4 Creating a Valid Premarital or Postmarital Agreement

• Library: Premarital Agreements: Drafting and Negotiation (ABA) (2017 Ed.)

4 Creating a Valid Premarital or Postmarital Agreement

§4.01 Overview

This chapter addresses the substance of the elements of a valid premarital or postmarital agreement. The prerequisites for a valid agreement range from the most minimal requirements for procedural fairness, which some states equate solely with voluntariness, to more substantial requirements, which may include full disclosure, opportunity for advice of counsel, and substantive fairness. Inasmuch as many states apply the same criteria to determine validity of postmarital agreements, much of the discussion in this chapter is equally applicable to them. This chapter discusses the meaning and interpretation courts have given to the elements of validity without regard to which elements are required by which states.

§4.02 Legal capacity

A party who lacks capacity to understand the nature and consequences of a transaction or to make a rational judgment about it is incompetent to enter into a valid contract.¹ Legal capacity to contract means that a person "possesses sufficient mind to understand, in a reasonable manner, the nature, extent, character, and the effect of the act or transaction. . . ."² Lack of capacity sufficient to void a contract must stem from a mental illness or defect, including congenital deficiencies in intelligence, deterioration caused by old age, and brain damage.³ Mental illness alone is not sufficient to establish lack of legal capacity.⁴ There must be some evidence of irrational or unintelligent behavior to warrant such a finding.⁵ A decision that is merely unwise or eccentric does not, without more, establish incapacity.⁶ Similarly, courts have held the following not to constitute incapacity: immaturity, lack of experience regarding the subject matter, poor judgment, dependence on prescription drugs or alcohol, developmental disability, and emotional distress.⁷ The question of legal capacity goes to the ability of the party to understand the transaction, not whether he or she actually did so.⁸

"Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances."⁹ Where one party is incapacitated to some degree at the time of execution of a premarital agreement, a postmarital agreement, or an amendment to either type of agreement, and where the incapacity provides an opportunity for the other party to take advantage of the situation, the instrument will be vulnerable to attack.¹⁰ A party with diminished capacity may be more vulnerable to duress, undue influence, or fraud.¹¹ Moreover, he or she may have come to rely on the other party to the transaction to such a degree that a fiduciary or confidential relationship has come into being. These facts, if known to counsel, call for extra caution.¹²

Contractual legal capacity requires a higher level of functioning than testamentary capacity, or as a Massachusetts court put it, "something more than a transient surge of lucidity."¹³ It involves not merely comprehension of what is going on, but an ability to comprehend the nature and quality of the transaction, together with an understanding of its significance and consequences.¹⁴ The Massachusetts court discussed the significance of a party's ability to understand a contract in the context of his or her own particular circumstances. A woman in failing mental and physical health contracted to sell her home to a trusted friend for half its value at a time when she needed cash for nursing home care. The court pointed out the distinction between the seller's awareness that she was selling her house—that is, her "awareness of the surface of [the] transaction,"¹⁵—and her failure, due to mental impairment, to appreciate the unreasonableness of selling it for far less than fair value given her needs.

Physical illness, infirmity, old age, or forgetfulness do not necessarily mean a person is incapable of entering into a premarital contract.¹⁶ But they do suggest that additional caution may be warranted to clearly establish capacity at a point when evidence is readily available. A party's capacity may be established through the testimony of lay witnesses, including those who observed the execution of the agreement, as well as through medical professionals.¹⁷ If there is any question about a client's capacity, it may be appropriate to obtain an opinion from the client's physician, and in appropriate cases, from a psychiatrist, before execution. Further, if possible, the agreement should be notarized and witnessed by disinterested persons, even if these formalities are not required by state law, so as to provide a body of testimony, if needed, as to the party's capacity at execution. In some cases, it may be appropriate to tape-record or videotape the execution of the agreement and the interchanges that precede it and to ask each party to explain on the record his or her understanding of the document about to be executed.¹⁸

The question of legal capacity is closely related to other components of the process. As the court pointed out in In re Estate of Goldberg,¹⁹ a significant factor in assessing the capacity of a party to a transaction who may have some deficit is whether that person had the advice and guidance of independent counsel. As discussed further below,²⁰ independent counsel for the weaker party is the single most important factor in creating an enforceable premarital or postmarital agreement. Where there is any doubt about the legal capacity of an unrepresented party, counsel should do everything within reason to cause that party to obtain independent advice.

