Financial Agreements: Australia vs South Africa

The Family Law Act 1975 (Cth) was amended in 2000 and introduced the concept of financial agreements. The significance of this change was that a binding financial agreement (BFA) would allow parties to essentially opt out of the jurisdiction of the Family Law Act. However, the potential significance of the amendment has not been realised as the Australian courts have shown a trend in refusing to uphold these financial agreements and setting them aside. Consequently, the legal profession has generally become reluctant in acting in matters involving the drafting of such agreements. The legal costs of preparing such an agreement have also unfortunately reached very high amounts as a result of the fact that the practitioners liability escalates.

By comparison, in other jurisdictions such as South Africa, binding financial agreements, or antenuptial contract as they are so called, are common practice. An antenuptial contract, also commonly called an ANC contract or post-nuptial agreement (after the marriage but by application to court) in South Africa, regulates the terms and conditions of a marriage between prospective spouses. Parties in South Africa may make the decision to marry in community of property, which is the default position incidentally should parties not elect another regime applicable to their proprietary consequences. All assets and liabilities are equally shared and jointly owned by the spouses. Spouses can be sued jointly and they are both vulnerable to litigation as a couple. Parties can elect to marry out of community property without the application of the accrual system which means that both parties hold completely separate estates and parties do not own joint property and cannot in principle be sued jointly as a couple should they be married with this specific regime. Most commonly in South Africa parties elect to marry with the chosen regime of out of community of property but with the application of the accrual system. This in essence entails parties retaining their assets prior to marriage however during their marriage accumulating assets into what is termed an “accrued estate”. This accrued estate at the time of divorce is determined and one or the other party will make payment to the other party to ensure that the parties have received an equal distribution of the accrued estate. This regime however encapsulates issues such as starting values and the consumer price index being attributed to it to calculate what the final amount shall be of the division of the accrual to the respective parties.

Having an ANC in place offers a number of benefits including the protection of assets as all debts and assets of each party can remain exclusively theirs when they marry, offering transparency in the relationship by recording the rights, duties and consequences of the marriage and preventing unnecessary disputes with your spouse down the line. In addition, in South Africa generally inheritances received by parties prior to the marriage are not included in the division of the accrued estate at time of divorce. There are occasions when parties are unable to ring fence one’s inheritance that has been brought into purchase accrued assets and in that case courts often accept that the inheritance monies are entrenched in the accrued estate.

The use of BFAs in Australia has similar benefits, however the lack of use of BFAs in Australian legal practice has meant that those wishing to take advantage of the benefits are unable to moreover by virtue of the fact that legal practitioners are hesitant to prepare such BFAs.

The unavailability of prenuptial and postnuptial agreements in Australia is unfortunate, given the lengthy delays in the Family Court and Federal Courts, and the costs associated with reaching a financial settlement. It is believed by many that in the event that BFAs were more readily available as an alternative to traditional avenues in family law parties would be able to privately arrange their property interests upon separation or divorce and avoid the enormous backlog in the courts as well as the legal fees which accompany litigious matters regarding property settlements. Unfortunately, the courts have not taken favourably to this possibility of quarantining one’s property from the oversight of the courts operating under the FLA and are likely to declare the BFA invalid. As a result, legal practitioners are reluctant to get involved in both the drafting of these agreements or to advise on their validity due to the large risk associated with the agreement being overturned in the courts. Those who do elect to become involved with BFAs often charge such exorbitant fees that are arguably out of the price range for many Australians.

The good news is that a financial agreement is not the only means available to parties to make a ‘private’ agreement. Parties may enter into consent orders pursuant to the Family Law Act, which operate as court orders and finalise the property interests of the parties. A consent order can be enforced relatively easily compared to a financial agreement. The alternative also exists for parties to enter into a financial agreement that does not conform to the requirements of a binding financial agreement and in the event that it is challenged, a court may decide to follow the agreement or ignore it either fully or in part.