Do “Pre-nups” Need to Be Fair?

In what some may consider to be a reflection on society’s perception of the permanence of marriage, it is not uncommon for people to discuss “pre-nups” with their friends and family when considering marriage. A “pre-nup” is a Financial Agreement entered into before marriage which, by its very definition, determines how people’s assets are divided in the event that they separate.

Last year I wrote about two recent decisions from the Full Court of the Family Court of Australia which provided guidance on circumstances in which a “pre-nup” will be considered binding, or may be set aside.

The Background

One of those cases, Kennedy & Thorne (2016) FLC 93-737, upheld a pre-nup which was signed only 4 days before the wedding. In that case, the parties met on a dating website while Ms Thorne was living overseas. Ms Thorne spoke Greek and English, although her proficiency in English was not great. Mr Kennedy visited Ms Thorne overseas where they holidayed before he brought her back to Australia. Ms Thorne obtained a 9-month visa during which they intended to marry.

Although Mr Kennedy made it clear to Ms Thorne from the beginning of their relationship that his wealth was his and he intended it go to his children, and that Ms Thorne would be required to “sign paper”, he did not present Ms Thorne with the pre-nup until 10 days before the wedding, and made it clear to Ms Thorne that if she did not sign, then the parties would not be getting married.

Despite Ms Thorne being told by her lawyer that the pre-nup was the worst that she had ever seen, was entirely inappropriate and wholly inadequate in relation to everything, Ms Thorne nevertheless signed the pre-nup 4 days before the wedding. Mr Kennedy and Ms Thorne also entered into a second Financial Agreement in the same terms approximately two months later, which Ms Thorne signed while Mr Kennedy waited in his car outside Ms Thorne’s lawyer’s office and called Ms Thorne during that meeting to see how much longer she would be.

When the marriage ended, Ms Thorne applied to have the Financial Agreement set aside on the basis that she entered into it under duress by virtue of Mr Kennedy’s superior bargaining power (his assets being worth approximately $11,000,000 at the time), the status of Ms Thorne’s visa if she did not marry, Ms Thorne’s desire to marry and have children, and the time pressure of the impending wedding.

Pre-nup Initially Set Aside

The trial judge in the Federal Circuit Court of Australia found that the Agreement was entered into under duress and set it aside, that is, Ms Thorne was under excessive or undue pressure to enter into the pre-nup, and it was therefore invalid. 

Pre-nup Found Valid on Appeal

On Mr Kennedy’s appeal to the Full Court of the Family Court of Australia, the Court disagreed that there had been any duress, noting that although the husband was in a superior bargaining position for many of the reasons cited by the wife, it did not amount to duress.

The Full Court found that for duress to occur, the pressure had to be illegitimate or unlawful, such pressure arising as a result of threatened or unlawful conduct by the other party to the agreement.

The Full Court found that Ms Kennedy’s conduct was not unlawful, and upheld the second Financial Agreement, noting that the Agreement was consistent with Mr Kennedy’s conduct throughout the relationship, and that Ms Thorne entered into the Agreement with the benefit of legal advice and after being advised not to sign the Agreement.

Ms Thorne sought special leave to appeal the Full Court’s decision to the High Court of Australia. Leave was granted, and on 8 November 2017 the High Court handed down its decision in the case of Thorne v Kennedy [2017] HCA 49.

The High Court’s Decision

The High Court of Australia unanimously dismissed the Full Court’s decision and upheld the trial judge’s decision that the Financial Agreement should be set aside, and Mr Kennedy ordered to pay Ms Thorne’s legal costs, leaving Ms Thorne free to make an application for property settlement against all of Mr Kennedy’s assets.

The High Court’s decision looks closely at the inequality of bargaining power between a fiancé and a fiancée, noting that Financial Agreements by their very nature will usually favour one party over another, and the circumstances in which a pre-nup may be set aside on the basis of equitable considerations.

The majority of the High Court found that, although the trial judge characterised Mr Kennedy’s actions as duress (which colloquially we can refer to as one party placing undue or excessive pressure on the other party), in reality the trial judge’s findings actually amounted to a finding of undue influence and unconscionable conduct. On that basis, the High Court did not consider whether Mr Kennedy’s actions had to be unlawful to amount to duress, but found that the pre-nup should nevertheless be set aside.

