It has been a common occurrence over the years, especially in India, for families to face disputes related to distribution of properties and other family assets. The problem becomes a bigger issue if the predecessor does not leave behind a Will that specifies how the assets will be distributed amongst the successors. Besides, even a well-executed Will may be challenged by successors that have not been mentioned or are unhappy with the distribution of assets. In such cases, a family settlement agreement can prove to be an effective solution to solve such disputes.
What is a Family Settlement Agreement?
Family Settlement Agreement (FSA) refers to an informal agreement between the members of a family to distribute property and assets in a different way as directed by the law. It can be considered as an alternative to resolve dispute or potential disputes related to asset distribution amongst family members. This includes both movable and immovable assets.
- FSA is considered an out of court settlement between the family members which is much simpler and cost-saving.
- FSAs records that all the members of a particular family agree that a potential dispute/difference will be resolved in a certain way.
- In addition, an FSA shall only be valid and legally binding, if it has been drafted and all the family members have entered the agreement on their own will and agree to adhere to the terms mentioned therein.
Need for Family Settlement Agreements
The purpose of an FSA is to avoid disputes amongst members of a family and ensure that the familial relations are maintained even if there are disputes or differences. It aims to maintain the unity and harmony between family members and prevent them from breaking apart due to conflicts for assets in the future.
In the case of
Kale & Ors v. Dy. Director of Consolidation [AIR 1976 SC 807], the Supreme Court termed the general effects and values of FSAs to be an agreement as per which the descendants of a certain family aim to resolve their differences and disputes along with conflicting claims and titles once and for all to achieve peace of mind and harmony and goodwill in the family.
Contents of a Family Settlement Agreement
An FSA is similar to other contracts between two or more parties. The members of the family are bound by the agreement if they have entered it on their own free will and consent to adhere to the clauses mentioned in the agreement in case of any potential dispute/difference.
The FSA must be genuine for it to settle disputes and claims through fair and equitable standards.
The parties of an FSA must have some ancestorial claim, title or interest in the asset(s). However, if there is a party who has no title but is supported by another party, who has given up their claim, the Court shall uphold the terms of the FSA.
Some crucial clauses in an FSA are:
- Parties to the FSA – includes all the family members who are likely to be part of the dispute that has arisen or that may arise in the future.
- Particulars of Properties – if the FSA aims to resolve property disputes, all the details of such properties should be mentioned.
- Purpose of the FSA – the aim of the FSA, which usually is to resolve disputes between family members, should be mentioned.
- Nature of Dispute – a short description of the dispute should be mentioned in the FSA to ensure all members of the family are aware of it and on the same page.
- Additional Information – any other relevant details that may play a vital role in determining the claims and division should be mentioned in the FSA.
- Details of Actual Division of Properties – one of the most critical aspect of FSAs - the details of how properties and/or assets shall be divided amongst the family members should be mentioned. Extra care must be taken while doing this to ensure there is no space for any ambiguity.
- Declaration – a declaration that all family members agree to resolve disputes/differences as per the clauses of the agreement should be mentioned in the FSA.
The parties involved in an FSA should be related to each other or have some interest in the property for the agreement to be valid. The concerned property should be a common property, which has the claim or interest of all parties.
If family arrangements have been made orally, no registration will be required.
FSA cannot be considered as a document for transfer of property. It can only be used to resolve property or asset-related disputes between members of a particular family and not to transfer a property to anyone that has no claim or interest in the property.
Courts' Take on Family Settlement Agreements
After taking the numerous judicial statements into consideration and reviewing them, it can be evidently seen that Courts have a very open mind and a broad view of the validity of FSAs. They generally try to respect and uphold the terms of such agreements between family members.
The basic thought behind this certain approach towards FSAs is that if the members of the family have consented and willingly agreed to join the agreement, then they shouldn’t be allowed to question or reopen the case for random reasons. However, if any of the parties involved in the agreement proves that some sort of fraud is involved in the FSA, the entire agreement shall be deemed invalid, as fraud discredits everything.
Besides, a valid and legally binding FSA also acts as an estoppel and prevents parties who have benefitted through the FSA to challenge the same.
Conclusion
Wills are the most reliable documents to determine inheritance and the manner in which properties shall be divided amongst the successors. However, family settlement agreements prove to be equally valuable in cases when a Will does not exist and the members of a family need to decide how the assets and properties will be divided amongst themselves. Besides, if the family agrees and consents to how assets will be divided, a lot of potential conflicts and differences can be avoided by simply drafting an FAS that documents the willingness of family members to do so.
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