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McFarlane v McFarlane – where are they now?

How should the concept of compensation be accounted for in a variation application? Clare Williams, of Pannone LLP, looks at what lessons might be learnt from the recent judgment in McFarlane.

image of Clare Williams, solicitor, pannones LLP

Clare Williams, Solicitor, Pannone LLP

Julia McFarlane hit the headlines in May 2006 following her successful appeal to the House of Lords (reported as Miller v Miller; McFarlane v McFarlane [2006] UKHL 24; [2006] 1 FLR 1186).  This case continues to shape the court’s approach to matrimonial finance in the post-White landscape and practitioners will now be familiar with the three linked principles of needs, compensation and sharing that it established.

In the House of Lords, McFarlane was described as a “paradigm case” for an award of compensation.  Mrs McFarlane’s ongoing maintenance entitlement was heavily influenced by parties’ decision that she would give up her lucrative employment as a City solicitor to care for the children of the family, leaving the husband free to concentrate on his career, ultimately becoming a top-tier equity partner at Deloitte.  The clear discrepancy in the parties’ prospective financial positions was held to be the result of the choices they had made.  As there was insufficient capital to achieve a fair result on a clean break, the wife was granted a generous proportion of the husband’s substantial income by way of an order for joint lives maintenance of £250,000 per year.

On 18th June 2009 Charles J handed down judgment in the wife’s application for a variation of child and spousal periodical payments.  The wife achieved an increase in maintenance which will leave her with at least £350,000 per year until just after the husband’s retirement.  Although the case has attracted much media attention, it does not break any new legal ground.  However, it is of interest as an object lesson in the application – and limitations – of the compensation principle.

The continuing importance of Miller; McFarlane
In his judgment, Charles J reproduces passages of particular relevance from Miller; McFarlane, especially their Lordships’ explanation of needs, compensation and sharing, “which might guide the court in making an award” (see paragraph 144, per Baroness Hale).  Of special relevance to Mrs McFarlane then as now is the principle of compensation for relationship-generated disadvantage or, as Lord Nicholls put it, “significant future economic disparity, sustained by the wife, arising from the way the parties conducted their marriage” (see paragraph 93).

Charles J then traces the application of these principles through subsequent authorities including VB v JP [2008] EWHC 112 (Fam); [2008] 1 FLR 742, which provides a neat summary of the crux of Mrs McFarlane’s position with respect to the compensation principle at paragraph 60:

“not only was the husband’s annual income far in excess of the financial needs of both the parties even after separation, but the economic disadvantage generated by the wife’s abandonment of an established career as highly paid as that of her husband went well beyond the compensation afforded by a generous interpretation of needs.”

The compensation principle
The McFarlanes’ financial circumstances were and are such as are rarely encountered in practice.  The husband earned around £750,000 net in the year to 31 May 2003, which had increased to £1m net for the year to 31 May 2008.  The headline feature of the case and the parties’ major “asset” was the husband’s considerable earning capacity. 

Relatively early on in the original proceedings, the parties agreed a broadly equal division of capital (£3m in round figures). There was insufficient capital to give the wife a fair share of the family’s wealth on a clean break. There had to be some sharing of the husband’s future income but the parties differed on the principles that would underlie the terms of any order for maintenance. This was the subject matter of the appeal and the House of Lords ordered that the wife should receive £250,000 per year on a joint lives basis with £20,000 per year for the benefit of each of the parties’ three children.

This order was aimed at “redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage” (per Lord Nicholls at paragraph 13). The provision was substantial and clearly exceeded the wife’s needs even on a most generous interpretation. This “premium” was founded on the principle of compensation.  To quote Baroness Hale:

“This is the paradigm case for an award of compensation in respect of the significant future economic disparity, sustained by the wife, arising from the way the parties conducted their marriage.” (at paragraph 93)

She went on to summarise: “her compensation claim is not needs-related; it is loss-related.” (at paragraph 99)

Although the House of Lords made strong statements of principle there was – understandably – little guidance on the appropriate quantum for a compensation-based claim for financial provision.