§4.03 Voluntariness

(a) Criteria to Determine Voluntariness

Voluntariness is the essential requirement for validity of all premarital and postmarital agreements, consistent with general contract law principles. A voluntary act is one that results from "the free and unrestrained will of the person."²¹ A voluntary act is one that is done "intentionally; without coercion."²² At a minimum, voluntariness in connection with a contract means that the party acted out of his or her own volition, that he or she had a meaningful choice whether to execute it.²³ A contract is not voluntarily executed if it is the product of fraud, duress, or undue influence.²⁴ Duress and undue influence are related concepts. Both involve wrongful, though not necessarily illegal, conduct that overcomes the free exercise of the will of the victim. Duress is the result of coercion.²⁵ "Undue influence is influence that deprives one person of his or her freedom of choice and substitutes the will of another in its place."²⁶

A court may consider a number of factors in determining whether a challenging party executed an agreement voluntarily,²⁷ including

• Whether the disadvantaged party got independent legal advice or had the opportunity to do so;
• Whether the economically dominant party made adequate financial disclosure;
• The opportunity of the disadvantaged party to negotiate better terms than initially proposed;
• Whether the parties, directly or through counsel, actually engaged in any negotiations and whether the stronger party made changes to the agreement as a result;
• The timing of presentation of a premarital agreement in relation to the wedding;
• Whether the agreement was presented without any prior warning;
• The parties' intelligence and education levels;
• The parties' prior experience, especially in a prior divorce, the probate of an estate, or a business or profession;
• The parties' relative bargaining power in terms of their economic resources, age, sophistication, education, employment, and experience;
• Whether the disadvantaged party actually had independent advice of any kind from any source;
• Whether each party had adequate time to review the agreement;
• Whether each party understood the terms of the agreement;
• Whether each party understood the marital rights he or she would have if the parties married without an agreement or, in the case of a postmarital agreement, stayed married without an agreement.²⁸

Rarely will a single factor cause a court to invalidate an agreement for lack of voluntariness. Indeed, when a court refuses to enforce an agreement, there is usually a combination of egregious factors.²⁹ The lawyer for the proponent can reduce the risk for his or her client by working to create a combination of factors supportive of voluntariness, such as adequate time, a good financial disclosure, access to counsel, and opportunity to negotiate.

(b) Actual Negotiation or Opportunity to Negotiate Terms

An actual give-and-take negotiation indicates an agreement is a contract between equals.³⁰ Thus, a challenging party's active role in shaping the terms of an agreement—for example, by proposing the original terms, by negotiating for substantive changes in the proponent's draft agreement, or merely by marking up a draft—virtually negates a claim of duress, undue influence, or lack of voluntariness.³¹ This is so even when the proponent does not accept every change proposed. For example, in Spiegel v. Spiegel,³² the wife's lawyer was able to negotiate three changes to the husband's proposed agreement, but the husband rejected other changes requested by the wife. The court upheld the premarital agreement over the wife's claims of duress and undue influence. Changes made as part of a negotiation need not be significant. That a party obtained any changes before signing tends to show the party was acting out of his or her unrestrained volition and not as a result of undue influence or duress. For example, in Howell v. Landry,³³ the court upheld a premarital agreement over an involuntariness claim where the husband presented it to the wife the night before the parties were scheduled to leave for Las Vegas to get married. The wife was initially reluctant to sign, but she made two changes to the agreement and signed.³⁴

An invitation to the non-proponent to propose changes tends to show a...