The devil is in the detail - Financial agreements & spousal maintenance

The Family Law Act 1975 enables parties to a marriage to enter into financial agreements with each other:

• prior to a marriage (90B);
• during a marriage (90C); and
• after the breakdown of a marriage (90C).

Similar provisions also exist in relation to de facto relationships whereby parties are able to enter into a financial agreement:

• prior to the commencement of a de facto relationship (90UB);
• during a de facto relationship (90UC);
• after the breakdown of a de facto relationship.

Provided the legislative requirements are satisfied, a single agreement can be drafted to be a financial agreement under a number of scenarios, for example a financial agreement during a de facto relationship that, upon marriage, is also a financial agreement made during a marriage, see Piper & Mueller [2015] FamCAFC 241.

When prepared properly, a financial agreement ousts the jurisdiction of the court to make a determination on the subject matter of the agreement in the event of separation. In other words, upon separation, the property of the parties will be dealt with in accordance with the terms of the financial agreement. The court does not have the jurisdiction to make any property adjustment or spousal maintenance orders (if the agreement covers both of these issues) unless and until the financial agreement is set aside, or certain provisions of the financial agreement are found to be void.

Spousal maintenance in a financial agreement

Regardless of whether an agreement is entered before, during, or after a relationship, it is common that the parties will want the agreement to address spousal maintenance, typically which state that neither will make, or attempt to make, any spousal maintenance claim against the other in the event of separation.

Often this is achieved by the agreement stating that each party will provide to the other a nominal sum by way of spousal maintenance, and that same will extinguish any future spousal maintenance claims.

The legislation covering the treatment of spousal maintenance in financial agreements is similar for agreements made for married couples, and agreements made for de facto couples.

As  the case below demonstrates, in order for the terms of a financial agreement which relate to spousal maintenance to be binding and effective, there are a number of essential elements:

1. that the individual/s whom the provision relates to is identified; and
2. that the agreement clearly stipulates the amount provided for, or the value of the portion of the relevant property attributable to spousal maintenance is clearly identified.

However, the legislation also states that even if the above requirements are met in the financial agreement, those provisions can be void “if the court is satisfied that, when the agreement came into effect, the circumstances of the party were such that, taking into account the terms and effect of the agreement, the party was unable to support himself or herself without an income tested pension, allowance or benefit”.

Put another way, if at the time the agreement comes into effect, and taking into account the terms and effect of the agreement, a party is unable to support themselves without an income tested pension, allowance or benefit, the provisions in the agreement relating to spousal maintenance can be found to be void (not binding) - even if a financial agreement complies with the legislative requirements.  Thus enabling the court to make a spousal maintenance order.

It’s prudent to note that the phrase “at the time the agreement came into effect” is not the time the parties enter into the financial agreement, but the time they separate (potentially many years after the financial agreement was prepared).

When an agreement is prepared post-separation, the inclusion of such provisions is typically uncontroversial and not problematic, as the circumstances of the parties at that time are known and it is clear whether one party is unable to support themselves without an income tested pension, allowance or benefit.

However, an agreement prepared before, or during, a relationship that purports to deal with spousal maintenance upon a separation that may  occur many years in the future is far more problematic. The normal vicissitudes of life can mean that it can be difficult to say with a high level of confidence what the future holds and whether a party may, at the time of separation, be unable to support themselves at that time without an income tested pension, allowance or benefit. 

If it eventuates they are unable to support themselves without an income tested pension, allowance or benefit, any terms of the financial agreement which dealt with spousal maintenance can be void and the court may entertain an application for spousal maintenance. The balance of the agreement and evidence of an individual being unable to support themselves without an income tested pension, allowance or benefit is required.

The recent case outlined examines this issue and provides a useful example of how this issue is treated by the court. It also serves as a reminder of the attention required in drafting these documents, and the inherent risks.

Ellerton & Jennings [2021] FedCFamC1A 39

On 21 April 2006, the parties entered into a financial agreement. It’s unclear whether that agreement was entered prior to, or during, their marriage however little turns on that distinction.

The parties agree that the agreement became operative on 11 or 12 May 2018, the date they separated.

A dispute then arose in relation to the agreement, and in February 2021 the husband applied to the court seeking an order that the agreement be set aside or, in the alternative, that the provisions of the agreement which related to spousal maintenance be declared void and set aside. The husband also sought periodic or, in the alternative, lump sum maintenance from the wife.

The relevant terms of the agreement were as follows:

19. The parties acknowledge that they are currently self-sufficient and capable of supporting themselves, and that no provision of spousal maintenance is necessary or desired.

