Are prenuptial agreements binding, and when are they required?

To prenup, or not to prenup?

Known in Australia as financial agreements, there is a common misconception that prenups are reserved for wealthy celebrity couples, or that they are easily set aside.

What many people don't know is that a prenup, if prepared correctly, can protect your current assets, and in some cases future assets such as inheritances, from being the subject of division by the Federal Circuit and Family Court of Australia following a separation.

There are circumstances where such agreements will be set aside. However, if correctly prepared and all legal requirements are met, they remain the best possible safeguard against lengthy and costly litigation in the event of a separation.

What is a prenup, and how can it protect me?

Traditionally, a prenup refers to a signed contract between two people before their wedding that governs how their property and resources will be divided if they separate.

A financial agreement pursuant to the Family Law Act 1975 (Cth) has a wider scope. You can enter into a financial agreement in contemplation of what will happen to your assets, liabilities and financial resources in any of the following situations:

1. Before marriage.
2. During marriage (also colloquially known as a postnup).
3. Before a de facto relationship.
4. During a de facto relationship.

So, just because you might already be married (or not planning to marry at all), doesn't mean you can't enter into a financial agreement to determine what will happen to any current or future assets in the event of a separation.

The effect of a financial agreement, if binding, is to exclude the jurisdiction of the Federal Circuit and Family Court of Australia (the Court) from making decisions about the division of your assets (or some of them), and future maintenance, if you later separate.

Is a financial agreement binding?

There are many technical requirements that must be met in order for a financial agreement to be binding. These include:

1. The agreement must be signed by both parties.

2. Both parties must obtain independent legal advice before the agreement is signed (and the lawyers must sign a statement to confirm they have provided that advice); and

3. The agreement has not been terminated, or set aside by the Court.

It is crucial that both you and your partner receive independent legal advice about the advantages and disadvantages of entering into the agreement, and the effect of the agreement on your rights and entitlements. This advice also needs to be independent, meaning you can't both see the same lawyer.

It is also important to keep in mind your conduct, and that of your partner, whilst the financial agreement is being negotiated and signed, to give you the best chance of avoiding the agreement being set aside down the track.

When could a financial agreement be set aside?

Even if a financial agreement meets the technical requirements and you have each obtained independent legal advice, it may be later set aside in a number of situations. The most common of these situations are:

Non-disclosure

Both you and your partner are required to make full disclosure of your respective financial positions, including all assets, liabilities and financial resources (and in some cases, possible future resources if you plan on receiving a large inheritance), at the time of making the agreement.

All assets, liabilities and financial resources must be correctly identified, so they can be appropriately dealt with by the financial agreement. You cannot intentionally hide any assets or financial resources, as this may later be a reason to set aside the financial agreement.

Duress or undue influence

In situations where one party has exerted duress or undue influence towards the other party in having them enter into the financial agreement, the agreement may be set aside.

There are several situations in which the Court has considered this to have occurred, for example where a power imbalance has existed between the parties as a result of educational or cultural differences, or otherwise; and where one party has applied pressure or made threats to the other if they fail to sign the financial agreement.

In short, you should be aware of the circumstances of your relationship at the time of entering into the agreement and consider whether your partner is exercising their own free will in doing so. It is important that you discuss with your partner and agree on the terms of the financial agreement, and that you feel comfortable with the terms of the agreement before it is signed - ideally, before any wedding invitations are sent out!

If it's too close to your wedding day, you may instead wish to negotiate a postnup.

Care and welfare of children

A financial agreement may be set aside in the event that you or your partner would face hardship as a result of caring responsibilities for your child or children, who were born after signing the agreement.

This is unlikely to arise simply as a result of children being born after the agreement. It requires a party to demonstrate that the caring responsibility of such children would result in hardship if the terms of the financial agreement were implemented.

For this reason, it is important to discuss with your partner the possibility of having children, and ensure the financial agreement contemplates whether an adjustment is made to the party who has caring responsibilities in the event of a separation.

The Court's power to set aside the financial agreement is discretionary, meaning that even if one of the grounds in section 90K is made out, the agreement is not automatically set aside.

What happens if it is set aside?

If the financial agreement is set aside, then the Court has jurisdiction to make orders with respect to the alteration of property interests in the event of a separation, which may lead to costly litigation.

Lander & Rogers' family lawyers have extensive experience advising individuals on matters relating to dividing property and other assets. Please contact a member of our Family & Relationship Law team if you would like to discuss how a financial agreement could safeguard you and your assets.