28 February, 2019
Whatever one’s marital status (single, married, separated or divorced), it is never too late to become aware of one’s legal rights and set boundaries, in order to ensure a fair outcome in the event of a relationship breaking down. Nuptial agreements (such as prenuptial agreements and separation agreements) have become a common way of managing premarital and post-marital relationships.
In modern family litigation and dispute resolution, fairness is the touchstone and a nuptial agreement will be given effect if “freely entered into by each party with a full appreciation of its implication, unless in the circumstance prevailing, it would not be fair to hold the parties to their agreement” (Radmacher v Granatino[2011] 1 AC 534).
Prenuptial agreements
A prenuptial agreement is a contract entered into between the parties prior to and in contemplation of their marriage. Such agreements usually include provisions for the division of assets, spousal maintenance and other financial arrangements, such as trusts and company shareholdings, in the event of divorce.
Nowadays, it is common for wealthy individuals to enter into prenuptial agreements. Engaged couples who are or will become members of high net worth families are often required by their parents to enter into prenuptial agreements, to protect not only the couples’ interests and assets, but also those of their families.
Prenuptial agreements are particularly advantageous where (a) there are children from a previous marriage; (b) one party is much wealthier than the other; (c) a party’s assets include a substantial business, shareholding or trust; or (d) one party is heavily in debt or is giving up a successful career for the marriage.
Historically, prenuptial agreements have been regarded in Hong Kong as being contrary to public policy because they were seen to adversely affect the institution of marriage and oust the jurisdiction of the courts to grant financial relief. However, in 2014, Hong Kong’s Court of Final Appeal made it clear that, although the court is not bound to give effect to such an agreement , it will give decisive weight to it where it is fair to do so (SPH v SA [2014] 3 HKLRD 497; [2014] HKCU 1377 (unreported, FACV 22/2013, 9 June 2014)). The Court of Final Appeal confirmed that the principles enunciated by England’s Supreme Court in Radmacher v Granatinoshould also be regarded as the law in Hong Kong. Accordingly, a prenuptial agreement will carry full weight only if each party had entered into it of his or her own free will, without undue influence or pressure, having all the information material to his or her decision to enter into the agreement and intending that it should be effective to govern the financial consequences of the marriage coming to an end.
There are certain guiding principles that are applied by the court when considering the weight to be attached to a prenuptial agreement and bearing those principles in mind, more weight is likely to be given to such agreement where:
- It was entered into a sufficiently long period before the marriage (indicating that the parties had enough time to make an informed decision);
- Prior independent legal advice was sought;
- There are no vitiating factors, e.g. duress, undue influence etc.;
- Prior full financial disclosure had been made;
- It does not purport to oust the court’s jurisdiction;
- Enforcement will not result in significant injustice for one party;
- Future events e.g. birth of a child, loss of a job etc. are covered; and
- It does not purport to govern arrangements for children, because the overriding principle governing such arrangements is that they must be in the best interests of the child.
A prenuptial agreement may serve to ring-fence third parties’ assets for the purpose of distribution in divorce proceedings. For instance, high net worth families may have family trusts to protect the ownership of their assets. Such assets may be transferred to trustees under a discretionary trust, whilst certain family members who are the beneficiaries or potential objects under the trust continue to use and enjoy them as far as the trust deed permits or the trustees exercise their discretion, normally based on a memorandum of wishes. It is worth noting that in divorce proceedings in Hong Kong, if there is clear evidence of an overwhelming likelihood that trustees would, if requested by one party to the proceedings, advance the whole or part of the capital or income of the trust to him/her, such interest in the trust will be considered to be a financial resource of that party and included in the matrimonial assets available for distribution between the parties. Parties can prevent this from happening by making it clear in a prenuptial agreement that such trust interests are not to be considered as matrimonial assets in the event of divorce.
In some international or cross border marriages, there are couples who have entered into prenuptial agreements in other jurisdictions and who seek a divorce in Hong Kong. If such agreement would be binding in the other jurisdiction, the parties would be taken to have intended to be bound by it in any proceedings instituted elsewhere, such as in Hong Kong. This may give such agreement more weight before the Hong Kong courts, although the Hong Kong courts are not bound to give effect to it.
Separation agreements
Many couples separate for a period before they divorce. It is common for couples who have separated or will separate to enter into a separation agreement. Both legislation (s.14 of the Matrimonial Property and Proceedings Ordinance (MPPO)) and case law (L v C [2007] HKCA 208; [2007] 3 HKLRD 819; CACV 169/2006) recognise separation agreements as valid contracts, which will be upheld unless there is a compelling case of unforeseeable circumstances.
Nuptial agreements other than separation agreements
Apart from separation agreements, other post-marital agreements are less common. There is no specific legislation governing such agreements and the Hong Kong courts do not generally recognise them as legally binding. Having said that, it is arguable that there is nothing to prohibit the courts from taking such agreements into account should a couple need the courts’ determination on the division of properties and other ancillary relief in their divorce proceedings, when considering the factors referred to in section 7 of the MPPO, which imposes a duty on the court “to have regard to the conduct of the parties and all the circumstances”.
Settlement agreements
A couple is only legally divorced when the court pronounces the decree absolute of divorce and the marriage is thereby dissolved. If there are children of the family, the decree absolute will not be granted until the court makes a declaration of satisfaction regarding children under section 18 of the MPPO. If there are a lot of issues in dispute between the parties requiring the court’s determination at trial (such as the custody, care and control of children, access rights, maintenance and relocation issues), it may take years for the decree absolute to be granted. In view of the time, costs and energy to be spent, and more importantly, the adverse effect of ongoing litigation on the children, it is wise for the parties to reach a full and final settlement of all their disputes, through negotiation, mediation or other dispute resolution method, as early as possible. A settlement agreement will take the form of a consent summons filed with the court for approval. Upon approval, the consent summons will become a consent order. Certain terms of a consent order can be amended subsequently if there are material changes of either parties’ and/or the childrens’ circumstances.
Conclusion
“Change is the only constant in life” and “uncertainty is the only certainty”. What matters is that, where possible, one prepares for the consequences of any change. An effective prenuptial agreement allows parties to prepare for any unfortunate future breakdown of their relationshipand avoid the costs of litigation.
For further information, please contact:
Paul Kwan, Partner, Deacons
