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Arrangements for cutting the $ cake

Feature Articles

Cite as: December 2010 84(12) LIJ, p.44

When are binding financial agreements really binding? Recent amendments should guide practitioners although some issues still need to be clarified.

By Sally Nicholes and Lucy Daniel

The Federal Justice System Amendment (Efficiency Measures) Act (No. 1) 2008 (Federal Justice System Act) commenced on 4 January 2010. This legislation amended the Family Law Act 1975 (FLA) and introduced significant changes to the formal requirements of binding financial agreements (BFAs).

BFAs are agreements made between parties before, during or after they enter into a marriage or de facto relationship, stating how their property and financial matters should be divided if the relationship breaks down. BFAs entered into before marriage are colloquially known as “pre-nuptial agreements” or “pre-nups”.

By entering a BFA, parties effectively oust the jurisdiction of the Family Court of Australia to determine how the parties’ property matters should be settled in accordance with the FLA. Accordingly, the FLA sets out various criteria that BFAs should include to ensure that parties make an informed choice when entering a BFA. Before the commencement of the new federal law in January 2010, there were several criteria that BFAs had to comply with to be binding. These included that:

  • the agreement must be signed by all parties;
  • the agreement must contain a statement that each party had been provided with independent legal advice from a legal practitioner regarding the effect of the agreement on their rights and the advantages and disadvantages of making the agreement. The agreement was also required to contain as an annexure a certificate signed by the relevant legal practitioners stating that such advice had been given; and
  • after the agreement is signed, the original agreement must be given to one of the parties and a copy provided to the other party.

As perhaps could be expected, a significant number of cases have been brought before the Family Court disputing whether a BFA was binding or whether the parties could bring Family Court proceedings to settle their property matters under the FLA. These cases are frequently initiated by partners who would be entitled to a significantly larger proportion of property under the FLA than under the private arrangements they had made in the BFA.

A landmark case in this regard was Black and Black.1 In this decision, the Full Court of the Family Court found that the legislative requirements for a BFA to be binding should be enforced to a very high standard. The Full Court found that “care must be taken in interpreting any provision of the [Family Law] Act that has the effect of ousting the jurisdiction of the court”, and consequently formed the view that strict compliance with the statutory requirements is necessary for a BFA to be binding to the exclusion of the FLA.

This decision ushered in a wave of apprehension among family law practitioners. Were the BFAs that they drafted for clients sufficiently compliant with the legislative requirements to be enforceable under the approach in Black and Black? There was concern that the standard set by Black and Black was so high it would undermine practitioners’ certainty and confidence that BFAs would in fact be binding should their clients later rely on these.

The Federal Justice System Act was drafted in response to these concerns, with the Bill’s Explanatory Memorandum explaining that it intended to restore confidence in BFAs following the decision of Black and Black. It seeks to do this through two key amendments. First, it changes the legislative criteria required for a BFA to be binding. And second, it provides that, in certain circumstances, the Court may find that a BFA is binding despite non-compliance with these criteria, in departure from the decision in Black and Black.

New legislative criteria for BFAs

In contrast to the former legislative criteria listed above, the amended FLA now provides that a financial agreement will be binding on the parties to the agreement if:

  • the agreement is signed by all parties;
  • before signing the agreement, each 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 of making the agreement at the time the advice was provided;
  • either before or after signing the agreement, each party was provided with a signed statement by the legal practitioner stating that the independent legal advice referred to above was provided to that party (whether or not the statement is annexed to the agreement);
  • a copy of the signed statement referred to above that was provided to a party is given to the other party or to a legal practitioner for the other party; and
  • the agreement has not been terminated and has not been set aside by the Court.

Certificate of legal advice

This means that BFAs no longer need to include a certificate of legal advice signed by each solicitor. Each practitioner must provide the legal advice before the parties enter the agreement, and each practitioner must provide to their client a signed statement that such advice has been given and provide a copy of this statement to the other party. However, this statement may be provided before or after the parties sign the agreement, and does not need to be annexed to the agreement.

