BFA – Binding Financial Agreements

What is a BFA?

The term “Binding Financial Agreement” (“BFA”) relates to a contract which spouses to a marriage or de facto relationship may enter into under the relevant provisions of the Family Law Act 1975 (Cth) (“the Act”) relating to their property.[1]

There are various types of BFAs which parties may enter into including agreement after parties separated to formalise legally an agreement to split their property.  This article is not about such BFAs.

Instead, this article is discusses the various types of BFAs about the future of parties’ relationships – a contract to regulate how parties may divide their assets if they separate sometime in the future, namely, “cohabitation agreements”.

The primary function of a BFA is to provide certainty and clarity regarding the distribution of assets, liabilities, superannuation, spousal maintenance, and other financial matters in the event that parties separate in future.  

Parties may enter into a BFA under Part VIIIA (for marriages) or Division 4 of Part VIIIAB (for de facto relationships) of the Act.

Types of Agreements

Some of the different types of BFAs include:

• A prenuptial agreement (under section 90B of the Act): made before a marriage in contemplation of the parties marrying.
• A cohabitation agreement during marriage (under section 90C of the Act).
• A cohabitation agreement before a de facto relationship commences  (under section 90UB of the Act).
• A cohabitation agreement during a de facto relationship (under section 90UC of the Act).

Contracting out of Court’s powers under the act

By entering into a BFA, parties “contract out” of the provisions under the Act which otherwise give the Court discretion about how their assets should be distributed.[2]

Instead, the contract they entered into before their relationship commenced or even during their cohabitation will dictate how their assets are distributed if the parties separate in future.  

Certainty

The main motivation why parties enter into BFAs is to ensure certainty

A BFA, if properly made, will avoid the need for parties to have to become involved in lengthy and expensive Court proceedings in future and for a Court to have to decide how their property should be distributed after they separated.

The BFA will dictate precisely how property and finances are to be managed and divided at separation.

When are binding financial agreements binding

The relevant sections of the Act, set out the requirements necessary for a BFA to be valid[3] including that:

• The BFA must be in writing.
• It must be signed by the parties.
• Before signing the agreement, each party must be provided with independent legal advice:
  • about the effect of the agreement on the rights of that party; and
  • about the advantages and disadvantages, at the time that the advice was provided, to that partyof making the agreement.
• Each party must be provided with a copy of a signed statement establishing that each received independent legal advice.

Even when parties have complied with the requirements as listed above, there are cases when a BFA may be declared invalid or void in certain circumstances[4] as explained below.

BFAs are popular in some specific circumstances

In our experience, BFAs are a popular instrument that parties use if they have previously been married or in long-term relationship and each has built up assets of their own and have accumulated substantial superannuation entitlements.

In those circumstances, parties often wish to

• Keep assets they bring into the marriage/relationship as separate assets.
• The parties may agree that
  • if they acquire property jointly
  • they will be entitled to a share equivalent to what they contributed
  • when they acquired the property.

We discuss below the fact that the parties’ union creates one new single blended family from the extended families of each party. The new blended family may include children (including adult children) from a  previous marriage or a long term relationship. Beyond the legal considerations parties entering a BFA are  often also see it as a tool for the new relationship to be accepted by each extended family.

BFAs as Estate Planning Instruments

A BFA entered into by Party A and Party B may become, together with a will,  an “estate planning” tool which will protect the entitlements of members of the new blended family who will be beneficiaries of Party A’s and Party’s B’s estate in future.

In this regard, the Act outlines the enforce-ability of Binding Financial Agreements after the death of one of the parties to a BFA. [5]

BFAs have become increasingly more prevalent (sometimes many years after having been created) in disputes about parties’ entitlements  to an estate as evidence of what the parties intended when they entered into their BFA.

BFAs traditionally have a bad name

BFAs are a creature of legislation. They were created by the Act itself in 2000. 

In the early stages, when a party challenged the validity of a BFA they previously entered into Courts would interpret requirements under the Act strictly and stringently and BFA’s were often declared invalid.

As a result, BFAs gained a negative reputation which to an extent has endured to this date.

During these early cases, the lawyers who advised the parties when their clients originally entered into their BFA, were called as witnesses and were subjected to cross examination about the advice they provided at the time.

