Australia: Pre-Nups – Avoid or Embrace?

Legal Alert

Financial Agreements hold increasing interest for lawyers, accountants and financial planners as their clients investigate the possibilities documents such as these offer for risk management, asset structuring and estate planning.

In mid 2009, we published a Legal Alert which asked whether Financial Agreements, were "worth the paper they were written on?". The article looked at the case of Blackmore v Webber in which the Federal Magistrates Court set aside a "pre-nup" on a number of grounds.

Financial Agreements hold increasing interest for lawyers, accountants and financial planners as their clients investigate the possibilities documents such as these offer for risk management, asset structuring and estate planning. Financial Agreements can be entered into before or during a relationship to determine how property will be divided on separation, and after separation to document a property settlement agreed by a separated couple.

A properly prepared, binding Financial Agreement can offer a couple the ability to make practical decisions for themselves about how to tailor a matrimonial or de facto property division if they separate. The end goal is a cost and tax effective outcome which takes into account the parties' own unique circumstances.

But how are Financial Agreements being used by lawyers, accountants and financial planners and what are some of the challenges in applying them?

A little bit of history

Financial Agreements have been part of Australian law since late 2000 when the Family Law Act was amended to enable a married couple to effectively contract out of certain provisions of the Family Law Act. In the absence of a valid and binding Financial Agreement, the Family Law Act gives the Court the power to determine how matrimonial property will be divided following a marriage split.

After the Family Law Act amendments in 2000, various state legislatures followed suit, giving de facto couples similar (although not strictly equal) ability to make decisions about how their property would be divided in the event of a relationship breakdown. By 2009, de facto and married couples in all states and territories could use Financial Agreements to record in a binding way their own agreement about how their assets would be divided if their relationship ended

The system was two-tiered however, with married couples falling under the federal Family Law Act, and de facto couples, including same sex couples, falling under the various states' regimes.

By 2009, all states with the exception of Western Australia and South Australia had referred their power to deal with de facto property division to the Commonwealth. This meant that the Family Law Act could be amended to address property division for all relationships, whether married, same sex, heterosexual or de facto. (De facto couples in South Australia and Western Australia continue under their own states' regime.

Notwithstanding this practical change, some significant questions remained - how safe were Financial Agreements, and how likely were they to stand up to a challenge?

Challenging times

Since 2000 there have been a number of challenges to the validity of Financial Agreements. The Full Court in Black v Black made it quite clear that the technical requirements of the Family Law Act need to be strictly adhered to when parties enter into Financial Agreements, failing which the Financial Agreement may be struck down for a lack of technical compliance with the legislation. Additionally, the Act set out a number of other grounds upon which the Financial Agreements could be set aside, including fraud and duress, unconscionability, attempts to defeat creditors and attempts to defeat the interests of a second spouse or the other party.

In the face of a number of cases in which the Financial Agreements were struck down, lawyers and their clients became increasingly concerned that Financial Agreements were too likely to be set aside by the Courts to be considered "safe". In some states and in some family law firms, Financial Agreements were largely shunned, depriving clients of the useful and flexible qualities that they were intended to offer.

What changed?

Recognising the argument that Financial Agreements may be too easily set aside, the Federal Government introduced changes to the Family Law Act which were designed to overcome at least some of these concerns.

The Federal Justice System Amendment (Efficiency Measures) Act No.1 of 2009 took effect from 4 January 2010. A key element of the amendment is that it gives Court the discretion to deem a Financial Agreement to be binding, notwithstanding some minor technical non compliances.

This important change was designed to overcome the risk that a Financial Agreement which would otherwise have been valid and binding would be set aside because of a minor technical error which, of itself, did not affect the rights of the parties.

It is important to note that the change is not designed to overcome any of the obligations on the parties to negotiate and enter the Financial Agreement in good faith. If a Financial Agreement could have been set aside on any of the usual grounds such as fraud, non-disclosure and duress, the new provisions will not save the agreement.

Another change was to remove the requirement for lawyers to execute a particularly worded certificate which was to be attached to the Financial Agreement, and confirmed that certain legal advice had been given. Instead, lawyers now need to give their clients a written statement to the effect that they have provided advice about the Financial Agreement and its effect on the client's rights.

A copy of the statement should also to be given to the other party or their solicitor. If that statement is not provided to the other party or their solicitor, the Agreement may well be struck down by the Court.

The changes are welcome news for lawyers, accountants and other professional advisers who would like their clients to have the opportunity to determine in advance what will happen to their property in the event that they separate.

Lessons to be learned

Although lawyers and their clients can proceed with more confidence, the change should not encourage lawyers to drop their guard when assisting their clients to negotiate and prepare an appropriate Financial Agreement.

Financial Agreements by their very nature are designed to oust the jurisdiction of the Court. For that reason alone, the Court will continue to closely assess the validity of a Financial Agreement in any case where a party seeks to have one set aside.

The Court will be looking to ensure that Agreements are not misused, abused, entered into unconscionably or without due care and consideration. Parties will need to continue to be diligent about their levels of disclosure to each other, and to be honest and upfront in their negotiations.

Lawyers will need to observe the technical requirements of the document, and give clear advice about the effect of the Financial Agreement on their client's rights, and the advantages and disadvantages that it offers. Moving forward, it will be interesting to see how the Court interprets the new legislative changes, but all in all the changes are almost certainly good news for lawyers, professional advisors and their clients.

Cooper Grace Ward was named Best Australian Law Firm in the BRW Client Choice Awards 2010 - Revenue < $50m. Joint Best Australian Law Firm in the BRW Client Choice Awards 2009 - Revenue < $50m.
The firm has also been named as the fastest growing law firm in Australia for 2009 by The Australian.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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