Pre-nups, mid-nups and done-nups – financial agreements
The Family Law Act permits a couple to enter into a contract about their financial circumstances in the event of a breakdown of a relationship, or after they have already separated.
In Australia we have one term for that type of contract, whether before, during or after a relationship: Financial Agreement.
The first rule to wrap your mind around is that pre-nups (and mid-nups) cannot regulate the financial conduct during a relationship. The terms of those contracts are only enforceable if and when the couple separates.
There are a number of reasons why people enter into Financial Agreements.
After separation
When a couple separates, either of them may apply to the family courts for orders about property settlement and/or spousal maintenance.
If the couple have reached an agreement about either or both of those matters, they generally have two options to document and create binding, their agreement:
- A joint application to the Court to make a “consent order”; or
- A financial agreement.
An effective agreement requires certainty and enforceability. If a party to an agreement can simply renege on the deal, it is not effective.
The Family Law Act provides that a court may make property settlement orders and spousal maintenance orders, if the court considers it appropriate, with only one exception: if a financial agreement is binding on both parties.1
The only way to create an effective agreement then is either to exclude the court’s jurisdiction or to exhaust the court’s jurisdiction.
The former is done by entering into a financial agreement.2
The latter is done by applying for a consent order. The Court may only exercise its power in relation to property settlement once.3 So a consent order will exhaust the jurisdiction.
There are reasons why people choose to enter financial agreements rather than apply for consent orders, and vice versa. This is important to understand, but it depends on your specific circumstances.
Before or during the relationship
The contract with which most family lawyers have a love-hate relationship: the “pre-nup”.
American TV tells us that husbands can demand weekly pillow fights from their multiple wives and wives can contractually limit the recreational activities of their husbands.
If a couple entering a relationship (or recently in one) wish to avoid the potential for litigation in the event of their future separation, they can enter into a contract setting out how their finances will be settled at the end of their relationship.
The legal effect of this agreement is as discussed earlier: the exclusion of the court’s jurisdiction.
There are ways for these contracts to be set aside in the future. It is critical that you understand this before entering the contract.
Another reason why a “pre-nup” may suit a couple is if they wish to settle their finances – in the event of the breakdown of their relationship – in a way that is unlikely to be the conclusion of a court.
In that sense, the law does not protect a person from entering a bad deal.4
What can we do for you
One of the reasons that couples choose to enter financial agreements (instead of apply for consent orders or let the court decide) is the flexibility of the content of their agreement.
Financial agreements must still meet the legal requirements of contract law generally, but they are not bound by the same principles upon which courts must base their decisions (including consent orders).
For pre-nups, there are many options to address what will happen in the event of separation and importantly when. For example, if a relationship were to end after 5 years, the couple may expect a very different outcome than if it were to end after 20 years.
David Marcolin
Senior Associate
1 The actual legal position is a bit more technical. The exception applies to the extent that the financial agreement applies to the matters about which the court would otherwise seek to make orders.
2 See the note above.
3 Again, the legal reality is more nuanced. But this is assuming well prepared documents.
4 It does however protect a person from entering a deal for a bad reason. It is critical that you understand this before entering the contract.