What part of a compensation award is regarded as part of the marital asset pot available for distribution in the event of divorce or judicial separation?
Under the Matrimonial Causes Act 1973 (MCA) the family courts must have regard to the factors contained in section 25. The court should give primary consideration to the welfare of any minor children of the family. There is then a statutory checklist which requires the court to consider factors such as the needs, obligations and responsibilities of the parties, the length of the marriage, the standard of living enjoyed during the marriage, any physical or mental disabilities, the parties’ contributions and, in exceptional cases only, conduct. No one factor trumps the others and the courts pride themselves on creating a bespoke solution for each case.
This approach can cause significant anxiety to clients particularly as the MCA has developed alongside much needed case law. For instance, in White v White (2001) 1 AC 596, (2000) 2 FLR 981, the court, in considering all the circumstances, was obliged to go through the process of looking at any proposed division of assets against a yardstick of equality. Often the case starts and finishes with needs and complications arise where there is a surplus of assets (should some be ring fenced?) or, at the other end of the scale, not enough assets to go round.
Where a significant asset in a marriage comes from an award for damages, there are surprisingly few reported cases over recent years. The leading case is still Wagstaff v Wagstaff (1992) 1 WLR 320. Per Butler-Sloss LJ:
“The reasons for the availability of the capital in the hands of one spouse, together with the size of the award, are relevant factors in all the circumstances of section 25. But the capital awarded is not sacrosanct nor any part of it secured against the application of the other spouse….
.. any calculations made in respect of the capital of the parties should reflect a substantial discount for the fact that the money was received as damages. In general, the reasons for the availability of the capital by way of damages must temper the extent of, and in some instances may exclude the sharing of, such capital with the other spouse. It is important to stress yet again that each case must be considered on its own facts.”
And in his judgement, Lord Donaldson, MR, said:-
“.. compensation is a financial asset which, like money earned by one spouse by working excessively long hours or in disagreeable circumstances, is (subject to human selfishness) available to the whole family before the breakdown of the marriage and, like any other asset, whether financial or otherwise, has to be taken into account when the court comes to exercise its powers in accordance with section 25 of the Matrimonial Causes Act 1973. In so far as it represents compensation for loss of amenity, as contrasted with pain and suffering, there might be a need to spend it on acquiring a replacement amenity, but this would be financial need within section 25 (2)(b).”
In the case of Wagstaff the parties were married in 1976. W had been married previously and had two children by that marriage. H assumed responsibility for them. In 1981 H suffered serious injuries in a RTA. He became paraplegic. H and W separated in 1983. W retained the family home, a rented council house which she purchased for £10,500, and on separation the value was £24,500. In 1984 W petitioned for judicial separation and in 1985 obtained a decree. In 1988 H received a damages award of £418,000. At the first hearing the deputy district judge (then deputy registrar) took H’s damages into account but made a large discount to W on the basis that H’s capital derived from his PI award. He awarded W £32,000 on a clean break basis. H appealed. By the time of the appeal W had purchased a property with a colleague from work. That property was purchased for £65,000 with a deposit of £25,000 and a mortgage of £40,000. On sale W was to receive the first £30,000 and one half of the balance of the equity.
Her only other capital was £5,000. She had a modest income from her employment working for Norweb. Prior to the accident both H and W had enjoyed a modest lifestyle. H had in the region of £291,000 from his original damages award, having invested some of the award unwisely in a health club (premises alone costing £75,000). A further sum of £63,000 had been invested in that business which was unlikely to yield an income for many years.
The judge allowed H’s appeal. No lump sum award was made to W.
W then appealed seeking a larger award. The Court of Appeal agreed with the deputy registrar and restored his order providing for W to receive £32,000.
The Court of Appeal found that the judge below treated H’s disability and consequential needs as very important but attached too much weight to it and lost sight of W’s needs.
The case of Mundell v Name 1 (2019) 4 WLR 139 primarily involved capacity to marry in circumstances where a vulnerable adult planned to marry and the applicant, the deputy appointed by the Court of Protection, applied for a declaration that the vulnerable adult lacked the relevant capacity to marry.
