Binding Financial Agreement
Also known as BFAs
Binding financial agreements (‘BFAs) are becoming increasingly common in Australia between married and de facto couples. BFAs can provide:
• Peace of mind and protection for new couples before saying ‘I do’ or entering into a new de facto relationship.
• BFAs are an indispensable tool for financial and succession planning.
• BFAs are a contract between a person and their partner setting out their agreement for financial separation in the event of a breakdown of their marriage or de facto relationship.
• BFAs can include terms about the division of property including superannuation and spousal maintenance.
BFAs can also be made when couples are settled in a marriage or de facto relationship or even after the breakdown of a marriage or de facto relationship. This is the primary reason why it is incorrect to refer to BFAs as prenuptial agreements. BFA can been entered after the date of marriage and even after the date of separation.
Often mistakenly referred to as a “pre-nuptial” or “post-nuptial” agreement, a Binding Financial Agreement can be entered into by parties before, or during a relationship or marriage, as well as after separation.
What is a prenup? Is a prenup different from a BFA?
BFAs are often mistakenly referred to as a ‘pre-nuptial agreement’ or a ‘prenup’, which is an American concept. A ‘prenup’ (or ‘prenups’ as they are sometimes called) is made before the parties are married.
There is no concept of pre-nuptial agreements, prenup agreements or prenups in Australia. The Acts deliberately do not make any reference to the phrase “pre-nuptial” to draw the distinction the BFAs are a completely different concept. Many people however still refer to BFAs as pre-nuptial agreements or prenups.
The effect of a Binding Financial Agreement is to finalise a property settlement between the parties which is legally binding but entered into as a private agreement between themselves – effectively contracting away from the Family Law Act 1975 and any rights that they may have pursuant to that legislation.
The main advantages of entering into a Binding Financial Agreement, is to enable the parties to tailor a financial settlement that is specific to their needs and requirements. Often it is cheaper and more convenient to enter into a Binding Financial Agreement rather than commence legal proceedings in the Federal Circuit or Family Court, which may also improve the relationship of the party’s post-separation.
The disadvantage of entering into a Binding Financial Agreement is that the Agreement can be overturned by the Court for a number of reasons under the Family Law Act 1975 (Cth), although it is uncommon. For this reason, we recommend an Application for Consent Orders from the Family Court of Australia, the difference being that the agreement reached by the parties is scrutinised by a Court Officer under the Family Law Act to which a Binding Financial Agreement is not.
That said, Consent Orders are only available to a couple that has separated and, in that respect, many couples who are still together, but wish to agree to how their financial matters would be resolved should their relationship fail at some stage, enter into a Binding Financial Agreement.
A Binding Financial Agreement holds the same power as an Order of the Court and can be entered into by married, de facto and same-sex couples. We can assist you in drafting one of these Agreements, tailored to suit your needs, or alternatively we can assist you by providing to you the Independent Legal Advice necessary to execute one of these Agreements.
Parties should consider preparing BFA if they answer positively to any of the following questions:
1. Have you been previously divorced or separated?
2. Do you own your own real estate?
3. Do you own significant other assets?
4. Have you received any significant gifts from your parents?
5. Are you likely to receive any significant gifts or inheritances in the future?
6. Are you a beneficiary of a trust of your parents?
7. Do you have children from a previous relationship?
8. Do you have a reasonably good income earning capacity?
9. Have you reached an agreement about how you want to divide the assets after separation?
For good reason BFAs cannot be entered-into hastily or as a last-minute decision.
To enter-into a valid BFA, parties will need the involvement of 2 experienced and independent family law lawyers.
Drafting a BFA that will withstand future challenge is a complicated task and the lawyers must have an extensive knowledge of all the technical requirements.
There have been a number of cases, that have shown the problems that can arise if BFAs are not prepared properly.
