Katie McCann analyses the issues that can arise in high-net worth financial proceedings involving non-matrimonial assets, marital agreements and international elements in Family Law Journal.
Katie’s article was published in Family Law Journal, 2 September 2022, and can be found here.
In the divorce world, lawyers tend to fall into two camps. Those that act for everyday people with assets comprising of maybe a house, a pension and some savings and those that act for families where there is significant wealth.
In cases in the former category “needs” tend to trump all other issues; there simply isn’t enough in most cases to go around to allow both parties to maintain the lifestyle they had previously.
In high net worth divorce however, the scope for argument is much wider. Asset bases tend to include complex corporate considerations; involve difficult and wide ranging family trusts; or can have tax implications that span international jurisdictions for example. All of which need specialist consideration and a lot of the time external experts to assist.
This area of family law is so vast that to do it justice I would need a whole book to cover all the aspects involved. This article however will cover just some of the main points that make this area so wide ranging and fast paced for the lawyers involved.
1.The expectations of the client: clients in this category often have significant wealth and significant ability to pay legal fees. They often have very high expectations of their lawyer and can be quite demanding in terms of what time and how often they are able to contact their lawyer. In other words they often require a very bespoke service. This tends to be very different in everyday cases where the rising cost of legal fees is top of the agenda for the divorcing couple.
2. Where there is significant wealth, arguments over what is matrimonial and non matrimonial can become all consuming: as mentioned above in everyday cases “needs” take priority. But in cases where there is a significant amount of wealth left over once needs have been dealt with, arguments about whether that wealth should be “shared” tend to rear their head. The distinction between matrimonial and non matrimonial property was first identified and discussed by Lord Nicholls in White v White [2000] UKHL 54 He drew a distinction between:
- Property brought into the marriage by one party, or inherited during the marriage (inherited property)
- Property brought about by the efforts of one or both of the parties during the marriage (matrimonial property).
Lord Nicholls believed that there was an argument for saying that the party that had inherited wealth before or during the marriage, was gifted monies from an external source etc that such party should be able to keep this property. Of course if ringfencing such property means that the other parties’ needs would not be met then this argument carried limited weight. Paragraph 43 of the House of Lords Decision is the most pertinent here.
The argument was developed further in the case of Miller v Miller; Mcfarlane v McFarlane [2006] UKHL 24. Baroness Hale’s approach was agreed by the majority and interestingly suggested that the parties should share in the fruits of the matrimonial partnership. She said that matrimonial property could be made up of everything built up during the marriage, but that a difference should be drawn between those assets that were family assets and those that were not. For example, she said assets that were clearly used for the benefit of the family should be included as matrimonial regardless of the source.
As the caselaw has developed so have a number of differing approaches amongst the judges, of course giving rise to more scope for argument.
In Rossi v Rossi [2006] EWHC 1482 Fam Mostyn QC said that the court should have regard to the length of the marriage, as the longer the marriage the more likely it would be that the non matrimonial property would be merged with the matrimonial pot. But in a short marriage unless needs require, non matrimonial property is not likely to be shared.
In Charman Sir Mark Potter felt that the sharing principle should apply to all the parties’ property but there would be more reason to depart from equality if it could be shown that some of the property was non matrimonial.
A formulaic approach was advocated in Jones v Jones [2011] EWCA Civ 41, suggesting that the pot should be divided into two sections, non matrimonial and matrimonial. The matrimonial pot should be divided equally (subject to needs and compensation) and the non matrimonial left effectively with the owner. LJ Wilson however, in this case was weary about being “too” formulaic as in the case of the accuracy of company valuations, as this could lead to injustice and unfairness.
In N v F (Financial Orders: pre Acquired Wealth) [2011] EWHC 586 (Fam); Mr Justice Mostyn adopted the two step approach in Jones as above. i.e:
- It should be decided if there is non matrimonial property at all. Issues of intermingling should be considered and length of marriage.
- It should then be decided how much of that non matrimonial property should be taken out of the pot.
- The rest of the matrimonial property should be divided equally and the overall fairness of the award should be tested by looking at what the overall final percentage split looks like (of the non matrimonial and matrimonial pot combined).
Interestingly though the alternative approach is a telescoped approach. This is a much more discretionary based approach. Mr Justice Mostyn in JL v SL and another [2010] EWHC 1630 (Fam) was really very critical of this approach, saying that he thought it was quintessentially intuitive and ran the risk of becoming a lawless science! The telescoped approach basically says that the court should look at the value of the whole pot and adjust on a discretionary basis away from 50% to reflect non matrimonial property, but that it does not need to separate the two or indeed decide its exact value.
I think that there are risks in both approaches that unfairness could occur with a final award, however I have to say I find Mostyn’s approach much more logical and easier to argue in most cases.
When families have wealth to protect it is more common for there to be pre and post nuptial agreements to grapple with when the parties separate: as these agreements are still not “technically” legally binding, if at the point of divorce one of the parties in the high net worth couple wishes to try and rescind from one, then a layer of additional and complex litigation is added in arguments to try and invalidate the agreement completely or at least have the court interpret it in a less strict fashion.
