Family Law update: Financial Agreements — your questions answered

May 5, 2022

What is a Financial Agreement?

Parties who agree on issues regarding what is to occur in relation to their respective or joint property and/or the payment of spousal maintenance in the event their marriage or de facto relationship irretrievably breaks down, can finalise those financial matters by entering into a Financial Agreement.  

A Financial Agreement is a particular kind of agreement under the Family Law Act 1975 (Cth) (the Act) between parties the effect of which, if entered into properly and is binding:

  • contracts out of the provisions of the Act that apply to the parties’ financial matters; and
  • removes the jurisdiction of the Federal Circuit and Family Court of Australia;

in relation to all financial matters to which the Financial Agreement applies.

Why enter into a Financial Agreement?

A Financial Agreement can address:

  • how all or any of the property or financial resources of either or both of the parties at the time when the Financial Agreement is made or at a later time, is to be distributed – thereby resolving financial claims a party may have or later have against the other under the Act; and
  • to resolve all claims either party may have for the receipt of spousal maintenance from the other.

Financial Agreements can be considered in circumstances where one party wishes to protect and exclude from any possible future claim made by the other party on:

  • property accrued prior to the commencement of the marriage or relationship, including any substitution or accretion of that property;
  • inheritances; and
  • multi-generational family wealth, including familial businesses, trusts, property, income and investments.

Financial Agreements provide parties certainty and eliminates, as much as possible, any future impediment to their relationship or marriage that may arise as a result of uncertainties as to their respective financial responsibilities to each other. Additionally, Financial Agreements:

  • reduce and/or avoid the possibility of litigation if their relationship or marriage irretrievably breaks down;
  • create certainty about their financial and legal responsibilities towards each other; and
  • provides for the settlement of all financial matters and other rights and entitlements that may arise from their relationship or marriage, in so far as is possible under the Act.

A Financial Agreement that is properly entered into and complies with the Act will be binding on the parties.

When can I enter into a Financial Agreement?

There are different sections of the Act that apply to marriages and de facto relationships. Part VIIIA of the Act deals with Financial Agreements for married couples and Part VIIIAB of the Act deals with Financial Agreements for a de facto couple.

De facto relationships

Parties can enter into a Financial Agreement before, during or after their de facto relationship.

Contemplating marriage

If the parties decide to marry at a future time, the Financial Agreement they entered into pursuant to Part VIIIAB will no longer be valid and a new Financial Agreement in accordance with Part VIIIA of the Act will need to be entered into. 

Parties can enter into two separate Financial Agreements (i.e. as de facto parties and as a couple contemplating marriage) or as a combined Financial Agreement.

Marriage

Parties can enter into a Financial Agreement before or during a marriage and/or after a divorce order is made.

Parties to a marriage will continue to be considered spouse parties until a divorce order is made (i.e. parties can enter into a Financial Agreement after they separate but before a divorce order is made).

When is a Financial Agreement binding?

The question as to whether a Financial Agreement is valid, enforceable or effective is determined by a Court pursuant to principles of law and equity.

Financial Agreements which are binding will continue to operate after the death of one party to the Financial Agreement and will be binding upon the legal representative of the deceased party. A Financial Agreement that deals with how property is to be
dealt with following a death, will not necessarily be able to be enforced unless there is a reciprocal arrangement detailed in the deceased party’s Will.

Requirements of a binding Financial Agreement

A Financial Agreement will be binding on the parties if, and only if:

  • it is in writing;
  • it specifies and clearly expresses the relevant sections of the Act that it is made under;
  • it is signed by all parties;
  • there is no other Financial Agreement in force between the parties with respect to any of the matters referred to in the Financial Agreement;
  • each party before signing the Financial Agreement was provided with independent legal advice from a legal practitioner about the effect of the Financial Agreement on the rights of that party and about the advantages and disadvantages, at the time that the advice was provided, to that party of making the Financial Agreement;
  • each party was provided with a signed statement by the legal practitioner stating that the advice referred to above was provided to that party either before or after signing the Financial Agreement;
  • a copy of the statement of independent legal advice provided to a party is given to the other party; and
  • the Financial Agreement has not been terminated by the parties or set aside by a Court.

If the above requirements are not strictly satisfied, the Court has the power to find that the Financial Agreement is not binding. However, a failure to comply with such requirements may not be fatal to the binding nature of the Financial Agreement. The Court can declare that a Financial Agreement is binding on the parties if satisfied that it would be unjust and inequitable if it was not binding.

