Binding Financial Agreements Myth-busting Edition
Written By Sarah Quilliam
A Binding Financial Agreement (BFA) is a contract that can be entered into between spouses/partners and previous spouses/partners, that can deal with:
How all or any of the property or financial resources of either or both of the spouse parties are to be dealt with at the time of the agreement, or at a later time and during the de facto relationship, or marriage; and/or
The maintenance (if any) of either of the spouse parties;
Incidental or ancillary matters to (1) and/or (2), and other matters.
BFAs can be entered into before, during a relationship or marriage (commonly referred to as “pre-nuptial agreements” or “cohabitation agreements”), or after a relationship or marriage (commonly referred to as “separation agreements”). This article focuses on the type of BFA that can be entered into before or during a relationship or marriage.
A BFA can be an effective and appropriate way to protect your assets in the event of a separation, and to decide in advance how to divide any property that you may acquire jointly during your relationship, if you were to later separate.
A BFA has the effect of ousting the jurisdiction of the Federal Circuit and Family Court of Australia, to which you might otherwise have been entitled to apply for property adjustment. This article focuses on busting some commonly heard myths about these types of agreements.
MYTH: "Pre-nups aren’t worth the paper they are written on."
False!
A well-drafted agreement that complies with legislative requirements should be valid and enforceable. There is a wealth of case law in which the Courts have upheld BFAs. Your BFA should be individually drafted to your specific circumstances and intentions, and generic internet templates should be avoided.
However, it is incorrect to suggest that any BFA is ‘bullet-proof‘ or ‘water tight’. There is no such thing. That is because the Family Law Act 1975 makes allowance for the Court to set aside a BFA, albeit in very limited and specific circumstances.
You cannot ask the Court to set aside a BFA just because you have changed your mind or no longer agree to the terms, but the Court may decide to set aside a BFA in circumstances such as (and this is a non-exhaustive and simplified list):
The BFA is void due to such things as duress, unconscionable conduct or undue influence;
The BFA was obtained by fraud (such as non-disclosure), or for the purpose of defeating a creditor;
Circumstances have arisen since the BFA was signed making the terms (or some of them) impracticable to be carried out.
A good lawyer will be able to identify factors that may be present in your matter, that may expose you to the risk of your BFA being set aside in the future. Most of the time, reasonably foreseeable risks can be mitigated or reduced by dealing with them within the BFA. It is important that you are completely upfront with your lawyer when they are taking your instructions to prepare a BFA.
MYTH: "A pre-nup is just a standard document, right? You can just sign-off on the certificate of legal advice?"
False!
There is a strict requirement in the Family Law Act 1975 that each spouse party was provided with independent legal advice which must, at minimum, include advice as to:
The effect of the BFA on the rights of that party; and
The advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement.
The lawyer providing the advice must sign a certificate to prove that they have provided advice to their client. The requirement of independence means that each party must retain different lawyers.
In order for this specific advice to be given, your lawyer must be able to identify how the terms agreement compares to what you might otherwise have been entitled to if there was no BFA, and whether it is likely to be advantageous to you or otherwise (and how so). A lawyer is unable to properly provide this advice until they have thoroughly explored with you factors relevant to these considerations, as well as the property that you each already have, and your intentions (i.e. what you expect this BFA to achieve).
This advice requires the lawyer to fully inform themselves of all relevant matters and exercise considerable legal skill and expertise in forming and providing the relevant advice. It is far from a ‘tick and flick’ advice certificate.
If your lawyer’s role is to provide you with advice for a BFA that has already been prepared, they will need to carefully read through that document, and they may also advise you as to some suggested changes to that draft BFA. This all involves time and work which your lawyer will charge for. You should be given an estimate of fees and costs before substantial work is carried out in your matter.
It is recommended that your chosen lawyer specialises in family law and is experienced in providing this advice. Please note that pre-separation BFAs are a highly specialised area within family law and not all family lawyers will provide that service. We are able to assist you with all types of BFAs, and we can also provide you with referrals to other local practitioners if you need a referral for yourself or your spouse/partner.
MYTH: "If we sign a BFA and then have a baby, the BFA is no longer valid."
Not strictly true!
