High Court of Australia condemns "grossly unreasonable" Binding Financial Agreement
“The description of the Agreements by the primary judge as not being “fair or reasonable” was not merely open to her. It was an understatement.”
- Justices Kiefel, Bell, Gageler,
Keane and Edelman
8 November 2017
Yesterday, the High Court released their eagerly awaited decision in the case of Thorne & Kennedy.
The wife, Ms Thorne, had appealed to the High Court after the Full Court of the Family Court upheld two Binding Financial Agreements, entered into before and after marriage, between her, a poorly educated, impecunious online bride, and her husband, a multimillion dollar property developer. The effect of the Agreements meant that Ms Thorne received a mere payment of $50,000 (indexed) after 4.5 years of marriage, when Mr Kennedy decided to end their relationship. The background facts to this case and the parties’ submissions to the High Court were summarised in our earlier article in August 2017.
The High Court unanimously found that the two Financial Agreements should be set aside, thereby overturning the Full Court’s decision. In a concise judgment, five Justices of the High Court found the Agreements to be vitiated by reason of both undue influence and unconscionable conduct. The remaining two Justices agreed that neither Agreement could be binding, due to a finding that Mr Kennedy had engaged in unconscionable conduct in procuring Ms Thorne’s consent to the Agreements.
In their majority decision, Justices Kiefel, Bell, Gageler, Keane and Edelman found that “undue influence” may arise due to a variety of circumstances and sources. In this particular case, they focused on “excessive pressure” depriving a person of free choice ‘where it causes the person substantially to subordinate his or her will to that of the other party’. While they acknowledged that pressure may affect a person’s will to different degrees, for a finding of undue influence, they held that ‘at the very least, the judgmental capacity of the party seeking relief must be "markedly sub-standard" as a result of the effect upon the person's mind of the will of another.’
Their Honours approved the trial judge’s findings that Ms Thorne had “no choice” but to consent to the Agreements. In particular, they endorsed the trial judge’s conclusions that:
“Ms Thorne’s powerlessness arises not only from her lack of financial equality, but also from her lack of permanent status in Australia at the time, her reliance on Mr Kennedy for all things, her emotional connectedness to their relationship and the prospect of motherhood, her emotional preparation for marriage, and the publicness of her upcoming marriage.”
Although the trial judge found that these factors justified a finding that Ms Thorne signed the first Financial Agreement under “duress”, the High Court Justices held that the trial judge’s conclusion ‘is more aptly described as one of undue influence’. They determined that the abovementioned factors meant that Ms Thorne lacked any free choice in deciding whether or not to sign the Agreements and that her will was subordinate to Mr Kennedy’s.
Critically, in the context of Binding Financial Agreements generally (which they referred to more colloquially as “pre-nuptial and post-nuptial agreements”), their Honours held that the following factors may have prominence to a finding of undue influence:
whether the agreement was offered on a basis that it was not subject to negotiation;
the emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
whether there was any time for careful reflection;
the nature of the parties' relationship;
the relative financial positions of the parties; and
the independent advice that was received and whether there was time to reflect on that advice.
We expect that the above factors will be regularly quoted during future proceedings involving challenges to Financial Agreements.
In the particular circumstances of this case, the High Court majority found it relevant that:
Ms Thorne’s lawyer had strongly advised her not to sign the Agreement;
the Agreements were ‘grossly unreasonable’, noting that ‘some of the provisions could not have operated more adversely to Ms Thorne’; and
it was not open to Ms Thorne to attempt to negotiate substantial changes to the provisions of the Financial Agreements proposed by Mr Kennedy.
In her dissenting decision on the issue of undue influence, Justice Gordon held that Ms Thorne’s lack of options or belief that she had no choice but to sign the Agreements did not impact her ‘will or capacity to exercise independent judgment’. Her Honour was satisfied that those circumstances resulted in a special disadvantage, but found that they could not impact the quality of Ms Thorne’s consent.
Each of the High Court Justices found that the Agreements could be set aside on the grounds of unconscionable conduct. Following an earlier High Court decision in CBA v Amadio, their Honours confirmed that unconscionable conduct requires:
the innocent party to be subject to a special disadvantage “which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests”; and
the other party must also unconscientiously take advantage of that special disadvantage – which generally also requires ‘that the other party knew or ought to have known of the existence and effect of the special disadvantage’.
