DLS Updates – Binding Financial Agreements (BFA)

Binding Financial Agreements

There are many names for Binding Financial Agreements (BFA), including;

• Pre-nuptial Agreements (commonly known as pre-nups),
• Post-nuptial Agreements (post-nups); and
• Cohabitation Agreements.

They are known by the courts as Binding Financial Agreements. There have even been movies about them and their enforceability including plenty of sensational newspaper stories.

BFA’s were first made famous in the early two thousands by celebrities like Brad Pitt, Angelina Jolie and Nicole Kidman. Famously, it was rumoured that Brad Pitt and Angelina Jolie’s pre-nuptial agreement included an infidelity clause where Angelina Jolie allegedly got primary custody of the children if Brad Pitt was to ever stray while Nicole Kidman and Keith Urban’s pre-nuptial agreement allegedly includes a clause that absolves Nicole Kidman of any financial responsibility if Keith Urban were to ever use illegal drugs or drink to excess.

Due to the influence of celebrity culture; BFAs are mistakenly thought to be able to include any kind of ‘lifestyle’ clause you want. Of course, anything can be written into the contract, but not everything will be enforceable in the courts. For example, clauses about faithfulness or weight gain are simply not legal and have been regularly dismissed by our courts.

How do they work?

A BFA allows a couple to agree in advance on an acceptable division of assets. After a relationship between a couple breaks down or is no longer workable, a BFA can reduce the financial stress of a separation and allow the couple to amicably separate without the need for costly, time-consuming and stressful court action.

Therefore entering into a properly drafted and executed BFA can prevent the courts from interfering with the agreed property distribution and provide certainty at the time of the breakdown of any relationship.

When do the parties enter into a BFA?

BFA’s can be entered into before the commencement of a marriage or relationship or at any point during the marriage or relationship and even after separation.

Are they Binding?

The short answer is that they are binding, provided they have been set up correctly. To be binding, there are certain requirements that BFA’s need to meet, if these items are not met, then the agreement can be void or set aside. It is important that the parties obtain independent legal advice and have a solicitor draft and sign the document to avoid the agreement being set aside.

In addition, BFA’s should also be reviewed about every two years or after a significant event in the lives of the parties or if there has been a material change in circumstances, such as the birth of a child or one party receiving an inheritance.

Children Born after Signing

If the birth of a child has not been accounted for in a BFA and the court find that following the birth of the child there has been a material change in circumstances, they may decide that the BFA is not valid and should be set aside. However, a BFA will not be set aside just because children are born after signing a BFA.

In Fewster and Drake [2016] FAM CAFC 214 the Court reaffirmed that just because an agreement is unfair, doesn’t mean that it should be set aside. Even if, a party is receiving substantially less than they would have if they had not executed the agreement (pursuant to the Terms of S79 of the Family Law Act), then that by itself is not a sufficient ground to set aside an agreement.

The decision reaffirmed that it is difficult to set aside an agreement just because children are born after the agreement is executed.

The Trial Judge based his position on the fact that the agreement, itself, did not provide recognition for the wife’s contribution as a parent and the neglect of these important contributions by the wife in the agreement meant that the agreement should be set aside.

The Full Court reiterated that there must be a material change in circumstances that has arisen since the signing of the Financial Agreement.

Importantly, the Full Court pointed out that it is the changed circumstances which themselves must give rise to any hardship and not the actual agreement itself.

They stated that people were free to enter into such Binding Financial Agreements as they see fit and there is no statutory provision which enables an agreement to be set aside merely because it is “unfair”.

The Trial Judge’s conclusion that because the agreement failed to provide any provision for the increased responsibility for the child, and that therefore this inevitably creates “hardship” for the wife was incorrect.

Hardship has to be something more than just unfairness – it must be a substantial detriment and more burdensome than any appreciable detriment.

What does a BFA usually cover?

A BFA can specify how the parties have agreed to divide the asset pool in the event the relationship fails. They deal with property, financial resources as well as maintenance, generally described as:

• The financial settlement (including superannuation entitlements);
• The financial support (maintenance) of one spouse by the other;
• The agreed arrangements for the children; and
• Any incidental issues

This means the following practical issues that commonly arise, are dealt with in the BFA:

• Protect existing assets or likely inheritances;
• Ensure that children of previous relationships inherit;
• Preserve family farms or other businesses for future generations;
• Provide more weight to the contribution of a higher income earner; or
• Avoid disputes about financial matters at the end of a relationship.

What are the benefits?

A correctly executed BFA may provide some degree of certainty to the parties and avoid unnecessary arguments, if a relationship ends, as they have agreed in advance as to how the property will be divided.

It can also make parties feel secure knowing that the property they have accumulated before the relationship or marriage is safe. By reaching agreement in advance, the issues that occur after a break up are more likely to be carried out without costly legal expenses or court delays.

In Summary

BFA’s can provide significant comfort to parties before any relationship issues arise. They not only provide certainty if done properly but reduce stress and costs as well as provide a timely solution without having to experience any court delays as would occur if there was a prolonged argument between the parties.

Note though the importance of not only getting it done properly at the beginning but of having BFA’s reviewed from time to time.
If you know someone who may need assistance get them to call us on 61 2 9212 1099 or email info@dls-lawyers.com.