It is not the case that a BFA will automatically terminate or become invalid upon the birth or adoption of a child (unless you have specifically provided for that to happen). The Family Law Act 1975 says that the Court may set aside a BFA if:
“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, if the applicant has caring responsibility for the child, a party to the agreement will suffer hardship if the court does not set the agreement aside”.
There are several elements here which must be satisfied before the Court will set aside a BFA. Your lawyer should explore with you whether or not you intend to have or adopt any children together in the future. If so, then it may be appropriate to make provision for this life event within the BFA.
MYTH: "If the BFA doesn’t meet the Family Law Act 1975 requirements, it won’t hold up."
Sometimes, and sometimes not!
The Family Law Act 1975 sets out the requirements that must be met in order for a BFA to be defined as that type of agreement, those requirements being: -
It must be in writing;
It must specify which type of BFA it is, by reference to the relevant section of the Family Act 1975 (e.g. if it is a pre-nuptial BFA it will be made pursuant to section 90B), and you must in fact be in the stage/s of a relationship to which that section of the Family Law Act relates to;
It is made with respect to how all or any of the property or financial resources of either or both of the spouse parties are to be dealt with at the time of the agreement, or at a later time and during the de facto relationship, or marriage; and/or the maintenance (if any) of either of the spouse parties; incidental or ancillary matters to the preceding, and other matters.
That there is no other BFA in force between the parties with respect to any matters stated at (3) above.
For the BFA to be enforceable, then the following strict requirements must also be met:
The BFA must be signed by all parties;
Before signing the BFA each party must have been provided with independent legal advice from a legal practitioner as mentioned above;
Either before or after signing the BFA each party must be provided with a signed statement by the legal practitioner stating that the advice at (2) above was provided to that party;
A copy of the Statement must be given to the other party or their legal practitioner and;
The BFA must not have been terminated or set aside by a Court.
Despite non-compliance with the above, a Court may declare the BFA is still binding on parties if the Court is satisfied that it would unjust and inequitable if the BFA were not binding.
MYTH: "I don’t really like these terms, but I can just get the BFA set aside later, right?"
Usually false!
A BFA is a contract, and is binding on you and the other party. You can only avoid being bound by the terms of a BFA if:
You and the other party agree otherwise (although that agreement can be retracted);
You both agree to terminate the BFA by way of a Termination Agreement; or
The Court finds the agreement does not comply with the requirements for an agreement at law; or a BFA under the Family Law Act 1975; or a binding agreement under the Family Law Act 1975, and it is declared not to be a binding agreement; or
You (or the other party) are successful in setting aside the agreement by an application to the Federal Circuit and Family Court of Australia, which, as mentioned, is only open in very limited circumstances.
The setting aside of any legal agreement whether a BFA under the Family Law Act 1975 or otherwise, is often a difficult and expensive process, even if you have good prospects of success. Therefore, you should not enter into a BFA hoping that later on you may be able to have it set aside based on a legal argument. If you have doubts about entering into the BFA, please discuss this with your lawyer.
MYTH: "I can just set up a trust to protect my assets from my partner, right?"
Wrong!
In Australia, the only way that parties are able to contract out of their legal rights and entitlements in relation to a property division and/or maintenance is to enter into a BFA. Anything less than a valid and enforceable BFA is unlikely to have any binding effect if a family law claim is brought.
When assessing rights and entitlements under the Family Law Act 1975, the pool of assets and liabilities need to be identified and valued. For this purpose, items that are considered “property” will usually extend to all interests in property, no matter which party’s name the property is held in and no matter when or how the property was acquired. This can include business interests, superannuation, inheritances, gifts, overseas property, licences that have a value (such as a taxi licence or fishing licence), lottery wins, and interests in trusts.
In almost all cases where a party has control of a discretionary trust (such as a family trust), the trust and all its assets will be included in the property pool for division, even if the precise beneficial interest cannot be quantified and even if the trust or trust assets are situated overseas.
Too often, people assume that holding assets in a family trust will protect them from claims during a separation only to find out that this isn't always the case.
Who can I talk to about a BFA?
If you're planning to marry, move in with or make a major financial decision with your partner, now is the time to consider how best to safeguard your property interests. Our Accredited Specialist Family Lawyers can guide you through your options, including whether a Binding Financial Agreement (BFA) is right for your circumstances.