Lack of Disclosure, Setting Aside Separation Agreements and Duty of Recipient to Verify Suspicious Information

Virc v Blair et al 2014 ONCA 392

In this case, the Ontario Court of Appeal deals with the issue of whether the recipient of a deliberately misleading, false, inaccurate disclosure as part of a separation agreement negotiation has a duty to question its accuracy.

Background

Virc, the appellant wife, was a commercial litigation lawyer who after marrying Blair, a businessman, moved left her firm to work for her husband as in-house litigation counsel. After nearly 14 years of marriage, the couple decided to separate and began negotiating a separation agreement in 2008.

The facts strongly suggested that Blair structured his net family property (NFP) statement to make it appeared that Virc owed him an equalization payment of nearly $1 million. He did not provide her with any valuations of his businesses prior to the signing, but they were in the process of being prepared. The final agreement provided Virc with $10,000 in monthly spousal support for roughly two years and waived her equalization obligation to Blair.

Despite having suspicions about the accuracy of the information and knowing that business valuations were forthcoming, Virc chose to rely on her husband’s representations and disclosures regarding his NFP. She signed the agreement without consulting independent legal advice or financial advisors.

Summary Judgment

When the business valuations were finally available, they revealed that Blair’s disclosures seriously overvalued his date of marriage assets associated with his businesses. When the calculations are properly adjusted, he in actuality owed his wife an equalization payment of $1.3 million. Naturally, Virc brought an application to have the separation agreement set aside on the grounds of unconscionability under s. 56(4) of the Family Law Act.

Blair brought a motion for summary judgment to have the application dismissed to avoid trial. Working with the assumption that Blair had intentionally and materially misrepresented in his disclosure, the motions judge dismissed Virc’s application on the basis that it lacked a realistic chance of success at trial. Since Virc’s position afforded her access to Blair’s financial records and information about his affairs, she was in a position to verify the disclosure’s veracity. Her choice not to act and her failure to inquire further precluded setting aside the separation agreement.
Virc appealed the decision.

Appeal

The Court of Appeal reversed the summary judgment and ordered Virc’s application to proceed to trial. It held that the motions judge had erroneously applied the test to set aside a separation agreement and failed to distinguish the facts at hand from the cases she relied on in her reasons.
Under s. 56(4) of the FLA, a court can set aside a domestic contract or provisions in it if (a) one party failed to disclose significant assets, debt or liabilities made at the time of contract formation, (b) one party did not understand the nature and consequences of the contract, or (c) for any other valid reason under contract law. The analysis of s. 56(4) is done in two stages; first the party seeking to set aside the agreement must demonstrate that at least one of section’s scenarios are engaged, then the court will assess the appropriateness of using its discretion to set aside the contract.

In engaging this analysis, the motions judge had erroneously decided that Virc, the disclosure recipient, had a duty to question the veracity of her husband’s disclosure because she was suspicious and her position afforded her access to the necessary information.

Where there is a deliberate material misrepresentation in disclosure, the onus is on the disclosing party to establish that the recipient had actual knowledge of the falsehood – no such burden is imposed on the recipient spouse. There was no basis in law to suggest that the recipient of deliberate non-disclosure had a duty to test its veracity.  According to the Court of Appeal ‘…a mere suspicion of lack of veracity does not absolve a fraudster of responsibility’ as ‘the law does not entitle a liar to succeed just because the recipient of the falsehoods has not ferreted them out.’
The motions judge had also made a key error by assuming that the non-disclosure was deliberate. This was not an assessment she could make given that her ability to evaluate the evidence was limited in a motions hearing. In doing so, she had failed to distinguish the possibilities of unintentional, innocent, careless, or deliberate misrepresentation.

As the degree of inaccuracy and intention on Blair’s part and the level of knowledge and awareness by Virc were crucially undetermined facts, summary judgment was an inappropriate venue. These were genuine issues that required a trial to be resolved, thus summary judgment was precluded under procedural rules.

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