When can a Financial Agreement be set aside? Key lessons from Thorne v Kennedy

Financial Agreements, also referred to as Binding Financial Agreements, are agreements under the Family Law Act 1975 (Cth) (the Act) for married couples, or Family Court Act 1997 (WA) for de facto couples.

Financial Agreements are often called “pre-nups”. Although, they do not need to be made prior to marriage. You can also enter into a Financial Agreement during marriage, after separation or divorce, or before, during or after a de facto relationship.

Couples often elect to enter into Financial Agreements so that they can determine how they want to divide their assets upon separation without involvement or scrutiny from the Family Court. Parties also have much more discretion when entering into Financial Agreements, as the agreement does not need to be “fair and equitable” in the eyes of the Court. Rather, it is a legally binding contract that negates the conventional process of dividing matrimonial assets under the Act in favour of terms mutually agreed upon by the parties.

The reason that Financial Agreements effectively have the power to oust the jurisdiction of the Family Court is because they are contained in the Act. The Act sets out the necessary steps in making a Financial Agreement binding, which are:

1. the agreement is signed by all parties;
2. prior to signing, each party receives independent legal advice from a legal practitioner in respect to the effect of the agreement and the advantages and disadvantages of entering into the agreement;
3. each party receives a signed statement from their solicitor stating that the solicitor provided that party with independent legal advice, and a copy of the statement is provided to the other party; and
4. the agreement is not terminated or set aside by the Court.

If those circumstances are satisfied, the agreement is binding. A party is entitled to apply to the Family Court to enforce a Financial Agreement if the other party fails to comply with the terms, and the Court can subsequently make orders in accordance with the terms.

Nonetheless, there are circumstances whereby the Court may set aside or refuse to enforce a Financial Agreement.

When can you challenge a Financial Agreement?

Even if a Financial Agreement is legally binding, you can still potentially make an application to the Court to set it aside. Broadly, some circumstances where the Court can set aside a Financial Agreement include:

1. the agreement was obtained by fraud, including a material failure to disclose financial circumstances;
2. the agreement was entered into to defraud or defeat the interests of a third party or creditor;
3. the agreement is void, voidable or unenforceable;
4. circumstances have arisen since entering into the agreement that make it impracticable to be carried out;
5. there has been a material change in circumstances since the agreement was made, such as the birth of a child; and
6. a party engaged in unconscionable conduct in the making of the agreement.

Thorne v Kennedy [2017] HCA 49: The facts

A seminal authority in determining when a Financial Agreement can be set aside, where allegations of duress or unconscionable conduct arise, is the case of Thorne v Kennedy.

In the case, the husband and wife met when they were 67 and 36 respectively in mid 2006. They met online while the wife was living in the Middle East. She grew up in Eastern Europe and spoke some Greek, which the parties conversed in. She spoke little English.

The husband was a wealthy property developer with a net worth of around $18 million. He had three children from a previous marriage. On the other hand, the wife had negligible assets and no children.

The wife travelled to Australia in February 2007 to live with the husband, with the intention of getting married. The date of the wedding was subsequently arranged for 30 September 2007.

On 8 August 2007, the husband instructed his solicitors to prepare a Financial Agreement.

On 19 September 2007, the husband told the wife that they were going to see solicitors about the signing of an agreement, and if she did not sign it, the wedding would not go ahead.

Subsequently, on 20 September 2007, the husband took the wife and her sister to see a family lawyer. He waited in the car outside. Although the husband had told her that they would be signing an agreement, she did not know about the terms until this meeting.

The agreement stated that the wife would receive $50,000 plus CPI if the marriage lasted at least three years. Otherwise, the husband would retain all of his assets. If the husband died during the relationship, she would receive an apartment worth around $1.5 million, a Mercedes and a continuing income. The agreement also had a clause that they would enter into another agreement once they were married.

As this was 10 days before the wedding, the wife’s family had already flown over, her dress had already been made and everything for the ceremony had been booked.

