The Sword of Damocles Now Hangs Above All Financial Agreements

The Sword of Damocles Now Hangs Above All Financial Agreements

Financial agreements (also known as pre-nuptial agreements or ante-nuptial agreements) were introduced and recognised in Australia in 2000. Many wealthy individuals instructed their lawyers to draft financial agreements in the belief that the financial agreement would oust the jurisdiction of the Family Law Court, thus safeguarding their wealth in the event of a marriage breakdown. However, the Family Law Act 1975 (Cth) has always provided grounds for setting aside a financial agreement.

On 8 November 2017, the High Court considered the Full Court’s decision in Kennedy v Thorne [2016] and has allowed the appeal.

This article has been structured in a non-legal format to allow all audiences to understand the findings.

The High Court Decision

In the matter of Thorne v Kennedy [2017] HCA 49, the High Court unanimously allowed the appeal, setting aside the orders of the Full Court of the Family Court of Australia. The High Court held that ‘the agreements were voidable due to both undue influence and unconscionable conduct’ (at [2]). In essence, this means that the agreements have been set aside and referred back to the Federal Circuit Court for a determination on the payout amount to Ms Thorne.

The High Court’s finding means that many wealthy individuals who have married a person with somewhat lesser assets and have drafted a financial agreement as a safeguard will now have to reconsider their options should the marriage fail. This decision has long-lasting effects on the security of all financial agreements from now on.

Grounds for Setting Aside a Financial Agreement

The grounds for setting aside a financial agreement are set out in section 90K(1) of the Family Law Act 1975 (Cth). In applying the statute to the factual case matrix in Thorne v Kennedy, the High Court was satisfied that ‘the agreement is void, voidable or unenforceable’ under s 90K(1)(b) and ‘a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable’ under s 90K(1)(e). Further, the High Court considered the principles of law and equity and applied ‘the question of whether a financial agreement is valid, enforceable or effective’ under s 90KA.

The Facts Leading to the High Court

In this matter, the parties met on an internet dating site in 2006; the future wife (Thorne) was a resident of a country in the Middle East and held no assets of substance. The future husband (Kennedy) was a resident of Australia and quite wealthy, with assets in the range of $18,000,000 to $24,000,000. In July 2006, Kennedy travelled overseas to meet and spend time with Thorne. In February 2007, Thorne move to Australia with the intention of marrying Kennedy. Kennedy had informed Thorne that he had two children of a previous marriage and needed to ensure that his children’s financial position was protected and that documents would need to be signed. Kennedy had told Thorne that if she did not sign the pre-nuptial agreement the wedding would not proceed.

The terms of the agreement made no provision for any payment if parties separated within the first three years of the marriage, and made provision for a payment of $50,000 (indexed) to Thorne if the parties separated after three years of the marriage. The problem with the financial agreements in this matter is that they were exceedingly one sided in favour of Kennedy. Thorne retained legal advice, and was informed by her lawyer that it was ‘the worst agreement that she had ever seen’, however, she signed the first agreement and the parties married shortly after in late September 2007. Approximately two months after the marriage, a second financial agreement was signed by the parties.

The parties separated four years after the marriage (June 2011). A separation declaration was signed, and in August 2011, the wife moved out of the home. In 2012, the wife filed an application in the Federal Circuit Court seeking that the financial agreements be deemed non-binding because she had been under duress to sign the agreements.

The wife sought an adjustment of property of $1,100,000, and a lump-sum spousal maintenance of $104,000—the husband filed a response opposing the orders sought by the wife. In 2014, Kennedy died from non-Hodgkin lymphoma.

In Thorne v Kennedy [2015] FCCA 484 (4 March 2015), the trial judge considered the factual matrix and found that the wife had signed the agreements under duress, due to ‘duress borne of inequality of bargaining power where there was no outcome available to her that was fair or reasonable’ (at [94]). Her Honour made orders that the financial agreements were not binding on the parties and were to be set aside.

In Kennedy v Thorne [2016] FamCAFC 189 (26 September 2016), the trustee of the husband’s estate filed an appeal in the Full Court of the Family Court. Their Honours made a judgment overturning the trial judge’s findings of duress, and upheld the validity of the financial agreements binding the parties.

In March 2017, special leave was granted to the wife to appeal the Full Court’s decision in Kennedy v Thorne [2016] to the High Court of Australia.

Fair and Equitable

Was it fair and equitable for Kennedy to pay Thorne $50,000 when his assets were in the range of $18,000,000 to $24,000,000?

Arguably, if Thorne had accepted the $50,000 (which equates to approximately 0.25% of total assets, based on calculation at $20,000,000) she would have been destitute. In 2012, Thorne sought a property settlement of $1,204,000 which equated to approximately 6% of the total asset pool. In hindsight, this would have been a fair payout and would have saved the Court’s time, taxpayers’ money and the parties’ legal fees, as well as the fact that we now have a situation where the High Court has intervened and set a precedent.

The payout may be considerably more than the 2012 application.

Is This the Death of Financial Agreements?

Has the High Court decision made financial agreements difficult to enforce? My view is that it depends on the circumstances of each individual case and so one must simply ask, was the financial agreement unfair, unjust and unreasonable (at [120])? Has ‘one party taken unconscientious advantage of another party’s position of special disadvantage regardless of whether the conduct is otherwise lawful’ (at [74])? In this case, equity has intervened to correct the consequences. Moreover, if an agreement is deemed unfair; for example, the party was powerless other than to sign the agreement, then a court may find the agreement void.

Conclusion

When taking instructions from clients it is of utmost importance for lawyers to critically analyse both the client’s and the other party’s needs and circumstances and provide comprehensive legal advice that is fully documented. As I stated in my previous article (with regard to financial agreements – 30 May 2017) entitled ‘The Concrete of Legality Never Dries’. Lawyers must consider if the financial agreement will be deemed fair and equitable for all parties. If the client is fair and reasonable in their instructions for drafting of the financial agreement then the court need not intervene.

In contrast, if the financial agreement is drafted in a way that it may enliven s 90K, then should the marriage fail the client will not be able to control the outcome.

Finally, if the lawyer and client have reservations, then maybe they should reconsider their options in this regard.

Disclaimer: The information in this article is for general informational purposes only, it is generalist in its approach. The information presented in this article is not legal advice or a legal opinion, and it is not intended to be tailored to the specific circumstances of any particular case and should not be relied upon as such. Persons should seek professional legal advice before acting upon any of the information in this article.

By: Raymond M Earl
DipQA, DipVET, LL.B (Hons), GDipLP, MEI, M.Ed

Principal, Markus Earl Legal