Prenuptial Agreements
A pre-nuptial agreement (or “prenup”) is a form of Binding Financial Agreement (BFA).
Prenup is the term commonly used when a BFA is signed prior to a marriage, and the term “postnup” (post-nuptial agreement) is used if it is signed after the marriage.
All BFAs, whether prenup or postnup, set out how the assets of the marriage will be divided if the couple separate in the future. A BFA can also include agreements about maintenance, financial arrangements for children and other property matters. A BFA is a way for parties to agree that they will not be subject to the property settlement rules contained in the Family Law Act 1975 (Cth).
Thorne v Kennedy
For a prenup or postnup to be valid, the parties must enter into the agreement of their own free will. This means that it must not be the result of undue influence or unconscionable conduct.
An important Australian case concerning BFAs and free will is Thorne v Kennedy (2017). The couple in this case signed both a prenup and a postnup during their relationship. The key facts in Thorne v Kennedy were:
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- The husband (Mr Kennedy) was more than thirty years older than the wife (Ms Thorne);
- The parties met online;
- The wife was from Eastern Europe, spoke little English, and had few assets;
- The husband was an Australian property developer with assets in excess of $18 million;
- The wife received a copy of the prenup only 10 days before the date of the wedding;
- The prenup specified that in the event of separation she would receive a lump sum of $50,000, as long as the parties were married for at least three years;
- The wife had independent solicitors, who advised her that she should not sign the prenup as it was against her own best interests;
- If the wedding did not proceed, the wife would have no right to remain in Australia and her family, who had been flown in for the wedding, would also be stranded in Australia;
- The wife also signed a postnup, almost identical to the terms of the first agreement with only minor amendments, shortly after the marriage; and
- The parties separated after 4 years of marriage, at the instigation of the husband.
Following the separation, the wife applied to the Federal Circuit Court under the Family Law Act for the agreements to be set aside. At first instance the trial judge set aside both the prenup and the postnup as void.
The husband’s estate appealed this decision after his death to the Full Court of the Family Court of Australia. The Full Court found that the husband had made no misrepresentations and there was no undue influence or unconscionable conduct. The Full Court found the agreements to be fair and reasonable in the circumstances.
However, the wife was not satisfied and appealed to the High Court of Australia.
That High Court unanimously held that both agreements were voidable due to unconscionable conduct, and the majority also found them voidable due to undue influence. The High Court also considered the doctrine of duress, although it was ultimately not necessary to decide upon this issue.
The majority of Kiefel CJ, Bell, Gageler, Keane and Edelman JJ identified some factors which may have “prominence” in determining that a Binding financial agreement was not made freely:
- Whether the agreement was not subject to negotiation;
- The emotional circumstances involved in the agreement, including any explicit or implicit threat to end a marriage or engagement;
- Whether there was any time for careful reflection;
- The nature of the parties’ relationship;
- The relative financial positions of the parties; and
- The independent advice that was received and whether there was time to reflect on that advice.
Undue influence
Undue influence is an equitable doctrine. This means that if someone enters into an agreement without free will, the agreement is voidable by that party. In simple terms, if you are forced into an agreement, you can apply to get out of it.
In Thorne v Kennedy, the High Court agreed with the trial judge that the terms of the agreements were “grossly unreasonable”. The majority agreed that the financial agreements were the result of undue influence and the wife had a lack of free choice (Gordon J dissenting).
Unconscionable Conduct
To be considered unconscionable, conduct must be more than simply unfair—it must be against conscience according to the norms of society. Unconscionable conduct arises when one party to a transaction takes advantage of the fact that the other party has a special disadvantage that seriously affects their judgment as to their own best interests.
The decision of the Full Court of the High Court was unanimously that the financial agreements in Thorne v Kennedy were the result of unconscionable conduct (Nettle J and Gordon J in a judgement separate to the majority).
The High Court also agreed with the primary judge’s finding of undue influence. Nettle J found that the husband created his wife’s special disadvantage by bringing her to Australia, and keeping her here with the belief he would marry her. The husband exercised undue influence when he presented his wife with the agreement and refused to marry her unless she entered into the Agreement on his terms. The husband also created undue influence by actions such as waiting downstairs while she visited her solicitor.
The High Court acknowledged that a BFA is usually more favourable to one party. Often, the whole point of agreements of this nature is to allow an imbalance that would otherwise be prevented by the Family Law Act. However, the Court found that if an agreement is grossly unreasonable even for an agreement of this nature, this is indicium of undue influence and/or unconscionable conduct.
