Binding Financial Agreements (BFAs)
The terms “financial agreement”, “binding financial agreement” or “BFA” are often used loosely by lawyers and non-lawyers alike in reference to contractual agreements which parties may enter under the Family Law Act (1975) and other legislation such as the Child Support Assessment Act (1989).
As described below, there are maybe ten different variations of BFAs which parties may sign up to.
Among the most popular BFAs, there are two categories:
- Cohabitation agreements – where parties make a contract about the future regarding their property and how it may be divided if they separate;
- Property settlements – where parties have already separated and wish to formalise legally the division of their assets.
A definition of a BFA
A possible, general, definition of a BFA is:
A private deed or a contract that parties enter into in writing under the Family Law Act (1975) or the Child Support (Assessment) Act (1989) to formalise an agreement about their property or child support, either because:
- they are about to marry or commence a de facto relationship and they want to make provision about how their assets will be divided between then if they separate;
- they are in a marriage or a de facto relationship and they want to make provision about how their assets will be divided between then if they separate;
- they separated, and they wish to formalise a property settlement for the division of their assets;
- they are separated, and they wish to make provision for child support for their children as an alternative to an assessment for periodic payments under the Child Support (Assessment) Act (1989).
However, the above definition does not do justice to all the various alternative BFAs that parties may sign between themselves. For example, parties may enter a BFA about:
- Spousal maintenance;
- A relationship which is not a marriage or a de facto relationship but a “domestic relationship” as understood under the Domestic Relationships Act (1984). This may include, for example:
- two persons in a personal relationship although they are not living together; or
- a carer and a patient such as a daughter and her mother or persons who are not related.
Ten Alternative Versions of BFAs
I counted ten possible variations of BFAs which parties may sign up to:
- A “pre-nuptial” agreement, that is, an agreement between two parties before their marriage in contemplation of their marriage about how they will divide their assets in future if they separate;
- An agreement between two parties before they commence to live together in a de facto relationship, in contemplation of their relationship, about how they will divide their assets in future if they separate;
- An agreement between two parties after they marry about how they will divide their assets in future if they separate;
- An agreement between two parties after they commence their de facto relationship about how they will divide their assets in future if they separate;
- A private agreement, after a married couple have separated for a property settlement, instead of consent orders to be made by a court, that provides how their assets must be divided between them;
- A private agreement after a de facto couple have separated for a property settlement, instead of consent orders to be made by a court, that provides how their assets must be divided between them;
- A spousal maintenance agreement – a private agreement which parties sometimes enter into after they separated (whether they were married or in a de facto relationship) normally in addition to a property settlement which makes provision about future periodic payments or lump sum spousal maintenance which one party will pay to the other;
- A superannuation agreement is a private agreement for a property settlement which parties sometimes sign up to after they separated (whether they were married or in a de facto relationship) making provision about how to split their combined superannuation entitlements between them;
- A Child Support Agreement – an agreement which parties may enter under the Child Support Assessment Act (1989) about child support for their children including for periodic payments and such other things as child care fees, school fees, medical expenses, orthodontal expenses etc;
- A domestic relationship agreement – an agreement which parties to a “domestic relationship” may enter between themselves under the Domestic Relationships Act 1984 (ACT).
Why sign up to a BFA?
There are many reasons why people choose to enter BFAs.
When it comes to a property settlement, parties have no choice but to formalise legally their agreement for division of their assets. Parties may do this by signing a BFA or consent orders. There are two main reasons why their property settlement must be formalised legally:
- A BFA will end the parties’ financial relationship, and neither will have a claim against the other under the Family Law act in future;
- There are various exemptions in relation to stamp duty fees for the transfer of title to real property, shares and motor vehicles if parties may produce a BFA which reflects their property settlement. There is also roll over relief regarding capital gains tax which otherwise may be payable by a party.
With regard to cohabitation agreements the most common reason why parties choose to sign a BFA is to ensure clarity and certainty about the division of their assets in the event that they separate in the future.
Requirements for a BFA to be valid
There are various specific requirements under the Family Law Act which must be followed for a BFA to be valid.
In every case, for a BFA to be valid and enforceable:
- It must be made in writing;
- It must be signed by all parties;
- Each party must obtain independent legal advice from his/her solicitor and:
a) Each solicitor must sign a statement or certificate of legal advice;
b) The solicitors’ certificates must be exchanged between the parties and normally they are attached to the BFA.
In drafting the agreement, the lawyers and the parties must be aware that BFAs are sometimes challenged in court in the future after parties separated if one of party no longer wishes to abide by the agreement. The Family Law Act lists various reasons why a BFA may be set aside including:
a) If it was obtained by fraud;
b) If the agreement was created to defraud or defeat a creditor or another person;
c) If circumstances have changed since the BFA was signed:
i) relating to the care, welfare and development of a child of the parties and hardship would be caused to a party as a result and, as a result of the change, the child or, if the applicant has caring responsibility for the child or
ii) and it has become impracticable for the agreement to be carried out.
Cut and Paste Jobs and Templates
Far too frequently, BFAs which parties have entered into are subsequently challenged in court and set aside by the courts for various reasons, sometimes because basic errors have been made by the drafter and/or the clients.
Parties’ motivation to sign a BFA in the first place is often sound and it is a good idea to have a contract between themselves about their joint assets if they were to separate is a good idea and it normally ensures that there will be clarity and certainly when they separate and a BFA avoids future disputes in Court.
However, it is important for the parties and their lawyers to have a healthy respect for the necessary process to draft a good BFA. The errors which are sometimes made relate to the fact that the drafter did a cut and paste job and the agreement was not adjusted and refined to address the needs of the parties.
Precedents and templates (some which may be obtained in the internet) may be dangerous unless used wisely and carefully and adapted to the parties’ needs. There is a need for the parties and the lawyers themselves to apply themselves to the task of drafting a comprehensive agreement, in particular, about cohabitation agreements.
Obviously, there are many uncertainties about the future. It is impossible to predict all possible vicissitudes of life. However, it is important to reflect about all likely future events and to address those between the parties and the lawyers and make appropriate provision in the cohabitation agreement including, for example:
- one party is likely to survive the other;
- one or both parties may not have the capacity to make decisions about their affairs at some stage before death;
- the children of the party who lost capacity may wish to make decisions which affect the other party adversely;
- should the cohabitation agreement make provision for the surviving party to have the right to live in the other’s property for live if he/she survives the other?
These are matters which may be addressed simply by the original drafter applying appropriate care and precision.
If you are considering singing up into a BFA…..