High stakes

In most European and common law jurisdictions the financial consequences of divorce are dealt with through the implementation of those countries’ prevailing marital property regimes. These property regimes create a marital estate on marriage and provide rules dictating how that estate will be divided if the marriage comes to an end.

If they wish, spouses can opt out of part or all of the provisions of the prevailing marital property regime before their marriage by, for example, entering into a prenuptial agreement. The obvious benefit is that the division of a family’s assets on divorce is entirely predictable: jointly owned assets are divided equally between the couple and solely owned ones are left untouched. The significant disadvantage is that any inequity that arises is very difficult to remedy.

Destination unknown

Almost uniquely, our jurisdiction does not have a marital property regime. Each spouse owns his or her own separate property during the marriage but subject to the court’s wide redistributive powers following a decree of divorce. The upside of course is that there is inbuilt flexibility to cater for any situation. But this comes at the cost of unpredictability of outcome.

This unpredictability of outcome has troubled senior members of the family judiciary ever since the Matrimonial Causes Act was enacted in 1973, with our higher courts straining to find ways to impose some certainty of outcome in divorce finance cases.

Initially, this led to the judiciary imposing ‘reasonable requirements’ as a limit to the claims of the economically weaker party: no matter the magnitude of the assets respectively owned by the spouses, the claimant was only entitled to a housing fund and a lump sum amortised to provide an income stream to maintain her during her actuarially predicted life expectancy (a ‘Duxbury fund’).

In cases involving significant family wealth, reasonable requirements led to gender discrimination: bread winning was rewarded more than home making. Furthermore, reasonable requirements created a paradox whereby the longer the duration of the marriage, the less the wife could expect to receive by way of a Duxbury fund, since the older she was, the shorter her anticipated life expectancy.

Successive decisions of the House of Lords in first White v White [2001] 1 AC 596 and, later, in the conjoined appeals in Miller v Miller; McFarlane v McFarlane [2006] 2 AC 618, removed this gender discrimination. The law lords rejected the concept of reasonable requirements and introduced in its place a presumption that where a couple’s assets exceeded their needs the surplus should be divided broadly equally.

In arriving at this position, the House of Lords went further than any parliament commission had ever recommended and introduced, without any debate, a quasi marital property regime.

As a result, our matrimonial finance law now draws a distinction between matrimonial and non-matrimonial property in much the same way that marital property regimes distinguish between separate and joint property.

Tight hold

Broadly speaking, non-matrimonial property can be characterised as assets that are either given to or inherited by one party during the marriage or that were brought into the marriage by one party. Matrimonial property can be characterised as everything else that is produced during the marriage as a result of the efforts of one or other of the parties to it.

But, unlike traditional marital property regimes, the obligation on the court to exercise discretion to find a fair outcome means that the distinction between matrimonial and non-matrimonial property is not sharp; the boundaries are frequently blurred so that what may have started as the exclusive non-matrimonial property of one spouse may later become matrimonial property to be divided between both of them.

The inherently fluid nature of non-matrimonial property was articulated by Wilson LJ (as he then was) in K v L [2011] 2 FCR 597: “The true proposition is that the importance of the source of the assets may diminish over time. Three situations come to mind:

• over time matrimonial property of such value has been acquired as to diminish the significance of the initial contribution by one spouse of non-matrimonial property;
• over time the non-matrimonial property initially contributed has been mixed with matrimonial property in circumstances in which the contributor may be said to have accepted that it should be treated as matrimonial property or in which, at any rate, the task of identifying its current value is too difficult;
• the contributor of non-matrimonial property has chosen to invest it in the purchase of a matrimonial home which, although vested in his or her sole name, has – as in most cases one would expect – come over time to be treated by the parties as a central item of matrimonial property.”

Where this leaves us is that, while we undoubtedly have a fairer system ?of matrimonial finance law than was the case before White (to the extent it is no longer gender biased), it is by no means any more predictable than it was before.

