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In Australia, a Binding Financial Agreement (BFA) is a legal document that allows couples to set out how their financial assets and liabilities will be divided in the event of a separation.

BFAs can be entered into before, during, or after a relationship (including marriages and de facto relationships), providing a sense of financial security and clarity for both parties. While BFAs can offer significant benefits, it’s important to understand their limitations and potential pitfalls.

As an experienced family lawyer, I often encounter clients who are surprised to learn that a BFA may not be 100% binding 100% of the time. This article will explore the benefits and pitfalls of BFAs, along with the circumstances under which they may be set aside by the courts.

What is a Binding Financial Agreement?

A BFA, commonly referred to as a “prenup” or “postnup” depending on when it’s made, is governed by the Family Law Act 1975 (Cth). These agreements allow couples to decide how their financial resources will be divided if they separate, rather than leaving the decision to the Family Court. BFAs can cover a wide range of financial matters, including property, superannuation, spousal maintenance, and financial resources such as business interests.

Benefits of a Binding Financial Agreement

1. Financial Certainty and Control

One of the primary benefits of a BFA is that it provides financial certainty for both parties. Rather than leaving property and asset division up to the discretion of the Family Court, a BFA allows couples to have control over how their finances will be handled in the event of separation.

By setting out clear financial arrangements in advance, both parties can feel more secure, knowing that they have already agreed on what will happen to their assets if the relationship breaks down.

2. Avoiding Costly Litigation

Divorce and separation proceedings can be emotionally and financially draining, particularly if there is a dispute over property division. A well-drafted BFA can help avoid the need for protracted litigation by pre-emptively resolving financial issues. This can save both parties time, money, and stress.

3. Protecting Pre-existing Assets

BFAs are particularly useful for protecting assets that one party brings into the relationship. For example, if one partner owns a business, investments, or real estate prior to entering the relationship, a BFA can specify that these assets will remain theirs in the event of separation. This is a valuable tool for business owners, individuals with significant wealth, or those who have children from a previous relationship.

4. Flexibility

A BFA offers flexibility in terms of what can be included in the agreement. Unlike property orders made by the Family Court, which are limited to dividing property and financial resources, a BFA can also address future financial arrangements, including spousal maintenance and ongoing financial support.

Pitfalls of a Binding Financial Agreement

While BFAs offer significant advantages, there are also some potential pitfalls that parties should be aware of:

1. Not 100% Binding 100% of the Time

One of the most significant misconceptions about BFAs is that they are always enforceable. However, there are circumstances under which the Family Court can set aside a BFA. The court has the power to declare a BFA invalid or unenforceable if it finds that certain legal requirements weren’t met, or if there are concerns about fairness and equity.

2. Complex Legal Requirements

For a BFA to be valid and enforceable, it must comply with strict legal requirements under the Family Law Act 1975. Both parties must receive independent legal advice from a qualified lawyer, and each lawyer must certify that they have explained the advantages and disadvantages of the agreement to their client.

Failure to follow these legal requirements can result in the BFA being declared invalid by the court. For example, if one party didn’t fully understand the agreement or was pressured into signing, the BFA may be set aside.

3. Risk of Being Set Aside for Unfairness

Even if a BFA meets all the formal legal requirements, it can still be set aside by the court if it is deemed to be unfair or unconscionable. For instance, if one party experiences a significant change in circumstances—such as a serious illness, the birth of a child, or a drastic change in financial circumstances—the court may determine that enforcing the BFA would lead to an unjust outcome.

Additionally, if there was any evidence of fraud, non-disclosure of assets, or undue influence at the time the agreement was made, the BFA may be set aside.

4. Limited Scope of Court Intervention

While a BFA can provide financial certainty, it also limits the court’s ability to intervene in certain situations. For example, if the BFA does not adequately provide for one party’s financial needs, the court may be limited in its ability to grant spousal maintenance or adjust the division of assets. This lack of flexibility can sometimes result in an unfair outcome for one party.

Are Binding Financial Agreements 100% Binding?

While BFAs are designed to be legally binding and provide financial certainty, they are not always guaranteed to be enforceable. The Family Court has the power to set aside a BFA if certain legal grounds are met. These grounds are outlined in Section 90K of the Family Law Act 1975 and include:

  • Fraud or Non-Disclosure: If one party failed to disclose all of their assets or financial resources at the time the BFA was made, the agreement may be set aside.

  • Duress or Undue Influence: If one party was pressured or coerced into signing the BFA, the court may find that the agreement was not entered into voluntarily and set it aside.

  • Unconscionable Conduct: If the BFA is found to be grossly unfair to one party, particularly in light of a significant change in circumstances (e.g., illness, loss of income), the court may decide that enforcing the agreement would be unjust.

  • Lack of Independent Legal Advice: Both parties must receive independent legal advice before signing the BFA. If this requirement is not met, the agreement may be invalid.

The recent case of Thorne v Kennedy [2017] HCA 49 demonstrates the court’s willingness to set aside BFAs in certain circumstances. In this case, the High Court set aside a BFA on the grounds of unconscionable conduct and undue influence, as one party felt pressured to sign the agreement just days before the wedding, without fully understanding the financial implications.

How to Protect Your Binding Financial Agreement

To maximise the enforceability of your BFA and reduce the risk of it being set aside, consider the following tips:

  1. Full and Honest Disclosure: Both parties must fully disclose their financial circumstances, including all assets, liabilities, and financial resources. Failing to do so may lead to the BFA being invalidated.
  2. Independent Legal Advice: Ensure that both parties receive independent legal advice from qualified family lawyers. The lawyer should explain the advantages and disadvantages of the agreement and provide a certificate of independent legal advice.
  3. Avoid Pressure or Coercion: A BFA should be entered into voluntarily and without pressure. Both parties should have enough time to consider the agreement and obtain legal advice before signing.
  4. Review the BFA Regularly: Life circumstances change over time, and a BFA may need to be updated to reflect those changes. Regularly review your BFA to ensure that it remains fair and appropriate for both parties.

Conclusion

While a Binding Financial Agreement can offer significant benefits, such as financial certainty and protection of assets, it is not without its risks. BFAs are not 100% binding 100% of the time, and there are legal grounds upon which they can be set aside by the Family Court.

To ensure that your BFA is as secure as possible, it’s essential to meet all legal requirements, be transparent in financial disclosures, and seek independent legal advice.

If you’re considering entering into a BFA or need advice on an existing agreement, consulting with an experienced family lawyer can help you navigate the complexities of the law and ensure that your financial interests are protected.

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