Does A Pre-Nuptial Agreement Have To Be Fair?

It is now more than 10 years since the Family Law Act was changed to allow Australians to enter into pre-nuptial agreements (known as Financial Agreements or Binding Financial Agreements).

Under the Act, the Court does not have to approve a Financial Agreement for it to be binding. That is, the Family Law Act allows parties to enter into a bad or grossly unfair pre-nuptial or other sort of Financial Agreement. However, that does not necessarily mean that all Financial Agreements will necessarily be binding.

The Court’s attitude to BFAs

There is a widely held belief among family lawyers that the Family Court judges were not happy that the Family Law Act was changed to allow people to enter into pre-nuptial style agreements without the Court’s oversight. Throughout the last decade or so, the Court has used various technical legal difficulties to find that certain Financial Agreements were not binding, even though the Agreements had been signed by the husband and the wife, both of whom had received independent legal advice.

The government then changed the law again, to make it more difficult for judges to rely on legal technicalities to overturn a Financial Agreement. But some judges were still not happy that they couldn’t impose their version of fairness on an Agreement the parties had made.

Pre-Agreement conduct

Having been thwarted in their efforts to overturn Financial Agreements on the basis of legal technicalities, some judges started to turn their attention to the conduct of the parties prior to entering into the Agreement, in an attempt to find a way to undo a Financial Agreement that the judge didn’t think was fair.

That is what occurred in the first instance hearing in a case called Saintclaire & Saintclaire. In her Judgment, the trial judge expressed her view that there was “no doubt that [the] transaction should not have proceeded”, because of her view of its perceived unfairness to the wife.

However, as the Act does not allow the Court to overturn a Financial Agreement just because the judge considers it to be unfavourable to one party, her Honour had to find another way to undo the Agreement the parties had signed. To do that, she turned to the law of undue influence and unconscionable conduct.

The facts of the case

The parties, then aged in their mid – to late-thirties, moved in together in 2005 or 2006. They were both educated professionals, earning good incomes. They had two children, born in late 2006 and early 2008. The wife suffered some post-natal depression after the children’s births; which had resolved by about October 2008. The parties were otherwise in good health.

In 2007, they entered into a de facto relationship agreement, by which they each agreed to make no claim on the other party for property settlement or “spouse” maintenance in the event their relationship ended.

Sometime later, the parties decided to marry. They agreed to enter into a pre-nuptial agreement on essentially the same terms as their de facto relationship agreement. Through their lawyers, they commenced negotiations for that agreement in March 2009. They married the following month, without having finalised or signed their pre-nuptial agreement.

Negotiations for the now post-nuptial agreement re-commenced in June 2009 and continued for the succeeding four months, during which time the husband agreed to various amendments to the agreement proposed by and beneficial to the wife.

One of those amendments required the husband to pay $100,000 to the wife so that she could discharge her credit card debts, of which the husband had previously been unaware. The Financial Agreement was ultimately signed in late September 2009.

Sadly, the parties separated less than 12 months later. By then, the wife’s financial circumstances had worsened and she wanted to get out of the Financial Agreement.

The trial judge’s decision

At first instance, the wife argued that as a result of her post-natal depression, the husband’s violence and the wife’s difficult financial circumstances, the Agreement should be set aside on the basis of either undue influence or unconscionable conduct. The trial judge agreed, notwithstanding that the post-natal depression had resolved itself 11 months before the Agreement was signed, the husband’s alleged violence consisted of two disputed incidents some eleven and five months prior to the signing of the Agreement, and the wife, herself a financial planner, was the author of her own financial difficulties.

In agreeing with the wife, it seems that the trial judge was swayed more by her view of the unfairness of the Agreement than by the law of unconscionability and undue influence.

The Appeal Court’s decision

The Appeal Court disagreed with the trial judge. It found that she had been confused and mistaken as to the law relating to undue influence and unconscionable conduct. Specifically, the Appeal Court reiterated that the Family Law Act allows parties to enter into Financial Agreements which will be binding, notwithstanding that the Agreement might seem to be unfair or unjust to one of the parties.

Conclusion

It is clear from both the Family Law Act and the Appeal Court’s decision in Saintclaire & Saintclaire that a Financial Agreement can be binding on both parties, even if one of them or the Court thinks it is unfair. While there may be other avenues available to a party to try to get out of a Financial Agreement that he or she has signed, the perceived unfairness of that Agreement is not, of itself, a good enough reason. This applies to all Financial Agreements, whether entered into before, during or after a marriage or de facto relationship.

If you or someone you know wants more information or needs help or advice, please contact us on 02 8325 1520 or email info@cappellorowe.com.au.