18 THINGS THAT YOU CAN GET IN A
SETTLEMENT BUT NOT FROM A COURT1
Lorne H. Wolfson
Torkin Manes
Apart from the obvious benefits of settlement over litigation (savings of time and costs, avoiding
conflict, and certainty of results), skilled family law mediators and negotiators will emphasize to
the parties the things that can be obtained through a settlement that they cannot get from a court.
Once the parties disclose their interests, as opposed to their positions, a wide range of settlement
opportunities can become available. In this paper I will consider a number of advantages and
practical techniques that may enhance the attractiveness of the settlement option.
1.
Confidentiality
Confidentiality can be important not just for movie stars and politicians, but also for
professionals and others who are concerned about their reputation. Confidentiality can be
particularly important where the facts of the case may be embarrassing to a party. Apart from
public embarrassment arising from bad conduct, a reported decision may attract the attention of
creditors such as CRA, the CAS, the criminal justice system, or professional discipline bodies.
In Sagl v. Sagl (1997), 31 R.F.L. (4th) 405 (Ont. Gen. Div.), for example, the wife’s evidence that
the husband was stealing from his own company resulted in the company’s bank calling its loan
1
An earlier version of this paper was presented at the Osgoode Hall Continuing Education program on September
26, 2011.
-2during the trial. Similarly, a party who operates a business may be concerned that trade secrets,
business plans or confidential financial information might become available to competitors.
The courts are very reluctant to order the sealing of a court file. Even when a sealing order is
made, confidentiality is extremely difficult to maintain, given the pervasive nature of today’s
press and social media. In this context, the promise of a confidential process and resolution
(together with sanctions for any breach of confidentiality) can be particularly appealing to many
spouses. M.S.K. v. T.L.T. unreported, February 7, 2003 (O.C.A.) was a rare case in which the
Ontario Court of Appeal (reversing the motion judge) ordered the court file sealed to protect the
subject of a custody dispute from possible kidnapping. Regardless, the parties subsequently
opted for private arbitration to ensure confidentiality.
2.
Non-variability of Support
Support orders are generally based on the current or most recent income of the parties. Support
orders are generally variable in the event of a material change in circumstances, which can
include a change in either party’s income. It is rare that a court will make a support order that is
non-variable. Nonetheless, there are many cases in which the parties want a non-variable
support arrangement. Parties may wish to avoid the aggravation and cost of future financial
disclosure, to prevent the other from using disclosure as a lever for control and invading privacy,
or simply to avoid having to retain lawyers and return to court. Often parties find non-variable
support (either for a finite period of time or for the duration of the support obligation) to be
appealing, either for finality and certainty or simply to achieve a “holiday from the fight”. While
insulating a child support provision from variability can be challenging, it can usually be done by
careful drafting including references to section 15.1(5) of the Divorce Act (which provides for
-3“special provisions” that have been made for the children) and section 24.1 of the Child Support
Guidelines (which permits a waiver of future financial disclosure).
3.
Review of Support
Support reviews have grown in popularity over the past 10 years. Many agreements made today
provide for a review of support at a predetermined date. The difference between a “variation”
and a “review” is important. In a variation, the party who initiates the proceeding bears the onus
of proving a material change in circumstances before the decision-maker (court or arbitrator) has
the jurisdiction to determine any change. The Supreme Court of Canada decision in G.L. v. B.G.
(1995), 15 R.F.L. (4th) 201 (S.C.C.) has reduced the utility of variation applications by
emphasizing issues of foreseeability and the burden of proof. Typically, a variation can occur at
any time and it can be used as a pretext to harass or to obtain financial information from the
other party.
By contrast, a review is a de novo redetermination. It is typically scheduled at predetermined
date when a “fresh look” would be appropriate. A review of spousal support may be fixed for a
date when the wife has completed her vocational upgrading or is expected to be employed or
when the husband is expected to retire. A review of child support may be appropriate when a
child may be expected to complete high school and enter university or to complete a first postsecondary degree. A review of spousal support often provides a husband with enough “faint
hope” that spousal support may come to an end that he can be encouraged to accept a deal
without a predetermined time limit on support.
