Practice trends: ancillary relief

The principle under the Matrimonial Causes Act 2003 is clear: when adjudicating over the distribution of assets between divorcing spouses, the judge is required to have regard to the needs of the parties.

But when it decided to bring ancillary relief into the 21st Century and did away with the accepted presumption in favour of the husband, the House of Lords in White v White [2001] AC596 introduced an element of subjectivity which may have opened the door to greater uncertainty.

One principle that the White v White ruling did establish, though, which Lords Nicholls said was of 'universal application', was that the homemaker's role, usually the wife, should not be regarded as of lower value than the revenue earner's role: 'In seeking to achieve a fair outcome, there is no place for discrimination between husband and wife and their respective roles.'

The traditional division of labour between the husband as the one earning the money and the wife being at home 'is no longer the order of the day'.

As the courts strive to analyse the needs of the parties from this new angle, so it seems that the yardstick of equality of division is shifting. More and more, arguments are being heard over which assets should be regarded as 'matrimonial' and the latest trends show that, where one party is a high earner, the non-earning spouse is able to claim a greater share of the assets.

Enhanced contributions

Earlier this year, the High Court considered the post-separation of assets and the share in future income in H v H [2007] EWHC 459 (Fam), a case where the husband received an annual bonus in the region of £2m a year. On the latter point, the judge had to consider whether future income was a fruit of the marriage. By not working the wife had helped her husband develop his career and multiply his income potential while she was bringing up the family, but could the husband's future income thereafter be genuinely regarded as flowing from the marriage or was the effort really only all his?

In this case, the judge said that '[the husband's] high level of income is primarily based on his talent, hard work and good fortune in pursuing his career' and only a small part of his future income represent a fruit of the partnership to which the wife should be entitled to have some share (the enhanced element). Contribution by the wife to the family after the marriage did not of itself warrant an entitlement to a share in future income. Charles J awarded half of the capital as at separation plus a decreasing share of the husband's income over the three years after separation to allow her to make a transition to a new life.

Quantifying such enhanced element is particularly complex, according to Michael Gouriet, family law partner at Withers, and on which there is little guidance.

The issue of treatment of post-separation assets had already been addressed in Rossi v Rossi [2006] EWHC 1482 (Fam) and in S v S [2007] EWHC 1975 (Fam), but dealt with differently in H v H. In addition, Gouriet says that the more recent decision in CR v CR, also in the High Court, sits at odds with H v H in that it appears to suggest that all post-separation assets should be included in the overall assessment. A practical consequence of the approach throughout the courts is that the wife's needs tend to be more generously assessed than previously.

'This should depend on the circumstances', comments Gouriet, 'and given the apparent divergence in views at High Court level on this question and the question of future income, guidance from the Court of Appeal would be welcomed.'

The wife role in shaping her husband's career was also taken into account in Lauder v Lauder [2007] EWHC 1227 (Fam). In this case, Baron J found that as the wife had actively been associated in the social side of her husband's professional life, she was eligible to higher level of capitalised income than her needs alone dictated, to take into account compensation for relationship-generated disadvantage, on the basis that the wife's caring role within the family had affected her availability to generate income or assets as she grew older.

Special contribution

On the husband's side, a possible defence is that of 'special contribution', an issue addressed in Charman [2007] EWCA Civ503 and which is likely to feature in the proceedings involving Heather Mills and Paul McCartney, according to Tom Farley-Hills, a solicitor at Speechly Bircham.

'John Charman asserted that his extraordinary business acumen was a special contribution that the court had to take it into account when dividing the assets of the marriage,' says Farley-Hills. 'Although contributions to the marriage is a factor prescribed by the statute, the courts approach to departing from an equal division of assets in big money cases to take into account special contribution has been unclear since White. One of the reasons for postponing the argument about special contribution until after the House of Lords' decision in Miller/McFarlane [2006] UKHL24 was to see whether this concept survived '“ and survive it did.'

McCartney is likely to fall in this 'special contribution' category, with most of the assets having been generated from his extraordinary talent before the marriage 'Heather Mills could not realistically claim that she contributed to his success,' says Farley-Hills. 'If ever there was a special contribution, McCartney is a perfect example, and the House of Lords decision Charman has reinforced this concept.'

But, as Farley-Hills points out, special contributions in divorce cases will usually only apply where there are enough resources to meet the needs of the parties first, and that unless the amount of capital in the marriage is sufficient to house both parties and their dependants and there is capital left over, arguments in respect to special contributions are unlikely to be attractive to the courts.