The matter came before Mostyn J who refused the deputy’s application, stating that the right to form a marriage was a fundamental right and had been for centuries. It is an interesting case because the judge looks at the history of the marriage contract and some of the case law mentioned is over 100 years old.
For the purposes of this article it is worthwhile reflecting on the final part of the judgement in which he says:-
“I would say this, however, if this marriage happens and then later breaks down and a financial claim is made, then the scope of any claim is necessarily going to be extremely limited, given that the entirety of Name 1’s means derive from a personal injury compensation payment which will have been calibrated by reference to his needs. There are numerous authorities in the books which have effectively emphasised the near-immunity of personal injury awards from a financial claim. So, the extent of any claim that were to be made on the breakdown of this marriage, were it to happen, would be limited, in my provisional prognostication at this point, to alleviating serious financial hardship and no more.”
That is a bold judgement and it does not represent my interpretation of the limited published case law.
In Mansfield v Mansfield (2011) EWCA CIV 1056, (2012) 1 FLR 117 H received an award of damages of £500,000 in 1988, before he had even met W. H and W married in 2003 and separated in 2008. There was 18 months’ pre-marital cohabitation so the relationship endured for 6.5 years. Their twin children were four years old at the time of the appeal hearing.
H had invested his damages in two properties. One was specially adapted to his needs (Orchards) and the other was a flat which was let out for investment income. Post separation, H remained in Orchards and W rented accommodation for herself and the children. W had invested £30,000 from the sale of her pre-marital home in Orchards. The sole question for the court was the extent to which the judge should reflect the origin of the family assets in a substantive award.
At the first hearing the district judge awarded W £285,000. In default of payment, Orchards was to be sold and W was to receive 63% of the sale proceeds or £285,000 whichever was the greater. H appealed but the circuit judge dismissed his appeal. H sought to appeal again and was given permission to do so.
At first instance, the district judge who had heard the case had noted that the damages were available for distribution, but she had not noted the guidance from earlier cases; namely that each case should be looked at on its own facts and the sharing rule should be tempered to reflect the needs of the recipient and the special nature of the compensation award.
The Court of Appeal felt the first question was whether the award of £285,000 was sustainable in view of the misdirection in law. In the leading judgement of Thorpe LJ he was reluctant to interfere with the “careful finding” that £285,000 was the minimum that W needed to meet her needs and those of the children and that H’s needs could be met by the remaining £320,000. Thorpe LJ thought that the award was on the high side but concluded “it would be unprincipled for this court to interfere. Having heard none of the oral evidence, such interference would not show proper respect for the function of the trial judge”.
On the second question; namely whether the trial judge was right to refuse the application of the husband for a chargeback, Thorpe LJ found H’s case “overwhelmingly good”.
“The need to give special regard to the origin of the family capital and the special purposes for which it was provided … can be properly reflected in converting the order below into a Mesher order. The rationality of that is obvious. There is a fixed amount of capital within the family. For the immediate future the wife’s need for a substantial share rests upon her function as the primary carer.”
The judge quantified the chargeback at one third of the capital awarded to the wife, the charge to be redeemed when the twins achieved maturity.
The most recent case which involves a compensation award is AZ v BZ (2020) EWFC 28. The case was anonymised to the extent that the parties’ ages were redacted and even the date of separation. The appeal from a district judge came before Vincent J and we are told that the parties were together in 2011, married and there was a final hearing in 2019, so I am assuming this was a medium length relationship.
W had cancer before the marriage, the recurrence of which was not detected by scans. This meant further extensive treatment and a negligence claim against the NHS in 2015, as a result of which W received £550,000.
Part of the compensation award was invested in a property in Spain which was worth £195,000 at the final hearing. The rest was spent on living expenses for H and W, including several family holidays in Spain. During the marriage H was unemployed for two periods as a result of his ill-health.
Shortly after the separation H agreed that £70,000 (the balance in a trust account) should be paid to W. It was not entirely clear what she did with it but £21,000 was loaned to her new partner and £10,000 was spent on a car.
At the time of the hearing before the district judge, H was earning £25,000 per annum and had debts of £15,000 (a car loan) and a small pension. W also had a small private pension and an NHS pension resulting from part-time work.