20. Both parties fully and freely waive any and all rights or claims they may now or in the future have to spousal maintenance under the Family Law Act 1975 and under any or all statutes now or later enacted in this or any other state or country having jurisdiction over the parties.

21. The parties agree and covenant that in the event of the breakdown of marriage and a claim being made for settlement of property, variation of property interests or spousal maintenance by either or both of them, the terms of this Agreement will determine the issues between them.

In March 2021, a Judge of the Federal Circuit Court (as it then was) heard and determined the matter, specifically the application as it related to spousal maintenance and found that the relevant clause dealing with spousal maintenance (clause 19) was not void pursuant to s90E of the Family Law Act 1975 (Cth), and that s 90F of that Act applied to the Agreement.

In short,  at the initial hearing the court found that clause 19 of the agreement was valid and did not offend s90E of the Act. The court also found that at the time the agreement came into effect the husband was unable to support himself without an income tested pension, allowance or benefit, thus enlivening s90F.

The obvious risk to the wife was that such a finding exposed her to a claim for spousal maintenance by the husband. It is unsurprising that the wife appealed that decision,  specifically the finding by the trial judge that the husband was unable to support himself without an income tested pension, allowance or benefit. 

The husband opposed the wife’s appeal, and also cross-appealed asserting that the trial judge had fallen into error by not finding that clause 19 of the financial agreement was not void due to non-compliance with s90E.

Outcome of the wife’s appeal

The wife’s argument on appeal was that the husband had not demonstrated he was unable to support himself without an income tested pension, allowance or benefit and that failure should have seen a different result before the trial judge.

On appeal it was noted that the parties had relied solely on their affidavit material and written submissions. There was no oral evidence or cross-examination. 

The appeal court then turned its attention to the evidence which was before the trial judge, and the findings of the trial judge. The trial judge had regard to the husband’s affidavit evidence (noting that none of that had been objected to by the wife at first instance). The appeal court agreed with the findings of the trial judge that the husband had, through his unopposed and untested affidavit evidence, satisfied that he was unable to support himself without an income tested pension, allowance or benefit.

Thus, the wife’s appeal failed.

Outcome of the husband’s cross-appeal

The husband’s cross-appeal argued the trial judge had fallen into error in finding that clause 19 of the agreement was not void pursuant to s90E.

That ground of appeal centred on that clause 19 of the financial agreement made no reference to a monetary amount, and that the language “no provision of spousal maintenance is necessary or desired” which appears in clause 19 was insufficient to meet the requirements of s90E.

For the sake of completeness, s90E reads as follows:

A provision of a financial agreement that relates to the maintenance of a spouse party to the agreement or a child or children is void unless the provision specifies:

(a) the party, or the child or children, for whose maintenance provision is made; 
and
(b) the amount provided for, or the value of the portion of the relevant 
property attributable to, the maintenance of the party, or of the child or each child, as the case may be.
    (Emphasis added)

It was the husband’s argument, both at first instance and on appeal, that the failure of clause 19 to mention a specific dollar amount meant that the clause did not comply with the requirements of s90E and was, therefore, void.

At first instance the trial judge was satisfied that whilst clause 20 of the agreement did not meet the requirements of s90E, clause 19 was clear in both the language and meaning, with her Honour finding as follows:

I conclude that clause 20 does fall foul of s. 90E , as it does not identify what quantum, or potential quantum, of future spousal maintenance the parties are each foregoing. This contrasts with clause 19, which makes it clear that there is to be no provision of spousal maintenance – and no provision must mean nil, zero, none. I conclude that clause 19 in relation to spousal maintenance does meet the requirements of s. 90E and is not void for that reason. (Emphasis added)

Following an analysis of the relatively sparse case law on the point, the Full Court on appeal were of the view that the trial judge’s findings were correct.

It follows that the husband’s appeal was also unsuccessful.

Conclusion

This case serves as a reminder of the attention to detail required for financial agreements, particularly if they are to withstand a challenge in the future.

It is also a timely that people entering into a financial agreement before, or during, a marriage or de facto relationship must accept the inherent risk of being confronted with a spousal maintenance application in the future, should their partner be unable to support themselves without an income tested pension, allowance or benefit at the time of the breakdown of the relationship and when the agreement comes into effect. 

To avoid a spousal maintenance claim, thought should be given to ensuring each party receives sufficient property upon the breakdown of the relationship, to make them ineligible for any income tested pension, allowance or benefit in the event of separation. However, given the agreement is a document which is intended to not come into effect for many years (possibly never) this can sometimes be easier said than done.