Are Binding Financial Agreements Worth It? The Pros and Cons You Should Know
Good Morning Everyone
Whilst a Binding Financial Agreement can provide significant protection and certainty, it can also create significant problems if it is poorly drafted, unfairly negotiated or allowed to become outdated. The decision to enter into a BFA should therefore be made after considering both sides.
The advantages, in my opinion a BFA are as follows:
Perhaps the greatest advantage is certainty. Instead of leaving the financial consequences of separation to future negotiations or litigation, the parties can agree in advance how particular assets, liabilities and financial resources are to be dealt with.
The Court describes a binding Financial Agreement as a means by which parties can formalise financial arrangements outside Court proceedings.A BFA can be particularly useful where one party enters the relationship with substantial assets including and not limited to real estate; shares; a business or family business or substantial cash investments. A carefully drafted agreement can establish how those assets are to be treated if the relationship breaks down.
A BFA may help protect a business from being divided or becoming the subject of complex litigation following separation. This can be particularly important where:
the business has been in the family for generations;
other family members are shareholders;
the business is operated through companies or trusts; or
the value of the business is expected to increase substantially.
Protection for children of previous relationships. In these circumstances a BFAs can be particularly valuable. A person entering a second or subsequent marriage may want to preserve assets for children of a previous relationship. The BFA can form part of a broader estate-planning strategy.
However, a BFA should not be regarded as a substitute for a properly prepared Will, testamentary trust arrangements or appropriate trust and succession planning.Where a BFA is valid, binding and enforceable, it may prevent the parties from later litigating matters covered by the agreement. Such planning can potentially avoid expensive litigation cost and the appointment of expert valuers. Litigation brings emotional stress and potentially years of uncertainty in the Court process.Where a BFA is valid, binding and enforceable, it may prevent the parties from later litigating matters covered by the agreement. Such planning can potentially avoid expensive litigation cost and the appointment of expert valuers. Litigation brings emotional stress and potentially years of uncertainty in the Court process.
Court proceedings can involve extensive disclosure of financial information. A private agreement can potentially avoid some of the public and adversarial aspects of litigation.
A BFA allows flexibility and can be tailored to the parties’ individual circumstances. The agreement does not necessarily have to divide every asset in the same way. It may deal with particular categories of property or maintenance arrangements. The Court confirms that a Financial Agreement can “cover the field” or deal only with particular issues.
The disadvantages are as follows:
1. The agreement may become outdated when circumstances change dramatically which may require a new BFA to be drafted. Examples of changed circumstances include:
children may be born;
one party may leave the workforce;
assets may increase dramatically;
a business may fail;
an inheritance may be received;
one party may become disabled; or
the parties may acquire assets jointly.
I believe you should review your BFA periodically to ensure that it is valid to your circumstances.
2. A BFA may be challenged and is not immune from Court scrutiny. Section 90K permits a Court to set aside a financial agreement in specified circumstances. These include circumstances where the agreement is void, voidable or unenforceable, and circumstances involving unconscionable conduct. In the case of Thorne v Kennedy the High Court set aside agreements despite the fact that the wife had received independent legal advice. The case demonstrates that independent legal advice is essential but is not an absolute guarantee that an agreement cannot subsequently be challenged.
3. A significant disparity between the parties’ financial positions is not, by itself, a reason why a BFA cannot be entered into. However, the circumstances surrounding the agreement become particularly important where one party has overwhelming bargaining power. The High Court identified matters including:
whether the agreement was negotiable;
the emotional circumstances;
whether there was time for reflection;
the relationship between the parties;
the parties’ relative financial positions; and
the independent advice received.
4.A BFA removes the financial matters away from the Family Court and the Family Law Act 1975 rules and regulations, which if applied may result in a better outcome than the parties have agreed in the BFA.
5. Maintenance cannot always be completely excluded. The legislation contains important limitations concerning maintenance. Section 90F provides that an agreement cannot exclude or limit the Court’s power in certain circumstances where a party is unable to support themselves without an income-tested pension, allowance or benefit.
6. A properly prepared BFA can be expensive where both parties are required to obtain independent legal advice and other costs may be required to be taken into account such as accountants; business valuations; property valuations; obtaining financial advice; taxation advice; and estate planning advice. The cost should be weighed against the potential value of the protection sought.
The question that each couple should ask is “it appropriate, given their assets, circumstances, relationship, future expectations and bargaining positions?”
A carefully negotiated BFA can provide substantial certainty. A rushed, one-sided or outdated BFA can create expensive litigation.
In my final newsletter I will discuss what are the circumstances when a BFA should be considered, what is the approach when drafting a BFA and the warning signs that may make a BFA vulnerable, and the practical alternatives to a BFA.
Wishing you a wonderful day,
Jeffrey Choy
JCL Legal
0419 233 670
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Legal Disclaimer: This guide is for informational purposes only and does not constitute legal advice.
