Australia: To BFA or not to BFA - a Binding Financial Agreement?

One of the few means available to Australian couples to deal with their assets on separation, other than in accordance with the financial provisions of the Family Law Act, is to enter into a Binding Financial Agreement ('BFA').

These agreements are available to both de facto and married couples and may be entered into before, during or at the end of a relationship, although typically much of the press coverage in this area is directed to the 'pre-nup' end of the market!

How effective are BFAs?

The recent litigation commenced by Grant Hackett against his lawyers complaining of a failed pre-marriage BFA is only the latest in a long line of disaster stories focusing on the vulnerability of financial agreements; so are these documents worth the paper they're laser-printed on?

The answer to that question depends very much on a number of factors including (but by no means limited to) the following:

  • the type of agreement (ie, is it being entered into prior to a relationship commencing or a marriage taking place; during the relationship, or at the end of the relationship?);
  • the stage of life of the parties entering into the agreement (and particularly whether or not they are contemplating having children);
  • the length of the relationship;
  • the complexity of the arrangements contemplated by the parties;
  • whether or not one of the parties experiences insolvency in the future;
  • whether the parties have fully and frankly disclosed their assets;
  • whether or not the formal requirements of the Family Law Act have been complied with.

Without going into these issues in detail, each of them throws up a potential source of failure for a party's attempt to escape the terms of the Family Law Act regime for dividing matrimonial property. For example, a couple who are marrying for the first time in their 20s may have a reasonable expectation that they will have children. If they do, and the effect of their BFA is to lead to hardship for one of the parties who has carer obligations after separation, the Court may set the agreement aside under 90K(1)(d). Clearly, if parties are well over the age when they might expect to have children, this danger no longer applies.

In the 2009 case of Kostres the Full Court set aside a BFA on the basis that its terms were 'uncertain'.

In this case, the trouble was that at least a part of the supposed uncertainty arose from the fact that each side of the bar table was arguing for the construction of a number of words that best suited their clients' individual purposes. Unfortunately, this very argument was taken by the Court to support the existence of uncertainty, as the following quote makes plain:

129. While, for the purpose of construing the agreement a court should, as in the context of a commercial agreement, apply an objective test of a reasonable bystander to the construction of an agreement, it cannot give meaning to an agreement whose terms are so imprecise or ambiguous the parties' intent cannot be discerned. This is particularly so when regard is had to provisions of Part VIIIA in the overall context of the Act.

130. The differing arguments of the legal representatives in this case as to how the terms 'acquired', 'assets', 'joint funds' and 'from their own moneys' should be construed brings into sharp focus the ambiguities in those terms found in the drafting of clause 6 of the agreement.

Perhaps it is enough to successfully attack one of these agreements to argue about the meaning and usage of ordinary English words that have no definition in the agreement or the Act? Or perhaps the lesson from this case is to keep arrangements simple and avoid complex legal constructions (to the degree that this is possible in what are necessarily complex legal documents!).

Kostres also highlights the fact (one that has been underlined by several later cases) that Judges tend to consider that the Family Law Act does a decent job of ensuring that justice and equity is achieved between parties, because it looks at direct, indirect and homemaker contributions, and takes into account the unique needs and resources of the parties.

On the other hand, focusing exclusively on direct financial contributions (which is what most BFAs do) seems unfair and inequitable. Accordingly, a Judge may not need much persuading that a harsh BFA, which delivers a result that the Court would never countenance, should be set aside if it is defective in any respect.

Of course, quite apart from the legal uncertainties, there is plenty of anecdotal evidence to suggest that in some relationships the requirement by one party that the other enter into a BFA acts as a corrosive on the long-term trust and therefore survival of the relationship itself.

So given that no-one can guarantee the effectiveness of BFAs, is there any good reason to throw good money at them?

Why enter into a BFA?

One unexpected advantage of a BFA, even a faulty one, may be that it can give a clear picture of the initial financial contributions of the parties to a relationship, including a set of agreed values. This could provide a useful datum for assessing the contributions during the course of a relationship, even if the BFA is not used to govern the division of property.

All BFAs are somewhat unreliable and therefore dangerous; but some are more dangerous than others.

If you have clients who are considering one of these agreements and would like some guidance on the pros and cons in their specific circumstances, contact one of our Accredited Family Law Specialists. And of course, we draft BFAs for clients and provide the necessary certificates of independent legal advice.

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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