Many families spend months working on a family constitution or charter. Parents write a letter of wishes to sit with their Will or family trust. Everyone signs, and the family feels that the future has been settled.
Then a question arises that the document was meant to answer: who runs the business, whether a son-in-law can be employed, how much each branch receives. Someone asks, “Is this actually binding?” Often the honest answer is: not in the way the family assumed.
For Chinese and Asian families, where agreements are often built on trust and respect for the founder rather than on legal paperwork, this gap can be wide.
Two kinds of force: moral and legal
A family document can carry two very different kinds of weight.
- Moral and relational force. The document records what the family has agreed to value and how members have promised to behave. People follow it because they respect each other, because the elders asked them to, or because breaking it would cost them standing in the family.
- Legal force. A court will enforce the promise, or the document controls what a trustee, director or executor is permitted to do. If someone ignores it, there is a legal consequence.
Most family governance documents sit in the first category. That is not a defect. It is usually how they are designed. The problem arises only when the family believes a document is in the second category when it is really in the first.
Is a family constitution legally binding?
Usually not, by itself. A family constitution (sometimes called a family charter or family protocol) is generally written as a statement of values, intentions and processes: the family’s history, its vision, how meetings are run, who may work in the business, and how disputes should be handled.
Whether any part of it is enforceable as a contract depends on its wording and on whether the parties intended to create legal relations. Australian courts look objectively at what the parties said and did, and arrangements made within families are often found not to have been intended as legally binding. Many family constitutions also say expressly that they are not intended to be legally binding. Where that statement appears, it will usually settle the question.
Even where a family constitution is drafted to be binding, it cannot override the documents that actually hold legal power. A family constitution does not amend a company’s constitution, a shareholders’ agreement or a trust deed. If the family charter says decisions require family council approval but the company constitution lets the directors decide, the directors’ legal power remains.
Is a letter of wishes legally binding in Australia?
No. A letter of wishes (or memorandum of wishes) is a guide, not an instruction. It is commonly written to accompany a Will, a testamentary trust or a family discretionary trust, to explain to the executor or trustee how the person would like discretions exercised.
A trustee of a discretionary trust must still exercise its own discretion under the trust deed. It may, and often should, take a letter of wishes into account, but it is not bound to follow it. Indeed, a trustee that simply did what the letter said, without genuinely considering the matter, could be failing in its duty. Likewise, a letter of wishes does not change what a Will says. If a gift matters, it belongs in the Will itself.
What about the family understanding nobody wrote down?
Many families have an unwritten arrangement: the eldest son will take over the restaurant, the property in the daughter’s name is “really” the family’s, the parents will be looked after in return for the house. These understandings may sometimes give rise to legal claims, for example on the basis of promises relied upon, or a trust over property, but outcomes are uncertain, expensive to prove and very damaging to relationships. Relying on them is the riskiest position of all.
When can a family document become enforceable?
A family promise gains legal force when it is placed into, or reflected in, a document that the law recognises for that purpose. In practice this means:
- a deed signed by the relevant family members, which can be enforced without the usual requirement of consideration;
- a shareholders’ or unitholders’ agreement covering transfers, exits, board seats and decision-making;
- an amendment to the company constitution, which under the Corporations Act has effect as a contract between the company and its members, and between the members themselves;
- an amendment to the trust deed, where the deed’s variation power allows it;
- policies formally adopted by the board, which then bind management as company policy;
- Wills, powers of attorney and binding death benefit nominations for what happens on death or incapacity.
The family constitution remains the “why” and the “how we behave”. These bridging documents become the “what must happen”. Our next article looks at each of them in more detail.
Why some things should stay non-binding
It is tempting to make everything enforceable. That is usually a mistake.
- Values cannot be litigated. A clause saying family members will treat each other with respect is important, but a court is the wrong place to test it.
- Families change. A binding rule written for three siblings may not suit nine grandchildren. Rigid provisions can trap the family in arrangements that no longer fit.
- Binding language changes the conversation. When family members know every word may be enforced, they negotiate like opposing parties. Non-binding sections allow honest discussion of hopes and concerns.
A good rule of thumb: make binding the things where uncertainty would cause real harm, such as control, ownership, exit and money. Leave non-binding the things that depend on goodwill, such as values, communication, education and the family’s aspirations.
A practical sorting exercise
- List every promise or rule in your family constitution, letter of wishes or family understanding.
- For each, ask: if one person ignored this, how much damage would it cause, and to whom?
- Mark high-damage items (control of the trustee company, share transfers, buy-out prices, distributions) as candidates for legal effect.
- Identify which existing document already governs that issue: the trust deed, company constitution, Will or shareholders’ agreement.
- Check for conflict. Where the family document says one thing and the legal document says another, the legal document will generally prevail.
- Decide whether to amend the legal document, sign a new deed, or leave the item as a moral commitment.
- Add a clear statement to the family constitution about which parts are intended to be binding and which are not.
Frequently asked questions
Is a family constitution legally binding in Australia?
Generally not, unless it is drafted and signed with a clear intention to create legal obligations, and even then it cannot override the trust deed or company constitution. Most are deliberately non-binding statements of values and process. The parts that need legal force are best placed in separate legal documents.
Is a letter of wishes legally binding in Australia?
No. A trustee or executor may consider it, and families usually expect them to, but it does not override the Will or trust deed. A trustee must still make its own decision under the powers it holds.
Can a family charter be enforced in court?
Only to the extent it amounts to a binding contract or deed, which most charters expressly avoid. A court will look at the words used and whether the family intended legal consequences. Relying on a charter alone to resolve a serious dispute is risky.
Should our family constitution be binding?
Usually only in part, and through other documents. Keep values and aspirations non-binding, and give legal effect to decisions about control, ownership, exit and money through deeds, agreements and amendments.
How Chua Tan Associates can help
We help families review their family constitution, letters of wishes and informal understandings against their Wills, trust deeds and company documents, identify where they conflict, and decide which promises need legal effect and which should remain moral commitments. Justin Chua is a Nationally Accredited Mediator and an Accredited Family Business Advisor with a background in accounting, and we work alongside the family’s accountant. We assist families across Australia and overseas, work with local lawyers in other countries, and advise in English, Mandarin and Cantonese so that every generation understands what has been agreed.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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