A contracting out agreement or as its better known – a prenup – enables parties to a relationship to determine how their property is divided if the relationship fails.
It’s called a contracting out agreement, because the couple are choosing to opt out of the express provisions of the Property (Relationships) Act 1976. For example, that relationship property is shared regardless of the ownership of an asset prior to the start of the relationship.
But what happens if a party commits a breach of the contracting out agreement? Can it be cancelled?
Yes it can. There are two ways in which a contracting out agreement can be voided or cancelled where one party has breached the agreement. One is through the discretionary powers of the court under the Property (Relationships) Act 1976 (PRA) and the other is under the Contract and Commercial Law Act 2017 (CCLA).
Option One: “Serious Injustice” under section 21J of the Property (Relationships) Act
The only way an agreement can be set aside (cancelled) under the RPA is if not doing so would cause “serious injustice”. Although it’s worth noting that this is likely to arise where a party to the agreement claims the agreement itself is unfair, not that the actions of the other party are unfair.
So what does “serious injustice” mean? What’s the threshold?
The standard of “serious injustice” is very high. Judges have been rigorously debating it for years. The most relevant cases and the views of “serious injustice” are:
a. Harrison v Harrison : “Serious injustice” is likely to be demonstrated more often by an unsatisfactory process resulting in inequality of outcome rather than mere inequality of the outcome itself.
b. Clark v Sims : There would need to have been unfairness at the time of entering the agreement.
c. White v Kay : In this relationship dispute involving a couple who had been living together for 20 years, the court assessed and explained each of the criteria (set out in S21J) for determining whether ‘serious injustice’ has occurred:
- The provisions of the agreement – this requires an assessment of the terms of the agreement itself.
- The length of time since the agreement was made – the more time that passes since the execution of an agreement, the more difficult it will be to meet the threshold under s 21J.
- Whether the agreement was unfair or unreasonable in light of all the circumstances at the time it was made – whether the agreement is fair depends on whether it was entered into freely (without duress) and to measure unreasonableness, the court must compare the terms of the agreement against the parties’ entitlement under the Act.
- Whether the agreement has become unfair or unreasonable in light of any changes in circumstances since it was made – an agreement may become unfair over time. In this case, the couple made improvements to a property resulting in an increase in value which disadvantaged a party.
- The fact that the parties wished to achieve certainty – just because the parties enter an agreement doesn’t necessarily mean they wanted the certainty it provided, especially if they don’t rely on the agreement or there’s no benefit to achieving the certainty.
Once the factors above have been considered, the court must decide whether giving effect to the agreement would result in ‘serious injustice’. The high threshold is likely to result in the courts not being willing to overturn agreements.
Option Two: Contract and Commercial Law Act
The other way in which a contracting out agreement can be cancelled is if the right to cancellation arises and is exercised under the CCLA.
Under Section 36 of the CCLA, a party can cancel the contract if it is repudiated by the other party.
Repudiation occurs where one party makes it clear that they do not intend to perform their obligations under the contract.
Just like “serious injustice” under the RPA, the courts will not find repudiation lightly. A party may cancel where a term of the agreement is or will be breached only if:
a. The parties have expressly or impliedly agreed that the performance of the term is essential to the cancelling party; or
b. The effect of the breach will:
- substantially reduce the benefit of the contract to the cancelling party. (In order for the term to be deemed essential, it must be seen to be essential to both parties not just the party seeking to cancel the agreement.); or
- substantially increase the burden of the cancelling party under the contract; or
- will make the benefit or burden under the contract substantially different to that contracted for.
The term ‘substantially’ is looked at by the court objectively and subjectively and is ultimately a question of degree for the court to decide.
Before the court finds repudiation, three prerequisites must be met:
a. The term must be breached and it must be interdependent. Typically the terms in relationship property agreements are severable from the other obligations, in which case the breach of one aspect does not cancel the entire agreement. Only if the term is expressly or impliedly intended to be interdependent does the breach of one support cancellation of another.
b. The breach must be serious. For example, a breach such as a missing a payment will not normally support cancellation unless accompanied by an act or statement implying repudiation.
c. The right to cancel is lost if the other party waives the breach and agrees to continue the contract (Gray v Thomson ).
If the three criteria are not met in the case of a breach of a contracting out agreement by one party, the other party cannot elect to cancel the contract.
But they can seek is damages for the breach of contract.
If you need help reviewing your contracting out agreement, or advice about whether you should enter one, speak to our experts today.