Charmaine was clear - she’d read the Contracting Out Agreement (also called a prenuptial agreement) that Todd, her partner, had his lawyer prepare. “I’m happy with it and want to sign it”, she said to me.
Like Charmaine and Todd many couples sign a Contracting Out Agreement to protect themselves financially in the event of the relationship ending. They want certainty about what property will be theirs alone and what property will be shared if they separate. Such agreements are a useful tool, especially if one spouse is bringing greater assets or financial means into the relationship. I also find many younger couples like to do these agreements because they wish to maintain some financial independence from one another or safeguard financial assistance that one has received from their parents.
Sometimes these agreements are called ‘pre nuptial agreements’ but 'Contracting Out Agreement' is a more appropriate name because the agreements can be made in the absence of nuptials/marriage (for example, de facto partners) and may occur at any stage of the relationship, before or during it. Furthermore, these agreements are used to “contract out” of the law that stipulates the rights and entitlements each person has to property if the relationship ends. Instead of relying on how the law says their property should be classified and divided, couples may use these agreements to ‘contract out’ of that law and put in place their own legally binding arrangements.
While television would have us think we can use these agreements to lock away all our assets and prevent any future claims at all by an ex, that isn’t the case, as Charmaine and Todd soon learned.
I advised Charmaine to pump the brakes and slow down on wanting to sign the agreement. Charmaine's draft agreement contained some things you simply cannot or should not include in a Contracting Out Agreement if you want the Agreement to endure. To avoid putting time and money into an agreement only to find it is legally invalid or overturned by a Court, here are some of the things you should get careful advice about before having them in your Agreement:
Dictating what is to happen on death #1
If your spouse or partner dies, the Property (Relationships) Act requires you to sign a legal document choosing choose whether to receive the property your deceased partner left to you in their will or make a relationship property claim so that you receive your rightful share of the relationship property. The choice has to be made in writing and you have to receive independent legal advice before making your choice.
Charmaine and Todd’s agreement tried to state now that neither would choose to bring relationship property proceedings if the other died. Essentially it meant they were now electing to simply take whatever property the other left for them in their will).
I have long argued that a couple should not commit themselves to a future choice about how property is to be divided on the death of their significant other when they have no idea what the property situation or their wills will be at that time. This should be done after the spouse or partner has died, not when the contacting out agreement is completed, so that an appropriate assessment can be made about which option is best to choose. At the stage of doing a Contracting Out Agreement, that assessment simply cannot be made. How can you possibly know now what the situation will be upon the death of one of you in terms of how long your relationship will have endured for, whether there are other dependents, what the property pool is and what the deceased's will says (it could be changed many times between now and death)?
Dictating what is to happen on death #2
The Family Protection Act may provide you with a solution if your spouse or partner dies and you find yourself left out in the cold in their will. This can happen for all sorts of reasons and not necessarily out of malice. People are often very good at putting off updating their wills which can result in a partner or spouse not being appropriately provided for.
Charmaine and Todd's prenuptial agreement said they could not bring a claim under the Family Protection Act in the event of the other dying. The Courts have long held that you cannot legally contract out of the Family Protection Act. To the extent your Contracting Out Agreement tries to do so, it could be deemed void and of no effect.
Charmaine and Todd could not say in their agreement that neither of them may make a Family Protection Act claim if they didn't like how the other's will provided for them. However, we could record in the Agreement their current expectations about the extent of any duty to provide for each other in their wills. Doing so may help a court assess the extent of any duty either had to provide for the other in the event a claim was made under the Family Protection Act.
Trying to Avoid Spousal Maintenance
Todd and Charmaine’s agreement said that neither of them would claim spousal maintenance from the other. Maintenance is a payment by one spouse to another after separation to help the receiving person meet their reasonable expenses.
Such a clause should not be included in a Contracting Out Agreement. Contracting Out Agreements deal with property and spousal maintenance does not come within the matters that the law says can be covered in such an agreement. The risk of including a clause about maintenance is that this may invalidate the agreement.
Furthermore, I suggested to Charmaine that it is almost impossible for her to predict with any certainty what the future financial position will be for her and Todd and whether grounds for claiming spousal maintenance will emerge as their relationship or marriage progresses. In Charmaine and Todd’s situation, there was every possibility that spousal maintenance may become an issue in the future as they were talking about having children.
Trying to Avoid Economic Disparity Compensation
If, at separation, your income and living standards are significantly less than those of your spouse or partner due to the different roles you each took during the relationship or marriage, then compensation may be payable to you from your spouse's share of the relationship property. This is called economic disparity compensation.
I sometimes see Contracting Out Agreements that say neither spouse will be able to claim such compensation. In signing to this, you are agreeing not to bring a claim for economic disparity compensation without knowing with certainty how you and your partner will navigate your roles in the future, how this may impact your financial future if you separate and how much such a compensation claim may be.
While there is nothing in law that says you cannot put this in your agreement, it could lead to the entire agreement being set aside by a Court in the future. If there are changes in your circumstances (such has having children together) that mean this clause becomes seriously unjust, then the entire agreement (not just this clause) may be set aside by a Court. Given this, it is likely to be safest to leave out such clauses so that the remainder of your agreement is less at risk!
Trying to Ensure “It’s all mine and never yours”
An agreement will be at risk of being set aside by a Court if it is heavily one sided or takes an “it’s all mine and never yours” approach. Such agreements will often say that the income each earns is their separate property and any assets they have, even if contributed to during the relationship, are never going to be the property of the other person.
This may be appropriate at the outset or early days of a relationship or marriage or in circumstances where you both have equal wealth or capacity to earn. However, over time, such an approach can become unjust. As the relationship endures and your circumstances change, a Court may view such an approach as creating a serious injustice and set the agreement aside. If this happens, your property will be divided in accordance with what the relevant law says and not how you envisioned in your agreement.
If you do want to take this approach, the best way to avoid the agreement being deemed unjust is to build in ways for your partner or spouse to gain an increasing interest in the assets, particularly the family home, in recognition of their contributions to the relationship and your sense of partnership. You should include in the agreement a termination date or when and how it will be regularly reviewed. Ensuring you both regularly review the agreement with your lawyers to check that it is reasonable given your changing circumstances and make any necessary amendments is the best way to ensure your agreement stands the test of time and endures.
These are some of the "should nots" and "cannots" of prenuptial or Contracting Out Agreements. There are others and, of course, each situation is different so it pays to take a cautious and carefully considered approach and listen to your legal advice! After some discussions with Todd and his lawyer, Charmaine signed an amended agreement. Todd realised that if he wanted an agreement that he and Charmaine could rely on, it was wise to have amendments made to it.
Names and any identifying information have been altered to protect the privacy of individuals. The information in this blog is current at 1 October 2022. The information in this blog is general, educative information only. As such, it should not be relied on in place of getting your own legal advice. If you'd like to have us assist you with your own Contracting Out Agreement, then book a free consultation now.