Good Morning Everyone
Part 1 — How Did Binding Financial Agreements Come About?
I have had many requests to cover the topic regarding binding financial agreements (“BFAs”). As the topic is large, this is the first newsletter of four newsletters to discuss BFAs.
The legislation regarding family property matters have moved from Court-determined settlements to allow for private financial arrangements.
When people marry or enter into a de facto relationship, they often concentrate on their future together rather than what might happen if the relationship ends. Australian family law has long recognised that relationships can break down and that financial arrangements following separation can become complex and expensive. BFAs were introduced to provide couples with another option, the ability, subject to important statutory safeguards, to make their own financial arrangements.
A BFA is a written contractual agreement made under the Family Law Act 1975 (“the Act”) which allows parties to a marriage or de facto relationship to deal with financial matters between them. The Act allows BFAs to be drafted before marriage, during marriage or after marriage. There are corresponding provisions for de facto relationships. A BFA may deal with property, financial resources and spousal maintenance, together with matters incidental or ancillary to those matters.
Traditionally, financial disputes following relationship breakdown were principally resolved through the Court’s statutory jurisdiction. The parliament in response to changing societal attitudes, introduced the Family Law Amendment Act 2000 to allow parties within the limits established by Parliament, to make their own arrangements. The policy behind the regime is that adults should, in appropriate circumstances, have the ability to determine their financial affairs without necessarily having a Court determine the outcome following separation.
The legislation subsequently developed, including the introduction of corresponding provisions dealing with de facto relationships. The result is that financial agreements can now be used at different stages of a relationship.
The expression “pre-nuptial agreement” is commonly used in the media. Legally, however, the concept is broader. A BFA may be made:
- before marriage;
- during marriage;
- after separation in appropriate circumstances;
- following divorce; or
- in the context of a de facto relationship.
Accordingly, the term “BFA” is generally more accurate than “prenup”.
A BFA can establish how specified property and financial resources are to be dealt with if the relationship breaks down.
For example, an agreement may address:
- property owned before the relationship;
- future property;
- businesses;
- company interests;
- interests in trusts;
- investments;
- inheritances;
- superannuation;
- liabilities; and
- spousal maintenance.
The precise drafting is critical. A clause stating that “each party keeps their own property” may have very different consequences from a carefully drafted agreement dealing separately with pre-relationship assets, jointly acquired property, business growth and inheritances.
BFAs can be particularly relevant where:
One party has substantially greater wealth.
- One party owns a family business.
- There are children from an earlier relationship.
- There is a substantial inheritance or family wealth.
- One party has accumulated significant assets before the relationship.
- There are complicated company or trust structures.
- The parties want greater certainty about their financial arrangements.
A BFA is not, however, only for wealthy couples.
Although the law permits parties to enter into BFAs, the agreement is not simply an ordinary commercial contract. Parliament has imposed specific requirements and there are also circumstances in which a Court can set aside an agreement.
This distinction became particularly important in the High Court’s decision in Thorne v Kennedy [2017] HCA 49. In that case the husband was a very wealthy property developer and the wife had no substantial assets. The wife moved to Australia for the marriage and shortly before the wedding, she was presented with a proposed financial agreement and was told that if the agreement was not signed, then the wedding would not proceed. Despite being provided with independent legal advice and advised that the agreement was very disadvantageous to her, she signed it.
The High Court ultimately set aside the agreements on the basis of undue influence and unconscionable conduct. That case sets out that the circumstances in which an agreement is negotiated and entered into can be just as important as the document itself.
A BFA should therefore be:
- negotiated well in advance;
- properly explained;
- independently advised upon;
- supported by adequate financial information;
- entered into voluntarily; and
- reviewed when circumstances materially change.
A BFA can provide significant certainty as long as all the requirements are fulfilled.
The next newsletter examines the requirements for making a BFA binding, including independent legal advice, execution, disclosure, timing and the circumstances in which a Court may intervene.
I have assisted many clients with drafting their BFAs to ensure as much as possible that the agreement will withstand any challenge. I you or any one you know needs advice regarding BFAs, please do not hesitate in contacting me.
Wishing you a wonderful day,
Jeffrey Choy
JCL Legal
0419 233 670
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Legal Disclaimer: This guide is for informational purposes only and does not constitute legal advice.