We all want to secure our future, and the future for our loved ones. Our trusted advisors tell us when estate planning to be prepared, to write our wills, to sign Powers of Attorney. Sometimes our advisors might recommend that a binding financial agreement (a “BFA”) should be prepared. And whilst a BFA can be a valuable tool in asset protection and in managing the unwanted side effects of relationship breakdown, it is probably a false analogy to put BFAs in the same barrel as the other standard estate planning documents.
At their heart, what BFAs do is provide a mechanism for dividing assets and managing payments in the future, after a separation. The content can be as simple or as complex as required however the law and procedure surrounding BFAs is anything but simple and it would be a mistake to approach the negotiation, preparation and finalization of a BFA as like signing a Power of Attorney, or a similar document regulating future, unknown events.
A recent case on appeal in the Victorian Court of Appeal demonstrates, lamentably for the appellant, what can go wrong if BFAs are not approached seriously. In Orwin v Rickards [2020] VCSA 225 an appeal by Ms Orwin against a finding that her solicitor was not responsible to pay her damages for negligence was rejected. Whilst there were several issues in dispute (such as whether or not she was even in a relationship at the time she signed the BFA – something her lawyer should have considered) the court also considered the conduct of the lawyer she instructed to prepare the document. Despite its admitted faults, Ms Orwin still lost.
She had asked her lawyer, Mr Rickards, in 2009 to prepare an agreement on the basis that she was in a de facto relationship with a partner. That document was prepared, and signed by the parties on 12 March 2010. Ms Orwin and her partner separated in 2011 and in 2015 Ms Orwin’s now former partner sought orders in the Federal Circuit Court to have the BFA set aside. It turned out that the agreement that Mr Rickards had prepared was faulty and it did not serve as a bar at all to the partner’s claim for property settlement, which then proceeded. Ms Orwin was ordered to pay her former partner a settlement, incurring her own legal costs on top of the costs she incurred with Mr Rickards in the first place setting up the BFA.
Understandably, Ms Orwin was affronted by Mr Rickards standards. She had instructed him to prepare a BFA which would protect her in the family law courts and the document which he prepared and which was signed by her and her partner was defective and gave her no protection against her partner at all. She sued Mr Rickards for negligence.
Unfortunately for Ms Orwin she was unsuccessful in this claim as well. The court was concerned with the question of when the loss suffered by Ms Orwin actually occurred. There are two trains of thought:
- The loss happened on 12 March 2010 when Mr Rickards delivered to Ms Orwin a defective contract which afforded her no protection whatsoever in the Federal Circuit Court (ie, the “damaged asset” argument); or
- The loss happened when the parties separated and she was required to pay a settlement to her former partner (ie the “contingent loss” argument, described as contingent because it requires a future event to occur, in this case the liability to pay the settlement, to have taken place).
Whilst you may think that the “contingent loss” argument makes the most sense, given Ms Orwin was not out of pocket until she was obliged to pay her former partner and that that particular date was unforeseeable in 2010, the court (following precedent in similar cases) took the “damaged asset” approach and found that as the contract, the BFA, was formed in 2010, her claim in negligence, filed in the court in 2017, was statute barred as a result of the limitations periods contained in the Limitations of Actions Act.
So, Ms Orwin lost twice.
None of this provides a reason to throw BFAs out the window. They remain, when prepared thoughtfully and properly, with due consideration to all the relevant legal, procedural, and personal issues, an invaluable tool for couples to plan with dignity for the unfortunate event of their separation and to approach the aftermath of separation with commercial sense. What Orwin v Rickards demonstrates is the importance of never underestimating the complex strata of the personal facts of the parties, and the overlying legal principles which surround BFAs. They require careful consideration, time, negotiation, and forethought. BFAs cannot be thrown together at the last minute with an expectation that they will stand the tests of time and being contracts (ie, an agreement between two people) they will always have more intricacies than a one person document such as a Will or Power of Attorney.