person was unjustly enriched, you must prove three things:
  1. that the person received a benefit,
  2. that the other person suffered a loss corresponding in some way to the benefit, and
  3. that there is no juristic reason for the benefit and the loss.
Say your partner owns a restaurant and one day the cook quits. Your partner phones you up in a panic, asking you to come down and help out. You've been in this relationship for quite awhile, so of course you agree, and you head on down to the restaurant. One day turns into two days, which turns into two weeks and then two months. Before you know it, you've been working at the restaurant for two years! Over all that time, you never asked to be paid for your work and your partner never offered to pay you; you are your partner's partner after all and the money from the restaurant did wind up paying for the mortgage, the car loan and the phone bill.

In this example, your partner received a benefit (your unpaid work as a cook for two years) and you suffered a loss which exactly corresponds to the benefit your partner received (the money you could have made if you had worked as a cook in someone else's restaurant for two years), and there was no juristic reason for the benefit and loss (you weren't under a contractual obligation or court order to do the work). Your partner has been unjustly enriched.

The Law since Pettkus v. Becker

The legal underpinnings of unjust enrichment and the constructive trust were first set out in another case from the Supreme Court of Canada, Pettkus v. Becker, decided in 1980. The law has evolved somewhat over the past 31 years.

The benefit received by a party must be tangible even though it may not be permanent. A benefit can be positive, in the sense of goods or services received, or negative, in the sense of an expense avoided. None of this is a significant change from Pettkus.

The loss must relate to the benefit. A loss will be irrelevant and incompensable if there is no corresponding benefit. This too doesn't represent much of a change

The law on the absence of juristic reason issue is where the action is. The courts have refused to confine juristic reason to a narrow definition. In the mid-80s, juristic reason was found to encompass moral issues and policy questions. In the early-90s, juristic reason included the parties' reasonable expectations. In 2004, in a case called Garland v. Consumers’ Gas Co., the court developed a two-stage test:
  1. the person claiming unjust enrichment must show that there is no established category of juristic reason to deny the claim, and
  2. the person opposing the claim may then argue that the parties' expectations were such that the claim should be denied or that the claim should be denied for public policy reasons.
Compensation for Unjust Enrichment

When unjust enrichment is proven, the court first tries to provide compensation through a cash award. When a cash award would be insufficient or can't be paid, the court will provide compensation by giving the non-owner an interest in the property.

Using the example above, the compensation due to you would be calculated as the amount a cook of equal skills would have been paid for working the same hours at a similar restaurant. If your partner could pay the compensation due to you, you'd get cash. If you partner couldn't pay the compensation, your partner would be considered to hold an interest in the restaurant for you in trust. A constructive trust is a potential remedy for a party's unjust enrichment.

Of course things are rarely as simple as this. First, in the context of a domestic relationship, benefit is rarely a one way street and both parties usually gain something from their relationship (the value of the work you provided as a cook is balanced to some degree by living for free in your partner's house). Second, it isn't always clear whether the compensation should be given based on the cost of the services rendered (a cook's wages multiplied by the hours worked), called quantum meruit, or by the net benefit of the services rendered (the improvement to the restaurant's value), called quantum valebant; some cases have interpreted a case called Peter v. Beblow as requiring the quantum meruit approach.

The Decision in Kerr v. Baranow

In this case, the court took the opportunity to clarify three issues which have become controversial:
  1. how should cash awards be calculated when unjust enrichment is proven,
  2. how to address mutual benefits, and
  3. how the parties' expectations should be considered when addressing juristic reason.
On the first issue, the court held that no calculation method should be preferred. A court should choose the method which best suits the circumstances and the claimant's loss:
"The unjust enrichment principle is inherently flexible and, in my view, the calculation of a monetary award for a successful unjust enrichment claim should be equally flexible. This is necessary to respond, to the extent money can, to the particular enrichment being addressed. To my way of thinking, Professor Fridman was right to say that 'where a claim for unjust enrichment has been made out by the plaintiff, the court may award whatever form of relief is most appropriate so as to ensure that the plaintiff obtains that to which he or she is entitled, regardless of whether the situation would have been governed by common law or equitable doctrines or whether the case would formerly have been considered one for a personal or a proprietary remedy'."
However, where the enrichment is based on one person keeping the fruit of the family's collective effort, a cash award should be calculated as the claimant's proportionate contribution to the family enterprise.

On the second issue, the court held that mutual benefits can be taken into account either as a juristic reason against a finding of unjust enrichment or as part of calculating the compensation due when unjust enrichment has been found. Mutual benefits should not be considered when arguing about whether there was a benefit and corresponding loss:
"I conclude that mutual benefits may be considered at the juristic reason stage, but only to the extent that they provide evidence relevant to the parties’ reasonable expectations. Otherwise, mutual benefit conferrals are to be considered at the defence and/or remedy stage."
On the third issue, the court held that the parties' reasonable expectations should be considered in the second stage of the juristic reason test, and that it is each party's expectations which must be considered not just those of the claimant:
"The parties’ reasonable or legitimate expectations have a role to play at the second step of the juristic reason analysis, that is, where the defendant bears the burden of establishing that there is a juristic reason for retaining the benefit which does not fall within the existing categories. It is the mutual or legitimate expectations of both parties that must be considered, and not simply the expectations of either the claimant or the defendant. The question is whether the parties’ expectations show that retention of the benefits is just."
Like Peter v. Beblow, and Pettkus v. Becker before it, this case will become one of the standard cases used to argue unjust enrichment claims.

Update: 24 March 2011

I've just come across a recent judgment of the British Columbia Supreme Court, Mr. Justice Willcock's decision in D.P.S. v. B.H.L. which provides a very helpful discussion of Kerr v. Baranow. The discussion of the law begins at paragraph 43.