Introduction
The High Court of Australia has recently clarified when loss first arises in professional negligence claims involving defective binding financial agreements (BFAs).
In R Lawyers v Mr Daily [2025] HCA 41, the Court held that a client does not suffer compensable loss at the time a defective BFA is executed because any benefit remains contingent until separation. The limitation period therefore did not commence until the marriage broke down.
However, the Court also confirmed that the plaintiff’s only proven loss was a modest sum of wasted legal fees, and that his broader “loss of a better outcome” claim failed for want of evidence.
Background
Before marrying in 2005, Mr Daily (a pseudonym) engaged R Lawyers to prepare a BFA under Pt VIIIA of the Family Law Act 1975 (Cth) (the Act). The agreement was intended to regulate how property would be divided in the event of separation.
After the parties separated in 2018, the Family Court set aside the BFA for uncertainty and hardship under s 90K of the Act. Mr Daily then sued R Lawyers, alleging negligent drafting and advice. He claimed that, because the BFA was invalid, he received a property settlement under s 79 that was less favourable than the outcome he would have achieved with a valid BFA.
R Lawyers denied negligence and pleaded that the claim was statute-barred under the Limitation of Actions Act 1936 (SA). It also contended that Mr Daily had suffered no measurable loss.
Key issues
The key issues for consideration before the Court were as follows:
- When did loss first occur for limitation purposes — on execution of the BFA or upon separation?
- Whether the plaintiff established any additional compensable loss beyond the wasted legal fees, including proof of a less favourable property outcome.
The decision
The High Court allowed the appeal, holding that while the claim was not statute-barred, the plaintiff failed to prove any compensable loss beyond the wasted legal fees.
When loss arises
The Court held that negligent drafting of a BFA does not cause immediate loss when the agreement is signed.
Unlike a commercial contract, a BFA under Pt VIIIA of the Act has no operative effect until separation. Until then, a party’s interest in the agreement is prospective and contingent, not an enforceable right. This means the client is not worse off in any measurable way until the marriage ends and the agreement fails to deliver the protection it was intended to provide.
This statutory framework was central to the Court’s conclusion. Unlike the prenuptial agreement in Davys Burton v Thom1, which was found to have operated immediately upon marriage, a BFA under Pt VIIIA of the Act does not alter property rights during the relationship. Its purpose is to define how property and financial resources will be dealt with if the marriage breaks down, and those provisions only become enforceable after separation through an order under s 90KA of the Act. Until then, the agreement has no practical effect on ownership or entitlements.
The Court emphasised that this makes the “damaged asset” analogy inappropriate to BFAs. R Lawyers argued that Mr Daily “did not get what he should have got” when the BFA was signed, and therefore suffered an immediate loss. However, the Court rejected that view, finding Mr Daily’s interest was not in a present bundle of contractual rights but in future protection against statutory adjustment under s 79 of the Act. That protection was contingent and could not crystallise until the marriage ended.
The Court found that unlike many contracts, a BFA can be set aside for reasons that cannot be predicted at the time of execution, including hardship arising from changes in circumstances such as the care and welfare of children. These contingencies mean that assessing loss at the time of signing would involve speculation about events that may never occur.
The Court found that assessing loss at execution would involve “so many imponderables” that it would be “almost farcical”, because the financial consequences of separation depend on variables that cannot be predicted at the time of marriage (e.g. length of the relationship, children, health, and financial circumstances).
The Court also rejected R Lawyers’ submission that Mr Daily could have recovered legal costs to remedy the BFA immediately after execution, which supposedly demonstrated that loss was suffered in 2005. It was found that argument was speculative because no such costs were incurred. Identifying when loss accrues depends on actual events, not hypothetical expenses that might have arisen if circumstances were different.
Ultimately, this resulted in a finding that this made the case analogous to Wardley Australia Ltd v Western Australia2 and The Commonwealth v Cornwell3, where loss was held to accrue only when a future contingency occurred, and confirmed that contingent exposure does not amount to compensable loss until the contingency actually materialises.
On that basis, the limitation period did not begin in 2005 when the BFA was signed. It began in 2018 when the marriage broke down and the agreement failed to provide the protection it was intended to deliver. Until then, any disadvantage was hypothetical.
The Court reinforced this conclusion by highlighting the policy rationale. Allowing claims to be brought only after separation prevents premature litigation and reduces the risk of under-compensation based on guesswork. It also aligns with the compensatory principle that damages should restore the plaintiff to the position they would have occupied had the wrong not occurred, which is a position that cannot be assessed until the relevant event has taken place.
Failure to prove further loss
However, Mr Daily’s claim for a more favourable property outcome failed because Mr Daily did not establish the essential counterfactual. The Court held that he had not proved:
- what a competently drafted BFA would have contained;
- that his spouse would have agreed to those terms; and
- that such an agreement would have remained enforceable and produced a better result than the orders ultimately made under s 79 of the Act.
Without that evidence, any comparison was speculative.
The Court stressed that proving loss in solicitor negligence [cases] requires more than showing a defective agreement. It requires evidence of the alternative agreement and its likely effect. Mr Daily provided none, so the only compensable loss was the wasted legal fees incurred defending the BFA’s validity.
Practical take-aways for practitioners and insurers
The key take-aways from the decision are as follows:
- In negligence claims involving agreements contingent on future events (such as separation), loss is unlikely to arise until the contingency occurs. For BFAs, this means the limitation period starts at separation, not at execution
- Proving loss is critical. Plaintiffs must show what a competent agreement would have looked like, that the other party would have agreed, and that it would have delivered a better outcome. Without this, claims are likely to fail, even if negligence is proven;
- Documentation and advice are paramount. Practitioners preparing BFAs should record clear warnings about uncertainty, hardship grounds, and enforceability, and confirm the client’s informed acceptance of those risks.
Conclusion
The Court’s reasoning reflects core principles of pure economic loss, particularly the distinction between mere exposure to risk and actual financial harm.
A contingent or prospective disadvantage does not become compensable until the event that turns risk into reality occurs. In this case, the unenforceable BFA caused no measurable harm until separation exposed its defect.
R Lawyers v Daily confirms that limitation periods in professional negligence claims run from the point of actual loss, not from the creation of a potential risk.
For practitioners, the decision underscores the importance of clear advice and thorough documentation. For insurers, beyond the limitation point, the case also highlights that even timely claims may fail where plaintiffs cannot prove what competent performance would have achieved.
1 [2009] 1 NZLR 437.
2 (1992) 175 CLR 514
3 (1992) (2007) 229 CLR 519.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
