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Binding Financial Agreements - A Cost Saving Measure?

A binding financial agreement (BFA) ousts the jurisdiction of the family law courts with respect to property settlement and spousal maintenance provided that certain requirements are met. The developing jurisprudence in this area of law has shown that practitioners and clients embarking upon this process need to attend same with caution and due diligence. Some practitioners simply do not draft or sign off upon BFAs through fear of being sued by their client when the agreement is determined not have been binding or is otherwise set aside.

A binding financial agreement (BFA) ousts the jurisdiction of the family law courts with respect to property settlement and spousal maintenance provided that certain requirements are met. The developing jurisprudence in this area of law has shown that practitioners and clients embarking upon this process need to attend same with caution and due diligence. Some practitioners simply do not draft or sign off upon BFAs through fear of being sued by their client when the agreement is determined not have been binding or is otherwise set aside.

A quick brush up on BFA's

Currently in Australia, the capacity of two parties to enter into an agreement affecting their respective rights upon termination of the relationship, is governed by legislation. Where parties are married, Part VIIIA of the Family Law Act applies. Provisions for de facto couples mirroring Part VIIIA are contained in Division 4 of Part VIIIAB. To prevent this article looking like a veritable bowl of alphabet soup I will refer merely to the Part VIIIA provisions. Assume there is a corresponding Part VIIIAB provision.

Under the Family Law Act pre-nuptial agreements are referred to as “financial agreements before marriage” (see s90B) whilst agreements made during the marriage but before or after the relationship has broken down are referred to as “financial agreements during marriage” (see s90C).

For a financial agreement before during or after marriage to be binding and enforceable, the following requirements must be met:

  • The agreement must be in writing;
  • The agreement must be expressed to be made pursuant to Section 90B, C or D of the Family Law Act;

The agreement may deal with:

  1.     How all or any of the property or financial resources owned by either or both of the parties at the time when the agreement is made or acquired by either or both of them at a later time, is to be dealt with upon separation. Any property not covered by the agreement may be dealt with by a subsequent agreement or order (including consent order – order by agreement) made by the Court;
  1. The maintenance of either party during the marriage and/or after the dissolution of the marriage;
  1. The agreement can refer to other matters regarding the relationship that are incidental to the parties’ financial affairs;
  1. From 28 December 2002, the agreement may include superannuation agreements providing for the splitting of payment of a spouse’s superannuation entitlements.

Any provision for spousal maintenance needs to be clearly identified and set out in the agreement. In particular, spouses can contract out of the right to claim spousal maintenance in the future. (Note sections 90E and 90F).

To be considered a binding financial agreement (and thereby preventing court intervention other than to enforce the agreement, see s71A) there are a number of mandatory requirements that must be met. These are contained in s90G and are;

The agreement needs to be signed by both parties.

Before signing each of party needs to be given independent legal advice.

Such legal advice must be about the;

  1. Effect of the agreement upon the rights of that party; and
  2. About the advantages and disadvantages to that party of making the agreement (see s90G(1)(b))

Further, each solicitor is required to provide a statement that they have provided a party with independent legal advice about the agreement as required above.

After the agreement is signed, either party may retain the original agreement and a copy of it is to be given to the other.

Whilst a properly executed financial agreement is binding and enforceable  (and to the extent that the agreement deals with property and financial resources, the Court cannot make an Order for Property Settlement in relation to same) the Family Court does have a supervisory function over financial agreements and has power to set aside the agreement in circumstances referred to below.

It is not simply enough to say that with the benefit of hindsight the financial agreement now appears unfair or that a “better deal” should have been negotiated.

“….., s 90G’s requirements must be seen against a crucial consideration. The legislature has decided that the essence of the regime created by Part VIIIA of the Act is that parties who are independently advised and receive appropriate advice should, in the absence of fraud, unconscionability or other vitiating factors, be perfectly free to bind themselves to an entirely unjust and inequitable agreement (in s 79 terms) that governs their future rights and operates as a bar to future property (and/or maintenance) proceedings. In short, if the relevant pre-requisites are met, and there is an absence of vitiating factors, the parties are perfectly free to make a “bad bargain”.[1]

The provisions relating to financial agreements in the Family Law Act have not seen a considerable body of settled law and the jurisprudence concerning same could fairly be said to be technical and developing. There is only a limited body of case law providing any precedent or guidance as to the operation of a financial agreement. As provisions such as section 90K and s90KA mirror other provisions in the Act (for example s79A and provisions relating to Maintenance Agreements) or apply the general law of contract it is reasonable to assume that Courts will follow those relevant authorities where appropriate.

