Margaret Hatwood, Partner
Family Law Journal - January 2010
In Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, [2006] 1 FLR 1186 described as the paradigm case for an award of compensation, the House of Lords said that not only did the court have to have regard to the s 25 Matrimonial Causes Act 1973 (MCA 1973) criteria but to three additional strands namely needs, compensation and sharing. This article seeks to examine how the second strand, compensation, is relevant in substantial asset cases, those with more modest assets and claims for variation of maintenance. In Miller/McFarlane Lord Nicholls said (at para [13]):
‘Another strand, recognised more explicitly now than formerly, is compensation. This is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage. For instance, the parties may have arranged their affairs in a way which has greatly advantaged the husband in terms of his earning capacity but left the wife severely handicapped so far as her own earning capacity is concerned. Then the wife suffers a double loss: a diminution in her earning capacity and the loss of a share in her husband’s enhanced income.’
So how have the courts dealt with compensation post Miller? Is the principle limited to exceptional cases like McFarlane? Or is it possible that the average
professional woman who gives up a career for a family could make a claim?
SUBSTANTIAL ASSET CASES POST MILLER
These cases are well known to all family lawyers and so the facts will only be dealt with briefly.
Charman v Charman (No 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246
This was a 30 year marriage. The wife had given up work to have and bring up the children (now grown up and financially independent).The husband had been exceptionally successful in insurance. The husband’s assets were £56m with an additional £68m held in the Dragon Trust, set up by the husband as a dynastic trust albeit with no named beneficiaries. It was said that need (generously interpreted), compensation and sharing must be applied in the light of the size and nature of all the resources.
In Charman compensation was said to relate to the prospective financial disadvantage which one party faces as a result of the decisions they took for the benefit of the family during the marriage, for example in sacrificing or not pursuing a career. However it can also refer to disadvantage relating to the ending of the marriage, eg loss of pension rights or future enhanced income.
Coleridge J at first instance awarded the wife 36.5% and the husband 63.5%, taking the assets in the Dragon Trust into account. The Court of Appeal declined to interfere with the award. In Charman there was never any suggestion that the wife had given up any special career. The court unfortunately shied away from any detailed analysis of compensation.
McCartney v Mills McCartney [2008] EWHC 401, [2008] 1 FLR 1508
Following Miller/McFarlane some pundits were predicting that Ms Mills might receive as much as 25% of Sir Paul’s assets which at that stage media placed at £800m. So why did Ms Mills receive ‘only’ £24.3m when the parties had one young daughter? First the rumours about Sir Paul’s wealth estimated at over £800m were inaccurate. The judge found that total of his assets was only £400m. Secondly, and significantly Sir Paul’s wealth had been built up many years prior to the marriage rather than during it. (Unlike Miller where the husband’s wealth, although significant before, had increased substantially during the marriage). Thirdly, this was a short marriage, just over 4 years. Ms Mills’ argument that the couple had lived together prior to the marriage failed.The judge decided that Ms Mills needs were of magnetic importance. While Ms Mills sought £125m Sir Paul proposed that she should leave the marriage with assets of £15.8m. The judge found that she had maintenance needs of £600,000 pa and capitalised that arriving at a sum of £14m for a clean break. Ms Mills also received £2.5m to buy a house in London, as well as retaining assets which were already in her name.
One of Ms Mills’ arguments was that she was entitled to ‘compensation’ for having given up a lucrative career as a TV presenter, a model and public speaker. However, she was not able to adduce any evidence to support her contention that her pre-marriage income was as much as she claimed. She had said that during her modeling career her income was £200,000 pa. Moreover, following the accident which resulted in her losing her left leg below the knee, her income had increased to £300,000 pa. However she did not supply tax returns or any other evidence which supported her claimed income of £300,000 pa. In the McCartney case the judge found that Ms Mills’ pre-marital income was significantly less than she claimed so she was not entitled to any such compensation.