The Supreme Court of Canada held in Leskin v. Leskin (2006), 268 D.L.R. (4th) 577 (S.C.C.)
that, while a court has jurisdiction to make an order that is subject to variation, it has no
-4jurisdiction to order a review unless it is clear that information will be available to the court by
that date which is not available today. As a result of this authority, most judges are of the view
that they do not have jurisdiction to impose a review of quantum or entitlement to support at a
predetermined date. No such restrictions apply in the case of negotiated agreements. Where a
review has been agreed upon, the parties can agree in advance as to the procedure to be followed
(court vs arbitrator, timing and type of financial disclosure, who has the onus, summary
procedure, and other terms and conditions).
4.
Formula for Determining Income
In many cases the most difficult issue is determining a party’s income for support purposes. This
determination can involve factual issues, unreported income, imputed income and financial
information in the hands of third parties. A major problem in many variations and reviews is the
need to re-determine income annually. Courts will generally determine income afresh each time
a support issue arises. In many cases, the parties are prepared to expedite and simplify the
income-determining process by agreeing to a formula to determine a party’s income. For
example, the parties may agree to base income solely on a party’s line 150 income subject to
Schedule III adjustments, or to impute a predetermined percentage of corporate income or of
certain questionable business expenses, or to ignore certain types of investment income (for
example, flow through shares or rental income/losses) for support purposes. Often the cost of
litigating these issues is significantly out of proportion to the amount of support dollars in
dispute. By agreeing on a simplified formula for determining income, the parties can often save
significant amounts of legal and forensic accounting expenses, to say nothing of their time and
aggravation.
-55.
If and When Division of Income
One example of a formula that may be useful in determining the value of a particular income
source is an “if and when” division. Where a party at the valuation date is a beneficiary of a
discretionary trust or has options or RSUs or other employment vehicles that may or may not pay
him any benefits in the future, litigation would require that the asset be valued. Typically, a
business valuator would be employed to make complex calculations based on theoretical
formulae to determine a lump sum payment today to equalize the value of an asset that may or
may not ever generate any income. A more practical option (which is available in settlement, but
not from a court) is to divide the asset on an “if and when” basis. In Ross v. Ross, [2006] O.J.
No. 4916 (Ont. C.A.), the Court of Appeal held that this approach cannot be used to value and
divide property. An agreement could provide: “If and when the husband receives any benefit
from exercising his options or RSUs, he shall pay to the wife 50% of the net after-tax benefit
received by him”. Similarly, where the husband is an artist who has an inventory of artwork at
valuation date whose value is difficult to determine, the parties may agree to divide the net
proceeds of sale as the inventory is sold off over time. While these arrangements may delay the
“clean break” that many parties prefer, they offer a more realistic and less complex way of
resolving the issue, provided that adequate security and transparency are built into the
agreement.
6.
Release of Spousal Support
Perhaps the most valuable (and therefore the most important from a negotiation point of view)
benefit that can be obtained through settlement though not from a court, is a release of spousal
support rights. While a court can, in appropriate cases, order a nominal amount of spousal
support (courts have ordered $1/month so as to ensure that there is a basis for future variation) or
-6no spousal support at all, neither order precludes the claimant from instituting new proceedings
for spousal support in the future. A spousal support release, on the other hand, prevents the
claimant (subject to the court’s residual discretion to set aside the release on the grounds laid
down in Miglin v. Miglin (2003), 224 D.L.R. (4th) 193 (S.C.C.)) from ever asserting a claim for
spousal support.
Courts have a very limited jurisdiction to order spousal support in the form of a lump sum.
However, support payors are often prepared to pay a significant lump sum to “buy a release” of
future spousal claims. Apart from the certainty of the amount payable and an end to monthly
payments, advantages to the payor include an end to annual financial disclosure and the need to
provide insurance or other security for future payments.
From the recipient’s perspective,
advantages include non-taxability of a lump sum and certainty of amount and collectability.
Other benefits to the recipient include an end to the need to provide annual financial disclosure,
an accounting as to her efforts to become self-sufficient and the feeling of dependency that
accompanies periodic support payments. Where the recipient spouse expects to remarry or enter
into a new relationship that would likely result in a termination or reduction in the quantum of
spousal support, a lump sum in exchange for a release can often represent a win/win result.
