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Compensation Employed As The New Contribution

Alexander Thorpe, of Queen Elizabeth Buildings, examines how the courts have handled the concept of compensation in recent ancillary relief cases.

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Alexander Thorpe, Barrister, Queen Elizabeth Building

As the impact of Miller & McFarlane cascades down through the lower courts, parties and their advisers are increasingly relying on compensation to justify an enhanced award for a party, usually a wife. The perceived injustice that the concept of compensation is used to address is the continued and superior earning capacity of the economically dynamic party to the marriage. In other words, the economically disadvantaged party complains that; though the assets have been divided broadly equally, the other party retains that valuable asset - earning capacity, such that the economically dynamic party will only get richer whilst the economically disadvantaged party will start the lifelong depletion of their capital.

In a recent batch of cases this issue has been addressed by the High Court who in their wisdom have sought to find a practical path through the ethereal musings of the House of Lords. I shall take each case in chronological order so that the progression of the ratio of the court can be ascertained.

In S v S (Non-Matrimonial Property: Conduct) [2007] EWHC 2793 (Fam); [2007] 1 FLR 1496, Burton J sat in the Family Division having been transported in from the Queen's Bench Division due to one of the witnesses of fact being a well known Circuit Judge of the Family Division. It represents therefore an additionally interesting case in that it provides an outsider's assessment of the jurisprudence emanating from White and Miller & McFarlane. On the issue of compensation, Burton J quoted paragraph 13 of the Judgment of Lord Nicholls of Birkenhead in Miller in which Lord Nicholls developed the concept of compensation based on a relationship generated economic disadvantage. Burton J found, [para 59],

"I am quite satisfied that she gave no sign of what might be the case in other circumstances, a thwarted ambition or an irrevocably damaged career. I do not believe that this head of loss can be said to arise in every circumstance."

In RP v RP [2007] 1 FLR 2105, Coleridge J found that one of the sub-issues in the case was "whether the court should have special and extra regard to compensating the wife for the loss occasioned by her career break whilst living with the husband and now whilst bringing up the children". Coleridge J found that, [para 59-60]

"The word compensation, which has been used frequently during this hearing, does not appear in the statute. Does it, I wonder, in the end, add anything to the concept of financial ...obligations and responsibilities which each of the parties has deriving from s25(b)? Obligations arise, surely, because of the parties contributions, equal but different, (including career sacrifice) at the beginning, during the marriage and beyond its end. Baroness Hale of Richmond has very successfully highlighted this as an underlying principle and reminded the courts of its importance in a given case but it is not new. Further it is neither possible nor desirable to break up, artificially, these ancillary relief claims into separate heads of claim as if they were actions for damages for personal injury. In this jurisdiction there is only one finite pot of resources which has to be divided between the two parties fairly by balancing their competing claims by reference to s25."

He determined the case, having found that the wife's career was now back on its feet, by discounting compensation as a relevant factor and proceeded to decide the case on the basis of fairness having regard to each party's needs.

In Lauder v Lauder [2007] EWHC 1227 (Fam); [2007] 2 FLR 802, the wife appealed a capitalisation of maintenance order made in the Principal Registry in which she had been awarded £500,000 as a capitalised figure for maintenance of £40,000 p.a. The parties had been married for 24 years and had three children who were 20, 18 and 14 at the date of the divorce. On the original application for ancillary relief, pre-White, W had been awarded 26% of the net assets and approximately 35% of the net income. Since separation, the husband's assets had increased from £651,000 to not less than £4.5m with a net income of £200,000 p.a. Baron J affirmed that the court could not seek to redress the apparent injustice in the original division of capital - for to do so would be to flout the statute and the dicta in Pearce v Pearce [2003] 2 FLR 1144 which made plain that the function of the court was not to reopen capital claims but to substitute for the periodical payments order such other orders as would fairly compensate the payee and complete the clean break. Baron J held, [para 50]

"in the context of a marriage which lasted 24 years and produced three children this lady did her best after divorce and continued to spend many years caring for the younger child of the family. Despite her disability, given that she was 50 years old when the parties separated, the wife had a modest earning capacity. This was a direct result of the marriage and the parties' decision that she should be a wife and mother. This disadvantage requires proper compensation."

Baron J concluded,

"I consider that the figure was plainly too low in the context of this case, the wife's needs as "generously interpreted". I take into account her right to have an element of compensation. I do not consider it right to seek to separate those two factors in delineating my figure. I consider the right lump sum for the termination of periodical payments is a total of £725,000."

In CR v CR [2007] EWHC 3334 (Fam), the parties had been married for 19 years and had two children. The wife had followed the husband to Hong Kong and had given up her job as a fashion buyer to do so. The husband had an ongoing income of £1m p.a. net. Bodey J, like Coleridge J in RP and Baron J in Lauder warned against creating separate heads of claim, he held,

"However, it is important in my judgment that these strands underlying fairness do not become elevated into separate "heads of claim" or "of loss" independent of the words of the statute. If such an approach were to gain momentum, there would be a real danger of double counting, against which the House of Lords expressly warned in Miller. It remains the statutory criteria which ultimately guide the court's overall discretion by the exercise of which fairness is sought to be achieved."