What are the advantages and disadvantages of entering into a Financial Agreement?

The advantages and disadvantages of entering into a Financial Agreement will vary for each party and will need to be considered at the date of entering into the Financial Agreement. However, below is a list of the general advantages and disadvantages of entering into a Financial Agreement.

Advantages
  • Parties can control their financial and future circumstances in the event their marriage or relationship irretrievably breaks down, without the need to attend Court. Parties can contract out of their financial matters under the Act, including spousal maintenance.
  • Provides parties certainty and finality to their financial circumstances in the event that their irretrievably breaks down.
  • Parties can protect their property and financial resources from a claim made by the other, including any accretion of such property, property purchased in substitution or income derived from such property. Parties can also protect any inheritance they may receive from a claim made by the other.
  • Provides versatility as it can be entered into at various times.
  • Parties can avoid incurring significant legal costs
    to defend a claim for adjustment of property in the event of the relationship or marriage irretrievably breaking down.
  • A party’s entitlements to a financial settlement, which have been detailed in the terms of settlement in the Financial Agreement, may be higher than a financial settlement under the Act.
  • If binding, a party can enforce the terms of the Financial Agreement against the other party, even if there are adverse consequences arising from the provisions in the Financial Agreement, or if the other party’s circumstances change significantly for the worse.
Disadvantages
  • It may be difficult for a party to successfully set aside the Financial Agreement in the future, even if there are adverse consequences arising from the provisions in the Financial Agreement or circumstances change significantly.
  • A party’s entitlements to a financial which have been detailed in the terms of settlement in the Financial Agreement, may be lower than a financial settlement under the Act.
  • If parties do not continue to behave in a manner consistent with the Financial Agreement, such that one party increases the other’s entitlements under the Financial Agreement to a level it did not originally intend, that party will be bound by the Financial Agreement and the outcome that provides the other party with a greater property base than was originally intended.
  • The structure for the ownership of assets and management of a party’s financial affairs to ensure compliance with the Financial Agreement, may be inconsistent with financial and accounting advice designed to maximize your wealth and reduce tax.
  • If binding, a party can enforce the terms of the Financial Agreement against you, even if there are adverse consequences arising from the provisions in the agreement, or if your circumstances change significantly for the worse.

Can a Financial Agreement be terminated?

A Financial Agreement is intended to continue in full force and effect unless it is terminated by the parties. Parties can only terminate a Financial Agreement by:

  • entering into a new Financial Agreement, which includes a provision to the effect that the previous Financial Agreement is terminated; or
  • entering into a termination agreement.

Neither party can unilaterally terminate a Financial Agreement.

Can a Financial Agreement be set aside?  

The circumstances in which a Court may set aside a Financial Agreement or termination agreement are detailed in sections 90K and 90UM of the Act. These include, but are not limited to:

  • if the Financial Agreement was obtained by fraud (including non-disclosure of a material matter);
  • if the Financial Agreement is void, voidable or unenforceable;
  • if, in the circumstances that have arisen since the Financial Agreement was made, it is impractical for the Financial Agreement or part of the Financial Agreement to be carried out; or
  • if a party engaged in conduct with respect to the making of the Financial Agreement that was in all
    the circumstances unconscionable — including any threatening behaviour, coercion, illegitimate pressure and duress.

Financial Agreements signed in contemplation of marriage can be at greater risk of an application to be set aside at a future time on the basis of duress, particularly in circumstances where the Financial Agreement was entered into shortly before the wedding and one party had a greater bargaining position than the other. It is important to leave sufficient time between entering into a Financial Agreement and the date of a wedding.

If a Financial Agreement is set aside, the Court is able to make orders for a property settlement under the Act if it decides that it is proper to do so. In making such Orders, the Court may have regard to the terms of the Financial Agreement but it will not be bound to such terms.

More information

For more information regarding Financial Agreements or if you need legal advice regarding a family law matter, please contact Daniel Kolieb, Senior Associate, on (03) 8600 8874 or dkolieb@kcllaw.com.au.

Additionally, if you are in a relationship and unsure whether you are in a genuine de facto relationship and/or you are contemplating entering into a genuine de facto relationship, I recommend you obtain legal advice regarding what constitutes a genuine de facto relationship and your responsibilities that may ensue once such a relationship commences.

Note: This Family Law update is a guide only and is not intended to constitute legal advice.

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