Obviously, payment of a lump sum in exchange for a spousal support release is not realistic in
every case. Often, there are so many contingencies that the parties cannot reach a consensus as
to the appropriate amount. In other cases, the parties can agree on the amount but the size of the
required lump sum is not within the payor spouse’s capability. However, in the right case, a
lump sum in exchange for a spousal support release can have tremendous appeal to both parties.
In such a case, this opportunity can significantly increase the chances of a negotiated settlement.
-77.
Swapping/Sharing Assets
In determining property issues, a court is typically limited to determining ownership (via title,
trust claims or otherwise) and/or calculating the equalization payment.
A court has no
jurisdiction to require one joint owner to purchase the interest of the other, to require parties to
swap assets, or even to divide chattels on any basis other than ownership. In many settlements,
one joint owner may purchase the interest of the other at current values (for example, the wife
acquires the husband’s interest in the matrimonial home and the husband acquires the wife’s
interest in the cottage), the wife may transfer to the husband her shares in the husband’s business
(since the shares have value to him but not to her), and the parties may divide their chattels in a
fashion that makes sense to them. Where ownership and/or values are unclear, a court may have
no choice but to order the disputed property sold and the net proceeds divided, even though this
process may only generate ten cents on the dollar after disposition costs.
A major issue in many cases is which spouse enjoys the post-valuation date increase in value of a
particular asset (or, as in Serra v. Serra (2009), 66 R.F.L. (6th) 40 (O.C.A.), the post-valuation
date decline in value). This issue often spawns further disputes over ownership, constructive trust
claims, occupation rent vs. carrying costs, and so on. Many settlements provide that the parties
will treat the disputed asset as if it were jointly-owned, thereby side-stepping all of these divisive
issues.
8.
Assuming Debts
Just as a court has no jurisdiction to order the transfer of assets from one party to the other, it
cannot order one party to assume the other party’s debts or share of a joint debt. Where one
party retains a jointly-owned house or cottage, it will usually make sense for that party to assume
-8sole responsibility for the debt (mortgage, line of credit, etc) associated with that asset. Where
the husband retains the business, it will usually make sense for him to be solely responsible for
the business loan (so that he can deduct the interest payments), even if it is secured by the
jointly-owned matrimonial home. While the creditor cannot be forced to cooperate (some banks
will refuse to give a release to the non-titled spouse until the debt has been retired in full),
usually the problem can be resolved by refinancing the property. If not, the party retaining the
debt can indemnify the other party against any future liability on the debt.
9.
Paying Support Directly To A Third Party
Often a parent will be prepared to pay child support directly to the child or to a third party (the
school, dentist, summer camp, etc.) on the child’s behalf but not to the other spouse, for fear that
the money will not be applied as it should be for the child’s benefit. Similarly, a husband may be
prepared to pay spousal support to a third party (the mortgagor, the credit card company, etc.)
rather than the wife, where he is concerned that the funds may otherwise be mis-managed. While
they may have jurisdiction to make such orders, courts are very reluctant to do so for fear of
putting strings on the money in the recipient spouse’s hands and encouraging the payor to
oversee the recipient’s use of the funds. Where the payor’s concern (legitimate or not) is an
impediment to settlement, a carefully drafted agreement providing for payment directly to the
child or a third party (with appropriate provisions for certainty, transparency, and enforcement)
can often overcome this obstacle.
10.
Custody/Access Concessions in Exchange for Financial Benefits
Courts will generally treat custody and access issues separately from support issues and reject
any attempt to link the two. While some family law lawyers and their clients may find trading
-9custody/access concerns for financial benefits to be both morally and legally repugnant, others
will simply say that it happens anyway in most settlement negotiations. The wife may be more
willing to permit the husband to have additional access time if she knows that he will not seek a
reduction in child support by virtue of his time exceeding the 40% level. The husband may be
prepared to concede sole decision-making to the wife in exchange for a concession in the
quantum or duration of support. Skilled mediators can often go behind the parties’ positions to
determine their actual interests and resolve the support issues while at the same time ensuring
that the children’s best interests are protected.
11.
Creditor-Proofing
A feature of many family law cases is the parties’ common concern as to existing or possible
future claims by third-party creditors. Many family law court orders are ultimately frustrated
when creditors seize assets, garnishee wages, or otherwise interfere with the anticipated result.
While judges must be very cautious about making orders in family law cases that affect the rights
of third party creditors, the parties and their legal advisors have no such limitations in their
settlement negotiations.
