Implications to financial arrangements | Wallace v Stelzer

A binding financial agreement is a written agreement that ousts the jurisdiction of the family law courts to make an order under the property settlement or spousal maintenance provisions of the Family Law Act 1975 about the financial matters to which the agreement applies.

Financial agreements can be entered into by:

  • parties who are about to enter into a marriage or de facto relationship;
  • parties in a marriage or de facto relationship; and
  • parties who have separated. 

A financial agreement entered into prior to a marriage or de facto relationship (commonly referred to and as they are known in the USA as “pre-nuptial” agreements) may be useful to:

  • protect assets and likely inheritances being brought into a relationship;
  • ensure that children from a previous relationship inherit monies;
  • protect family farms or other businesses;
  • protect the earnings of a higher income party in the relationship; and
  • avoid disputes and costs related to disputes about financial matters at the end of a  relationship.

There have been a number of cases following the introduction of financial agreements where financial agreements have been set aside and have not been found “binding”.  Accordingly, financial agreements can be a minefield to draft, with many lawyers avoiding doing so due to the risk of liability.  Care must be exercised when drafting financial agreements.  They are not standard documents.  They need to be tailor made to suit the client’s needs and as such caution must be exercised when drafting. 

In 2004, the Federal Government introduced changes to the Family Law Act 1975 (Family Law Act) that required solicitors to certify they had taken certain steps to ensure their clients understood their agreements.  But it gave way to a rash of litigation, with people attempting to avoid their obligations on the basis their lawyers had not followed those steps meticulously.

In 2010, the Government relaxed the wording of the legislation and the court could uphold an agreement that did not comply with the technicalities of the legislation.

Wallace v Stelzer

In the matter of Wallace v Stelzer and Anor [2013] FamCAFC 199 (commonly referred to within legal circles as the “pole dancer case”) the Full Court of the Family Court of Australia upheld the validity of a financial agreement entered into by the parties prior to marriage, and found the financial agreement binding.

This case was watched closely by family lawyers around the country as the potential ramifications of the judgment could have invalidated thousands of binding financial agreements.  What made this case even more interesting was that Mr Wallace was the party with significant assets of about $16 million but he was the party wanting to set aside the financial agreement. 

Background

Mr Wallace met and married Ms Stelzer at a Sydney club shortly after his first marriage broke down. At the time Mr Wallace was 51 and Ms Stelzer was 38. 

The parties married in 2005.  Prior to their marriage, Mr Wallace had his lawyer draft a financial agreement. The agreement included a clause that provided Mr Wallace pay Ms Stelzer $3.25 million if their relationship failed within 4 years of the marriage.  Both parties were independently advised and signed the agreement.

Less than two years later, in 2007 the couple separated and Mr Wallace initiated proceedings purporting that his financial agreement was not binding.  The Family Court ruled that the agreement was binding and Mr Wallace appealed this decision.  The Appeal largely concerned amendments made to the Federal Justice System Amendment (Efficiency Measures) Act (No.1) 2009 (Act) that amended the  Family Law Act.

The Act Items 8(1) and 8A amended section 90G of the Family Law Act in response to an influx of financial agreements being ruled invalid due to the strict requirements of section 90G.The further amendments to section 90G relaxed the wording of this requirement and the court could uphold an agreement that did not comply with the technicalities of the legislation.  Mr Wallace appealed to the Full Court of the Family Court of Australia. 

The proceedings

Mr Wallace challenged the constitutional validity of the amendments applying retrospectively. Wallace submitted that the amendments to the Act breached the separation of powers doctrine by interfering with the independence of a Federal Court.  He argued that his pre-nuptial agreement was signed before the 2010 amendments and therefore his agreement should be deemed invalid.  The Court held that legislation which applies retrospectively did not contravene the doctrine of separation of powers:

  1. the retrospective operation of s90G(1) was not an interference on the Judicial process  by the Legislative; and
  2. the retrospective amendments did not compromise the Judiciary’s capacity to function as a Federal Court.

Mr Wallace also submitted that the legal advice given was not consistent with the Family Law Act s90G(1)(b) requirements.  Mr Wallace said his lawyers did not give him adequate legal advice and make clear the pros and cons of the pre-nuptial agreement.  The Court held that the Trial Judge did not err in finding that the legal advice given to both parties was consistent and sufficient for the purposes of s90G(1)(b) of the Family Law Act.

Mr Wallace also submitted that he was induced by Ms Stelzer to enter into the financial agreement by fraud or unconscionable conduct.  He claimed Ms Stelzer behaved fraudulently by making “false promises of love and desire for children”. The Court was not persuaded that the Trial Judge erred in dismissing this submission.  Wallace had himself sought to enter into a financial agreement because of his last divorce; he was not induced by fraud or unconscionable conduct.

The final submission by Mr Wallace regarded the inconsistency of the amendments to the Act, specifically Items 8 and 8A.  Wallace submitted that these items were mutually inconsistent with each other and they did not apply to his agreement, or any agreement between January 2004 and January 2014. The Court held that the Trial Judge was correct in finding no inconsistencies between the items. The Court also noted that the financial agreement would be binding by operation of either item 8(1) or 8(A). 

Lavan Legal comment

The effect of the Full Court’s decision in the Wallace v Stelzer case gives confidence to parties entering into a financial agreement prior to marriage.  The decision removed a lot of uncertainty surrounding financial agreements.  Prenuptial agreements have played an increasingly important role in modern marriages.  With statistics as high as 50% of marriages ending in divorce and 89,000 divorce applications in 2014, the financial agreement can be an important means through which to settle property division.

In April 2015 Commonwealth Attorney General George Brandis released the exposure draft for the Civil Law and Justice Legislation Amendment Bill 2015:family law. The proposed legislation will make further amendments to the binding financial agreement provisions of the Family Law Act 1975. Specifically, the amendments seek to remove existing uncertainties around requirements for entering, interpreting and enforcing agreements.