As a result, many lawyers became hesitant to work with BFAs due to the perceived risks and complications in case the BFA’s were subsequently declared invalid.

The 2010 amendments to the act

The law was amended in 2010 to make it more difficult to challenge the validity of BFAs.

The Courts now have discretion to confirm the validity of BFAs even in some cases where requirements under the Act were not strictly followed, if the Court is to the view that it would be unfair to declare the BFAs void.

The existence of a Certificate of Independent Legal Advice signed by each lawyer became sufficient evidence that each party was advice as required and Courts could no longer go behind the Certificate to challenge the BFA.

The matter of  Dragomirov & Dragomirov (2024)[6] relates to a BFA which was not a cohabitation agreement but a BFA after separation to formalise the division of their assets. Each party received independent legal advice. The Applicant Wife’s lawyer gave inappropriate advice to her regarding her entitlements if a Court were to decide  how their assets should be split. The Court concluded that the Applicant who challenged the BFA had received inappropriate advice from her lawyer. Even in those circumstances, the Court decided that it could not look behind the Certificate of Independent Legal Advice which each party signed when entering their BFA.

Another notable case decided after the 2010 amendments to the Act was Wallace v Stelzer and Anor [2013] FamCAFC 199 known as “the pole dancer case”. Mr Wallace, a developer, came into the marriage with assets totalling about $16,000,000. Ms Stelzer earned her living as a pole dancer. She had accumulated assets worth about $10,000 when the parties married. The parties entered into a BFA before the marriage which provided, among other things, what Ms Stelzer would be entitled to as a property settlement if the marriage lasted less than four years. The parties separated in less than two years, and she became entitled under the BFA to receive $3,250,000. Mr Wallace challenged the BFA arguing among other things fraud and unconscionable behaviour by Ms Stelzer, but the BFA withstood the challenge and was considered valid. [7]

Court’s powers to Set Aside Agreements

There are various specific circumstances under which a BFA may be declared void by a Court under section 90K (in relation to a BFA by a married couple) and section 90UM (in relation to a BFA by a defacto couple). These circumstances include:

• when the agreement was obtained by fraud.
• If a party was unduly influenced when entering the agreement
• If one or both parties’ motivation to enter into the BFA was to defeat the claim of creditors or another person
• When the agreement is void or voidable or unenforceable.
• In the circumstances that have arisen since the agreement was entered into, it is impractical for the agreement to be carried out.
• Since the agreement was entered into a material change of circumstances has occurred relating to the care and development of a child of the marriage or relationship.
• In respect of the making of the agreement, a party acted unconscionable.

The legislation also refers to the fact that the law of contract applies to BFAs including remedies which either party may have under the law of contracts.

The 2017 High Court decision of Thorne v Kennedy [2017] HCA 49 is a good example about why a Court may set aside an existing BFA. Mr Kennedy and Ms Thorne met online on a website for potential brides. She lived overseas. They met via a website for potential brides. Mr Kennedy was a developer with assets worth between $18,000,000 to $24, 000,000. Ms Thorne did not have substantial assets. Mr Kenny travelled to meet Ms Thorne, and they had an extensive holiday overseas. During the courtship period, Mr Kennedy said to Ms Thorne that if he liked her then he would marry her but that “you will have to sign paper. They became engaged after a short courtship period.

Four days before the wedding, Mr Kennedy presented Ms Thorne with a BFA. She obtained independent legal advice, and the advice was that she should not sign the agreement.  Guests for the wedding had already arrived from overseas including Ms Thorne’s parents. Ms Thorne signed the BFA against the advice she had received.  After separation, Ms Thorne challenged the BFA in Court. The trial judge found in her favour. The Full Court overruled the trial judge’s decision and the matter ended up in the High Court. The High Court decided unanimously in favour of Ms Thorne although they were not unanimous in her reasons which included that the BFA should be set aside:

• Because it was voidable for undue influence and unconscionable conduct on the part of Mr Kennedy.
• Only on the basis of unconscionable conduct
• On the basis of unconscionable conduct but not undue influence.