The recent case of the High Court in S v AG (financial remedy: lottery prize) [2011] All ER (D) 143 (Oct), is a case in point.

The husband and wife were married in Colombia in 1984 and had two children born in 1986 and 1988. Their marriage had been troubled and unhappy from an early stage, not least because of the husband’s alcoholism. In 1999, the wife and a friend with whom she had entered a lottery syndicate won £1m between them. The husband had been wholly ignorant of the wife’s participation in the lottery and he accepted that her contribution to the winning ticket came from her earnings.

In January 2000, £500,000 was paid into an account in the wife’s name. In May 2000, the wife purchased a house in her sole name for £275,000. In January 2004, the husband was removed from the house by the police as a result of an episode of serious domestic violence and the parties were fully separated from that date.

The principal issue to be decided was whether the lottery prize was to be classified as matrimonial or non-matrimonial property.

The court ruled that whether or not a lottery prize was to be regarded as matrimonial or non-matrimonial property was highly fact-specific and did not necessarily depend on the origin of the money used to purchase the lottery ticket.

If both the parties were aware that tickets were being bought and had agreed tacitly or expressly to their purchase then it was easy to classify the prize as matrimonial property.

If, on the other hand, one party was unilaterally buying tickets, from his or her own income, without the knowledge of the other party, then it was equally easy to see the prize as non-matrimonial property.

In the event, the judge decided that the initial lottery prize was non-matrimonial money; the wife had been unilaterally playing the lottery, without the husband’s knowledge, and had bought the tickets from her own earned income. However, when she purchased what was to become the new family home with her lottery money, she converted that part of her non-matrimonial assets into matrimonial property.

Clearly, the category of property (matrimonial or non-matrimonial) into which a lottery win falls will be entirely dependent on the facts surrounding the acquisition of the winning ticket. Likewise, if a lottery win starts as non-matrimonial property it can transition into matrimonial property.

Joy division

And it isn’t just the classification of assets that is unpredictable. The way in which the courts reflect the existence of non-matrimonial property in their ultimate awards is also, so to speak, a lottery.

Where it is decided that the existence of pre-marital property should be reflected in a final award, there are two distinct judicial schools of thought as to how to make the necessary adjustment.

The first is the technique of simply adjusting the percentage share from 50 per cent. This was the position in Charman v Charman (No 4) where the former president of the Family Division stated: “To what property does the sharing principle apply? [...] We consider [...] the answer to be that [...] the principle applies to all the parties’ property but, to the extent that their property is non-matrimonial, there is likely to be better reason for departure from equality.”

The alternative technique is to identify the scale of the non-matrimonial property to be excluded, and divide the remaining matrimonial property in accordance with the equal sharing principle. This approach was recently deployed by the Court of Appeal in Jones v Jones where Wilson LJ stated: “My view is that, in applying the sharing principle to this case, we should [...] effect a division of the total assets of £25m into the part reflective of non-matrimonial assets and that reflective of matrimonial assets [...] The remaining step to be taken pursuant to Miss Stone’s approach will be easy, partly because, in this case, there is no ground for sharing the non-matrimonial assets other than 100 per cent to the contributor and zero per cent to the other, and partly because, by contrast, there is no ground for sharing the matrimonial assets other than equally.”

And then there is the decision of Burton J in S v S (Non-Matrimonial Property: Conduct) [2007] 1 FLR 1496, which combines these distinct approaches. In that case, the judge identified and excluded from division the non-matrimonial assets. He then divided the matrimonial property unequally in order to reflect the fact that some of those assets had been derived from non-matrimonial property.

Ideally, lawyers would prefer to be able to advise their clients with some certainty as to the likely division of their assets on divorce. But certainty comes at a price. The reality is that a formulaic or inflexible system of asset division is more likely to produce inequality than our current discretionary system.

With this in mind, the best advice that a lawyer can give a client is that all litigation comes with risks and the only way to mitigate that risk of inherent uncertainty is to reach a negotiated settlement.

Sandra Davis is a partner and head of family at Mishcon de Reya