The Facts
What is a binding financial agreement?
A binding financial agreement (also commonly known as a prenuptial agreement or “prenup”) is an agreement made between two people that sets out how they want their affairs to be arranged if their relationship ends.
These agreements can be made before, during or after a marriage or de facto relationship, including for a same sex relationship.
A binding financial agreement is a formal document made under the Family Law Act 1975 (Cth), but it is not reviewed or approved by the Family Court and, as long as it complies with the requirements set out in the Act, the court has no jurisdiction to adjust it.
Husband and wife enter into binding financial agreement
In 2002, a husband and wife entered into a binding financial agreement under the Act. They agreed that:
- the husband would sell the property that he owned and deposit the funds into a joint bank account,
- the wife would deposit into the same joint bank account the proceeds of a personal injury compensation claim,
- they would then buy a family home with the funds in the joint bank account, and
- in the event of separation, they would sell the family home and the proceeds would be split equally.
Agreement signed before wife’s personal injury claim finalised
An agreement was signed on 3 September 2002, and then slightly amended three days later. Both parties sought and obtained independent legal advice prior to signing the agreement, as required under the Act.
After the agreement was signed, but before the wife’s personal injury claim had been finalised, the husband and wife purchased a family home.
The wife’s personal injury claim was ultimately settled out of court for an amount smaller than anticipated and therefore her contribution ended up being less than the couple had expected at the time they’d entered into the agreement.
Couple separates and husband seeks to have binding financial agreement set aside
In May 2003, the parties separated.
The husband brought an application to the Family Court, claiming that the binding financial agreement should be set aside on the basis that a 50/50 split of the couple’s assets was not fair in the circumstances.
The trial judge dismissed the application on the basis that the agreement had met the requirements of the Act and therefore the court had no jurisdiction to adjust the split of assets.
The husband appealed the decision to the Full Court of the Family Court.
Expert commentary on the court's decision
Conditions to be met for a financial agreement to be binding
The appeal in Black & Black [2008] FamCAFC 7 hinged on the interpretation of section 90G of the Family Law Act 1975 (Cth). At the relevant time, section 90G stated that a financial agreement is binding on the parties “if, and only if” certain conditions are met.
This included each of the parties receiving independent legal advice in relation to whether the provisions of the agreement were prudent, fair and reasonable. (Section 90G has been amended since the decision in this case.)
On appeal, the Full Court of the Family Court found that there was no reference to legal advice regarding whether the agreement was prudent, fair and reasonable. That meant that the agreement did not comply with the legislation and was therefore not binding on the parties.
Agreement found to be flawed and set aside
The court observed that the Commonwealth parliament had created section 90G to remove some of the restrictions that had previously existed on the rights of parties to arrange their own affairs as they saw fit.
The compromise it reached was to permit parties to oust the court’s jurisdiction to make adjustive orders, but only if certain stringent requirements were met. For that reason, it was important that the court take a strict and literal approach when interpreting that section of the Act.
While the husband had argued that the agreement should be set aside because it had not been re-certified after being amended, the court found that it was not necessary to determine this point because the agreement itself was defective, as it did not adhere to the statutory requirements.
As a consequence, the property was not split 50/50 as originally agreed. Instead, the husband received a larger share of the asset pool.
Attempt to engineer financial advantage backfires
Apart from anything else, the case serves as an interesting study in human motivation and how the best-laid plans can backfire. The trial judge noted that the husband had raised the matter of a binding financial agreement several times before the couple got married, because he was hoping to share in an anticipated windfall from his wife’s personal injury claim.
By forming an agreement that they would split the proceeds of the sale of the house 50/50 in the event of a separation, the husband was trying to engineer a financial advantage for himself. However, as events transpired, he could well have been caught out by the very arrangement he had hoped would shore up his position.
Luckily for him in this case, there were some technical flaws in the binding financial agreement that meant it could not be enforced by his ex.
The case also serves as a reminder that binding financial agreements are highly technical documents and are not always the right choice for couples looking to achieve some certainty about their affairs if they break up.
It is very important to seek expert legal advice if you intend to enter into enter into a binding financial agreement.