The parties were granted a divorce on September 13, 1999. The divorce Order was made on consent by the parties, in accordance with their prior Minutes of Settlement. The judgment included support payments by the Respondent Husband to the Appellant Wife in accordance with the following schedule: $50,000 by Sep. 16, 1999, $50,000 by Oct.1, 1999, and $4,000 / month starting Nov. 1, 1999, for a period of 72 months (to Nov. 2005).
Of particular importance, however, was the inclusion of a ‘penalty’ clause in the support order, in the event that the husband defaulted on a support payment. Specifically, at paragraph 3 of the divorce judgment, the parties agreed that in the event the husband defaulted on a payment, double the remainder of the total amount outstanding, as well as an additional $50,000.00, would immediately become due and payable.
When the husband defaulted on his payments approximately 15 months into the aforementioned schedule, a total of 57 payments remained outstanding. This totaled $228,000 in outstanding support. As per the penalty clause outlined above at paragraph 3, the husband now owed an additional $228,000, as well as a further $50,000, totaling $506,000.
Following the suspension of the husband’s license by the Office of the Family Responsibility Office, the husband moved to vary the amount of support in the divorce Order. The motion judge, Justice Hood, assessed whether there had been a material change in circumstances, sufficient to vary the amount of support originally ordered. Justice Hood concluded that the husband had not established that there had been a material change. However, his Honour further found that the ‘penalty’ clause was unenforceable, as it had no bearing on any potential loss that the wife could suffer through default in the support payments. Justice Hood subsequently deleted the penalty clause from the prior support Order.
Under common law, penalty clauses in a contract are generally considered unenforceable, unless they constitute a genuine pre-estimate of damages. However, as the Court of Appeal explains in their judgment, different considerations apply when the terms of the contract are incorporated into a judicial order.
Justice Hood initially found that there had not been a material change in circumstances in dismissing the husband’s motion to vary the amount of support owed. As a result, the motion judge had no authority to vary the other terms of the support order, including the penalty clause. The court should not conduct a new analysis of the correctness of the previous divorce Order. This determination is left to the original judge who granted the divorce Order to begin with. It is presumed that this judge knew and applied the law, and as such, the support Order met the objectives as set out under the Divorce Act.
By incorporating the parties’ Minutes of Settlement into a formal court Order, the court was giving effect to the penalty clause. This does not mean that the support provisions could not be varied upon demonstration of a material change in circumstances, but, upon Justice Hood determining no material change had occurred, no variation could occur.
The common law doctrine that contractual penalties are not enforceable is only applicable to contracts, and not court Orders. As soon as the domestic contract was incorporated into a Court Order, any contractual remedy under the common law is lost. The question of whether a clause in a family law agreement is valid must be raised before the clause is incorporated into a Court Order that requires its performance. After the Order has been issued, a judge is presumed to deem that the provisions are correct.
If the husband had wished to contest the validity of the clause, he could have done so before the term became an Order. Further, he could have appealed the Order. But because he did not raise any concerns when the penalty clause was converted into a judgment, he cannot do so now.
The case of Assayag-Shneer v Shneer presents a cautionary tale for those wishing to seek the enforcement of a penalty clause. The subtle difference in incorporating a family law agreement into a Court Order can result in drastically different treatment by the court. Had the parties left the penalty clause as simply a domestic contract, the clause would likely be deemed unenforceable. However, because the parties incorporated it into a court Order, the terms therein are considered to be valid and correct, and any change would have to meet the legal test for variation. Should you be considering including a penalty clause in the event of a default of support payments, it may be prudent to consider the different treatment that will apply if the agreement is left as is, or incorporated into a formal court Order.