Binding Financial Agreements – Why We Don’t Do Them

This article was published by Rachel Nickless in the Australian Financial Review on 28 January 2012.

Forget that pre-nup.  If you have signed an agreement to determine who gets what after a relationship breaks down, you may find it worthless.  And should you be about to ring-fence your assets from your partner-to-be, you might struggle to find a lawyer.

So-called pre-nuptial agreements have become so contestable they are scaring lawyers away because far from preventing litigation, they are sparking it.  “Lawyers are saying ‘I don’t want to be playing golf in my retirement and get served with a claim saying I buggered up a pre-nup years ago’,” said Geoff Sinclair, chairman of the Law Council of Australia’s family law division.

Mr Sinclair is lobbying the federal Attorney-General’s Department for reform after dozens of lawyers approached him to say they no longer offered pre-nuptial agreements or were highly selective about whom they offered them to.

Sydney family lawyer Paul Doolan said many financial agreements were “not worth the paper they are written on” because the law still imposed such a high degree of technicality about how they should be agreed and drafted.  Mr Doolan said his firm was now very selective about which clients it would do pre-nups for because of the risk of being sued and because of the time and expense involved in preparing them.

Similarly, Melbourne barrister Martin Bartfield, QC, said pre-nups were “unsuitable for the purpose for which they were intended”.  He said advising on binding financial agreements – or BFOs – was “too dangerous” for many barristers and he did it very rarely.

Professional indemnity insurers for law firms have begun warning lawyers about the risks of advising on BFOs, with a rise in the number of legal claims against family lawyers over failed agreements.  LawCover Insurance chief executive Paul McGahenurges lawyers to keep extensive file notes indefinitely, as it is impossible to predict if or when the relationship at the centre of a pre-nup will break down.

In 2010, after a Family Court decision put the validity of tens of thousands of agreements in doubt, the federal government introduced retrospective amendments to the Family Law Act to ensure agreements would not be held void for small errors.

Courts now have discretion to uphold an agreement where certain technical steps were not taken and the list of technical requirements for the agreements has been narrowed.  But some family lawyers say the changes do not go far enough and have created new loopholes, citing cases where financial agreements are still being thrown out.

Still, the Family Court has upheld some BFOs with technical errors, such as in the case of Wallace v Stelzer last year.  In that case, the wealthy 55-year-old husband had to pay his 42-year-old second wife some $3.15 million, plus interest, after two years of marriage.  But family lawyers still argue that the case highlights the lengths people must go to before they know whether their financial agreements are valid.

The husband in the case, who had assets of $16.5 million and met his second wife at an “adult entertainment venue”, argued his pre-nup was invalid because of technical errors.  Mr Bartfield said the financial agreement was ultimately upheld but “only after a long and expensive court case resulting in a 73-page judgment”.

Also see this article published by Nicola Berkovic in the Australian on 17 August 2012.

Lawyers Back Off Pre-nups Over Qualms About Being Sued

WEALTHY Australians who marry later in life are having to take the plunge without a prenuptial agreement to protect their assets in the event their marriage sours.

A growing number of family lawyers say they will no longer draw up binding financial agreements for fear of being sued by unhappy clients.

Figures from LawCover obtained by The Australian show the uncertainty surrounding the agreements has led to a rise in the proportion of claims against family lawyers.

While family law claims represented 6 per cent of overall claims made against lawyers in 2008-09, that number rose to 8.5 per cent last year, with most of the rise blamed on the uncertainty in the area of financial agreements.

This follows a string of cases in which courts have been prepared to set aside the agreements.

LawCover’s chief claims solicitor Peter Driessen said while the rise was small, it had been enough to cause concern. He said claims in other areas of law, such as conveyancing, had been falling.

“Our concern was that there might be lawyers out there who thought these agreements were pretty easy to do,” he said.

“The problem is that there are people who come into these agreements with unequal bargaining positions.”

In 2009, a Family Court decision cast doubt on the validity of tens of thousands of agreements, which resulted in the government passing retrospective legislation to ensure the agreements would not be set aside because of minor technical errors.

The chairman of the Family Law Section of the Law Council of Australia, Geoff Sinclair, said the changes did not go far enough and had resulted in further uncertainty.

The Family Law Section has written to the government a number of times urging it to fix the law relating to financial agreements.

Mr Sinclair said the Attorney-General’s Department had not yet provided any definitive response to those issues.

He said law firms were increasingly reluctant to have anything to do with the agreements because of the uncertainty. “A lot of practitioners along the eastern seaboard are no longer doing them,” he said.

In an appeal currently before a full bench of the Family Court, known as Wallace and Stelzer, a multi-millionaire businessman is challenging a prenuptial agreement in which he agreed to pay his second wife, a former Sydney strip-club dancer, $3.25 million if their marriage failed.

The pre-nup was initially upheld by Family Court judge Robert Benjamin but that has been challenged by the businessman.

Lawyers say there are significant differences between judges as to how the laws and agreements are interpreted, causing substantial risks for lawyers and their clients.

Paul & Paul Lawyers partner Carly Middleton said she had all but stopped drafting the agreements, and offered them now only in very limited circumstances. She said she warned clients they were the only security they had, but they could not be relied upon as legally binding.

Ms Middleton said she believed courts were reluctant to have their jurisdiction ousted by the agreements and were prepared to look behind them.

In two recent cases, she said, agreements were set aside because a solicitor acting for one party did not provide their client with proper advice.

She said that raised the question of whether a solicitor’s duty extended to the other party and solicitor who were involved in the financial agreement.

A spokesman for the Attorney-General’s Department said: “The government is aware of the concerns in this area and has been monitoring the cases and is working with the Law Council on this issue.”

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