Risks and costs compared
A recent article regarding financial agreements appeared in the Sydney Sun Herald, titled, “Lawyers advise first wives to ditch pre-nup”. It claimed that an increasing number of law firms have been refusing to draft financial agreements due to their inherent ‘risk’ and are warning clients, in particular, women, to avoid entering into them. Our view is that this warning is misleading. This article discusses the risks and the costs of financial agreements compared to the risks and costs of Court Orders even when made by consent of the parties.
Issue 1: Risk
Risk of Financial Agreements being set aside
While it cannot be denied that there are risks in entering into a Financial Agreement, the risks usually identified are not unique to Financial Agreements alone. The usual arguments advanced against Financial Agreements are that they can be set aside because:
- they have not been drafted properly;
- one of the parties has signed the Agreement under duress or as a result of unconscionable conduct by the other party or undue influence applied by the other party;
- one party has failed to disclose a material financial matter/s; or
- there has been a material change in circumstances of one of parties due to the care of a child since the agreement was made;
- they are expensive to prepare; and
In isolation, these seem to be very compelling reasons to steer clear of Financial Agreements. Without such an Agreement, parties cannot control in advance, what might happen if they separate. This means that if parties separate they are left with either a Consent Order or a Court Order to formalise their property settlement.
Risk of consent orders being set aside or overturned
Consent Orders and Court Orders are not immune to being overturned, varied or appealed due to reasons similar to those for Financial Agreements. Court Orders even if made by consent also have the added risk of a former spouse being able to make a later claim for spousal maintenance.
Section 79A(1) of the Family Law Act 1975 enables an order made by a Court (including Consent Orders) to be set aside for reasons including:
- miscarriage of justice by reason of fraud or duress;
- miscarriage of justice by reason of suppression of evidence (i.e. non-disclosure of a material financial matter); and/or
- that, in the circumstances that have arisen since the making of the order, a child of the relationship, or the person who has the caring responsibility of a child of the relationship, will suffer hardship if the Order is not varied or set aside.
Furthermore, if Consent Orders are not drafted properly but are nevertheless made on a final basis, parties must apply to the Court to correct the error. If there is disagreement over the interpretation of the drafting error, the matter may end up back in litigation;
When these risks are compared with the risks of having an Agreement set aside because it is held not to be binding on the parties, it is clear that no process dealing with relationship or matrimonial financial matters is risk free. Financial Agreements are a better risk management tool as they enable parties to have more control over their future financial relationship.
Issue 2: Costs
The cost of financial agreements
In family law, there is no ‘standard’ Financial Agreement just as there is no `standard’ Consent Order or Court Application. It is true that it is possible to buy a proforma financial agreement on line. While they might be inexpensive, they come with significant risk as they are fraught with problems that expose the Agreement to being set aside by a Court when the time comes to rely on such Agreements.
The cost to prepare a Financial Agreement that addresses the particular requirements of the parties who sign it should be viewed as a `cost effective’ alternative to litigation. Such an Agreement prepared by family law specialists is best able to withstand a possible later application by one of the parties to set it aside.
The cost of Court Orders
Applications for Court Orders especially, can be expensive. The actual cost depends on the length of the negotiations, the complexity of both the financial and emotional circumstances of the parties, and the effect of judicial discretion in the case of Orders that are not made by consent– that is, the Court has a very wide discretion inherent in property settlement proceedings which is said to allow the Court ‘… to do justice according to the needs of the individual case, whatever its complications might be’ (Norbis v Norbis (1986) 11 CLR 513 at 520).
The cost of litigating a matter through the Court system (and Consent Orders to some extent) in each case is specific to the particular facts which include the following circumstances:
- the complexity of the parties’ financial circumstances;
- the intentions, emotional state and mental health of the parties;
- the advice received by each party and/or the view each party forms about their entitlements;
- whether the parties can reach an agreement or the matter is required to be litigated in a Court;
- whether a barrister or other experts are required to be engaged;
- the length of the negotiations and/or litigation; and/or
- the complexity associated with drafting any agreement reached or orders sought.
While we regularly provide our clients with an estimate of costs prior to the commencement of their matter and at various stages throughout, in each case our estimate is subject to change depending on the factors above. The expense of and/or variation in cost is not exclusive to Financial Agreements.
Issue 3: Future
Inability to account for future life events
There is a misconception that ‘pre-nups’ cannot allow for future life events.
‘Sunset clauses’ are often included in Financial Agreements to allow for a change in circumstances in the future. A ‘sunset clause’ is a clause that makes the Agreement as a whole or part of the Agreement, no longer operative if a certain event occurs or upon the expiry of a certain period of time. The most common example of the use of a sunset clause is the birth of a child of the relationship.
In this case if the parties do not enter into a new Agreement, the Family Law Act 1975 will apply in the event they separate.
Is a pre-nup or Financial Agreement right for you?
Just as parties have a right to apply to the Court for a property settlement and/or spouse maintenance, they also have the right to contract out of the provisions of the Family Law Act and so the Court’s ability to otherwise impose a decision upon them. Financial Agreements allow parties to contract out of Family Law Act and so control how they will conduct and/or end their financial relationship.
The main risk, as far as we are concerned, is not in entering into a Financial Agreement, but rather, parties obtaining the required independent legal advice from a lawyer who has little or no family law experience. The risk is also greater for those parties who engage a lawyer who is willing to cut costs and/or allow a party to enter into the Agreement in haste or without due consideration.
Provided a Financial Agreement meets the strict requirements of the Family Law Act 1975, and the agreement is drafted properly by a suitably experienced family lawyer, they offer many benefits.
We are strategic and results based and understand our client’s needs during challenging times.