When negotiating terms of a financial agreement to deal with spousal maintenance you should be aware that 90F of the Family Law Act 1975 and 205ZR of the Family Court Act 1997 provides that any provision in a financial agreement that purports to exclude or limit maintenance payments can be ineffective if at the time of the agreement coming into effect the receiving party was unable to support themselves.
Once the terms of the BFA are agreed and drafted into the correct form each party must obtain independent legal advice.
Both parties must receive independent legal advice about the effect of the BFA on their rights and the advantages and disadvantages of entering the BFA.
Each of the parties’ independent legal advisers will then complete a certificate of advice and this will form part of the BFA.
In summary the BFA is binding if and only if:
1. The agreement is signed by both parties
2. The agreement contains, in relation to each party to the agreement, a statement to the effect that the party to whom the statement relates has been provided, before the agreement was signed by him or her with independent legal advice from a legal practitioner as to the following matters —
a. The effect of the agreement on the rights of that party; and
b. The advantages and disadvantages, at the time that the advice was provided, to the party of making the agreement; and
3. The annexure to the agreement contains a certificate signed by the person providing the independent legal advice stating that the advice was provided; and
4. The agreement has not been set aside by a court; and
5. After the agreement is signed, the original agreement is given to one of the parties and a copy is given to the other.
Upon the mutual signing of the BFA, it will come into effect and is legally binding, unless the BFA expressly states that it will come into effect at a later date.
The discretion of the courts to set aside a BFA is wide. Therefore, parties and their family lawyers to a BFA must be careful when preparing and entering into a BFA. You cannot ‘cut corners’ when preparing a BFA.
If a BFA is set aside, the Court then has the jurisdiction to make orders for a property settlement and/or spousal maintenance in accordance with the usual principles.
If the parties wish to terminate, alter or replace their BFA this can be done by mutual agreement. If this is the case the parties will have to enter into a new financial agreement or a termination agreement. Both carry the same formalities and technical requirements of the original BFA.
If either party breaches a term of a BFA then the other party can apply to the courts to enforce the BFA. The court can assist to enforce the terms of the financial agreement as if they were orders of the court.
Some advantages of entering into a financial agreement is having certainly and control over your future financial position, privacy from the usual court process and freedom to do things on the agreed terms. Financial agreements can be helpful in promoting an amicable and reasonably fast division of assets and liabilities after a breakdown of a relationship.
However, financial agreements are not without their faults. Some of the disadvantages of financial agreements include their inability to cater for unforeseeable changes in circumstances, their ability to be set aside (if a circumstance is proved) and the possibility of contractual disputes arising.
Once a BFA is legally binding a party cannot simply change their mind, depart from the terms of the BFA or set aside the BFA.
Even if a party to the BFA passes away, the BFA will continue to operate and be binding on that person’s representative.
In order to set aside a BFA, a party must apply to the court to set aside the financial agreement.
Setting aside a financial agreement can only be ordered in limited circumstances. The Court may make an Order setting aside the Agreement if, and only if the Court is satisfied that:
1. If there has been a failure to disclose relevant matters (such as an asset, interest in a trust, or a real estate valuation; or
2. If the Agreement was obtained by fraud or duress; or
3. If the Agreement is uncertain or incomplete or has been obtained by undue influence, misrepresentations, mistake, fraud, or other contractual irregularities;
4. A party to the agreement entered into the agreement:
a. For the purpose, or for purposes that included the purpose of, defrauding or defeating a creditor or creditors of the party; or
b. With reckless disregard of the interest of a creditor or creditors of the party; or
5. The agreement is void, voidable or unenforceable; or
6. In the circumstances that have arisen since the agreement was made it is impractical for the agreement or part of the agreement to be carried out; or
7. Since the making of the agreement a material change in circumstances has occurred (being circumstances related to the care, welfare and development of a child of the de facto relationship) and as a result of the change the child or, if the applicant has caring responsibility of the child, a party to the agreement will suffer hardship if the Court does not set the agreement aside; or
8. In respect of the making of a financial agreement or former financial agreement, a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.