When couples enter into a binding financial agreement (BFA) in Australia, one of the most important questions they face is whether the agreement will actually hold up if challenged. The courts have the power to set aside a BFA that is deemed unfair or was entered into under certain circumstances. Understanding what makes a binding financial agreement fair under the law is essential for anyone considering this type of arrangement, whether you are planning for marriage, already married, or separating from your partner.
The Legal Requirements for a Valid Binding Financial Agreement
Before examining fairness, it is crucial to understand that a binding financial agreement must first meet specific legal requirements under the Family Law Act 1975 (Cth) to be considered binding. Both parties must receive independent legal advice from separate lawyers before signing the agreement. Each lawyer must provide a signed statement confirming they have given advice about the effect of the agreement on the rights of that party and the advantages and disadvantages of entering into the agreement. The agreement must be in writing and signed by both parties, with each party’s lawyer signing a certificate stating that the required advice was given.
These procedural requirements exist to protect both parties and ensure that each person enters the agreement with a clear understanding of what they are agreeing to and how it affects their legal rights. Failing to meet these requirements can render the entire agreement invalid, regardless of how fair the substantive terms might be. The courts take these procedural safeguards seriously because they form the foundation upon which fairness can be assessed.
Why Independent Legal Advice Matters
Independent legal advice serves as a critical safeguard against unfairness in binding financial agreements. When each party receives advice from their own lawyer, they have the opportunity to understand their rights under the Family Law Act and what they might be giving up by entering into the agreement. A lawyer can identify terms that might be disadvantageous to their client and suggest amendments or raise concerns about whether the agreement is in their best interests.
The requirement for independent advice also helps establish that neither party was pressured or coerced into signing. If one party later claims they did not understand the agreement or felt forced to sign, the fact that they received independent legal advice can demonstrate that they had the opportunity to make an informed decision. This protection is particularly important in relationships where there may be an imbalance of power or where one party has significantly more knowledge about financial matters than the other.
Circumstances That Can Make a BFA Unfair
Under section 90K of the Family Law Act (for married couples) and section 90UM (for de facto couples), courts have the power to set aside a binding financial agreement in certain circumstances. Understanding these grounds helps clarify what the law considers unfair when it comes to these agreements.
Fraud and Misrepresentation
A binding financial agreement may be set aside if it was obtained by fraud. This includes situations where one party deliberately deceived the other about material facts, such as the true extent of their assets, debts, or income. If you discovered after signing that your partner had hidden significant assets or lied about their financial position, this could form the basis for having the agreement set aside. The fraud must relate to matters that would have influenced your decision to enter into the agreement or accept its terms.
Misrepresentation can take many forms, from outright lies about asset values to more subtle forms of deception such as failing to disclose business interests or expected inheritances. Courts expect both parties to approach the agreement-making process honestly and to provide accurate information about their financial circumstances. When this expectation is violated, the resulting agreement cannot be considered fair because one party made their decision based on false information.
Duress, Undue Influence, and Unconscionable Conduct
Agreements entered into under duress or undue influence can be set aside by the courts. Duress involves situations where one party was threatened or coerced into signing the agreement against their will. This might include threats of violence, threats to end the relationship unless the agreement is signed, or other forms of pressure that override a person’s free will. The timing of when an agreement is presented can also be relevant; for example, presenting a BFA to someone days before a wedding and refusing to proceed unless they sign could potentially constitute duress.
Undue influence occurs when one party takes advantage of a position of power or trust over the other to pressure them into an agreement they would not otherwise have entered into. This can occur in relationships where there is a significant age difference, where one party is financially dependent on the other, or where one party has a dominant personality that the other finds difficult to resist. The courts look at the overall dynamics of the relationship and the circumstances surrounding the signing to determine whether undue influence was present.
Unconscionable conduct refers to behaviour that is so harsh or oppressive that it goes against good conscience. An agreement might be unconscionable if one party took advantage of the other’s special disadvantage, such as a lack of education, language barriers, emotional vulnerability, or lack of understanding about financial matters. The courts consider whether a reasonable person in the position of the stronger party would have entered into such an agreement knowing of the other party’s disadvantage.
Material Change in Circumstances
A binding financial agreement can be set aside if there has been a material change in circumstances relating to the care, welfare, and development of a child of the relationship. This ground recognises that when children are involved, their needs must be prioritised, and an agreement that made sense at one point may become inappropriate if circumstances change significantly. For example, if a child develops a serious illness or disability that requires one parent to become a full-time carer, an agreement that left that parent with minimal financial support might be set aside.
This provision reflects the broader principle in family law that the best interests of children are paramount. While adults can make agreements about how to divide their property, the law does not allow those agreements to prejudice the welfare of children. If enforcing an agreement would cause hardship to a child, the courts have the discretion to intervene regardless of what the parties originally agreed to.
Impracticability and Hardship
Courts may also set aside an agreement if circumstances have arisen since it was made that would make it impracticable to carry out, or if carrying out the agreement would cause hardship to a party. Impracticability might arise if assets mentioned in the agreement no longer exist or if the financial circumstances of the parties have changed so dramatically that the original terms no longer make sense. Hardship considers whether enforcing the agreement would leave one party in an unreasonably difficult financial position.
