A few weeks ago, we covered the upcoming celebrity divorce of actor Kevin Costner and his wife Christine Baumgartner. As has been widely reported, the couple were smart enough to agree to a comprehensive pre-nup before they got married; it addresses their financial and other arrangements now that they have decided to part ways.
Pre-nups are always a great idea, regardless of celebrity (or non-celebrity) status. Of course the clauses will vary with the particular couple, their overall situation, and their individual needs and wants.
According to some news sources, the Costner-Baumgartner version has an interesting clause: If Christine decides to challenge the pre-nup, then she will forfeit the $1.5 million settlement she’d otherwise receive.
Reportedly their agreement stipulates that “If Christine, in any manner, challenges or assists in the challenge of the validity or enforceability of any provision of this Agreement, she shall lose any and all rights to receive any payment, Property or Interest from Kevin pursuant to this Agreement.”
These kinds of clauses are called “in terrorem” provisions, and they are more customarily seen in commercial agreements. In a Canadian appeal court ruling in Bobrowski v. Canadian Fire Insurance Co., the court defines them as being “a condition … which is intended to frighten or intimidate”.
Since they are akin to penalty clauses, they tend to be subject to special scrutiny by the courts – especially when they show up in domestic agreements like the Costner-Baumgartner one. Family Courts will uphold them if they represent a genuine pre-estimate of the liquated damages the other party will actually suffer as a result of the breach. But they will be struck down if they are designed to essentially coerce or compel the other party’s performance.
In one Canadian Family Law decision called Dundas v. Schafer, the court struck down a clause like this, since it purported to limit one spouse’s right to challenge her entitlement to the pension of the other.
In that case the husband and wife had reached what the trial court found was a clear and unambiguous separation agreement. It included a provision in which the wife agreed to waive or release her interest in the husband’s pension. In return the wife received – and was duly paid – $20,000 from the husband. When the wife later decided to challenge the pension clause anyway, the husband considered it a breach of the in terrorem clause. He asked for the money back, and the trial judge granted him an order accordingly.
The Manitoba Court of Appeal overturned that ruling; the wife could keep the $20,000. The clause was tantamount to an unenforceable penalty provision. There was no relationship between its breach, and the amount the husband had paid the wife under it. In other words, the $20,000 was not a true pre-estimate of damages the husband would suffer if the wife challenged the agreement, let alone if she challenged the pension clause specifically.
Full text of the decisions: