Thorne & Kennedy – A caution on Binding Financial Agreements in Australia

60-Second Summary:

Thorne & Kennedy is a recent High Court decision that has changed the legal landscape in Australia when dealing with “prenups” and Financial Agreements. This case has changed the way lawyers approach such Agreements and unconscionable conduct is now at the forefront of legal discussion across the country.

• Don’t leave it until the last minute to sign a Financial Agreement. The proximity to the wedding date can cause extra stress and pressure that may be construed as undue influence (or duress).
• The nature of the relationship between parties who are entering into a Financial Agreement and the circumstances surrounding the entering into and signing of the Agreement are important considerations in determining whether the Agreement will be valid.

 

The Finer Details

Thorne & Kennedy was a High Court of Australia appeal from a decision of the Full Court of the Family Court of Australia setting aside orders of the trial judge, who had found that two substantially identical financial agreements (a prenuptial agreement and a post-nuptial agreement) were not binding. In overturning the trial judge’s decision, the Full Court prevented the wife from seeking property settlement and spousal maintenance under the Family Law Act 1975 (Cth) following the breakdown of the parties’ marriage.

In reaching her decision, the trial judge had posed the questions: “Why would the wife sign an agreement which she understood to be the worst her solicitor had ever seen?’ and “why, despite her solicitor’s advice, would the wife fail to conceive of the possibility that the husband may end the marriage?’ The answer to both questions was the same, namely, that the wife was powerless to do otherwise. The High Court agreed and overturned the Full Court’s decision.

The financial agreements were made between Mr Kennedy, a wealthy Australian property developer of Greek extraction, and his eastern European fiancée, Ms Thorne. The parties met over the internet in 2006 and, following a brief courtship during which the parties travelled extensively through Europe, they returned to Australia in February 2007 with the intention of getting married.

Soon after meeting, Mr Kennedy explained to Ms Thorne that if he liked her then he would marry her but that “you will have to sign paper. My money is for my children.” At the time Ms Thorne was 36 years of age with few, if any, assets and spoke only Greek and a little English. Mr Kennedy was 67 years of age with three adult children and assets worth between $18 and $24 million.

 

The first agreement

On 20 September 2007, 18 days before the date set for the wedding, Mr Kennedy took Ms Thorne to obtain independent legal advice about the first agreement, having advised her the day before that if she chose not to sign, the wedding would not proceed. This was the first occasion that Ms Thorne had learned of the agreement’s contents, by which time her extended family had already arrived in Australia and extensive wedding preparations had been made.

In her written advice, which was explained to Ms Thorne the next day, the independent solicitor noted that:

1. The agreement provided for Ms Thorne to receive maintenance during the marriage of the greater of $4,000 per month, or 25% of the net income from the management rights of a proposed development. This was considered a very poor provision given Mr Kennedy’s financial circumstances.
2. Ms Thorne and her family would be permitted to live rent-free in the proposed development, however, it was noted that the local council had refused planning permission for that development.
3. If the parties separated within the first three years of marriage, with or without children, Ms Thorne would get nothing.
4. If the parties separated after three years, without children, Mr Kennedy would be obligated to pay a lump-sum of $50,000, a sum described by the solicitor as piteously small.
5. If Mr Kennedy died while the parties were living together as husband and wife, Ms Thorne would be entitled to (i) a penthouse in the proposed development, or otherwise a unit in the same city not exceeding $1.5 million in value; (ii) The greater of 40% of the net income of the management rights of the proposed development, or $5,000 per month; and (iii) The Mercedes Benz motor vehicle presently in Ms Thorne’s possession, or a replacement vehicle of the same or higher value.

The advice concluded with the observation that Ms Thorne appeared to be under significant duress in the lead up to the wedding and had been put in a position where she must sign the agreement, regardless of its fairness, for the wedding to proceed.

The oral advice led Ms Thorne to the clear understanding that the agreement was “entirely inappropriate” and the worst her solicitor had ever seen. Furthermore, it was evident to her solicitor that Ms Thorne failed to so much as consider the possibility of Mr Kennedy separating from her.

 

The second agreement

The first agreement was nevertheless signed (following some very minor amendments requested by Ms Thorne’s solicitor) and, in accordance with a recital contained therein, a second agreement, in similar terms to the first, was entered into very shortly after. Prior to signing the second agreement the independent solicitor again urged Ms Thorne to reconsider. During that meeting Mr Kennedy telephoned Ms Thorne to enquire how much longer she would be, furthering the impression that Ms Thorne was being pressured to sign.

Slightly less than 4 years after the marriage, Mr Kennedy signed a separation declaration and Ms Thorne commenced Family Court proceedings shortly thereafter.

 

Undue influence and unconscionable conduct

Depriving a party of their ‘free will’, known in equity as “undue influence”, does not require that the stronger party’s conduct is capable of being characterised as illegitimate or improper. In Johnson v Buttress, Justice Dixon observed that undue influence may arise merely from the “deliberate contrivance” of a party, resulting in a transaction which was the outcome of “such an actual influence over the mind of the [other] that it cannot be considered a free act.”

When entering into agreements of this type, there will inevitably be an inequality of bargaining power between the parties. Where the discrepancy rises to the level of ‘special disadvantage’, a further vitiating factor known as “unconscionable conduct” may be inferred. A finding of special disadvantage requires that the disadvantage be not merely a difference in bargaining power, but an inability of the weaker party to make a judgment as to their own best interests.

The application of equitable principles, including undue influence and unconscionable conduct, demand an evaluative judgment and are not dependent upon clearly defined legal categories. Rather, they require a “precise examination of the particular facts, a scrutiny of the exact relations established between the parties and a consideration of the mental capacities, processes and idiosyncrasies of the other party.”

 

The trial judge’s findings

The trial judge referred to an inequality of bargaining power and the absence of any outcome open to Ms Thorne that was ‘fair or reasonable’. However, Her Honour noted that the circumstances in which Ms Thorne found herself powerless to do other than sign the agreements arose from much more than an inequality of financial position (as later asserted in proceedings before the Full Court).

The trial judge set out six matters which led her to the conclusion that Ms Thorne had ‘no choice’ when entering into the agreements, a conclusion with which the High Court agreed.
Those matters were:

1. Her lack of financial equality with Mr Kennedy;
2. Her lack of permanent status in Australia;
3. Her reliance on Mr Kennedy for all things;
4. Her emotional connectedness to their relationship and the prospect of motherhood;
5. Her emotional preparation for marriage; and
6. The ‘publicness’ of her upcoming marriage.

 

Of particular significance was the gap between the independent solicitor’s strong advice not to sign the “entirely inappropriate” agreements, and Ms Thorne’s actions in nevertheless signing, which was construed as supporting an inference of undue influence.

The Full Court’s findings

The Full Court rejected the trial judge’s findings, and held that the agreements were fair and reasonable, because:

1. Mr Kennedy told Ms Thorne at the outset (and she accepted) that his money was for his children; and
2. Ms Thorne’s only concern (which the agreements duly accommodated) was that provision be made for her in the event of Mr Kennedy’s death.

The Full Court also held that Mr Kennedy had not taken advantage of Ms Thorne, and accordingly, his conduct was not unconscionable, because:

• There was no misrepresentation as to Mr Kennedy’s financial position;
• Mr Kennedy made early representations that Ms Thorne would not receive any part of his wealth on separation;
• Ms Thorne staunchly believed that Mr Kennedy would not leave her (and eschewed any concern for her financial position in that event); and
• Mr Kennedy accepted the handwritten amendments to the agreements sought by Ms Thorne’s solicitor.

 

The Wife’s appeal to the High Court of Australia

Ultimately the High Court determined that the Full Court had erred in rejecting the trial judge’s finding that there was no ‘fair or reasonable’ outcome open to Ms Thorne. Given both parties’ awareness that Mr Kennedy would not amend the agreements (except in very minor respects), their Honours reasoned that the trial judge had, in fact, under-stated Ms Thorne’s predicament. This, together with the six factors set out by Her Honour, led the High Court to reject the assertion that the trial judge’s findings were based entirely upon an inequality of bargaining power.

The High Court observed that “…the extent to which [Ms Thorne] was unable to make ‘clear, calm or rational decisions’ was so significant that she could not aptly be described as a free agent.” This led inexorably to the inference that she was also subject to a ‘special disadvantage’ in her entry into the agreements (and a further finding of unconscionable conduct).

Usefully, the High Court listed in its reasons various factors which may be of significance in the context of financial agreements generally, including:

1. Whether the agreement was offered on the 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 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.

 

Conclusion

Ultimately the High Court found that the agreements were voidable due to both undue influence and unconscionable conduct and accordingly it set aside the orders of the Full Court with costs and made a further costs order in favour of Ms Thorne in respect of the High Court appeal.

At DS Family Law our team of dedicated family lawyers are fully cognizant of the legislative requirements (and equitable principles) relevant to binding financial agreements. Whether certainty in the unfortunate event of a relationship breakdown is sought, or independent advice as to the merits of a proposed agreement is required, we at DS Family Law take pride in ensuring our clients’ interests are preserved and that they don’t become a footnote in the Family Court’s canon of cautionary tales.

The above information is general in nature and is not specific advice for your situation. If you have questions about how the information contained in this article may apply to your situation, you must seek independent legal advice.