Making Binding Financial Agreements Watertight
By Richard Maurice – NSW Bar
Note: This paper now includes the Amendments of January 2010
Contents
Essential ingredients ...2
Common traps ...2
Aim for certainty and clarity ...2
Be careful when using precedents and templates ...3
Ensure full and frank disclosure ...3
The schedules to the agreement: ...3
Include “defensive” clauses...4
Prepare a Separation Declaration if required...5
Be careful with the Statements attached to the agreement...5
Amendments of January 2010...6
Setting aside a binding financial agreement ...7
Fraud/non-disclosure...8
Void, voidable or unenforceable ...9
Material change in circumstances relating to the welfare of a child... 10
Unconscionable Conduct ... 10
Powers of the Court in 90K (3) ... 11
Court can declare a technically defective agreement binding ... 11
The Court always retains a discretion ... 11
Please note: As a result of various decisions during 2011 and 2012 the probability of Financial Agreements being set aside has increased significantly. For example, no amount of careful drafting can eliminate entirely the possibility of human error or a change in circumstances of one or both parties that could lead to the agreement being set aside. No one should ever approach this topic in the belief that an agreement can be drafted that is immune from challenge. The author is not providing legal advice and accepts no responsibility for the use to which this paper is put.
Essential ingredients
The Essential ingredients of a Binding Financial Agreement are set out in sec 90G of the Family Law Act and as of 4 January 2010 it says:
90G(1) [Requirements for binding agreement]
Subject to subsection (1A), a financial agreement is binding on the parties to the agreement if, and only if:
(a) the agreement is signed by all parties; and
(b) before signing the agreement, each spouse party was provided with independent legal advice from a legal practitioner about the effect of the agreement on the rights of that party and about the advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement; and
(c) either before or after signing the agreement, each spouse party was provided with a signed statement by the legal practitioner stating that the advice referred to in paragraph (b) was provided to that party (whether or not the statement is annexed to the agreement); and
(ca) a copy of the statement referred to in paragraph (c) that was provided to a spouse party is given to the other spouse party or to a legal practitioner for the other spouse party; and
(d) the agreement has not been terminated and has not been set aside by a court.
Prior to the January 2010 amendments the checklist had to be followed to the letter; see Black and Black (2008) ¶ FLC 93-357 or the agreement would be held to be invalid. The situation now is less clear as explained later.
Common traps
Aim for certainty and clarity
Like any contract to be valid and enforceable a Binding Financial Agreement must:
Include clear and concise recitals which provide an adequate history of the marriage, complete definitions of relevant people and things and otherwise complies with all of the relevant statutory requirements;
Deal with all of the assets, liabilities and financial resources of the parties; Set out the obligations of the parties in clear and unambiguous terms; Make provision for what is to happen upon default by either or both of the
parties;
Be self-contained; (ie: does not rely on something or someone else for interpretation);
Ensure that each party gives full and frank disclosure (see below).
Be careful when using precedents and templates
Binding Financial agreements more closely resemble tailored clothing than items bought off the rack. As I have explained later in this paper, the re-use of outdated precedents has led to numerous problems because on 13 January 2004 sec 90G was amended. It is always worthwhile to approach your drafting job from scratch and follow a checklist referring back to the legislation itself, rather than simply cutting and pasting someone else’s work. Be extra careful with any precedents prepared prior to January 2010.
Ensure full and frank disclosure
Schedules should be attached to the agreement which set out the assets, liabilities and financial resources of the parties both:
As at the date of cohabitation/marriage; and At the date the agreement is signed.
The schedules to the agreement:
Ought to be comprehensive, ie: include values as well as descriptions; Should include liabilities and financial resources in addition to assets; All current items ought to be supported by appraisals or preferably by
valuations. Simply guessing values could prove very costly in the long run. You should ask to see bank statements or other financial records to verify
mortgages, loan accounts or other liabilities. Generally speaking most clients get some or all of these figures wrong.
The schedules and indeed the whole agreement, although not subject to any judicial scrutiny when it is executed, ought to be written with a view to such scrutiny; just in case something does go wrong.
