Binding financial agreements – Thorne v Kennedy revisited

Since the High Court of Australia handed down its findings in the matter of Thorne v Kennedy [2017] HCA 49, there has been much discussion as to what the implications of the decision are for binding financial agreements in Australia, with more than one headline rhetorically questioning whether the decision marks “the end” of BFAs as a mechanism by which parties can protect their assets in the event of a marriage or de facto relationship breakdown.

While the answer to that question is, quite clearly, no, it is worth revisiting the case to clarify what implications it does have for individuals contemplating entering into a pre-separation binding financial agreement (and, of course, their advisors).

In broad outline, the facts of the case were as follows:

1. Mr Kennedy, a very wealthy 67-year-old Greek-Australian property developer (net assets of approximately $19m), met Ms Thorne, a 30-something Eastern European woman with minimal assets, online.
2. After Mr Kennedy travelled overseas to meet Ms Thorne and a subsequent European vacation together, the pair returned to Australia with the intention of getting married.
3. A week and a half before their wedding, Mr Kennedy told Ms Thorne that she would need to sign a binding financial agreement, otherwise the wedding would be cancelled.
4. The BFA that Mr Kennedy instructed his solicitors to prepare made very minimal provision for Ms Thorne (the High Court noted that, while Mr Kennedy had told Ms Thorne from the early stages of their courtship that his intention was that his assets be bequeathed to his children upon his death and that, if he and Ms Thorne were to marry, she would “need to sign some papers”, he had not told her just how one-sided the agreement would be). In a nutshell, the agreement provided that if the parties separated:
   1. within three years of marriage, Ms Thorne would receive no monetary settlement; or
   2. after three years of marriage, Ms Thorne would receive a single lump sum of $50,000, indexed for CPI if separation occurred after a certain date.

   The agreement also provided that, if Mr Kennedy died while the parties were still together, Ms Thorne would receive a somewhat more substantial entitlement, albeit fairly modest in the context of $19m estate.

5. As is the requirement for a financial agreement to be binding, Ms Thorne attended a lawyer and obtained independent legal advice in relation to the agreement. Her lawyer advised her that the agreement was completely one-sided and “entirely inappropriate” and should not be signed. As the High Court noted, Ms Thorne understood her lawyer to be saying that the BFA was the worst she had ever seen.
6. Despite receiving this advice, Ms Thorne signed the agreement (with some minor amendments) and the wedding proceeded.
7. This BFA contained a recital that, within 30 days of the wedding, the parties would enter into a subsequent agreement in similar terms. A more-or-less-identical BFA was prepared and again, against her lawyer’s advice, Ms Thorne signed it. While Ms Thorne was meeting with her lawyer to sign the agreement, Mr Kennedy (who was waiting in the car park) phoned her and asked why it was “taking so long”.
8. After four years of marriage, the parties separated, and thereafter Ms Thorne brought an action in the Federal Circuit Court looking to set aside both BFAs.

After initially being successful in having the agreements set aside, and then having the agreements reinstated following an appeal by the estate of Mr Kennedy (who had since passed away) to the Full Court of the Family Court of Australia, Ms Thorne appealed the decision to the High Court.

The High Court unanimously allowed Ms Thorne’s appeal and made orders setting both agreements aside. The majority judgment of the High Court (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ) set the agreements aside on two bases: namely, that when Ms Thorne entered into the agreements she was, firstly, the subject of undue influence, and, secondly, unconscionable conduct. In separate judgements, Nettle J and Gordon J also set the agreement aside on the basis of unconscionable conduct (with Gordon J determining that there was no undue influence). The following focuses on the findings of the majority.

Undue influence

In simple terms, undue influence is an equitable doctrine which provides that in circumstances where a party is not acting as a “free agent” or exercising “free will” at the time of entering into an agreement—which may be the result of or arise out of any number of different circumstances—the agreement is voidable by that party.¹ One circumstance that can give rise to a person’s will being overborne is “excessive pressure”: where such pressure causes a person to simply follow the wishes and demands of the pressuring party, a finding of undue influence may result.²

Although the trial judge couched her decision in terms of duress, the majority of the High Court determined that a more apt “characterisation” of Her Honour’s findings was that the BFAs were voidable on account of undue influence as when entering into the agreements, Ms Thorne had been “deprived of the ability to bring a free choice to the decision as to whether to sign the agreements”;³ her “choices about entering the agreements on Mr Kennedy’s terms … [having been] subordinated to the will of Mr Kennedy”.⁴

In doing so, the majority held that the primary judge was entitled to rely on the six factors she mentioned in reaching her decision, which they summarised as follows:

(i) [Ms Thorne’s] lack of financial equality with Mr Kennedy; (ii) her lack of permanent status in Australia at the time; (iii) her reliance on Mr Kennedy for all things; (iv) her emotional connectedness to their relationship and the prospect of motherhood; (v) her emotional preparation for marriage; and (vi) the ‘publicness’ of her upcoming marriage.”⁵

Furthermore, the trial judge had, in reaching her decision, also relied on the fact that the BFAs were not “fair and reasonable” to Ms Thorne, and the majority of the High Court held that this was valid, stating that “it can be an indicium of undue influence if a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of this nature.”⁶

Significantly, in addition to its findings in respect of the particular BFAs in question, the High Court majority also set out a number of factors which may be relevant to whether or not there is undue influence in relation to binding financial agreements generally. Specifically, these factors are as follows:

(i) whether the agreement was offered on a basis that it was not subject to negotiation; (ii) the emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement; (iii) whether there was any time for careful reflection; (iv) the nature of the parties’ relationship; (v) the relative financial positions of the parties; and (vi) the independent advice that was received and whether there was time to reflect on that advice.⁷

It is important for parties and their advisors to contemplate these factors and take necessary steps to mitigate the risk of a finding of undue influence when a binding financial agreement is being entered into.

