Pitfalls of Binding Financial Agreements

It is not uncommon for one party to a relationship to be in a significantly stronger financial position to the other, especially prior to marriage.

In these circumstances, the wealthier party may be concerned about securing the assets they are bringing to the marriage in the unfortunate event their pending marriage ends in divorce. After the changes to the Family Law Act that came into effect in 2009 (as per the Family Law Amendment (De facto Financial Matters and Other Measures Act) 2008) this also applies not only to those contemplating marriage, but also those entering into or already in a de facto relationship.

It is in these circumstances that couples may consider approaching a Family Law Solicitor to seek advice on entering into a private agreement (a Binding Financial Agreement) before their marriage or commencement of a de facto relationship in order to determine how their property will be divided in the event that the marriage or relationship ends.

When parties enter into such an Agreement, they intend the terms of the Agreement rather than the principles of the Family Law Act 1975 to determine how their property will be divided in the event that the relationship or marriage breaks down. Although they are commonly referred to as ‘pre-nuptial agreements’, they are referred to as ‘Financial Agreements’ in the Family Law Act and in order to be binding, they must meet numerous specific requirements as stipulated in the Act.

This idea of self-determination is attractive, however there are numerous bases on which a Binding Financial Agreement can be set aside if challenged by either party, often after separation. The article below outlines some of the pitfalls and alternatives to Financial Agreements.

Who can enter into a Binding Financial Agreement?

Since the changes made to the Family Law Act 1975 which came into effect in 2009, Financial Agreements can be entered into by both de facto and married couples. As same sex relationships are now recognised by the Family Law Act 1975, both same sex and heterosexual couples are able to enter into Financial Agreements.

As a person can be legally recognised as engaging in more than one de facto relationship at the same time, or be married and engage in one or more de facto relationship/s at the same time, a person is also able to enter into multiple Financial Agreements at the same time.

When can a couple enter into a Binding Financial Agreement?

Despite being most commonly referred to as ‘pre-nuptial agreements’ under the Family Law Act, couples can enter into Financial Agreements before, during or after a de facto relationship OR before or during a marriage or after a divorce.

What are the pitfalls?

The Family Law Act stipulates a variety of requirements that must be met for a Financial Agreement to be binding. This means that the Agreement must be very carefully drafted so that is complies with the requirements of the Act. A Financial Agreement will need to include:

1. Identification of the type of Financial Agreement that is being entered into;
2. Identification of the parties;
3. A ‘definitions’ section;
4. A list of ‘recitals’, that is, a background of each party and their relationship;
5. When the couple plan to cohabit, or if applicable, marry;
6. If the relationship has ended, the date of permanent separation and/or divorce;
7. If there is a previous Financial Agreement in place, a Termination Agreement;
8. The substance of the agreement- that is, how the property of the couple will be divided upon separation;
9. If desired, a release pursuant to the Succession Act
10. If desired, a superannuation agreement;
11. If desired, a maintenance agreement;
12. A list of the assets and liabilities held by each party individually, and if applicable, jointly, at the time of entering into the Agreement;
13. If entered into prior to a breakdown of the relationship, two undated and unsigned Separation Declarations; and
14. Two signed statements of independent legal advice (one for the solicitor of each party)

When considering whether to enforce or set aside a Financial Agreement, the court has repeatedly emphasised the importance of strict compliance with the requirements stipulated in the Act. Seemingly small errors in drafting can lead to the Agreement being set aside. If this happens, despite the intention of the couple to when they entered into the Agreement, the court can then make orders regarding the division of the property pool. This could result in the property that the wealthier party brought to the relationship being adjusted (divided between both parties).

A publicised example of the importance for strict compliance with legal and technical requirements is the case of Australian Olympic Champion Grant Hackett, who sued his lawyers by commencing legal proceedings in the Supreme Court for what the media has referred to as a “botched” agreement. (Learn more by reading the Daily Telegraph article on Grant Hackett)

Furthermore, circumstances that surround the couple entering into the Agreement can result in the Agreement being overturned. Examples include: fraud by either party (eg. incomplete financial disclosure by either party), unconscionable behaviour by either party; the Agreement being used to evade creditors; and either party failing to obtain independent legal advice prior to signing the Agreement. What constitutes ‘unconscionable behaviour’ has been interpreted quite broadly by the court. Examples include:

1. A party not being given enough time to obtain and consider advice and/or seek amendment of the agreement;

2. A party presenting the Financial Agreement to the other a short time from the scheduled wedding ceremony and threatening to cancel the marriage if the other party refuses to sign the Agreement.

In addition to the technical requirements, certain changes in circumstances after the Agreement has been reached can result in the court setting aside the Agreement if either party chooses to challenge the Agreement. This includes where clauses in the agreement are no longer enforceable at the time of separation and if there are child/ren of the relationship, where the effect of the Agreement will cause hardship for the child or the party who cares for the child. A typical scenario that illustrates the latter point is where one party agrees that they will have no interest in the property that the other brought to the relationship, if they will suffer hardship as a result of this agreement and they have the care of a child/children of the relationship, the Agreement can be set aside and the court can order that they receive an interest in the other party’s property.

Is there an alternative?

When parties reach an Agreement regarding their future, given what is at stake, they want it to be as certain as legally possible. There are many pitfalls that can render a Financial Agreement unable to achieve this aim. There is however, an alternative.

The Court has jurisdiction where there is a matrimonial or de facto cause. This means that when a separated couple reach agreement regarding the division of their property, they can ask the Family Court to formalise the agreement by turning it into Orders. As these Orders are made with the agreement of the parties, they are called Consent Orders. The court has a form that must be completed and signed by both parties that accompanies the set of Orders (also signed by both parties) that the parties request the Court to make. The completion of this form is usually quicker, more precise and therefore less expensive than drafting a Financial Agreement and Consent Orders can only be overturned in very limited circumstances. Furthermore, Orders can easily be expanded to incorporate parenting matters if desired.

Our policy at Prime Lawyers is to assist our clients to obtain Consent Orders rather than Financial Agreements wherever possible. Also, rather than encouraging clients to enter into “pre-nuptial agreements” we provide advice to people who are considering marriage or entering into a de facto relationship regarding the operation of the Family Law Act in the unfortunate event that their relationship does break down. They are then able to make informed decisions regarding their future finances armed with the knowledge of how those decisions may influence a property division in the future.

If you require assistance with or have an enquiry regarding the division of property in a family law matter, our experts at Prime Lawyers – Family Law Division can help. Contact us to make an appointment with a family lawyer at your nearest Prime Lawyers office.

If you live in the Sydney Metro or Greater Western Sydney, contact us today to speak to one of our Family lawyers in Sydney, Parramatta, Chatswood or Sutherland. Or if you live in the Illawarra or South Coast, call (02) 4228 7722 to make an appointment with one of our Family Lawyers in Wollongong.