Australia: Binding Financial Agreements - "A Plague on Both your Houses!"

Last Updated: 7 July 2010

When poor Mercutio gets embroiled in a familial punch-up between the Montagues and the Capulets, he is the one that gets stabbed and dies. Before collapsing off-stage, he curses the fight that brings about his untimely demise. Such a curse might also fall from unsuspecting and unprepared family lawyers who prepare financial agreements for couples who may, perhaps years or decades into the future, end up warring like Romeo and Juliet's mum and dad.

Much blood and ink has already been spilt in dire admonitions and imprecations concerning compliance with the formal requirements necessary to bind the parties to financial agreements set out in section 90G of the Family Law Act 1975. We see no coincidence that the case which demanded "strict compliance with the statutory requirements" is named Black. Thankfully, recent amendments to the compliance regime have ameliorated the legal gymnastics required to ensure an agreement is binding. Having said that, as Paul Doolan notes in his recent paper to the 10th Annual Family Law Intensive in Sydney 1, prudent lawyers will take the extra steps anyway.

This e-alert, however, concerns other difficulties with financial agreements.

Recently, I appeared before the Full Court in a case which is now recorded as Kostres & Kostres [2009] FamCAFC 222. We acted for Mrs Kostres, who sought to uphold a financial agreement drafted days before her shortish marriage. Happily for Mrs Kostres, there was no dispute as to compliance with section 90G. Unhappily, the dispute concerned the interpretation of the agreement and whether equity would interfere with the operation of its terms.

The Full Court struck down the agreement because it was incapable of discerning the parties' intentions. I respectfully disagree. We did not draft the Kostres agreement but, in any event, took the view it was capable of execution and enforcement. So did Wilson FM at first instance, although to be fair to his Honour, he did have his reservations. But what we cannot disagree with the Full Court upon is its own admonitions concerning drafting of agreements. Their Honours said:

" in establishing the mutual intention of the parties and drafting terms of the financial agreements with precision assume the utmost importance."
"As this unfortunate case demonstrates, agreements designed to avoid costly litigation can have expensive consequences if the intention of the parties is not readily discernible from the drafting of the agreement."
"...substantive clauses of such agreements [must be] drafted with precision to ensure effectiveness, especially as they may be dealing with future acquired property or other interests in property."

It is relatively easy to draft clauses which state how property already in the hands of the parties may be dealt with upon the breakdown of a relationship. Difficulties will arise concerning property the parties may acquire in the future. Often, newly formed couples will instruct that anything they jointly acquire will be shared in some form - either equally or perhaps pursuant to the legal title. That is all very well, but as Kostres shows, great care should be taken in defining the concept of acquisition. For instance, as loomed large in Kostres, a clause which states that "if one party buys it, they keep it" is potentially ineffective if one party buys "it" using finance, even if the finance is solely acquired. Similarly, gifts acquired by the parties, especially by the parties' parents, may assume some controversy. If a clause in an agreement says "any jointly acquired property is shared," is a house purchased by the wife's parents in the wife's name and gifted to the couple for them to live in jointly acquired? Or acquired by the wife?

It follows that financial agreements not only should comply with the statutory formalities regime, but should also clearly define:

  • the parties' present property and financial resources and how they should be dealt with;
  • exactly how the parties may acquire future property or financial resources, and then how that property is dealt with;
  • exactly how the parties determine their legal and equitable interests in property they presently have, and may acquire into the future;
  • exactly what happens if property is acquired in a certain way, and then disposed of or traded such as property may then be held in a different way - i.e. traced; and
  • exactly how parties "contribute" to property such as may enliven an interest upon the breakdown of a relationship - contribution in the "family law" sense or otherwise?

There are, perhaps, other aspects of the drafting exercise requiring precision and care. Each case will undoubtedly be different. Slavish application of precedents will rarely suffice. If the Court demands a very high level of precision before its jurisdiction is ousted, clients will also demand the same precision. Otherwise, we may be left bleeding to death off-stage left cursing the nice young couple we met years ago.

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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