Binding Financial Agreements following the High Court decision of Thorne V Kennedy

March 26, 2018 / Summer Report 2018

Dead and Buried?

On the 8th of November 2017 the High Court of Australia handed down a widely anticipated decision in Thorne v Kennedy [2017] HCA 49 (Thorne v Kennedy). Some legal commentators say it sounds the death knell for Binding Financial Agreements (BFA) as both a pre‑marriage (pre-nuptial) and post‑marriage (post-nuptial) BFA were set aside by the High Court for unconscionable conduct and undue influence.

On 27 December 2000 the Family Law Act 1975 (Cth) (FLA) Part VIII(A) was amended to allow couples to make their own financial agreements prior to the commencement of a relationship, during a relationship or after separation. The agreements became known as Binding Financial Agreements and one of the attractions of using a BFA was that, unlike with the FLA which requires the Court to consider whether proposed financial orders are just and equitable between the parties, a BFA could be financially advantageous to one party over the other.

Since 2000, the Courts have set aside BFAs for often technical reasons, such as whether legal advice was obtained at the right time, but the importance of Thorne v Kennedy coming from the High Court is that it deals with the issue of fairness and the conduct by one of the parties in negotiating the BFA.

The facts of Thorne v Kennedy are as follows:

• Mr Kennedy was a 67 year old wealthy property developer with assets of between $18M and $24M. He had three adult children from a previous relationship.
• Ms Thorne was a 36 year old Romanian woman living in the Middle East with no children. She spoke little English.
• The couple met online in 2006. Ms Thorne came to Australia on a tourist visa to marry Mr Kennedy. She was hopeful of having a child.
• The marriage was scheduled to take place on the 30th of September 2007.
• On the 19th of September 2017 Mr Kennedy told Ms Thorne that she was going to a solicitor to sign a BFA and, if she did not sign the agreement, the wedding would be off. Mr Kennedy told Ms Thorne that his wealth was for his three adult children.
• Some key features of the BFA were as follows:
  • Ms Thorne was to receive maintenance during the marriage of the greater of:
    1. $4,000 per month; or
    2. 25 per cent of the net income from the management rights of a proposed development Mr Kennedy was pursuing.
  • Ms Thorne would be permitted to live rent free in a penthouse located in the proposed development and her family would be permitted to live rent free in a unit located in that development.
  • If the parties separated within the first three years of marriage, with or without children, Ms Thorne would get nothing and the rights mentioned above would also cease.
  • If the parties separated at least after three years without children, Ms Thorne would receive a single lump sum of $50,000 indexed to the Consumer Price Index.
  • If Mr Kennedy died while the parties were living together and were not separated, then the agreement allowed for Ms Thorne to be entitled to:
    1. a penthouse in the proposed development or, if this was not possible, a unit she chose in the same city not exceeding a market value of $1,500,000;
    2. 40 per cent of the net income of the management rights of the proposed development or $5,000 per month indexed annually, whichever was the greater;
    3. a Mercedes Benz motor vehicle that was presently in Ms Thorne’s possession or a replacement vehicle of the same or higher value.

As is required by BFAs, Ms Thorne sought independent legal advice from a lawyer on the 20th of September 2007. Ms Thorne told her lawyer that the Local Council had refused to grant planning permission for the proposed development.

The lawyer advised (confirmed in writing) that there was no provision for an increase to the $4,000 monthly maintenance during the marriage, making the provision granting the maintenance a poor one for somebody in Mr Kennedy’s circumstances.

The lawyer also considered that the allowance of $50,000 was “piteously small” and overall the BFA was the worst she had ever seen.

While consulting with her lawyer Ms Thorne received a phone call from Mr Kennedy to discuss the signing of the agreement. This reaffirmed the urgency with which Mr Kennedy expected the agreement to be signed and compounded the pressure Ms Thorne was under to do so.

• At the time the advice was given by the lawyer, Ms Thorne’s family had come to Australia for the wedding, the reception and accommodation had been booked, and the wedding dress had been made.
• Despite legal advice not to sign the BFA, Ms Thorne signed the agreement four days before the wedding on the 26th of September 2007.
• Shortly after the wedding a second agreement (post‑nuptial agreement) with substantively the same conditions was signed despite Ms Thorne receiving further legal advice not to sign it.
• On the 16th of June 2011 Mr Kennedy signed a separation agreement.
• In April 2012 Ms Thorne commenced proceedings seeking orders that both agreements be declared not binding and/or be set aside and, orders for property settlement and spousal maintenance.