The provision that the statements may be provided after the parties sign the agreement may be intended to encompass the decision in Ruzic and Ruzic,2 in which the legal practitioners signed fresh certificates two months after the BFA was executed as the original certificates did not comply with statutory requirements. Stevenson J in this case found that the certificates signed after the agreement were sufficient and therefore the agreement was binding. Before the Federal Justice System Act commenced, it was unclear whether the high standard of compliance required by Black and Black had overturned this decision in Ruzic.

On one hand, the changes to the legislative requirements introduced by the Federal Justice System Act will make BFAs “more enforceable” in circumstances such as those in Ruzic, by relaxing the procedural requirements regarding certification of independent legal advice. On the other hand, by requiring that each practitioner provide the statements while not requiring that they be provided before the signing of the agreement or annexed to the agreement, the legislation potentially creates more uncertainty regarding enforceability. If a statement has been provided after the BFA is signed, or held separately from the BFA, the content of the BFA itself cannot be relied on to verify whether the statement has in fact been provided and whether the BFA is binding. In this case, parties will have to go back to personal records and their previous solicitor’s file to confirm this. This may create difficulties and delay, especially if there has been a long period of time between the parties entering the BFA and their separation or if one party changes solicitors in the meantime. Consequently, it would remain good practice for legal practitioners to include the statement of legal advice as an annexure to BFAs, as they did previously with the certificate of legal advice.

Provision of legal advice

A second change is that the legislation now explicitly requires that independent legal advice be provided before the BFA is executed, rather than requiring that a certificate of legal advice is provided.

What would happen if the practitioner provides a statement that they have given the legal advice, but in substance this advice was insufficient or inaccurate? Some guidance may be taken from the case of Kostres and Kostres.3 In dealing with the legislative requirements in its previous form, Federal Magistrate Wilson found in this case that “it is not open to a party to argue that the substance of the advice given was incorrect or given on the false premise . . . if the advice was wrong (in the sense of being given negligently or in breach of retainer) the party to the marriage has rights elsewhere”. Wilson FM’s decision has been overturned on appeal to the Full Court of the Family Court; the Full Court’s judgment did not address or contradict this aspect of his reasons. Therefore, it is yet to be seen whether the Court would be willing to find that a BFA is not binding because the legal practitioner had not provided sufficient independent legal advice required by the new legislation. In any event, it is good practice for legal practitioners to put such advice in writing and to ensure that this comprehensively covers all relevant aspects of the agreement.

The original and copy of the BFA

Finally, the new legislation retains the former requirement that there should only be one original agreement, which should be given to one party, and an exact copy of the agreement, which should be given to the other party after execution. The judgment of Murphy J in Fevia and Carmel-Fevia4 is relevant to this point. Murphy J found that the original and copy of the BFA must be identical, and cannot have signed counterparts of the agreement. His Honour also considered that it was possible for the parties to sign both copies of the agreement, rather than have one original signed copy and a second photocopy; however, in this case, one copy must be marked “original” and the other marked “copy”.

In Fevia, Murphy J also considered the timing of the delivery of the copy to the parties. His Honour found that the legislation did not require that the copy be given to each party immediately after its execution, but that it should be provided to each party “within a reasonable time”, as failure to provide a party with a copy had “the potential to create injustice” as that party may not be able to rely on or prove the BFA. Murphy J found that implying the concept of reasonable time was appropriate as this was commonly used throughout legislation and in business dealings. While his Honour did not give a specific example of what constituted a “reasonable time”, he did find that delivery of a copy of the agreement seven years after the other party had signed it breached the reasonable time requirement.

Departing from Black and Black

As foreshadowed above, the changes introduced by the Federal Justice System Act are not limited to the content of the legislative criteria for BFAs. The amending legislation also provides that if the BFA is signed by all the parties, but one or more of the criteria relating to:

  • obtaining the legal advice;
  • having a signed statement by the legal practitioner stating that the legal advice was provided; or
  • exchange of such statements –

has not been satisfied, the financial agreement can still be binding on the parties if:

  • the Court is 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); and
  • the Court makes an order declaring the agreement is binding on the parties.