The main case for consideration is still the 2010 case of Radmacher (Radmacher v Granatino [2010] UKSC 42)
The judgement was very clear to note that the parties to a marriage still cannot currently oust the jurisdiction of the court and enter into an agreement attempting to override s25 Matrimonial Causes Act 1973. It still could only be deemed to be considered as one of the overall factors of the case.
The main section in the judgement to consider is the three stage test of fairness in para 75:
White v White and Miller v Miller establish that the overriding criterion to be applied in ancillary relief proceedings is that of fairness and identify the three strands of need, compensation and sharing that are relevant to the question of what is fair. If an ante-nuptial agreement deals with those matters in a way that the court might adopt absent such an agreement, there is no problem about giving effect to the agreement. The problem arises where the agreement makes provisions that conflict with what the court would otherwise consider to be the requirements of fairness. The fact of the agreement is capable of altering what is fair. It is an important factor to be weighed in the balance. We would advance the following proposition, to be applied in the case of both ante- and post-nuptial agreements, in preference to that suggested by the Board in MacLeod :
“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement. ”
The question then inevitably arises as to “what then would be deemed to be fair”? This is the elusive question that can only be determined on the facts of each case. However if a party is left in real need and the parties cannot have possibly intended that when the agreement was signed, the court is likely to step in.
Radmacher does give us some practical considerations to assist us when drafting such agreements and when discerning arguments to unravel them. The main points to be considered are inter alia as follows:
- The agreement must have been entered into freely. Duress on the run up to the marriage for example will always put the agreement in question on shaky ground. It is good practice for the parties to have the agreement done and dusted at least 28 days before the date of the wedding.
- Each party must absolutely understand what they are entering into and the implications of the same. There should be parity of legal advice and the party with the financial advantage generally should agree to pay for that advice for their intended spouse. There should be full disclosure of each other’s asset position, time should be allowed for documentary disclosure (if requested) and for questions to be asked on the disclosure.
The Law Commission in 2014 Law Commission: Matrimonial Property, Needs and Agreements (Law Com No 343) (27 Feb 2014), proposed that a nuptial agreement should be binding if it met certain conditions. If it met those criteria it would be termed as a “qualifying agreement”. However, this proposal has not been taken any further at present in parliament and we are awaiting progress on this front at the point of publication of this article. However, it is hoped that in the future these agreements will have complete legal standing, which will then remove this layer of argument from high net worth divorce litigation and hopefully make the separation of couples who have such agreements considerably smoother and less costly when one party (who has the means to do so), chooses to try and rescind from it.
There are regularly international elements to consider as couples with higher net worth tend to have assets and connections across the world:
A major consideration for any family lawyer who practices in this space was whether the act of the UK leaving the EU via Brexit would have any impact upon how international elements of divorce and financial remedies where handled. This is a very complex area but for this article I will focus on one point; Forum. There has been some noise made in the press earlier this month about a multi millionaire businessman from Norway wining his fight in the High Court in London about whether his divorce should be dealt with in England or in Norway. A classic argument about “forum”. This is an argument that happens regularly in higher net worth cases where the family in question has an asset base that is spread globally.
Before deciding on the “best” forum, it is often regular practice from the outset to instruct a lawyer in the other “alternative” jurisdictions that are in the frame to (a) determine the law in that jurisdiction and to (b) determine which jurisdiction the respective client would do “better” in in any resulting argument in relation to the couple’s finances.
Before the UK officially left the EU at the end of the transition period the rule of lis pendens was applied in England and Wales. In other words, this requires a court to stay proceedings if another EU court (apart from a court in Denmark) was already seized (Article 19, Brussels II Revised). This was the old “first past the post petition race” that used to occur. As London was termed to be the “divorce capital of the world”, being renowned for its generosity especially from a maintenance perspective, there was often a race to issue in London first. This led to many cases being urgently issued at court, when in fact ADR may have been more appropriate.
After the end of the transition period, the lis pendens rules are now repealed. Instead, the courts in England and Wales now look to the principle of forum non conveniens to assess which court and which jurisdiction should be used. The principle generally points to the jurisdiction where the family has the closest connection (para 7(4) Schedule, JJAR 2019 amending schedule 1 Domicile and Matrimonial Proceedings Act 1973).
The problem with this approach is that lis pendens gave a degree of certainty; forum non conveniens introduces the possibility for considerable argument and bitterly fought litigation, increasing costs and stress for the couples and families involved. There is also the issue of whether if an EU member state is seized first in time, whether they will in fact recognise proceedings in England and Wales that have been accepted under the forum non conveniens principle. There is a risk that each member state of the EU may take a different approach.
Therefore it is imperative that when there are potential international jurisdictions in the frame that swift and concise cross jurisdictional advice is taken at the outset.
Summary: in an article of this length it is impossible to cover all the aspects of high net worth matrimonial litigation. However, it is clear that it is incredibly wide ranging and places many demands on the practitioner, who needs an “awareness” of many other areas of law and accountancy, but most importantly can build a robust team of experts around their high net worth client.
