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WHAT YOU NEED TO KNOW ABOUT BINDING FINANCIAL AGREEMENTS

The decision in the case of Thorne v Kennedy delivered by the High Court of Australia in November 2017 has far-reaching implications for ‘pre-nups’ or ‘binding financial agreements‘ between couples when the relationship breaks down.

This famous High Court case has significantly influenced the way in which binding financial agreements between couples will be undertaken in Australia into the future.

Details of the case

Thorne v Kennedy involved agreements between a wealthy, 67-year-old property developer, Mr Kennedy, and his 36-year-old Eastern European fiancée, Ms Thorne. The couple originally met via the internet in 2006 and following a brief romance conducted during extensive travels together in Europe, the couple returned to Australia in February 2007 with the intention of getting married. Mr Kennedy already had three adult children and assets worth between $18 and $24 million. He informed Ms Thorne that he would marry her if she were to “sign the paper… My money is for my children.”

The High Court appeal was against the finding of the Full Court of the Family Court of Australia that two significant financial agreements, being a prenuptial agreement and a  a post-nuptial agreement, were not made invalid by duress, undue influence or unconscionable conduct. The Full Court’s decision meant Ms Thorne was prevented from seeking property settlement and spousal maintenance under the Family Law Act 1975 (Cth) after the parties’ marriage broke down. This overturned the decision of the first judge in the original Federal Circuit Court trial which set aside the agreements as voidable due to duress placed upon Ms Thorne.

The trial judge had asked two main questions: “Why would the wife sign an agreement which she understood to be the worst her solicitor had ever seen?” and, “Why, despite her solicitor’s advice, would the wife fail to conceive of the possibility that the husband may end the marriage?’ Both these questions had the same answer, that the wife was in no power to do anything else. The High Court agreed and overturned the decision of the Full Court.

The first agreement

On 20 September 2007, only a mere 18 days before the wedding was to take place, Mr Kennedy took Ms Thorne to obtain independent legal advice about the first agreement. Mr Kennedy had advised Ms Thorne the previous day that if she were to choose not to sign the agreement, the wedding would not go ahead. At this time, Ms Thorne’s family had already arrived in Australia to witness the wedding, and many other wedding preparations had already taken place. This was also the first time that Ms Thorne became aware of the contents of the agreement.

Ms Thorne received written advice the following day, explaining that:

  • Ms Thorne was to receive a monthly maintenance during the marriage of $4,000 per month or 25% of the net income from the management rights of a proposed development, whichever was the greater.
  • Ms Thorne and her family were permitted to live rent-free in the proposed development.
  • If Mr Kennedy and Ms Thorne were to separate within the first three years of marriage, Ms Thorne would not receive anything.
  • If the parties separated after three years, Ms Thorne would receive a lump-sum of $50,000 from Mr Kennedy.
  • If Mr Kennedy passed away while the parties were living together as a married couple then Ms Thorne would be entitled to: a) Either a penthouse in the proposed settlement or a unit that does not exceed $1.5 million in value within the same city; b) the greater of $5,000 per month or 40% of the net income of the management rights of the proposed development; c) either the Mercedes-Benz motor vehicle currently in Ms Thorne’s possession, or another vehicle of equal or greater value.

The solicitor advised Ms Thorne the provisions were extremely poor given Mr Kennedy’s financial position. Secondly, the local council had actually refused planning permission for the proposed development included in the agreement. Thirdly, the lump sum that Ms Thorne would receive from Mr Kennedy if they were to separate after three years was considered extremely undervalued. It was suspected that Ms Thorne was under extreme duress during the lead up to the wedding and that she felt she would have to sign the agreement in order for the wedding to proceed. Ms Thorne’s solicitor advised Ms Thorne that the agreement was the worst he had ever seen, as well as “entirely inappropriate”.

The second agreement

Ms Thorne signed the first agreement, subject to a few minor amendments as requested by her lawyer. A second agreement was produced shortly after the first agreement was signed, in accordance with a recital held within. Ms Thorne was urged by her lawyer not to sign the document and during that very meeting, Ms Thorne received a telephone call from Mr Kennedy asking how much more time she required, indicating that Ms Thorne was being put under pressure.

Only a mere four years after the marriage took place, Mr Kennedy signed a separation declaration which prompted Ms Thorne to commence court proceedings.

Undue influence and unconscionable conduct

‘Undue influence’ is the term used to refer to the deprivation of a party’s free will. This sort of inequality in bargaining power is sometimes inevitable when entering into agreements of this nature. ‘Unconscionable conduct’ arises when the imbalance produces a level of special disadvantage due to an inability of the weaker party to actually make a judgement that supports their own best interests.  It should be noted a claim of undue influence and unconscionable conduct requires an evaluative judgment – that is, one not based on clearly defined legal categories – to be delivered by the judge.

binding financial agreements

The trial judge’s findings

The trial judge found that Ms Thorne was powerless to do anything other than sign the agreements provided to her, but this situation arose from more than just the extreme inequality of financial position. In particular, there were six matters the trial judge believed led Ms Thorne to having ‘no choice’ but to sign. The High Court also agreed with the matters, which were:

  • Financial inequality in comparison to Mr Kennedy;
  • lack of permanent residence status in Australia;
  • Ms Thorne’s reliance on Mr Kennedy;
  • Ms Thorne’s feelings towards the relationship and the prospect of motherhood;
  • Ms Thorne’s emotional preparation for marriage; and
  • the publicness of the upcoming marriage.

The Full Court’s Findings

The trial judge’s findings were originally rejected by the Full Court for the reasons that Mr Kennedy had originally advised Ms Thorne that his wealth was for his children. Ms Thorne accepted this and her only concern (which the agreements acknowledged) was that provision be made for her if Mr Kennedy were to die.

The Full Court also held that Mr Kennedy had not taken advantage of Ms Thorne and that his conduct was not unconscionable because: there were no misrepresentations of Mr Kennedy’s financial position; there were early representations that Ms Thorne would not receive his wealth if they were to separate; Ms Thorne faithfully believed that Mr Kennedy would not leave and repudiated any concern for her financial position if that were to happen; and Mr Kennedy had accepted the hand-written amendments sought by Ms Thorne’s solicitor.

Ms Thorne’s appeal to the High Court

The High Court held that the Full Court was wrong in rejecting the trial judge’s findings that there was no fair and reasonable outcome available to Ms Thorne. The Court found the trial judge had actually understated the predicament of Ms Thorne and that, in combination with the six factors outlined by the trial judge, an inequality of bargaining power was not the only basis for the original decision.

In its reasoning, the High Court listed various factors which it said were significant in the context of financial agreements, including:

  • whether the agreement was offered and not subject to negotiation;
  • the emotional circumstances in which the agreement was entered;
  • whether there was any time for prudent consideration;
  • the nature of the relationship between Ms Thorne and Mr Kennedy;
  • the financial positions of the parties; and
  • the independent advice that was received and whether there was time to consider the advice.

Conclusion

The High Court found that both undue influence and unconscionable conduct made the agreements between Ms Thorne and Mr Kennedy voidable (invalid). The Court accordingly set the orders aside and made further costs orders in favour of Ms Thorne.  Overall, this famous High Court case has significantly influenced the way in which binding financial agreements between couples will be undertaken in Australia into the future.

It’s imperative that you seek estate planning assistance as soon as possible following separation. 

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