Firstly – Download and Read the User’s Guide. It will answer lots of your questions and show how the right way to complete a financial agreement. We also recommend you send a copy to your partner / ex-partner.
Todays tip covers the six fundamental principles of Contract Law… Now before you groan and give up – this is important!! You need to be familiar with these principles so that you draft your agreement correctly.
We realise this information is lengthy and we promise that our other tips will be much shorter.
Six Fundamental Principles of Contract Law
It’s important to note that your financial agreement is like any other contract and subject to the normal principles of Australian Contract law.
Most contracts pose no problems – they are usually a simple interchange of cash for goods. But when contracts get more complicated they can, and do, go wrong.
This is less likely to occur when the parties understand what they are doing, what their rights and obligations are, and how to recognise potential problems.
A contract is a legally binding promise or a set of promises between two parties. In this context a promise is an undertaking by one person to do something or refrain from doing something if another person does something or refrains from doing something or makes a promise in return.
In order for a contract to be valid certain requirements must be met. These are:
1. Agreement
There must be an offer and an acceptance with a definite agreement between the parties. In simple terms, one party must make a clear offer, and the other party must accept it.
2. Consideration
Except in very limited circumstances there can be no contract or agreement without consideration. Consideration is the exchange of promises by the parties to the contract or agreement. It can be the payment of money, the delivery of equipment, the promise to do or perform a service or work, the promise not to take an action or not to take or enforce a right.
3. Intention
Each person, on entering a contract, must intend to be bound by it. For a person to be bound to a contract, s/he must seriously intend to create legal obligations and have intended the agreement to have legal consequences.
4. Capacity
Both parties in a contract must have the necessary mental capacity to understand what they are doing.
Under common law, anyone has the right to enter into a contract but the following groups of people are considered likely to lack the necessary capacity to a certain extent:
- young people (persons under the age of eighteen);
- people who have a mental impairment (including an intellectual disability); and
- people under the influence of drugs or alcohol.
For a person to avoid a contract on the ground of their incapacity, they must also show that they lacked capacity to enter into a contract and that the other party knew or ought to have known their incapacity.
A contract is voidable at the option of a party who, as a result of mental disorder or intoxication, is unable to understand the nature of the contract being made – provided that the other party knew, or ought to have known, of that person’s disability. The party seeking to withdraw from the contract has the onus of proving both these requirements – that is
(a) that they were suffering from such a disability and
(b) that the other party was – or ought to have been – aware of it.
5. Genuine consent
Both parties agree to the contract of their own free will; a party’s genuine consent is an essential element of a legally binding contract.
Genuine consent to enter into a contract can be affected by a number of issues. For example, during the contractual negotiations, there may have been:
- Undue influence. Undue influence exists where one party exercises influence over the other and is so influential that the party cannot be said to have entered into the contract voluntarily. Where the influence is said to be ‘undue’ the court may set aside the contract;
- Mistake as to the terms and identity of the person;
- Misrepresentation is the giving of false information by one party to the other before the contract is made, which induces them to make the contract. If you make a contract in reliance on a misrepresentation and suffer loss as a result, you can cancel the contract or claim damages;
- Duress; Duress is defined as ‘actual or threatened violence to an individual to obtain a contractual promise’. If it is established that consent is obtained through duress then the weaker party may choose to avoid the agreement;
- Unconscionable conduct; Unconscionable conduct also deals with transactions between dominant and weaker parties; it therefore overlaps with duress and undue influence;
Each of these factors or events may mean that consent was not freely given by one of the parties and that party may therefore be able to avoid their contractual obligations.
6. Legality
All of the parts of, or the subject matter of the contract must be legal. When considering Financial Agreements, sections 90G and 90UJ of the Family Law Act are particularly relevant as they require each party to the financial agreement to receive independent legal advice and meet certain requirements before a financial agreement is binding on the parties.
Following these six principles will ensure your agreement is legally binding and provides the protection and outcome you expect.
When we drafted the template we did it specifically with the intention of using the find and replace function. For instance you will notice that there are a number of points within the document where you are required to replace the following text [insert first name of first person] with the first name of the first person. In this case let’s call her Julianna.
HOW TO SAVE BY USING THE FIND AND REPLACE FUNCTION
1. Place your cursor at the beginning of your document.
2. Go to the Edit menu and select Find. The Find and Replace window opens.
3. Select the Replace tab.
4. Type the word or phrase that you want to find in the “Find what” box.
5. Type the word or phrase you want to replace it with in the “Replace with” box.
6. Select All, Up, or Down in the Search drop-down menu to tell Word how much or which part of the document you want to cover with this search and replace.
7. Select Find Next or Replace if you want to manually replace each word or phrase.
8. Select Replace All if you want Word to automatically search for and replace each instance of the word or phrase without first checking with you.
In some documents you may have to insert your name or your partners name 26 times so using this simple tool could save you a great deal of time.