Include “defensive” clauses
Including clauses similar to the following may be of assistance in limiting potential complaints about alleged lack of disclosure and/or unfairness:
A. In concluding this agreement the parties have with the advice of their Solicitors:
i. Considered the asset pool, the contributions by each of them to that pool and the factors set out in section 75(2) of the Act and have agreed that the resultant arrangements are fair and equitable;
ii. Had explained in detail to each of them the effect of this agreement.
B. Each party has made their own enquiries as to the other’s financial affairs and have not relied solely upon each other’s disclosure of their financial position and in particular:
i. The husband has provided to the wife all financial documentation that she has requested through her solicitor including those relating to his assets, liabilities and income; and
ii. The husband through his solicitor has answered all questions (if any) asked by the wife’s solicitor about the husband’s current financial circumstances.
And including clauses along the following lines may deal with allegations that promises or threats were held out to induce a party to sign:
C. This Agreement and the annexures to this Agreement or otherwise referred to herein contain the whole agreement between the parties relating their property division and supersede all prior agreements, arrangements and understandings between the parties relating to that subject matter.
D. The parties each acknowledge that no representations were made prior to entering into this Agreement. The parties each agree that, in entering into this Agreement, neither relied on any representations (whether written or
oral) of any kind or of any person other that those expressly set out in this Agreement.
Prepare a Separation Declaration if required
If the agreement is executed before parties have actually separated then the additional requirements of sec 90DA must be satisfied.
1. A financial agreement between 2 people, to the extent to which it deals with:
(a) how, in the event of the breakdown of the marriage, all or any of the property or financial resources of either or both of them at the time when the agreement is made, or at a later time and before the termination of the marriage by divorce, is to be dealt with; or
(b) the maintenance of either of them after the termination of the marriage by divorce;
i. is of no force or effect until a separation declaration is made. 2. A separation declaration is a written declaration that complies with subsections (3)
and (4).
3. The declaration must be signed by at least one of the parties to the financial agreement.
4. The declaration must state that:
(a) the parties have separated and are living separately and apart at the declaration time; and
(b) in the opinion of the parties making the declaration, there is no reasonable likelihood of cohabitation being resumed.
5. In section 90DA:
declaration time means the time when the declaration was signed by a party to the financial agreement (or last signed by a party to the agreement, if both parties to the agreement have signed).
separated has the same meaning as in section 48 (as affected by section 49). [ NB: This is a reference to separation for the purposes of applying for a divorce ]
Be careful with the Statements attached to the agreement
Prior to the amendments to sec 90G on 13 January 2004, the certificates (now called statements) for the agreement had to have content in these terms:
I, Margaret Denton, solicitor, have provided Judy Jones ("my client") with independent advice as to the legal effect of an Agreement in writing proposed to be entered into between Bill Jones and Judy Jones ("the husband and the wife") to which Agreement this certificate is annexed. I advised my client independently of the other party and before the time at which my client signed the said Agreement as to the following matters:
i. the effect of the Agreement on the rights of my client;
ii. whether or not at that time it was to the advantage, financially or otherwise, of my client to make the Agreement;
iii. whether or not at that time it was prudent for my client to make the Agreement;
iv. whether or not at that time and in the light of such circumstances as were at that time reasonably foreseeable, the provisions of the Agreement were fair and reasonable.
The highlighted parts above were amended or in the case of (iii) and (iv) deleted altogether. Unfortunately precedent agreements with the old certificates are still floating around and are still being used. In the last year or so I have been involved personally in several cases where this has happened.
Subject to the amendments in January 2010 as a result of the Full Court’s endorsement of what His Honour Collier J. has said in J and J [2006] FamCA 442, any use after January 2004 of a certificate in this form will render the agreement invalid and unenforceable.
Since January 2010 the requirements for these certificates (now called Statements of Advice) have changed.
Amendments of January 2010
Legislation amending that part of the Family Law Act dealing with Financial Agreements came into operation on 4 January 2010. It was intended as a way of overcoming the strict approach adopted by judges of the Family Court concerning compliance with the procedures for making a binding financial agreement.
Ironically, in some respects it has introduced more room for confusion than it was intended to overcome.
