The gasp factor: litigation misconduct

One of the most pronounced misconceptions for clients embarking on financial remedy proceedings surrounds the raising of conduct.

All practitioners will be familiar with having to break the bad news to a client that while their spouse may have behaved poorly during the marriage, behaviour is unlikely to amount to that which would “be inequitable to disregard”, in the immortal words of section 25(2)(g) of the Matrimonial Causes Act (MCA) 1973.

This article seeks to set out the current position with regards to conduct; the threshold for a successful conduct argument; and the interplay between conduct and the costs rules – drawing on the recent judgment of Mostyn J in OG v AG [2020] EWFC 52.

The case concerned a long marriage of 25 years. The parties had cofounded and worked together on a successful ducting business (X).

This was valued at £13.8m, of which the trading element was just under £4m with the balance comprising surplus company assets.

Conduct

The wife’s conduct argument arose primarily as a result of the husband ceasing work for X shortly before a competitor ducting company (AB) was incorporated.

AB’s shareholders were the husband’s father and close friends. The wife’s case was that the husband was the true owner of AB. 

She argued that:
1.    The value of X should be discounted by 10 per cent due to covid-19 and Brexit and a further 40 per cent due to the husband setting up AB.

2.    The matrimonial assets (after discounts) should be divided two thirds to her and one third to the husband to reflect his conduct in setting up AB and his extensive non-disclosure.

3.    The husband should pay her costs as a result of his misconduct.

In his judgment, Mostyn J set out four distinct scenarios in which conduct rears its head:
1.    Personal misconduct by one party to the other.

2.    Add-backs.

3.    Litigation misconduct.

4.    A party’s failure to provide full and frank disclosure, causing adverse inferences to be drawn.

Personal misconduct

Personal misconduct must be “both obvious and gross” (Wachtel v Wachtel [1973] Fam 72) and will only be taken into account in rare circumstances (Miller v Miller [2006] UKHL 24).

It must also have financial consequences to be relevant in financial remedy proceedings.

In H v H (Financial Relief: Attempted Murder as Conduct) [2005] EWHC 2911 (Fam), the wife was awarded the lion’s share of the assets following the husband being sentenced to 12 years in prison for her attempted murder.

The wife was left unable to work and should “be made as secure as possible, free from financial worry or pressure”.

It was held in OG v AG that conduct under this head can be reflected in the substantive award, where the high standard of “inequitable to disregard” is met.

The authorities do not provide an exhaustive list of what would meet this threshold and it is suggested that such a list would be neither desirable nor possible.

Its best formulation perhaps remains that of Sir George Baker P in W v W [1976] Fam 107 where he suggests that conduct requires the “gasp factor” – behaviour so extreme that it makes you gasp.

Add-backs

An add-back arises where a party has wantonly and recklessly dissipated assets.

As set out in OG v AG, it must be “clear and obvious”.

In Martin v Martin [1976] Fam 335, Cairns LJ held that a “spouse cannot be allowed to fritter away the assets by extravagant living or reckless speculation and then to claim as great a share of what was left, as he would have been entitled to if he had behaved reasonably”.

In Norris v Norris [2002] EWHC 2996 (Fam) Bennett J, finding that the husband had overspent by £250,000 and that this sum should be reattributed, opined that “a spouse can, of course, spend his or her money as he or she chooses, but it is only fair to add back into that spouse’s assets the amount by which he or she recklessly depletes the assets and thus potentially disadvantages the other spouse within ancillary relief proceedings”.

An add-back will be reflected in an adjustment to the substantive award.

Litigation misconduct

This is inextricably linked to the proceedings and the parties’ behaviour within them and Mostyn J said litigation misconduct should be “severely penalised in costs”.

The costs consequences of litigation misconduct are set out in part 28 of the Family Procedure Rules (FPR) and practice direction 28AFPR 28.3(7) sets out the factors the court must take into account.
 
The general rule on costs is set out at FPR28.3(5) in that the court will not make an order requiring one party to pay the costs of another party.

This is subject to FPR28.3(6) which provides that the court may make an order for costs where it considers it appropriate due to the conduct of a party.

Since April 2019, amended paragraph 4.4 of PD28A provides that the court will “generally conclude that to refuse openly to negotiate reasonably and responsibly will amount to conduct in respect of which the court will consider making an order for costs.

This includes in a ‘needs’ case where the applicant litigates unreasonably resulting in the costs incurred by each party becoming disproportionate to the award made by the court”.

This amendment puts parties under further pressure to litigate responsibly.

Prior to this amendment, a party in a needs case who had committed litigation misconduct could rely on the financial effect of a costs order pursuant to FPR 28.3(7)(f) to limit or avoid sanctions.
 
This is no longer the case.

In MB v EB (No 2) [2020] 1 FLR 1086, for instance, Cohen J limited the wife’s liability for the husband’s costs and stated it was “not for the wife to bankroll this litigation which I find to have been unreasonably conducted by the husband”.

Adverse inferences

The final head of conduct is the court’s ability to draw adverse inferences from a party’s failure to give full and frank disclosure (a long-established doctrine, set out in J v J [1955] P215).

Although a form of litigation misconduct that may result in a costs award, he distinguishes the two scenarios on the basis that the drawing of adverse inferences is “part of the process of computation rather than distribution”.

The ruling

Mostyn J found that the husband was the real owner of AB, and the £900,000 of loans used to fund the company were added-back at the computational stage.

The trading value of X was to be discounted by 10 per cent due to Brexit and covid-19, with a further 30 per cent as a result of the husband starting AB.

His conduct in starting AB met the ‘inequitable to disregard’ threshold and the reduction in value of an asset to be retained by the wife was the change to the substantive award warranted by his conduct.

But the wife’s claim to two thirds of discounted assets and her costs was held to be disproportionate and untenable, amounting to the husband suffering a triple jeopardy – a reduction in the asset value, departure from equality and costs order – all as a result of his conduct.

Conduct apart, this was held to be “a paradigm case for the application of the equal sharing principle”.

As a result of his significant litigation misconduct, a £278,020 costs order was made in the wife’s favour.

This would have been larger but was discounted by £50,000 due to the wife’s failure to negotiate reasonably.

Mostyn J held that from the time when the husband’s disclosure had allowed the wife to being open negotiations, her stance had been “unreasonable and untenable”.

This should serve as a warning to parties adopting unrealistic positions in open correspondence.

As a result of his misconduct, the husband was left with 44.7 per cent of the total assets – a departure from equality of some £869,741.

Matthew Taylor is a senior solicitor specialising in complex financial cases at Stowe Family Law stowefamilylaw.co.uk