Ms Mills also argued that during the marriage she used her own money to live. She also claimed that she had substantially reduced her own workload in order to spend time with Sir Paul and to support him emotionally: ‘My ability to earn the same level of income I had been earning diminished once my relationship with Paul became serious.’ However this was not supported by the evidence which showed that during the marriage the wife’s net profit for the tax year 2003 was £541,000, significantly more than prior to the marriage. As the judge said at para [305]: ‘In my judgment the compensation principle set out in Miller is simply not engaged in the instant case given my findings of fact.’
COMPENSATION IN MORE MODERATE ASSET CASES
In Lauder v Lauder [2007] EWHC 1227, [2007] 2 FLR 802 the appellant W appealed against the variation of an order for periodical payments to be paid by the respondent H. The parties had been married for 24 years and enjoyed a good ‘middle class lifestyle’. A consent order had been made in 1988 and it had envisaged that the wife would receive 66% of the value of the matrimonial home which amounted to 26% of the net assets and periodical payments of £8,000 pa. H retained the other assets which were in the region of £500,000. It had been agreed that the sale of the property be deferred until the children of the family were independent. During the 15 1/2 years or so until sale H had paid the outgoings on the property and £50 per week in maintenance. By the time of the sale of the property it had doubled in value and H was an active businessman worth £4.5m. When the house was sold the property was worth £743,000. There was a provision in the original order that if the property sold for a sum in excess of £360,000 the parties would each receive 50% of the additional sum.
In 2004 W sent a letter before action indicating that she was seeking an increase in maintenance. The district judge assessed W’s assets at £487,000 and her gross income as £9,120. She calculated that the periodical payments be increased to £40,000 pa and H should make a lump sum payment of £500,000. The lump sum was calculated using the 3% tables, a multiplicand of £40,000 and a multiplier of 12.8. W’s counsel suggested that this calculation was more appropriate than a strict Duxbury calculation although his primary submission was that the wife should receive a lump sum based on the cost of the annuity. On appeal Baron J said:
‘The real crux of this appeal is not the valuation issue rather it is whether the assessment of £40,000 per annum net based on the wife’s reasonable needs, as supposedly “generously interpreted” by the District Judge . . . is the fair and proper answer against the factual matrix.’
The decision of the district judge was before Miller/McFarlane was decided in the House of Lords. Baron J referred to the decision in Pearce v Pearce [2003] EWCA Civ 1054, [2003] 2 FLR 1144 which made it clear that on dismissing an entitlement to future periodical payments the court’s function is not to reopen capital claims but to substitute for the periodical payments order which other order or orders as would fairly compensate the payee and at the same time complete the clean break. There is no power or discretion to embark on a further adjustment of capital to reflect the outcome of unwise/unfortunate investment on one side or prudent/lucky investment on the other. Pearce made it clear that three questions need to be asked: (1) what variation, if any, should be made in the order for periodical payments; (2) the date from which the variation should take effect; and (3) whether to substitute a capital payment calculated in accordance with the Duxbury tables, to replace the income stream being terminated.
Baron J said that there was a very clear line of authority which permeated the decisions of the courts that when assessing any application for variation the provision of simple needs may not be sufficient or fair. The judge quoted at some length from Baroness Hale in Miller. In short (and paraphrasing) while need is a sound rationale it should not be seen as a limiting principle. A second rationale is compensation for relationship generated disadvantage. Economic disadvantage may go beyond need, however generously interpreted. The best example is a wife like Mrs McFarlane, who has given up what would very probably have been a lucrative and successful career. The third rationale is the sharing of the fruits of the matrimonial partnership.
Baron J concluded that the district judge was plainly wrong when she assessed this wife’s variation claims at £40,000 and capitalised it at £500,000. The judge decided that the right sort of lump sum for the termination of her periodical payments was £725,000 which on a Duxbury type of formulation would provide the wife with somewhat less than £60,000 pa net.
‘The wife is entitled to spend her latter years without undue concern so far as finances are concerned. She will have an income of about £60,000 under a Duxbury type of calculation together with her own income and this represents about 30% of the husband’s net spendable income (para [80].’
