Fraud and undue influence in financial agreements

How to make sure your agreement is not tainted.

Fraud and undue influence are two factors that may negate a person’s otherwise valid consent to a binding financial agreement.

Just like any other contract in Australia, the Court has the power to end a binding financial agreement in certain circumstances.  These circumstances are outlined in section 90K of the Family Law Act and include agreements obtained by fraudulent means, and those obtained by undue influence.  Both these factors affect whether a party truly consented to the Agreement.

Would the party have truly consented to entering into the agreement had these factors not been present?

Fraud

The law takes a very serious stance against fraud.  Where a party has been induced to enter into an agreement by fraud, their consent has been invalidated, giving them grounds to have the agreement set aside.

It should be understood that fraud is not only giving of false or misleading information so as to induce a person to enter into an agreement they otherwise would not have. Fraud also includes withholding of relevant information – information which would have impacted on a person’s decision as to whether to enter the agreement.

Example

Ruth and Frederick were married for 25 years and are in the process of separating and finalising the division of their assets and liabilities. They have decided to formalise their agreement by way of a binding financial agreement. As part of this process, each party must disclose all relevant matters. The pool of assets must be identified, including assets and liabilities held both individually and jointly.

It was agreed that the assets would be divided in a way which, in effect, gives them both approximately 50% each of the asset pool.

Unbeknownst to Frederick, Ruth has a personal account which she has been depositing part of her income in throughout the later part of the marriage.  She feels that this is “her” money and that she should not have to tell Frederick.

This stash of funds means that the division is really skewed 65/35 in Ruth’s favour.  Had Frederick been aware of the extra funds that Ruth was saving during the course of the marriage, he would not have consented to the agreement in its current form.

By not disclosing her personal savings account, Ruth has fraudulently induced Frederick to enter into the current form of the agreement. A Court would most likely set the agreement aside (end the agreement) on the basis of non-disclosure by Ruth of a material matter.

Disclosing all relevant information

It is vital that parties entering into a financial agreement act openly, honestly and transparently.

Any information that is relevant, or that you think might be relevant to the other party in deciding whether consent to the agreement, should be disclosed, so that each party may have the opportunity to give their full and informed consent.

In this respect, it is safer to err on the side of caution and disclose more, rather than keep things to yourself that may in fact, be of relevance to the other party.

Undue influence

Undue influence is another factor which may unwittingly affect the validity of a binding financial agreement.

Undue influence exists where one party (the stronger party) has influence over the other (or a presumed relationship of influence exists) and uses that influence unduly (unfairly or unjustly) so that the weaker party enters into an agreement they otherwise wouldn’t.

This may overlap with, or include elements of, duress, illegitimate pressure, fraud, force, coercion, threats, or actual or threatened violence.

In some situations, the law presumes that a relationship of influence automatically exists, for example, between parent and child, solicitor and client, doctor and patient, and fiancé and fiancée.   In such cases, it must be also be established that the stronger party used his/her influence unduly, so that the weaker party was not acting freely or voluntarily when making the agreement, but rather, was under the undue influence of the stronger party.

In such a case, the weaker party can apply to the Court to have the agreement set aside (ended).

Example

Francesca and Deakin are engaged to be married. Deakin is an affluent professional with a large asset holding, and Francesca is an immigrant with meagre assets and little support other than Deakin. She is dependent on Deakin to stay in Australia as he is the sole sponsor of her Australian visa. She is also pregnant. He has asked whether Francesca would be willing to sign a prenuptial agreement before the wedding, and she has refused as this is not common practice in her culture. Days prior to the wedding date, Deakin brought up the issue again, this time presenting her with a pre nuptial agreement, which he had instructed his solicitors to prepare without her knowledge.  He told Francesca that if she didn’t sign it, the wedding was off and he would no longer continue to support her.  In the final days before the wedding, Francesca acquiesced and signed the agreement.

It is already presumed by the court that by virtue of their relationship of fiancé and fiancée a relationship of influence exists.  Pertinently though, it is likely that the Court would view that Deakin used this influence unduly, to induce Francesca to sign the Agreement, in a situation where she otherwise would not agree to it, knowing that if she did not sign it, she would have to return to her family in Russia, pregnant and unable to support herself.  This example is actually based roughly on the facts of Moreno & Moreno [2009] and Blackmore & Webber [2009] and also has parallels with duress.

Be fair and honest in your dealings

Fraud and undue influence are two reasons that financial agreements have been set aside in the past, and rightly so.

These examples show how a financial agreement may, sometimes even unintentionally, be affected by fraud and undue influence.

In such cases, the wronged party may apply to the Court to have the agreement set aside.

Enter into negotiations well in advance of the wedding date

As you can see, there can be a very fine line between asking a person to enter into an agreement, and unduly influencing them. This is especially true for engaged couples, particularly where the wedding date is imminent.

It is important that neither party should feel pressured into signing the agreement, and that each party enters into the agreement freely.

For this reason, it is not advisable to enter into a pre-nuptial agreement within close proximity of the wedding date, as this may hint at some kind of unfair pressure or influence being involved.

To summarise

If you conduct yourself in an open, honest, and transparent way, and do not put any unfair pressure the other party, it is unlikely your agreement will be tainted by fraud or undue influence.

These issues are expanded on in the user’s manual contained in the binding financial agreement kit – go to Choose the Agreement for you.