A surprising decision in the High Court involving binding financial agreements where 2 agreements were set aside by the court for various reasons. In Thorne v Kennedy, the deceased husband’s legal personal representative (LPR) and his aggrieved surviving wife arrived in court on appeal with the widowed wife hoping to have the 2 agreements set aside in favour of a more favourable property settlement and spousal maintenance settlement under the Family Law Act.
The deceased husbands LPR obviously wanted to rely on the agreements, being a better deal for the surviving blended family, where the ultimate beneficiaries would have been the deceased husband’s surviving children from his first marriage.
The deceased had a significant amount of funds in the region of $18,000,000 at the beginning of the relationship. The wife came from Eastern Europe at the invitation of the husband from a linkup on the Internet. She arrived virtually penniless and once in Australia was dependent financially on her former husband. Not having the financial means herself became a pivotal factor in the court challenge.
The angle was propagated that she was under undue influence prior to the marriage, when the husband gave her an ultimatum to sign the agreement as a condition prior to marriage.
Even though the wife did have her own legal representation who advised her not to sign the agreements, she went ahead and signed the agreements. The husband in his defense had made it clear prior to marriage that he wanted the majority of his estate for his children. Prior to the husband’s death, he signed a separation declaration effectively starting divorce proceedings.
The case summaries make no mention of the husband’s Will or his superannuation.
The grounds for the wife’s appeal to set aside the binding agreements was based on the grounds of duress, undue influence and unconscionable advantage on behalf of the husband in securing the agreements prior to marriage.
By no means does this mean that binding financial agreements are off the table, or will not be effective in the majority of cases. It just means that particular care needs to be taken and here are some tips to consider:
- Always use a legal a practitioner to draft the agreement
- The agreement should be created through a process of open negotiation. There should be no pressure to sign or ultimatums delivered
- The emotional circumstances around the agreement are to be considered. Threats to end an engagement or marriage if agreements are not signed should be avoided
- Each party needs sufficient time to consider the agreements and these should not be rushed
- Consideration must be given to each parties different legal understanding and communication skills
- Each parties relative financial position must be considered. Where one side is significantly wealthier than the other creates potential unfair bargaining positions
- Each party must seek out independent legal advice
Some legal practitioners are opting out of preparing or drafting binding financial agreements because of the risk of professional negligence claims arising from errors in drafting the agreement. There are a number of cases where the court has set aside ineffective agreements because of errors made by lawyers in not complying with section 90G requirements.
The government has introduced rectification provisions which enable a judge to rectify any technical defects, however, the judge still has the discretion to set aside the agreement notwithstanding the power to rectify.
More recent cases have looked at the substance of the agreement, for example, whether the drafting was in plain English and covered the situation the parties found themselves in upon separation. Maybe there is a case for reviewing agreements and keeping them relevant?
Where an agreement was signed and circumstances subsequently changed, matters could lead to an agreement being set aside in court because the results were not contemplated at the time the agreement was made.
When agreement does not take into account contingencies such as the birth of children, the agreement is at risk of being set aside. Financial agreements need to be specifically drafted to each situation and these are not a standard documents. When in doubt seek legal professional help.
Modern day society has increased the incidence of blended families and situations arising where interested parties can enter the scene very quickly especially where one party or even both parties to a binding financial agreement pass away. In this situation, the LPR’s task of administering the deceased estate becomes increasingly difficult.
If you want to find out more about binding financial agreements or are considering taking this path with your partner, contact us for a discovery discussion.
Author: Andrew North: a 17 year veteran CPA member, a public practitioner, registered tax agent, registered SMSF auditor and authorised representative of a financial services licensee.