LAST week's High Court prenuptial agreement decision took many legal experts by surprise and served as a wake-up call.
It ruled against a rich property developer who married a younger eastern European bride.
The developer insisted his bride sign a pre-nuptial agreement, otherwise known as a binding financial agreement, in an attempt to protect his assets. But he failed, with the highest court in the land ruling against him and effectively quashing the prenup agreement.
Some legal experts have said this is the end of prenup agreements in Australia.
Amendments to the Family Law Act 17 years ago made it possible for people to enter into regulated financial contacts setting out how to split assets if the relationship dissolved. There were some conditions that needed to be met for this contract to be enforceable by the court. This amendment created the ability for prenups to be used in Australia.
Ensuring prenup is valid
Although some rules need to be followed for a prenup to be valid.
Section 90K of the Family Law Act 2000 spells out a long list of circumstances whereby the prenup can be overturned. It includes situations such fraud and trying avoiding creditors, but the main clause that has been a bone of contention within the legal community has been around the unconscionable conduct clause (90K 1e).
Tash Nolan, a director at Sydney family law firm Nolan Lawyers, explained unconscionable conduct as "knowing someone is in an inferior bargaining position, but proceeding with the contract anyway".
In last week's High Court case of Thorne v Kennedy, Nolan said, "Mr Kennedy knew about Ms Thorne's special disadvantage (both pseudonyms as neither can be identified in a Family Court case). He created it and put her into an inferior bargaining position by bringing her to Australia, where she had no financial means, minimal English language skills and could not be reasonably expected to otherwise survive in the country without the financial support of Mr Kennedy".
In other words, Ms Thorne was not in a position to negotiate the terms of the prenup as she was reliant on the late Mr Kennedy's ongoing financial support, which would be at risk of being taken away if she didn't sign the prenup.
Another element of prenups that Nolan highlights as being relevant in this case is the concept of undue influence, also known as duress.
Nolan explained it this way; "Mr Kennedy had applied pressure to Ms Thorne around signing the prenup saying, 'If I like you I will marry you, but you will have to sign paper. My money is for my children'."
The Thorne v Kennedy case is quite extreme in Nolan's opinion and has raised a range of questions in the legal and wealth management sectors.
Certainly, prenup agreements continue to be a valid asset protection tool, but when entering into these types of agreements it is important to consider the following factors highlighted by the High Court.
Tash Nolan's suggests:
- The prenups should be created through a process of open negotiation. The courts look down upon the "here it is, please sign" types of situations.
- The emotional circumstances in which the agreement is entered into should be considered. Threat to end a marriage or engagement if the prenup is not signed should be avoided. An adverse financial or relationship outcome should not be implied if the prenup is not signed by the other party.
- Make sure each party has sufficient time for careful reflection. Nolan usually gives one to two weeks for her clients to reflect on the draft prenup.
- Be conscious of differences in legal understanding and communication skills.
- Take into consideration the relative financial positions of each party. Be conscious when one side has significantly more assets than the other. The party with the higher level of assets should not use this to their advantage in the prenup process.
- It is a basic condition that each party seeks out independent legal advice and whether there was time afforded to the parties to reflect on that advice.
Prenups will continue to be common beyond this week's High Court ruling but, from a financial perspective, the most obvious advice is to try and stick with the marriage and avoid divorce. Of course, that's easier said than done.
As the late American actor Zsa Zsa Gabor used to say; "Getting divorced just because you don't love a man is almost as silly as getting married just because you do".
James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au