All About Estates

Capacity to Contract – The Settlement Edition

Capable adults are free to enter into a contract with one another. Once entered into, the contract is binding on the parties (exceptions apply) and they may ask the court for assistance enforcing the terms of the contract.

Different rules apply to contracts entered into by minors (in Ontario, the Age of Majority and Accountability Act defines a “minor” is anyone under the age of 18). Subject to a few exceptions, any contract entered into by a minor is voidable at the minor’s discretion. In other words, a minor can back out of a contract at any time. The same cannot be said for the capable adult who enters into a contract with the minor – the adult is bound by the contract even though the minor is not. For this reason, it is generally considered unwise to rely on documents signed by children. (The minor cannot, however, keep the goods contracted for without also fulfilling her end of the bargain. For example, if the minor entered into a contract to pay $50 for a pair of shoes, the minor could not back out of the contract after receiving the shoes but before paying the $50. The minor would have to return the shoes in order to void the contract.)

Similar rules apply to contracts entered into by adults who lack the capacity to enter into contract (for example, adults who have dementia which makes them unable to understand the contents or consequences of a contract) – in such cases, the contract is voidable.

Concerns about the capacity of a party to enter into a contract frequently arises in estate and capacity disputes where a settlement is reached and minutes of settlement are signed – minutes of settlement are, after all, a contract. The purpose of the settlement is to end the litigation, but how can the parties be certain the litigation is over if one of the parties is a minor or an incapable adult who is allowed to back out of the settlement at any time?

The solution is found in rule 7.08 of the Rules of Civil Procedure (previously blogged about here). Further to rule 7.08, the settlement becomes binding on the minor or incapable adult (i.e. a party “under disability”) once approved by a judge. Rule 7.08 reads: “No settlement of a claim made by or against a person under disability, whether or not a proceeding has been commenced in respect of the claim, is binding on the person without the approval of a judge.” On a motion or application to approve the settlement, the judge will review the settlement and, if the judge agrees that the settlement is in the best interests of the party under disability, the judge will approve the settlement on behalf of the minor or incapable adult. At that time, the settlement is binding on all parties involved.

Where litigation has been commenced (either by way of action or application), a motion may be brought to a judge to approve the settlement on behalf of the minor/incapable adult. However, where parties have settled a pending claim (i.e. one that has not yet been commenced), then an application will have to be brought to obtain a judge’s approval of the settlement.

In Leonard v Saint-Vincent Hospital, 2018 ONSC 370, the court explored the differences between bringing a motion to approve a settlement where litigation has started and bringing an application to approve a settlement where no litigation has been commenced. While the evidence required in support of the motion and application are the same, the procedure is not. As set out in sub-rule 7.08(4), the parties to either the motion or the application must provide:

  1. an affidavit of the litigation guardian setting out the material facts and the reasons supporting the proposed settlement and the position of the litigation guardian in respect of the settlement;
  2. an affidavit of the lawyer acting for the litigation guardian setting out the lawyer’s position in respect of the proposed settlement;
  3. where the person under disability is a minor who is over the age of 16 years, the minor’s consent in writing, unless the judge orders otherwise; and
  4. a copy of the proposed minutes of settlement.

Recall the minors and incapable adults cannot represent themselves in litigation. Rather, their interests are represented in the litigation by a litigation guardian (see rule 7.01). All litigation guardians must in turn hire a lawyer (with the exception of the Children’s Lawyer and the Public Guardian and Trustee, who do not need to hire outside counsel).

The main difference between a motion and an application to approve a settlement that a motion for approval may be heard in writing, but an application for approval must be heard orally. The judge explained the principle underlying the distinction as follows:

[40]      Through the litigation process, the merits of the claims on behalf of or against a person under a disability are explored and considered. The motion for approval of a settlement is the final step in that process; a process intended to ensure that the action is resolved on terms that are both reasonable and in the best interests of the person under a disability. The evidence on the motion for approval of the settlement includes that of counsel for the party under a disability with respect to the steps taken, etc. That evidence is intended to provide the judge reviewing the record with confidence that the party under a disability has been treated fairly both procedurally and on a substantive basis.

[41]      Parties to an application are not required to exchange pleadings, comply with discovery rules, or attend a pre-trial conference before they attend in court on the return of the application. An application proceeds directly to a hearing on the merits. It is the oral hearing that provides the opportunity for judicial oversight; the presiding judge considers the procedural fairness to and the substantive rights of the party under a disability.

The court acknowledged that the parties could, as part of their application, request that the need for an oral hearing be dispensed with. However, the circumstances where the court would agree to such a request would be rare.

Leonard v Saint-Vincent Hospital is a comprehensive summary of the rules and reasons behind court approval of settlements involving an incapable party and is worth a read.

About Gillian Fournie
Gillian is a lawyer with de VRIES LITIGATION LLP. Her practice focuses on the area of trusts and estates litigation. gfournie@devrieslitigation.com

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