Financial Agreements, commonly referred to as “cohabs” or “prenups”, offer a safety net for individuals looking to protect their assets and income in the event of a separation.
While they are often associated with wealthy individuals with significant assets, they can be beneficial for anyone looking to define financial obligations and protect personal assets, even if they are looking to protect a single asset, such as a house or investment property.
In fact, having a Financial Agreement in place can help ensure that both parties have clear expectations around the ownership of separate property, the purchase of (future) joint property, and payment of expenses in relation to assets, which can help limit the scope of dispute at the time of separation.
But what happens if it is contested?
While a Financial Agreement can provide security and clarity, it is not invincible. There are several factors and circumstances under which the agreement can be challenged in court, and it’s essential to understand these potential avenues of challenge when entering into a Financial Agreement.
Important points to remember
- Financial Agreements are not bulletproof: Financial Agreements can offer protection, but may be contested in certain circumstances, such as lack of independent legal advice, duress, or significant changes in circumstances.
- Legal compliance is essential: For a Financial Agreement to be enforceable under Australian law, it must meet strict statutory requirements, including receiving independent legal advice prior to signing the agreement, and full financial disclosure.
- Regular reviews are necessary: Financial Agreements should be treated as living documents, requiring periodic reviews and updates to stay relevant and enforceable, particularly after major life events.
What is a Financial Agreement (‘pre-nup’)?
A prenuptial agreement (formally known as a Financial Agreement in Australia) is a legally binding contract that couples can enter into prior to or during a marriage, or de facto relationship. It outlines how their assets, property, and associated financial matters will be handled in the event of a future separation or divorce.
For most couples, Financial Agreements permit clarity and protection by establishing clear, mutually agreed-upon terms, tailored to the couple’s unique circumstances, about what is to happen if and when a relationship breakdown ever occurs. In this way, they’re designed to circumvent potential future disputes about financial matters.
Are there any technical requirements?
Under Australian law, for a prenuptial agreement to be enforceable, it must meet specific statutory requirements under the Family Law Act 1975, Section 90G.
These requirements include:
- The agreement must be signed by all parties.
- Before signing, each party must receive independent legal advice from a legal practitioner about:
- The effect of the agreement on their rights.
- The advantages and disadvantages of making the agreement at that time.
- Each party must receive a signed statement confirming they were provided with independent legal advice.
- A copy of the signed statement must be provided to the other party.
It’s important to note that prenuptial agreements can be set aside under certain circumstances. Sections 90K and 90KA of the Family Law Act 1975 outline these grounds.
So, Financial Agreements are legally enforceable, provided they are properly drafted, and both parties have received independent legal advice. However, they can be subject to legal review if they are found to be unfair or if statutory requirements are not met.
Can Financial Agreements be contested after separation?
Yes, Financial Agreements can be contested, but there are only defined circumstances where this can occur.
For example, an agreement may be contested in court if:
- One party did not receive independent legal advice
- There was duress or undue pressure to sign
- The financial needs of either party or any children are not sufficiently addressed in the agreement
- The terms are impractical to carry out
- The party caring for a child would suffer hardship as a result
Additionally, if there are significant changes in circumstances after the agreement is made, such as a substantial change in financial position or the birth of a child, the agreement may be subject to challenge.
The court will carefully consider whether the agreement aligns with the principles of fairness and justice when considering these sorts of grounds.
Case study: A contested Financial Agreement
One of the most well-known cases involving a contested prenup is Thorne v Kennedy (2017), where the High Court ruled that the agreement was unenforceable due to undue influence.
The wife was pressured to sign the agreement just days before their wedding under the threat that the wedding would be called off. Despite being advised that the agreement was heavily biased against her, she signed it due to the pressure.
This case highlights the importance of ensuring that both parties enter into the agreement willingly, possessed with full knowledge of what they are signing, and with full awareness of its implications.
What happens if a Financial Agreement is set aside?
If a Financial Agreement is successfully contested, the court will disregard the terms of the agreement and apply the standard property settlement and spousal maintenance laws. The case will then be determined as if the Agreement does not exist.
This process involves a thorough examination of the relationship and financial contributions, following the four-step process under Australian family law.
The division of assets will be based on what is deemed just and equitable by the court, which can result in an outcome that differs significantly from what was originally agreed upon in the Agreement.
Ensuring your Financial Agreement stands: The importance of financial disclosure and regular reviews
Financial disclosure plays a crucial role in the validity of a Financial Agreement. Full and honest disclosure of assets is necessary to ensure both parties are making informed decisions about entry of the Agreement. If one party fails to disclose material assets or misrepresents their financial position, the Agreement could be contested on the grounds of material non-disclosure.
It is therefore essential for both parties to share complete and accurate financial details to ensure the Agreement stands up to scrutiny.
Moreover, a Financial Agreement isn’t a “set and forget” document. It is often considered a “living document” that requires periodic reviews, especially after major life events like the birth of a child or the acquisition of a significant asset.
Regularly revisiting and revising the Agreement helps ensure it remains fair, relevant to the circumstances at large in the relationship, and enforceable. Neglecting this step could lead to complications if the Agreement is ever challenged.
Final thoughts: Are Financial Agreements worth it?
Despite the potential for a Financial Agreement to be contested, it remains one of the best ways (in fact, the only way enshrined in legislation) to provide clarity and certainty in the event of a separation.
It helps define financial expectations, protects personal assets, and can prevent lengthy disputes in court. While no legal agreement is entirely beyond challenge, having a well-drafted and legally sound Financial Agreement is how to, as much as is possible, achieve peace of mind.
How BGM Family Lawyers can help
Navigating the complexities of Financial Agreements and understanding when they might be contested can be daunting. If you’re considering entering into a Financial Agreement or need advice on an existing agreement, it’s important to seek expert legal counsel.
Our experienced team can guide you through the process, ensuring your agreement is legally sound (including that the outcome it provides for is in line with what the law would deliver) and enforceable.
