Prenuptial and post nuptial agreements in Scotland
Under Scots Law, prenuptial and postnuptial agreements are treated as binding and enforceable. Such agreements are most frequently used to ringfence particular assets in order to ensure that they do not form part of the matrimonial property to be divided between the parties on divorce.
Understanding matrimonial property under the Family Law (Scotland) Act 1985
Under the Family Law (Scotland) Act 1985 (FLSA 1985) matrimonial property means all property belonging to the parties or either of them which was acquired by them either jointly or individually (with certain exceptions) before the marriage for use by them as a family home or as furniture or plenishings for such home; or during the marriage but before the “relevant date” (usually being the date of the parties’ separation). Strictly speaking, if the aim of an agreement is simply to ringfence assets held in individual names at the date of marriage, then provided that there is no anticipated change in the nature of those assets during the course of a marriage it could be suggested (and many clients do suggest) that there may be no requirement for a prenuptial agreement.
The FLSA 1985 appears, at first glance, formulaic in its approach to division of net assets on divorce. However, there is in fact great scope for judicial discretion so as to attempt to achieve “fairness”. Assets which would not otherwise have been matrimonial (such as an inheritance or a gift from a third party) may fall into the “pot” for division if they change form during the marriage. In those circumstances, a “special circumstances” argument can be advanced, seeking account to be taken of the fact that the source of funding for this converted asset derives from a non- matrimonial source. It is, however, unlikely that the entire value of the converted asset will be excluded from the calculation of matrimonial property. Scottish prenuptial or postnuptial agreements would accordingly ordinarily be drafted so as to safeguard against such conversion.
What can you include in a prenuptial or postnuptial agreement?
The scope of a prenuptial agreement varies depending on the wishes of the parties. Some parties elect to simply ringfence assets owned prior to marriage, whereas others wish to clarify how all matrimonial property will be dealt with upon separation or divorce, including any claim for financial provision.
A postnuptial agreement may be entered into seeking to alter the terms of a prenuptial agreement or to regulate a particular transaction which is to take place during the course of the marriage.
Under Scots Law, cohabitants may also have the ability to make claims if either party to the cohabiting relationship is Scots domiciled. Scots lawyers are regularly instructed to prepare cohabitation agreements (even where cohabitants are residing out-with Scotland), regulating what is to happen in the event of the relationship coming to an end by death or otherwise.
Enforceability of prenuptial or postnuptial agreements in Scotland
Since the introduction of the FLSA 1985 which regulates financial provision on divorce, the Scottish courts have not produced a decision regarding the binding nature of a prenuptial or postnuptial agreement. It was held in the case of Thomson v Thomson that parties can freely contract to include a discharge of rights on divorce if they wish. The Scottish courts are reluctant to disturb an individual’s right to enter into a contract and pre and postnuptial agreements have therefore always been binding and enforceable under Scots Law.
Provided that the agreement is set up correctly and at arm’s length, it will be enforceable. An agreement can, however, be reduced (set aside) under any of the usual contractual grounds (extortion, fraud, facility and circumvention, undue influence, error and misrepresentation), or on the basis that it was “not fair and reasonable at the time that it was entered into”. This emphasis on the “time that it was entered into” is important. An agreement which may appear unfair/unreasonable at the date of signature may well be unfair at the point of separation, but no element of crystal ball gazing is required.
Even if there is a significant departure from the terms of the FLSA 1985 or the party later regrets entering into the agreement, that does not give rise to an inference that the agreement was neither fair nor reasonable at the time of it being entered into.
It is therefore relatively difficult to set aside a pre or postnuptial agreement under Scots Law. However, to minimise the risk of challenge, it is best if both parties obtain comprehensive legal advice prior to signing. Whilst there is no minimum time period in which a prenuptial agreement must be signed prior to the marriage, ideally any agreement will be entered into in sufficient time to avoid accusations of coercion. If the wedding is imminent, it may be prudent for parties to enter into a postnuptial agreement.
Considering global wealth in prenuptial or postnuptial agreements
It is not uncommon for couples to have links to, and hold wealth in, multiple jurisdictions. Where parties are entering into a pre or postnuptial agreement under Scots Law and there are links to multiple jurisdictions, advice should be obtained from lawyers in each of those jurisdictions regarding the enforceability of the Scots Law agreement in that jurisdiction should divorce be dealt with there. Specific wording may require to be included to strengthen the prospect of that jurisdiction ceding jurisdiction to a Scottish court. In some cases, a ‘mirror’ agreement in each of the jurisdictions may be necessary as a ‘belt and braces’ approach.
For more information on prenuptial or postnuptial agreements, please get in touch with one of our family lawyers.
This is a condensed version of an article first published in Issue 23 of the HNW Divorce Magazine by ThoughtLeaders4 High Net Worth Divorce.
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