Prenup pitfalls

Practitioners are aware that in this jurisdiction prenuptial agreements (prenups) are not strictly binding or enforceable. But, since K v K (Ancillary Relief: Prenuptial Agreement) [2003] 1 FLR 120, prenups are increasingly taken as evidence of the parties' intention and considered on divorce. However, the lack of prescription in this area is difficult for both the public and the practitioner alike.

Practical application

In practice, the two most straightforward elements of the K v K checklist (independent legal advice and full disclosure) will quickly be addressed as a 'preliminary issue' before the more technical aspects are considered. As with divorce, the first issue to consider is jurisdiction. It is likely that a party to an agreement might seek to enforce it on death or divorce. Determining which courts might have jurisdiction in either scenario is relevant. As the rules for jurisdiction differ from country to country, it is sensible to consider at least:

the countries of which the parties are nationals;

• the countries in which they live or might live in the foreseeable future; and
• the countries in which they hold assets.

There is no substitute for specialist legal advice in other jurisdictions. Key questions include:

• whether that country might have jurisdiction in the event of a divorce;
• if so, what is the approach to financial provision on divorce?;
• whether a prenup will be enforceable;
• the criteria for a valid prenup; and
• whether the court will recognise and uphold an agreement drawn up under the law of another jurisdiction.

A careful decision then needs to be made as to which jurisdiction(s) should be involved in the drafting of an agreement(s). The next, and perhaps most important, question will be what the parties seek to achieve. The aims of couples entering into such agreements can differ substantially. Common aims include:

• ring-fencing assets acquired prior to marriage;
• applying a separate property regime;
• excluding inherited assets from consideration on divorce;
• protecting 'future inheritance' for children of first marriages from a divorce in a second marriage; and
• protecting a spouse from third party claims in the event of death.

When the aims have been identified, the practical job of drafting an agreement that fulfils the criteria for validity but also meets the needs of the parties, begins.

Difficulties with agreements

As a result of the lack of prescribed drafting requirements in this country, prenups present a number of challenges. Most countries where prenups are enforceable have well-defined criteria for validity, from what the agreement should contain to when and how it should be signed. If an agreement in more than one country is being considered, there is the potential for conflict. Difficulties include:

Conflict of laws

Some jurisdictions require an agreement to promote marriage, meaning that the parties cannot benefit from anything in the event of a divorce that they would not have had during marriage, while other jurisdictions require specific provision for divorce. This can be difficult to resolve.

Another potential conflict arises if there is to be more than one agreement. Should there be mirror agreements with identical provisions or a lead agreement with satellite agreements in jurisdictions of lesser importance. It is always necessary to consider what will be effective and enforceable. Key considerations include severance clauses, incorporation and comity.

Timeframe for signature

Many clients who wish to enter into a contract electing a marital property regime originate in countries where this can be done immediately prior to marriage. Often, they take advice at the 11th hour and the negotiations are last minute. This has practical consequences for compliance with K v K and emotional consequences for the parties involved. Increasingly, in the authors' experience, parties are entering into postnuptial agreements to address this.

Review clauses

These can create difficulty in international agreements, where provisions are more standard and well recognised. This conflicts with the position in England where the court's approach to the agreement might be affected by any change in circumstance (such as the birth of children) or the length of marriage. One way to try to maintain the validity of an agreement is to consider reviewing the document periodically, so that the terms are relevant to the parties' 'current' circumstances and may be considered fair. However, even if a review clause is agreed, there can be problems agreeing what should happen if the review is unsuccessful.

Tax issues

The tax implications of any gifts or trust structures under the agreement also need specialist consideration, particularly in international documents.

Difficulties with client care

Solicitors' primary professional obligation is to act in the best interests of our clients. One particular problem with prenups is the potential for conflict between the practitioner and the client on this point. Most clients underestimate the difficulty they may have negotiating with their partner, especially if the agreement will specify financial provision in the event of a divorce. Many couples have never had in-depth or open financial discussions with their partner before. For the client, there is a difficult balance to strike between the desire to marry the other party (and not upset them) and the need to ensure that they will have 'enough' in the event of divorce. For the practitioner, this presents many difficulties including:

• Do you advise your client of the risk that the marriage might not take place if the negotiations do not proceed successfully? What are the implications of this in terms of pressure? Most practitioners who work in this area will have experience of couples who chose not to marry following abortive discussions on a potential prenup.
• Is it better for your client to make a concession that is important to them at a personal level when, from a legal perspective, you are advising against that?
• Is the client under pressure to sign the agreement? What is the source of the pressure? If it is from the other party, some protective steps can be taken, however what if the added pressure is from non-contracting third parties with whom the client must have a personal relationship for years to come.
• Current guidance suggests that prenups should be signed at least 21'“28 days before the wedding to relieve pressure '“ is that sufficient? Many people begin wedding planning months, even years, before the wedding. By this time, it is likely that the parties are liable for a high proportion of the wedding costs and they have probably sent their invitations. While this may seem insignificant to the objective bystander, the idea of wasting the costs or suffering the perceived embarrassment of cancelling the wedding at this late stage may impact on the parties' approach.
• Will taking steps to ensure that the agreement is enforceable be in your client's best interests? This is a particularly difficult issue. First and foremost, there is the question of good faith. Most practitioners are not comfortable entering into negotiations with their legal counterpart unless they are working towards the mutual aim of creating a binding agreement. However, many clients believe that the marriage they are about to enter will never end in divorce. They are willing to sign any agreement proposed, so that they enter into an agreement that meets their partner's requirements (if they did not propose the agreement) even if it does not meet their own. In those circumstances, as their adviser you may recognise that their longer-term interests would be best served if the agreement were to be unenforceable. From a professional perspective, the only logical approach to this dilemma is to provide your client with full advice and recommend that they do not sign the agreement. They remain free to act against the advice you provide.

Insurance risks

Many practitioners will not advise on prenups (or will not do so without specialist counsel) because of the risk associated with them. The practitioner advising on a prenup must consider the impact of the provisions under negotiation on a wide range of foreseeable and unforeseeable future events and also potential changes in the law.

Over the course of time, the circumstances in which the agreement was concluded might change significantly. In the event of divorce, one party to the agreement might seek to resile from the terms while the other may seek to enforce. The unsuccessful party may then seek recourse against the solicitor that advised on the prenup and practitioners must keep this in mind while they are providing advice.

All practitioners should make sure they have adequate professional indemnity cover. The particular difficulty prenups represent is the value of the potential future claim. The wealth of the parties may have increased in ways that could not have been anticipated (say, by a lottery win) between the date that the agreement was concluded and any subsequent proceedings. Insurance should be addressed on a case-by-case basis.

In addition to ensuring adequate insurance, practitioners also need to keep careful records and give full written advice. This is aptly demonstrated in the case of NA v MA [2006] EWHC 2900 (Fam), albeit that the case concerns a postnuptial agreement. The facts are beyond the scope of this article, but the trial itself is relevant. When the matter came before the court, the wife argued that she should not be held to the terms of the agreement. The husband argued that her solicitors had a strategy and had deliberately entered into a course of conduct so as to give her an exit route. The solicitors involved in the preparation of the agreement were called to give evidence. The court reviewed their attendance notes (including when and by whom they had been amended). The judge dismissed the accusations of a strategy by the wife's legal team. However, the case must serve as a warning to us all.

In Charman v Charman [2007] EWCA Civ 503, the House of Lords led a call for reform, to include some recognition for prenuptial agreements. The authors of this article echo its sentiments both for the benefit of the client and the practitioner alike.