In a recent Ontario case, the court declared that a wife’s unauthorized $600,000 withdrawal from the husband’s line of credit did not show a lack of “clean hands,” nor did it preclude her from seeking court-ordered relief in her battle with him, over nearly $11 million in shares of the company they owned together.
The husband and wife married in 1992, and separated in 2010. During their marriage they co-founded a company called Marine Magnetics Inc., which the court described as “a highly successful manufacturing company that makes specialized sensors to measure the earth’s magnetic field”.
The husband served as company president; the wife was the lead for sales, marketing and business development – but only until 2020 when the husband terminated her for cause and without notice. (She sued him separately for wrongful dismissal, in tandem with the Family Law proceedings). The wife then obtained a court order confirming she and the husband each owned 50 percent of the company, and that they had equal shareholdings totalling $10.8 million. The court ordered the husband to purchase his wife’s common shares for $5.4 million.
As part of the husband’s appeal of those rulings – which was ultimately unsuccessful – he raised the argument that the wife did not have “clean hands” in coming to court, and that she should be disentitled from obtaining any sort of equitable remedy at all. That’s because she had admittedly made $600,000 in unauthorized withdrawals from the husband’s line of credit, which she ultimately repaid.
In rejecting the husband’s position and dismissing his appeal on various grounds, the court explained that the wife was seeking a contract-based remedy – not one based on equity. It also disagreed that her conduct was tantamount to a lack of “clean hands”, writing:
The “clean hands doctrine” comes from the 18th century maxim that “he who comes to equity must come with clean hands” …
[The husband] Doug submits that [the wife] Melissa’s improper withdrawals should therefore have disentitled her to the equitable remedy granted by the trial judge. We disagree that the “clean hands” doctrine applies in the circumstances of this case.
First, the trial judge did not grant equitable relief. As we earlier concluded, the trial judge made no error in finding that there was an agreement between Doug and Melissa to increase Melissa’s common shareholdings to 50%. This was not the granting of equitable relief but the finding by the trial judge of the existence of an agreement between the parties and the granting of the relief that flowed from that agreement.
Moreover, because Melissa’s withdrawals from the company and from Doug’s line of credit are unrelated to the proper division of the shares, Melissa’s conduct would not fall within the application of the “clean hands” doctrine: …
Importantly, the court added that even if the wife did not have “clean hands”, this did not automatically prevent her from seeking the court’s help:
In any event, the “clean hands” doctrine does not automatically disentitle a party with “unclean hands” from obtaining any relief. Equitable principles are not based on the application of strict rules but are applied at the judge’s discretion and are “crafted in accordance with the specific circumstances of each case” … As this court observed … “It is a matter of discretion for the trial judge whether to refuse to grant equitable relief on the basis that a litigant has not come to court with clean hands”. Here, the trial judge carefully considered the circumstances surrounding both withdrawals.
The Appeal Court added:
The trial judge did not condone Melissa’s unauthorized withdrawal of the $600,000 from Doug’s line of credit, which Melissa repaid. However, as she was entitled to do, the trial judge exercised her discretion to grant Melissa relief, having regard to all the circumstances, including Doug’s conduct that she found precipitated Melissa’s rash but wrongful act.
In other words, the trial judge had not excused the wife’s conduct, but rather had framed it in the context of all the circumstances – including the overall complexity of the family dynamics, and the ongoing and acrimonious Family Law proceedings relating to their children. Her conduct was also measured against the fact the husband had “suddenly pulled the rug out from under her” by firing her from the company, allegedly for cause. This caused her to panic, since she was cut off from her only source of income.
For the full text of the decision, see:
Hrvoic v. Hrvoic, 2023 ONCA 508 (CanLII)
For the prior decision appealed-from, see:
