Divorce can destroy family finances, with the effects felt for many years. The Family Law Act includes provisions, such as financial agreements, that encourage couples to take greater control of their affairs in the event of a divorce. Here’s a lesson in what not to do.
The High Court has ruled that a pre-nuptial agreement and a post-nuptial agreement should be set aside, after finding that one partner has used “undue influence” on the other.
Mr Kennedy and Ms Thorne (both pseudonyms) met online in 2006. Kennedy, then aged 67 and a divorcee with three adult children, was an Australian property developer with assets worth more than $18 million.
Thorne, then aged 36, was Eastern European and living in the Middle East.
As the relationship developed, Kennedy told Thorne that if they married “you will have to sign paper. My money is for my children.”
Seven months after they met, Thorne moved to Australia to live with Kennedy and they planned to get married.
About 11 days before the wedding, Kennedy told Thorne that they were going to see solicitors about signing a pre-nuptial agreement. He told her that if she did not sign the agreement the wedding would not go ahead.
Thorne’s family members had been brought to Australia for the wedding and some of them were planning to live here.
The Family Law Act requires that the parties to a pre-nuptial agreement must receive independent legal advice before they sign an agreement. The solicitor Thorne consulted advised her that the agreement was drawn up solely to protect Kennedy’s interests and that she should not sign it. The solicitor, a family law specialist, told Thorne it was “the worst agreement [she] had ever seen.”
Key features of the agreement included:
- Thorne was to receive maintenance during the marriage of the greater of $4000 a month or 25 per cent of the net income from the management rights of a proposed development.
- Thorne would be permitted to live rent free in a penthouse located in the proposed development and her family would be permitted to live rent free in a unit located in that development.
- If Kennedy and Thorne separated within the first three years of marriage, with or without children, Thorne would get nothing. The rights listed above would cease.
- If Kennedy and Thorne separated after three years, without children, Kennedy would pay a lump sum of $50,000 to Thorne.
- If Kennedy died while they were living together, Thorne would be entitled to a penthouse in the proposed development or a unit in the same city worth up to $1.5 million; 40 per cent of the net income of the management rights of the proposed development or $5000 a month, whichever was greater, and a car.
Thorne believed she had no choice but to sign the agreement, which she did four days before the wedding. The agreement contained a provision that within 30 days of signing, another agreement would be entered into on similar terms (they were “substantially identical” financial agreements).
The couple separated in 2011, slightly less than four years after the marriage, when Kennedy signed a separation declaration.
A year later, Thorne started proceedings in the Federal Circuit Court, seeking orders setting aside both agreements, an adjustment of the property order and a lump sum maintenance order.
The primary judge set aside both agreements, on the grounds of “duress”. The judge found that Thorne’s circumstances led her to believe that she had no choice and was powerless to act in any way other than to sign the pre-nuptial agreement, and that the post-nuptial agreement was signed while the same circumstances continued.
On appeal, the Full Court of the Family Court ruled that the agreements should not be set aside on the grounds of duress, undue influence or unconscionable conduct.
The High Court agreed with the primary judge, although it said “a better characterisation of the primary judge’s finding was that the agreements were set aside for undue influence.”
Amendments to the Family Law Act in 2000 were designed to “encourage people to agree about the distribution of their matrimonial property and thus give them greater control over their own affairs, in the event of marital breakdown.” It introduced Part VIIIA, which allows couples to make regulated financial agreements. These agreements include financial agreements before and after marriage.
For financial agreements to be binding each party must be provided with independent legal advice concerning the effect of the agreement.
Agreements cannot exclude the power of the court if, when the agreement came into effect, the circumstances of the party were such that the party was unable to support himself or herself without an allowance or benefit.
Also, a court may make an order that the agreement is void if a party to the agreement engaged in conduct that was unconscionable.
The issue in this case was whether Thorne was subject to any of the vitiating factors of duress, undue influence or unconscionable conduct. On this issue the High Court said: “The vitiating factor of duress does not require that the person’s will be overborne. Nor does it require that the pressure be such as to deprive the person of any free agency or ability to decide. The person subjected to duress is usually able to assess alternatives and make a choice.”
Kennedy argued that any pressure he exerted did not involve unlawful threat or conduct. The Court did not accept this as a defence.
It found that “it was open to the primary judge to conclude that Ms Thorne considered she had no choice or was powerless other than to enter the agreements The extent to which she was unable to make clear, calm or rational decisions was so significant that she could not aptly be described as a free agent.”
The presence of Thorne’s family in Australia increased the pressure on her.
The High Court said: “While Ms Thorne knew Mr Kennedy required her acknowledgement that his death would not result in her receiving a windfall inheritance at the expense of his children, she had no reason to anticipate an intention on his art to insist upon terms of marriage that were as unreasonable as those contained in the agreements.”