Sutton v Bell – an expensive lesson in the vital importance of Contracting Out Agreements

When entering into a new relationship it is understandable that parties will look at how their separate property may be affected. 

This is particularly the case when one or both of the parties have married or been in long term relationships previously, and one or both have substantial assets. 

Even more so if they have been burned before.  In such circumstances parties are likely to discuss how their respective assets may be safeguarded. 

No doubt the prospect of approaching solicitors to prepare an agreement along these lines will come up.  But why can’t the parties just prepare the agreement themselves?  Paying for it is just money for old rope, right?

Wrong.  The importance of legally documenting such agreements has been thrown into sharp relief, following the case of Sutton v Bell - [2023] NZSC 65.

Mr. Sutton and Ms. Bell, who commenced a relationship in 2003, agreed between themselves that Mr. Sutton’s Auckland property (which he retained following the earlier breakup of his marriage) should remain safe from any relationship property claim that Ms. Bell could make. 

The property was thus transferred to a trust, settled by Mr. Sutton, in November 2004.  The parties’ de facto relationship began the following month, or thereabouts. 

Mr. Sutton no doubt felt satisfied that he was protected by way of belt and braces.  The property was owned by a separate legal entity, safe from any claim by Ms. Bell. 

Furthermore, Ms. Bell herself had suggested in writing that he take steps to this effect.  Further still, the property was transferred out of his name before they even started living together.  Surely this could not be unwound?

The court disagreed.  It concluded that the disposition was made in order to defeat Ms. Bell’s rights under the Property (Relationships) Act 1976. 

Even though Ms. Bell agreed with the transfer at the time, and it was therefore not transferred by way of dishonest intention, the court considered that Mr. Sutton’s knowledge of the effect of what he was doing was enough to consider it a disposition, for which Ms. Bell may be compensated. 

The fact that they were not in a de facto relationship at the time did not matter: there was a clear and present intention that such a relationship would happen.

The court has interpreted its powers in such situations very broadly indeed.  It can make orders in respect of dispositions made before a de facto relationship even begins, despite the disposition being agreed at the time - and thus made in what was believed (by the parties, at least) to be good faith.

Mr. Sutton’s mistake?  Not entering into a valid Contracting Out Agreement, signed off by both parties’ lawyers, securing the disposition of property.  If he had taken this relatively simple step, making a comparatively small investment, his property would have remained beyond Ms. Bell’s reach. 

So, if in doubt, consider a Contracting Out Agreement before dealing with the hard-earned property that you want to keep separate.  Without one, you may find that no transfer to a trust, a company, or even to your great aunt Mildred, is truly safe. 

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