COMPENSATORY MAINTENANCE WHERE THERE ARE CONTINUING PERIODICAL PAYMENTS
This issue was considered in VB v JP [2008] EWHC 112 (Fam), [2008] 1 FLR 742. In the early days of the marriage the wife, an Oxford graduate worked in personnel but having been unable to take up a significant promotion because of the husband’s career. She took a career break to start a family. On divorce after 11 years of marriage she received around 60% of the capital assets and was awarded periodical payments of £33,000 (with periodical payments of
£24,000 pa for each of the two children). At the time of the divorce the husband’s income was £340,000 net. After a number of years the wife applied for an upward variation of her maintenance from £33,000 to £130,000 on the basis that the children’s outgoings had more than doubled, and that she was entitled to an element of compensation for loss of earning capacity following the decision in Miller. The husband argued that the only time for consideration of the principle of compensation was at the exit point of the marriage.
That argument was rejected. The court held that if the husband was a high earner with a substantial surplus of resources over both parties’ needs and the parties had arranged their affairs in a way that greatly advantaged the husband in terms of his earning capacity but had disadvantaged the wife’s earning capacity, some element of compensation for relationship-generated disadvantage might be necessary to achieve a fair result. However it was said that where it was necessary to provide ongoing periodical payments for the wife, any element of compensation was best dealt with by a generous assessment of the wife’s continuing needs unrestricted by purely budgetary considerations. The judge found that the husband had a likely future income of £470,000 net pa which was likely to increase. And after payment of all outgoings obligations and an allowance for ‘savings and insurance’ of £130,000 the husband had £140,000 free to meet any order for periodical payments. The judge however only increased the wife’s periodical payments to £65,000 pa, just over one half the increase she was seeking. The judge felt that this was a ‘substantial increase’ in maintenance due to the husband’s income having increased substantially.
In the author’s view this was extremely parsimonious. The wife in this case had a house but virtually no income of her own. The wife also had a troublesome back condition sustained during the marriage as a result of pushing one of the children on a bicycle. In 1999 she underwent an operation and although only 43 she had developed degeneration which caused her lower back always to feel unstable. The judge found ‘I regard her as likely to be able to cope with the demands of a job which does not involve unduly long periods of sitting but I am not able to proceed with confidence on that assumption.’ Unfortunately for those wishing to advance compensation arguments, permission to appeal was refused apparently on the basis that there is no principle of law at stake.
IS COMPENSATION NOW DEAD?
For various reasons this article has been some time in gestation. The writer was about to conclude that the way compensation had been dealt with post Miller/McFarlane really amounted to no more than needs generously assessed. However just before this article was signed off the McFarlanes came back to court.
MCFARLANE v MCFARLANE [2009] EWHC 891, [2009] 2 FLR 1322
The parties in what was one of the most significant cases in the last 20 years came back to court in rather unexpected circumstances. Mrs McFarlane (‘the wife’) applied for an increase in maintenance for the children that were subsequently amended to include an application for an upward variation of her own periodical payments; this was in part caused by the fact that the House of Lords had not reinstated a provision in the district judge’s original order for index linking. Her application for an increase in her own payments meant inevitably the court had to consider whether the time had been reached for a clean break or a deferred clean break.
By the time that the matter came back to court Mr McFarlane’s career had gone from strength to strength, in 1998 he had become an Equity Group Two Partner at Dolomites; this was just 2 years before the parties separation in December 2002. By the time of these applications he was in Equity Group One, something that only 2% of partners achieved. His net income for the last 3 years was £899,139 in 2006, £982,664 in 2007, and £1,109,696 in 2008. At the time of the original hearing in 2003 his net income had been £753,381. He was ordered to pay £250,000 spousal periodical payments and £20,000 for each of the children of the family plus school fees and health insurance. Mr McFarlane had remarried; his second wife was a partner in Deloitte and the couple had a child aged 4 at the time of this application. The children of the first marriage were doing well. The eldest was at university and was likely to graduate in 2010. The second child was likely to start university in September 2009 and the youngest child was just 12.
What was especially interesting was the wife’s position. At the time of the marriage the wife had just qualified as a solicitor and Mr McFarlane had just qualified as an accountant. The wife had moved to 3i the large venture capital company from which the couple had the benefit of a reduced rate mortgage. After the birth of the first child the wife returned to work. In 1990 Mr McFarlane became a partner in Touche Ross. Until that point the wife had earned as much as and, for a period more than the husband. Shortly before the second child was born it was agreed the wife should give up work. Prior to the birth of the third child the wife had started a Professional Graduate Certificate in Education course with a view to becoming a full-time teacher, this plan had been abandoned when the third child was born.