On 21 September 2007, the wife’s solicitor provided her with a letter of advice, stating that the agreement was grossly unfair to her and she should not sign it. Nonetheless, the wife chose to proceed.

The agreement was fully signed on 24 September 2007 and the wedding went ahead.

On 5 November 2007, the husband and wife entered into another Financial Agreement on essentially identical terms. The wife met with the same solicitor, who again told her not to sign it. During the meeting, the wife received a call from the husband, who asked her how long she was going to be. Her solicitor believed that she was being pressured into signing the agreement. Though, again, she signed the agreement.

The husband and wife separated in 2011. The wife subsequently commenced proceedings in Court, seeking to set aside the agreement and an adjustment of property interests and spousal maintenance.

The decision

The Federal Circuit Court set aside both agreements in 2015 on the grounds of duress, due to the inequality of bargaining power between the husband and wife, and the fact that the agreement was not at all fair or reasonable.

That decision was successfully appealed by the husband in the Full Court of the Family Court.

The matter was eventually heard in the High Court in March 2017, where it was held that the agreements should be set aside due to duress, undue influence and unconscionable conduct.

It was held that the wife felt pressured into signing the agreement, as it was thrust upon her shortly before the wedding. She felt that she had no choice, as the wedding would not go ahead otherwise.

The Trial Judge, Demack J, made a finding of duress on six grounds:

1. The wife’s lack of financial equality with the husband.
2. The wife’s lack of permanent status in Australia at the time.
3. The wife’s reliance on Mr Kennedy for all things.
4. The wife’s emotional connectedness to their relationship and the prospect of motherhood.
5. The wife’s emotional preparation for the marriage.
6. The publicness of the marriage.

Furthermore, six considerations were identified to determine whether the agreement was freely entered into:

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.

The agreement was found to be unfair to the wife as she had moved country and left her life behind for the sake of the marriage. Should the marriage end, she would have no job, assets, home, or family in Australia. The bargaining power was entirely in the hands of the husband. While she ultimately consented to the agreement, it was not a decision that she made on her own free will, with sufficient time to consider.

What does the law say about setting aside Financial Agreements?

Thorne v Kennedy is an example of just one scenario in which Financial Agreements can be set aside. The Court does not simply set aside agreements that are “bad bargains”, there needs to be significant circumstances, as contained in the Act, that warrant the contract to be voided.

In Frederick & Frederick [2018] FCCA 1694, the wife, who lived overseas before moving to Australia to be with the husband, entered into a Financial Agreement about two months before her visa for Australian residency was due to expire. The parties then subsequently married. The wife sought to have the agreement set aside on the basis of undue influence and unconscionable conduct. The Trial Judge cited Thorne v Kennedy, although remarked that unreasonable terms in itself, was not sufficient to make a finding of undue influence and there needs to be greater regard to the circumstances as a whole. It was ultimately found in this case that the agreement was binding, as there were negotiations to the terms prior to signing, there was no evidence that the relationship would be terminated if the agreement was not signed, the wedding was not as “public” as the wedding in Thorne v Kennedy, as no relatives were present, and the wife was not as dependent on the husband.

More recently, in Mansour v Kaleel (No 2) [2024] FedCFamC2F 107, a Financial Agreement on the basis of undue influence and unconscionable conduct. The Court in this case adopted the considerations outlined in Thorne v Kennedy. It was found that the husband did not exercise free and independent will when entering into the agreement as, amongst other things, the wife had told him that her parents would not allow them to marry unless he signed the agreement. He signed the agreement seven days after his wife approached him about it, about six weeks before the wedding.

Thorne v Kennedy continues to be a leading authority in Courts today in respect to Financial Agreements. Something of significant importance to note from the case is that, prior to entering into a Financial Agreement, it is essential that the other party is given as much opportunity to consider and negotiate the terms as possible. Otherwise, the door may be open to challenge the agreement in the Family Court.