A well-negotiated separation agreement can be essential in protecting your rights when a relationship ends. However, parties must be diligent in ensuring they have not missed an important issue in reaching a settlement. Rushed negotiations can lead to confusion, misunderstanding the terms of the agreement, and potentially creating further litigation. What happens when an agreement fails to reflect one party’s understanding of what was agreed upon, or when drafting mistakes are incorporated into the agreement?

Courts Are Cautious About Setting Aside an Agreement

Under section 56(4) of the Family Law Act courts can set aside a domestic contract, such as a separation agreement, in whole or in part. The Act states that a domestic contract, or a provision contained within one, can be set aside:

1. If a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;
2. If a party did not understand the nature or consequences of the domestic contract; or
3. Otherwise in accordance with the law of contract.

When one party alleges a mistake in a domestic contract, courts are cautious when determining whether something should be set aside.

The case of R.C. v. J.B. makes it clear that courts are reluctant to set aside domestic contracts, as it is desirable that parties can settle their own affairs and consequently there is a need for certainty or else there would be a disincentive to enter into agreements.

The ability to set aside an agreement is different from varying an agreement. In C. (J.) v. M. (A.M.) the court noted that “there is no overriding authority for the court to rewrite the bargain between the parties.” The settlement of issues is not to be interfered with lightly, as that would ignore the “dynamics of what transpires in settlement negotiations.”

Types of Mistakes and Their Effect on the Agreement

Courts have identified three types of mistakes that may arise in separation agreements. In Greater Vancouver Water District v. SSBV Consultants Inc the court explains there can be common, mutual, or unilateral mistakes. A common mistake arises where both parties believe the same assumption which turns out to be false, making the same mistake. A mutual mistake occurs when both parties are mistaken, but their mistakes are different such that the parties misunderstand one another and are “not on the same page.” A unilateral mistake is when only one of the parties operates under an assumption which the other party knows to be incorrect.

With a common mistake, agreement is acknowledged and what remains to be determined is whether the mistake is so fundamental that it renders the agreement void or unenforceable. On the other hand, a mutual or unilateral mistake confirms there has been no consensus and therefore no real agreement exists.

In evaluating the impact of a mistake on an agreement, courts will look at whether the parties are obtaining the benefits of their bargain. In C. (J.) v. M. (A.M.), the court explained that a fundamental mistake is one that negates the intentions of the parties or deprives a party of the basic consideration for which they bargained. Lesser mistakes may not render the agreement void but relief may be available if it would be unconscionable for one party to take advantage of the mistake. The mistaken party may benefit from a remedy of rescission or rectification or other equitable defence to correct honest mistakes.

Husband Alleges a Mistake by Remaining as a Guarantor to Wife’s Line of Credit

Gill v. Gill involved a motion by the wife to enforce an order requiring the husband to transfer his interest in a holding company that managed the wife’s dental practice. Though the husband consented to the order, he later alleged it should be set aside as it was based on a domestic contract where the husband remained as a guarantor on a line of credit for the benefit and use of the wife’s dental practice. The husband maintained that he was unaware he had signed the guarantee and alleged that the parties made either a mutual or a unilateral mistake, as the agreement did not contemplate the guarantee.

The husband argued that the wife ought to have known of the guarantee and that he was unaware of it. As the judge noted, the two were partners responsible for running the dental practice, and the husband, who had signed the guarantee, was in charge of finances. The husband could not support his belief that the wife had greater knowledge of the guarantee than he did. His personal liability for corporate debts were included in the shareholder’s agreement, so he should have been familiar with the concepts. Additionally, the husband could have conducted his due diligence before he consented to the order.

The husband cited the decision in C. (J.) v. M. (A.M.), suggesting that his consent to the order arose from a fundamental mistake that was outside of the parties’ real intention. Justice Kurz, however, did not accept that this was a case of a fundamental mistake and the husband was ordered to return the shares that he held in trust for the wife. The agreement did not alter his liability to any third parties. Further, it is not the role of the courts to rewrite the agreement that the parties entered into. The husband might have preferred greater protection from liability for corporate debts, but he reached an agreement that was premised on his pre-existing liability and that was unchanged by the order.

Rectification as a Remedy to a Mistake

Equitable relief may be available to parties for certain types of mistakes. Rectification is the main remedy that is available, and in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd the court explains its purpose as preventing a “written document from being used as an engine of fraud or misconduct equivalent to fraud.” Justice Binnie noted that rectification is predicated on the existence of a prior oral contract with ascertainable terms. The goal is to restore the parties to their original bargain and not to rectify an error of judgement by one party and certain conditions must be met. First, there must be an oral contract with definite terms that were not written down accurately and the attempt to rely on the document must amount to fraud. The court in First City Capital Ltd. v. B.C. Building Corp held that this refers to unfair dealing where it is unconscionable for a party to obtain an advantage.

Rectification has a high bar that must be met to be available as a remedy. As Justice Binnie put it, the law should be wary of parties who look to their own unilateral mistakes to resile from the terms of a document. Accordingly, in Stevens v. Stevens, equitable relief can be granted where one party knows of the other’s mistake and concludes a contract on the mistaken terms. It may also be available if an unmistaken party ought to have known of the other party’s mistake. In Gill, the judge was unconvinced that rectification was available for the husband’s claim of a unilateral mistake. He was instead unpersuaded that the wife was aware of or took advantage of any failure by the husband to consider his potential personal liability as an issue in the agreement. Even if the husband had made a unilateral mistake there was no reason the wife should have known of it.

Contracts require the parties to agree on all of the essential terms, and a mistake by the parties can impact the validity of an agreement in different ways. Courts have jurisdiction over domestic contracts, including separation agreements, but are hesitant to apply equitable remedies. Courts are also easily able to determine whether a party is attempting to allege a mistake to redress a bargain they no longer wish to be bound by.

Contact the Family Law Lawyers at NULAW in Toronto to Avoid Mistakes in Your Separation Agreement

Separation and divorce can be difficult processes to navigate. However, when parties are able to work together to negotiate a separation agreement, the last thing on anyone’s mind should be future conflict over a mistake. The family law lawyers at NULaw are experienced in negotiating and drafting domestic agreements unique to each client’s needs and circumstances, ensuring that everything from property division to parenting time are included. To discuss your needs with a member of our family law team, contact us online or by telephone at 416-481-5604.