An agreement that has been determined not binding also has the added complication (as noted above) that the Court may determine that agreement should otherwise be binding – s90G(1A).

This provision was inserted into the Act after it became clear that the Full Court was requiring a strict approach in relation to the s90G(1) prerequisites.[2] Some examples of cases now applying both s90G(1) and (1A) are provided below.

A financial agreement may be set aside (as opposed to being found to be “not binding”) in certain circumstances including:

  • If the agreement was obtained by fraud including non-disclosure of a material matter or defrauds a third party then the Court may set aside the agreement (section 90K(1)(a) and (aa));
  • A financial agreement may be set aside if the agreement is found to be void, voidable or unenforceable. The Court will invoke ordinary principles of contract law and equity. For example, the Court may find that there has been misrepresentation, mistake, acts of duress or acts of unconscionable conduct which would lead to the agreement being set aside (see section 90K(1)(b) and section 90KA).
  • The agreement may also be set aside if circumstances have arisen since the agreement was made rendering it impractical for the agreement or part of the agreement to be carried out (section 90K(1)(c)).
  • That since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care welfare and development of a child of the marriage) and as a result of the change, the child or person caring for the child, a party to the agreement will suffer hardship;
  • If there was unconscionable conduct on the part of a party to the agreement (s90K(1)(e));

Returning to discussion upon whether a Financial Agreement is void, voidable or unenforceable (s90K(1)(b)); if an agreement is void it never effectively existed.  Contracts may be void for uncertainty, incompleteness or in very limited circumstances, mistake. 

“Voidable” means that the contract can be pronounced void by one of the parties or held to be void by a Court.  It is not void unless action to void the contract is taken.  A party may choose to rescind or affirm it.  The contract is binding unless and until it is rescinded.  A common example is a contract by a minor (somebody under the age of 18).  Most void contracts are a nullity from when they were entered into.  The simplest example is that generally in Australia a contract for the sale of land is void unless made by deed.

Unenforceable means that the contract is valid but for some reason cannot be enforced.  An agreement may be unenforceable for public policy reasons or breach of contract.

Agreements may be voidable because of misrepresentation, mistake, duress, undue influence, unconscionability or uncertainty.

Even where an applicant satisfies the common law principles and establishes that the agreement is void, voidable or unenforceable the Court still has discretion whether to grant revocation or not.

Section 90K, unlike the applicable provision in the Family Law Act to set aside an order of the court (section 79A), contains no specific power for the Court to vary a financial agreement. At common law, there are limited circumstances where a Court may vary an agreement – largely for interpretative reasons.

Section 90K(3) enables a Court to make whatever order upon setting aside a financial agreement it determines just and equitable – whether that means applying established principles pursuant to s79(4) and s75(2) or varying a term of the agreement is quite unclear.

Enter the 2016 Amendments

Whether due to increasing claims against lawyers for negligence or growing discontent about BFA's determined to be invalid due to failure to meet the requirements of section 90G, Part VIIIA is due to be amended by the introduction of s90GA(5) by the Family Law Amendment (Financial Agreements and Other Meansures) Bill 2015 as well as appealing and replacing the existing 90G, 90GA and 90GB. Importantly "in determining whether an agreement is binding, the court is not to consider whether the legal advice described in new subsection 90GA(2) has actually been provided. This means that the court should not go behind the statement provided by a legal practitioner to examine the content of advice. This would increase certainty for parties and for legal practitioners, by making it clear that if the conditions relating to statements about legal advice, as well as the conditions for agreements made after 3 January 2010 if applicable, are met, then that legal advice is taken to have been provided."

Well that's all well and good but it does not follow that advising a client whether to (or not to) sign a BFA is protected from suit by their client, or the other client. Further, as the following cases reveal, there now jurisprudence to the effect that the advising solicitor may get drawn into the controversy between a husband and wife as a third party creating not only legal exposure to the practitioner but exposing clients to greater litigation costs.

Joinder to proceedings of potentially negligent solicitors

Three recent matters have been considered in the course of the last 24 months, the first two having both being considered by the Full Court. Noll and Noll and Another (Noll) is a Full Court decision of Bryant CJ, Finn and Strickland JJ upholding the decision of Le Poer Trench J. F Firm & Ruane and Ors (Ruane) is a Full Court decision of May, Tackray & Strickland JJ upholding the decision of Murphy J. What is intriguing about Ruane is that at first blush it would appear that there is some debate by particularly Strickland J and Thackray J about whether the decision in Noll was correct and should be departed from however ultimately both determining that it was not necesary for the dispensation of the appeal for there to be a conclusion that Noll was plainly wrong.

