A couple seeking a property settlement once their relationship breaks down to divide up the assets accrued during their time together will often have the matter complicated by the existence of a third party interest.
The third-party could be a close family member or another relative, a business partner of one half of the couple, a creditor of one party, or someone else who has a property interest or financial relationship with one or both parties.
A common example is a parent who lends money to an adult child to help their son or daughter buy a house with their partner.
Changes made to Australia’s Family Law Act (‘the Act’) in 2004 give those courts charged with interpreting the Act wide-ranging powers in relation to third party interests in property settlements.
Specifically, under Part VIIIAA of the Act, the court may alter the rights, liabilities and property interests of third parties in relation to the couple’s property settlement proceedings, including for former de facto couples.
This means the court may issue orders which direct a third party to do something in relation to the property of a party to the marriage or, alter the rights, liabilities or property interests of a third party in relation to that marriage.
The court may order, for example, a creditor of one party to a marriage to substitute the other party, or both parties to the marriage for that party in relation to a debt. It could also order a company to register a transfer of shares from one party to the marriage to the other party.
The question arises as to who is responsible for the costs of legal action involving a third party, which we’ll address in this post.
How are third parties joined to property settlement proceedings?
A party to a property settlement proceeding after a relationship break-up can join a third party to the proceeding in their Initiating Application to the court.
A third party can also ask to be joined to the proceedings. This will usually happen if there is a significant asset legally owned by one half of the ex-couple in the proceedings that the third party considers to be theirs, or where the third party’s rights will be affected by the orders being sought by one of the parties to the property settlement.
A third party may apply to the court to strike out the application joining them to proceedings. By joining as a party, the third party is subject to disclosure obligations, legal costs and potentially becoming the reluctant subject of a court order.
The third-party can ask the court to exercise its discretion not to make orders affecting its rights.
It should be noted that a third party can still be asked to disclose financial information in the property proceedings under a subpoena, even if they do not join as a party to the legal action. If one spouse had a role with a third party entity, for example, documents relevant to that financial asset or property may be relevant under the usual disclosure obligations in the proceedings.
The issue of costs
Before joining a third party to property settlement proceedings, careful consideration should be given to the legal costs the third party is likely to incur.
A cost-benefit exercise needs to be conducted to work out whether the possible financial benefit to the person who joins the third party is significantly greater than the third party’s potential legal costs.
Under section 117 of the Act, costs in property settlement proceedings state that ‘each party to the proceedings under the Act shall bear his or her own costs’.
Other clauses in that section, however, allow the court to make other costs orders for one party to pay the other’s legal costs. The court takes into account the financial circumstances of each of the parties, the conduct of the parties, and whether the proceedings were necessary because one party failed to observe earlier court orders, among other reasons.
Importantly for this topic, section 117 of the Act does not make express distinction between the parties to the proceedings, such as a former husband and wife, and a third party. This means a third party can make an application to the court for its legal costs to be covered by a party or parties to the proceedings.
It should be remembered that costs order are not designed to be punitive but are simply made to compensate a party for the costs incurred in becoming part of the litigation.
Nevertheless, depending on the extent of the third party’s involvement in the property settlement proceedings, that party could obtain an oppressive order against the applicant to pay legal costs and expenses if the latter is unsuccessful after including the third party.
In this situation, if the court decides the third party did not need to be joined to the proceedings, the party who did so may have to pay the third party from their share of the asset pool.
Speak with experienced family lawyers
The decision to join third parties in property settlement proceedings between ex-spouses is one that needs careful consideration and the advice of expert family lawyers.
Felicio Law Firm counts on many years’ experience advising parties to family law proceedings, whether they are a primary partner such as a husband or wife, or a third party.
We will help you decide on the wisdom of third party participation in property proceedings so you are aware of both the benefits and the risks.
If anything raised in this post applies to your situation, call us for an initial discussion of your case today.