The impact of power imbalance and undue influence on financial agreements – should you be concerned?

In Thorne v Kennedy [2017] HCA 49, the High Court determined that two financial agreements were voidable due to an inequality of bargaining power and a lack of fair or reasonable alternatives available to one of the parties. If there is a significant power imbalance, parties to a relationship should consider whether it is prudent to have a financial agreement or if there may be preferable alternatives to quarantine their wealth.

Background facts

The parties met online on a website for potential brides.

Ms Thorne lived in the Middle East and had no substantial assets. She had no children.

Mr Kennedy had assets worth between $18 million and $24 million. He was divorced and had three adult children.

Mr Kennedy told Ms Thorne that if he liked her he would marry her, but she ‘will have to sign paper. My money is for my children’.

In February 2007, they moved to Australia to live in Mr Kennedy’s penthouse with the intention of marrying. They intended to have children together.

Their wedding was set for 30 September 2007. On 8 August 2007, Mr Kennedy instructed a lawyer to prepare a section 90B financial agreement. The agreement was heavily weighted in Mr Kennedy’s favour; it effectively quarantined his assets from Ms Thorne if they separated, save for small payments in certain circumstances. A more generous payment or property would only be available to Ms Thorne if Mr Kennedy died while they were still together.

On 19 September 2007, Mr Kennedy told Ms Thorne they were going to see solicitors to sign an agreement. When asked if she was required to sign the agreement, Mr Kennedy told her if she did not sign, the wedding would not go ahead.

Ms Thorne first spoke with a solicitor about the agreement on 20 September 2007. The following day, the solicitor provided written advice to Ms Thorne. The solicitor said she thought Ms Thorne was under significant stress, the agreement was incredibly unfair, and she strongly advised her against signing the agreement. By this time, guests, including Ms Thorne’s family from overseas, had flown in for the wedding.

Despite her solicitor’s advice, Ms Thorne signed the agreement four days before her wedding. Ms Thorne and Mr Kennedy then signed a section 90C financial agreement after they married on 5 November 2007 (in almost identical terms to the section 90B financial agreement).

Mr Kennedy signed a separation declaration on 16 June 2011. Ms Thorne then applied to set aside the financial agreement.

Decision at first instance

The primary judge concluded that Ms Thorne was powerless to make any decision other than to sign the first agreement. This powerlessness extended to the signing of the second agreement. The judge reflected that there was more than an inequality in their financial positions, but also a lack of any outcome for Ms Thorne that was ‘fair or reasonable’.

The primary judge outlined six matters that led her to the conclusion that Ms Thorne had ‘no choice’ or was powerless. These were:

1. her lack of financial equality with Mr Kennedy;
2. her lack of permanent status in Australia;
3. her reliance on Mr Kennedy for all things;
4. her emotional connectedness to their relationship and the prospect of motherhood;
5. her emotional preparation for marriage; and
6. the ‘publicness’ of her upcoming marriage.

The primary judge found that Ms Thorne was deprived of the ability to make a free choice as to whether she signed the agreements and that she signed them under duress. Accordingly, both agreements were deemed voidable.

Mr Kennedy died during the trial and the executors and trustees of his estate appealed the decision.

Decision of the Full Court of the Family Court

The Full Court upheld two of the husband’s grounds of appeal, being that:

• the primary judge’s reasons were inadequate, because it was not possible to determine the weight given to each of the six matters she relied upon in making her decision; and
• the primary judge erred in the test for duress she applied.

The Full Court held that duress requires threatened or actual unlawful conduct. The evidence did not support a finding that the pressure placed on Ms Thorne by Mr Kennedy was ‘illegitimate’ or ‘unlawful’.

Their Honours disagreed with the trial judge’s finding that there was no outcome available to Ms Thorne that was fair or reasonable. They noted that Mr Kennedy was upfront about wanting to leave his assets to his children at the commencement of the relationship and Ms Thorne chose to marry him anyway. The appeal was upheld.

Ms Thorne appealed to the High Court.

The High Court decision

The High Court disagreed with the Full Court on both grounds.

As the primary judge found that Ms Thorne was deprived of the ability to choose whether she signed the agreements due to Mr Kennedy’s behaviour, the majority held that this constituted undue influence, rather than duress. Therefore, it was not necessary for the primary judge to apply the test for duress.

Further, the reasons outlined by the primary judge for her conclusion of undue influence (which she characterised as duress) were not inadequate.

Their Honours held that it was not necessary for the primary judge to apportion weight to each of the six factors as though it were a mathematical exercise.

The appeal was upheld and the original decision reinstated.

What can be done if there is a significant power imbalance between parties entering a financial agreement?

Both the primary judge and the High Court were at pains to clarify that it was not simply the discrepancy in power between the parties that resulted in a conclusion of undue influence. It was due to a myriad of other factors that placed Ms Thorne in a position where she felt she had no alternative other than to sign the agreements.

In Thorne v Kennedy, there were clear red-flags that if the agreements were ultimately challenged, they were likely to be considered voidable. In such circumstances, Mr Kennedy would likely have been better not entering into an agreement at all.

In light of the High Court decision in Stanford v Stanford [2012] HCA 52, it is no longer the case that, upon two parties separating, it is automatically assumed there should be a property settlement. The High Court has clarified that there should be an ongoing assessment as whether it is just and equitable to divide the equitable and legal interests of parties at all.

Mr Kennedy could have simply quarantined his assets from Ms Thorne, not intermingled their finances, and avoided the cost and subsequent problems of entering an agreement that was fraught with risk. If they had then separated after only a short period, it is unlikely Ms Thorne would have made any significant contributions that would justify the courts awarding her a sizeable entitlement, or perhaps any entitlement at all, from Mr Kennedy’s estate.

The case reflects the need for parties and family lawyers to carefully consider whether a financial agreement is the best mechanism to protect their assets and to assess other available options.

Please do not hesitate to contact Craig Turvey or any of our other experienced family lawyers if you have any questions about financial agreements or property settlement matters.