The third, a more recent first instance decision of Hogan J in Gibbs & Gibbs & Ors (Gibbs), considered both Ruane and Noll. The factual matrix in Gibbs reflected neither the facts of Noll or Ruane comfortably.

I do not intend to embark upon a detailed examination of each case other than to summarise the factual scenario in each as the question of whether accrued jurisdiction is activated will turn upon the facts of each case in order to determine whether there is one controversy as opposed to considering whether there are different causes of action that arise within the context of that controversy.

Noll

The husband and wife entered into a BFA in February 2007 and separated in February 2009. The wife contested the validity of the BFA pursuant to s90G(1)(b)  and pursuant to s90K for equitable relief. The Husband cross-claimed to seek relief against the wife's solicitor (Firm A) effectively contending that if the wife's s90G(1)(b) application succeeded he would sheet home his loss to Firm A for failing to provide the adequate advice to the wife despite the representations to the contrary contained in the certificate of independent legal advice. The wife opposed joinder of Firm A notebaly Firm A did not oppose being joinded to the part of the proceedings concerning the validty of the BFA.

Le Poer Trench J did not join Firm A determing the claims between husband and wife on the one part and Firm A and the husband on the other part did not form part of a single justiciable controversy.

The Full Court of Bryant CJ, Finn and Strickland JJ dismissed the appeal.

It is noted (see para 55) that the first instance decision of Murphy J in Ruane became available after the hearing of the appeal but before the decision was handed down and the Full Court noted "that whether or not accured jurisdiction is attracted in a particular case willl very much depend on the facts of that case."

Ruane

In Ruane earlier proceedings before Cronin J had concluded that a BFA entered into between the husband and wife was not binding within the meaning of s90G with the husband successfully arguing that the certificate for the husband that had been signed by an English lawyer did not comply with the requirement that the BFA certificate be signed by a "legal practitioner" as required by s90G(1). The wife, in her response to substantive property settlement orders, sought alternate orders against  Firm W (the firm retained by the wife to prepare the BFA). In relation to the accrued jurisdiction argument the husband did not seek to be heard. Murphy J made orders reflecting a determination of there being a single justiciable controversy enlivening the Court's accrued jurisidiction.

The Full Court, with each member providing separate reasons, dismissed the appeal.

Gibbs

The first instance decision of Hogan J involved a BFA that had already been set aside on the basis that the agreement was void or voidable or unenforceable because of uncertainty in its terms. (see Gibbs & Gibbs). Interestingly, on the eve of the hearing to determine the validity of the BFA the husband did not oppose an order being made upon the basis that it was void, voidable or unenforceable. The stark difference then between the earlier Full Court cases and Gibbs is that the later involved setting aside of the agreement as opposed to a determination pending (in Noll) and finding (in Ruane) of invalidity pursuant to s90G. The husband sought to join his previous lawyers claiming, inter alia, that they had been negligent in the preparation of the BFA and had caused him loss. Her Honour determined the court's accrued jurisdiction applied in joining the firm to the proceedings.

What is clear from Gibbs is that a property settlement trial which had been scheduled for the following fortnight for 3 days was vacated. The question then is how long will the final trial be ? Will the approach of the joined solicitors be to go behind the earlier decision of Hogan J setting aside the agreement and/or also running all of the wife's "many bases asserted to provide a basis for" challenging the validity of the BFA ?

To my knowledge no appeal has been filed. 

Summary

My thoughts about the above are this;

  • The prospect of lawyers becoming embroiled in litigation where there has been a BFA prepared or advised upon by them is very real
  • The proposed amendments may avoid joinder of firms where the only ground of validity that concerns them is s90G and the advice provided - because s90GA(5) takes away the capacity to go behind the advice given so where will the single justiciable controversy be ?
  • The proposed amendments do not provide an immunity from suit in civil jurisdictions - if your advice was lacking in due care expect to be sued !
  • The proposed amendments provide no comfort to a firm where, as in Gibbs, the BFA is struck down pursuant to a ground contained within s90K.

Winter is coming.

Disclaimer

[1] Per Murphy J in Hoult [2012] FamCA 367

[2] Black v Black [2008] FamCAFC 7

 

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