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Compensation in Financial Remedies Cases – Parthian Shots and The Emperor’s New Clothes

Joshua Viney of 1 Hare Court and Matthew Brunsdon-Tully of 1 Hare Court and St John’s Chambers examine the issue of compensation in spousal maintenance claims

Joshua Viney of 1 Hare Court and Matthew Brunsdon-Tully  of 1 Hare Court and St John's Chambers

Is the compensation principle consigned to be little more than a footnote in financial remedy history? Possibly. A series of cases, notably the judgments of Mostyn J, have reaffirmed, often in increasingly strong language, the exceptional nature of compensation claims and that in the rare case where compensation is in issue, it ought not be reflected by a premium or additional element on top of the needs based award.

However, Coleridge J, who stepped down as a High Court Judge in April 2014, launched two Parthian shots in the case of H v H [2014] EWHC 760 (Fam). First, he declared 'there remain a very small number of cases where it [compensation] stares the court in the face and to ignore it … does not do full justice'. Second, he appeared to support reflecting compensation by an additional sum on top of a needs based award.

The rise and fall of compensation
The road must start with reference to the judgments of the Lords in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24. Lord Nicholls in para [13] stated:

'Another strand, recognised more explicitly now than formerly, is compensation. This is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage. For instance, the parties may have arranged their affairs in a way which has greatly advantaged the husband in terms of his earning capacity but left the wife severely handicapped so far as her own earning capacity is concerned. Then the wife suffers a double loss: a diminution in her earning capacity and the loss of a share in her husband's enhanced income. This is often the case. Although less marked than in the past, women may still suffer a disproportionate financial loss on the breakdown of a marriage because of their traditional role as home-maker and child-carer.'

Baroness Hale also provided guidance, the key paragraphs being [140] and [154] where she respectively stated:

'But the economic disadvantage generated by the relationship may go beyond need, however generously interpreted. The best example is a wife, like Mrs McFarlane, who has given up what would very probably have been a lucrative and successful career. If the other party, who has been the beneficiary of the choices made during the marriage, is a high earner with a substantial surplus over what is required to meet both parties' needs, then a premium above needs can reflect that relationship-generated disadvantage.'

'In McFarlane, there has been an equal division of property, but this largely consisted of homes which can be characterised as family assets. This was not enough to provide for needs or compensate for disadvantage. The main family asset is the husband's very substantial earning power, generated over a lengthy marriage in which the couple deliberately chose that the wife should devote herself to home and family and the husband to work and career. The wife is undoubtedly entitled to generous income provision for herself and for the sake of their children, including sums which will enable her to provide for her own old age and insure the husband's life. She is also entitled to a share in the very large surplus, on the principles both of sharing the fruits of the matrimonial partnership and of compensation for the comparable position which she might have been in had she not compromised her own career for the sake of them all. The fact that she might have wanted to do this is neither here nor there. Most breadwinners want to go on breadwinning. The fact that they enjoy their work does not disentitle them to a proper share in the fruits of their labours.'

As a starting point Miller; McFarlane provided a number of subjective principles. Reference to 'generous income provision', sharing and compensation provided an opaque set of principles going forward. Sir Mark Potter considered these principles in VB v JP [2008] EWHC 112 (Fam). He stated:

'[52] … Thus, on the facts, the case for compensation, whether viewed simply as a matter of fairness, or as itself adding some "premium" element, was weak if not non-existent. Further, I would endorse the warning sounded by the judge against the introduction of an approach which seeks to separate out and quantify the element of compensation, rather than treating it as one of the strands in the overall requirement of fairness in the assessment of the parties' joint contribution to the marriage, where the wife, as a result of joint marital decision has sacrificed her own earning capacity in the interests of the bringing up the family. Attempts under the rubric of Compensation to isolate and quantify the level of income or earning capacity sacrificed by a wife years after the event for the purpose of calculating a premium element on the award, constitutes a search for precision which is to be discouraged both on the grounds of policy and practicality, and which goes beyond what is required or generally appropriate in the exercise required of the court under s.25.'

'[59] On the exit from the marriage, the partnership ends and in ordinary circumstances a wife has no right or expectation of continuing economic parity ("sharing") unless and to the extent that consideration of her needs, or compensation for relationship-generated disadvantage so require.