What is now required that each party receives independent legal advice and their solicitor must sign a written statement confirming that the advice was actually
given; [ see: sec 90G(1)(c) ] whether or not it is attached to the BFA. In my view it ought always to be attached so that it remains with the agreement.
As a minimum the signed statement must deal with the provision of advice to the client about:
The effect of the agreement on their rights under Part VIII of the Act; and The advantages and disadvantages at the time the advice was provided
of entering into the agreement.
If the written advice does not cover these matters it is arguable that the requirements of the Act have not been met and the BFA will be invalid.
On my reading of sec 90G(1)(b) it does not appear that you are required to give details of the advice itself simply confirmation that it was given to the client.
In order to take the utmost care a solicitor will have to retain:
A copy of the Agreement
A copy of the signed Statement of Advice; and
Proof that a copy of the Statement of Advice (and I suggest the Agreement) was served on the other side.
Although not required, it would be wise to serve a signed copy of the agreement at same time as the Statement of Advice is served and keep a record of the service of both. The written advice can be provided before after the agreement is signed but I would recommend it be done beforehand.
Setting aside a binding financial agreement
The grounds for setting aside an agreement made under Part VIIIA are set out in 90K of the Family Law Act.
There are rarely used provisions to set an agreement aside if, for example, it was intended to defraud creditors or if the agreement covers at least one superannuation interest that is an unsplittable or there is a payment flag incapable of being lifted.
However the main grounds lawyers encounter most often are:
(a) the agreement was obtained by fraud (including non-disclosure of a material matter); or
(aa) …….
(b) the agreement is void, voidable or unenforceable; or (c) …….
(d) 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 (as defined in subsection (2)), a party to the agreement will suffer hardship if the court does not set the agreement aside; or
(e) in respect of the making of a financial agreement—a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable; or
(f) ….. (g) …..
There is a definition relevant to subsection 1(d) in 90K (2) as follows:
For the purposes of paragraph (1)(d), a person has caring responsibility for a child if:
(a) the person is a parent of the child with whom the child lives; or (b) a parenting order provides that:
(i) the child is to live with the person; or
(ii) the person has parental responsibility for the child.
Fraud/non-disclosure
The effect of fraud (including non-disclosure) upon most agreements is that it vitiates the consent of the aggrieved party.
There are few Family Law authorities concerning the operation of sec 90K (a). 1 However there are an abundance reported cases which refer to similar provisions under sec 87 (now repealed) and sec 79A. 2
1
See analysis by Altobelli FM in Shepherd [2007] FMCAfam 735 at para 44 and following.
2
Void, voidable or unenforceable
Section 90KA provides that:
The question whether a financial agreement or a termination agreement is valid, enforceable or effective is to be determined by the court according to the
principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts, and, in proceedings relating to such an agreement, the court:
(a) subject to paragraph (b), has the same powers, may grant the same remedies and must have the same regard to the rights of third parties as the High Court has, may grant and is required to have in proceedings in connection with contracts or purported contracts, being proceedings in which the High Court has original jurisdiction; and
(b) has power to make an order for the payment, by a party to the
agreement to another party to the agreement, of interest on an amount payable under the agreement, from the time when the amount became or becomes due and payable, at a rate not exceeding the rate prescribed by the applicable Rules of Court; and
(c) in addition to, or instead of, making an order or orders under
paragraph (a) or (b), may order that the agreement, or a specified part of the agreement, be enforced as if it were an order of the court.
This section confers on the Court jurisdiction in the common law and equitable aspects of the enforceability of financial agreements. They confer the powers of the common law courts with respect to contracts on the Family Court when dealing with binding financial agreements.
This includes the power to order specific performance, to award damages, to declare contracts void, and to order rectification.3 The concepts of fraud, void, voidable or unenforceable contracts, and unconscionability, are all derived from the common law of contract. The application of the general law of contract to the validity and enforceability of binding financial agreements brings with it a significant body of statutory and case law. In effect, it makes applicable all those rules of law which potentially impact on the validity and enforceability of a contract – including, in New South Wales, the Contracts Review Act (which permits a Court to declare void a contract which was unjust in the circumstances relating to it at the time at which it was made).