Common Reasons for BFA to fail

There are various reasons why a BFA may in future be declared invalid beyond questions of fraud, undue influence or unconscionable conduct by one party. including:

• Poor drafting skills including at times “cut and paste” jobs by lawyers thus creating a BFA that does not reflect the parties’ needs.
• Lack of discipline by the parties themselves in not adhering the terms of the BFA they entered. For example, even though an agreement may provide that each party has separate assets identified in the BFA itself, the BFA is likely to fail if the parties subsequently intermingle their assets. In that situation, the existence of the BFA would tend to complicate any future dispute about the distribution of the parities’ assets.  

• Parties may fail to adhere to BFA provisions after signing their BFA and maybe intermingle and not keep their assets separate.
• Failure to review the parties BFAs within reasonable intervals to ensure that the BFA reflects the parties’ situation and changing circumstances.

Another reason why a BFA may fail in future is that it is difficult to predict the future or to cover in a BFA every possible vicissitude. However, it is important to consider some likely changes in a person’s life. As an example, these days it is more common for a party (say, Part A) to lose capacity and functionality and that party may need to move to a nursing home.  Ideally, the BFA will make provision for that eventuality including:

• The source of funds to be applied to pay for a bind to enter a nursing home.
• On going costs.
• Whether Party B may continue to reside in a property owned by Party A indefinitely, for a specific period of time, etc.

Financial advice

Even though the title itself of a BFA, Binding “Financial “Agreement refers to finances, there is no obligation that the parties obtain financial advice before entering a BFA.

A BFA will fail if the parties did not obtain independent legal advice. However, it is curious that there is no obligation for the parties to obtain financial advice before entering into a BFA. There used to be such an obligation in the past but the obligation fell on lawyers rather than financial advisers. The obligation imposed on lawyers was subsequently removed but not replaced by an obligation about for the parties to obtain financial advice.

In our view, it would be prudent for parties to obtain financial advice as well as legal advice regarding whether to enter into a BFA.

Sometimes, there is an obvious imbalance regarding the parties’ finances at the time when they enter into a BFA. While the law of contract applies to a BFA and parties must not act “unconscionably, a BFA need not be fair. However, it may be in the interest of both parties to make the BFA fair to both of them  to avoid the possibility that it may be challenged legally in the future under any of the numerous grounds available.

In circumstances where there is an imbalance in the parties’ finances, it may be in the interest of better off Party A and worse off Party B to incorporate a financial plan into the BFA that provides how Party B will build assets over time, maybe even with the assistance of Party A. Maybe the financial plan should relate to safe investments such as real property. If the parties separate in future Party B will be entitled to the assets accumulated during cohabitation following the overall financial plan.

Must keep it simple

In our view, it is essential to keep BFAs as simple as possible. Maybe the BFA relates to one single asset. If so, it should be limited to that single asset  and not seek to regulate every aspect of parties’ day to day life such as who pays for the outgoings and at what percentage.

[1] The Family law Act, 1975 (Cth) refers to BFA’s as “financial agreements”.

[2] “A Financial Agreement, if it binding, ousts the Court’s jurisdiction in relation to financial or property proceedings between the parties generally, or in relation to specific issues. In other words, a Financial Agreement, if prepared and entered into properly, can be a way to ‘contract out’ of court proceedings.”  see brochure issued by the Federal Circuit and Family Court of Australia – https://www.fcfcoa.gov.au/fl/fp/financial-agreements

[3] Section 90G of the Act regarding spouses in a marriage and section 90UJ for spouses in a de facto relationship.

[4] If the matter falls under section 90K, section 90KA, section 90UM and section 90UN of the Act.

[5] Section 90H and section 90UK of the Act.

[6] Dragomirov & Dragomirov (2024)  FedCFamC1A 187 

[7] See also Harris & Cameron [2024] FedCFamC2F 1033

“Despite finding potential deficiencies, the court ruled that it would be unjust or inequitable under Section 90UJ(1A) not to treat the agreement as binding,” 

https://www.collaw.edu.au/community/news/financial-agreements-in-family-law-what-makes-them-binding/#:~:text=Some%20recent%20cases%20that%20tested%20the%20boundaries,parties%20genuinely%20understood%20what%20they%20were%20signing.