HOW TO DEAL WITH ASSETS
Binding Financial Agreements can cover all of the property of the parties, or you may choose to deal with selected assets only. That is, your agreement can specify what happens to all assets owned prior to, during or after the relationship or you may only want to deal with what happens to a single asset or a class of assets.
An example of how a selected asset can be protected by the Financial Agreement.
Ken and Barbie have been happily married for 6 months and they intend to stay happy and married.
Ken is concerned about his family farm and it is causing friction within the relationship. Ken’s great grandparents settled the family property in the late 1800’s, and it has sentimental value for Ken and his siblings, who are also shareholders in the family property. If Ken and Barbie were to separate it could potentially threaten the ownership of the farm and cause a rift in the family.
Ken and Barbie decide that in the event of Kens death or their relationship breaking down, that Barbie will not make claim in relation to Kens share of the family farm.
However Ken also has other assets including investment properties and a successful business. In this case he is only looking to quarantine the family farm (a selected asset) from any future litigation.
When Ken and Barbie draft their financial agreement, Ken completes his assets and liabilities statement which only contains the details regarding Ken’s entitlement in the family farm. The agreement may also contain a clause covering how the farm should be treated in the event of death or separation.
As Barbie does not have any assets that she feels a need to protect, she would waive completing the Assets and Liabilities statement Schedule B for her self.
Ken and Barbie detail the assets that they declare to be joint assets and liabilities in Schedule C.
This means that the family farm will not form part of the asset pool available for division in the event that their marriage breaks down. The Agreement will prohibit Barbie from making a claim in relation to Ken’s Family Farm Assets.
Issues not dealt with may be addressed at another time.
In short any assets or liabilities you choose not to include or deal with at the time of creating your Financial Agreement are left open to be dealt with at any other time.
For instance if Ken and Barbie make no mention of maintenance for Barbie in their agreement today then the door is left open for Barbie to apply to the court for orders to be made in relation to her maintenance by Ken at another time should the need arise.
HOW TO COMPLETE THE ASSETS AND LIABILITIES SCHEDULE
As you go through the process of drafting your financial agreement, you will see that you need to provide an Assets and Liabilities Statement.
An Assets and Liabilities statement is a snapshot of your financial health and allows you to calculate your net worth at a given moment in time. In this case at the time of drafting your agreement.
You and your partner must determine the value of everything you own and the amount of debts you owe. Your net worth is just your total assets (what you own) less your total liabilities (what you owe).
If the assets and liabilities statement sounds familiar, that’s probably because you’ve already made one. Many of us have prepared a personal financial statement for some other purpose for example, when applying for a mortgage or other loan.
If you still have a copy of that financial statement or loan application, you can use it as a starting point and simply update it as needed.
Ready to make your personal balance sheet? Here’s what you do:
Print a copy of the assets and liabilities form – Schedule A of the agreement.
Grab a pen and start jotting down your assets. With each item, write down its corresponding current value.
Here’s a short list of assets you might have:
- Cash on hand and in the bank
- Current market value of properties such as real estate, vehicles and Superannuation accounts.
- Some life insurance policies have a surrender value that can be cashed in before you die. These types of policies, often known as endowment policies, have an asset value and you should include the surrender value in the assets column. Don’t mistake a term life policy for being an asset, these policies only pay someone else if you leave this earth and have no asset value while you are still breathing.
- Receivables such as money friends or family may owe you
- Current market value of investments such as shares, bonds and term deposits etc
- Valuables such as antiques, jewellery, or other collectables
Next, list down all your liabilities or debts Some of the items you should include are:
- Amount that still needs to be settled with financial institutions such as your mortgage, car loans and credit cards.
- Other payables such as money that you owe to friends or family.
After this, simply subtract the sum of your liabilities from the total value of your assets to get your net worth.
Handy Tip: The totals at the bottom of the schedule page will automatically calculate your Assets total, liabilities total and net worth total. Simply click on each of the grey fields and press F9.
GETTING YOUR AGREEMENT CERTIFIED
Sections 90G and 90UJ of the Family Law Act require each party to the agreement to receive independent legal advice as to the advantages and disadvantages of entering into the Agreement.
Before your financial agreement becomes legally binding it must contain
- a statement in the body of the agreement by the parties to the effect that they have received legal advice independent of each other and
- a certificate from the legal adviser that the advice has been provided.
This prevents either party from arguing that, when signing the agreement, they did not understand what they were signing or the consequences thereof.
With this in mind we have negotiated a reduced rate for our customers with several independent, nationally licensed lawyers who can provide the required advice by telephone and e-mail.
What does this mean for you?
Our Agreement review service assists you to complete your financial agreement properly, meeting the requirements of the Act, with a minimum of fuss and expense.
You can learn how the Review Service works here
Reaching agreement in a non-combative atmosphere minimises costs, empowers the parties and reduces stress.
Our Lawyers understand that both parties have spent considerable time negotiating a mutually acceptable agreement and they simply need the added security and guidance of good legal advice.