Penalty clauses are found in various legal contracts and agreements. They set out a stated consequence in the event a contract is breached. Penalty clauses that are unconscionably punitive and have no connection to the loss that will result to the “innocent” party have largely been held by Ontario courts to be unenforceable. 

However, in Assayag-Shneer v Shneer, 2023 ONCA 14, the Ontario Court of Appeal made an important distinction in the family law context in situations where an agreement containing a penalty clause is incorporated into a court order.  

This case involved a former couple who were divorced back in 1999. They eventually resolved their separation issues by Minutes of Settlement, which they then incorporated into a divorce judgment (i.e. a court order). Both parties had legal counsel. The Divorce Judgment, which was granted on consent, required the husband to pay support to the wife in the amount of $338,000.00, to be paid over six years. If the husband defaulted at any time, he would owe the wife twice the full amount then outstanding on support, plus a further $50,000.00. At the time the husband defaulted, he still owed $228,000.00, resulting in a total balance of $506,000.00 owing under the terms of the penalty provision. 

When the wife sought to enforce the penalty provision, the husband brought a motion to vary the terms of the Order. 

The lower court judge found that the husband had not established a material change – i.e. a change in the condition, means, needs or other circumstances of either spouse – sufficient to vary the Order. The judge nevertheless found he had the authority to declare the penalty provision unenforceable and to vary the Order by deleting it. He reasoned that the doubling of the outstanding support plus $50,000.00 bore no relationship to any loss or damage suffered by the wife, and that the lack of material change in circumstances should not disentitle the husband from a declaration that the penalty clause was unenforceable. The judge cited the Divorce Act and the Courts of Justice Act as his authority to do so.  

The Court of Appeal unanimously reversed this decision on the wife’s appeal.  It considered three possible grounds relied on by the lower court judge: 

1. Section 17 of the Divorce Act: The Court of Appeal held that a material change is a threshold condition to amend or delete a provision in a divorce judgment under section 17 of the Divorce Act. Relying on the Supreme Court of Canada decision of LMP v LS, 2011 SCC 64, the Court of Appeal reaffirmed that absent a material change, there is no power to vary a support order under the Divorce Act.  

2. Section 98 of the Court of Justice Act: This provision confirms a court’s power to relieve against penalties and forfeitures on such terms as are just in the context of contracts. The Court of Appeal found that nothing in this section authorized a judge to review an order of another judge of the same court and weigh in on the correctness of the original order. 

3. The common law doctrine on non-enforceability of contractual penalties: While the Court of Appeal recognized that the common law doctrine for contractual remedies may be applicable to family law agreements, it held that when that agreement is then incorporated into a court order, its enforceability has already been determined. In other words, the husband’s time to challenge the validity and enforceability of a contractual provision was before the signed agreement was included in a court order. 

In this case, the Court of Appeal highlights the important distinction between a penalty clause in a family law agreement and one in a court order, the latter not being subject to the same vulnerability on enforcement. In light of this decision, parties and counsel must be deliberately thoughtful about when and whether to incorporate such agreements into a court order.