… where a continuing award of periodic payments is necessary and the wife has plainly sacrificed her own earning capacity, compensation will rarely be amenable to consideration as a separate element in the sense of a premium susceptible of calculation with any precision. Where it is necessary to provide ongoing periodical payments for the wife after the division of capital assets insufficient to cover her future maintenance needs, any element of compensation is best dealt with by a generous assessment of her continuing needs unrestricted by purely budgetary considerations, in the light of the contribution of the wife to the marriage and the broad effect of the sacrifice of her own earning capacity upon her ability to provide for her own needs following the end of the matrimonial partnership'.

Sir Mark Potter's emphasis on 'generous needs' as a mechanism for encompassing any element of compensation did little to dissipate any obscurities. Meanwhile, each parties' submissions in the Court of Appeal case of Hvorostovsky v Hvorostovsky [2009] EWCA Civ 791 regarding Sir Mark Potter's reference to 'relationship-generated disadvantage' were considered to be a 'departure from reality'. The Court of Appeal reflected on whether 'an endeavour to assert a relationship related disadvantage [was] really necessary?' before concluding:

'[38] Whatever she gave to him and to the children is aptly assessed under the heading of 'contribution'. That, rather than relationship-related disadvantage is the language of the statute.'

Indeed, the application of Miller; McFarlane and VB v JP frequently led to inconsistent and unpredictable awards.

The case of B v S (Financial Remedy: Marital Property Regime) [2012] EWHC 265 Fam concerned a marriage of 14 years. There were two children. One of the issues in the case related to an alleged agreement between the parties whereby they had agreed a matrimonial property regime of separate property. In relation to compensation Mostyn J held:

'[73] The capital division in this case will be determined by application of the familiar distributive principles of sharing and need. The principle of compensation is not applicable, and, as I have observed before, is likely only to be applicable in the exceptional kind of case exemplified by Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, [2006] 2 AC 618, [2006] 2 WLR 1283, [2006] 1 FLR 1186, HL.'

In February of this year Mostyn J unveiled an extensive critique of compensation in his judgment in SA v PA [2014] EWHC 392 (Fam), opening the criticism with:

'[18] I confess that I find the theory to be extremely problematic and challenging both conceptually and legally. It would seem that I am not alone.'

SA v PA concerned an 18-year marriage. The husband was Dutch and the wife was English. They had four children aged 19, 17, 15 and 13. One of the relevant issues was that the wife claimed that her periodical payments award should be significantly enhanced by reference to the principle of compensation as per McFarlane v McFarlane.

Evidently, this did not find favour with Mostyn J who went on to outline five problems with compensation based claims from paragraphs [22] – [28]:

1. He did not understand how the parties' choices supplied the rationale for compensation, highlighting that in this jurisdiction compensation almost invariably denotes a payment made by a wrongdoer to a victim to make amends for harm caused by the wrongdoer to the victim and that in any usual situation where compensation is claimed the victim is not an active enthusiastic voluntary participant in the events that give rise to the claim. He concluded:

'[22] … what cannot be disputed is that the reason Mrs McFarlane gave up work was because she, an intelligent liberated autonomous adult woman, decided to give up work. I cannot see how that can be characterised as a loss "suffered" by her entitling her to an award in excess of her reasonable needs.'

2. The principle required the court to find 'extraordinary' counterfactual findings, the basis of which:

'[24] … involves making an award in hard money based on a guess founded on a vision that events that did happen, did not happen, and events that did not happen, did.'

3. The awards granted were 'highly' arbitrary.

4. The awards were difficult to compute 'rationally, let alone predictably'.
5. The ultimate award to Mrs McFarlane was no more than a conventional needs based exercise would have produced.

