Written on behalf of Shariff & Associates

There is a common law rule that courts will not enforce a penalty clause in a contract. However, the terms of family law agreements and minutes of settlement that parties consent to are frequently incorporated into court judgements. Once that happens, and the terms of the agreement become a court order, they are enforceable and are required to be performed. However, if a party seeks to contest the enforceability of a term on the ground that it is a penalty, they must do so before it becomes a court order.

Minutes of Settlement are Incorporated into the Divorce Judgment

In Assayag-Shneer v. Shneer, the parties participated in a mediation and entered into Minutes of Settlement (“Minutes”). The court order contained the terms of the Minutes, which required that the respondent pay support to the appellant. One of the terms that was incorporated into the divorce judgment increased the amount of support that would be payable if the respondent defaulted in making support payments. Afterwards, the respondent failed to pay all of the support as required, and he brought a motion to change support under section 17 of the Divorce Act.

The motion judge determined that a material change that warranted altering the judgment had not occurred. Importantly, the motion judge found that there was still authority to vary the judgment, declare the provision of the judgment increasing support payments on default to be an unenforceable penalty, and to reduce the interest owing on the support arrears. The motion judge found that the doubling of support plus payment of $50,000 to be a penalty that had no relationship to the losses that the support recipient could suffer through a default in payment. This penalty was deemed to be unenforceable, and even though there was no material change in circumstances, this did not prevent a declaration that the penalty clause was unenforceable. The issue of whether a judge could vary or delete a provision in a divorce judgment on a motion to change support where there has not been a material change in circumstances was appealed.

Material Change in Circumstances Required for a Variation

Varying an order under section 17 of the Divorce Act requires that there be a “change in the condition, means, needs, or other circumstances” since the divorce judgment (in other words, it requires a material change in circumstances to have occurred). As the Ontario Court of Appeal noted, without a material change, there is no authority to make a variation under section 17, and consequently there was no authority for the motion judge’s order. The effect of the motion judge’s decision was to amend the divorce judgment by deleting the paragraph that increased the amount of support in the event of a default. However, the motion judge did not identify any authority to make the changes.

The requirement of a material change is a threshold requirement. The motion judge did not find that a material change had occurred, and erred in failing to give effect to the fact that the threshold was not met. In L.M.P. v. L.S., the Supreme Court of Canada explained that the threshold had to be met before a spousal support order could be varied under section 17. L.M.P. v. L.S. also involved a motion to vary an order that contained the support terms of the parties’ separation agreement. The decision from this case was clear that the threshold was the same, regardless of whether the support order incorporated an agreement.

Courts to Consider Any Agreement Relating to Support

In L.M.P. v. L.S., the Court explained that it is an error for a judge to conduct an assessment of the propriety of the support provisions in the absence of a material change in circumstances. The failure to meet the threshold was enough to dispose of the motion to vary support. In this case, the Court indicated that a judge “ought not to consider the correctness of that order” since it is “presumed that the judge who granted the initial order knew and applied the law” and that the original support order met the objectives of the Divorce Act.

Moreover, section 15.2(4)(c) of the Divorce Act requires that courts take into consideration any agreement or arrangement relating to support. This provision was met when the divorce judgment incorporated the terms the parties agreed to in their Minutes of Settlement. Justice Zarnett wrote that “this does not mean they could not be varied upon demonstration of a material change in circumstances, but the correctness of the divorce judgment’s provisions for spousal support was not open to question on a motion to vary without any material change in circumstances”.

Courts Will Not Enforce Penalty Clauses in Contracts

The motion judge looked to Crosbie v. Crosbie as the basis for an independent jurisdiction to vary or suspend provisions of a divorce judgment even if there is no material change in circumstances. In Crosbie v. Crosbie, a father sought to retroactively change his support obligations. His application was dismissed as he did not establish there had been a material change in circumstances.

On appeal, the Court held the motion judge failed to use his discretion to relieve the father of his obligation to pay the “statutory post-judgment interest rate” of 10% on support arrears. The Court explained the statutory rate should apply unless there are exceptional reasons to depart from it. However, this case was not a basis for the motion judge’s deletion of the terms of the divorce judgment.

Distinguishing Between Contracts and Court Orders

The motion judge did look to the common law rule that courts will not enforce a penalty clause in a contract. However, the Court of Appeal noted that doctrine applied to contracts, not to court orders. Here, the motion judge determined the provision increasing the support payable on default amounted to a penalty and was unenforceable. Yet on appeal, Justice Zarnett explained that “contractual remedies, and common law doctrines that restrict them, may be applicable to a family law agreement when the parties’ agreement has not been incorporated into a court order.” If, however, the term is included in a court order, it is enforceable.

The issue of whether a term in a family agreement is valid had to be raised before the clause is included in a court order that “directs its performance.” Here, the parties entered into Minutes of Settlement, and on consent obtained a divorce judgment that enforced the Minutes. The respondent did not raise concerns about the provision being an unenforceable penalty at that time, so could not complain after it was included in a judgment.

Rule Against Penalty Clauses Not Applicable to Terms in Court Orders

Courts cannot change the support provisions in a divorce judgment where there is no material change in circumstances. However, the restriction against penalties may be applicable to family law agreements when the terms have not been incorporated into a court order.

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