Inappropriate Pre-Nup Set Aside By the High Court of Australia in Landmark Ruling

In the recent case of Thorne v Kennedy [2017] HCA 49, the High Court of Australia (Kiefel CJ, Bell, Gageler, Keane, Nettle, Gordon, and Endelman JJ) heard the appeal by the wife against the decision of the Full Court of the Family Court of Australia. This was the latest occasion in which the High Court considered the validity of Binding Financial Agreements entered into pursuant to the provisions of the Family Law Act 1975 (the “Act”).

Factual Background

The appeal concerned two substantially identical Financial Agreements, a pre-nuptial agreement and a post-nuptial agreement which replaced it, made under Pt VIIIA of the Act. The parties met over the internet in 2006 as part of an online bridal service. At that time, Ms Thorne was 36 years old with minimal assets. Mr Kennedy, however, was a Greek property developer with substantial assets. They moved together to Australia with the intention of getting married. Prior to the wedding, however, Mr Kennedy had Ms Thorne sign a pre-nuptial agreement with the proviso that if she did not sign it, the wedding would not go ahead.

At the time, Ms Thorne obtained the advice of an independent family law specialist, Ms Harrison, who she saw without Mr Kennedy being present. While some minor amendments were made, Ms Thorne signed the pre-nuptial agreement upon the urging of Mr Kennedy, despite Ms Harrison’s advice that “the agreement was the worst agreement that Ms Harrison had ever seen”. Mr Kennedy then singed a substantially similar agreement after the wedding.

Four years after the wedding, Mr Kennedy signed a separation declaration from Ms Thorne. Ms Thorne then proceeded to commence a proceeding seeking orders to adjust the terms of the agreement to be more favourable to her – increasing the property order to $1.1 million and the lump sum spousal maintenance order of $104,000. During the proceedings, in May 2014, Mr Kennedy died and his children took up party as trustees and executors of his estate.

Court’s Analysis

In 2000, the Act was amended, introducing Pt VIIIA, allowing couples to make regulated financial agreements, including pre-nuptial and post-nuptial agreements. One restriction in this part with relation to pre- and post-nuptial agreements is that in s 90G(1), whereby a financial agreement is only binding upon the parties if:
(a) the agreement is signed by all parties; and
(b) before signing the agreement, each spouse party was provided with independent legal advice from a legal practitioner 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 party of making the agreement; and
(c) either before or after signing the agreement, each spouse party was provided with a signed statement by the legal practitioner stating that the advice referred to in paragraph (b) was provided to that party (whether or not the statement is annexed to the agreement); and
(ca) a copy of the statement referred to in paragraph (c) that was provided to a spouse party is given to the other spouse party or to a legal practitioner for the other spouse party; and
(d) the agreement has not been terminated and has not been set aside by a court.

Setting Aside Financial Agreement

What was important for this case, was s 90K and 90KA. Under section 90K(1), a court may set aside a Financial Agreement if satisfied that matters, specified in s 90K(1) are satisfied. One important factor in section 90K(1)(b) is whether “the agreement is void, voidable or unenforceable. Additionally, as per s 90K(1)(e), the court may hold the agreement void if “a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable”.

Section 90KA then provides, in part, that the question whether a Financial Agreement is valid, enforceable or effective “is to be determined by the court according to the principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts”.

The Issues

The matter for the High Court was whether, in dismissing the judgement of the primary judge in the Federal Circuit Court of Australia, the Full Court of the Federal Court erred in their decision as a question of law.

The only issues were whether the agreements should be set aside because Ms Thorne was subject to any of the vitiating factors of duress, undue influence, or unconscionable conduct in her entry into each of the agreements and whether the reasons of the primary judge were adequate.


Undue Influence and Unconscionable Conduct

Duress, undue influence and unconscionable conduct were all discussed in the reasoning of the High Court. However, importantly, with regards to unconscionable conduct, their Honours stated that a conclusion of unconscionable conduct required the innocent party to be subject to a special disadvantage which seriously affected the ability of the innocent party to make a judgment as to their own best interests.

The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring “victimisation”, “unconscientious conduct”, or “exploitation”. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.

Although undue influence and unconscionable conduct will overlap, they have distinct spheres of operation. One difference is that although one way in which the element of special disadvantage for a finding of unconscionable conduct can be established is by a finding of undue influence, there are many other circumstances that can amount to a special disadvantage which would not establish undue influence. A further difference between the doctrines is that although undue influence cases will often arise from the assertion of pressure by the other party which might amount to victimisation or exploitation, this is not always required.

Urgency

The High Court found that Mr Kennedy created the urgency with which the pre-nuptial agreement was required to be signed and the haste surrounding the post-nuptial agreement and the advice upon it and that he took advantage of Ms Thorne’s vulnerability to obtain the agreement.

Conclusion

The High Court held that the appeal should be allowed on the basis that the Full Court erred in concluding that the primary judge’s reasons were not adequate and erred in overturning the primary judge’s conclusion that, in effect, Ms Thorne was subject to undue influence. In the Court’s view, it was not necessary to consider the operation of the vitiating factor of duress. This was particularly so in the absence of any detailed argument about the operation of a criterion for duress that the conduct of the dominant party was improper or illegitimate, and the absence of any findings by the primary judge or the Full Court on these matters. In contrast, the issues concerning unconscionable conduct were fully argued. For the reasons which followed, the Full Court also erred in its conclusion that Ms Thorne’s entry into the agreements was not procured by unconscionable conduct

Orders

The High Court decided that the judgment of the Full Court should be overruled and the judgment of the primary judge of the Federal Circuit Court should be upheld.

Leave a Reply