Often parties will negotiate “friendly settlements” to protect the
family’s assets against their creditors. Common examples are the debtor husband transferring his
interest in the jointly-owned matrimonial home to the wife to settle either property or support
claims, re-organizing the family’s assets and debts in anticipation of a bankruptcy, or planning
for the insolvent spouse to file for bankruptcy, thereby removing competing claims against the
insolvent payor spouse’s income. While lawyers must guard against being parties to fraudulent
transactions, there is considerable opportunity for “creative settlements” in which the parties can
choose to cooperate for their mutual self-interest.
- 10 12.
Settlement Involving Third Parties
In many family law cases the legal issues include claims by or against third parties. Typical
examples include claims by a spouse’s parents to enforce an alleged loan to one or both spouses,
claims by a spouse for an interest in property owned by a third party, or claims against a
corporation in which the spouse has or is alleged to have an interest. A court order will not end
the involvement of third parties who are not parties to the litigation nor will it resolve the dispute
involving the third party. Only a comprehensive multi-party settlement can resolve all of the
legal issues, including all claims by or against third parties.
In settlement negotiations or mediation (unlike in a court), third parties can often play an
important role in facilitating settlement.
In some cases, a third party may agree to fund
payments (such as summer camp or private school) or to guarantee payments to be made by a
spouse under a settlement. In other cases, the third party may have no legal or financial stake in
the case but may be “calling the shots” or funding the litigation. By changing the third party’s
role from “part of the problem” to “part of the solution”, a skilled mediator may be able to
expand the list of settlement options in a way that a judge at trial never can.
13.
Support Adjustment Clause
Courts will typically use last year’s income to determine next year’s support. A payor whose
income is uncertain (for example, one who is self-employed or receives a significant portion of
his income as a bonus that he doesn’t control), may be reluctant to commit to a support deal that
assumes a level of income that he may not actually receive. A judge typically does not worry
about this. He/she will make whatever order that appears appropriate based on the most recent
financial information and leave future changes in income to be dealt with by future variation
- 11 applications. Most parties find this to be unsatisfactory; by the time the payor husband can bring
an application and have it determined by a court, he may have substantially overpaid the wife to
the extent that he may never recover his over-payment. Often the cost of a variation application
is out of proportion to the dollars in dispute. One way of addressing this problem is to build into
the agreement an automatic support adjustment formula. Such a formula will typically provide
for the annual exchange of financial information (usually in May, after the parties’ tax returns
have been filed with CRA) and the exchange of relevant supporting documentation for the
previous tax year. The parties may agree in advance that the quantum of child and/or spousal
support will be re-determined annually based on the previous year’s income information and that
the new support levels will apply retroactively to January 1 of the year in which the redetermination is made. Any overpayment or underpayment in that year would be dealt with over
the balance of that year. The following year, the process is repeated. In order to minimize
disputes, the parties may agree on a formula to determine support (for example, the mid-point of
the SSAG range or a 50/50 NDI division). Alternatively, they may opt for a dispute resolution
clause which establishes the procedure and a med-arb clause which provides a process for
finality. These support adjustment clauses can be very effective in providing for annual
adjustment as required while minimizing the cost and conflict between the parties.
14.
Dispute Resolution Clause
Once the judge issues his/her judgment, the case is over and everyone goes home. If there is a
subsequent problem in interpreting, implementing, or varying the terms of that judgment, it is up
to the parties to institute fresh legal proceedings to address those issues. In settlement, these
problems can be anticipated and dealt with efficiently. Today it is fairly typical for a separation
agreement to incorporate a dispute resolution clause to resolve any disputes arising out of the
- 12 settlement. This clause may provide for negotiation or mediation before either party institutes
further legal proceedings. It may provide for the appointment of a named mediator/arbitrator to
deal with these issues. If the parties have settled their dispute with the assistance of a mediator,
they may be inclined to continue to involve that mediator in their case since he/she already has
some knowledge of the parties, has their confidence, understands the history of the negotiations
and is the best person to determine any dispute regarding the agreement’s meaning or
implementation.
15.
