This post is the last of our series on Binding Financial Agreements. If you have not already done so, we recommend you read our first post in the series; What is a Binding Financial Agreement?, and then our second in the series Entering into a Binding Financial Agreement, first.
When can a BFA be set aside?
As the name suggests, Binding Financial Agreements are legally binding and a party cannot simply change their mind and walk away from it. However, the High Court of Australia decision of Thorne & Kennedy [2017] cast a spotlight on the ability of Binding Financial Agreements to be set aside.
We explore how this decision has affected the landscape of Binding Financial Agreements and practical lessons to take away from it.
But first, let’s get back to basics.
The legislation
In Western Australia, the law in relation to Binding Financial Agreements is found at:
- Part VIIIA of the Family Law Act 1975 (Cth) for married couples; and
- Part 5A Division 3 of the Family Court Act 1997 (WA) for de facto couples.
Both Acts contain similar provisions and for the purposes of this blog post, we will refer only to Family Law Act 1975 (Cth) provisions. It is important to remember that de facto couples adhere to mirrored provisions in the Family Court Act 1997 (WA).
Specific grounds for setting aside a Binding Financial Agreements
Section 90K of the Family Law Act 1975 (Cth) prescribes specific grounds to set aside a Binding Financial Agreement.
To name a few examples, a Binding Financial Agreement may be set aside on the following grounds:
- The agreement is void, voidable or unenforceable;
- The agreement was fraudulently obtained (including non-disclosure of a material matter);
- A party has entered into the agreement for the purpose of defrauding or defeating a creditor;
- Whilst making the agreement, a party engaged in unconscionable conduct; and
- The agreement covers at least one superannuation interest that is an unsplittable interest.
Treat Binding Financial Agreements as contracts
Compounding the provisions of section 90K set out above, section 90KA provides that questions of validity, enforceability or effectiveness of a Binding Financial Agreement should be determined according to the principles of contract law and equity.
Contracts can be set aside on many grounds, including fraud, duress and undue influence.
Thorne & Kennedy – a cautionary tale
In short, the respondent was a wealthy man with significant assets and the appellant had no significant assets. The parties met online and the appellant moved to Australia to marry the respondent about 7 months later. The appellant had basic English skills, no family or support in Australia and was in the country on a tourist visa at the time the parties got married.
Shortly before their wedding, the respondent insisted the appellant sign a Binding Financial Agreement and indicated that if she refused, the wedding would not go ahead. The appellant’s family had already arrived from Eastern Europe (her country of origin) and she had made all arrangements for the wedding.
The appellant signed the Binding Financial Agreement proposed by the respondent four days before the wedding, despite her own independent legal advice that she should not do so and that the agreement was entirely inappropriate. The appellant signed a secondary agreement in similar terms, a short period after the wedding.
What the Federal Court said
After separation, the appellant applied to the Federal Circuit Court to set aside both agreements. The appellant was successful. The trial judge attributed her actions to duress or undue influence, describing her as powerless with no choice but to sign the agreement. The trial judge noted six key factors. These were the appellant’s:
- lack of financial equality with the respondent;
- lack of permanent residency in Australia at the time;
- reliance on the respondent at all times;
- emotional connection to her relationship with the respondent and the ensuing prospect of motherhood;
- emotional preparation; and
- the overall publicness of their upcoming marriage.
This case progressed on the respondent’s appeal to the Full Court of the Family Court, and then on the appellant’s appeal to the High Court of Australia. The High Court ultimately had to decide whether it could set aside Binding Financial Agreements according to principles of “common law and equity” i.e. duress, undue influence or unconscionable conduct.
Ultimately, the High Court unanimously allowed the appellant’s appeal. They held that the agreements were voidable under section 90K of the Family Law Act 1975 (Cth) on the grounds of unconscionable conduct. The majority also found that the agreements were voidable on the basis of undue influence.
Why is Thorne & Kennedy significant?
This High Court decision appears to broaden the circumstances in which a Binding Financial Agreement can be set aside. Hence this ruling by the High Court makes it critical for parties to engage specialist lawyers when contemplating entering into such an agreement.
Note that both parties sought their own independent legal advice and both had satisfied the legislative requirements. However, the Court still found this insufficient in this case. This is because of the circumstances surrounding execution of the agreement and the inequality of both their bargaining positions outweighed their compliance.
Lessons for the financially stronger party to a Binding Financial Agreement
- In Australia, two people can enter into Binding Financial Agreements before, during or even after separation. This means that in reality there is no real urgency when making binding financial agreements. Therefore, take care to watch out for any perceived urgency – this might be a warning sign of an oppressive proposal. There is no urgency and time limitations should not overcome the consideration, negotiation or execution of the agreement
- Negotiation needs to be collaborative, and not adversarial. Be careful that your advocacy for the agreement does not amount to unconscionable conduct or undue influence. The existence of inequality of bargaining power itself is not a problem, just don’t take advantage of it.
- As was the case in Thorne & Kennedy, don’t let the marriage be contingent on signing the Binding Financial Agreement.
- Seeking independent legal advice is a necessary condition of an enforceable Binding Financial Agreement. This is a because BFAs are highly technical legal documents that have to meet very specific legislative requirements. If your BFA does not meet some of these requirements, you increase your risk of having it set aside. This is doubly important if you are the financially weaker party in a proposed BFA. If so, make sure you take some leisure in seeking out independent legal advice about your BFA from a family lawyer that specialises in this area.
Lessons for the financially weaker party to a Binding Financial Agreement
- Be comfortable. Both parties to a Binding Financial Agreement need to be entirely comfortable with the terms. It is important not to feel rushed, bullied or reluctant.
- Understand it. Both parties to a Binding Financial Agreement need to understand the circumstances that will entail after separation if they enter into the agreement. Ask as many questions as are necessary for every term of that agreement to be crystal clear.
- Ensure there is mutual disclosure and don’t just take the other party’s word for the state of their finances. Binding Financial Agreements do not require full and frank disclosure. They are already in Family Court proceedings and the exchanging the likes of bank statements may not be necessary. However, make sure enough disclosure has been requested and provided to allow for cross-checking of a comprehensive Asset & Liability schedule.