Binding Financial Agreements (Pre-Nup) – “Unfair” Assessments and children born after signing

Home News Binding Financial Agreements (Pre-Nup) – “Unfair” Assessments and children born after signing

A recent Full Court decision (Fewster and Drake [2016] FAM CAFC 214) has reaffirmed the previous position of the Full Court of the Family Court that just because an agreement is unfair, doesn’t mean that it should be set aside. Even if, a party is receiving substantially less than they would have if they had not executed the agreement (pursuant to the Terms of S79 of the Family Law Act), then that by itself is not a sufficient ground to set aside an agreement.

Also, the decision reaffirmed that it is difficult to set aside an agreement just because children are born after the agreement is executed.

In this case, the wife was pregnant at the time of signing the agreement and a second child was also born during the relationship. The Trial Judge set aside the agreement on the basis that circumstances had arisen since the time of the agreement that would cause hardship to the wife, if the agreement was not set aside.

The Trial Judge effectively based his position on the fact that the agreement, itself, did not provide recognition for the wife’s contribution as a parent and the neglect of these important contributions by the wife in the agreement meant that the agreement should be set aside.

The Full Court reiterated that there must be a material change in circumstances that has arisen since the signing of the Financial Agreement.

Importantly, the Full Court pointed out that it is the changed circumstances which themselves must give rise to any hardship and not the actual agreement itself.

They stated that people were free to enter into such Binding Financial Agreements as they see fit and there is no statutory provision which enables an agreement to be set aside merely because it is “unfair”.

The Trial Judge’s conclusion that because the agreement failed to provide any provision for the increased responsibility for the child, and that therefore this inevitably creates “hardship” for the wife, was incorrect.

Finally, if there has been a material change that itself had given rise to the hardship, then before setting aside the agreement the Court must undertake some comparison between the parties’ positions if the agreement remains in place (and that of the child) and the position, if the agreement is set aside – it is only be doing so that the Court can then place itself in the position to determine whether there would be hardship if the agreement was not set aside. The Trial Judge did not embark on such a comparison.

Hardship has to be something more than just unfairness – it must be a substantial detriment and more burdensome than any appreciable detriment.

The above decision is a stark reminder to those contemplating on entering into a Binding Financial Agreement (especially those who may find their circumstances changing through the birth of children), that they should not lightly enter into such agreements.

These Agreements are becoming more difficult to set aside, if drafted correctly. The financially weaker party and the party who may, in the future, be the primary carer of children, needs to give considerable thought into entering in to such agreements in the first place and/or ensuring that the Agreement provide an adequate outcome to them in the event of some separation in the future.

The relevance of disparities in current income earning and capacity to earn income in the future under the Family Law Act

Under the third step of a property settlement, the Court has the power to make adjustments in favour of a party after considering and weighing up various factors that are mentioned under sub section 75(2). None of those factors are more important than the other and each of them must be considered and weighed having regard to the particular circumstances of each case.

The problem is that the Court has a wide discretion and there is no black and white answer as to how each different case should be treated.

One of the most common problems that we come across as practitioners working in the field, is the disparity in income earning and capacity to earn an income in the future. In my view, this is often the fact that can be undervalued in some cases by the Court and on other occasions, given far too much weight.

It is suggested that the length of the marriage, together with the circumstance and roles that each party took within that marriage are vitally important factors and are two of the more important factors in determining adjustments for earning capacity.

Let us look at some simple examples:

In Marriage No 1, the husband comes in with $5M in assets and the wife with nothing. After three years the husband has the same asset base and is in his late 60s and is close to retirement. He earns a high income. The wife is in her 50s and has only worked on and off sporadically for the last ten years and earns about $25,000.00 per annum. During this short marriage, the wife gave up work and travelled the world with the husband and enjoyed a high lifestyle.

In Marriage No. 2, let us assume that the parties were married at a young age (in their 20s), and both completed professional qualifications. They decided to have a family at a young age and the wife agreed to give up work and subsequently she gave birth and raised five children of the marriage over the next 20 years. The husband pursued his professional career and some 30 years later the parties separate. The husband has a high income earning capacity and he is at the prime of his career. The wife, has been working part-time in her chosen field, but due to her age and lack of previous experience, is only able to earn approximately $30,000.00 per annum.

It is clear, in Marriage No. 2 – that the impact of the decisions that were undertaken in that marriage, has had a profound effect, not only on the current income earning, but also on the capacity to earn income for the future for wife no. 2. She has effectively, over a long period of time during the relationship, given up the potential to earn substantial income. Not only has she given up the potential, but she has given up the capacity that exists with the husband at the date of separation. The capacity to earn income is made up of all of the skills, contacts, experience and other factors that have gone into someone’s working life. In these cases, there should be a substantial adjustment to the party who has given up a working career and has limited capacity to earn income in the future.

Often, such adjustments are restrained because of the size of the asset pool, or because of the notion that the party who has the substantial capacity has no “security” of employment because of changing industry conditions etc.

However, in other cases, such as in Marriage No. 1, we see often that adjustments are made, because even in a short marriage a party comes out with a lack of any earning capacity. However, there is a stark difference between Marriage No. 1 and Marriage No. 2. In the first marriage, the wife certainly had little or limited working capacity in any event when she married her husband. The length of the marriage and the assumptions and decisions during that marriage, had no impact upon her earning capacity for the future. The husband had experience well before he even met his wife. It is in these type of cases, it is suggested that the adjustments should be minor compared to cases such as Marriage No.2.

The above is an obvious example of differences that arise, but highlights the complexity that surrounds the making of or not making adjustments under this third step for property settlement matters.

Each case is different, but in my opinion more emphasis needs to be placed by our Courts on adjustments in favour of parties who have given up an earning capacity during a long marriage.

Litigation Funding for Parenting Cases

We recently had a Case in our office whereby we successfully obtained a Judgement for our client (the mother of a young child) to obtain what is commonly known as “litigation funding” to enable her to pay her lawyers and Barristers, so as to be properly represented in a Trial in the Federal Circuit Court.

Whilst, most cases with litigation funding involve property settlement (where a party usually obtains an upfront advancement of their property settlement – so as to fund for litigation costs), rarely is such an Application made in parenting cases.

Under s117 of the Family Law Act, there is simply no restraint to making such an Application for a parenting case. S117 does not apply only to property settlement and financial matters.

It seems to be a common misconception that because a party may be eligible for Legal Aid, then that rules them out of having a lawyer of their own choice and having their fees paid for by the other party. The availability or otherwise of Legal Aid is only one factor to be taken into account and is not a determinative factor, nor a fatal factor in the Court’s exercise of discretion.

Whilst, in most cases, litigation funding for parenting matters will not be available, one should not close their eyes to it, especially in circumstances where the following factors may exist:-

  • Where one party’s Application has limited prospects of success and lacks merit;

  • Where a party has failed to comply with procedural directions or Orders of the Court.

  • Where one party is in a substantial superior financial position to the other party;

  • Where the party who seeks the funding is in a poor financial position but is the primary carer of the child, or children;

  • The amount and regularity of Child Support payments;

  • The history of proceedings between the parties;

  • The conduct of the parties towards each other (including, but not limited to issues concerning domestic violence).

In cases, where a party does have the capacity to pay for the other’s legal fees in parenting matters, and some or all of the matters, listed above, substantially exist, then there may be prospects to obtain litigation funding for a parent.

It is suggested that these cases would be the exception, rather than the rule, but in all matters, one should not close off the option, merely because a party is eligible (or may be eligible for Legal Aid) and just because it is a parenting matter and not a property matter.

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