The district judge made a finding that H’s needs were less than W’s. However, H had contributed £20,000 from his own money in the early part of the marriage and had debts of £21,000 (£15,000 car loan and £6,000 soft loan).
The district judge made an order that the Spanish property would be sold and H would receive £21,000 from the net proceeds of sale.
H appealed and I can only assume that his legal team did so with a heavy heart as this was not a high value case and presumably the legal costs were significant. W was a litigant in person as she had been at first instance but H had legal representation at first instance and on appeal.
The appeal was allowed and the district judge’s order was set aside. In essence, the judge felt the district judge’s order was unfair as the assets were divided 99% to W and 1% to H. He held that the district judge had unreasonably favoured the litigant in person, W, and had made unfounded conclusions about her needs which she had quantified at £180,000. The district judge had unreasonably admitted evidence from the clinical negligence proceedings but this was simply an extract from counsel’s opinion and not an expert opinion or witness statement. It was held that the district judge had written-off H’s housing needs and noted that W had spent £70,000 post-separation. Vincent J held that the district judge had been wrong to reach the conclusion that the case amounted to whether W’s needs outweighed H’s and that W’s needs were just one of the Section 25 factors.
Unsurprisingly, whilst the first instance order was set aside, it was felt that a rehearing would be a huge burden on both parties in terms of delay and costs so the judge substituted his own award and concluded:-
- The starting point after a marriage of this length was 50:50.
- The sale of the Spanish property and an equal division would give H and W £97,500 each and it was found that H could obtain a mortgage.
- W would still be better off than H because her pension fund was larger and she had a car worth £18,500. Her new partner could repay her the loan amounting to £17,000. She had an assured tenancy so her accommodation needs were met.
This amounted to a 60:40 split in W’s favour and took into account the fact that she had received £70,000 following the separation, of which 50% could be said to be H’s entitlement.
Yet again this was a case where it was practically impossible for provision to be made which would meet both parties’ needs.
What principles can be drawn from these cases?
As always it is difficult to draw principles from family cases as many cases are fact-specific, added to which we have the fuzzy discretion of the family courts and the difficulty in predicting outcome. However, in the Section 25 balancing exercise, weight must be given to the party who has suffered a disability/injury even when those injuries are serious, but not to the extent where the court should rule that the needs of one party outweigh the others.
In AZ v BZ, Vincent J made it clear that a large part of compensation payments would generally relate to loss of earnings and this should not be ringfenced as a matrimonial asset. However, the courts still have a statutory duty to give first regard to the welfare of any minor children whilst dependants. A convenient way of dealing with competing needs is to impose a Mesher type order which was the case in Mansfield. As most of you will know, this follows the well-known 1980 case of Mesher v Mesher & Hall but it is essentially a postponement of the exercise of the trust for sale of a home until a named event occurs. That event is normally linked to the dependency of the children so that an order for sale could, for example, be made when the children have ceased full-time education.
Another convenient way of dealing with competing needs and those of the children is to impose an order based on the principles established by schedule 1 of the Children Act 1989 so that the advance of funds from a compensation settlement are made purely to assist with housing a child during minority years. Any monies so advanced are then returned to the party in receipt of the compensation award upon that child attaining the age of 21 or ceasing full-time tertiary education.
Nuptial agreements of all sorts are now given increasing weight by the family courts and I would urge injury and medical claims lawyers to advise on the importance of these for married couples and those who intend to marry to ensure that a client’s compensation payment meets short and long term needs. A carefully crafted nuptial agreement could go a significant way to protecting the settlement by setting out the division of assets in the event of a divorce and making it clear to what extent a compensation settlement is regarded as a marital asset.
For unmarried couples, there is the potential to make financial claims on behalf of a child under Schedule 1 of the Children Act 1989 which can include a lump sum, settlement or provision for property for the benefit of the child, generally meaning that the property settlement reverts to the settlor when the child reaches majority. In those circumstances, a cohabitation agreement may be of assistance so that compensation awards are clearly defined.
There is obviously a careful balance between protecting the client in receipt of a compensation settlement and achieving fairness for any future spouse who may argue for a share of such settlement to provide accommodation for themselves or any children of the family.