11 March 2014

"Significant unfairness" is addressed at last! Sort of. Well, no, not really.

Yesterday, the British Columbia Supreme Court released its judgment in Karreman v Karreman, the first decision to address the meaning of "significant unfairness" under the new Family Law Act.

This is important, you see, because the Family Law Act uses "significant unfairness" as the threshold that must be met to:
  • set aside an agreement on the distribution of property and debt between spouses (s. 93(5))
  • divide family property or family debt other than equally (s. 95(1), (2)(i))
  • divided property normally excluded from division (s. 96(b))
  • set aside an agreement on spousal support (s. 164(3))
Under the old Family Relations Act, we knew what "unfair" meant, as that was the test that had to be met to divide family assets unequally (s. 65(1)). We also knew what "grossly unfair" meant, as that was the test to be met to reduce or cancel arrears of child support or spousal support and interest accruing on those arrears (s. 96(2), (3.1), (3.2)).

Although we had loads of Family Relations Act cases explaining the meaning of unfair and grossly unfair, we have nothing explaining the meaning of significantly unfair... although a quick glance at at a dictionary suggests that significantly unfair falls somewhere between mere unfairness and gross unfairness. Accordingly, family law lawyers have been waiting with bated breath to learn what this new phrase means; how else can we give advice about whether an agreement is likely to be set aside, whether family property is likely to be divided unequally or whether excluded property will be divided?

It would be nice to say that with Karreman the wait is over. It isn't.

In this case, the parties had been married for about twelve years, during which time they managed to have four children. Shortly after separation, the parties agreed, without legal advice, that the wife would have the home in lieu of child support and the husband would keep business equipment worth some $100,000. However, the transfer of the family home never happened and further misfortunes befell the husband's business and the parties' indebtedness. By court order, the family home was put up for sale. At the time of trial, the home had been sold with $70,000 remaining after the mortgage was paid off and the husband was in arrears of child support to the tune of $26,000.

Ignoring some of the complexities, this means that the husband had kept property worth $100,000, for which he would normally have given the wife $50,000, while the wife was left with $70,000 from the family home, of which the husband would normally have been entitled to $35,000, and the husband still owed the wife $26,000 in child support. An unsatisfactory situation to be sure.

Here is the court's take on things:
"[15] I find there are elements to this case that clearly militate against dividing up the proceeds of sale equally between the parties. The affidavit material filed by the claimant establishes the respondent intended the claimant to have the equity from the matrimonial home in lieu of child support. While that might have made sense to the parties at the time, it reflects a view that all of the matrimonial property, including the equipment and vehicles worth approximately $100,000, belonged to the respondent to dispose of as he saw fit without regard to the claimant’s interests in the couple’s assets. 
"[16] If the proceeds from the sale of the matrimonial home were divided equally between the claimant and respondent, the respondent would be receiving a double benefit — giving the claimant the home in lieu of child support and then effectively clawing half of it back, while still retaining the benefit of the equipment and vehicles. 
"[17] Based on the rationale behind the [child support order], which imputed income of $30,000 per year to the respondent and fixed his child support obligation at $754 per month, the respondent notionally owes child support from the date he moved out of the matrimonial home in October 2009 to December 31, 2012, the month before the [child support order] took effect. This is a total of 26 months (November 1, 2009 to December 31, 2012) and amounts to $19,604. The respondent paid $4,300 in child support prior to January 1, 2013. I deduct that amount from $19,604 and find that he owes the claimant $15,304 for support prior to the [child support order]. 
"[18] From January 1, 2013 up to and including March 1, 2014 the respondent owes child support in the amount of $754 per month for a total of $11,310. A total of $26,614 is therefore due to the claimant for child support from November 1, 2009 to March 1, 2014. 
"[19] When the amount of child support owing to the claimant is deducted from the net sale proceeds of the matrimonial home, the amount of $43,768.55 remains. As I noted above, the respondent had the benefit of about $100,000 worth of vehicles and business equipment as a result of the first agreement he made with the claimant. The claimant was entitled to a share in the vehicles and business equipment as well as a share of the matrimonial home. Apart from any interest in matrimonial assets, the respondent had an obligation to pay child support. 
"[20] After considering all the circumstances I find it would be significantly unfair within the meaning of s. 95(2)(i) of the Act to award the respondent any of the proceeds of sale from the matrimonial home, even after deductions for child support currently owing. I order that the proceeds of sale be paid to the claimant. With that order, the respondent’s liability for child support up to March 1, 2014 is satisfied."
It is clear that in this case, the parties' management of their property and support obligations were less than ideal, but neither this nor the absence of legal advice automatically relieves them from the presumption that they were bound by the agreement they had struck. Nor does the husband's failure to pay child support relieve them of their agreement.

Unfortunately, it is not clear that the court was able to make an order about property without first setting aside the parties' agreement. Under s. 94(2), the court may not make an order about the division of property in the face of an agreement on the division of property, unless that agreement is set aside.

The test to decide whether to set aside such agreements is set out in s. 93, and although an absence of legal advice can be read into that test, the absence of legal advice on its own is not sufficient. There must be proof of non-disclosure, that a party was taken advantage of, that a party did not understand the agreement, or other circumstances under the law of contracts that would void the contract. Failing that, the court can set the agreement aside if it is "significantly unfair" in light of the time passing since the agreement was made, the parties' intention to achieve certainty and the extent to which the parties relied on the agreement. The court, however, addressed none of these issues.

Nevertheless, assuming that the agreement had been properly set aside, leaving the court with a free rein to divide the family property, what then was the "significant unfairness" justifying the unequal division of that property? As near as I can figure, it stemmed from (1) the parties' mutual misunderstanding of the law, which resulted in the husband keeping more than half of the family assets, and (2) the arrears of child support owed by the husband. This, I think, may be reasonable.

If one assumes that all of the property at the time of separation was shareable family property, which would ignore contributions made prior to the beginning of the parties' twelve year relationship, each party should have received $50,000 for the business equipment and about $35,000 for the sale of the family home. $85,000 each, in other words. Instead, the parties agreed that the husband would have all of the equipment, $100,000, and the wife would have all of the house, $70,000. This yields a shortfall of $15,000 owed by the husband to the wife, about 9% of their total assets.

This may not on its own be significantly unfair, however the court took the husband's arrears of child support into account, and when you deduct the arrears of $26,000 from the money due to the wife from the sale of the family home, things look grim indeed. The husband received $100,000 while the wife received, net of the arrears, $43,000. Although I'm not convinced that a debt for child support is a factor to be taken into account in the division of family property — it isn't under s. 95(2) — the shortfall of $42,000 from an equal division of $85,000 each now amounts to 21% of the total assets. Perhaps this is the degree of unfairness that must be reached to be "significant."

In any event, the result was that the $70,000 remaining from the sale of the family house was "reapportioned" to the wife and the husband's arrears of $26,000 were extinguished. All in all, not a bad deal at all the husband, assuming that the equipment he kept was really worth $100,000.

My thanks, again, to Agnes Huang for bringing this case to my attention.