What can result in a Binding Financial Agreement being set aside: a discussion of Thorne v Kennedy and Frederick & Frederick.

Many readers will have heard of ‘pre-nups’, or as lawyers in Australia refer to them, ‘Binding Financial Agreements’.  Since the outcome of the Thorne v Kennedy case in November 2017, there has been discussion over whether these agreements will still hold up in court.

The essence of a Binding Financial Agreement is when two people, whether prior to, during, or following a committed relationship (de-facto or marital), decide to enter into a contract determining their entitlements under the Family Law Act 1975 (Cth) privately (as opposed to having those entitlements determined through the court system).

These documents can address a variety of financial circumstances, including but not limited to: 

1. If a party wants parcels of real estate to be excluded or treated differently because of when, or how they were purchased;
2. If parties want an interest in a family business or a trust fund to be wholly or partially excluded from the joint asset pool;
3. If parties want an existing or expected inheritance to be wholly or partially excluded from their joint asset pool; and
4. How parties want their Agreement to adjust to a change in their circumstances (such as having kids, or if one party is injured and/or out of work in the future).

A Binding Financial Agreement is intended to encompass the full range of each party’s available assets at the time that the Agreement is signed.  To ensure that both parties to the Agreement fully understand both the protections and restrictions imposed by the Agreement, the Family Law Act requires each person to receive independent advice from a qualified solicitor prior to entering into a Binding Financial Agreement.  

The head of Coleman Greig’s Family Law team, Malcolm Gittoes-Caesar was recently invited to participate in a forum on Binding Financial Agreements on the SBS program Insight where the pros and cons of ‘pre-nups’ where debated.  Malcolm’s five key takeaways from the show can be found here.

Binding Financial Agreements are lengthy, technical and complex documents by nature.  Historically, there has been a spate of litigation where people have attempted to have Binding Financial Agreements disregarded or ‘set aside’, claiming that they are unfair, unreasonable, that they were only agreed upon due to negative influence, or because one person simply did not understand the agreement when they signed it.

The litigation surrounding the validity of Binding Financial Agreements came to a head in 2017, when the High Court delivered judgement in the matter of Thorne v Kennedy.  An article discussing the full outcome of that case written by Principal and Accredited Specialist, Malcolm Gittoes-Caesar can be found here.  To briefly summarise, the High Court of Australia found that the Binding Financial Agreement entered into between the husband and wife could be set aside on the grounds of unconscionable conduct, as well as undue influence.  

There was significant media attention surrounding Thorne v Kennedy, particularly as the High Court decided to disregard the agreement in its entirety, which left many commentators asking the question: are Binding Financial Agreements still worthwhile?

The recent case of Frederick & Frederick [2018] FCCA 1694, has provided some additional insight into questions surrounding the validity of such Agreements.

In that case, the wife sought to have a Binding Financial Agreement set aside alleging that her poor English language skills meant that she did not understand the agreement when it was signed, that she was pressured when signing the document, and that the document did not adequately provide for the change in circumstances that arose from her being the primary carer of the parties’ autistic son.

In this case however, the court did not set aside the Binding Financial Agreement for two primary reasons:

1. The court determined that the wife had not established that she would ‘suffer hardship’ if the agreement was set aside; and
2. The court found that the wife did not have sufficient proof that she did not understand the agreement, or that the legal advice she received when she entered into the agreement did not explain its effects.  

Frederick tells us, particularly when read in contrast to Thorne, that if a court does not have a legally valid reason to set aside a Binding Financial Agreement, it won’t.  The Family Law Act 1975 is very strict about what a Binding Financial Agreement needs to include and consider, and Frederick and Thorne both support the fact that if a Binding Financial Agreement is drafted properly and in accordance with the Act, and if both parties receive independent legal advice as required, then the Binding Financial Agreement can remain intact.  

The Judge in Frederick determined that unreasonable or subjectively unfair terms are not the same as undue influence, and quoted the matter of Hoult v Hoult [2013] FamCAFC 109, where the court said:

“The point of the legislation is to allow the parties to decide what bargain they will strike, and provided the agreement complies with the requirements of Section 90G(1) [being the Section of the Family Law Act 1975 (Cth)] that sets out the formal requirements that make a Financial Agreement binding on the parties] they are bound by what they agree upon.” 

What does this mean for you?

What the cases of Frederick v Frederick and Thorne v Kennedy establish most clearly is that the terms of the Binding Financial Agreement, provided they comply with the Family Law Act 1975, are privately determined.  What is not acceptable in the eyes of the court (and what is a common cause for those agreements to be set aside) is for a parties’ behaviour outside of those terms to be unjust or unethical, such as:

a) Failing to disclose large assets or information;
b) Threatening to end the relationship or cancel the wedding;
c) Failing to obtain adequate legal advice (or ensure the other party does the same); and/or
d) Trying to influence or manipulate the circumstances surrounding the agreement to ensure it is signed without the other party having time to consider and/or understand it.

Binding Financial Agreements are an incredibly useful tool and can provide couples with understanding and security when either entering or ending new stages of their relationship.  They are, however, the subject of ongoing case law for a reason.  It is important they are well considered, well drafted, and well timed.

If you are considering entering into a Binding Financial Agreement, or have any concerns with regard to an existing Agreement, please don’t hesitate to get in contact with one of our Family Law Accredited Specialists.