27 Sep Thorne and Kennedy – High Court decision on ‘Binding’ Financial Agreements

The High Court has delivered its much-awaited Judgement in the case of Thorne and Kennedy, a case involving a ‘pre-nuptial’, and subsequently a ‘post-nuptial’, Financial Agreement, the Court being asked to determine whether either were binding.

The first instance decision of the Trial Judge in the Federal Circuit Court proceedings was that the Agreements should be set aside due to duress.

The Full Court of the Family Court disagreed and upheld the post-nuptial Agreement, which had the effect of terminating the earlier prenuptial Agreement.

Interestingly, the High Court took a different view again, finding that both Financial Agreements had been vitiated by unconscionable conduct and the majority finding that there had also been undue influence.

Duress

The High Court determined that there had been no duress in this case, contrary to the first instance decision by the Federal Circuit Court of Australia, although they noted that the Trial Judge’s findings were consistent with a finding of undue influence.

The High Court noted that the current test for duress is whether there is proof of “threatened or actual unlawful conduct” procuring a party to sign a Financial Agreement.

The High Court raised whether that test should be revised to “whether there is pressure which goes beyond what is reasonably necessary for the protection of legitimate interests” but noted that there would need to be detailed argument and consideration before the test is changed.

Undue Influence

This case confirms that, in essence, undue influence involves one party having their free will overborne by the other party i.e. an influence over the mind which means that an act is not a ‘free act’.

The Trial Judge relied on six factors which, together with the fact that the agreement provided an unfair outcome for the wife, led to the conclusion that the wife had “no choice” but to sign the Financial Agreements in this case. Those six factors were:

1. Her lack of financial equality with Mr Kennedy;
2. Her lack of permanent status in Australia at the time;
3. Her reliance on Mr Kennedy for all things;
4. Her emotional connectedness to their relationship and the prospect of motherhood;
5. Her emotional preparation for marriage; and
6. The “publicness” of her upcoming marriage.

The majority to the High Court agreed that these factors, combined with the fact that the agreement provided an unfair income to the wife, supported a finding of undue influence.

Justice Gordon however found that there was no undue influence as the wife’s will had not been impaired by the husband in circumstances where she had assessed that she would rather sign the Agreement than have the relationship come to an end. His Honour stated that entry into the Agreement must be “the outcome of such an actual influence over the mind of the person that it cannot be considered her free act”. Justice Gordon stated that it is not the point that the wife’s options were narrow or limited, although this is relevant to a consideration of unconscionable conduct.

The High Court stated that, in the particular context of pre-nuptial and post-nuptial agreements, some of the factors which may have prominence when considering undue influence include the following:

1. Whether the Agreement was offered on a basis that it was not subject to negotiation;
2. The emotional circumstances in which the Agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
3. Whether there was any time for careful reflection;
4. The nature of the parties’ relationship;
5. The relative financial positions of the parties; and
6. The independent advice that was received and whether there was time to reflect on that advice.

To avoid a finding of undue influence, this case provides that Financial Agreements need to be carefully considered, well in advance of signing, and that it is ‘risky’ (and perhaps fatal) for a party to threaten to end the relationship if an Agreement is not signed. This is particularly so where the Agreement provides for an outcome which is well outside the range of likely outcomes.

Unconscionable Conduct

The High Court stated that unconscionable conduct requires one party to have a ‘special disadvantage’ which means that they are “unable to make a judgement as to his or her own best interests” and for the other party to unconsciously take advantage of that.

Justice Gordon stated that “it is not possible to identify exhaustively what amounts to a special disadvantage. Relevant matters may include illness, ignorance, inexperience, impaired faculties, financial need or other circumstances that affect the weaker party’s ability to protect their own interests”.

His Honour went on to say “A special disadvantage may also be discerned from the relationship between parties to a transaction; for instance, where there is a strong emotional dependence or attachment. Whichever matters are relevant to a given case, it is not sufficient that they give rise to inequality of bargaining power: a special disadvantage is one that “seriously affects” the weaker party’s ability to safeguard their interests.”

The High Court found that the wife in this case did have a special disadvantage, in part created by the husband and the circumstances surrounding the signing of each Financial Agreement.

Whist it seemed to be accepted that the wife knew early on in the relationship that a Financial Agreement was required, the High Court was critical of the circumstances in which the wife was provided with the Agreement to sign, noting that she had already moved to Australia, she had committed to and planned the wedding (which was only a few days after the signing of the pre-nuptial Agreement) and had been told that the wedding would not proceed and she and her family would be sent home unless she signed the Financial Agreement. Further, the Court noted that that there was no evidence of any offer to help the wife and her family return home if she chose not to sign the Agreement. The High Court was unanimous in finding that the husband’s procurement or acceptance of the wife’s assent to each Agreement was unconscientious in these circumstances.

The Future of Financial Agreements

This case highlights the risks involved in parties entering into Financial Agreements (particularly pre-nuptial and post nuptial style agreements) without proper consideration of all the circumstances and the relevant law (including the developing common law) which regulates these Agreements.

Whist Financial Agreements may currently be the best means available to parties who wish to enter into an agreement in relation to property and financial matters in advance of a separation, they are indeed a complex beast and clearly should not be entered into in haste or in the misbelief that they ‘bullet proof’. The decision in Thorne and Kennedy demonstrates that these Agreements must be treated with caution.

Call our office now on 1300 768 719 to review your Pre-nuptial or Post-nuptial agreement to ensure that you are protected.