The final breakdown of a marriage or a de facto relationship is a sad, stressful and all-too-common event in modern Australia. The consequences of a relationship ending are traumatic for most people, impacting them emotionally, physically and financially.
One way to potentially mitigate the effects of a relationship break-up is to enter into a Binding Financial Agreement (‘BFA’) with your partner, so that both of you are clear what will happen to property, assets, superannuation and debts once the union is over.
Nicknamed ‘pre-nups’ (pre-nuptials), these agreements can actually be entered into before, during or even after the relationship, and generally come into existence to avoid the need for lengthy, costly and messy property settlement legal proceedings once the relationship is over. They also allow a couple to make contingency arrangements which are more flexible and tailored than those which might be handed down in a Family Court decision.
BFAs are sanctioned by the Family Law Act 1975, which recognises that married or de facto couples may make an agreement to cover:
- financial settlement (including superannuation entitlements);
- financial support (maintenance) of one spouse by the other, post-relationship;
- any incidental issues.
The key to a BFA being legally binding is that both parties to the agreement receive independent legal and financial advice before signing, that both parties sign the agreement, that each party receives a statement signed by their lawyer confirming that advice was provided, and that the lawyers’ statements are exchanged between the parties.
While the creation of a BFA means the parties give up their right to have the Family Court determine a property and financial settlement between them once the relationship ends, a BFA can be set aside by a court in certain circumstances (see below). Problems with BFAs often arise because of poor drafting in the initial making of the agreement, which is why you should consult legal experts in family law matters such as Arbon Legal Group before proceeding.
When can BFAs be set aside?
An application can be made to the Family Court to set aside the terms of a BFA if a party to the agreement can show that:
- The agreement was signed as a result of fraud or duress, such as where one party to the relationship made the other sign the agreement under threat of withholding agreement to something else, such as wedding plans or a financial commitment.
- One party failed to disclose assets or information which should have been included in the agreement.
- The BFA was created to defeat or defraud a creditor of one party, or with reckless disregard to the interest of a creditor.
- When neither party has sought independent advice;
- There has been significant change to either or both parties’ circumstances which make it impractical for the terms of the agreement to be honoured. This might include a change in circumstances in relation to a child from the relationship where the child or their carer would experience hardship if the BFA is not set aside.
If the Court agrees to set the BFA aside, each party is free of the agreement’s terms and may apply to the Court for a property settlement.
Case example: The 2017 High Court case of Thorne v Kennedy is an instructive example of the potential pitfalls of an improperly drafted and executed BFA.
In this case, 36-year-old Ms Thorne met 67-year-old Mr Kennedy through an online dating site. Ms Thorne had no substantial assets but Mr Kennedy had assets of between $18 and $24 million in value.
After Ms Thorne moved to Australia, Mr Kennedy took her to a solicitor to obtain advice about the terms of a BFA ahead of their wedding in 10 days’ time. The solicitor advised Ms Thorne not to sign the BFA because its terms were overwhelmingly favourable to Mr Kennedy.
On hearing this news, Mr Kennedy told Ms Thorne that if she did not sign the BFA he would not go ahead with the wedding. As a result of this conduct, Ms Thorne signed the agreement and the wedding took place.
When the couple later separated, Mr Kennedy gave Ms Thorne a lump sum payment under the BFA. Ms Thorne subsequently took legal action to have the BFA set aside and after lengthy proceedings, the matter ended up in the High Court where it was found Mr Kennedy had used undue influence, illegitimate pressure and unconscionable conduct in order to get Ms Thorne to sign the BFA. The court found the BFA was ‘entirely inappropriate and wholly inadequate’ and should be set aside. Ms Thorne subsequently brought a property settlement case against Ms Kennedy in the Federal Court.
Contact us for advice and guidance
The case of Thorne v Kennedy highlights the importance of both parties to a BFA being fully informed about the advantages and disadvantages of such an agreement before they proceed to signing it.
While a BFA can provide a clearer path to a fair and equitable disentangling of your finances after a relationship ends, it’s important to get the terms of the agreement right from the outset. BFA’s, once made, can also be changed or amended to reflect changed circumstances in the relationship, if both parties agree.