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Morgan v Hill: Schedule 1 Children Act Claims and pre-existing agreements

Lynsey Cade-Davies of 29 Bedford Row assesses the impact on financial provison for children of unmarried couples of the recent judgment in Hill v Morgan.

Lynsey Cade-Davies, 29 Bedford Row

Introduction - Morgan v Hill [2006] EWCA Civ 1602
This is the first reported case to deal with the court's approach to pre-existing agreements in respect of financial provision for the children of unmarried parents.

Background
This case concerned the Father's (M) appeal against an order made by Peter Hughes QC pursuant to the Mother's (H) application for financial provision under Schedule 1 of the Children Act 1989. The parents to Mark, aged 5, were never married or cohabited. Prior to the parties' relationship the mother had an affair with Mr P and she gave birth to their daughter Mary in 1997. In 1999 the Mother pursued Mr P under schedule 1 and was awarded periodical payments of £4,160 pa.

M began a relationship with H in 1998 and Mark was born in 2001. M was very wealthy and helped H to buy a cottage. Shortly after Mark's conception the parties' relationship broke down. Negotiations for a financial settlement, through solicitors, began shortly before Mark's birth and a concluded agreement was reached in August 2001 providing:

a) Cottage held on trust in equal shares (H holding her interest subject to mortgage)
b) Remarriage trigger to end trust save if H applies to court to extend
c) If H cohabits the trust ends save if she moves house – H to pay rent re M's share in property
d) M to make PPs at £39,000pa (index linked) being £16,000 for Mark and £23,000 for H's carer's allowance;
e) Provision for reduction in PPs should H remarry, cohabit or return to work;
f) M to pay Mark' school fees;
g) M to provide an allowance for a car every 5 years;
h) M to make a contribution towards housing (at £115,000) including a mechanism by which M would match any capital contribution by H towards a new property.

The agreement was expressed to be comprehensive and to make provision for the foreseeable future. Neither party pressed for the agreement to be converted into a court order.

Later H applied against Mr P for an increase in the periodical payments order. Shortly before trial the matter was compromised on the basis that periodical payments be increased to £12,000 pa and that Mr P cover Mary's school fees.

3 years after the agreement, H moved to a newly built house worth £382,500. To enable her to do so she invested her share of the proceeds of sale of the cottage and took out a larger mortgage of £225,000. This resulted in H holding a 65% share in the property as opposed to M's 35% share. However the combination of moving costs and the burden of a big mortgage drove H into debt. She made an application for financial relief against M under section 15 Children Act 1989 on 17 January 2005. At trial her debts amounted to £96,503.

At first instance the Judge ordered a settlement of property worth £700,000 for Mark's minority. He accepted H's case that the family needed a property in the country with paddocks and stables to enable them to pursue their passion for riding. M was ordered to pay a lump sum of £100,000 to cover H's debts and his liability for periodical payments was increased to £60,000 pa. Therefore together with £12,000 pa from Mary's father H received £72,000pa plus child benefit and school fees on top. The motor allowance was also increased to £25,000 every 5 years.

The appellant relied on two points of principle. Firstly that the Edgar principles disentitled H to any relief on the grounds that she had negotiated, with the best legal advice, an agreement intended to be final and comprehensive of all her claims. Further H had failed to identify any factor vitiating the agreement. Secondly the judge had erred in imposing financial obligations on M which had the effect of conferring a benefit on Mary and thus relieving Mary's father of his financial responsibilities.

The principle issue therefore, was whether H was entitled to renege on the agreement. The case also raised subsidiary issues as to whether an applicant should be obliged to use her own capital towards expenses and debts and to what extent a respondent should subsidise the applicant's other children.

Judgment
Held, allowing the appeal in part, that the appellant's second submission as to subsidy succeeded in relation to the judge's lump sum award and accordingly it should be reduced to £50,000.

The pre-existing agreement is one of the circumstances of the case and the weight to be given to it will vary from case to case. However the court had power to make alterations to maintenance agreements where no order of the court had been sought. The judge had chosen to depart from the agreement on the basis that it was inadequate in respect of the mother's future earnings, the remarriage or cohabitation clause, the level of periodical payments and Mark's future housing needs. Thorpe LJ considered that the judge was correct to do so. The judge's quantification of housing allowance, motoring allowance and the mother's income needs were well within broad ambit of discretion and they adequately reflected the circumstances of the prior agreement. However the court was satisfied that part of the responsibility for H's overall debt of £97,000 rested with Mary's father as they largely resulted from the costs of moving to bigger home which was driven by Mary's needs as much as Mark's. Therefore the lump sum award should be reduced.

Comment
Pre-existing Agreement
The relevance of a pre-existing agreement upon an application for financial provision arose in respect of Schedule 1 claims for the first time in this case. This point has been greatly reported in the context of ancillary relief claims and the majority of practitioners are fully aware of the Edgar principles as clarified by cases such as Camm v Camm (1982) 4 FLR 577. In these cases the court has held parties to a bargain where it has been "properly and fairly arrived at with competent legal advice unless there are good and substantial grounds for concluding that an injustice will be done." (Edgar)

In this case Thorpe LJ considered:

"Whether a claim is brought under paragraph 1 or 10 of the Schedule, the first hurdle is that the pre-existing agreement must be demonstrated to be either unenforceable given the circumstances surrounding its creation or, as the judge here found, inadequate in its extent."

