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The Reality of Financial Agreements

Apr 5, 2019 12:37:09 PM

Introduction

Although the legislation relating to Financial Agreements seems clear-cut, Financial Agreements are often overturned or set aside by the Court for a variety of reasons. This makes it more difficult to guarantee that a Financial Agreement will indeed be ‘binding’. When considering the application and utility of Financial Agreements in practice, it is therefore prudent to weigh the advantages of entering into a Financial Agreement against the drawbacks or risks associated with it.


The Advantages of Financial Agreements

Provided a Financial Agreement is drafted correctly, independent legal advice is given by a suitably experienced lawyer, and the requirements stipulated by the Family Law Act 1975 (Cth) (“the Act”) are met, entering into a Financial Agreement can be quite advantageous for a party.

Some of the main advantages of entering into Financial Agreements are:

  • No Fairness Requirement – there is no explicit requirement on the parties that the terms of a Financial Agreement must be just and equitable, proper or reasonable. Rather, for the Financial Agreement to be binding and enforceable, only Section 90G of the Act (or Section 90UJ for de facto relationships) relating to the documentation, execution and certification of the agreement, must be complied with.
  • Avoid Court – there is no requirement for parties to obtain judicial approval, attend Court or commence proceedings to obtain a Financial Agreement. In this sense, a Financial Agreement may be a more cost-effective resolution for the parties. Further, the Court has a wide discretion under the Act in altering parties’ property interests, whereas in a Financial Agreement, parties are able to use their own discretion to ensure their contributions are given greater weight.
  • Flexibility – Financial Agreements can deal with property matters, superannuation, child support, spousal maintenance or even matters relating to a third party, all in the one agreement.
  • Protection – Financials Agreements can be drafted to protect assets which were inherited prior to the relationship or may be inherited during the relationship, or to protect the assets of one party where there is a significant disparity in wealth.
  • Privacy – there is no public record of a Financial Agreement and the document is not filed with the Court, unless required for enforcement purposes down the track, so both parties’ financial circumstances remain private and confidential.

The Disadvantages of Financial Agreements

Even if a Financial Agreement is drafted correctly and meets all the formal requirements in the legislation, there is potential for the Court to set aside the agreement. Further, there are a number of disadvantages associated with entering into a Financial Agreement:

  • Unfairness – there is potential for a Financial Agreement to be unfair to one of the parties.
  • Uncertainty – as there is no requirement that a Financial Agreement must be approved by a Court before being implemented or enforced, a party may later commence proceedings for a property settlement or for spousal maintenance. They might allege that the Financial Agreement is defective in some way or should be set aside.
  • Broad Grounds for Setting Aside – the grounds for setting aside a Financial Agreement are very broad and, indeed, much more so than the grounds for setting aside financial orders approved by the Court. Sections 90K and 90UM of the Act detail the circumstances in which Financial Agreements can be set aside, including:
    • Fraudulent conduct of one of the parties, including non-disclosure of a material matter or where the agreement was entered into to, at least in part, defeat a creditor;
    • Void, voidable or unenforceable clauses within the agreement;
    • The agreement is no longer practicable;
    • Hardship due to a material change in circumstances relating to the care, welfare and development of a child of the relationship; or
    • A payment flag is operating in relation to a superannuation interest.
  • Court’s Interpretation – if a Financial Agreement is challenged by a party or a party applies to the Court for the agreement to be set aside, it becomes subject to the Court’s discretion. The judicial officer may read the agreement down or may determine whether the agreement was fair and reasonable in the circumstances.
  • Change in Circumstances – the financial circumstances of the parties might change significantly over time and it is often difficult to predict in advance what those changes might be. While clauses could be drafted into a Financial Agreement to account for certain changes of circumstances, these agreements are generally inflexible.
  • Responsibility for Documents – after the execution of a Financial Agreements, the documents are retained by the parties. As there is no register for Financial Agreements, there is a risk that the documents may be misplaced or lost, with a party being potentially unable to prove the terms of the agreement in the future.
  • Difficulty of Enforcement – operative clauses in a Financial Agreement may be more difficult to enforce than Court Orders.

The major uncertainty for a Financial Agreement is whether the Court will uphold the agreement if challenged. When deciding whether a Financial Agreement is valid, the Court determines the matter in accordance with the principles of law and equity that are applicable in determining the validity of contracts: Section 90KA or 90UN of the Act. The Court can consider vitiating factors such as duress, undue influence and unconscionable conduct.

In Thorne & Kennedy [2017] HCA 49, the High Court set aside two Financial Agreements, one made four days before a marriage and one made after the marriage purporting to replace the first, on the grounds that the terms of the Financial Agreements were unfair and unreasonable in all the circumstances. This left the ex-wife’s application for property adjustment and spousal maintenance open to be determined by the Federal Circuit Court.

Conclusion: Financial Agreements in Practice

In practice, if a Financial Agreement is drawn up correctly as per the legal requirements, it is likely to be binding on the parties. However, this protection is not absolute and Financial Agreements are challenged more and more often, particularly in circumstances where the strict requirements of an agreement are not met, or there is duress on the weaker party to sign the agreement. Accordingly, Financial Agreements must be drawn up and entered into carefully and with appropriate consideration and advice.

This is not legal advice. 

Photo by Beatriz Pérez Moya on Unsplash

Topics: Family Law

Karla Elias

Written by Karla Elias