3
Material change in circumstances relating to the welfare of a child
There are still, so far as I am aware, no reported decisions about sec 90K (d) so we have to look at the law concerning a comparable section, namely sec 79A (1) (d) which says that a ground for setting aside property orders made under sec 79 is:
(d) in the circumstances that have arisen since the making of the order, being circumstances of an exceptional nature relating to the care, welfare and development of a child of the marriage, the child or, where the applicant has caring responsibility for the child (as defined in subsection (1AA) ), the applicant, will suffer hardship if the court does not vary the order or set the order aside and make another order in substitution for the order.
It should be noted that the Full Court has held that the fact that the conditions of sec 79A(1) (d) are met does not mean that the property order must be varied or set aside. This is discretionary and the Full Court has said in this regard that:
“the court must consider in the exercise of its discretion whether [the] hardship is of such a serious nature and results in such inequity that it can only be rectified by the extreme step of setting aside or varying an existing order of the court''. 4 It seems clear that a relevant consideration in this regard is whether the applicant for setting aside was in any way responsible for the “exceptional circumstances''. 5 If so, getting the agreement set aside might be impossible.
It should be noted that sec 90K (1) (d) refers instead to a “material change in circumstances” which might lower the bar a little. The phrase “extreme step” used by the Court when describing the setting aside of orders (or agreements) conveys how seriously they view the exercise.
Unconscionable Conduct
In the context of binding financial agreements this often boils down to unequal bargaining power. Again in the absence of authorities on sec 90K (e) we can look to examples of the type of situations were the exercise of the discretion under sec 79A is justified. These were identified by Strauss J. as follows: 6
4
Simpson and Hamlin (1984) FLC ¶ 91-576 at p 76,759 and Public Trustee (as executor of the estate of Gilbert) v Gilbert (1991) FLC ¶ 92-211 at p 78,429
5
see Sandrk and Sandrk (1991) FLC ¶ 92-260 at p 78,751
6
“lack of any or any proper representation or advice, concealment by the husband or ignorance by the wife of relevant financial matters, pressure on or undue persuasion of her, or unequal bargaining power on her part, and no doubt there may be many other such circumstances.”
Gee J. went further and said that “duress” in the context of the previous sec 79A meant ''the compulsion of a person by physical or mental harm'' (p 76,557). 7
Powers of the Court in 90K (3)
If the agreement is set aside, the powers of the Court are very wide and are set out in sec 90K (3)
A court may, on an application by a person who was a party to the financial agreement that has been set aside, or by any other interested person, make such order or orders (including an order for the transfer of property) as it considers just and equitable for the purpose of preserving or adjusting the rights of persons who were parties to that financial agreement and any other interested persons.
Court can declare a technically defective agreement binding
Another addition following the January 2010 amendments is that the Court can declare that the agreement is binding on the parties notwithstanding failure to comply with these provisions if satisfied that it would be unjust and inequitable if the agreement were not binding on the parties to the agreement (disregarding any changes in circumstances from the time the agreement was made) [ see: sec 90G(1A) and 90UJ(1A) ]. We have yet to obtain guidance from the Court about how this would be determined.
The Court always retains a discretion
Sec 90K (6) says as follows:
The court must not make an order under this section if the order would:
7
(a) result in the acquisition of property from a person otherwise than on just terms; and
(b) be invalid because of paragraph 51(xxxi) of the Constitution.
For this purpose, acquisition of property and just terms have the same meanings as in paragraph 51(xxxi) of the Constitution.
It must never be forgotten that no matter how many arguments an applicant seeking to set aside an agreement wishes to raise, there may be numerous reasons why the Court still will not exercise its discretion in their favour. The discretion remains in order to accommodate the “flood gates” principle. Broadly speaking, judges do not want parties to litigate (or re-litigate) unnecessarily. Some reasons might include:
Substantial delay in bringing the application;
The Respondent or perhaps a third party would be unfairly prejudiced; Whether there are other less drastic remedies available than setting aside
the agreement.
Setting aside the agreement has unwelcome side-effects for one or both of the parties (eg: tax problems).
No one should ever assume that an agreement will be set aside as a matter of course. These types of applications are often bitterly fought, especially where there is a lot of money at stake. Alternatives ought to be explored before bringing this type of application.
Richard Maurice October, 2010
