A binding financial agreement – also commonly referred to as a ‘pre-nuptial agreement’ – is an agreement sets out the division of property and child custody agreements in the event of the breakdown of a relationship. These documents are legally binding and can be enforced by the courts, which allow for certainty, trust, and peace of mind in a relationship.
However, the High Court has made it clear in a recent case that it will not enforce any binding financial agreements as a consequence of unconscionable conduct, particularly when there is a significant power imbalance between the parties. Unconscionable conduct is defined to mean conduct which is so harsh that it goes against good conscience. A common instance is when an innocent party is subject to a special disadvantage which seriously affects the ability of the innocent party to make a judgment as to their own best interests.
What are Binding Financial Agreements?
Binding financial agreements are legally binding agreements that address what happens to a couple’s finances and property in the event that there is a break down in a marriage or de-facto relationship.
The Family Law Act 1975 is the relevant legislation which applies to binding financial agreements. Importantly, a binding financial agreement can protect assets including cash, property, superannuation and inheritances.
However, in order for a binding financial agreement to be binding on the parties’, it is prudent that each party obtain independent legal advice, and the binding financial agreement must contain a statement from a legal practitioner.
Recent Case: Thorne v Kennedy
A recent High Court case has demonstrated that if a binding financial agreement is entered into in circumstances of unconscionable conduct, the agreement will not be upheld.
Thorne v Kennedy involved a binding financial agreement between a wealthy Australian property developer and his ex-wife.
The couple met online in 2006 on a website for potential brides. At the time, Ms Thorne was 36 years old, living in the Middle East with no substantial assets. Mr Kennedy was 67 years old and had assets in the vicinity of $18 million – $24 million.
Ms Thorne moved to Australia. Then, ten days before their wedding Mr Kennedy took Ms Thorne to a solicitor to obtain advice about the terms of a binding financial agreement which was purported to be entered into between them. The lawyer advised Ms Thorne that the agreement was highly prejudiced against her, and advised her not to sign it. Mr Kennedy told Ms Thorne that if she did not sign the agreement then the wedding would not go ahead. Despite the lawyer’s ‘advice, Ms Thorne signed the agreement and the wedding continued.
The couple separated in 2011 and Ms Thorne was provided with what the High Court described as a ‘piteously small’ lump sum payment based on the terms of the binding financial agreement. After lengthy legal proceedings, the High Court ruled that Mr Kennedy had taken advantage of his ex-wife’s vulnerability to obtain an agreement which was ‘entirely inappropriate and wholly inadequate.’ The agreement was entered into as a result of undue influence, illegitimate pressure and unconscionable conduct – Ms Thorne was in a foreign country, with no support system, and was entirely reliant on Mr Kennedy for financial and emotional support. Mr Kennedy had also promised to help relocate Ms Thorne’s family to Australia following the marriage. As a result, the binding financial agreement was not enforceable and was subsequently set-aside.
Impact on Binding Financial Agreements in Australia
This ruling has been considered a landmark case in the interpretation of binding financial agreements in Australia. As a consequence of the agreement being set aside, the Federal Circuit Court allowed Ms Thorne to bring a property settlement claim against Mr Kennedy.
This case serves to reinforce that binding financial agreements are not cheap documents and therefore appropriate advice and caution must be taken when entering into these agreements.
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