The Take Home Points

1. The majority of the High Court spent some 9 pages defining the concepts of undue influence and unconscionable conduct, but speaking generally they can be distilled as follows:
   • Undue Influence: Where one party’s will is overborne to the point that it is not independent and voluntary, and they are not a free agent or have no free will in entering into the agreement
   • Unconscionable Conduct: Where one party has a special disadvantage which the other party knows about and unconscientiously takes advantage of to procure the agreement
2. The High Court confirmed that the relationship of fiancé and fiancée does not give rise to a presumption of undue influence, that is, it cannot be presumed that either party substantially subordinates his or her free will to the other simply because he or she accepts the other party’s marriage proposal;
3. Equitable remedies such as duress, undue influence and unconscionable conduct don’t lend themselves to a clear definition or test which can be applied to each case, it is important to look more comprehensively at all of the circumstances of each case to determine whether equity can apply to set aside an agreement to ensure justice;
4. The circumstances in this case which led to the pre-nup being set aside were:
   
   1. Ms Thorne’s lack of financial equality with Mr Kennedy;
   2. Ms Thorne’s lack of permanent status in Australia at the time;
   3. Ms Thorne’s reliance on Mr Kennedy for all things;
   4. Ms Thorne’s emotional connectedness to her relationship with Mr Kennedy and the prospect of motherhood;
   5. Ms Thorne’s emotional preparation for marriage; and
   6. The publicness of Ms Thorne’s upcoming marriage.
5. The fact that Ms Thorne’s solicitor advised her not to sign the agreement and Ms Thorne’s actions in signing the agreement anyway is capable of being a circumstance relevant to whether Ms Thorne was under undue influence;
6. The Court is not required to assign weight to any factors relied upon for a finding of undue influence, or a determination of which factors are fundamental, and which factors are subsidiary – an assessment of the will power of a person is not an exercise of mathematical precision, and the factors may not be independent of each other;
7. The finding that Ms Thorne was subject to undue influence pointed to the conclusion that Ms Thorne was subject to a special disadvantage in entering into the agreements;
8. In large part, Ms Thorne’s special disadvantage was created by the timing of the wedding and Mr Kennedy having brought Ms Thorne’s family members out to Australia, and Mr Kennedy’s ultimatum to Ms Thorne (sign the Agreement or the wedding is off, and the relationship is over) was not accompanied by an offer to assist Ms Thorne’s family to return home. Mr Kennedy clearly knew of this special disadvantage and took advantage of it to obtain Ms Thorne’s agreement to the pre-nup in the weeks leading up to the wedding;
9. Although Financial Agreements will often favour one party, the agreements which Ms Thorne signed involved gross inequality;
10. Things would likely have been different if instead of waiting until the eleventh hour, Mr Kennedy had made clear to Ms Thorne from the outset of their relationship that his love for her was conditional on her giving up any semblance of her just entitlements in the event that the parties separated;
11. It is not possible to identify exhaustively what amounts to a special disadvantage, but relevant matters may include illness, ignorance, inexperience, impaired faculties, financial need or other circumstances that affect the weaker party’s ability to protect their own interests; and
12. It is not a sufficient response to the conclusion of unconscionable conduct to point to the fact that Ms Thorne received independent legal advice about the financial agreements and chose to reject her solicitor’s recommendations. This fact only serves to underscore the extent of the special disadvantage which Ms Thorne was under, which Mr Kennedy had substantially created, and that it was unconscientious for Mr Kennedy to procure or accept Ms Thorne’s agreement in those circumstances.

Justice Nettle came to the same conclusion as the majority, but based on a finding that duress had taken place. Justice Gordon also came to the same conclusion as the majority, but on the basis that there had been no undue influence, as Ms Thorne knew what she was doing and her will was not overborne, she was however at a special disadvantage which Mr Kennedy unconscientiously took advantage of to procure her agreement.

Important Lessons

While much has been said about the High Court’s decision in Thorne v Kennedy sounding the death knell for Financial Agreements, to the contrary, the High Court has merely illuminated some key considerations for parties entering into pre-nups to ensure that they are upheld following separation.

The High Court confirmed that in the context of pre-nuptial (and post-nuptial) agreements, some of the factors which may have prominence include:

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 decision highlights the importance of ensuring that parties enter into a Financial Agreement of their own free will, and that where one party may be at a disadvantage that disadvantage is not exploited. The decision may also cause parties to consider the fairness of the agreement, to avoid parties being advised not to enter the agreement in such emphatic terms as in this case, and therefore avoid a finding that their signature to the agreement despite being advised not to enter it was an indication of undue influence.

Thorne v Kennedy is a reminder of the operation of equitable principles in family law, and that each case must be assessed on its particular circumstances. There is not a one-size-fits-all approach to financial agreements and it is prudent for parties to seek advice from a specialist family lawyer at an early stage when considering proposing a pre-nup, not in the weeks before the wedding.

Phillips Family Law practices in the area of Financial Agreements and provides advice and assistance to parties considering entering into a pre-nuptial or during marriage Financial Agreement for asset protection and estate planning purposes.