Clearly the circumstances surrounding the creation of the agreement will largely reflect the principles of Edgar and Camm. However Thorpe LJ provides an additional ground for departing from the terms of agreement, namely the inadequacy of the bargain. By comparison, in Edgar, the mere fact that one party might have done better by going to court was not of itself generally a ground for permitting that party to resile from what was agreed. In fact M submitted that, in line with Edgar principles, the degree of inadequacy had to be "off the Gieger counter" for a departure from the agreement. Whilst Thorpe LJ indicated that he did not intend to depart from the approach adopted in cases under Matrimonial Causes Act 1973 he felt that M put the bar too high against the applicant and thus he appears to provide unmarried parents with a ground for departure which may be easier to satisfy in Schedule 1 cases than in ancillary relief cases. This reflects the fact that under paragraph 10 of the Children Act 1989 the legislative framework gives the court wide powers to re-write financial arrangements entered into between parents. This indicates that ultimately it is the interests of the child which must provide the crucial test and it is for the court to determine as to what those require.

No doubt this case has highlighted to practitioners the need to convert an agreement into an approved court order. Whilst there may always be an application to vary the level of periodical payments and for further lump sums, the largest expense towards a housing fund cannot be made for a second time once ordered by the court (Phillips v Peace No 2 [2005] 2 FLR 1212).

Subsidy
Thorpe LJ considered the appellant's submissions on this point were his most powerful. The fact that M had commenced an affair with a single mother and had been generous to her so long as their relationship lasted did not prevent M from objecting to an assumption of the financial responsibilities of Mary's father. Thorpe LJ rejected the judge's conclusion that it would not be right to scale down H's claim were she failing to seek an increase from Mary's father.

Whilst the court recognised the practical difficulties in separating out costs and expenses relating to each child especially in respect of indirect costs such as household and motoring expenses it warned that such difficulties should not allow the judge to gloss over the objection in principle. The jurisdiction of Schedule 1 is limited to making an order against a parent of a child and there is no jurisdiction to make an order against a father for the benefit of any child other than his.

This case was unusual in that H had made separate claims against each father some years apart. The court emphasised that it would be objectionable for mother to obtain more by consecutive applications than she would do by simultaneous applications. Despite the startling disparity between both father's contributions the fact the court had approved an agreement between H and Mary's father where evidence of the father's means was before the court justified the judge in ordering M to pay the balance. Furthermore the housing sum was not inflated because H was a mother of two children rather than one.

Given the court's comments in respect of consolidated applications (see below) it is hoped that future subsidy arguments will be avoided. Where the disparity in the father's fortunes is large it is anticipated that the comments of Hale J in J v C [1999] 1 FLR 152 in respect of housing for half-siblings will continue to guide the courts.

Mother's Own Capital
In this case H had a small flat in Paris which she rented out at a loss. M argued that if she had sold her flat she would have been able to clear her debts and further the fact the rental income failed to cover mortgage instalments meant that M was subsidising her ownership of the property through periodical payments.

The court recognised the disparity between H's present and likely future fortune and the M's was so great as to be "almost incalculable". Under the order H had forfeited her share in the equity of the home. Therefore the Paris flat was her only appreciating asset and its liquidation would destroy her only financial security. The court emphasised that there is "no rule or principle which obliges the mother to contribute her own capital".
Fortunately this case took the opportunity to reiterate that an applicant has to be able plan for her own future by allowing her to retain her own modest capital as was the case in F v G (Child: Financial Provision) [2005] 1 FLR 261. It is unknown what view the court will take where the disparity of capital is not so huge. However it is hoped that certainly in big money cases the courts will remember the potential economic disadvantage that an applicant may suffer as a consequence of caring for the child and the fact that any housing provision will revert to the respondent upon the child's majority.

Future Procedure in Schedule One Applications
Thorpe LJ gave some general guidance about the manner in which Schedule 1 claims should progress pending any procedural reforms. He anticipated that the Family Procedure Rules Committee would seek to bring Children Act claims in line with the procedure in ancillary relief. Thus there will be a similar exchange of financial information by the use of Forms E and questionnaires limited by the court and an appointment equivalent to a FDR appointment. Pending reform these directions can only be achieved consensually and Thorpe LJ urged parties to seek such directions whilst reform is awaited. It is hoped that practitioners will heed Thorpe LJ's advice as it can only be in the best interests of all parties involved to encourage settlement at an early stage in the litigation.

Where an applicant under Schedule 1 has a statutory claim against more than one father, it is appropriate to establish the fathers' respective liabilities at a consolidated hearing. The proper response to M's cross-subsidy defence would have been to offer to issue proceedings against Mary's father. However upon H's refusal M should have applied to the court for joinder of Mary's father. Since neither of these routes had been followed the court found that the responsibility for the absence of Mary's father was more or less equally shared. However a firm view was given as to the way future cases should be conducted. Therefore where there is more than one child by different parents, practitioners should be alert to the possibility that more than one application should be made. Hughes LJ recognised that where the means of two fathers are very different there will continue to be real problems of quantum but those issues can only be resolved case by case. Practitioners will no doubt eagerly await the court's approach to such consolidated applications to see how it will balance the competing liabilities of the respondents. The potential for drafting confusion, especially in respect of a settlement of property by more than one settlor for different durations, will inevitably provide much cause for concern for the family lawyers amongst us!

Lynsey Cade Davies
29 Bedford Row
London
WC1R 4HE