In May 2014 while the Court proceedings were underway, Mr Kennedy passed away and his estate continued to defend the action.

Ms Thorne was successful at trial because the Trial Judge held that Ms Thorne had signed the agreements under duress borne of inequality of bargaining power where there was no outcome for her that was fair and reasonable.  The Trial Judge believed that Ms Thorne’s situation was “much more than inequality of financial position” and he set out six matters which, in combination, led to the conclusion that Ms Thorne had no choice and was powerless:

1. the lack of financial equality with the husband;
2. her lack of permanent status in Australia at the time;
3. her reliance on the husband for all things;
4. her emotional connectedness to their relationship and the prospect of motherhood;
5. her emotional preparation for marriage;
6. the publicness of her upcoming marriage.

The Trial Judge went on to emphasise that Ms Thorne was in Australia to further her relationship with Mr Kennedy and she left behind her life and possessions. If the relationship ended she would have nothing: no job, no visa, no home, no place, no community.

Mr Kennedy’s estate appealed to the Full Court of the Family Court. The Full Court reversed the Trial Judge’s decision and held that both agreements were binding. The Full Court accepted that Mr Kennedy had not engaged in duress, undue influence or unconscionable conduct, holding that the Trial Judge had failed to provide adequate reasons for making those findings and concluding that the agreement bound both parties.

Ms Thorne subsequently appealed to the High Court and was successful.

The High Court held that both agreements were voidable due to both undue influence and unconscionable conduct (the Court found it unnecessary to decide whether there was duress). According to the High Court, the Full Court had not fully considered the principles of duress, undue influence and unconscionable conduct that Ms Thorne had been subjected to.

The focus of the appeal was on whether the agreements should be set aside because Ms Thorne was subject to mitigating factors, namely undue influence and unconscionable conduct when entering into these agreements.

The High Court emphasised that undue influence can arise from widely different sources, one of which was excessive pressure and that the pressure does not necessarily have to be illegitimate or improper. The Court was keen to state that pressure can deprive a person of free choice.

In essence, the High Court substantively agreed with the findings of the Trial Judge taking into consideration the following factors:

1. Whether the agreement was offered on a basis that it was not open to negotiation;
2. The emotional circumstances in which the agreement was entered into, including the threat to end the engagement.
3. There was no time for Ms Thorne to have any careful reflection on the terms of the agreement.
4. Consideration was given to the nature of the parties’ relationship with Ms Thorne having come to Australia on a tourist visa with no friends, family or job and not being able to speak English.
5. The relative financial positions of the parties, with Mr Kennedy having millions of dollars’ of assets, whilst Ms Thorne had no assets.
6. The independent legal advice that was received and whether there was time to reflect on that advice.

Despite legal advice to Ms Thorne not to sign the agreements (which she did not follow), this in itself did not count against her. In fact, the High Court pointed out that because Ms Thorne received strong advice not to sign the agreements but went ahead and signed, this in itself was an event capable of being a circumstance relevant to whether an inference should be drawn of undue influence.

Ms Thorne was deprived of the ability to exercise any or any genuine free choice in deciding whether to sign the agreements due to the will of Mr Kennedy and because she relied fully on Mr Kennedy as a result of him bringing her to Australia to marry him.

The High Court took the view that Ms Thorne had a special disadvantage which extended beyond a difference in bargaining power and Mr Kennedy had partly created this special disadvantage by creating the urgency with which the agreement, prior to marriage, was required to be signed and the haste around signing the post‑nuptial agreement.

Conclusion

We expect that BFAs will still be a valid course of action for some individuals who want to protect their assets in the event of a separation, however there is no doubt that the High Court decision requires careful consideration of the facts of each case and the proposed division of property.

An obvious point to make is that any agreement that is produced just prior to a wedding is likely to be scrutinised very carefully by a Court and would probably run the risk of being set aside. A more appropriate course of action is not to link the signing of an agreement to any specific date or event. There should be time allowed to enable reflection on both the terms of the agreement and any legal advice that a party may receive. One would also expect that if children are born to the parties that appropriate financial allowances for children should be incorporated into any agreement.

Overall it appears that the best way to ensure that a BFA will be held to be binding is to require the terms of the agreement to be fair to the party with less wealth.

Not all factual scenarios will be a stark as in Thorne v Kennedy but the High Court has squarely raised the issue of fairness.  If you are considering entering into a BFA then, now more than ever, it is essential to obtain detail legal advice so talk to us about the terms and enforceability of the agreement.

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This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.