The hardship ground is particularly relevant in long relationships where circumstances have changed significantly since the agreement was signed. A prenuptial agreement entered into when both parties were young professionals with similar earning capacity might become unfair if one party sacrificed their career to raise children while the other’s wealth grew substantially. Courts have the discretion to consider these changed circumstances when determining whether to uphold an agreement.
Factors That Contribute to a Fair Agreement
While the law sets out circumstances in which an agreement can be set aside for unfairness, it is equally important to understand what makes an agreement more likely to be considered fair and therefore enforceable.
Full and Frank Disclosure
One of the most important elements of a fair binding financial agreement is full and frank disclosure by both parties of their financial circumstances. This means providing complete and accurate information about all assets, liabilities, income, and financial resources. Both parties should exchange detailed financial statements before entering into the agreement, and these should be attached to or referenced in the agreement itself. This transparency ensures that each party can make an informed decision about whether the proposed terms are acceptable.
Full disclosure serves multiple purposes in establishing fairness. It allows each party’s lawyer to give accurate advice about the advantages and disadvantages of the agreement. It prevents later claims that one party was deceived about the other’s financial position. It also demonstrates that both parties approached the agreement-making process in good faith. When disputes arise about BFAs, courts often look at whether proper disclosure was made as an indicator of whether the agreement was entered into fairly.
Reasonable and Proportionate Terms
While the law does not require binding financial agreements to result in an equal division of assets, terms that are grossly one-sided may be more vulnerable to challenge. An agreement that leaves one party with virtually nothing while the other retains all assets accumulated during a long relationship may be considered unconscionable, particularly if there were circumstances that contributed to that disparity, such as one party giving up career opportunities to support the family. Courts consider the overall fairness of the outcome, not just whether the procedural requirements were met.
This does not mean that agreements must mirror what a court would order in property settlement proceedings. Parties are entitled to make their own arrangements that differ from what the court might impose. However, the further an agreement departs from a reasonable outcome, the more scrutiny it may attract if challenged. Agreements that provide for a fair division of assets based on the circumstances of the relationship, including contributions made by each party, are generally more likely to withstand challenge.
Adequate Time for Consideration
Fairness requires that both parties have adequate time to consider the agreement and obtain proper legal advice before signing. Presenting an agreement at the last minute and demanding immediate signature is more likely to result in a finding of duress or undue influence. Best practice suggests that agreements should be discussed well in advance of any wedding or other significant event, giving both parties time to consider the terms, seek advice, negotiate amendments if necessary, and make a considered decision about whether to proceed.
Courts have been critical of agreements that were signed under time pressure, particularly where that pressure was created by one party. If you are entering into a binding financial agreement, allowing sufficient time for the process demonstrates good faith and helps protect the validity of the agreement. It is generally recommended that discussions about a BFA begin several months before any wedding or commencement of cohabitation to ensure both parties have adequate time to participate meaningfully in the process.
The Role of Future Circumstances in Fairness
One of the challenges in creating a fair binding financial agreement is anticipating how circumstances might change over time. An agreement that seems fair when signed might become unfair if circumstances change dramatically. Good agreements often include provisions that address potential future changes, such as the birth of children, significant changes in earning capacity, or the acquisition of substantial assets.
Including Review Mechanisms
Some couples choose to include provisions in their agreements that require periodic review or that adjust terms based on specified circumstances. For example, an agreement might provide for different outcomes depending on the length of the relationship or whether children are born. These mechanisms can help ensure that the agreement remains fair as circumstances evolve, reducing the risk that it will be set aside in the future for being impracticable or causing hardship.
Review clauses might specify that the parties will revisit the agreement after a certain number of years or upon the occurrence of specific events such as the birth of a child or a significant change in either party’s financial circumstances. While including such clauses adds complexity to the agreement, they can provide valuable flexibility and help ensure the agreement continues to serve the interests of both parties over time.
Addressing Children and Parenting
Binding financial agreements cannot make binding arrangements about children. Parenting arrangements are always subject to the overriding requirement that decisions be made in the best interests of children, and parties cannot contract out of this requirement. However, financial agreements can and should consider the potential impact of children on the parties’ financial circumstances. An agreement that makes no provision for the possibility that one party might become a primary carer for children may be more vulnerable to challenge if that situation arises.
Thoughtful agreements often include provisions that adjust the financial outcomes if children are born, recognising that caring for children typically affects earning capacity and career progression. By addressing these possibilities upfront, parties can create agreements that are more likely to remain fair and enforceable even as their family circumstances change.
Need Help With Your Binding Financial Agreement?
Creating a binding financial agreement that is fair under the law requires careful consideration of legal requirements, thorough disclosure, and terms that reflect the reasonable interests of both parties. Whether you are considering entering into a BFA or want to understand whether an existing agreement might be challenged, obtaining proper legal advice is essential.
As a law firm offering binding financial agreements across Australia, my law firm can help you understand your rights and create an agreement that protects your interests while meeting all legal requirements. We offer transparent, fixed-fee costs so you know exactly what to expect. Contact our team today by calling 1300 529 888.