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Family Law - Binding Financial Agreements - Pre-Nuptial Agreements - Will a court enforce a BFA that is a bad bargain for one of the parties?

Date: January 11, 2012

Authors: Patrick Mulligan B.A., LL.B.

CASE NOTE: Sanger & Sanger [2011] FamCAFC 210 (28 October 2011)

Facts

This case concerned a couple that entered into a biding financial agreement (BFA) after they separated. They were married for 17 years. They entered into the BFA after they separated in 2007. The relevant clauses of the agreement provided that the home was estimated at $750,000 provided that repairs were undertaken. The husband had to undertake the repairs which were estimated at around $31,000. Further the agreement provided that commercial properties including his business were comprised in a fund. From that fund the wife was to receive $350,000. Anything above that sum would go to the husband. Either way the agreement provided that he must give the wife $350,000 from proceeds of those assets. The BFA estimated that the split would be 60/40 in the wife’s favour. As it turned out his business that was estimated at $400,000 went into voluntary administration and was worth nothing. Further, the repairs in the house exceeded the estimated repair bill. The husband also argued that the wife was unjustly enriched by approximately $115,000 of payment that were not contemplated by the agreement.

The husband therefore argued that the relevant clauses of the agreement that guaranteed the wife money from the fund should not be enforced by the court. He also argued that the wife was unjustly enriched and that the BFA was impracticable in light of the change in circumstances. Effectively he argued that he did not get what he bargained for and that pursuant to s90K(c) of the Family Law Act the BFA should be set aside as it was impracticable.

Held

The court applied equitable and contract principles. They assessed the relevant provisions of the BFA. The court noted that the recitals and the provisions in question acknowledged that there was a risk involved. Each party had taken on some risk in the transaction. In particular, the commercial properties in the fund could have been higher in value, therefore distributing more funds to the husband if they were valued well over $350,000. Further, the valuations were agreed to in the BFA as estimates. The fact that the house was estimated at $750,000 and sold for $649,000 was a risk that was provided for in the agreement. With respect to the business, the husband estimated the good will to be worth $400,000 and the wife understated the value of the business.

Accordingly, the court held that the agreement was not impracticable. This term was likened to frustration concepts in a contract. A contract is frustrated and therefore not workable where supervening events occur that make performance of the contract impossible. In this case, the recitals and relevant provisions of the agreement took into account risks where either party could potentially gain or lose, depending on the division of assets after proceeds of sale. Therefore, the contract was workable. With respect to the business becoming insolvent, the court also suggested that frustration concepts could not apply. There was no evidence to suggest that the failure of the business was not self induced.

In short the court concluded that the alleged supervening events did not create a mischief, therefore rendering the BFA void. The BFA provided for risk and the parties agreed to guestimate values of their assets. Therefore the court concluded that the agreement was not impracticable.

Observations

BFA require care in drafting. This is a case where the BFA was drafted to take into account risks that could effect the division of assets between both parties. The husband could have negotiated for the BFA to be drafted in different terms. The relevant provisions could have provided for a spiraling division of assets based on proceeds of sale. It could have taken into account if any assets were diminished etc.

This case also shows that the courts are hesitant to set aside binding financial agreements. The courts will associate the doctrine of frustration when assessing if a contract is impracticable and not workable. In this case, the court ruled that the agreement was workable. It took into account risk factors in the provisions of the agreement. When those risks occurred the husband could not therefore argue that he did not get what he bargained for. The frustration test Is a relatively high threshold to meet. The intervening event needs to render the contract unworkable to the extent that neither party could have contemplated the intervening events. Unfortunately, in this case, the agreement contemplated risks and was workable even though his assets were substantially reduced.

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