The law governing financial agreements is technical and complex. This guide gives practical direction for practitioners advising on agreements to help ensure they are binding and avoid claims.
Financial Agreement requirements
Sections 90G and 90UJ of the Family Law Act 1975 (the Act) prescribe what is required to achieve an effective Financial Agreement must be “binding” on the spouse parties. Strict compliance with the sections is mandatory. Once made binding, the agreement has the effect of excluding the power of the court to make any property or spousal maintenance order under Part VIII or Part VIIIAB of the Act in respect of any financial matter dealt with by the agreement.
It is worth noting that the Act refers to Financial Agreements not Binding Financial Agreements although many practitioners colloquially refer to them as that. In this article they will be referred to as Financial Agreements.
An important prerequisite is the provision of independent legal advice before the agreement is signed by the client and also a signed Statement by the practitioner that this advice has been provided in relation to:
(a) the effect of the Agreement on the client’s rights
(b) the advantages and disadvantages, at the time that the advice was provided, to the client of the making of the Agreement.
Those words give the impression of simplicity, but the task is much more complex than meets the eye.
The following matters should always be considered when practitioners receive instructions to give advice on a financial agreement.
Don’t act in a knowledge vacuum
Lawyers are frequently approached to read an agreement drawn by the other party’s lawyer and give some quick advice. Often in this scenario the “client” is generally new to the firm and, inevitably, the financially weaker party. This happens, for example, when there is time pressure from an imminent wedding or there is a desire to save on legal fees. It is not possible to give appropriate advice in these circumstances. Such instructions should be rejected.
Advise on THE agreement not AN agreement
Advice of a general nature concerning the legal effect of a Financial Agreement is not what is required under the legislation. The LPLC sees instances where the client is simply told that they will lose the right to bring a property settlement or spousal maintenance application in court if they have a Financial Agreement. Although such general advice may be a way of setting the scene, the practitioner must provide advice that is directed to the specifics and particulars of the agreement before them and how it affects the rights of the client.
The advice should be given in writing
The advice should be contained in a detailed letter which covers all topics. Having a good precedent letter of advice that can be easily customised for each matter is good practice, but it must be carefully edited to reflect the advice given. The letter of advice should be provided to the client in sufficient time to allow them to consider its contents at their own pace.
The letter should then be supplemented by a meeting with the client, without the other party present, at which all of the issues are explained to the client and they have an opportunity to ask questions. Check the client has understood the advice. It is a mistake to simply ask the client, “Did you understand my letter?” as the answer will inevitably be yes. Clients may feel self-conscious disclosing that they do not fully understand the advice and a discussion will often reveal issues about which the client will seek additional information. In other words, they don’t know what they don’t know.
Identify the client’s rights
Before any advice can be given about the effect of the agreement on a client’s rights, those rights must be identified. It is usual that the rights being considered refer to institution of proceedings for property or spousal maintenance, but there may be others which are peculiar to the individual.
A statement that the rights exist is insufficient. It is necessary to quantify those rights by reference to the current known circumstances. That involves having some knowledge of the parties’ current assets and liabilities, an appreciation of the income position of each of the parties, an understanding of each of the factors identified in sections 75(2) and 90SF(3) and some educated guesswork. It is only then that a practitioner is able to approximate the result of a court case. That estimate should be compared to the result produced by the operation of the Financial Agreement. Through this comparison the client will be able to appreciate, in monetary terms, the rights being acquired or given up. This provides the first limb of the statutory requirement.
Identify the advantages and disadvantages
The advantages and disadvantages of entering into the agreement should also be listed in the letter of advice and explained. The advantages usually centre around certainty and finality. The disadvantages of signing away the right to relief under the Act cannot be underestimated. The legislation requires the advantages and disadvantages to be fixed at the time that the advice was provided. It is obvious that no one can predict the future, and the question must be asked whether the needs and expectations of each party will be the same in 20 years’ time as they are when the advice is given.