Bad Bargains
The result in Thorne v Kennedy is particularly of note because the Family Law Act actually makes provision for parties to enter into what would otherwise be considered a “bad bargain” (s 90g(1A)). Under the Act, an agreement may be upheld, notwithstanding it is a bad bargain, if the court is satisfied that it would be unjust and inequitable to void the agreement.
The High Court emphasised in Thorne v Kennedy that they will not always uphold a bad bargain, and that the recognition that something is a bad bargain can, in fact, contribute to a finding that the agreement should be set aside. It is therefore unclear post Thorne v Kennedy what agreements will be found to be acceptable bad bargains within the meaning of the Act, other than the court must not consider that voiding the agreement would be unjust in all of the circumstances of the case.
Implications for parties entering into Financial Agreements.
The decision in Thorne v Kennedy does not substantially change the law. However, it highlights that when one party to a prenup is in a superior financial position to the other party, the agreement is vulnerable to challenge.
This case also demonstrates that an agreement may not be binding even if both parties receive proper legal advice and fulfil the other technical requirements of the Family Law Act. The parties need to consider the specific circumstances at play, and question whether there is an inherent inequality between their bargaining positions.
What we can learn from Thorne and Kennedy
The decision in Thorne v Kennedy offers are a number of key lessons for anyone who is planning to enter into Financial Agreements prior to marriage or cohabitation.
This first lesson is that the courts will pay particular attention to the timing of the agreement and the wedding itself. A prenup agreement which is signed in the lead up to a wedding is sometimes described as “ink on the wedding dress”. The presumption is that if all of the wedding arrangements are made, then it is difficult for a party to negotiate freely and consider whether the financial agreement is really in their best interests. Therefore, it is better to enter into the financial agreement even before the wedding had been announced, so that the matter is still private and there is less pressure on both members of the couple. The Court is less likely to consider an agreement reached in cold blood to be the result of unconscionable conduct and/or undue influence.
As is also evident from Thorne v Kennedy, receiving independent legal advice is not in itself sufficient to prevent the court finding that there has been unconscionable conduct and undue influence. That is not to say that independent legal advice is not essential. Rather, it is critical that both parties (and especially the party who is receiving the less advantageous bargain) have legal advice which is truly independent and timely.
Certainly, as Thorne v Kennedy demonstrates, it is not appropriate for one party to be waiting impatiently downstairs while the party in the weaker position speaks to the lawyer, with the agreement ready for signing and the wedding eminent. Preferably, each party should select their own solicitor, visit the solicitor by themselves on several occasions and take time between visits to reflect on their situation. The parties should also seek legal advice as early as possible, so that they can consider the advice calmly with plenty of time for negotiation.
A final lesson from Thorne v Kennedy is that even arranging for a second postnup agreement may not be sufficient to save a prenup that was entered into through undue influence or unconscionable conduct. The Court found in this case that the factors that prevented the wife from exercising free will and independent judgement prior to the wedding were still relevant immediately after the wedding. In the case of Thorne v Kennedy the second agreement was entered into so quickly after the wedding that they events were practically contemporaneous and there was very limited time for the bride to have contemplated the bargain that she had made.
A factor that was underlying the decision in Thorne v Kennedy was the fact that some bad bargains are simply too bad. So one lesson to take away from this case is to approach the drafting of a binding financial agreement with a generous spirit. The party to a marriage to a millionaire with $18M should not leave the marriage with a conditional payment of $50,000. If the BFA had specified a more proportionate amount, which reflected a genuine consideration of the spouse’s future financial needs and contributions to the relationship, then it would not have been so open to a finding that it was an unreasonably bad bargain.
Summary of key Lessons:
- Parties intending to enter into a prenuptial or postnuptial agreement, or any Binding financial Agreement at all, should not leave it until the last minute to obtain independent legal advice;
- Parties should allow sufficient time between obtaining independent legal advice and their intended wedding date, so that both parties can exercise independent judgment, to avoid a potential ink on the dress/tuxedo agreement; and
- Do not rely on a prenup or a postnup to save a bad bargain. Rather, ensure that both parties do genuinely have the capacity to exercise free will and consider whether an agreement is in their best interests.
Speak to a family lawyer that specialises in prenuptial agreements today!
Binding Financial Agreements are complicated contract law documents. They can allow you to contract out of the otherwise binding provisions of family law, so they must be prepared by solicitors with significant experience in both family and contract law.
Unified Lawyers offer specialist assistance with all forms of Binding Financial Agreements. Please call 1300 667 461 today for legal advice or representation.
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