Ultimately, 'compensation' having been identified as a separate strand of fairness in Miller; McFarlane, Mostyn J was not in a position to overrule the House of Lords decision (or to conclude it had been decided per incuriam) in SA v PA. He therefore sought to define its application as follows (author's emphasis in emboldened text):

36. Obviously I am bound by the decision of the House of Lords. However, in the light of the later authorities, I think that the principles concerning a compensation claim can properly be expressed as follows:-

i) It will only be in a very rare and exceptional case where the principle will be capable of being successfully invoked.

ii) Such a case will be one where the court can say without any speculation, i.e. with almost near certainty, that the claimant gave up a very high earning career which had it not been foregone would have led to earnings at least equivalent to that presently enjoyed by the respondent.

iii) Such a high earning career will have been practised by the claimant over an appreciable period during the marriage. Proof of this track-record is key.

iv) Once these findings have been made compensation will be reflected by fixing the periodical payments award (or the multiplicand if this aspect is being capitalised by Duxbury) towards the top end of the discretionary bracket applicable for a needs assessment on the facts of the case. Compensation ought not be reflected by a premium or additional element on top of the needs based award.

37. Having regard to what I said in B v S at paras 73-79 it will be apparent that it is my firm belief that save in highly exceptional cases an award for periodical payments should be assessed by reference to the principle of need alone.

It is plain, therefore, that while Mostyn J acknowledges that there may be 'highly exceptional cases' where periodical payments might be assessed by reference to some principle other than 'need alone', for Mostyn J, 'compensation' should never supply that basis, and successful compensation arguments should instead reflect within the needs-bracket rather than as 'a premium or additional element' over and above the needs assessment. In conclusion one might venture to suggest that Mostyn J left the emperor of compensation without any clothes (at least, clothes of his own).

H v H - A Parthian shot?
In March 2014, Mr Justice Coleridge handed down judgment in H v H. In this case the Husband had made an application to terminate the joint lives periodical payments order in favour of the Wife to the sum of £150,000 pa. In the final paragraph of his judgment he reflected: 

'[66] I should only finally say that I agree with recent pronouncements about the dangers inherent in attributing special weight to arguments about compensation. However, there remain a very small number of cases where it stares the court in the face and to ignore it and simply approach the case on the basis of the more simplistic "needs" arguments does not do full justice to a wife who has sacrificed the added security of generating her own substantial earning capacity, as this wife undoubtedly did. I doubt in the end she is any worse off financially because her investment in the family enabled the husband to generate these enormous returns which she has fully participated in. However, the building up of a secure earning capacity over a working life is a greater security to an individual spouse, whether husband or wife, than merely being dependent on the future income generating resources of one's former partner however successful.'

Coleridge J did agree with the 'recent pronouncements about the dangers' of compensation arguments, which can only relate to SA v PA. However, Coleridge J appears to envisage, albeit in a 'very small number of cases', an assessment of maintenance which might indeed contain, using the words of Mostyn J, 'a premium or additional element' over and above 'simplistic needs arguments'.

We reach two conclusions. First, despite Mostyn J and Coleridge J appearing to sing from the same hymn sheet, the decisions in SA v PA and H v H seem to conflict. The question is simply this: does reflection of compensation take place within, or over and above, a needs-based assessment of spousal maintenance?

One problem is that in VB v JP, Potter P appears to show support for both conclusions.

On the one hand, he sounded a 'warning… against the introduction of an approach which seeks to separate out and quantify the element of compensation, rather than treating it as one of the strands in the overall requirement of fairness' (our emphasis - paragraph [52]). That is different from treating compensation as a guide within an assessment of needs. Fairness includes needs, compensation, and sharing.

Yet in the same Judgment, Potter P went on to say, at paragraph [59], that 'any element of compensation is best dealt with by a generous assessment of her continuing needs'.

The answer to the question may have real implications for spousal maintenance awards because it is difficult to escape the conclusion that compensation as a 'premium' over and above a needs assessment is likely to lead in practical terms to a greater degree of flexibility in quantifying claims, and therefore larger awards in some cases.

Second, whether compensation is relevant in a given case or not should be obvious to the practitioner at the outset. If it is not obvious and requires effort to put together a case, that is likely to be suggestive. That probably applies whether compensation takes effect within the needs principle or as a premium over and above it.

A tentative analogy can be drawn with conduct arguments. Are we now in the position where 'compensation' is only relevant where it would be inequitable to disregard it? If so, good practice may dictate pleading compensation arguments at the earliest stage, so that proper directions may be made.