In the matter of Thorne & Kennedy [2017] HCA 49, the High Court of Australia (“the High Court”) has recently handed down an important decision in relation to Binding Financial Agreements.
The background
The wife was living in Romania when she met the husband online, in or around mid-2006. At the time, the wife was 36 years of age and living a modest life in her home country. The husband, in contrast, was a 67 year old property developer in Australia with approximately $18 million dollars of net assets.
Following their online courtship, the wife travelled to Australia with the husband in February 2007, and moved into his residential premises with the intention to marry on 30 September 2007.
On 26 September 2007, the husband and wife signed the first financial agreement (“the September Agreement”).
The agreement provided that the wife was to receive a total payment of $50,000 plus CPI in the event of a separation following at least three years of marriage. There were some further provisions in the agreement which provided for the wife to receive a penthouse valued up to $1.5 million, a Mercedes and a continuing modest income in the event of the husband’s death and prior to either party signing a Separation Declaration following separation.
At the time, the wife’s main concerns were in relation to the provisions she was entitled to in the event of his death, and not the provisions regarding separation as, like most couples who are about to get married, she did not believe she would ever separate from her husband to be.
Despite receiving advice by her solicitor that the agreement was in the husband’s favour and should not be signed, she did so just days before the wedding with only some minor amendments being made..
The second agreement
Following the marriage and again on the husband’s instance, a second agreement was signed in November 2007 (“the November Agreement"). This agreement was for all intents and purposes the same as the original September Agreement but without the same time constraints, given that the wedding had now taken place.
Again, the wife was advised that the November Agreement should not be signed on the basis that the terms favoured the husband and was “one of the worst agreements” the solicitor had ever seen.
During the wife’s appointment with her solicitor, the wife received a phone call from the husband to discuss her signing of the agreement, which was witnessed by the wife’s solicitor.
Separation and first court proceedings
The parties separated in or around 16 June 2011, being the date that the husband signed a Separation Declaration. The total period of cohabitation was approximately four and a half years.
Proceedings were issued by the wife in the Federal Circuit Court following separation, seeking that both the September and November Agreements be set aside on the basis that they were signed under duress and the terms of the agreement if upheld would result in an unfair and unreasonable property settlement in the circumstances. She further sought orders for spousal maintenance.
The husband argued that he had made it clear to the wife very early on that he wanted to protect his wealth for his children and that if they were to get married, she would have to sign a legal agreement to that effect, the September agreement was only presented to the wife when she visited a solicitor (arranged by the husband) just days before the marriage. It was noted by the Court that the husband waited for the wife in the car outside her solicitors office.
In her application, the wife alleged that at the time of the appointment for the September Agreement, her family had already arrived for the wedding and were staying with her and the husband in the penthouse. She gave further evidence that the husband had also told the wife around that time that if she failed to sign it, the wedding would be cancelled.
Part way during these proceedings, the husband passed away. Regardless of his death, the proceedings were continued and the executors of his estate, being his two children, were substituted for him in the proceedings.
The Primary Judge accepted the wife’s evidence and held that the wife had “signed the Agreements under duress born of inequality of bargaining power where there was no outcome to her that was fair and reasonable”. The Primary Judge subsequently set aside both agreements, allowing the wife to seek a further property settlement.
Full Court appeal
The executor of the husband’s estate appealed the decision to the Full Court of the Family Court (“the Full Court”).
On appeal, the Full Court reversed the Primary Judge’s decision and held that both the September and November agreements were binding.
The Full Court further accepted the husband’s evidence (via his executors) that there had not been any duress, undue influence or unconscionable conduct on the husband’s part, and as such, the agreements entered into by the wife were upheld, essentially reversing the decision of the Primary Judge.
Whilst the Full Court did consider duress as one of the grounds to potentially set aside the financial agreement, they found there was no evidence of this. However, undue influence and unconscionable conduct were considered as less substantive issues within the case, and although the Full Court briefly considered these principles, they did not seek to clarify or give much weight to them and upheld the husband’s appeal. The question of what actually would amount to a sufficiently special disadvantage for the principles of undue influence and unconscionable conduct to be applied was never fully considered.
High Court appeal
The wife subsequently appealed to the High Court of Australia (“the High Court”) on the following grounds:
- That the Full Court erred in failing to find the Financial Agreements were not binding and should be set aside on the ground of duress;
- That the Full Court erred in failing to find the Financial Agreements were not binding and should be set aside on the ground of undue influence;
- That the Full Court erred in failing to find the Financial Agreements were not binding and should be set aside on the ground of unconscionable conduct in circumstances where the husband took unconscionable advantage in securing the wife’s signature to them.
High Court decision
The matter was heard before the High Court on 8 August 2017 with the decision only handed down on 8 November 2017.
The High Court reversed the decision of the Full Court and restored the decision handed down by the Primary Judge, setting aside both financial agreements signed by the parties.
In their reasoning, their Honours took the view that the Full Court erred in not fully considering the principles of duress, undue influence and unconscionable conduct that the wife had been subjected to. Their view was that this had actually been correctly considered and applied by the Primary Judge at trial and the Full Court therefore erred in overturning the Primary Judge’s ruling.
The High Court took into consideration, and ultimately accepted, the wife’s evidence that the husband placed the wife in a “special” form of disadvantage and exerted undue influence over her.
The factors taken into account by the High Court to come to this conclusion included:
- That the husband presented the wife with the agreement just days before the wedding, after the wife’s family had already arrived and were staying with the wife and husband;
- That the husband had made it clear to the wife that the wedding would not go ahead unless the agreement was signed;
- The husband arranged the legal appointments for the wife to sign the documents, to the point where he even contacted the wife via telephone whilst in with her solicitor and also waited outside of the solicitors office in his vehicle; and
- The husband never made any attempt to discuss with the wife any assistance or details as to what would happen to herself and her family (who had been flown over by the husband) if she did not sign the agreement before the wedding.
The High Court found that these matters increased the pressure on the wife which contributed to the substantial subordination of the wife’s free will in relation to the agreements, placing the wife in a position of undue influence and a “special” form of disadvantage, in that she was powerless and saw no other choice but to enter into the agreement.
On that basis, the High Court allowed the appeal and set aside the orders of the Full Court, with an order for the husband’s estate to pay the wife’s costs of the appeal. The wife can now bring a further application for property orders and spousal maintenance proceedings against the husband’s estate.
Conclusion
The decision reached in the matter of Thorne & Kennedy is an important one as it highlights the risks associated with signing financial agreements, either prior to, during, or even after a relationship.
Whilst they may be called “binding” it is important for parties to realise that financial agreements are not necessarily so and can be overturned for varying reasons, particularly when the disadvantaged party is given limited opportunity to question or have any form of bargaining power prior to signing the agreement.
Prior to Thorne & Kennedy, undue influence, duress and unconscionable conduct were often considered to mean some form of unlawful conduct or threat by one party to another, particularly within a family law context, and there was some uncertainty as to whether the threat of cancelling a wedding would amount to these principles being applied.
With this decision, the High Court has confirmed that in circumstances such as those involved in Thorne & Kennedy, a “special” form a disadvantage can exist and these doctrines can be applied in order to overturn financial agreements signed by the parties.
It is important that before drafting or entering into any financial agreement, either prior to or during a relationship, proper legal advice is obtained from a family law expert to determine whether or not a financial agreement is even appropriate. There are also other options available to parties wishing to protect any assets or material wealth they are bringing into the relationship, aside from financial agreements. The circumstances of both parties need to be considered and there is no ‘one size fits all’ approach. Please contact our family law team on (08) 8414 3400 should you need to seek specialist advice.