Settlement Agreements – When is a deal not a deal?

On February 22, 2012, the Superior Court of Justice issued a decision in a matrimonial case called Decraemer v. Decraemer.  The case involved a settlement agreement between separating spouses in which a critical term was missed by both sides. 

During the course of their marriage, the parties both owned shares in a construction company.  The wife alleged that the shares resulted from her husband’s employment by the company and that some of the shares had been put into her name for tax reasons.  During the marriage, any taxes relating to the shares were paid by the husband. 

After they separated, the shares in her name were converted into an income fund.  This triggered a tax liability of about $485,000. 

Canada Revenue Agency came after the wife for payment.  She took the position that the tax liability was really that of her former husband. 

The parties agreed to arbitrate the financial issues arising upon their separation.  Ultimately, they settled the dispute.  Their agreement called for the husband to pay the wife over $1.6 million including a payment of almost $1 million for child support.  By the time that they entered into their settlement agreement, the husband was well aware that the wife expected him to take responsibility for the tax debt.

Incredibly, and even though both parties were represented by counsel, neither of them turned their minds to the tax issue when negotiating their settlement agreement.  The wife never addressed it even though she had been the one to put forward the argument with CRA that her husband ought to take responsibility for it.  The husband never addressed it in the settlement negotiations even though he knew that this was his wife’s position with CRA.  The agreement clearly specified that it was intended to settle all disputes between them.

After the settlement agreement was made, and the husband was alerted by the Department of Justice to the fact that he might be brought into the tax proceedings against the wife as a potentially liable party, he refused to complete the settlement unless the wife agreed to indemnify him with respect to the tax debt. 

Not surprisingly, the wife refused to provide any indemnity.

The husband then brought a motion asking the court to enforce the award with an Order finding that it was an implied term of the settlement that the wife indemnify him for any tax arrears that might be attributed to him by the Canada Revenue Agency.  The wife responded by asking the court to enforce the settlement agreement “as is” and without any indemnity clause.  In summary, both wanted to enforce the settlement but neither agreed to be responsible for the tax debt.  Both parties maintained that had they known at the time of the settlement that they would be responsible for the tax debt, neither would have agreed to the settlement.  Both claimed that if either one had to pay almost $500,000 in taxes, it would significantly change the compensation package to which they had agreed.

The judge hearing the motion recognized that he had the authority to enforce the agreement as it was written.  However, the judge also noted that he had the right to vary or set aside the agreement on the grounds of mistake or, in the particular case of an agreement made under Ontario’s Family Law Rules, to change the agreement to deal with the matter that had not been determined. 

After review, the judge concluded that what he had before him was a matter of mutual mistake.  He felt that the potential tax liability was so large that one would think it should have been specifically addressed.  Accordingly, he set aside the settlement agreement and left the parties to continue their lawsuit.  According to the judge, “given the facts of the case, that is the only equitable thing to do”.

He also concluded that even if the mistake was only that of the husband, who apparently did not contemplate that he would be at risk for the tax debt and never intended to bear that risk, that was sufficient to justify the settlement agreement being set aside entirely. 

It should be borne in mind that had he chosen to do so, the judge could have amended the settlement to include a provision for indemnification.  Obviously, he declined to do so because there was no evidence that the wife would have ever agreed to this settlement on that basis had it been raised in a timely way.

It is difficult to understand how the parties could have settled a matrimonial dispute involving a significant amount of money without addressing a live issue of such magnitude.  In this particular case, the husband was exceedingly fortunate because courts are very reluctant to set aside settlement agreements except in rare and unusual cases.  This was such a case.  However, the case is a good reminder of the importance, when settling cases, to make sure to cover all of the issues in dispute.

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