A binding financial agreement (BFA) is a contract. Parties to a marriage or de facto relationship can enter into a BFA. It plans how they will divide property and finances if the relationship ends. In some circumstances, it also covers spousal maintenance.
A BFA helps parties avoid the family law system’s emotionally and financially draining process. Under the Family Law Act 1975 (Cth) (FL Act), parties can apply to the Court for property and maintenance orders. Instead, they can engage legal practitioners to prepare a BFA. A properly drafted BFA displaces the Court’s power to make different property or maintenance orders. However, the Court retains jurisdiction to set the agreement aside in limited circumstances.
Many people see BFAs as taboo, because they plan for the relationship’s end before it begins. However, a BFA is a legitimate financial planning document. If properly drafted, it can offer security and peace of mind. This lets you focus on your relationship instead of stressing about finances.
BFAs are commonly used in a range of situations, for example:
- A business owner wants to keep a family business separate from property that a Court might otherwise divide.
- A party has received, or expects to receive, a significant inheritance. They want to keep it separate from the relationship’s other assets.
- Parties in a blended family who want to preserve assets for children from an earlier relationship or marriage; and
- Couples have a significant disparity in wealth or income. One party wants certainty about what will happen to their existing assets.
Types of Binding Financial Agreements
The FL Act splits the BFA framework in Australia by relationship type. On the one hand, married couples sit under Part VIIIA of the FL Act. On the other hand, de facto couples sit under the separate but structurally parallel Part VIIIAB. The relevant requirements are then further split by timing as follows:
- For pre-marriage agreements made before a marriage (called a prenup under American law), s 90B of the FL Act applies. See s 90UB for pre-de facto relationships.
- For agreements made during a marriage, including after separation but before divorce, s 90C applies. See s 90UC for de facto relationships.
- For post-divorce BFAs s 90D is used (s 90UD for de facto relationships).
Planning for your relationship’s end before or during the relationship may feel counterintuitive. But by separation or divorce, an amicable conversation about property division often comes too late. BFAs therefore offer a unique, strong instrument to secure fairness and certainty.
The remainder of this article focuses on BFAs for marriages under ss 90B, 90C, and 90D of the FL Act.
Requirements of Binding Financial Agreements
Pursuant to s 90G of the FL Act, a ss 90B, 90C, and 90D BFA will be binding if:
- the agreement is in writing;
- the agreement is signed by all parties;
- each party to the agreement has received independent legal advice from a separate legal practitioner about the effect of the agreement on their rights, and about its advantages and disadvantages;
- each party’s practitioner must have given them a signed statement confirming that advice was provided;
- each party must exchange a copy of their signed statement with the other party;
- no court has since terminated or set aside the agreement.
In addition, the agreement should expressly state which of ss 90B, 90C or 90D it is made under. This is not a literal requirement of s 90G itself but follows from the fact that those sections apply to mutually exclusive periods of a relationship. A mismatch between the stated basis and the parties’ actual circumstances can render the agreement invalid.
A common pitfall is delaying the independent advice and signed statement process. Parties often leave it until shortly before a wedding or other significant date. Rushing this step does not necessarily invalidate the agreement. However, as the case study below illustrates, it can become relevant evidence of whether the parties entered the agreement freely.
What if you are forced into entering a Binding Financial Agreement?
A party can still challenge a binding financial agreement after signing it. This applies even where the agreement technically met all the formal requirements in section 90G. The challenge succeeds if the way the parties reached the agreement amounted to duress, undue influence, or unconscionable conduct. Each of these doctrines asks whether a party’s agreement to sign was truly free. They are distinct legal doctrines. Where a party establishes one, the Court may declare the BFA unenforceable and non-binding. The leading High Court authority on this topic is Thorne v Kennedy (2017) 263 CLR 85 (Thorne).
In Thorne, a wealthy property developer required his fiancée to sign a pre-nuptial agreement days before their wedding. She had no substantial assets, no permanent visa status, and no community in Australia. He told her the wedding would not go ahead if she refused. She signed despite her solicitor’s advice that the agreement was “entirely inappropriate” and signed a near-identical agreement again shortly after the marriage. She never had a real opportunity to reflect on the agreement or negotiate its terms. This absence proved central to the Court’s finding that he had exerted undue influence and engaged in unconscionable conduct.
Duress, undue influence, and unconscionable conduct
On duress, the High Court held that it focuses on the effect of a particular type of pressure. This pressure affects the person seeking to set aside the transaction. Their Honours put it this way at [26]:
‘It does not require the person’s will be overborne. Nor does it require that the pressure be such as to deprive the person of any free agency or ability to decide. The person subjected to duress is usually able to assess alternatives and to make a choice. The person submits to the demand knowing “only too well” what he or she is doing.’
Undue influence, by contrast, is a broad term. The Courts have not defined it. They have characterised it as influence over another person that leaves them unable to act freely. At [32], the majority of the Court in Thorne held:
‘The question whether a person’s act is “free” requires consideration of the extent to which the person was constrained in assessing alternatives and deciding between them. Pressure can deprive a person of free choice in this sense where it causes the person substantially to subordinate his or her will to that of the other party. It is not necessary for a conclusion that a person’s free will has been substantially subordinated to find that the party seeking relief was reduced entirely to an automaton or that the person became a “mere channel through which the will of the defendant operated”.’
Unconscionable Conduct
Finally, there is unconscionable conduct. The Court at [38] held:
‘A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage “which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests”. The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring “victimisation”, “unconscientious conduct”, or “exploitation”. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.’
If any one of the above factors is found, a BFA will be set aside, meaning it is non-binding and not enforceable. In the case of Thorne, undue influence and unconscionable conduct were successfully argued and the BFA was set aside.
Conclusion
A binding financial agreement, properly prepared, is not a hedge against a relationship failing. It is a tool that gives both parties certainty over how their finances would be handled if it did. The Court takes a strict view on BFAs, and for good reason. They are power tools which can alter the rights of you and your partner when it comes to property division at the breakdown of a relationship. An agreement made without genuine independent advice, adequate time for reflection, and full disclosure will be set aside and non-binding. Properly drafted, however, a BFA can replace uncertainty with a considered outcome both parties have chosen, rather than one a Court imposes on them later.
Whether you are entering a relationship, already in one, or navigating its end, Jake McKinley’s family law team can help. We can advise you on whether a BFA suits your circumstances. We can also prepare or review an agreement that meets the FL Act’s requirements.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article Written by James Cutrone, Law Graduate
