New law ends arbitration clauses in domestic contracts

Changes to the Family Law Act will put an end to clauses in domestic contracts that require the parties to use binding arbitration to settle disputes.

Bill 27, short-titled the Family Statute Law Amendment Act, 2006, received Royal assent on February 23. Corina Weigl, who practises with Fasken Martineau, Dumoulin LLP in Toronto and wrote about Bill 27 on the law firm's web site, says the law will change the way lawyers set up estate agreements.

In her article, Weigl notes the Ontario legal regime does not differentiate between family arbitrations and other arbitrations.

"This was considered problematic given the inequality of bargaining power that often exists between parties to a family arbitration. Further, it was thought to cause potential financial hardship in that some courts have been reluctant to grant interim financial relief in the face of a mandatory agreed upon alternative dispute resolution process.

"To level the playing field, the statute creates a new regime for 'family arbitrations.' Family arbitrations are defined to mean an arbitration that deals with matters that could be dealt with in a marriage contract, separation agreement, co-habitation agreement or paternity agreement (collectively referred to as 'domestic contracts'), and that is conducted exclusively in accordance with Ontario law or the laws of another Canadian jurisdiction," she writes in her article.

Weigl says she welcomes the change in the law. "Often you'll see, in a domestic agreement, whether it's a co-habitation agreement or a marriage contract, the parties will agree in advance how they are going to have these disputes resolved because they want to avoid going to court, if at all possible, if there is a dispute.

So you'll often see parties agreeing, in advance, to go to mediation first, then binding arbitration, if there is a dispute."

Weigl says she doesn't personally like binding arbitration and doesn't usually recommend it to clients because mediation or some other conciliatory, rather than binding, process works better in a matrimonial situation.

"It's not something that I would often have recommended my clients include in a contract in any event, but with this change, it's altered parties' abilities to agree in advance to arbitration. You can't if this law becomes law," she says.

Weigl notes an important provision in the legislation: a family arbitration agreement and an award made under it are unenforceable unless the agreement has been entered into after the dispute to be arbitrated has arisen.

"In other words, it is no longer possible for parties to a domestic contract to contractually agree in advance to have disputes resolved by binding arbitration. Rather, the parties must wait until a dispute concerning the terms of their domestic contract arises and then they must enter into a family arbitration agreement."

If a dispute arises and the parties have agreed to have the dispute arbitrated, in order for an arbitrator's award to be enforceable:

•    the parties must enter into a family arbitration agreement that is in writing and complies with any regulations;

•    the agreement must be signed by the parties and witnessed;

•    each of the parties must receive independent legal advice ("ILA") before making the agreement, which is certified by a lawyer completing a certificate of ILA; and

•    the arbitration must itself comply with certain procedural rules.

Even with those provisions met, the arbitrator's award may be enforced or set aside in the same way as any other domestic contract.

"I think the purpose [of Bill 27] is to deal with the inequality of bargaining power," says Weigl. "There have been some recent decisions where the courts have been reluctant to allow awards on interim child or spousal support in the face of a mandatory agreed-upon dispute resolution process, mediation, or arbitration.

The problem with arbitrations is they are typically agreed-upon to be binding."
She says the changes are important for lawyers practising estate and trusts law, especially those who are working on cases involving the equalization of spousal assets.

"Under the Family Law Act, spouses can elect for equalization in the death of a first spouse. In essence, you look at each spouse's pot of assets when they walk into a marriage, and their pots when they leave, and there's an equalization payment from the spouse whose pot has grown larger during the marriage, to the other spouse. It's the sharing of the growth of assets during a marriage.

"And that equalization does not just happen at the time of separation. It also happens at the time of the death of the first spouse, if the net family property of the surviving spouse is less than that of the deceased spouse.

"So people who are married have to remember that, at a minimum, they are leaving their spouses at least what they would be entitled to on an equalization. Otherwise, they run the risk that the spouse will make the election, under the Family Law Act, to get their equalization rights," she notes.

Lawyers are often called in to write agreements to protect the assets of a spouse who is heading into a second marriage or a long-term co-habitation relationship.

"When you are dealing with someone going into a second marriage, they typically have all sorts of issues, because it is a second marriage, and they will typically contract what is going to happen at the death of the first spouse. They contract out of the equalization process.

"So, as an estate planner, when you're dealing with clients who are in a second marriage or children who are of wealthy parents or children of family business owners, they want to make sure that the death scenario is covered off as much as the divorce scenario is covered off.

We will often draft marriage contracts or co-habitation agreements that deal with what the spouse's rights are to equalization on the death of the first spouse," she says.

Weigl says she was surprised by the changes to the Family Law Act.

"There were no bubbles that this was coming out. I was surprised they would take this route. There's been so much talk of the cost of resolving family law disputes that I'm not surprised they chose to go this route. I think the goal is to force people to use mediation rather than arbitration."

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