Family Law – Binding Financial Agreements or Prenups, Are They Bullet Proof?

Binding Financial Agreements (“BFA’s”) were introduced in the Australian legislation in 2000 with the intent of providing a mechanism for spouses who were either contemplating marriage (or entering into a de-facto relationship) or were already married (or in a de facto relationship) to determine what would happen to their property and how they would be looked after financially in the event of separation.

These types of marital agreements were designed to remove the uncertainty and the stress of the litigation which may follow in the event of separation.

Recent controversy has been enlivened surrounding the enforceability of such Binding Financial Agreements, especially following the recent High Court case of Thorne v Kennedy. In that case, the Court ultimately set aside the BFA because it was found to have been entered into through undue influence and unconscionable conduct.

In order to understand what sort of circumstances could give rise to “undue influence” and “unconscionable conduct” in the context of BFA’s,  it is important to look at not only the actual terms of the Agreements but also the surrounding circumstances of the parties who enter into such Agreements.

Thorne v Kennedy [2017] HCA 49

In the case of Thorne v Kennedy, Ms Thorne, was a person of a very limited financial means and limited job prospects who decided to migrate to Australia purely in furtherance of her relationship with Mr Kennedy who was a very wealthy man. In addition, Ms Thorne also wanted to have children and both her and Mr Kennedy had undertaken IVF for this purpose. From the very early stages of their relationship, Mr Kennedy had made it clear to Ms Thorne that he wanted to enter into a “prenup” with her before their wedding and that he wanted the majority of his wealth to go the children from his first marriage. At the same time, Mr Kennedy had assured Ms Thorne that he would look after her financially during the marriage as well as in the event he passed away. As Ms Thorne felt very strongly about her relationship with Mr Kennedy, she was not concerned that he would ever leave her and therefore she had agreed to sign a prenup.

A few days before the wedding and after Ms Thorne’s relatives had been flown over to Australia for the wedding at Mr Kennedy’s expense, Mr Kennedy presented Ms Thorne with a prenup. Ms Thorne understood that if she did not sign the prenup there would be no wedding. Upon obtaining legal advice, Ms Thorne was advised not to sign the agreement as it was inappropriate. Contrary to such advice, Ms Thorne went ahead and signed the Agreement as she believed she had no choice but to sign it as the wedding would be called off if she didn’t.

In reaching the conclusion that Ms Thorne had “no choice” and was powerless, the Court relied on the following findings:

1. The lack of financial equality between the parties
2. Ms Thorne’s lack of permanent status in Australia at the time
3. Ms Thorne’s reliance on Mr Kennedy for all things
4. Ms Thorne’s emotional connectedness to their relationship and the prospect of motherhood
5. Ms Thorne’s emotional preparation for marriage
6. The publicness of her upcoming marriage

In addition to the above factors, the High Court of Australia indicated that some further factors which may be relevant in determining whether there is a finding of undue influence in the context of prenuptial and postnuptial agreements are as follows:

1. Whether the Agreement was offered on a basis that it is not subject to negotiation;
2. The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end the marriage or to end an engagement;
3. Whether there was any time for careful reflection;
4. The nature of the parties’ relationship;
5. The relative financial position of the parties
6. The independent advice that was received and whether there was time to reflect on that advice.

Implications for spouses wanting to enter into a Binding Financial Agreement or Prenup

When done correctly and in the appropriate circumstances, BFA’s can be a useful tool for financial planning and can provide certainty in the event of a relationship breakdown. However, the above decision highlights the importance of the broad range of circumstances that the Court can take into account in determining whether undue influence or unconscionable conduct has occurred and that both parties should have the ability to negotiate freely and reach a “fair and reasonable” agreement in view of their particular circumstances.  Further, as demonstrated in the above decision, Agreements done in haste and under a sense of urgency (for example due to the impending wedding, or birth of children or other circumstances where a person is unable to make “clear, calm or rational decisions” etc) are even more likely to be challenged by a Court and therefore it is important that both parties take the time to reflect whether it is in both parties’ interests to enter into such an Agreement in order to avoid running the above risks.

Spouses who are considering entering into a Binding Financial Agreement should be mindful that there is always a risk that such BFA’s or prenuptial agreements may be set aside as there are no guarantees in litigation. Therefore if you are considering entering into such an Agreement, it is important that you first obtain legal advice in order to ascertain carefully whether such an Agreement is appropriate in your circumstances. Secondly, if you do decide to proceed with such an Agreement and provided that both parties have provided proper disclosure of all their relevant circumstances and the terms of the Agreement are fair and reasonable to both parties, such Agreements can still be useful in providing certainty in the event of a relationship breakdown.

If you wish to consider whether entering into a Binding Financial Agreement is right for you, please contact Anthi Balafas on (02) 9299 4912.

Author: Anthi Balafas, Partner.