Disadvantages of BFAs in 2023

There are disadvantages to BFAs including their inflexibility, impartiality, and the risk they cannot be enforced.

A Binding Financial Agreement (BFA), sometimes confused with the more American concept of a prenuptial agreement, is a legally binding contractual arrangement which delineates how financial assets and liabilities will be divided should a relationship break down.

A BFA can be executed prior to, during, or following a marriage or de facto relationship, and serve to forestall future disagreements or the necessity of judicial intervention. Notably, for the agreement’s terms to be considered valid, they must adhere to the provisions outlined in the Family Law Act of 1975 and must be executed by both parties after obtaining independent legal counsel.

Even when well drafted, a BFA may be unenforceable, limited in scope, or undermine the rights of one or both parties.

At face value, setting up a BFA may appear to be a rational and pragmatic choice. However several disadvantages should be considered before a decision is made.

First, a Binding Financial Agreement can be inflexible, opaquely complex, and lack impartiality. Even when well drafted, a BFA may be unenforceable, limited in scope, or undermine the rights of one or both parties.

Finally, it is important to consider the possible costs and benefits, as extensive legal fees may eat up the funds that it aims to protect. 

Inflexibility and Undermined Rights

One of the primary disadvantages of a Binding Financial Agreement is its inherent lack of adaptability. Once executed, these agreements are difficult to modify or amend, even in the face of changing circumstances. This rigidity can create challenges for the parties involved, especially when unforeseen events require an alteration of the agreement. 

For instance, the loss of a job, the birth of a child, or a significant change in financial circumstances could render the previously agreed-upon terms of the BFA obsolete or inadequate. In such scenarios, the inability to modify the agreement to reflect these changes could lead to significant difficulties for the parties involved or undermine enforceability.

BFAs can also limit a party’s rights to make a future property or spousal maintenance claims, and this limitation of rights can result in the parties being bound by terms that are no longer appropriate or in either party’s best interests. As a result, where there is a change in circumstances, parties may be unable to seek a fair and equitable resolution, as they are bound by the terms of the agreement and are limited in their ability to seek court intervention.

Lack of impartiality 

As a court does not oversee the process of drafting terms, there is a potential for a BFA to lack impartiality. In many cases, the negotiations may be influenced by the emotional state of the parties, leading to agreements that are not necessarily in their best interests. In such cases, the inflexibility of BFAs may create a dynamic where parties are confined to either accepting the terms laid out or incurring the significant burden of a legal battle which may or may not allow for any deviation from the terms.

Courts are generally tentative to intervene, yet even where a court battle ensues, they will generally abide by the terms of an agreement and thus any initial inequities will likely have significant effects on the outcome of negotiations or settlements.

Complexity

The complexity of BFAs poses another hurdle for many individuals who are not legally trained. These agreements often contain intricate provisions, complex legal language, and detailed financial calculations that can be difficult to understand, even for those with a decent understanding of the law.

Moreover, agreements can be further complicated when outside factors, such as the affects of the Family Law Act of 1975, are considered. 

This complexity can lead to misunderstandings and disputes between the parties, particularly if they are relying on their own interpretation of the agreement. In such cases, the parties may have to resort to costly and time-consuming legal proceedings to resolve the dispute, further exacerbating the difficulties arising from the agreement.

Furthermore, the complexity of the agreement can further undermine enforceability, particularly in instances where the provisions are unclear or the financial calculations are incorrect. 

Possible Unenforceability 

A BFA may also be a disadvantage in situations where one of the parties breaches the terms of the agreement. In such instances, the parties may not have access to the remedies available through the courts, as BFAs are typically enforced through private arbitration or mediation. The court can only become involved when one party wishes to challenge the terms of the agreement, which would constitute a substantial escalation in the costs and time required. Even where courts do become involved, it is possible that they reject a BFA entirely. This is particularly the case where children or unforeseen factors are involved. For this reason, the certainty which justified a BFA to begin with may be undermined. 

Limited scope 

BFAs may not cover all assets and liabilities, such as superannuation or future inheritances. The limited scope of BFAs can result in some financial matters being overlooked or not addressed, leading to disputes and difficulties in implementing the terms of the agreement. This can be especially the case where third-party interests are involved, as such parties are generally not bound by the agreed terms.

There are a number of norms for just such situations, yet these vary for cases such as superannuation splitting arrangements, further exacerbating the complexity. Given the challenges of addressing many competing interests in a single agreement, BFAs are often unsuitable for individuals with complex financial arrangements, such as multiple properties, businesses, or investments. 

Cost 

Individuals considering a BFA must carefully weigh the costs against potential benefits or disadvantages, in light of the individual’s financial circumstances. The agreement requires each party to obtain independent legal advice, which can be expensive and add to the already significant expenses associated with separating or divorcing.

A BFA may not be suitable for everyone, and should only be considered after obtaining dependable and independent legal advice.

This added expense can place substantial burdens on the parties, exacerbating the already stressful and challenging circumstances surrounding their separation or divorce. It is not uncommon for heated legal disputes over BFAs to significantly diminish the financial resources being fought over, leaving both parties in a worse situation financially than if a BFA hadn’t existed. 

A BFA may not be suitable for everyone and should only be considered after careful consideration of all factors and after obtaining dependable and independent legal advice. While they may appear pragmatic at first, the realities of executing them often outweigh the interests they aim to protect, such as costs, certainty, and simplicity. 

If you are in need of any legal advice, or are looking for help with a dispute, feel free to contact us.