Pre-Nups: avoid or embrace?

Binding financial agreements hold increasing interest for lawyers, accountants and financial planners as their clients investigate the possibilities that documents such as these offer for risk management, asset structuring and estate planning. Binding financial agreements can be entered into before or during a relationship to determine how property will be divided on separation, and after separation to document a property settlement agreed by a separated couple.

A properly prepared, binding financial agreement can offer a couple the ability to make practical decisions for themselves about how to tailor a matrimonial or de facto property division if they separate. The end goal is a cost and tax effective outcome that takes into account the parties’ own unique circumstances.

But how are binding financial agreements being used by lawyers, accountants and financial planners and what are some of the challenges in applying them?

A little bit of history

Binding financial agreements have been part of Australian law since late 2000 when the Family Law Act was amended to enable a married couple to effectively contract out of certain provisions of the Family Law Act.  In the absence of a valid and binding financial agreement, the Family Law Act gives the Court the power to determine how matrimonial property will be divided following a marriage split.

After the amendments took effect, various state legislatures followed suit, giving de facto couples similar (although not strictly equal) ability to make decisions about how their property would be divided in the event of a relationship breakdown. By 2009, de facto and married couples in all states and territories could use binding financial agreements to record how their assets would be divided if their relationship ended.

All states, with the exception of Western Australia and South Australia, had referred their power to deal with de facto property division to the Commonwealth. This meant that the Family Law Act could be amended to address property division for all relationships, whether married, same sex, heterosexual or de facto. (De facto couples in South Australia and Western Australia continue under their own states’ regime.)

Notwithstanding this practical change, some significant questions remained. How safe were binding financial agreements? How likely were they to stand up to a challenge?

Challenging times

Since 2000 there has been a number of challenges to the validity of binding financial agreements. The Full Court in Black v Black  made it quite clear that the technical requirements of the Family Law Act need to be strictly adhered to when parties enter into binding financial agreements, failing which the binding financial agreement may be struck down for a lack of technical compliance with the legislation. Additionally, the Act set out a number of other grounds upon which the binding financial agreements could be set aside, including fraud and duress, unconscionability, attempts to defeat creditors and attempts to defeat the interests of a second spouse or the other party.

In the face of a number of cases in which the binding financial agreements were struck down, lawyers and their clients became increasingly concerned that financial agreements were too likely to be set aside by the Courts to be considered ‘safe’. In some states and in some family law firms, financial agreements were largely shunned, depriving clients of the useful and flexible qualities that they were intended to offer.

What changed?

Recognising the argument that binding financial agreements may be too easily set aside, the Federal Government introduced changes to the Family Law Act designed to overcome at least some of these concerns.

The Federal Justice System Amendment (Efficiency Measures) Act No.1 of 2009 took effect from 4 January 2010. A key element of the amendment is that it gives Court the discretion to deem a financial agreement to be binding, notwithstanding some minor technical non-compliances.

This important change was designed to overcome the risk that a binding financial agreement that would otherwise have been valid and binding would be set aside because of a minor technical error that, of itself, did not affect the rights of the parties.

It is important to note that the change is not designed to overcome any of the obligations on the parties to negotiate and enter the binding financial agreement in good faith. If a binding financial agreement could have been set aside on any of the usual grounds such as fraud, non-disclosure and duress, the new provisions will not save the agreement.

Another change was to remove the requirement for lawyers to execute a particularly worded certificate that was required to be attached to the binding financial agreement, confirming that certain legal advice had been given. Instead, lawyers now need to give their clients a written statement to the effect that they have provided advice about the financial agreement and its effect on the client’s rights.

A copy of the statement should also to be given to the other party or their solicitor. If that statement is not provided to the other party or their solicitor, the Agreement may well be struck down by the Court.

The changes are welcome news for lawyers, accountants and other professional advisers who would like their clients to have the opportunity to determine in advance what will happen to their property in the event that they separate.

Lessons to be learned

Although lawyers and their clients can proceed with more confidence, the change should not encourage parties and their legal and financial advisers to drop their guard when negotiating and preparing an appropriate binding financial agreement.

Financial agreements by their very nature are designed to oust the jurisdiction of the Court. For that reason alone, the Court will continue to closely assess the validity of a Financial Agreement in any case where a party seeks to have one set aside.

The Court will be looking to ensure that Agreements are not misused, abused, entered into unconscionably or without due care and consideration. Parties will need to continue to be diligent about their levels of disclosure to each other, and to be honest and upfront in their negotiations.

Lawyers will need to observe the technical requirements of the document, and give clear advice about the effect of the binding financial agreement on their client’s rights, and the advantages and disadvantages that it offers.
We’ve developed a series of short videos about binding financial agreements that look at what makes an agreement binding as well as some of the advantages and disadvantages.