When applying these principles, the majority decision held that the trial judge’s conclusion that Ms Thorne was “powerless” necessitated a finding that Ms Thorne was in a position of special disadvantage, thereby impacting her ability to make decisions in her own interests.
Furthermore, their Honours held that the special disadvantage was known to Mr Kennedy and ‘had been, in part, created by him’ in respect to:
the urgency with which both the pre-nuptial and post-nuptial agreements were signed;
the late notice of the unreasonable nature of the agreements;
Mr Kennedy’s “ultimatum” to cancel the wedding if Ms Thorne didn’t sign the agreement, without making any provision for the return of Ms Thorne’s family members who had already travelled to Australia for the wedding (at Mr Kennedy’s expense).
In separate judgments, Justices Nettle and Gordon found that the special advantage also arose due to Mr Kennedy:
bringing Ms Thorne to Australia;
allowing preparations for the wedding to continue and waiting until ‘she had ceased for all practical purposes to have any other option’ before making his ultimatum.
A significant focus of the decision of the Full Court of the Family Court (which was appealed from) was whether Ms Thorne was under duress to sign the Agreements. Mr Kennedy’s lawyers relied on a NSW Court of Appeal decision (ANZ v Karam) to submit that duress required threatened or actual unlawful conduct. The Full Court relied in part on the lack of unlawful conduct to set aside the trial judge’s decision to invalidate the Agreements for duress.
However, the High Court majority’s re-characterisation of the trial judge’s conclusions as “undue influence” rather than “duress” meant that Justices were not required to decide whether duress required unlawful conduct or whether some lesser, lawful form of conduct could suffice.
Their Honours observed that a lack of submissions prevented them from making determinative findings in respect to the requirements for duress. However, Justice Nettle observed that ‘Karam’s rejection of illegitimate pressure by lawful means was largely based on a view that the concept is too uncertain to be acceptable’ and that American and English authorities favoured the view that duress did not require threatened or actual unlawful conduct. His Honour nevertheless concluded that detailed argument would be required before overturning the principles in Karam.
Risks of litigation
In allowing the appeal and upholding the trial judge’s original decision to set the Financial Agreements aside, the High Court awarded costs to Ms Thorne in respect to both the Full Court and High Court proceedings. Those costs related to two years of proceedings in Courts of superior jurisdiction and would in all likelihood be considerable.
In circumstances where Ms Thorne’s initial application filed with the Federal Circuit Court in 2012 sought a property settlement of $1.1 million and lump sum spousal maintenance of $104,000, we expect that Mr Kennedy/ his estate would have been financially better off reaching a settlement with Ms Thorne, even on her terms, some five years earlier. Instead, Mr Kennedy’s offer of settlement was to pay Ms Thorne her $50,000 entitlement under the Agreements plus a further $20,000.
The practical outcome of this case should be a reminder to practitioners and litigants to consider making reasonable offers of settlement, at an early stage.
The future of Binding Financial Agreements
While the High Court took the opportunity to clarify the law in relation to undue influence and unconscionable conduct as it relates to Financial Agreements, the decision will not result in any substantive changes to the manner in which our team prepares Binding Financial Agreements. Particularly as is not surprising that the High Court held that the “grossly unreasonably” terms in the Agreements pointed towards the possibility that undue influence had affected Ms Thorne’s decision.
This should not mean that Financial Agreements ought not be used or that they do not add value. If nothing else, Agreements negotiated in the context of a loving and trusting relationship and providing for a just and equitable settlement will minimise the risks of costly litigation in the event of separation. “Fair and reasonable” Financial Agreements can provide for a variety of settlement options depending on the individual circumstances of the parties and the potential scenarios that may arise throughout the course of their relationship. In light of the High Court’s decision, it would be prudent to negotiate such terms well before any wedding date and without any haste or pressure to finalise the Agreements at short notice.
If you would like an existing Financial Agreement reviewed, or if you have any questions or concerns about entering into a Financial Agreement in the future, our specialised family law team would be happy to assist.