CONTRACTING OUT AGREEMENTS AND THE FAMILY PROTECTION ACT 1995

Posted by Shan Langston on March 31 2021 in News

Contracting out agreements are useful to give certainty around the division of assets in the event of a separation. This is especially so for later life relationships where individuals are entering into second or subsequent relationships with a significant asset pool already in place.

A contracting out agreement is an agreement which allows a couple (whether married or in a defacto relationship) to contract out of the Property (Relationships) Act 1976. That Act sets out how property should be divided in the event of separation or death. 

But there are limitations. Two recent High Court cases are a timely reminder of one such limitation – the application of the Family Protection Act 1955 (Act).

The Act allows certain family members, who have not been adequately provided for under a will, to seek provision from an estate for recognition maintenance and support. Family members include surviving spouses. There is no express provision in the Act to enable parties to contract out of the Act. Accordingly, it has long been held that, to the extent that a contracting out agreement purports to settle any future claims arising under the Act, such a provision is void or voidable.

A Will, which makes inadequate provision for a surviving spouse, will likely fall short of the moral obligation which a deceased partner has to provide for the surviving spouse's maintenance and support, or recognition of that relationship. Accordingly, a surviving spouse would likely (depending on the circumstances) have a claim under the Act for further and better provision from the deceased partner's estate

That risk is highlighted through the recent High Court cases of Dymond & Ors v Upritchard [2020] NZHC 3274 and Matthews v Phochai [2020] NZHC 3544:

1. In Dymond & Ors v Upritchard, the High Court awarded a husband (of 32 years) 40% of their deceased partner’s estate. The parties had entered a contracting out agreement at the time of their marriage. The Court found that, during the relationship, the parties intended to preserve their separate property. The 40% award equated to approximately the deceased’s interest in the family home, of which the parties had a mistaken belief that their respective interest in the family home would pass to each other by survivorship.
    
2. . In Matthews v Phochai, the High Court awarded a de facto partner a 25% share in the deceased partner’s estate. The parties had a contracting out agreement, which provided that separate property was to remain separate, and that the agreement was to be binding in all circumstances, including death. Consistent with that agreement the parties had kept their assets and income separate (although the parties did reside in the home owned by the deceased partner).

Nevertheless, the existence and terms of a contracting out agreement can be relevant to assessing the extent of moral duty and the necessary measure of repair. But, depending on the circumstances, risk remains that a claim under the Act will be successful despite the existence of a contracting out agreement.

Accordingly, if one of the purposes of entering a contracting out agreement is to ensure that you are free to pass your assets down to children from previous relationships, then a contracting out agreement may not be fit for purpose. Rather individuals need to consider whether; assets should be transferred into a Trust (not without its own issues) to place those assets outside the reach of the Act; and/or whether the contracting out agreement/the parties will meet the obligations under the Act.

 

Kalev Crossland | Partner | Kalev.Crossland@shieffangland.co.nz

Shan Langston | Senior Associate | Shan.Langston@shieffangland.co.nz