Unless the agreement is particularly generous, the disadvantages have to be carefully explained. It is common that one party will be worse off if the relationship fails. If that party is your client, you need to make sure that they understand the consequences of putting their financial future at risk.
Ultimately it is for the client to decide whether they wish to proceed, but they must be armed with sufficient information to make an informed choice.
Record keeping
A future challenge to the agreement may involve an assertion that the client did not receive the requisite legal advice, resulting in the lawyer who advised to be called to give evidence. Your client will become your adversary. They will assert that you did not discharge your professional obligations. Their spouse may allege that you owed them a duty of care and sue you for damages arising from the failure of the agreement.
This could happen many years after the event when your memory of the circumstances is fallible. Comprehensive and contemporaneous file notes of what was said and done, what advice was given and records of time spent with the client are a vital resource which will prove an invaluable aid to refreshing your memory should you need to enter the witness box. Without contemporaneous file notes and letters of advice, the courts are also often unwilling to accept that adequate advice was given.
By making the assertion that the client did not receive proper legal advice they will waive legal professional privilege over your communications. That will likely result in your file going into evidence. Make sure that you would not be embarrassed if the file is read by a judge. Unnecessary commentary or superfluous humour should be avoided.
Even though files can be destroyed after seven years, it is good practice to keep Financial Agreement files indefinitely, as the agreements may not come into effect long after the expiration of seven years.
| Getting it right example
The client was only going to receive approximately one percent of current total assets owned by the parties. The practitioner assessed that this did not properly recognise their client’s contributions to the relationship at the time and raised the concerns in conference with the client and recorded them in an advice letter. It was a comprehensive seven-page letter which covered the following things.
When the client complained about the practitioner’s costs and the practitioner’s questions about potential duress the practitioner again pointed out the inequity of the agreement. The client responded that they understood the agreement was one-sided but felt it wouldn’t be fair to fight for anything more and the decision was based on their own morals. The practitioner was able to negotiate some minor changes to the agreement, but felt the version ultimately signed by the parties was very one sided. Several years later the parties separated and there was some indication that the practitioner may be blamed for an unfair settlement by not adequately advising the client. After producing the comprehensive letter of advice to the client’s new lawyers, nothing further was heard about the matter. | ||
Vulnerability of Financial Agreements
Practitioners acting for the financially stronger party keen to have the agreement signed shortly before the wedding should warn the client about the risks of trying to pressure the other party into signing even in the face of independent legal advice.
| In the High Court case ofThorne v Kennedy [2017] HCA 49 the plurality comprising Kiefel CJ, Bell, Gageler, Keane and Edelman JJ held two financial agreements voidable due to undue influence and unconscionable conduct. The parties met online and the wife, an Eastern European woman, moved from the Middle East to Australia to marry. The husband was a 67-year old property developer who had substantial assets and was divorced with three adult children. The wife received independent legal advice from an accredited family law specialist that the first agreement was ‘entirely inappropriate' and she should not sign it. Despite that emphatic advice, she signed the agreement four days before the wedding at the husband’s insistence. He said the wedding would not go ahead if she failed to sign the agreement. By that time, the wife’s family had travelled to Australia for the wedding. The wife then signed the second agreement in similar terms a month after the wedding, despite again being urged by her lawyer not to sign it. The plurality upheld the primary judge’s findings that ‘every bargaining chip and every power was in (the husband’s) hands’ and the wife was powerless to act in any way other than to sign the agreements. If the relationship ended she would not be entitled to remain in Australia and she had little to return to overseas. Notably, the plurality found the primary judge was correct to consider that a party signing a financial agreement where its terms were grossly unreasonable can be an indicium of undue influence. | ||
This case serves as a reminder that financial agreements can be vulnerable to challenge even where both parties received independent legal advice. Further information on the risks of preparing financial agreements can be found in LPLC’s practice risk guide Focusing on family law.
Thanks to Martin Bartfeld AM KC for the majority of this guide. Martin practises in Family Law and Domestic Relationships matters and is a Family Law Arbitrator.
