Understanding the difference between Financial Agreements (“BFAs”), Termination Agreements, and Prenuptial Agreements

Whether you are considering a “Prenuptial Agreement” to protect your assets before entering into a marriage or de facto relationship, a Financial Agreement to document financial arrangements during the relationship or after separation, or a Termination Agreement to cancel an existing financial arrangement, understanding these options is essential for protecting your financial future.

1. Financial Agreements (also known as a “Binding Financial Agreement” or “BFA”)

A Financial Agreement is a specific type of Financial Agreement that is legally binding, provided it meets all legal requirements set out in the Family Law Act 1975 (Cth) (the “Act”).

A Financial Agreement can be entered into:

• Before a marriage (also known as a prenuptial agreement or “prenup”) (s 90B). We will expand more on this kind of Agreement below;
• During the marriage (s 90C);
• After divorce order is made (s 90D).

For de facto relationships, a Financial Agreement can also be entered:

• Before a de facto relationship (s 90UB);
• During the de facto relationship (s 90UC);
• After the de facto relationship (s 90UD).

Clients often use the term “Separation Agreement” to refer to a financial agreement made after a divorce or the end of a de facto relationship. Although “Separation Agreement” is not a formal legal term, a financial agreement is one of the two methods available to legally formalise a financial settlement following the breakdown of a relationship.

The key feature of a Financial Agreement is its ability to provide certainty and security regarding the division of assets and liabilities. However, for a Financial Agreement to be legally binding, strict formal requirements must be met. These include:

• The agreement must be in writing and signed by all parties.
• Each party must receive independent legal advice regarding the agreement’s effect on their rights and whether the agreement is advantageous or disadvantageous.
• The agreement must contain a statement confirming that each party has received such advice.
• The signed agreement must be exchanged between the parties.

If these requirements are not met, the Financial Agreement may be set aside by the Court. A Court may also set aside a Financial Agreement under various circumstances outlined in section 90K of the Act, including (but not limited to):

• there was a material non-disclosure of an asset or liability;
• the agreement was made under fraud or duress;
• the agreement is void, voidable or unenforceable;
• the agreement is impractical to carry out;
• the agreement was made with the intention to defraud or defeat a creditor.

2. Prenuptial Agreement (before marriage)

The main difference is that a “Prenuptial Agreement” or “Prenup” is made before a marriage or de facto relationship takes place. However, a “Prenup” is a type of Financial Agreement made under section 90B (or s90UB for de facto) of the Act. This distinguishes it from other financial agreements made during (s 90C or s 90UC) or after (s 90D or s 90UD) the marriage or de facto relationship.

While all financial agreements aim to set out the financial arrangements in the event of a relationship breakdown, an Agreement made prior to marriage (or de facto relationship) is focused on protecting the assets and financial interests that each party brings into the relationship, aiming to avoid disputes if the relationship ends. These kinds of Agreements must also comply with the formal requirements set out above to be legally binding.

It is important to think carefully before entering into this kind of financial agreement, as one of the ways it can be set aside if there is a significant change in circumstances. No couple can predict the future or foresee what challenges may come their way after they marry. This is why it’s essential to understand the potential risks and consequences of the Agreement before signing.

3. Termination Agreements

A Termination Agreement is a specific type of agreement under the Act that terminates or ends a previously made Financial Agreement. This can happen for various reasons, such as a change in circumstances or the parties mutually agreeing to cancel the existing agreement.

Termination Agreements must also meet certain legal requirements to be valid. For example:

• The agreement must be in writing and signed by both parties.
• Each party must receive independent legal advice about the effect of the termination.
• The agreement must include a statement confirming that each party has obtained the required legal advice.

If these formal requirements are not satisfied, the Termination Agreement may be declared void, leaving the original Financial Agreement in effect. Once a termination agreement is validly executed, the original financial agreement is considered to have no legal effect. This means that neither party can rely on or enforce the terms of the original agreement in the future. Termination Agreements are commonly used when circumstances have changed, and the parties no longer wish to be bound by the terms of the original financial agreement.

While these terms are often used interchangeably, they have different legal implications and purposes under Australian law. Financial Agreements whether they are entered into before, during or after a marriage or de facto relationship, and Termination Agreements each serve specific purposes in managing financial matters and protecting the interests of parties in a relationship. Since Financial Agreements are made outside the court system, obtaining expert legal advice before signing is crucial. A lawyer can ensure that the agreement meets all legal requirements, is fair and equitable, and provides adequate protection for your interests. Proper legal guidance can help you understand the full implications of the agreement, avoid potential pitfalls, and reduce the risk of it being challenged or set aside in the future.