Unconscionable conduct

Unconscionable conduct is an overlapping, yet separate, equitable doctrine to that of undue influence. It arises where one party to a transaction is “subject to a special disadvantage ‘which seriously affects [their] ability … to make a judgment as to [their] own best interests’”, and that special disadvantage is unconscientiously taken advantage of by the other party to the transaction (whereby the latter party knows, or should know, of that special disadvantage).⁸

In Thorne v Kennedy, the majority held that—given the trial judge’s findings that Ms Thorne “saw no choice but to enter the agreements” (that is, her free will was overborne)—she was necessarily the subject of a special disadvantage.⁹ They further held that:

1. not only did Mr Kennedy know about Ms Thorne’s special disadvantage, but that he was somewhat responsible for it (inasmuch as he pressured Ms Thorne to sign the agreements in a short time frame, did not give her adequate forewarning of just how unreasonable the agreements would be, and, although telling her that the wedding would be called off if she did not sign, did not offer to fly her family (who he had flown out to Australia) home if that were to occur);¹⁰ and
2. that he had taken advantage of that situation to achieve highly (and unusually) inequitable agreements.¹¹

On this basis, the BFAs were vitiated for unconscionable conduct.

Observations

As is evident from the foregoing, Thorne v Kennedy involved a fairly extreme factual scenario, both in terms of the specific circumstances Ms Thorne found herself in when signing the agreements, and the extent to which they were not fair or reasonable, being, as the majority noted (and as mentioned above), conspicuously unfair even by the standards of BFAs,¹² which are often strongly weighted in one party’s favour. Given this, the issues of equity that arose in this case are unlikely to be enlivened in many or most instances where parties are contemplating entering into a BFA, and the decision, certainly, does not mark the demise of this type of agreement as a viable legal option.

Nonetheless, it is also not uncommon to receive instructions from clients in circumstances that—while perhaps not as extreme as in Thorne v Kennedy—involve similar elements: an agreement that quarantines the assets of the wealthy individual; pressure to enter into the BFA prior to a wedding; a party from overseas who speaks little or no English (for instance).

To this end, there are a number of important matters for clients and their advisors to take from Thorne v Kennedy, particularly when circumstances of this nature are present, but also when entering into or acting in relation to BFAs generally. This includes having regard to the following matters (the below list being in no way exhaustive):

1. the six factors referred to on page 4 above which the High Court majority indicated were relevant to a finding of undue influence. Advisors and their clients should be aware of these factors, and, where necessary and possible, take steps to preclude or mitigate circumstances indicative of undue influence (for instance, by making it clear that the terms of a BFA are open for negotiation and allowing sufficient time for a party disadvantaged by the agreement to absorb and reflect upon it);
2. that Courts may regard a grossly inequitable binding financial agreement as evidence of undue influence or unconscionable conduct. In this respect, the fact that a party receives independent legal advice that they should not enter into a BFA, but does so anyway, may in fact support an argument that their will had been overborne by the dominant party;
3. that, in general, the fairer the BFA, the lower the risk of the agreement being vitiated on account of undue influence or unconscionable conduct; and
4. that while parties should always endeavour to strictly comply with the technical requirements for BFAs (including obtaining independent legal advice), this alone will not guarantee an agreement’s validity—regard must also be had to the nature of the parties’ relationship, the circumstance surrounding the agreement’s preparation and execution, and the terms of the agreement itself.

This article provides general information about the aforementioned case. We recommend seeking professional legal advice from our experienced family law team in regard to your specific circumstances.

If you or someone you know would like more information or needs help or advice, please contact us on (08) 9335 9877 or complete the form below to request an Introductory Consultation.

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1. See Thorne v Kennedy [2017] HCA 49 at [30] to [32].
2. Thorne v Kennedy [2017] HCA 49 at [30].
3. Thorne v Kennedy [2017] HCA 49 at [57].
4. Thorne v Kennedy [2017] HCA 49 at [57].
5. Thorne v Kennedy [2017] HCA 49 at [47].
6. Thorne v Kennedy [2017] HCA 49 at [56].
7. Thorne v Kennedy [2017] HCA 49 at [60].
8. See Thorne v Kennedy [2017] HCA 49 at [37] to [40].
9. Thorne v Kennedy [2017] HCA 49 at [64].
10. Thorne v Kennedy [2017] HCA 49 at [65].
11. Thorne v Kennedy [2017] HCA 49 at [65].
12. Thorne v Kennedy [2017] HCA 49 at [56].