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Part 2 — When Is a Binding Financial Agreement Binding?

One of the most important misconceptions about Binding Financial Agreements is that the parties become bound merely because they have signed a document.

That is only the case when all the regulatory requirements have been met that as detailed in the Family Law Act 1975 (“the Act”). For married couples, the central provision is s 90G and s 90UJ for de facto couples.

Section 90G provides that a financial agreement is binding when, amongst other requirements:

1.             the agreement is signed by all parties;
2.             before signing, each spouse party receives independent legal advice from a legal practitioner;
3.             the advice addresses the effect of the agreement on that party’s rights;
4.             the advice addresses the advantages and disadvantages of entering into the agreement;
5.             the advising solicitor provides the required signed statement;
6.               the statement is provided in accordance with the legislation; and
7.             the agreement has not been terminated or set aside.

Most importantly each party must obtain advice from their own independent lawyer. If both the parties are advised by the same solicitor the agreement, which in all other respects conforms to the Act, will fail. Importantly each solicitor must advise their client regarding the advantages and disadvantages of their entering such an Agreement and how that agreement affects their rights if not for the Agreement. 

The solicitor advising a party should not merely explain the meaning of each clause but also ensure to the best of their ability, that the client understands the practical consequences of entering into the agreement. Such matters that need to be explained include the following:

1.             what the client might receive if there were no BFA;
2.             what the client would receive under the proposed BFA;
3.             the treatment of existing assets;
4.             future assets;
5.             future inheritances;
6.               businesses;
7.             trusts;
8.             superannuation;
9.               liabilities;
10.               future earnings;
11.             potential maintenance claims; and
12.               the circumstances in which the agreement could become disadvantageous.

The Federal Circuit and Family Court of Australia (Family Law) Rules 2021 impose a broad duty of full and frank disclosure in financial proceedings, including disclosure of income, property interests, financial resources, interests in entities and relevant trusts. The lack of disclosure by a party will inhibit any prospects of opposing a challenge to the Agreement by the other party. Full and frank disclosure should precede any negotiations regarding the terms of a proposed Agreement. Disclosure should include the following:

1.             interest in a company;
2.             an interest in a family trust;
3.             a substantial superannuation interest;
4.             an overseas property; or
5.             a substantial anticipated inheritance.

A party’s decision to enter into the BFA may have been materially affected by the incomplete information. The Court has ruled that incomplete disclosure may give rise to grounds to set aside a BFA. Another ground as set out in the case of Thorne v Kennedy is that timing matters. A BFA presented immediately before a wedding creates obvious risks. If one party is told: “Sign this tomorrow or the wedding is cancelled”, the existence of independent legal advice does not necessarily cure the problem when one party is coerced into signing. In Thorne v Kennedy, the wife received independent legal advice against signing the agreement, yet the High Court nevertheless found the circumstances sufficient to establish undue influence and unconscionable conduct.  

Where possible, negotiations should commence well before:

• the wedding;
• the commencement of cohabitation;
• a major financial transaction; or
• another event creating significant pressure.

The parties should have adequate time to:

• obtain independent advice;
• consider alternatives;
• negotiate;
• amend the agreement;
• obtain updated advice; and
• make a genuinely voluntary decision.

As circumstances change, parties can terminate a financial agreement by entering into an appropriate termination agreement or by making a subsequent financial agreement which terminates the earlier agreement, subject to the statutory requirements. It is therefore sensible to review a BFA when circumstances materially change. Whilst a BFA can be carefully drafted to anticipate changing circumstances a more nuanced approach is to review and if necessary, terminate an agreement and draft a new agreement to meet the changed circumstances.

In my next newsletter I will consider the advantages and disadvantages of a BFA, including asset protection, certainty, litigation risk, maintenance, children, inheritances and the potential costs of getting the agreement wrong. If you or anyone you know is considering a BFA, please have them contact me to obtain appropriate advice.

Wishing you a wonderful day,

 

Jeffrey Choy

JCL Legal

0419 233 670

[email protected]

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Legal Disclaimer: This guide is for informational purposes only and does not constitute legal advice.