Australia: Binding Financial Agreements: Are they worth the paper they are written on?

A recent decision by the High Court of Australia, known as Thorne v Kennedy, has caused a stir in the press and in the legal fraternity, because it has been viewed as calling into question the use of Binding Financial Agreements, especially what are colloquially known as "pre-nuptial agreements"

For years, family lawyers have been concerned about the use of Binding Financial Agreements, referring to them as "ink on the wedding dress" agreements. Many steer clear of them, because they are worried that they may be sued if a Binding Financial Agreement that they have drafted is set aside by the Court, which has been known to occur.

The decision of Thorne v Kennedy has served to only add to the concerns, not alleviate them.

However, in our view, a Binding Financial Agreement is still a go-to solution for any person entering into a relationship who wants to protect their wealth in the event of a separation, accepting that there is a potential risk that the Binding Financial Agreement may be set aside at some point in the future if the relationship breaks down.

What are Binding Financial Agreements?

A Binding Financial Agreement ("BFA") can be entered into at any time, that is:

Before the relationship or marriage (sometimes referred to as a "pre-nuptial agreement")

During the relationship or marriage

After separation or

After divorce in the case of married couples.

A BFA sets how, in the event of the breakdown of the relationship, all or any of the property or financial resources of either or both of the parties to the relationship is to be divided.

Indeed, a BFA can deal with all financial and property issues between the parties, including extinguishing claims for spousal maintenance.

While it may be possible for you to reach agreement in writing with your future or former partner regarding financial issues, such an agreement is not legally binding unless both of you receive legal advice and have your lawyer certify the agreement.

The facts of Thorne v Kennedy

Mr Kennedy and Ms Thorne (both pseudonyms) met online in 2006. Ms Thorne, an Eastern European woman then aged 36, was living overseas. She had no significant assets.

Mr Kennedy, then aged 67, a divorcee with three adult children, was a Greek property developer living on the Gold Coast with assets worth over $18 million.

Shortly after they met online, Mr Kennedy told Ms Thorne that: "You have to sign paper. My money is for my children."

Seven months after they met, Ms Thorne moved to Australia to live with Mr Kennedy the intention of getting married.

About 11 days before their wedding, Mr Kennedy told Ms Thorne they were going to see solicitors about signing an agreement. He told her that if she did not sign it then the wedding would not go ahead. An independent solicitor advised Ms Thorne that the agreement was drawn solely to protect Mr Kennedy's interests and that she should not sign it, saying that it was the worst agreement that he had ever seen! But she relied on Mr Kennedy for everything and believed that she had no choice but to sign the agreement.

Just 4 days before their wedding, Ms Thorne and Mr Kennedy signed the agreement.

The happy couple became unhappy and Mr Kennedy called it quits after less than 4 years of marriage.

Ms Thorne commenced proceedings in the Federal Circuit Court to set aside the agreement and apply for property settlement. Mr Kennedy died during the proceedings which were then continued by two of his children who were executors of his estate.

Ms Thorne was successful in her argument that she signed the agreement under "duress" and was granted $1.5 million dollars from Mr Kennedy's estate.

Mr Kennedy's children appealed to the Full Court of the Family Court and they were successful. The Full Court said she knew what she was signing, that the agreement was indeed binding, and there was no "duress".

Ms Thorne then appealed to the High Court.

What the High Court decided

The High Court granted Ms Thorne her appeal and sent the case back to the Federal Circuit Court for an assessment of her entitlements to property settlement (still to be heard).

The High Court said that it was unnecessary to decide whether the agreement was unenforceable because of "duress", and unanimously allowed the appeal on the basis that the agreement should be set aside because there was "unconscionable conduct" on the part of Mr Kennedy in having Ms Thorne sign the agreement.

"Unconscionable conduct" means a statement or action that is considered so unreasonable that it defies good conscience. The definition is so general because there is no precise definition of unconscionable conduct at law.

A majority of the High Court also concluded that the agreement should be set aside for "undue influence", which is when one party (in this case, Mr Kennedy) takes advantage of a position of power over another person (in this case, Ms Thorne).

The High Court concluded this because:

Mr Kennedy told Ms Thorne that the agreement was not subject to negotiation;

Mr Kennedy threatened to end the marriage if Ms Thorne did not sign;

There wasn't enough time for Ms Thorne to consider the agreement properly;

The nature of the parties' relationship was such that Ms Thorne was much less powerful (no assets, moving to a foreign country etc) than Mr Kennedy.

Why Binding Financial Agreements are still useful

It is clear from this case that, while BFAs are often used in circumstances where one party holds a superior financial position over the other and are designed to benefit the party who holds the wealth and the power in the relationship, they are therefore more likely to be open to challenge when relationships break down.

In hindsight, it was perhaps inevitable that Ms Thorne would be successful because the facts of the case were so extreme and unfair.

Certainly, lawyers, and therefore their clients, will be very wary if faced with similar cases in future, where one party is so much more powerful than, and the circumstances so disadvantageous to, the other that any agreement between could be later held to be set aside for "unconscionable conduct" and "undue influence".

Each relationship and BFA has to be assessed on a case by case basis and will be many instances where a BFA is appropriate and useful, indeed necessary. For example, where both parties are entering into second marriages and want to protect assets derived from their first marriage.

As long as the parties have sufficient time to calmly consider the terms of a BFA that is professionally, legally drafted by an experienced family lawyer and the other party to the BFA receives advice from a similarly experienced family lawyer, and as long as the other legal requirements of a BFA are present, that ithen there should usually be no reason why a BFA should be set aside and clients, and their lawyers, should absolutely still consider them as part of their asset protection strategy when entering into a new relationship.