The High Court decision of Thorne v Kennedy [2017] HCA 49, handed down on 8 November 2017, is another reminder of the Court’s power to strike down contracts where one party has been subjected to duress, undue influence or unconscionable conduct at the time of entering into the contract.

Background

The parties met over the internet in 2006. Ms Thorne was a 36-year-old Eastern European woman who was living in the Middle East. She had no substantial assets and had previously been married and divorced.

Mr Kennedy was a 67-year-old Greek Australian property developer with assets worth between $18 million and $24 million. He was divorced with three adult children.

Mr Kennedy travelled overseas to meet Ms Thorne shortly after meeting her online. Mr Kennedy told Ms Thorne that if he liked her then he would marry her but that “you will have to sign paper. My money is for my children.

In 2007, about 7 months after they first met, Thorne moved to Australia to live in Mr Kennedy’s penthouse apartment with the intention of later getting married.

On 20 September 2007, just 10 days prior to the wedding, Mr Kennedy took Ms Thorne to receive independent legal advice in relation to a pre-nuptial agreement drafted by his solicitors. Prior to this, Mr Kennedy informed Ms Thorne that if she did not sign the agreement the wedding would not go ahead.

The agreement provided that, if the parties separated within 3 years then Ms Thorne would get nothing. If they separated after 3 years, she would receive a lump sum payment of $50,000.

The independent advice provided to Ms Thorne noted that she was “under significant stress” and put in a position where she must sign the agreement, irrespective of its fairness, so that the wedding could go ahead. The solicitor urged Ms Thorne to reconsider her position as the agreement in no way considered her interests. Contrary to this advice, the pre-nuptial agreement was signed on 26 September 2007. This included a recital that a further agreement in similar terms would be signed by the parties within 30 days. On 5 November 2007, Ms Thorne again ignored similar advice and signed the post-nuptial agreement.

On 16 June 2011, less than 4 years into the marriage, Mr Kennedy signed a separation declaration and the parties separated in August 2011. Ms Thorne commenced proceedings in April 2012 seeking to set aside the two agreements, a property order in the amount of $1.1 million and a lump sum spousal maintenance order of $104,000.

Mr Kennedy died in May 2014 during the trial and was substituted as a party to the proceedings by the executors and trustees of his estate, who were two of his adult children.

The proceedings

At first instance, the Federal Circuit Court of Australia concluded that Ms Thorne was powerless to make any decision to sign the first agreement referring to an inequality in bargaining power and a lack of any outcome for Ms Thorne that was “fair and reasonable”. Importantly however the primary judge explained Ms Thorne’s situation was much more than inequality of financial position.

The primary judge set out 6 matters which, together, led to the conclusion that Ms Thorne was powerless and had no choice in entering the agreements, those being:

  1. her lack of financial equality with Mr Kennedy;
  2. her lack of permanent status in Australia at the time;
  3. her reliance on Mr Kennedy for all things;
  4. her emotional connectedness to their relationship and the prospect of motherhood;
  5. her emotional preparation for marriage; and
  6. the "publicness” of her upcoming marriage.

As to the second agreement, it was held that it was simply a continuation of the first and that the same matters invalidating the first agreement would also apply to the second agreement, with the exception of time pressure.

Mr Kennedy’s executors and trustees appealed to the Full Court of the Family Court of Australia, which overturned the primary judge’s decision. The Family Court found that there was no undue influence or unconscionable conduct on the basis.

On appeal to the High Court of Australia, the High Court held that there was undue influence and unconscionable conduct despite the evidence that Mr Kennedy had clearly communicated his wishes to Ms Thorne at the outset of their relationship. The High Court found that the primary judge was correct to consider the unfair and unreasonable terms of the pre-nuptial agreement and the post-nuptial agreement as matters relevant to her consideration of whether the agreements were void. While the High Court found that there was no duress, the fact that a pre-nuptial or post-nuptial agreement is signed despite being known to be grossly unreasonable even for agreements of that nature, is one indicator of undue influence.

The High Court upheld the primary judge’s findings that Ms Thorne was powerless and that she believed that she had no choice to do anything other than sign the agreements as presented. Those findings meant that, in effect, that Ms Thorne was deprived of the ability to bring a free choice to the decision as to whether to sign the agreements. That choice was affected by the urgency and pressure of the upcoming wedding and the threat that the wedding would not go ahead in the event that she didn’t sign the agreement.

The High Court upheld the primary judge’s findings that Ms Thorne was powerless and that she believed that she had no choice to do anything other than sign the agreements as presented. Those findings meant that, in effect, that Ms Thorne was deprived of the ability to bring a free choice to the decision as to whether to sign the agreements. That choice was affected by the urgency and pressure of the upcoming wedding and the threat that the wedding would not go ahead in the event that she didn’t sign the agreement.

Lessons to be learned

When entering into contracts in circumstances where one or more parties could be perceived to be in a disadvantaged position or there is an imbalance of bargaining power, the following factors universally relevant to the proof of undue influence should be considered (see American Law Institute, Restatement of the Law Third, Restitution and Unjust Enrichment (2011)):

  • the relation of the parties;
  • the susceptibility of the transferor to the influence of the other;
  • the opportunity of the other to exert undue influence; and
  • the extent to which the transferor acted on the basis of independent advice.