By the time of the previous proceedings the wife had not returned to work as a solicitor but had embarked on some retraining initially as an independent
financial adviser (IFA) but this was, she said, to understand the advice she was being given. By the time that the present proceedings came to court the wife had found employment at a firm of Patent and Trade Mark Attorneys and intended to take more exams to qualify as a trade mark attorney. The husband claimed in the present proceedings that the wife could have obtained and could still obtain other employment more closely related to her qualifications as a solicitor and which would be much better paid. In doing this the husband reverted to a central plank of the wife’s case that she was and is extremely talented and would have had a successful career if she and her husband had made a different choice as to how they should conduct their lives together.
Charles J felt that the husband’s assertion was not well supported by evidence. It was based on a conversation that the husband had with a partner in a professional recruitment consultant and some job particulars. The wife was able to demonstrate in evidence that the possible posts put to the wife by the husband were unsuitable for her and the husband accepted the force of her reasoning. So the judge rejected the husband’s assertion that the wife would be regarded as someone who a large firm of solicitors would be keen to employ notwithstanding the fact that she has not worked in the profession for over 15 years. Charles J outlined some facts that were not in the agreed facts before the House of Lords but which were confirmed in evidence before him or reflected in earlier evidence. In the writer’s view the most interesting of these was that the wife’s final job as a solicitor had been at Freshfields. She was working a 4 day week in a role that did not involve fee earning but was a support role relating to information. Charles J rejected the wife’s contention that if she had not given up her career then she would have had a career at least as successful as the husband’s. He concludes this issue by saying that had she not given up work in 1991 and had continued working as a solicitor (whether as a fee earner or in a supporting role) it was more likely than not that she would have been successful and well paid.
‘I accept her assertion that partners of her age (and his age) in large firms of solicitors earn equivalent amounts to the husband but it is also the case that successful partners of her age (and his age) in large firms of accountants and solicitors earn less (and significantly less) than the husband.’
Charles J went on to say at para [46]:
‘… another consequence of the choice made by the parties that cannot be accurately valued in monetary terms is the parts of the husband’s earning capacity, and thus his present and future earnings that are attributable to the wife’s contributions during the marriage and the platform that created.’
The wife’s evidence was that she was earning £22,000 net for a 4 day week; she hoped to work until she was 60 and that she was likely to earn £46,000 to £58,000 net by that time. The wife’s estimates were accepted. So far as the child maintenance was concerned the judge predictably steered a course between the parties’ respective positions and increased the child maintenance to £25,000 pa each. As far as spousal maintenance was concerned Charles J decided it was appropriate to impose a term maintenance order and chose to end the wife’s maintenance 7 months after the husband was expected to retire, ie ending in May 2015. However, he increased the maintenance payable equal to the following percentages of his net income as a partner in Deloittes namely 40% up to £750,000: 20% between £750,000 and £1m and 10% of the balance over £1m. This formulaic approach would obviate the need to come back to court for RPI increases.
It might seem to some unfair that the wife was being expected to work until 60 while the husband could give up work at 55. However it had always been the
husband’s intention to retire at 55. Equally the wife had indicated her intention was to work until she was 60. The order was backdated to the date of the application, ie until June 2007. The effect of that would be to enable the wife to repay her mortgage (which stood at £224,000, the wife’s property having a net
value of £3.73m). It was found by the judge that in the future it would be reasonable for the wife to downsize.
CONCLUSION
Compensation is not dead and buried. Indeed it is arguable that the principles are not limited to those who had the promise of glittering careers. It is far from clear that Mrs McFarlane would have had a career at the same level as her former husband’s given that he was in the top 2% of partners at Deloittes.
Margaret Hatwood is a Partner with Anthony Gold. She specialises in medium to high value financial cases involving both married and unmarried couples.
This article was published by Family Law (a publishing imprint of Jordan Publishing Ltd) in the January 2010 issue of the journal Family Law, at [2010] Fam Law 52.