It was submitted on behalf of the husband that the wife never had an established career and that therefore she could not have been said to have suffered a loss that merited compensation. Bodey J held

"I say straight away that the wife does not to my mind succeed in demonstrating any significant lost career prospects, certainly not for which compensation should be factored into the outcome. Such prospects as there were are in my view far too speculative. In any event, a wife with (if I may so describe them) "ordinary" career prospects which are forfeited following her marriage to a husband who is or becomes a financial high flyer, is highly likely to have been adequately "compensated" for that forfeiture by the very fact of an equal division of the family's resources."

But Bodey J then went on to weigh into the balance of fairness the factor of the husband's future income stream and questioned whether it would be fair to ignore this feature. He referred to Charman v Charman [2007] EWCA Civ 503 in which the Court of Appeal held,

"Irrespective of whether the assets are substantial, likely future income must always be appraised for even in an clean break case, such appraisal may well be relevant to the division of property which best achieves the fair overall outcome."

Body J concluded that,

"the most straightforward and least controversial way [of factoring in H's income capacity] is to link the required recognition, if the figures permit, to the degree of generosity of the assessment of the wife's reasonable requirements – an approach that brings me back to the figures."

By assessing W's needs generously, the learned Judge provided for W to receive £9 million, one million more that her predicted worth following an equal distribution of the existing assets. The court remained determined, however, that the assessment of how the earning capacity should be factored in as an asset should be firmly based on the balance of needs as against resources.

In P v P [2007] EWHC 2877 (Fam), Moylan J was determining a case in which the central issues were;

a) The effect of the fact that a significant part of the current wealth had been earned by the husband since the parties separated;

b) The effect of the Husband's future earning capacity.

Moylan J's approach is a paradigm example of weighing the competing jurisprudence in the exercise of the discretion without substantively adding to it. He bore in mind Baroness Hale's assertion that if the capital had been shared equally and was enough to provide for need and compensate for disadvantage, then there should be no continuing financial provision; whilst also weighing in the balance the dicta in McFarlane and Charman that a party's earning capacity is itself and asset; together with the statute's reference to the future earning capacity as an express factor. Moylan J then proceeded to determine the case on the basis of need and provided the wife with 65% of the liquid assets and 35% of the illiquid assets; having focused his decision of the wife's housing needs and income fund requirement. The net effect of dissimilar assets provided the wife with £8.4 million and the husband with £8.3 million.

In VB v JP [2008] EWHC 112 (Fam) the President determined a case in which a wife sought an increase in the amount of the periodical payments payable by her former husband. Under the original consent order, the wife had received 60% of the capital assets; and maintenance for the wife, children and school fees equated to 34% of his net income of £340,000. W was a graduate of Oxford University and had given up her career in Human Resources in order to have the children. Further, when she had sought to return to her career following a gap of 5 years following their births, the husband had refused to support the idea, arguing that his income rendered such a return unnecessary and ultimately, financially insignificant. The President found that there were four principles arising on the issue of compensation:

1) It is at the end of a marriage and in relation to division/redistribution of the family assets that the consideration of compensation arises but as a pillar of the assessment of fairness rather than as a separate head of claim in its own right.

2) At the end of a marriage, the partnership ends and the wife has no right or expectation of continuing economic parity unless and to the extent that her needs or compensation for relationship generated disadvantage so require; but that a clean break should be achieved wherever possible.

3) In big money cases, where matrimonial assets are sufficient to achieve a clean break, a wife with "ordinary" career prospects is likely to have been compensated by an equal division of the assets and an assessment of where her career might have progressed is speculative and unhelpful. Where the assets are insufficient to achieve a clean break, however, compensation will need to be weighted in to the exercise of discretion, but not as a separate head of claim but rather as one strand amidst the weave of fairness.

4) Where continuing periodical payments are necessary and the wife has plainly sacrificed her own earning capacity, compensation will rarely be calculable as a premium susceptible to calculation; rather it is best dealt with be a generous assessment of her continuing needs, unrestricted by budgetary considerations.

So it seems that the Courts have responded to the plethora of submissions on compensation by dampening down the fire, as contribution arguments were dampened down following White. In essence, in CR v CR, P v P and Lauder, the Court remained properly routed in the statute and the factors set out in s25. The overriding pursuit of fairness, however, required a generous assessment of the economically disadvantaged parties' needs when weighing up that factor amongst the remaining statutory factors, thereby giving it slightly greater weight. Where there are sufficient assets to provide a clean break it is suggested that that approach chimes with reason. Where there are insufficient assets to provide for a clean break, however, such that the assets are divided fairly between the parties, I posit the question as to why it is fair that the asset of economic generation is not divided according to fairness but is defined by the reasonable requirements of the economically disadvantaged party – however generously assessed? If economic generation is an asset of the parties borne of the decisions that they have made in their relationship, why is it not susceptible to a percentage division as any other asset would be? Clearly, the appropriate percentage division of that asset should reflect the continuing contribution to it by the economically dynamic party but is the anchor of reasonable requirements an appropriate method of division of an asset to which both parties have contributed equally to the creation of during the marriage?

Alexander Thorpe