On the 8th of November 2017 the High Court of Australia handed down a widely anticipated decision in Thorne v Kennedy  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:
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.
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:
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:
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.
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.
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.