This is again intended to address the concern that the Black and Black decision might cause an unfair outcome if parties could not enforce the agreement that they both had intended to be binding, on the basis that some procedural formalities were not strictly complied with. It is important to note that when considering the “unjust and inequitable” requirement here, the Court should not have regard to change in circumstances since the agreement was made. Therefore, the Court must be satisfied that it is unjust and inequitable to prevent the parties from relying on the BFA simply because of a failure to strictly comply with criteria – rather than because, for example, it is particularly hard for one of the parties not to be able to rely on the BFA because they have become unemployed or ill.

It should be noted that the Court is given a broad discretion here to determine when circumstances will be unjust and inequitable. Therefore, it is open to the Court to effectively follow the outcome in Black and Black to decide that the BFA should not be binding because of failure to comply with the legislative requirements, so long as it is not unjust and inequitable to do so. Therefore, the amendments do not make the legislative criteria for BFAs redundant. The policy of the changes is not to allow a relaxed attitude on behalf of legal practitioners towards the requirements, but rather to allow the Court to make orders that prevent unjust and inequitable outcomes. In some extreme circumstances, this would involve declaring that a BFA is enforceable, notwithstanding failure to comply with some of the requirements.

Transitional provisions of the amendments

The changes introduced by the Federal Justice System Act apply broadly to all BFAs made on or after 27 December 2000, except for agreements that had been set aside by court order. However, the new requirements that a statement of provision of legal advice be signed by practitioners and given to each party do not apply to agreements made before 4 January 2010. The new provisions allowing the Court to declare that BFAs are binding, notwithstanding failure to comply with procedural requirements, apply to all agreements made since 27 January 2000. Such retrospective application of legislation is not common, and is therefore significant in illustrating the legislature’s strong commitment to allowing BFAs to be binding and enforceable, where necessary to avoid injustice, even if they do not meet all formal requirements.

In practice, this retrospective application of the legislation will be relevant to clients who no longer wish to be bound by a BFA entered before 4 January 2010, and who were intending to rely on the reasoning in Black and Black to get out of the BFA. These clients will no longer be able to do so if the other party can demonstrate that avoiding the agreement would have an unjust and inequitable outcome.

The amendments will introduce some changes to family lawyers’ practices regarding BFAs. For example, precedents should be amended to replace the certificate of independent legal advice with a statement, which can be provided after the agreement is executed if necessary. To ensure that the document is self-contained, however, it will remain good practice to annex this statement to the agreement as well as providing independent copies to all parties. However, practitioners who formerly kept to good practice procedures, such as providing comprehensive written legal advice, and ensuring that agreements were promptly signed and copies delivered to all relevant parties, should not be substantially affected by the changes.

The main issue to be resolved is in regard to what will constitute an “unjust and inequitable” outcome that will justify the Family Court declaring a non-compliant agreement to be binding. Until case law has settled this point, there may be some uncertainty for practitioners whose clients are seeking to either rely on or set aside a BFA that does not appear to have met all statutory requirements. If the Court maintains the strict approach established in Black and Black, notwithstanding the legislative changes, it will import a high standard to this unjust and inequitable requirement and therefore be willing to find that non-compliant agreements are not binding, despite the new legislation. However, the clear intention of the legislation is to allow agreements to be enforceable in a broader range of circumstances, and not only where there is absolute and strict compliance with statutory requirements. If the Court incorporates and adopts this approach, the standard for the unjust and inequitable requirement may be less high. Either way, practitioners should no longer read non-compliance with statutory requirements as automatically invalidating the BFA, but should rather consider the global effect of this on the parties involved.

SALLY NICHOLES is a partner with Nicholes Family Lawyers, with wide experience in international family law disputes, financial agreements between partners and complex property settlements. LUCY DANIEL is an associate with the firm, working in areas including property disputes and binding financial agreements.

1. (2008) FLC 93-357.

2. (2007) FamCA 473.

3. (2008) FMCA Fam 1124.

4. (2009) FLC 93-411.


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