Business management

The Charman ruling also touched on the related issue of the assessment of the husband's (as is most often the case) business interests. At the centre of this question were two offshore trusts, one which Mr Charman claimed was a dynastic trust held for the benefit of the children and so should not be included and another trust which he also claimed should not be included.

The Lords found that the latter was not a dynastic trust as Mr Charman had retained control over its management. While this does not mean the end of offshore trusts as a vehicle for the management of personal wealth, Farley-Hills says that individuals setting up such trusts should bear in mind the possibility of them being exposed in the context of litigation upon divorce and ensure that the purposes of the trust and the role of the trustees leave no ambiguity as to the beneficiaries and who exercises control over the trust, or those assets may well be regarded as an extension of the settlor's wealth.

Where does this leave the clean break principle

The courts have a duty to consider whether a clean break can be effected '“ though not a duty to impose it. So if the judge makes a periodical payment order, he must consider whether this will allow the party to adjust without undue hardship.

For Gouriet, the principles applicable in such cases involving high net worth individuals with high earnings where there is already enough capital to meet the needs of the party claiming requires further clarification by the courts.

Only a few weeks ago, the Court of Appeal departed from the principle of equality in favour of the wife on the basis that this would ensure a clean break (Vaughan v Vaughan [2007] EWCA Civ 1085).

'If there is enough money in the matrimonial assets to provide for the wife's needs, there is usually no reason to depart from the principle of equality', Gouriet says, 'but the question is, more and more: 'what is enough'?' In CR v CR the wife's needs were generously assessed but as the husband had a high ongoing income, departure from equality of division of capital in the wife's favour was seen to be fair.'

According to Hazel Wright, head of private client at Cumberland and Ellis: 'The question goes back to the distinction between matrimonial and non-matrimonial assets. Should the matrimonial assets include inheritance, annual performance bonuses, redundancy payments?'

When the proceedings were started in Vaughan, the husband had suffered a breakdown and appeared likely to be made redundant on grounds of ill health. By the time the case reached the Court of Appeal the husband's return to work had become a real possibility and the question of what to do with the redundancy pay-off was not addressed, but the case illustrates some of the issues faced by judges when having to determine what is a fair share of the matrimonial assets.

According to Wright, this is a good example of the blurring between income and capital. Bankers and other City professionals are like young football players '“ a reference to the Parlour case [2004] EWCA 872 '“ who often start off with little capital but have solid long term revenue potential. Many have been investing in property, often taking very large mortgage, as an alternative to contributing to a pension, and so this makes it even more critical to have an understanding of where to draw the line between matrimonial and personal assets.

Some situations have, over the years, been clarified. A wife who, at the beginning of the marriage was the main earner and helped put her husband through college before he became the main earner will have a reasonable claim over his assets as this will usually be regarded as a contribution to the marriage. 'Even if the marriage is short,' Wright continues, 'this is a clear indication of the couple's intention to bring their lives together for the long term.'

On the other hand, in the case of a second marriage, if the husband inherits, the second wife is unlikely to be able to bring this inheritance within the matrimonial assets. This uncertainty, combined with the rise of property prices in the past decade, could well herald a boost for prenuptial agreements.

Prenup protection

As the courts are looking at prenups as an indication of the parties intention about the way their affairs should be regulated, 'there are signs that the courts are increasingly regarding prenups as an important factor that must be taken into account in divorce, even though they are still not strictly binding on the courts discretion,' say Farley-Hills.

'Private client practitioners should, as a matter of good practice, advise clients to regulate their financial affairs to mitigate loss on divorce,' he continues. 'In divorce proceedings a pre-nup can be a useful tool to record what are matrimonial and non-matrimonial assets, including for instance whether one party brings a substantial amount of money to the marriage, or how inherited wealth should be dealt with on separation.'

The decision in K v K [2003] IFLR 120 remains the leading case on prenups, with its checklist of key factors to take into account when judges review the fairness of the agreement (see 'Prenup pitfalls', [2007] 151 SJ 19 October 2007). The courts retain discretion as to the persuasiveness of prenups but if drafted in such a way they reflect the circumstances of the couple, prenups and now even post-nups, will be regarded by the courts as part of the circumstances of the case and a good indication of the parties' intention as to how they intend to organise their affairs. Wright says that most ask for a prenup and expect it to be binding, as most come from jurisdictions where they are enforceable.

Against this background, the case in favour of prenups is likely to become ever more compelling. Research undertaken for the Nuffield Foundation by a group of family law experts led by Professor Elizabeth Cooke at Reading University highlighted the lack of certainty and finality of the present system. One for the Law Commission to follow up?