When can a Binding Financial Agreement be set aside?

Shahn Beasley-Reickenvater

Senior Associate Aitken PartnersView Profile

Binding Financial Agreements are often used to protect assets, provide certainty and avoid lengthy disputes if a relationship breaks down. However, despite their intended finality, these agreements can be challenged and in certain circumstances set aside by the Court. Understanding the situations that may place an agreement at risk is essential for anyone considering entering into, or relying upon, a Binding Financial Agreement.

Binding Financial Agreements provide separating couples with flexibility when dividing their finances.

An enforceable Financial Agreement effectively removes the jurisdiction of the Federal Circuit and Family Court of Australia to determine the financial matters dealt with by the agreement. But the word “binding” does not mean unchallengeable.

The Family Law Act 1975 (Cth) defines when an agreement is “binding”, as well as circumstances in which a Court may set aside an agreement that would otherwise be binding. The requirements are substantially mirrored for agreements concerning marriages and de facto relationships.

What makes a Financial Agreement binding?

There are strict requirements that ordinarily must be met before a Financial Agreement will be binding.

Most importantly:

• there must not be any prior agreements in place;
• the agreement must be signed by all parties;
• before signing, each party must receive independent legal advice from a legal practitioner in writing;
• that advice must address the effect of the agreement upon the party's rights, together with the advantages and disadvantages to that party of entering into the agreement at that time; and
• the agreement must include signed statement from their lawyer confirming that the required advice was given.

The requirement for independent advice is more than a formality. It is not sufficient that a lawyer simply signs a certificate stating that advice was provided. The substance of the advice, and whether it was actually provided before the agreement was signed, can become critical if the agreement is subsequently challenged.

This means that disputes about BFAs can involve two different questions:

1. Was there ever a binding Financial Agreement?
2. If so, is there a basis upon which the Court should set it aside?

When can a Financial Agreement be set aside?

The grounds upon which a Court can set aside a Financial Agreement are prescribed by the Family Law Act. Broadly, they include the following.

1. Fraud, including material non-disclosure

A Financial Agreement may be set aside where it was obtained by fraud, including the non-disclosure of a material matter.

This makes financial disclosure particularly important when negotiating a BFA. A party who conceals assets, interests or other material financial matters may expose the agreement to a later challenge.

2. Agreements intended to defeat creditors or de facto spouses

The Court may intervene where a party entered into the agreement for the purpose of defrauding or defeating creditors or de facto spouses, or with reckless disregard for their interests. The protection extends to a person whom the party could reasonably have foreseen was reasonably likely to become a creditor, for example a liquidator or trustee in bankruptcy.

A Financial Agreement therefore should not be regarded as an asset-protection mechanism capable of being used to place property beyond the legitimate reach of creditors.

3. The agreement is void, voidable or unenforceable

A Court can set aside an agreement if it is void, voidable or unenforceable.

This brings ordinary principles of contract and equity into consideration and can encompass matters such as duress, undue influence, mistake, uncertainty and other circumstances affecting the validity or enforceability of the agreement.

4. It has become impracticable to carry out the agreement

Sometimes the problem arises not when the agreement was signed, but because of what happens afterwards.

A Court may set an agreement aside where circumstances arising since it was made mean that it has become impracticable to carry out all or part of the agreement.

This is more than a question of the agreement later becoming inconvenient or producing a result that one party considers unfair. There must be circumstances making its performance impracticable.

5. A material change involving the care of a child causes hardship

One particularly important ground concerns changes affecting children.

A Financial Agreement may be set aside where, since it was made, there has been a material change in circumstances relating to the care, welfare and development of a child, and because of that change either the child or a party with caring responsibility for the child would suffer hardship if the agreement remained in place.

This is particularly relevant to Financial Agreements entered into early in a relationship, commonly known as a “prenup”.

The parties' lives may look very different years later, particularly following the birth of children. Changes to working arrangements or one parent assuming substantially greater caring responsibilities may not have been considered at the time that the agreement was entered into.

Importantly, having a child after signing a BFA does not, by itself, invalidate the agreement. The statutory test requires a material change in circumstances and resulting hardship.

6. Unconscionable conduct

A Financial Agreement can also be set aside where one party engaged in unconscionable conduct in connection with the making of the agreement.

This is an important safeguard, but it does not give the Court a general discretion to set aside an agreement simply because its terms appear unfair in hindsight.

Whether conduct is unconscionable is highly fact-specific. Issues may include a party's vulnerability or special disadvantage, the other party's knowledge of that disadvantage, the circumstances surrounding the negotiations and execution of the agreement, and the extent to which the stronger party exploited that position. The circumstances in which an agreement was negotiated and signed can therefore be just as important as its wording.

7. Certain superannuation arrangements

There are also two more technical grounds relating to superannuation.

An agreement may be set aside where a payment flag operates in relation to a superannuation interest covered by the agreement and there is no reasonable likelihood of the flag being lifted by agreement, or where the Financial Agreement covers a superannuation interest which is legally unsplittable.

These grounds arise less frequently but demonstrate why careful consideration of superannuation provisions is important when preparing a Financial Agreement.

What happens if a Financial Agreement is set aside?

Setting aside a Financial Agreement can have significant consequences.

A binding Financial Agreement ordinarily removes the Court's jurisdiction over the financial matters covered by it. Once that obstacle is removed, the parties may be able to pursue the property or maintenance remedies which would otherwise have been excluded by the agreement.

The Court also has power, after setting aside an agreement, to make orders it considers just and equitable to preserve or adjust the rights of the parties and other interested persons, including orders involving the transfer of property.

For that reason, litigation about the validity of a Financial Agreement can have major consequences. The question is not simply whether the parties remain bound by a contract. It may determine whether the Court can undertake the broader statutory assessment of their respective property interests.

There is, however, an important qualification. Failure to comply with some of the technical requirements does not automatically mean that an agreement can never be binding. The Court has the power to declare an agreement binding despite certain deficiencies if it would be unjust and inequitable for the agreement not to bind the parties.

The Takeaway

Financial Agreements remain an important relationship planning tool. Properly prepared, they allow married and de facto couples to determine for themselves how particular financial issues will be dealt with rather than leaving those questions to be determined by the Court.

However, careful drafting alone is not enough.

To minimise the risk of a later challenge, parties should allow adequate time for negotiation, make appropriate financial disclosure, obtain genuinely independent legal advice, and when entering into a pre-nuptial agreement carefully consider foreseeable changes in their circumstances, particularly the possibility of children and changes to future earning capacity or caring responsibilities.

If circumstances have changed since a Financial Agreement was signed, or there is a concern about the circumstances in which an agreement was originally entered into, specialist family law advice should be obtained before assuming that the agreement is either binding or capable of being set aside.

Aitken Partners' Family Law team can advise on the preparation, review, enforcement and challenge of Financial Agreements for married and de facto couples. You can contact our team on 03 9600 6000 or book a consult here.