In deciding the wife’s application for variation, Charles J also declined to set down a formula for the application of the compensation principle, even though his very neat percentage scale for the distribution of surplus income may, erroneously, prove tempting for practitioners.  He did, however, make some useful comments about the uses and abuses of needs, compensation and sharing:

1. The principles should not “be given a free standing life, interpretation or application as if they were themselves part of the statute rather than descriptions of the approach to the reasoning to be used in applying the statute to achieve a fair result.” (at paragraph 112)

2. “An approach that isolates the principle of compensation and seeks to treat it in an equivalent manner to a damages claim is incorrect.  This means that an approach that seeks to quantify what the wife would have earned and be earning and provides that the husband pays her that in compensation would be wrong.” (at paragraph 113)

3. He rejected the wife’s proposed approach of considering each principle separately and adopting the highest result because this

“[…]incorrectly:
a. assumes that the principles can be applied separately with enough accuracy to identify different possible results,
b. ignores the overlap between the principles and in their application,
c. fails to have proper regard to the need to arrive at a result that is overall a fair one in all the circumstances, and
d. takes too formulaic an approach” (at paragraph 118)

These caveats aside, compensation undoubtedly shapes the varied order, which provides the wife with a “premium above needs” that reflects her relationship-generated disadvantage (see Miller; McFarlane per Baroness Hale at paragraph 140).

Charles J’s methodology
How does Charles J actually apply these statements of principle?  He summarises his approach as follows:

“In my view the amount and structure of the award is guided by:

i) an application primarily of the need principle, to identify the surplus income over and above need by reference to the standard of living during the marriage and the expectations of the parties concerning it, and
ii) an application of all three principles (having regard to the potential for overlap between them) to determine how that surplus should be applied as between the parties.” (at paragraph 127)

The judge analysed the parties’ respective budgets and attributed to each a “lifestyle spend” of £150,000 per year.  He then considered the children’s needs and the husband’s expenses referable to the son of his second marriage, including school/university fees.  This produced a rounded figure of £440,000 which would be effectively “spoken for” by the parties and the children of both families.

He then analysed the effect of the various options upon the parties.  In particular, he looked at where the parties would be financially in the future, with reference to the wife’s plan to continue working until 60 in her new role as a trade mark attorney and the husband’s long-standing plan to retire at 55.  He focused upon what would be needed to produce a fair result by the time of the wife’s retirement.  Practical considerations were very much to the fore, including an expectation that the wife, having paid off her mortgage, would release some equity from the home to fund her retirement.

Turning to the allocation of “surplus” income, Charles J calculated that if the husband were to earn £750,000 net (taking into account the new top rate of tax) there would be surplus of £310,000 after deduction of the £440,000 set out above.  Sharing this surplus equally would leave the wife with £305,000 (£150,000 (her trimmed budget) plus £155,000 (half the surplus), being 40.66% of £750,000.  To avoid the artificial appearance of accuracy, the judge rounded the percentage to 40%.  He then analysed the net effect of further percentage shares of income above £750,000 using the husband’s projected earnings and, adding in the wife’s current net employment income of £22,000, arrived at a “fair” result, which gave the wife:

For herself:

For the children:

A steer for subsequent applications
At paragraph 106 of the judgment, Charles J reminds us that the reasoning behind an earlier order is to be taken into account as a relevant circumstance of the case upon a future application to vary.  With this in mind, he outlined three possible scenarios at the end of the maintenance term and stated what he believes would be a fair outcome in each case:

i) “if before 31 May 2015 it can be established that from the funds built up, a 25% release of capital from her home and her own income the wife will receive £150,000 (in to-day’s terms) for her lifetime then there would be a strong pointer in favour of ending the periodical payments,

ii) “if at the end of the period those resources produce an income of between  £120,000 and £150,000 (in to-day’s terms) that would be a strong pointer in favour of no extension being ordered, and

iii) “if at the end of the period those resources do not produce an income of £120,000 (in to-day’s terms) the reasons for this would have to be considered and in particular whether this was because of the level of the husband’s income.” (at paragraph 196)

This guidance provides an excellent insight into why Charles J concluded that the order he settled upon was fair in all the circumstances and the desirable end result he had in mind.  It also shows how he balanced the wife’s need for life-long financial security with the desirability of a clean break and his expectation that the wife will make sensible provision for her own future.

What can we take away from this judgment?
It is clear that there is no formula for the application of needs, compensation and sharing on an application for financial provision or an application to vary under s31(7) MCA.  The objective is – as in every case – to achieve a result that is fair in all the circumstances.  In this case, it appears that a fair result has been identified and the full range of the court’s powers has then been used to make it happen.

This case also highlights that the principle of compensation will be important where the facts permit but it should not be overstated and certainly not elevated to the status of a damages claim.