The court will not treat a financial agreement as binding if it becomes impossible to comply with its terms.

The case of Herold & Kay shows what happens when unexpected circumstances make it impossible to carry out the requirements of a binding financial agreement.

The facts

Mr Herold and Ms Kay lived together in a de facto relationship for about two years. With the help of a mediator, they entered into a financial agreement when they separated.

The agreement provided that Mr Herold would deed his interest in a residence to Ms Kay and that Ms Kay would refinance the mortgage on that residence to relieve Mr Herold of responsibility for the mortgage debt. Ms Kay did not do so. Instead, she asked the court to make a property settlement.

The issue

Ms Kay was unable to refinance the property because the lender would not agree to do so. Although the financial agreement was not conditioned on Ms Kay’s ability to refinance, Ms Kay argued that the omission of that condition was an oversight. She asked the court to read the agreement as if that missing term had been included.

Mr Herold argued that he intended Ms Kay’s duty to pay his share of the mortgage debt to be absolute, not subject to Ms Kay’s ability to secure refinancing. He asked the court to enforce the contract as a binding financial agreement.

The court's decision that the agreement was not binding on the court

A binding financial agreement is one that the court must follow when a relationship breaks down, even if the court would take some other action in the absence of the agreement. Parties to an agreement must follow certain procedures to assure that it is binding. Those procedures were followed here.

The court did not decide whether to rewrite the financial agreement to make refinancing conditioned on the willingness of the lender to allow Ms. Kay to refinance. Instead, the court turned to a section of the Family Law Act that allows a court to depart from the requirements of a binding financial agreement if the agreement is unenforceable or if because of “circumstances that have arisen since the agreement was made it is impracticable for the agreement or a part of the agreement to be carried out.”

The court hinged its analysis on the provision of the agreement that required Ms Kay to refinance the mortgage. The agreement did not require Ms Kay to pay Mr Herold’s share of the mortgage debt under any and all circumstances. Instead, it assumed that Ms Kay would have the ability to refinance the debt. When the lender refused to refinance, the object of the agreement was frustrated, and it became impracticable for that part of the agreement to be carried out. Accordingly, the agreement was not binding on the court.

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