Parenting Co-ordinator
An example of a dispute resolution clause that has become quite popular is the appointment of a
parenting co-ordinator. A parenting co-ordinator is typically a mental health professional who
has particular training and skills in dealing with separating spouses in the context of custody and
access disputes. The parties will sign a parenting coordination agreement in which they engage
the PC for a defined period of time. The agreement will define the scope of the PC’s jurisdiction
(for example, issues of interpreting or implementing the agreement, minor variations, and so on).
The disputes that go to a PC are typically factual or parenting issues that do not require the
involvement of a lawyer and for which the courts are inappropriate. Over time, the parties may
learn from the PC how to resolve their disputes themselves. If not, and if mediation of the
dispute is unsuccessful, the PC is empowered to make a summary decision which is binding on
the parties. Unlike British Columbia, where proposed amendments to their Family Law Act will
empower judges to appoint PC’s, the Ontario Court of Appeal has held (in Kaplanis v. Kaplanis
(2005), 249 (4th) 620 (O.C.A.)) that an Ontario court does not have jurisdiction to appoint a
parenting co-ordinator unless the parties consent. As a result, this valuable dispute resolution
resource can only be available through a negotiated settlement.
- 13 16.
Arbitration of Division of Chattels
A particular dispute resolution clause that has appeal in some circumstances is the appointment
of an individual to mediate/arbitrate the division of the parties’ chattels. Like a parenting
coordinator, this individual will attempt to assist the parties in arriving at their own resolution of
the issues; however, if those efforts prove to be unsuccessful, the arbitrator will design a
summary process whereby the items are divided between the parties on an equitable basis,
thereby avoiding the unattractive option of a judicial sale. This process could involve an auction,
alternate selection or final offer selection.
17.
Experts: Quick and dirty/joint/binding/hot-tubbing
Many family law cases require the assistance of expert witnesses. These can include real estate
or business valuators, actuaries, tax experts or mental health professionals. Typically, when a
family law case goes to trial, each party lines up his or her own experts to testify on each of the
issues that require expert evidence. Experts are costly and they cannot guarantee that their views
will ultimately prevail. Most expert evidence involves a significant element of subjectivity. As
a result, it is not unusual to find equally qualified experts giving significantly different opinions
on the same issue. Judges are often put in the awkward position of having to choose between the
views of two competing experts without having sufficient knowledge of the subject matter in
order to make a reasoned decision. A further problem is that a court will not determine the
appropriateness of the expert evidence until it is tendered at trial, long after the cost of the
experts’ involvement has been incurred.
In the settlement process, there are many more options for obtaining and utilizing the expert
opinions that are required. Many experts will provide for settlement purposes a “quick and
- 14 dirty” opinion or calculation which, because of its informality, can be substantially cheaper than
a more formal court-ready report. Where parties are prepared to be cooperative, they may
consider a joint retainer of one expert, rather than each party retaining his or her own. The joint
expert’s opinion can either be on a binding or a non-binding basis and either be retained by the
parties or by the mediator himself. Finally, in settlement negotiations, the experts can be brought
together into the same room to explain and discuss the differences between their opinions, with a
view to either reaching a consensus or at least narrowing the difference between their respective
opinions. This process (often called “hot-tubbing”) has become quite popular in recent years.
The amendments to the Rules of Civil Procedure (and pending amendments to the Family Law
Rules) require experts to place their duty to the court above their duty to the party that hires
them. This obligation will continue in the settlement context, particularly if the experts have
dealt with each other previously and are able to work cooperatively to assist the parties.
18.
Creativity with Taxes
Negotiated agreements can allow the parties a considerable scope for creativity in structuring
their affairs in a tax-efficient manner. For example, spousal support payments can be made nontaxable simply by going off-side of the rules in the Income Tax Act, RRSPs can be rolled from
one spouse to the other on a tax-free basis, taxable events can be timed so as to occur in a
calendar year that generates a more favourable tax result, pre-judgment interest can be
capitalized to avoid taxability, rollovers of capital property that would normally be tax-free can
be made taxable by filing the appropriate election where the parties wish to incur a capital gain
and thereby bump up the cost base, and parties may be more inclined to pay taxable spousal
support where it gives the family the benefit of income-splitting. These and many similar
techniques are regularly used in mediation and settlement negotiations by family law lawyers
- 15 who are alert to the tax rules and related opportunities. In my experience, many family law
settlements are tax-driven. Once the parties understand that the pie can actually be made larger,
they may become less concerned as to which spouse gets the larger piece.
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