A financial agreement is a contract that deals with the division of a couple’s assets after they separate, or in the event that they separate in the future. They may be made before or during a marriage or de-facto relationship, or after it breaks down.
Financial agreements are also sometimes referred to as binding financial agreements, pre-nuptial or post-nuptial agreements and cohabitation agreements. They do not require court approval.
In the absence of a Financial Agreement, a division of the property of the parties may be determined by the relevant Courts in accordance with the principals set out in the Family Law Act. The Courts can also make orders regarding a party of the marriage or defacto relationship paying maintenance to the other.
Although any couple may enter a financial agreement, they are often used when one or both parties have previously been married or in a substantial relationship, have children to a former partner, or where one or both parties bring significant assets into the relationship. Generally, the financial agreement will attempt to protect existing assets or anticipated inheritances, ensure children from past relationships inherit from their parent, and take account of unequal contributions to the assets of the parties.
How binding are these agreements?
Some people may be cautious about entering an agreement to finalise their property affairs without approval or intervention by the court. Certainly, there are cases where such agreements have later been set aside by the Courts for various reasons.
A financial agreement is a legal contract so is presumably binding provided the stringent statutory technical requirements are met and certain circumstances did not exist during the making of the agreement that could make it appropriate to have it set aside.
Technical requirements
Financial agreements must comply with the relevant provisions of the legislation being the Family Law Act.
Both parties must sign the agreement and before doing so, obtain independent legal advice regarding the effect of the proposed agreement on their rights, and its advantages and disadvantages.
A legal practitioner must also provide the client and other party with a signed statement to the effect that such advice was provided. Each party must receive a copy of the financial agreement signed by both parties and their respective lawyers.
The court may order an agreement to be binding if challenged despite non-compliance with one or more of these formalities if it would be ‘unjust and inequitable if the agreement was not binding’. For example, in Ryan and Joyce [2011] FMCAfam 225 the Court upheld the validity of an agreement that cited the wrong section of the legislation.
When will a financial agreement be set aside?
Disputes regarding financial agreements generally arise when a party fails to honour his or her obligations and the other person applies to the court to enforce the agreement. The non-complying party may argue to have the agreement set aside on one or more of the following grounds.
The agreement was obtained by fraud
The court may set aside a financial agreement that was obtained by fraud such as non-disclosure of a significant asset. Parties should be honest in their dealings and give proper disclosure of their assets, financial resources and estimated values. Being transparent will reduce the risk of having an agreement set aside.
The agreement was made to defeat the interests of creditors or another party
An agreement may be set aside if made with disregard to the interests of a party’s creditors or to defeat or defraud the interests of the other party or a person with whom one of the parties had pending property matters.
There are material changes in circumstances
A subsequent material change in circumstances that creates hardship for a party, or affects the welfare of a child of the relationship may cause the agreement to be set aside. Similarly, circumstances that make it impracticable to carry out all or part of the agreement may invalidate it, for example, a person’s bankruptcy, the disposal of a party’s assets or an illness or injury that permanently affects a party’s earning capacity may be sufficient grounds for the Courts to set an agreement aside.
The agreement is void, voidable or unenforceable under contract law
As with all contracts, a financial agreement may be set aside under common law and equitable principles, for example, on grounds of uncertainty, duress, undue influence, unconscionability, misrepresentation, mistake, incapacity or public policy.
Many disputes concerning financial agreements involve allegations of undue influence and / or unconscionability. The following two cases are examples.
In Thorne and Kennedy [2017] HCA 49, an eastern European woman and wealthy Australian property developer with assets worth around $24 million, met through a website offering potential brides. The woman moved to Australia and the couple married. Shortly before the wedding the woman, who had few assets, no family connections, and spoke little English, was presented a financial agreement with an ultimatum to sign it or the wedding would not proceed. She received advice stating that the agreement was ‘entirely inappropriate’ and should not be signed but felt compelled to do so.
The marriage ended, and the woman applied for the agreement to be set aside seeking a financial settlement of $1.24 million. The man died before the matter resolved and his two children as executors defended the claim against the estate. Initially, the woman was successful on the basis that the agreement was signed under duress. On appeal to the Full Court of the Family Court, however the decision was reversed. The matter was taken to the High Court which determined that the agreement should be set aside on the grounds of unconscionable conduct and duress in circumstances where the woman was at a considerable disadvantage.
The case of Saintclaire and Saintclaire [2015] FamCAFC 245 saw a different result. In that case the wife argued that she had been unduly influenced when signing the financial agreement on the basis that she had been diagnosed with post-natal depression, was in debt, and the husband was abusive and threatening (it was noted that these claims were general and unparticularised). The wife was initially successful in having the agreement set aside however this decision was overturned by a higher Court on appeal.
The Court noted that negotiations concerning the financial agreement had been on foot for around seven months. The wife had credit card debts of $100,000- the extent of which had only been disclosed later in negotiations. The wife had consulted a lawyer throughout the entire process and had successfully sought amendments to the agreement including a cash payment to her of $100,000. When the agreement was signed, the wife’s post-natal depression had resolved, and she was optimistic about her financial future. There was no evidence to suggest that the wife did not want to sign the agreement. Despite her personal debt, she was an experienced financial planner whose income had been around $300,000 before having children. In the circumstances, the court considered that the negotiations surrounding the agreement were not unconscionable nor was there undue influence.
Conclusion
A financial agreement will be binding provided it complies with the provisions of the relevant legislation, the parties make full disclosure of all of their assets, financial resources and liabilities, and the agreement is not made contrary to general principles of contract law.
There is no one-fit solution when it comes to making a financial agreement and an informed decision should be made with the assistance of an experienced specialist lawyer. Once in place, a financial agreement made before or during a relationship should be reviewed regularly to take into account changes in personal and financial circumstances. Marriage can render a prior agreement relating to a defacto relationship void.
If you or someone you know wants more information or needs help or advice, please contact us on (08) 8344 6422 or email [email protected].